Ladies and gentlemen, thank you for standing by, and welcome to the Mattel, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] It is now my pleasure to introduce Vice President of Investor, Dave Zbojniewicz.

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 2020 full year and fourth 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 and loss and adjusted operating margin; adjusted earnings and loss per share; earnings before interest, taxes, depreciation and amortization or EBITDA; adjusted EBITDA; free cash flow; leverage ratio; and constant currency. Please note, going forward, references to revenues, sales, top-line and other similar terms will be only in net sales terms. We have also introduced a gross billings metric, which is directly comparable to the term gross sales that we used in prior quarters. This change has been made to clearly distinguish our revenue reported for GAAP purposes and the gross billings metric. Gross billings represent amounts invoiced to customers. It does not include the impact of sales adjustments such as trade discounts and other allowances. Mattel presents changes in gross billings as a metric for comparing its aggregate, categorical, brand and geographic results to highlight significant trends in Mattel's business. Changes in gross billings are discussed because while Mattel records the details of such sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with categories, brands or…

Thank you for joining Mattel's fourth quarter and full-year 2020 earnings call. I hope that you and your families are staying healthy and safe. This was an exceptional quarter driven by strong consumer demand capping an extraordinary year for Mattel. In the midst of a pandemic and very challenging market conditions, our results exceeded expectations with another major upswing in topline and a significant increase in profitability as we gain global market share and continued to transform Mattel into an IP-driven, high-performing toy company. The fourth quarter and full year demonstrated the resilience of the toy industry and the priority that parents place on quality toys, trusted brands, and purposeful play. At Mattel, we have been particularly proud to see children and families choosing our products again and again. Here are some key highlights for the fourth quarter compared to prior year. Net sales grew 10% as reported and in constant currency, the highest fourth quarter growth rate in 15-years. Adjusted gross margin improved significantly and reached 51.4%, the tenth consecutive quarter of improvement on a year-over-year basis. Adjusted operating income increased 88% and adjusted EBITDA increased 53%. In spite of a difficult first half, 2020 ended up being another milestone year for the company as we further advanced our transformation strategy. Here are some key highlights for the full year compared to 2019. Net sales grew by 2% as reported and by 3% in constant currency. This was the second consecutive year of growth in constant currency. Adjusted gross margin was 49.1%, an improvement of 420 basis points. Adjusted operating income was $448 million, the highest in 4 years increasing more than 2.5 times over last year. Adjusted EBITDA was $719 million, increasing by 59%. Free cash flow was $167 million, an improvement over $102 million, and we gained…

Thanks, Ynon. We had another outstanding quarter with results exceeding expectations. Net sales increased double-digits with broad-based gains across the portfolio and we are pleased with the continued improvement in gross margin. Our Structural Simplification and Capital Light Cost Savings Programs delivered $43 million of savings in the quarter and $193 million for the full year. And as Ynon mentioned, we are announcing the Optimizing for Growth program to further improve operations and drive greater productivity to accelerate growth and at the same time continue to reduce our cost base. This is expected to deliver in aggregate, an additional $250 million of savings by 2023. With a strong finish to the year and momentum into 2021, we are providing guidance for the New Year, reflecting continued growth in both our top and bottom line. I'll now review our detailed results. In the fourth quarter, we generated net sales of $1,626 million, an increase of 10% versus the prior year. Adjusted gross margin increased by 250 basis points to 51.4%, driven primarily by cost savings. On an adjusted basis, we generated $205 million of operating income, a $96 million increase year-over-year, driven by higher sales, gross margin gains and lower SG&A. EPS on an adjusted basis was $0.40 in the quarter, increasing 264% from 2019 and adjusted EBITDA grew by 53% to $284 million, as I said just an outstanding quarter. Commenting briefly on the full-year performance. Net sales increased by 2% to $4,584 billion with second half performance more than offsetting declines in the first half. Excluding the negative impact of $54 million of currency translation, net sales in constant currency increased 3%. We are very pleased with gross margin performance. Adjusted gross margin driven primarily by cost savings increased by 420 basis points to 49.1%, the third consecutive year…

Thank you. [Operator Instructions] Your first question comes from the line of Tami Zakaria with JPMorgan.

Hi, thank you so much for taking my questions and congrats on excellent results. I just wanted to - my first question is around the mid-teens operating margin guide by 2023. Can you help us understand the breakdown between gross margin and SG&A contributions to get to that level?

Yes, I'll take that. Hi, Tami, it's Anthony. So as we said, we have a goal here to expand our adjusted operating income margin to the mid teens by 2023, and a key driver of that is going to be our Optimizing for Growth Program, and as we disclosed that program, we've given an allocation of how that will impact the P&L, so about 50% comps, 40% SG,&A and the remaining 10% coming through the advertising and promotion line. We're not giving specifics around gross margins, but it is our expectation that the combination of pricing and Optimizing for Growth will more than exceed the impact of cost inflation over time, and then expanding gross margin will contribute to that OI goal.

Got it. Thank you so much. And my follow-up question is around the mid-single-digit net sales growth expectation until 2023. Again, could you help us understand what's driving that, meaning, which brands? And do you expect international growth to, sort of, be above that? Basically what is supporting that mid-single-digit sales growth expectation?

Hi, Tami, it's Ynon. So we were - we provided our goals this is different from the guidance we gave for '21. But directionally, when we look at the quality and breadth of our product, the enduring strength of our brands, the efficient supply chain that we now have and call a competitive advantage, the world-class commercial capabilities, and how we work in close collaboration with retail partners, and looking at the momentum we have, we feel confident to share with you our goal, and believe we will make it.

Understood. One last quick one from me. From a modeling perspective, how should we think about the tax rate for 2021?

Yes. So Tami, we're not providing specific guidance around the tax line, but I don't think it will be meaningfully different than where we've been in the recent past.

Got it. Thank you so much and best of luck.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Arpine Kocharyan with UBS.

Hi, thank you very much. Thanks for taking my question. I was wondering, if you could talk about retail inventory situation globally. The bigger question is, as you look at the rest of the year outside of current POS trends, which still won't be comping, sort of, pandemic related burst. What is your outlook on whether the industry can grow and where Mattel fits in, in terms of taking share? I guess, I'm trying to understand better why is the mid-single-digit growth the right number for you? For shipment given, sort of, really depleted inventories and strong film slate and easier shipment comps in the first half of the year? And then I have a quick follow-up.

Yes, so let me comment on the retail inventory situation, as you may recall, we did start 2020 with retail inventory slightly elevated and then as we progress through 2020, we achieved double-digit POS growth, which outpaced our 3% gross billings growth in constant currency. And therefore, we ended 2020 with retail inventories down mid-single-digit percentages in terms of dollars. And when you look at in corporate increased POS, which has continued into 2021, our weeks of supply are actually down double digits. And looking ahead into '21 that should bode well for our sales outlook as we enter 2021.

That's very helpful. And next question on, kind of, what's your view on industry, perhaps a question for Ynon, do you actually think industry can overcome this tough comps and grow? And then I have a quick follow-up.

Yes. So there is no question that the COVID lockdown drove strong consumer demand for Toys across the board, as parents spend more money in 2020 on quality product and trusted brands and consumers adapted to the new norm with particularly strong performance in certain search categories; including Outdoors, Games and Puzzles, and Building Sets. 2020 ended up seeing extraordinary growth for the industry, which again proved its resilience, highlighted the importance of play, and continue to be a strategic category for retailers. The demand driven by COVID, however, is difficult to quantify as the industry was projected to grow even before the pandemic. That said, when we look at our overall performance, our market share gains, a significant increase in profitability, that's been driven by the hard work of the organization, and many of the actions we took before the pandemic to reshape and simplify our operations as part of our turnaround strategy is now contributing to our strong performance overall. So we didn’t just ride the wave, we outpaced the industry, we gained share on a global basis in the third quarter, in the fourth quarter, and the full-year. Now we believe that the categories where we are a global leader, Dolls, Vehicles, and Infant Toddler and Preschool will continue to perform well and we expect to grow and increase our overall market share. With that, we expect that the search categories that benefited from the pandemic mostly will be more challenged Outdoors - Outdoor Games and Puzzles and Building Sets. Beyond '21, we believe strongly in the long-term growth prospects of the industry, we're seeing the strong fundamentals and we believe we are well positioned to capture this growth.

Thank you. That's very helpful. And I have one more quick clarification question. What does the cadence of that cash spend look like to help you get to that cost savings of $250 million, particularly as it relates to this year, it seems like $75 million of that cost savings are hitting the P&L this year? But what if cash expense offsets and I understand that's cash expense. What if the P&L could be different? Is it more 2021 skewed? Does that mean run rate EBITDA coming year-over-year would be higher than $800 million if I were to think about that spend that won't be really recurring in forward years?

Yes, if you're referring to the cat implementation costs are about 100 to 125, I think we're not going to get into too much detail, but I think it's reasonable to resume, kind of, pro rata over the three-year period.

Okay. Thank you. That's very helpful and great quarter. Thanks.

Thanks.

Thank you, Arpine.

Thank you. And our next question comes from the line of Eric Handler with MKM Partners.

Good evening. Thank you for the question. For Anthony, if you get to your plan $775 million to $800 million of adjusted EBITDA this year. What kind of free cash flow conversion do you think you could achieve off of that?

So, Eric, it's Anthony. So as we said in our remarks, our focus going forward is on increasing the conversion of EBITDA to free cash flow and we think we're well positioned to do that. Obviously, we'll get the growth and EBITDA up to the $775 million to $800 million range improving free cash flow. We are well positioned with respect to working capital, so we saw a $150 million increase in 2020 most of that was sales driven accounts receivable, which is really, kind of, timing so that bodes well for improving the conversion in 2021. So we're confident, we'll be able to improve our free cash flow generation in 2021 over 2020. And as we've talked about our expectation is to utilize our excess free cash flow to reduce debt in the near-term and continue to improve our leverage ratio, as I said, we're down to four times debt to adjusted EBITDA, and we would expect that to improve going forward as well.

And when you say, you want to achieve an investment grade credit rating. What target leverage do you need to achieve to get there and once you get there, our dividend buybacks are those back on the table?

Yes, I think it's premature to talk about the next evolution of capital allocation, as I said, our focus on the short-term is improving our leverage ratio getting ourselves and working our way back towards investment grade, that means a debt-to-EBITDA and that kind of that 2, 2.5 range and that's what we're focused on.

Thank you.

Thank you. And our next question comes from the line of Mike Ng with Goldman Sachs.

Hey. Thanks so much for time and for the question. I just have two. First, could you just talk about some of the key theatrical Toy property licenses you have for 2021? I know there are some pics or movies and obviously Minions, I think is also supposed to come in '21? And then the second question just to comment as it relates to top line growth for '21, the strong first half tough comps in the second half. Will we see growth in the second half? Or be it more muted or could second half actually be down? Thank you very much.

Yes. Hi, Michael. The current slate that we have includes great properties, including Spirit, Minions, Fast & Furious, Top Gun Maverick, as well as Halo, Minecraft and Tokyo Olympics. Now we all know that the entertainment slate remains fluid and there is still movement around the timing of releases and distribution models. But from our perspective, we are not as dependent as other companies on these properties, because the vast majority of our business is driven by our own brands and our own intellectual properties. Now we do have very strong relationships with all major entertainment companies and we look to continue to strengthen our position as a partner of choice, and to the extent there is a shift in the release calendar we will still benefit from those releases when they do come out. That said, we're not dependent on that, and we did factor our outlook on these properties in the EBITDA guidance that we provided. If you look at our results for the fourth quarter and the full year, our best performance in years, it shows you the strength and quality of the product that we had with very little entertainment properties in 2020.

And just to comment on the phasing, as we said we're wrapping double-digit declines followed by double-digit growth. So we do expect to see strong sales gains in the first half, more challenging comps in the second half and most importantly, right? Achieving our guidance of mid single-digit growth for the full-year.

Thanks, Ynon. Thanks, Anthony.

Thank you.

Thank you. And our next question comes from the line of Steph Wissink with Jefferies.

Thank you. Good evening, everyone. I mean, a couple of tactical questions; the first is on your comments, Anthony about gross margins and the inflation that you are embedding in 2021. I'm curious with the momentum in your business, why you wouldn't have the power to take some price? So maybe talk a little bit about how you're feeling about your brands and the pricing within their competitive sets and if you feel like you do have the potential opportunity to take some price to offset some of that inflation?

Yes, let me first just, kind of, reiterate the comment on the inflation. It is in both materials driven by resin and in logistics, driven by ocean freight and it came on pretty quickly. In terms of our brands, we feel great about our brands, we're not going to talk about specific pricing action, but our belief is that over time that combination of pricing and cost reductions is coming [ph] out of our Optimizing for Growth Program were more than offset cost inflation in the long-term and contribute to margin expansion.

Okay. That's helpful. And then on the Optimize for Growth is $720 million was your exit EBITDA rate for 2020 the guidance of $775 million to $800 million. Would include that $75 million of savings, so maybe help us think through the bridge and what's happening to the underlying business ex the savings be, kind of, flattish or up only modestly on a mid single-digit rate of growth?

Yes. So let me comment on that. I think the way to think about our EBITDA guidance, the $775 million to $800 million, which is growth of 8% to 11%, there's really three factors; the first is mid single-digit top line growth with strong flow through - through to EBITDA; the $75 million of expected savings from the Optimizing for Growth program and that's going to hit across the P&L, and those two more than offsetting the impact of cost inflation on gross margin. And as I said before that cost inflation ended up itself has about a 200 basis point negative impact. So those three things really gets you to the EBITDA guidance.

Okay, that's great. And then Ynon, if I could just one real quick question on ad spend, because it was up pretty sharply in the fourth quarter as you had planned? Anything you learned from how you allocated advertising by quarter, by brand, by channel, by digital versus legacy that you're going to carry forward into your programs and your plans for '21, '22 and '23?

Yes, we generally continue to adjust, improve and strengthen how we think about demand creation. We did move strategically certain spending to Q4 to align better with POS patterns that we saw coming into the fourth quarter and heading into 2021. And we will continue to adjust our advertising budget as we shift more spend towards digital platforms and focused on reaching more consumers, wherever they are and be more productive and more effective in our reach.

Thank you.

Thank you. And our next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Hey, good afternoon. Thank you. Ynon, first you came close to answering Arpine's question about your outlook for the industry. I asked Brian yesterday, so it's only fair IFU as well, if you can give us what you think that number would be in terms of US and worldwide, that's first. And second if Richard is around three straight years of Barbie shipment growth, I think it's about five years POS growth and these, kind of, trends are usually pretty cyclical in last maybe three to five years, so based on history perhaps Barbie should be peaking right about now. So do you anticipate growth in Barbie in '21? And should we can be concerned about the beginning of the down cycle?

Yes. So, hi, Gerrick, when you look under the hoods of the industry as a whole, there was different level of performance by category. By far the main growth of the entire industry was driven by that research categories, I mentioned earlier, Outdoors, Games and Puzzles and Building Sets. And they - we believe that these categories will have more of a challenge in 2021 just simply given the comping such a strong year. The categories were very strong, Dolls, Vehicles and Infant Toddler, Preschool were less impacted by COVID. And then to some degree our performance, kind of, it doesn't tell the full story, because we just outperformed so strongly. By those categories we're not - didn't benefit from the surge related to COVID, as much as the other categories, I mentioned. So with that, you will see - we will have different performance by category. Hard to tell what the industry as a whole will land, but we believe the categories where we are a global leader, we'll continue to perform well. And within that environment, we expect to increase our overall market share.

Gerrick, it's Richard. I'll take the next question proudly, and I appreciate the history that you have with the brand, but clearly Barbie has been gaining more and more momentum over the last several years. Certainly, we had a spectacular quarter, we grew double digits in the quarter and for the year. And that's what POS growing within 30%, we ended as you know, is the number one overall toy property globally, which speaks to the strength of the brand. We're confident in the momentum that we have moving into '21. There is great strong activations planned throughout the year, we have two new animated movie launches on Netflix, where we're extending characters like Chelsea, Barbie Sister, we have new fashion segments like Barbie EXTRA and Ken Turned 60 and we know how to do an anniversary program. We'll also continue with surprising pop culture milestone moments, which we've become incredibly well-known forward to maximize the current momentum. And look as the category leader in this high growth Dolls category, we've got incredibly exciting new content, digital engagement and we see significant power and opportunity for the expansion and the growth of Barbie. And it goes to say without taking anything away from Barbie's tremendous success and you've been tracking this and we certainly are enjoying the momentum. This is really a story about the success of the overall Mattel playbook. Barbie is based on the same approach, the same methodology, capabilities that we've been applying across the portfolio, brand purpose, the values of each brand, design led innovation, cultural relevance and executional excellence. And our category structure and centralize D&D organization, which we talked a lot about over the last couple of years is filled with extraordinary talent, who work across the portfolio, leveraging skill sets and creativity across all brands. The foundation that Barbie has been rebuilt on is strong, the growth trajectory we feel very confident about and in fact, we look forward to sharing a lot more detail with you at the upcoming Analyst Presentation.

Great. Thank you, Richard, Ynon.

Thank you, Gerrick.

Thank you. Your next question comes from the line of Drew Crum with Stifel.

Okay, thanks guys. Good afternoon. So with your directional guidance for Infant Toddler, Preschool, do you expect to grow Fisher-Price in 2021. Core has been better than Friends, does that dynamic continue this year? And I guess, asked differently when does Friends stop being a headwind? And then separately you gave us some numbers for e-commerce in the quarter, where did it end up for 2020, and can you remind us the impact has on margin relative to a bricks and mortar retailer? Thanks.

Sure. Look, we do expect to see continuing improvement in Fisher-Price Core and with Thomas. In the fourth quarter [Fisher-Price Core] was up, a strong 11% and it was driven by growth in its Infant, Little People and Imaginext product segments. We are encouraged by the performance, the first positive quarter frankly, since 2016. And as we look to 2021, we have incredible new innovation across product segments. To your point, Fisher-Price, Friends will no longer be a headwind as we've exited most of the underperforming licenses properties. We remain on track focused on our turnaround strategy and continue to be confident in its long-term growth prospects.

Hi, Drew. Responding to the question on e-commerce. This was another star performer for us, a big driver of our business. We grew in the fourth quarter by 40% and for the full year by 50%, currently representing a third of our global POS. We ended the year as the number one manufacturer in e-commerce in the US in the fourth quarter and we grew our e-commerce share in the US both in the fourth quarter and the full year. I talk about the US, because that's only market where we have specific measurement, but that's a good proxy for our performance in the rest of the world.

Thanks, guys.

Thank you.

And our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

Hi, thanks. So when you think about your long-term operating margin target, I guess back historically your peak was about 18%, but that was a little bit of a rarified environment where you had outsized doll positioning when Monster High was growing. So is 18% possible out in the future? Or do you need to add some additional major Doll franchises to get there? And on the subject of Dolls, can you talk a little bit about Cave Club Dolls, we saw a fair amount of shelf space at Walmart, is there a significant line and do you see some opportunity for that line? Thanks.

Hi, Linda. At this stage we are giving our goals only to 2023 and feel confident enough to share with you our goals, we haven't given more information beyond that mid-teen operating income margin at this point is a good reference for 2023.

Look - and Linda also we're really pleased with the performance of the overall Doll category, as you know we manage it as a portfolio Cave Club was a successful launch. Frankly in a challenging time period, we achieved all the objectives we had for the brand globally, we continue to believe in launching new brands Cave Club will have a good another year, as well as we have Polly Pocket, which has been continuing to grow. We've got several regional brands as well like Enchantimals that had a strong performance. So as we look at the Doll category overall, we expect to continue to see growth with of course, Barbie leading the way.

Great, thank you very much.

Thank you. And our last question comes from the line of David Beckel with Berenberg Capital.

Hey. Thanks so much. No question, right? Two questions for you guys, first I wonder the film slate. I'm just curious Ynon to get your thoughts on - I assume you're in pretty regular dialog with your film studio partners. How the change in film studio economics that's been experienced throughout this pandemic has affected the timeline of the projects that you currently have planned going forward. And relatedly, to what extent is your, sort of, mid single-digit growth outlook dependent on the release of those release? And then second question a little bit quicker. I just wanted to take another stab at dimensionalizing sales growth for next year given the depleted status of inventory. I'm wondering, if you can maybe quantify the extent to which mid single-digit sales is comprised of a inventory rebuild? Thanks.

Hi, David. So the industry is still finding its way within the restrictions imposed by the pandemic, but I have to say productions are ramping, people doing a good job with the right protections and safety protocols. So we expect that to gradually resume and get into more normal cadence. But not completely done, obviously given the expected impact of COVID. We - that will - to some degree impact release schedule, but all of this is moving and hard to see where things would land. As it relates to our plans, it hasn't really impacted our production calendar directly, because we haven't been - we haven't gone into production. But in the meantime, we continue to make a lot of progress on our projects. As you know, we just announced our 11th Motion Picture target - sorry film. We've been doing a lot of work on scripts, casting, budgeting and production plans and seeing continued interest in a lot of excitement around the - all of our projects. The - there's more coming that we haven't announced yet. The pipeline is building. We are also making great progress on the television side with numerous shows in production and more in development and expect that to continue to build. This - none of that is factored into our margin guidance that we provided that margin is solely driven by the toy side of the business. So, as we always say capturing value from our intellectual property is part of our mid to long-term strategy. These projects do take time given the scale and the ambition and we're going about them the right way. But given the level of interest, the quality of partners, the strength of these properties, we remain very excited about what this can improve us in the mid to long-term.

To the second part of your question around sales guidance for 2021. Well, we do expect inventory replenishment to have some impact, the vast majority of our growth will be driven by the POS performance across our portfolio.

Great. Thanks so much.

Thank you. That is all the time we have today for questions. I will now turn the call back over to Chairman and CEO, Ynon Kreiz for any closing remarks.

Thank you, operator. As I said, I could not be more proud of the entire Mattel Global team, not only for the resilience and execution in the face of a pandemic and such challenging market conditions this year. But also for stepping up as a responsible corporate citizen, leveraging our resources to support consumers, customers, business partners and the communities where we live, work and play. It's important to say that the fourth quarter was our best performance in years, but this is not just about the quarter or the year, but a multi-year turnaround that is tracking very well, which puts us in a strong position to continue to increase profitability and accelerate growth in 2021 and beyond. We look forward to sharing with you more detail on our ongoing progress to become an IP-driven high performing toy company at our Virtual Analyst Day on February 24th. And we thank you for your time and interest. I will now turn the call back to Dave to provide the replay details. Thank you.

Thank you, Ynon. And thank you everyone for joining the call today. The replay of this call will be available via webcast and audio beginning at 8:30 p.m. Eastern Time today. The webcast link can be found on our Investors page. Or for an audio replay, please dial (404) 537-3406. The passcode is 4894534. Thank you for participating in today's call.

Ladies and gentlemen, thank you for participating in today's conference call. Thank you for participating. And you may now disconnect.