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spk00: 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 on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker for today, Dave Sponjevic. You may begin.
spk03: Dave Sponjevic Thank you, operator, and good afternoon, everyone.
spk04: Joining me today are Inan Kryze, Mattel's Chairman and Chief Executive Officer, Richard Dixon, Mattel's President and Chief Operating Officer, and Anthony D. Silvestro, 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 Enon and Anthony providing commentary on our results, after which we will provide some time for Enon, 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 investor section of our corporate website, corporate.matel.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 investor section of our corporate website. In the second quarter of 2021, we elected to revise prior periods for certain immaterial out-of-period adjustments that do not require us to amend previous filings. These adjustments are reflected in our fourth quarter earnings release and slide presentation and will be reflected in our 2021 annual report on Form 10-K. These adjustments will also be subsequently updated on the financial history section of our investor relations website at a later date. Before we begin, I'd like to remind you that certain statements made during the call may include forward-looking statements related to the future performance of our business, brands, categories, and product lines. 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, including risks and uncertainties associated with the COVID-19 pandemic. We described some of these uncertainties in the risk factor section of our 2020 Annual Report on Form 10-K and on our Q3 2021 Quarterly Report on Form 10-Q. Our earnings release and the presentation accompanying this call 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 Inan.
spk01: 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 continued to improve profitability, accelerate top-line growth, and made important progress toward 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, 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 13 cents to 53 cents. Key highlights for the full year as compared to 2020, 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 141% to $1.30. Adjusted operating income margin improved from 9.6% to 14%. We doubled our free cash flow. and improved our leverage ratio to 2.6. Our strong full-year performance was broad-based. We grew in constant currency in six of seven categories, in each of our three power brands, as well as American Girl, and in three of four regions. It was also an outstanding year for Mattel in terms of market share. Per NPD, Mattel outpaced the industry and gained share globally for the second consecutive year. Mattel also gained share in every measured market this year. In the fourth quarter, Mattel was the number one manufacturer globally with three of the top seven properties. This was the sixth consecutive quarter of share gain. POS was up low single digits in the quarter and finished up low double digits for the year. Retail returned to a more balanced omnichannel environment with e-commerce stabilizing. E-commerce POS was up 2% in the quarter and up 6% for the full year, representing 31% of all POS. Our products resonated with consumers at levels we have not seen in years. We have also been very successful in making Mattel a partner of choice for the major entertainment companies and see this as another growth lever. In addition to our own IP, we now have a formidable lineup of evergreen properties from Microsoft, Nickelodeon, Nintendo, Universal, Warner Brothers, WWE, as well as Disney. The recently announced multi-year global licensing agreement for the Disney Princess and Frozen franchises builds on the existing licensing relationship between Mattel and Disney. Mattel will have the global licensing rights to develop lines of toys, including fashion dolls, small dolls, and figures for all Disney Princess and Frozen franchises, as well as the upcoming live-action film, The Little Mermaid. The collection is expected to launch at retailers around the globe at the beginning of 2023. The return of Disney Princess and Frozen to our portfolio is a fitting recognition of our strength and capabilities and adds yet another growth driver to our portfolio. The strong quarterly and full year results across all key metrics are attributed to the quality of our products, strength of our brand portfolio, capabilities of our team, and successful execution of our multi-year strategy to transform Attail to an IP-driven, high-performing toy company. Our turnaround is complete. We are now in growth mode. Looking at gross billings in constant currency by category versus the prior year, Dow's gross billings grew 14% in the quarter. led by gains in key power brand Barbie, as well as Spirit, Parley Pocket, and Enchantimals. POS was up low single digits. Mattel continued to gain global market share within Dahl's, increasing 1.3 points in the fourth quarter per NPD. For the full year, Dahl's gross billings grew a significant 21%. Barbie was up 19% in the quarter. POS was up low single digits. 2021 was a remarkable year for Barbie. Gross billings increased by 24% and reached the highest level we have on record. Barbie was the number one overall toy property globally in both the fourth quarter and full year. for the second consecutive year per NPD. American Girl gross billings declined 6% in the quarter compared to the prior year, which benefited from the very successful historical character launch. This was partially offset by growth across most other segments. The American Girl turnaround strategy is working, with this cherished brand growing 4% for the full year. We continue to see positive results across key metrics and our expanded D2C strategy. Vehicles declined 3% in the quarter with temporary manufacturing closures impacting Hot Wheels stock availability. Currently, all of our factories are open with minimal disruption to operations. Category POS was up low single digits. For the full year, vehicles gross billings grew 12% to achieve the highest full year on record. Hot Wheels gross billings declined 5% in the quarter with POS up low single digits. For the full year, Hot Wheels grew 11% to achieve its fourth consecutive record year and surpassed $1 billion in gross billings for the first time. Hot Wheels remained the number one vehicle's property globally in both the fourth quarter and full year. And the Hot Wheels singles assortment was the number one toy globally in 2021 per NPD. Infant, toddler, and preschool gross billings declined 1% in the quarter in line with POS. The decline was due to supply chain disruption that impacted Fisher-Price core and retail closures in Asia Pacific. For the full year, infant, toddler, and preschool gross billings grew 5%. Fisher-Price core gross billings declined 2% in the quarter, in line with POS. For the year, Fisher-Price grew gross billings 5%, as the brand's turnaround continues to produce positive results. We are planning for growth in Fisher-Price and Thomas in 2022. Fisher-Price was again the number one infant, toddler, and preschool property in the U.S. and globally for the fourth consecutive year per NPD. Also per NPD, Fisher Price was the number three global property in the fourth quarter across the industry and improved to be the number two global property in December, finishing the year as a top five global property overall. Thomas Gross Billings grew 7% in the quarter and 4% for the year, with strong POS. in the holiday quarter solidifying its turnaround. Our challenger categories gross billings together increased 26% in the quarter, led by exceptional growth in action figures and gains in other. POS was up low double digits. For the full year, the challenger categories collectively grew 31%. Action figures gross billings were up 53% in the fourth quarter, driven by Jurassic World and Masters of the Universe. Building sets was essentially flat, while games grew 7%. Mattel was the number two global manufacturer within both action figures and building sets in both the fourth quarter and full year per NPD. And Uno continued to be the number one card game globally, also per NPD. Other, including Plush, performed exceptionally well, and gross billings finished up 68%. 2021 was another great year for the toy industry, increasing by 9% per NPD, in spite of major global supply chain disruption and significant retail closures. The industry is expected to continue to grow as children, parents, and caregivers have made toys and play a bigger part of their lives. At Mattel, working in close collaboration with our retail partners, we outpaced the industry for the second year in a row and expect to continue to gain market share. In recognition of the quality and breadth of our product offering across all categories, we received a record high industry-leading 17 award nominations for the Toy Association's 2022 Toy of the Year Awards. Looking back at what has been achieved over the last few years, Mattel delivered on its strategy to improve profitability and accelerate top-line growth while also making progress toward capturing the full value of our IP. Two of our biggest Mattel Films projects move into production this year. Barbie is in pre-production with principal photography starting next month, and Masters of the Universe, our live action motion picture in development with Netflix, is expected to start production this summer. We look forward to sharing more on our entertainment offering and the progression of our strategy overall during our analyst presentation on February 18th. Mattel's full year results exceeded expectations and reinforced the company's growth trajectory with ongoing momentum and strength across the portfolio. As strong as 2021 was, Given our outperformance, 2022 is expected to be stronger. With that, our 2022 guidance exceeds our prior goals, and we now expect net sales to grow 8% to 10% in constant currency, adjusted EBITDA to be between $1.1 and $1.125 billion, and adjusted EPS is expected to increase to a range of $1.42 to $1.48. As strong as 2022 is expected to be, the outlook for 2023 is even stronger. We are increasing our 2023 goal for top line growth in net sales in constant currency to high single digits from mid single digits previously. We are updating our adjusted operating income margin goal in 2023 to approximately 16 to 17% of net sales. And we are adding a new goal for 2023 to exceed an adjusted EPS of $1.90. Anthony will provide more detail shortly. In closing, Mattel's 2021 results cap another year of exceptional performance. The organization once again performed remarkably well and overcame multiple challenges over the past year. We stayed committed to Mattel's purpose to empower the next generation to explore the wonder of childhood and reach the full potential and to our mission to create innovative products and experiences that inspire, entertain, and develop children through play. The company has made significant progress over the last few years on our transformation strategy. Our turnaround is complete. We believe we are well positioned to continue our strong momentum and are excited to be guiding to even higher growth in 2022 and higher goals in 2023. I would like to thank the entire organization for the hard work and efforts in growing long-term sustainable shareholder value. I will now hand it over to Anthony to cover the financials in more detail.
spk05: Thanks, Inan. We finished 2021 with another outstanding quarter. In the fourth quarter, we generated net sales of $1,795,000,000, 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 cost 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 53 cents 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 billion and $7 million, 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 fillings increased by 17%, driven by broad-based growth across the portfolio. Uran 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 gains in dollars and action figures, with POS increasing low single digits. For the year, gross billings were up 21%, with POS up double digits. For the full year, we gained share in North America and retained our leadership position as the number one manufacturer in the U.S. for the 28th consecutive year per NPD. EMEA has been our fastest growing region. For the quarter, gross billings increased 18%, with POS up mid-single digits. And for the full year, gross billings gained 20% with POS up low double digits. For the full year, we gained share anemia in every market per NPD. Latin America gross billings declined by 1% in the quarter, while POS increased by high single digits. For the full year, gross billings gained 10%, consistent with POS. We outpaced the industry, gained share, and extended our number one leadership position in Latin America for the full year per NPD. Asia Pacific gross billings declined 7% in the quarter in line with POS as the business was impacted by COVID-related retail closures in key markets and supply chain disruption. For the full year, gross billings declined just 1% in line with POS. Mattel outperformed the industry and gained share in Australia for the full year per NPD. At the end of the year, nearly all retail outlets were open in all regions, except for Asia Pacific, which had approximately 6% of stores closed. On a total company basis, this represented approximately 1% of global sales. Adjusted gross margin declined 220 basis points in the quarter to 49.3%. This was due primarily to significant cost inflation, which had a negative impact of 600 basis points as we continued to experience increases in materials and ocean freight costs. Going the other way, pricing actions, including those taken in the second half, contributed 150 basis points to gross margins. In addition, with double-digit top-line growth, growth margin benefited by 150 basis points from fixed cost absorption. And optimizing for growth contributed $13 million of incremental savings in cost of goods sold in the quarter, a benefit of 80 basis points. Moving down the P&L, advertising expenses for the quarter declined 7% to $266 million reflecting some timing shifts between Q3 and Q4. For the full year, advertising increased by 4% as we continued to drive demand creation to support POS. Adjusted SG&A expenses were $355 million in the quarter, an increase of 2% as we continued to invest in the business while effectively managing our cost structure. We finished the year with another quarter of strong bottom line performance. Adjusted operating income increased to $264 million from $200 million in the prior year, an increase of $64 million, or 32%. The increase was driven by higher sales volume, the benefit of pricing and cost savings partly offset by cost inflation. Adjusted EBITDA increased by $48 million in the quarter, or 18% to $321 million. Cash flow generation significantly improved for the full year. Cash from operations increased by $200 million to $485 million. The improvement was primarily driven by gains in net income, adjusted for the non-cash deferred tax valuation allowance, partly offset by higher working capital. Free cash flow doubled from $167 million in 2020 to $334 million in 2021 and was primarily used to reduce debt. Capital expenditures increased to $151 million, $33 million above last year, as we invest in dull capacity to support the high level of growth. free cash flow conversion continued to increase. As a percentage of adjusted EBITDA, free cash flow was 33% in 2021 compared to 24% in 2020. We believe we are well positioned to continue improving our conversion percentage going forward. Over time, we believe our free cash flow conversion ratio can exceed 50%. Taking a look at the balance sheet, cash balance at year-end was $731 million compared to $762 million in the prior year. Long-term debt declined by $284 million to $2,571 million. The debt reduction was funded by our free cash flow generation. Accounts receivable increased by $39 million to $1.73 billion, reflecting our four-quarter sales growth, while day sales outstanding improved by three days to 54 compared to the prior year. Inventory at year-end was $777 million compared to $528 million in the prior year. The increase is due to cost inflation and higher inventories to support future growth. In the first quarter of 2022, the inflation currently valued in our inventory will have a significant negative impact to gross margin. Leverage ratio continues to improve, driven by the growth in adjusted EBITDA and cash flow-driven debt reductions. We finished 2021 with a debt to adjusted EBITDA ratio of 2.6 times compared to 4.1 times in the prior year. The optimizing for growth program is generating significant cost savings. Savings from the program were $29 million in the fourth quarter and $97 million for the full year, exceeding expectations. 2021 savings benefited cost of goods sold by $69 million, SG&A by $20 million, and reduced non-working advertising by $9 million. Looking ahead, we expect the program to deliver savings of $80 to $90 million in 2022 and are on track to achieve our total targeted savings of $250 million by 2023. Building on very strong 2021 performance and continuing momentum, our 2022 guidance reflects the expectation for another strong growth year for Mattel. As Inan said, we expect to grow net sales in 2022 by 8% to 10% in constant currency. Net sales guidance reflects expected growth in our leader categories, dolls, vehicles, and infant toddler preschools. Within these categories, our power brands, Barbie, Hot Wheels, and Fisher, Price, and Thomas, as well as American Girl, are all expected to grow. Our challenger categories as a whole are also expected to grow. This is driven primarily by action figures benefiting from entertainment licensing agreements with theatrical tie-ins, including Jurassic World Dominion with Universal, and light year with Disney and Pixar, and by our building sets category, benefiting from new product innovation and expanded distribution. Full-year adjusted gross margin is expected to decline from 48.2% in 2021 to approximately 47% in 2022. We continue to be impacted by high levels of cost inflation, primarily in raw materials and ocean freight. Inflation, which had an approximately 400 basis point negative impact to gross margin in 2021, is expected to be even more significant in 2022. As I mentioned earlier, much of this is already on the balance sheet and will have a more significant negative impact on our first half results. The negative gross margin impact of inflation will be partly offset by the benefits from pricing actions, the fixed cost scale benefit from top-line growth, and anticipated savings from the Optimizing for Growth program. 2022 adjusted EBITDA is expected to increase to a range of $1.1 to $1.125 billion, representing growth of 9% to 12%. In spite of the gross margin decline, forecasted growth in adjusted EBITDA exceeds net sales growth as we continue to improve profitability. As a percent of net sales, SG&A is expected to continue to decline while advertising remains relatively stable. With our improvements in profitability, cash flow, and reduced leverage, we will provide guidance for adjusted EPS in 2022 as we begin to transition from adjusted EBITDA. From our 2021 base of $1.30, adjusted EPS is expected to increase to a range of $1.42 to $1.48 per share. Adjusted EPS is benefiting from lower interest expense as we reduce debt in the near term, partly offset by an expected increase in the adjusted tax rate compared to 2021. With the debt pay down and refinancing actions we took in 2021, our fourth quarter interest expense represents a more normalized run rate going forward, subject to any future debt reductions or refinancings. Capital expenditures are forecast to be in the range of $175 to $200 million, an increase from prior year, as we strategically invest to increase manufacturing capacity, in our owned dolls and vehicles facilities to support anticipated growth and where we have a significant competitive cost advantage. With our marketplace momentum, we expect to start the year with strong top line performance while margins will be negatively impacted by cost inflation. Our guidance takes into account the anticipated supply chain disruption that we are aware of today but is subject to any unexpected supply chain disruption, market volatility, and other macroeconomic risks and uncertainties. As Inan said, looking ahead to 2023, we are increasing our goal for 2023 net sales growth to high single digits and constant currency compared to the prior goal of mid-single digits. Following two consecutive years of double-digit inflation rates and cost of goods sold, we expect inflation to moderate in 2023. On profitability, we have updated our 2023 goal and now expect to achieve an adjusted operating income margin of approximately 16 to 17% of net sales. We have made significant progress toward this goal in achieving 14% already in 2021. In addition to the 2022 guidance for adjusted EPS, we are adding a new 2023 goal to exceed adjusted EPS of $1.90. This will be driven by top line growth, margin expansion, and use of free cash flow. With the improvement in balance sheet metrics, we are rapidly approaching investment grade metrics and will now share with you our near-term capital allocation priorities. Our priorities are based on our expectation to continue to significantly improve cash flow going forward. The number one priority is to drive organic growth. This will include strengthening core capabilities such as direct-to-consumer, digital marketing, e-commerce, and expanding digital experiences such as NFTs. We will also accelerate demand creation to drive category and geographic growth as well as channel expansion. And we will make targeted strategic capital investments to increase our manufacturing capacity where we have a significant competitive cost advantage. Our second capital allocation priority is to further reduce financial leverage in order to achieve and retain an investment grade rating. Our target is a leverage ratio in the range of two to two and a half times debt to adjusted EBITDA, which we expect to achieve in 2022. Achieving an investment grade rating will provide us greater financial flexibility, access to additional liquidity, and reduce our cost of capital. One example is being able to transition from our current asset-based credit facility to an unsecured credit facility supporting a commercial paper program, a flexible structure with more liquidity and lower cost. Our third priority, with the benefit of a stronger balance sheet, is to pursue M&A and other corporate development opportunities. which we believe will advance our strategy, improve our growth profile, and create economic value for shareholders. Fourth, we will repurchase shares as an effective and flexible capital deployment tool to manage our capital structure. Under our current authorization, we have approximately $200 million of capacity. 2021 has been another year of strong financial performance. We have made significant progress over the last four years, and as Inan noted, our turnaround is now complete. Our guidance for 2022 and goals for 2023 reflect our momentum and confidence in our future performance. We remain focused on executing our strategy and creating long-term shareholder value. Thanks for your time today. I will now hand it over to the operator for the Q&A.
spk03: Thank you, everyone. We'll be started in just another minute here.
spk00: Ladies and gentlemen, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Fred Whiteman with Wolf Research. Your line is open.
spk05: Hey, guys. Thanks for the question. I was hoping you could maybe just unpack
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