Ladies and gentlemen thank you for standing by. And welcome to the Mattel Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I'd now like to turn the call over to your speaker for today Dave Zbojniewicz. You may begin.

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 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 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, from which we exclude the impact of a 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 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. In the second quarter of 2021, we elected to revise prior periods…

Thank you for joining Mattel's fourth quarter and full-year 2021 earnings call. I hope you and your families are staying healthy and safe. Mattel's results for the quarter and year came in well ahead of expectations. Capping another exceptional performance by the company. 2021 was a pivotal year for Mattel. We achieved very strong results and continue to improve profitability, accelerate top-line growth, and made important progress towards capturing the full value of our IP. Our team managed through major global supply chain disruption in trying to fulfill the extraordinary increase in consumer demand to ensure there were plenty of toys for families this holiday season. Key highlights for the fourth quarter compared to prior year, and net sales were up 10% as reported, and 11% in constant currency. The sixth consecutive quarter of year-over-year growth. Adjusted EBITDA was $321 million, up $48 million and adjusted EPS improved by $0.13 to $0.53. Key highlights for the full-year as compared to 2020. And net sales were up 19% as reported and 18% in constant currency, the highest annual growth rate in decades. Adjusted EBITDA was $1.7 billion an increase of 43%. Adjusted EPS increased a 141% to $1.30. Adjusted operating income margin improved from 9.6% to 14%. We've doubled our free cash flow and improved our leverage ratio to 2.6. Our strong full-year performance was broad based. We grow in constant currency in six of seven categories in each of our three power brands, as well as American Girl, and in three or four regions. It was also an outstanding year for Mattel in terms of market share. Pair NPD, Mattel outpace the industry and gain share globally, for the second consecutive year. Mattel also gain share in every measured market this year. In the fourth quarter, Mattel was the number…

Thanks, Ynon. We finished 2021 with another outstanding quarter. In the fourth quarter, we generated net sales of $1.795 billion, an increase of 10% as reported, and 11% in constant currency. As expected, adjusted gross margin declined by 220 basis points to 49.3% due primarily to cost inflation, which was partially offset by cost savings, fixed costs absorption and pricing actions. Adjusted operating income was $264 million, a $64 million increase versus 2020 driven primarily by top line growth. Adjusted EPS was $0.53 in the quarter, increasing 33% versus the prior-year, and adjusted EBITDA grew by 18% to $321 million. Our full-year performance clearly demonstrates the improvement in profitability, and acceleration of top line growth. For the full-year, net sales increased by 19% as reported, and 18% in constant currency, driven by growth across categories and geographies. Adjusted gross margin declined 80 basis points to 48.2% due primarily to significant cost inflation, mostly offset by the scale benefit from higher sales, pricing actions and cost savings. Adjusted operating income increased by 73% to $763 million as our adjusted operating income margin expanded by 440 basis points to 14%. Adjusted EPS was $1.30, increasing 141% from the prior-year of $0.54. And lastly, adjusted EBITDA crossing the $1 billion mark increased by $301 million or 43% to $1.007 billion and well ahead of expectations. Turning to gross billings and constant currency for the company and by region. Mattel gross billings increased by 9% in the quarter. On a full-year basis, gross billings increased by 17% driven by broad based growth across the portfolio. Year-end retail inventory was up in dollars, but down in weeks of supply, which we believe positions us well for the first quarter. North America was up 13% for the quarter, driven primarily by games and dolls and action…

Thank you everyone. We'll be started in just another minute here.

[Operator Instructions]. Our first question comes from the line of Fred Whiteman with Wolfe Research. Your line is open.

Hey guys, thanks for the question. I was hoping you could maybe just unpack, what looks like a pretty big beat in the fourth quarter versus where you guys regarding previously. Was the biggest surprise, just maybe that shipments came in better than you were expecting? Was consumer demand better the pricing hit sooner than you'd expected. Maybe just where you saw the most upside expectations exiting 3Q?

Sure. I can start with that. I think the primary driver of the beat is our top-line performance. And I think the notable thing about it is it was very broad based across categories, across regions. We gain share in the fourth quarter, that's our sixth consecutive quarter. And we were the number one manufacturer in the quarter as well. So just a really strong finish and ahead of our expectation.

And Fred, I would add that when we say broad base, this is in six of the seven categories where we operate in each of our power brands, Barbie, Hot Wheels, Fisher-Price and American Girl. And also in three of the four regions where we operate. So very comprehensive, there was no one brand or category lifting everything else it was comprehensive. And just -- not just for the quarter, but the same for the full-year. So strong comprehensive performance across the board.

Great. And then as we think about Barbie into next year that business was up 24% this year, I think Anthony mentioned that that is -- the doll category is expected to grow in '22 as well. But how should we be thinking about Barbie specifically as some of these new doll brands emerge, right? We have Monster coming back. We have Princess entering the portfolio in '23. Should we be looking at this more from like a holistic doll portfolio perspective? Should we keep looking at Barbie as sort of a standalone? How would you suggest we evaluate the trajectory of that business going forward?

Hi, Fred, it's Richard. First off, Barbie had what can only be described as a remarkable year. I mean, the gross billings of 19% in the quarter, 24% for the year, incredible momentum as it relates to the brand. I mean, this was the highest full-year for Barbie that we have on record. The stats are truly amazing. Number one overall toy property globally. This is for both the fourth quarter and the full-year and this is also for the second consecutive year. And we were the number one U.S. doll property in each week in 2021 per NPD. Clearly, Barbie is a leader not only in the industry as a toy brand, but also clearly leading the doll business overall. The brand strength across multiple segments continue, primarily driven by the Mattel playbook. Innovation, incredible innovation, fueling growth. We've got particular momentum in our segments Color Reveal and Barbie Extra. And we're forecasting another year of growth for the brand. Unbelievable marketing programs driven by our purpose, innovative toys that are connected to our system. We're going to continue to expand brand experiences across multiple platforms. And we'll be sharing a lot more detail, not only about the Barbie brand, but our doll portfolio overall. As a leader in the industry, certainly Barbie is a key indicator, but we manage our business as a portfolio by category. And so building our brands to complement each other, and work with each other to earn consumers interest, and ultimately complement each other using our playbook together. Over the last several years, as you know, we've taken significant steps to transform the organization. The leadership in the doll category proves day in and day out that we are the best-in-class. And we will continue to do that and look forward to sharing a lot more details with you at our Investor Day upcoming on the 18th.

Great, thanks, guys.

Thank you. Our next question comes from the line of Arpine Kocharyan with UBS. Your line is open.

Hi, everyone. This is Arpine. Congrats on a stellar quarter.

Thank you. Thank you, Arpine.

So guidance ranges that are definitely sort of above our expectations. I'm just trying to understand was this resounding visibility coming from further into 2023? Is it because of some of the pipeline of entertainment and content that you have? Or I guess, could you maybe share your views on what you seeing the industry does this year in retail. Given some of the commentary from your competitor earlier this week on the industry perhaps being sideways and down for the year. And then I have a quick follow-up?

Let me start then talk about the industry. Because it's an important context. So we expect the industry to continue to grow. The toy industry is a growth industry. It's been growing for the last 10 consecutive years. It demonstrated resilience during the pandemic. It's been a very important and a strategic category for retailers. It's experiential, it drives traffic, very high engagement. The items are not expensive, and parents forever would spend money on children especially when it comes to quality product and trusted brand. As you know the industry grew up our NPD 11% in 2020, 9% in '21. And this is in spite of the major supply chain disruptions and retail closure. And important to say that your monitor is expecting the industry to grow at 5.4% CAGR through 2025 and reach $100 billion in '23. Within this environment, we expect to continue to grow ahead of the industry and gain share and continue to perform well across different categories and strong brands. Anthony will give you a bit more color on the actual drivers. But it's important to frame the environment where we expect growth and then compound that growth with our own performance.

Yes, our net sales guidance and goals for 2023 reflect our expectation that we'll continue to outpace the industry. Specifically in 2022 8% to 10% net sales growth driven by strength across our portfolio. Continued growth in our leader categories, growth in our power brand, growth in our challenger categories driven by Action Figures, benefiting from theatrical tie ins drastic role in light year. And also in Building Sets driven by innovation and expanded distribution. We expect to get off to a strong start and expect strong top-line growth in the first quarter of 2022. And then look into 2023. As you saw, we increased our goal to grow net sales now high single-digits in constant currency. Again, continued growth in our leader categories and MEGA and power brands. We also have a pipeline of catalog IP coming. For example, Monster High and Match Parts, and also the strength of our entertainment partnership with Disney Princess and Frozen coming online then as well.

That's very helpful. Thank you. And then just a quick second question, what you said under a capital allocations was sort of interesting in terms of M&A. I guess what direction are you thinking? What do you seeing is a gray area for you, where you can also make sort of one plus one equals three. I also saw buybacks in the slide deck and no mention of dividends, which has historically been the direction this board has moved. Based on where the stock is, that does makes sense to me. But just anything more you could comment on the -- on M&A? Thank you.

Yes, it is obviously premature to talk specifically. But I mean the approach is and the opportunities to pursue M&A areas that accretive to drive growth for the company. Corporate development opportunities that we believe can advance what we do, improve our growth profile and overall create economic value for shareholders. Our balance sheet is about to become another growth driver. The capacity that we have now, the strength 2.6 leverage, we're obviously very close to achieving investment grade credit metrics. And that will give us a lot more optionality and the ability to leverage our balance sheet for additional growth opportunities.

And just to add, Arpine, you're correct. Our near-term priorities do not include reinstating a dividend. We believe our approach to capital allocation provides us greater financial flexibility to manage our capital structure to be able to invest in growth and to create value for our shareholders.

Thank you, and congrats again on a strong quarter.

Thank you, Aprine.

Thank you. Our next question comes from the line of Steph Wissink with Jefferies. Your line is open.

Hi, thank you. Good afternoon, everyone. I'm just going to ask the question that I'm getting the most after the close today is just to try to sync up the POS up low single with the sales up 10%. And I think the inventory Anthony that you mentioned was almost 50% on the balance sheet at the end of the year. Just help us think through the triangulation of those measures and kind of have the trade inventory is with your comments that you expected to start the year quite strong and to hit that 8% to 10% top-line growth?

Yes, let me start with the inventory situation. I'll start with retailer inventories, because I think there's retailer inventories. And then there's our own inventories. In terms of retailer inventories, year-end retail inventory was up in dollars, that includes in transits, but they're down in the weeks of supply. So we believe that positions us very well for the early part of 2022. And that retailer inventory is healthy, and again positions as well to deliver another strong growth year. And as I said a moment ago, we expect to get off to a strong start in 2022. Now in terms of our owned inventory, we're up, right. We ended last year at $528 million, and that increased to $777 million this year. And there's a couple reasons for that. One is the significant level of cost inflation, that we've experienced this on the balance sheet. And we're also increased inventories to support our future growth. Again, we believe our owned inventory is very healthy. We got into a strong top-line growth in 2022. Expect to get off to a strong start in the first quarter. And then with respect to the inventory piece, again, it's in the inventory, which is why we said it'll have a significant negative impact on our first half gross margin performance.

Okay, then just as a follow-up, thinking about POS, if you can just help us reconcile. Usually when we see shipments exceeding POS in the fourth quarter, there's usually a digestion cycle in the trade for several months. But you're expecting to kind of ship ahead of POS again. So talk a little bit about just giving us a level of comfort that there's not excess inventory moving through?

Yes, I think if you look over the full-year, it's relatively in line. We came in the year below. We ended the year above. And we're down in weeks of supply, which we believe positions as well. When you talk about the POS, we're very happy with consumer takeaways, especially the all-important holiday season. And in the context of Q4 POS was up. We gained share and finished as the number one manufacturer globally in the quarter per NPD. In POS on a full-year basis up low double-digits, again, gaining share for the second consecutive year and expect strong growth in 2022. And I think we're all -- we're very confident in our inventory positions and in our growth outlook and the momentum that we have in the market.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Gerrick Johnson with BMO Capital Markets. Your line is open.

All right, good afternoon. Thank you very much. Hey, Richard, I was going to ask question on Disney Princess. It's a big undertaking and I know you're the best in the business in dolls. But does this still resources and human intellectual capital away from your other doll lines, most notably the relaunch of Monster High?

Thanks, Gerrick. The way to think about this is, our restructure several years ago by category really leverages the competency and the talent that we have, in the context of working together across the portfolio. And our proven success, if you will, particularly with Barbie. You look at our Playbook which has been executed incredibly well. On the Barbie brand is almost a case study. And in that context, you start to see not only in the Doll portfolio, but across the entire Mattel portfolio, the execution against that Playbook really work hard for us. As you know, we have an incredible portfolio of Dolls. And in that context, we work hard to complement them and complement them with each other. The Disney Princess and Frozen franchise coming back to Mattel is an extraordinary moment for the company. They're back because nobody designs, develops, manufactures or markets Dolls, better than Mattel. Hands down and we can't wait to unveil and can't wait to apply our Playbook approach. And we'll create as you can imagine incredibly innovative and inspiring lines for these iconic stories and characters. It's going to be a terrific reunion. And we're already very, very excited to present.

All right. Thank you.

And Gerrick, just to add a couple of words, it is a great win for Mattel, Disney Princess and Frozen together one of the crown jewels of The Walt Disney Company, as you know a huge wealth of characters and storylines. And it's important for Mattel for three reasons. It says our portfolio has reached as Richard mentioned, as the leader in the Dolls category, it's also going to be in accretive growth driver in both in terms of top line and profitability starting in '23. And also it strengthen our position as a partner of choice as we continue to build our relationships with the major entertainment companies. So obviously this is a symbolic milestone in our transformation strategy. But important to say, we do expect to grow it from the current levels. We have the capabilities, we have the expertise. And we definitely know how to develop and grow Evergreen franchises. So this is another big driver, and we do expect to grow it from the current levels.

Great, thank you. I'd like to ask one more question a little bit different topic here. We're seeing retailers delay spring set, set dates. How does that impact your outlook for the first half?

Yes, I don't see it having a significant impact relative to our expectations. As we said, we expect to get off to a strong start top line in the first quarter, although our gross margins will be impacted by inflation. But I think we're well positioned and I'll just add that, as our new product is hitting shelves, we are very pleased with the performance and we're in a very good position as we start the year.

Great, thanks folks.

Thanks, Gerrick.

Thanks, Gerrick.

Thank you. Our next question comes from the line of Mike Ng with Goldman Sachs. Your line is open.

Hi, good afternoon. Thanks for the question. I had a couple of follow-ups to the Disney Princess questions. Was that the primary driver of the improvement in the 2023 revenue guidance from mid-singles to high-singles? And then if I recall correctly, I think back in 2014, Princess was an excess of $500 million. Do you see an opportunity to get back to those levels, if not in 2023 over time, what does that ramp-up process look like? Thank you.

Yes, this is one of the drivers that gives us the building blocks for the goals we provided for '23. So, it's not the only reason but clearly it adds up to our strength and portfolio. And as it relates to size, we haven't provided specific numbers at this point. We don't do that by specific brands. But as I mentioned, we would be expected to grow from the current levels. We believe we have unique skill sets and capabilities and proven track record and a platform that is going, that is getting stronger and stronger by the day and we expect to absolutely exceed the current levels of performance.

Great, thank you. And if I could just have one follow-up. The 16% to 17% margin outlook, that's very strong. You also did a really great job of managing OpEx in the quarter. I was just wondering how if you could expand on that a little bit particularly in the inflationary market that we're currently in, is it simply the cost savings program? Is it something else any help, any color that would be helpful?

Sure, I can comment on that. As we said, the goal is to achieve operating income margin on an adjusted basis 16% to 17%, of net sales. And we've made really great progress, finishing 2021 at 14%, I would say there is a combination of drivers clearly 2021 and 2022 have been impacted by high levels of inflation, we expect that to moderate in 2023. We also are off to a great start on optimizing for growth program targeting $250 million of savings by 2023. That will be one of the key drivers to the margin expansion. We also will experience with our high level of top line growth, the benefit of fixed costs absorption as we scale the business. And lastly, we expect the combination of pricing and cost savings to exceed inflation over time and to contribute to margin expansion.

Great, thank you.

You're welcome.

Thank you. Our next question comes from the line of Megan Alexander with JPMorgan. Your line is open.

Hi, thanks very much. I was hoping you could just talk a little bit more about the cadence of gross margin over the year, you spoke to the pressure in the first half, but would you expect 1Q to be paid pressure from inflation perspective and kind of sequentially improve from there? And then if you look at the second half, can you recapture the cost inflation from last year such that gross margin could be up in the back half?

Yes, so let me give some context first on the inflation environment. I mean, as we pointed out, we continue to be impacted by high levels of cost inflation, which is actually expected to have a more significant margin impact in 2022 than the 400 basis point impact in 2021. Now, further details out of that -- on that inflation, about more than half of it right is on ocean freight. The balance is a combination of resins and zinc as well as higher than usual wage inflation in some of our supply chain markets. Now, on a full-year basis, we expect to be able to offset most of that inflation, with pricing actions, the scale benefit of top line growth and cost savings. On the pricing front, we did take pricing in 2021, had 150 basis point positive impact in Q4. So we'll get a carryover benefit from that. We've also made assumptions regarding additional pricing actions in 2022. Not going to get into this specifics today. But that's implied in our guidance, as well. And as we said earlier, with the amount of inflation we have on our balance sheet at the end of '21, a little bit more pressure on the first half relative to the second half.

That's helpful. And then I guess, just a follow-up to Michael's last question, in terms of getting to 16% to 17% operating margin next year, do you still expect expansion on gross margins versus 2020 levels of close to 49%?

Yes, we're not going to get into specific numbers, but we expect gross margin expansion in 2023.

Great, thank you.

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

Okay, thanks guys. Good afternoon. I'm wondering if you could provide an update on Monster High, you rebooted that brand, where you are in terms of the content production and launch and what product roadmap looks like for that brand? And then I got a follow-up.

Yes, sure Drew. We're incredibly excited to introduce or reintroduce this brand, we're going to be launching it late in 2022 and we believe Monster High will be a meaningful growth driver for the company in 2022 and beyond, we have a terrific lineup of live action and animated content to support the launch with our partners at Nickelodeon. We're not going to provide obviously specific numbers for it. But it's got incredible legacy, and a fan base that we're looking to excite as well as introduce to new audiences, we'll be utilizing our Playbook to amplify the brand, of course brand purpose, design led innovation, incredible cultural relevance and partnerships that are going to be announced and lastly executional excellence. Important to say, the brand purpose of this brand is really important. It's to foster a more accepting world, where everyone is proud to be their authentic self. And all these are just words, they're really culturally relevant and important in relation to diversity, inclusivity and to consumers overall today. So we're really excited, the brand is more relevant than ever. There's a lot more to share, and to comment our Analysts Day, but we couldn't be more excited about it.

Thanks, Richard and then I just wanted to ask the margin question maybe a little bit differently here, Anthony. The net sales guidance through '23 suggests you will pass the peak set in 2013 and that year you guys did an 18% EBIT margin, your guidance for '23 is about 100, 200 basis points below that. Is this just conservatism, is it gross margin and is the 16% to 17% of cap or do you see upside of that longer-term? Thanks.

Yes, first let me just clarify that these are goals for 2023 not guidance. And we're factoring our current expectations. And the outlook for as I said before, the outlook for that margin goal includes a couple of assumptions, one is that following that significant inflation in '21, and '22, that inflation will moderate in 2023. Implied in our guidance in 2022 is some margin expansion but not significant. And then, as I said before, the continued benefit of our optimizing for growth program, some carry over benefit of pricing from '22 to '23, that will see gross margin expansion, and we'll continue to scale our SG&A and continue to see declines in SG&A as a percent of sales. And then lastly, that's our goal. I would not say it's a cap, it's a goal at this point. And we have high confidence that we can get to that rate.

Okay, thanks guys.

Thank you. Ladies and gentlemen, due to the interest of time, our final question comes from the line of Alok Patel with Mattel. Your line is open.

Hi, thanks for taking my question and congrats on the great year. I wanted to follow-up on the CapEx guidance, the low end of $175 million is $25 million above 2021 spend. So I wanted to know where the bulk of that CapEx has been allocated?

Sure, I can take that. As we said, the 2022 guidance is for CapEx in the range of 175 to 200 and that's an increase from where we were in 2021. And really reflects strategic investments to increase manufacturing capacity in our owned Dolls and Vehicles facilities, really to support the anticipated high level of growth and these are areas where we have a very significant competitive cost advantage and while we're committed to a capital light model, our scale and capabilities give us that cost advantage and this strategic investment is expected to increase productivity and yield a very, very highly accretive return on invested capital.

Got you. Okay, okay that's all I had. Thanks.

Thank you. I would now like to turn the call back over to Ynon Kreiz, Chairman and CEO for closing remarks.

Thank you, operator and thanks to all of you for your questions and interest in Mattel. In summary, 2021 was an exceptional year for the company. Our turnaround is now complete. We're in growth mode. We expect to continue to grow and gain market share in 2022 and 2023. And I'm not stopping there. We look forward to sharing more details on our plans and growth strategy at our Virtual Analyst Presentation on Friday, February 18. And finally, if your weekend plans include watching the Superbowl on Sunday, please take a look at the Barbie big game debut in Rocket Homes and Rocket Mortgage Commercial. This is in the second quarter. Don't miss it, it's going to be fun and I'm sure you will enjoy it. We will now turn it back to Dave. Thank you, Dave, take it from here.

Thanks, 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 1-404-537-3406 with the passcode being 3299196. Thank you for participating in today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.