Good day, and thank you for standby. Welcome to the Mattel Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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.

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 released 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 $510 million non-cash 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 Investor 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. In the second quarter of 2021, we elected to revise prior…

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 will be greatly missed across our industry and secondly, 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-month growing almost 2.5 times 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. Third, 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 for NPD, looking at market share by region in the third quarter, Mattel gained 35 basis points in North America,…

Thanks, Ynon. As you just heard, this was another strong quarter with results exceeding expectations despite supply chain in 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 million compared to $1,636 million, 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 non-cash 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 tax rate in the prior year. And adjusted EBITDA was $463 million compared to $465 million. Overall, strong results for the quarter, as top line growth and the benefits from our cost savings program and pricing actions offset the impact of cost inflation. Gross billings increased by 7% in constant currency in the quarter with global POS increasing high-single digits. POS growth outpaced the industry. And for NPD, we again achieved market share gains in each of our four regions. Looking at gross billings in constant currency by region. North America was up 11% with POS increasing high-single digits, driven by growth across the portfolio. EMEA was up 3% with POS increasing high-single digits. Latin America increased 8% with POS increasing by double digits, as we further expanded our leadership position in…

[Operator Instructions] Your first question comes from the line of Eric Handler with MKM Partners. Please go ahead.

Good afternoon, and thank you for the question. So congratulations on the Lightyear license. I’m guessing that was separate from the Toy Story deal, do you still have an overall Toy Story license? And if we could go back to the last Toy Story movie, I seem to remember expectations of revenue something in excess of $200 million of retail sales. Is that still, do you think that’s a good starting point for Lightyear?

Hi, Eric. This agreement is separate from what we’ve done to-date. We are not providing specific guidance for this particular partnership, but as we said in the prepared remarks it is expected to be a very toyetic movie. So it’s a meaningful addition to our portfolio.

And Eric, it’s Richard. We still maintain the origin story of the original Toy Story movies of which we continue to market and sell products against.

Great, thank you very much.

Your next question comes from the line of Tami Zakaria with JPMorgan Chase. Please go ahead.

Hi, thank you so much for taking my question. So could you provide any color on the POS trends you’re seeing quarter-to-date, given you’re lapping Amazon Prime Day from last year?

Sure. This is Anthony. Look, we are off to a strong start in the fourth quarter and look ahead to a strong holiday season.

Got it. That’s helpful. If I could ask one more follow-up. I think, Fisher-Price POS was up about mid-single digit in the quarter, but it seems like shipments were down about a point. Can you help us understand the gap there?

Sure. It’s Richard. Hi. Despite a decline in gross billings for the first quarter, the POS, as mentioned remains strong. We grew our market share per NPD, the segments of growth were really little people, infant, newborn and Imaginext. We saw growth in North America and the decline in gross billings was primarily attributed to Asia-Pacific, because of COVID lockdowns. NPD also mentions as well that Fisher-Price is the number one Infant, Toddler Preschool property globally in the third quarter, as well as year-to-date and we expect growth in the category for 2021.

Your next question comes from the line of Steph Wissink with Jefferies. Please go ahead.

Thank you, good afternoon, everyone. Anthony, I think this one might be best for you, but it’s a question related to pricing. I think if I jotted it down correctly, you said about 110 basis points of benefit in the third quarter. How should we think about the benefit you expect to see in the fourth quarter? And I think you also mentioned that you expect margins to be down again, I’m just trying to reconcile benefits from price both in sales guidance and margins. And then anything you want to help us think through in terms of 2022, just the anniversarying of those price increases and how that should factor into our gross margin bridge for 2022? Thank you.

Sure. As we said in the remarks, pricing, it did have a benefit of 110 basis points in Q3, but that does not yet reflect all the incremental pricing actions that we’re implementing in the second half. So we should have a greater pricing benefit in Q4. That being said, our gross margin guidance implies a decline of about 300 basis points of gross margin in Q4. Obviously, the biggest driver of that is cost inflation, which we expect to partly offset with the pricing actions we’re implementing, as well as continued savings from our Optimizing for Growth program. It’s a little early to talk about 2022, and we look forward to providing guidance for 2022 on our fourth quarter earnings call. And lastly, I’ll just add, I mean, as Ynon stated in the remarks, we do expect to exceed $1 billion of adjusted EBITDA in 2022.

Okay. And what are you assuming in your sales guidance for the benefits of price in the fourth quarter?

We’re not going to get specific on the magnitude of the pricing action, for competitive reasons, but we are implementing those pricing actions. It’s going well. We haven’t seen any negative response in terms of consumer purchases so we’ll continue to implement those programs.

Your next question comes from the line of Arpiné Kocharyan with UBS. Please go ahead. Arpiné Kocharyan: Hi, thank you. This is Arpiné. You’re probably very well aware there is considerable concern among investors regarding supply chain disruption, and what it could mean for the holiday season? And primarily what risks it poses for the first half of the year? Could you spend a few minutes going over the tightest contingency measures you have taken to sort of mitigate any unanticipated disruption? And also if you could detail what percentage of your volume do you expect to go through direct import programs in Q4, if you have a sense at this point, which I’m hoping you do? Thank you.

Yes, hi, Arpiné. During the third quarter, our supply chain and commercial organizations were very successful in working through global supply chain disruptions. And it’s not that we were not impacted, but we did anticipate short supply and longer lead times, and factor that into our planning and took very specific mitigating actions. A few – some of the examples we talk about is how we expedited procurement of raw materials, we pulled forward finished goods production to increase capacity, we invested in more tooling in order to dual source manufacturing of very specific product lines where we expected shortage. We leveraged our scale, our diverse manufacturing footprint to optimize near shoring of production, we also contracted ocean freight capacity and rates in advance and secured access to additional ports and shipping lanes, which appears obvious in hindsight, but we were ahead of the game. And this is really where our scale expertise and flexible supply chain – all the work we’ve done over the last three years, is working to our advantage. And with that, we are ready for a strong holiday season, and do what we can to meet the strong demand for our product.

And to the second part of your question, we don’t really see it, we don’t really expect to see any material change in the mix of trade and direct import going ahead. Arpiné Kocharyan: Would you say that could be as much as north of 40% of your volume, could you just like breakdown. I know during the tariff period, tariff disruption, it could have been as low as 35% and above, but could you kind of give a sense of what that – where that percentage stands?

Yes, Arpiné, we are not going to get into that level of detail for competitive reasons. Arpiné Kocharyan: Okay. Okay, no problem. Thank you, everyone, and great job. Thank you.

Thank you.

Your next question comes from the line of Drew Crum with Stifel. Your line is now open.

Okay. Thanks. Hey guys, good afternoon. Just talk about your experience with Masters of the Universe in terms of product sales, anything separate from any content revenue recognized from Netflix? And what would be the next marker for this brand? And then I have a follow-up for Anthony.

Sure. We are incredibly pleased with the progress and momentum, not only with Masters of the Universe, but the entire Action Figures category. I mean, we’ve been consistently growing share in this category all of 2021. We are particularly excited about Masters of the Universe. The relaunch has been going incredibly well, product is performing, content is working. During the quarter, we released two series, which we have part two, actually, Masters of the Universe Revelation, that’s premiering on Netflix next month. Our performance in Action Figures really is a great example of the successful execution of our category structure. And we’ve been applying this methodology across our portfolio to existing properties like WWE, Jurassic and Minecraft, and it’s really showing up on the scoreboards. 2021, it’s been a phenomenal year for Action Figures, of course, with the excitement with Masters of the Universe as Mattel IP, but 2022 is going to be even bigger and better. Jurassic World, Minions, we just renewed our license with WWE and of course the expansion of Disney Pixar’s Lightyear, we are incredibly excited about the category and certainly Masters of the Universe is a prized performed property.

Okay. Thanks, Richard. And then my follow-up for Anthony. The updated guidance for 2021 would imply an adjusted EBIT margin in the low-teens range. If my math is correct, kind of 13%, 14%. Does that suggests you’re pacing ahead of you goal for the mid-teens threshold by fiscal 2023 and does it cause you to rethink that goal with perhaps something higher? Thanks.

Yes. So we are making great progress against our goal of an adjusted mid-teens OI margin by 2023. I’m not going to sit and tell you we’re ahead of that. But with the success we’re seeing on our Optimizing for Growth program, the scale benefit we’re getting from a higher top line, we are well on our way. And I think when we get to our fourth quarter call, we’ll be able to provide more specific 2022 guidance then.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Hi, good afternoon. Thank you. I want to talk about gaming for a second. Your Hot Wheels Unleashed game came out to great reviews, looks really cool. Just wondering about the economics of that a fact to be material to you guys and then other digital initiatives behind that, like UNO mobile and others. Thank you.

Hi, Gerrick, we’re not providing specific by project, but the message here is that we are growing our digital gaming activity. There is a strategic priority for us as part of our mid to long-term strategy to capture the full value of our IP. Given the strength of our catalog, we believe there is significant opportunity for us to go – to grow in digital gaming, increased brand engagement and capture more opportunities outside of the toy aisle. So, yes, we got – it was very – out with a very positive reviews. We also launched another game as part of Mattel 163, our mobile gaming platform. This is a third game to come out on our own mobile gaming platform. And with that, you will see additional activity in digital experiences, not just gaming, but also NFT and other digital opportunities.

Thank you.

Your next question comes from the line of Mike Ng with Goldman Sachs. Please go ahead.

Hey, good afternoon. Thank you very much for the question. I just wanted to follow-up on an earlier question about supply chain issues. Could you just give us a status update about where some of the biggest supply chain challenges are today, and how those challenges may have evolved over the last couple of months? And then separately, Ynon, you talked a little bit about the flexible supply chain as a mitigant and how important is it to own your manufacturing facilities to actually be able to navigate through these supply chain challenges? Thank you very much.

Right. Hi, Michael. So look, the – I will start with the second question. In that we do believe that owning our own manufacturing especially, in relation to dolls and diecast where we have so much scale that gives us a competitive advantage in terms of cost, quality and service. We do have the ability to design for – to do – to have a strategy of design for manufacturing principle to drive down cost, improve quality, increase speed to market and all-in-all, allowed us to perform so well in control and be in control of a of a key part of the chain. In terms of the challenges, what type of challenges we’re seeing? Look it does, it’s not different from what you’re reading and what everyone sees in terms of logistics, short supply on distribution capacity, but as we said earlier, given our scale, given our expertise and how we evolved our supply chain platform to be more nimble, more flexible, be able to mobilize resources and shift manufacturing and distribution where needed. We were able to manage through the disruption. And again, I want to say, this is not that we were not impacted. But even with that, we were able to grow our business, capture market share and position the company for growth in the fourth quarter and the holiday season.

Great, thank you, Ynon. And if I could ask a follow-up question on Richard’s comments regarding Action Figures. Obviously, a tremendous amount of strength in the quarter of 50% was that primarily Masters of the Universe? I know you mentioned Jurassic World as well. I was just wondering if there was a specific content catalysts or something that you call out for Jurassic World that drove a lot of strength and how should we think about Action Figures growth from here on out? Thank you.

Yes. As I mentioned, and very specifically, I think this is really about a portfolio strategy. I mean, clearly, we’ve got a great portfolio of brands and the growth is really comprehensive. Jurassic has certainly been a successful partnership for us and we continue to see great growth. As we mentioned WWE has been a partner of ours for over a decade, so we’re very excited about the renewal and we’ve got lots of great plans ahead. As we look forward and we recognize our extension with the Disney partnership with Lightyear, we’re clearly looking at a continued growth in the category. I mean, as you can see it’s already been a great year for Action Figures I mentioned as well. We’ve been consistently gaining market share in 2021 and 2022 is going to be an even bigger year. Masters specifically is a great story in relation to our overall strategy. Taking IP, unlocking the value, creating a franchise plan, working with content partners, driving toy product, both for adults as well as kid with a consumer product component and we’re really starting to get traction in that strategy. So overall Action Figures is definitely an exciting category for us.

And Michael, I just want to build off on what Richard said in talking about the portfolio, and how we run our Action Figures. This is really how we run the entire company. When we shifted to the category structure, the opportunity was to grow our business across all the full portfolio at scale. And the way you do that is through the category management strategy. If you look at our performance year-to-date, while – we outgrow the industry growth rate by 1.7 times. So this is not just growth relative to our own performance last year, but by industry standard we grew, where the industry grew in the third quarter by 6.4%, we actually grew by 11.5%. So well ahead of the industry, and a lot of it is driven by our strategy, portfolio strategy. But of course, execution across the enterprise, including strong performance by our supply chain, as well as our commercial organization. And this is where the entire company is working hand-in-hand to follow our strategy, and you’re seeing the results in the numbers.

Your next question comes from the line of Alok Patel with Berenberg Capital Markets. Please go ahead.

Hi, thanks for taking my question. So I noted in Q1 that you guys said resin and freight was approximately 15% of COGS, where does that stand today in Q3? And I think you guys also said you were expecting 35% inflation in those two items, what are your expectations for inflation going forward?

Yes, I’ll take that. Things have gone a little bit worse on the inflation front. We made some adjustments in our Q2 guidance. So those two items resin and ocean freight, as you said they are somewhere around 15% to 20% of our cost base. And our latest estimate is that on a combined basis, they’re increasing by a rate of 50%, so a little bit higher than the 35% we talked about earlier.

Okay. And I had a quick – go ahead.

I was just going to add that on a year-to-date basis, we’ve successfully offset all of that inflation in our gross margin through a combination of pricing, savings from our cost savings program as well as the scale benefit associated with our top line growth.

Okay, great. That actually was going to be my follow-up. I guess one more question. Are you guys taking on any hedging activities, mitigate some of the impact on the margins from these costs?

Yes. We have a pretty robust program across a number of commodities through a combination of advanced purchases and through financial hedges right to basically lock-in for a period of time, so we’re delaying the impact and that gives us some time to make adjustments such as the pricing actions that we’re taking in the second half.

Okay, great. That’s all I had. Thanks.

And your last question comes from the line of Jim Chartier with Monness, Crespi, Hardt. Please go ahead.

Hi, thanks for taking my question. It looks like on the balance sheet the inventory is pretty well positioned up over 20% on a two-year basis, which is stronger than your sales growth on a two-year. So I’m just curious, how much of that is in transit and make, be delivered late? And then what is your inventory look like at retail at the end of third quarter? And where do you expect it will end the year? Thanks.

Yes, I think there’s two parts to the question. Yes, our inventories are up on the balance sheet year-over-year, I think about $174 million and there’s two drivers of that. One is the cost inflation I just talked about, and the other part is increases to support future growth. In terms of retailer inventories, we ended the quarter with retailer inventory levels up mid-single digits in dollars compared to last year, but down low-to-mid single digits when you look at weeks of supply, and when you factor in the recent increases in POS. I think net-net, we believe, we are well-positioned as we head into the fourth quarter in the holiday season, and are working closely with our retail partners.

Great, thank you.

That concludes our question-and-answer session for today. I will now turn the call back to our Chairman and CEO, Ynon Kreiz for final comments.

Thank you, operator. Just to say in summary, that our third quarter performance shows that we are operating as an IP-driven high performing toy company, you are seeing it in the numbers you’re seeing it in the results. And while the industry as a whole has been growing strongly, we have been gaining market share for five consecutive quarters. There is strong demand for our product, we are entering the fourth quarter with great momentum, and are off to a good start toward a strong holiday season. We continue to successfully navigate global supply chain disruption that it is what the industry is facing as a whole, but we are on track to achieve our highest full year growth rate in decades, having just raise our guidance for the third time this year. We are clearly executing on our strategy to improve profitability and accelerate top line growth, and appreciate you following our journey. Thank you for your time. We appreciate all the questions and the interest in Mattel, and we’ll be happy to answer more questions offline. And I’ll turn it back to Dave. Thank you, Dave.

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 PM Eastern Time today. The webcast link can be found on our Investor page or for an audio replay, please dial 404-537-3406. The passcode is 6941839. Thank you for participating in today’s call.

And this concludes today’s conference call. Thank you for participating. You may now disconnect.