We're going to get started. My name is Chris Horvers. I'm the leisure and broadlines and hardlines retail analyst here at J.P. Morgan. Welcome to day 2 of J.P. Morgan's 52nd annual TMC conference. It's my great pleasure to welcome Mattel all the way down to my right is Chairman and CEO Ynon Kreiz, and to my right immediately is CFO Anthony DiSilvestro. I've channeled my inner Ken, and I wore as close to pink as a sports coat as I could possibly find. Let's kick it off and set the table a little bit. Oh, and we will do Q&A about 20 minutes in, so please, you know, make this as interactive as possible, and just wait for the microphone to come to you 'cause this is being webcast. Ynon, you've driven a significant amount of change at Mattel over the past 6 years.
You've energized innovation. You and Anthony have taken a lot of costs out of the business. You've pivoted capital light. Can you give a high-level overview of what your vision of the next stage from Mattel is, especially considering the success of Barbie last year?
Yeah, thank you, for the introduction, and thank you for hosting us. It has been an exciting period for Mattel, over the last few years in transforming the company from being a toy manufacturer that was focused on making items to becoming an IP company that is managing franchises. And we've made transformative changes to the toy side of the company and also started to execute on the entertainment strategy, with the Barbie movie being a very strong showcase for the potential of our IP outside of the toy aisle. In the process, we also continued to strengthen our balance sheet and achieved investment grade rating. This is a long distance away from 25 x leverage ratio at the start of the journey.
Today, Mattel is very well positioned within the toy side of the company. Last year, we had the highest share gain in the U.S. in the history of the company, in any one year, and continued to position the company for long-term growth. We've also generated a significant amount of cash for the year and put the company in a position where we today have the strongest balance sheet we've had in recent memory. All of that positioned the company, we believe, for long-term growth, continued execution within the toy side of the company in terms of share gain, innovation, and managing a very strong portfolio across multiple categories, continued to grow and scale our entertainment strategy.
We've said before that this is not just about Barbie and not just about movies, but across multiple categories and a very strong brand portfolio, and continued to strengthen our balance sheet, and gives the company more optionality and more opportunities to accelerate growth and create a long-term shareholder value.
Fantastic. So can you maybe talk about, you have the entertainment side of the business, and you have the toy side of the business. If I'm looking out over the next three to five years, as the toy category bottoms this year, beyond that, how do you think about the top-line growth opportunity on those two sides of the business?
Yeah, the toy industry will grow. We expect it to grow over time, continue to grow over time. It has grown for 10 years. Even with the decline last year, it's still 19% above 2019 pre-pandemic. So it's 2021 was the highest watermark for the industry, so and 2022 was flat in spite of the inventory challenges that impacted the broader economy, not just toys. And so coming off that all-time high in 2023 was not you know, a big surprise, you might say. But as a whole, the industry is positioned for long-term growth, and within that environment, we believe we'll continue to gain share and drive top-line growth within the toy side of our strategy.
In entertainment, our strength is driven by our portfolio, which is one of the strongest catalog of important brand, heritage brands, heritage brands that that have societal importance and cultural resonance. And we believe that as the owner of one of the strongest portfolios of children and family entertainment franchises, we have very exciting opportunities to create value, capture value outside of the toy aisle. And, you know, back to highlighting the Barbie movie as a showcase for the strength of our brands, our ability to execute at the highest level in collaborating with leading creative talent, and also being able to drive demand and turn what would have otherwise been a, probably a great movie to also become a cultural event beyond the success of the box office.
This is, to a large degree, part of or driven by our very strong demand creation capabilities, which is different from marketing. But that demand creation capability is something that we believe we can apply to other opportunities, not just movies, but create demand, create excitement, and drive cultural events outside of the initial execution of a particular vertical. And the opportunity is across film, television, location-based entertainment, such as theme parks and attractions, book publishing, digital experiences and games, consumer product and merchandise. And all of these verticals are driven by big brands, big IP, big franchises that people care about.
And the success that we've had to date across each of these verticals with the, with different showcases, whether it's the movie or television, where we have 13 shows that will broadcast or stream this year. A new park, the Mattel Adventure Park, that we are launching later this year in Arizona, just outside of Glendale. The second park that we've already announced in 2026, and more opportunities to capture value in digital will be an exciting part of our roadmap. And we also dated, as you may know, the Masters of the Universe movie in June of 2026. This is a tentpole movie in partnership with Amazon that will have a theatrical release that we believe will be another important driver for a big mythology.
The Masters of the Universe is a huge mythology, and we're very excited to bring it to the big screen with a very meaningful execution.
I was a big He-Man fan as a kid. To dovetail to Anthony, can you talk how this all affects the P&L of the business, and how the growth, presumably faster growth in the entertainment side, will affect the margin structure of the business going forward?
Sure. I think there's two parts to this. One is the core toy business. We've been making improvements, right, in the cost structure of that and the margins, principally through our cost savings programs that have been very, you know, successful. We finished a big program at the end of 2023, generated $340 million of savings. We launched a new one in 2024, targeting $200 million in savings in 2026. So we're very focused on improving the profitability of the toy business. And then on top of that, these verticals that Ynon is talking about in terms of the entertainment strategy, whether it's film, TV, digital gaming, location-based entertainment, publishing, they're all margin accretive to our core business.
As those grow and grow at a faster rate than toy, we've got a, you know, a pretty meaningful mix shift in terms of the margin structure and the potential to improve margins over time.
Following up on that one, so, you know, previously, you've, you've talked about a low fifties gross margin. You're guiding 100-150 basis points of improvement this year. A lot of that is driven by the cost optimization, but also recapturing the fixed cost absorption side of the business. So do you, is there still an opportunity over the long term to get back to that low fifties margin? And, you know, in your sort of best-case scenario, you look out, you look out 3 years-5 years, what do you think about the overall operating profit or rate of the business?
Look, there's nothing structural that gets in our way from returning to the historical highs in terms of gross margin, and we see gross margin expansion opportunities from where we are today, really driven by three factors. One is, you know, the cost-savings focus that we have and will continue to have going forward. Whether or not we have a, you know, a named program, you know, cost savings and productivity and efficiency are really part of our DNA, and they're, they're an important part of the earnings algorithm. The second is the entertainment verticals, which I just mentioned. They're accretive, and they're very accretive at the gross, gross margin. That, that'll help. And then overall growth, right?
We have a scalable platform, and as we continue to grow the business, which we expect to grow top and bottom line in 2025, that'll have an overall accretive impact, not only on gross margins, but on our operating margin when you consider the SG&A line as well.
Can you talk, you know, a little bit more about the entertainment slate that you see ahead? I think there's 15, you know, titles that have been mentioned. How do we think about, you know, what's coming next? You mentioned Masters of the Universe, and what's your vision on a regular cadence of those 15 properties? Do we get to, you know, sort of 2 events per year as you get to 2026 and beyond?
Yes. Our approach has been to partner with different studios and different distribution partners by design. More typical approach would have been to have an output deal with one studio. We selected to go broad and have different projects in different partnership structures in order to give us more capacity, take more shots on goal, and be able to distribute more than one movie every few years, which would have been the case if it was one output deal. This is a more normal cadence if you have a deal with one studio. So, and that, of course, gives us the ability to partner with the right studio, the right creative team, and also create the right dynamics to achieve the right deal terms for Mattel.
With that approach, we do expect to average about, call it two movies a year in, at the normal cadence, where we have different genres, different audience demographics, and a very healthy mix of product in the marketplace. And today's world is all about big brands, big franchises. Everybody's looking for big brands that resonate and have a built-in fan base, and this is something that positions Mattel very well in a crowded market, in a world where everyone is looking for the big IP. And when it comes to children and family entertainment, what we have is a very unique offering, a very unique proposition. And Barbie was a clear one, but it is not just about Barbie. And in some cases, success can come from left field.
You don't need to own a mega brand to have a very successful movie or a television series or a digital game. You need a brand, you need the awareness, you need the built-in fan base, but it can come from anywhere, and that's the beauty of our model. We're not dependent on more big hits, and for that matter, you don't need another Barbie movie type of success at the box office to drive meaningful benefit to our financials. This movie was actually not catering, not targeting children, and was not very toyetic. It was a great movie, an incredible movie, a cultural event, but in terms of impact on toys, it was not as meaningful and impactful as another movie could be if it's more directed at children. That was a strategy.
That movie was not designed to sell toys. We said it from the outset. It was about creating a cultural event and create something that will resonate in society, and this is exactly what it achieved. But you don't need the next Barbie movie level of success at the box office to drive meaningful commercial return for Mattel.
So I'll put one more in, then open it up to the audience for some Q&A. So can you, going back to the toy side of the business, you know, the industry, as we talked about earlier, it has been down. You know, POS was up for you, you know, in the first quarter, and even in April, you had some positive commentary. So, a two-part question: Can you talk about, like, what drove that? How much do you think was possibly just, you know, some seasonality of business or some comparisons? And can you think of, h as it affected your view of how the POS of the industry might play out, for all of 2024?
Sure, I can start on that one. We did see POS growth in our first quarter. We were up, you know, low single digits, and we saw improving trends as we went through the first quarter. Now, some of that could be the timing of Easter, but even when you normalize for Easter and look at six weeks through mid-April, we were positive year-over-year, and on a year-to-date basis, we're comparable to prior year. Was basically in line with what the industry did. So, you know, our POS grew on dolls and vehicles, games and building sets, and we gained meaningful share in dolls as well as vehicles. So we're off to a good start.
and as we look ahead, you know, you know, we are reiterating our guidance, which is for comparable top-line growth and for double-digit EPS growth. So, we think we're in a good spot, a good start, and we're confident.
Great. So any questions from the audience? There's one in the back corner right there.
Hi, just the question is on capital allocation framework. Can you just remind us what that is and how you plan to execute against it?
I'm sorry, the middle part, capital allocation framework, did you say?
Yep.
Sure. You know, going through our capital allocation priorities, you know, the first is to make investments to drive organic growth, and this is things like building capabilities in DTC or e-commerce, for example. It's about making capital investments in things like die-cast cars and fashion dolls, where we have a very significant and competitive cost advantage. Lately, you know, we've transitioned a bit and are looking to make targeted investments in some of our entertainment verticals. You know, for example, this could be taking a position, a partial position in a movie. It could be self-publishing on a digital game, right? So we see opportunity, and given our financial condition, we have the capacity to consider those types of investments.
Now, this doesn't mean we're abandoning our capital-light approach, but again, we do see opportunity to make investments, right, to capture a greater portion of the upside return. Our second priority is to maintain our investment-grade rating and a targeted leverage ratio of 2x-2.5 x. Now, we've been in that range for a couple of years now, and we have regained our investment-grade rating, and we intend to maintain that. The third is M&A, right? On M&A, we do take a very disciplined approach. We will consider things that advance our strategy, accelerate growth, and generate a positive economic value for our shareowners. And then fourth is share repurchases.
We view share repurchases as a very flexible and effective tool to manage our capital structure, and in fact, you know, given we haven't found an M&A opportunity to execute, we've been buying back our own stock, right? We've bought back $300 million since we resumed repurchases last year. We announced a $1 billion share repurchase program coming into this year, and we repurchased $100 million in the first quarter, and we repurchased another $100 million in the second quarter. So we're executing, you know, against that program. So those are our four capital allocation priorities that kind of help guide our decision making. You know, obviously, capital allocation is a very dynamic process, so we continue to evaluate over time.
I'm gonna follow up on that a little bit. Can you talk about, you know, we do get questions in terms of, like, what your risk tolerance is around investing in targeted investments around movies and, self-producing a digital game, and also from an M&A perspective. Can you talk about like, you know, what are you looking for in both of those scenarios to become more aggressive? Like, what are your thresholds and rules of the road?
Yeah. We are being very disciplined in where we take risk, and in the case of making investment in entertainment opportunities, we are looking to be very strategic and choiceful and look for asymmetric opportunities, where the risk-reward is very much in our favor. Where certain elements are in place that you know, "Okay, my risk is very much mitigated," and there, you know and we can be in a position where for a relatively modest investment, you can drive a meaningful return. It can happen in certain, you know, movies, and it will not be across a slate. It will be very choiceful decisions in per project that where we see meaningful upside.
Or in mobile game publishing as another example, where we see also asymmetric return with a very low cost, you can capture meaningful upside in success, and you can stage gate the investment across a project. You don't have to commit a large capital amount before you know that it will be successful or not. When it comes to M&A, you know, same thing. We are very disciplined and very thoughtful about the risk and implementation of an acquisition. We are very cognizant of the challenges and what can go wrong. We worked too hard to put the company in such a healthy place, a very strong balance sheet, and we would not take unnecessary risks.
So, being very strategic and thoughtful about it.
Any, any other audience questions? Right here in front.
Yeah, just curious about the adventure park. I know 2026, I don't know what it's up, but what does that roadmap look like? Obviously, you're going to see what. Thank you.
Obviously, you're going to see what that success looks like, but do you have other locations in mind if it is successful? 'Cause, I mean, that could be a great place to demo stuff, built-in target market, that kind of thing. Just a little curious about that, given the capital allocation and-
Sure
... M&A.
The parks that we've announced, the one that we're launching later this year and the second one in Kansas City, outside, just outside of Kansas City, are partnerships where we don't put the capital. We are the IP owner. These two parks are branded as Mattel Adventure Park, but we're not putting the capital. We participate across multiple streams in royalties and different parts of the waterfall of revenue as well as product sales. And this can be very high margin, very accretive, and the planning is to scale that. It is not—it's not just about these two parks, but to scale that.
Back to my prior point, in a world where everybody is looking for big brands, we have something very unique to offer in children and family entertainment, and for the most part, we've never done it. So this is all both evergreen and new properties that we're bringing to the marketplace. The Hot Wheels Monster Trucks Live Tour, for example, is expanding from 60 to 85 cities in 2024. 60 cities in 2023, 85 cities in 2024. So, we're seeing more traction, more expansion, and more opportunities to broaden our location-based entertainment strategy. Josh Silverman, who is our Chief Franchise Officer, is overseeing that, with the great experience that he's bringing to the table and overseeing an exciting opportunity for the company in that space.
Thank you.
I'm gonna go to another type of entertainment, which is digital games. One of your peers has created a lot of excitement around one of their digital games and, in terms of the margins that it's driving for the business overall and the flow-through. Can you talk about more specifically about your digital game strategy, Barbie coming out later this year? But it would seem like your portfolio has a lot of IP that would work really well in that universe.
Absolutely. This, this is, you know, much like what the Barbie movie did, to the, the, the movie industry, you're seeing what, a successful game execution is doing within the mobile game industry. And, Scopely as the, as the distributor, as a developer and distributor, has done a great job. It, it did take seven years to develop, the game. We're talking about Monopoly GO! and, and the third execution has done extremely well. And, and this is, a positive thing for the industry overall. We believe we, have multiple brands that, that can, translate to exciting, exciting games, and, and digital experiences.
We've seen it within our own joint venture with NetEase, where from a very, you know, from a nothing, from a ground zero, we grew the business to generate almost $200 million from just three mobile games. That one of them is known, is UNO, and the two others, Phase 10 and Skip-Bo, are less known. But these three games generated, you know, ramped very quickly and are very profitable for us. And this is just one showcase for the potential of our games to translate to mobile game executions. The Barbie experience on Roblox has already been the number one branded game on the platform, and still is the number one game on the platform since it launched in the fourth quarter of last year.
So, we are seeing how our brands translate and resonate in digital form. The opportunity for us is meaningful, and much like what we've seen with Monopoly GO! We believe that we can be very well positioned to also leverage the strength, the play mechanics, and the built-in fan base within our brands, and also capture significant value in digital games and experiences. And this is an area where we talked about us potentially invest and self-publish games to capture more upside and more return for the company.
Audience questions?
Yeah, maybe just on the cost savings program. The cost savings programs, I feel like, you know, every few years you guys put out a big number and then hit it, and then immediately roll into another really big number. There's not a lot of companies that do that. So maybe hear a little bit about the 2024-2026 plan, but I guess stepping back more broadly, philosophically, how you do this?
Yeah, I, I'll take it. It is an important muscle that we developed. And as you noted, it's-- we're now on to the third program, and each program we not just achieved the goal, but exceeded, including, in some cases, increased targets. And it, the, the, it's a muscle that continues to look for ways to optimize and improve how we work. We change approach. Initially, it was about simplifying the business, then it was about optimizing it, and now it's leveraging new opportunities to drive more profitability. And the strength of these programs is that it's not just about cost savings, but also improving how we work and how we're leveraging more scale and more capabilities.
With the recent program, Optimizing for Profitable Growth, the most of the benefit will come in cost of goods sold, not just SG&A. In the very beginning, it was SG&A, then it was about systems and processes, and now it's cost of goods sold. It's something that we believe will be an ongoing journey, that we'll always look to continue to optimize our cost structure and how we work as a company. It's, you know, it's now with more visibility and more expertise and more capabilities, we believe that we can continue to do that. You know, there's the question out there, sometimes you're being asked: How can you do both, bring costs down and drive growth at the same time?
And we've proven that we can do that in with the first iteration of more than $1 billion of cost savings with our first program, while we did that and reduced the workforce by 35% from 13,500 people to 8,500 people. And within the or jobs, 13,500 jobs down to 8,500 jobs, so 5,000 job reductions. And within the 8,500 jobs, we upskilled almost 3,000 people, so significant transformation within the company. While we did all of that and reduced the resources, so to speak, we actually grew top line by almost $1 billion.
So it's been a combination of execution on the operating side, but at the same time, continue to drive top-line growth and overall performance for the company.
Hello. A quick question on your expansion in terms of theme parks. Over the past decade or so, there have been other theme parks, sort of, that opened up in the Middle East, like Marvel being one of them, Warner Bros. in Abu Dhabi. Do you see in your pipeline, or, you know, your forecast, you know, a theme park, sort of, you know, based on one of your brands opening up in the Middle East, or is your focus right now really just North America?
Well, the Middle East is an important region and an exciting opportunity for Mattel. We're very well aware of the expansion and opportunities and some of the other companies that are developing parks in the region. And, you know, back to the strength of our portfolio, we believe we have a unique opportunity to engage more fans with our brands in parks across the world, including specifically the Middle East. Important region, fast developing, and an exciting fan base for the company. We haven't announced anything specific to share, but we are looking at opportunities across the world.
So, the question, can you talk about, you know, you talked about that, you know, your shipments on the toy side of the business will start to track POS. You're also lapping a significant destock. So, a two-part question: Why wouldn't the shipments, you know, accelerate and exceed POS? And the second part of the question is: What are you sensing from the retailers in terms of their appetite to take on more risk in the category?
Yeah, to the first, you know, part of the question, you know, we have made significant progress, certainly in 2023, reducing retail inventory levels. We did come into 2024 slightly elevated, and we think that, you know, we corrected most of that in the first quarter. And, you know, today we feel we're well-positioned in terms of retail inventory levels, that they're at appropriate levels to support the business going forward. Now, there's certainly always gonna be some quarterly volatility, but you're right, Chris, the on a full-year basis, toy shipments should exceed POS. So, when you think about our full-year top-line guidance, which is to be comparable, think about POS being stable against a declining industry, so gaining share.
And then there's the upside from the retail inventory movements on a year-on-year basis, which are offsetting the impact of the Barbie movie wrap. So it's kind of factored in, and we expect it to, you know, come through as we progress, you know, through the year. In terms of the retailer sentiment, Ynon mentioned this. You know, the toy category is very important to retailers. They wanna win. And given our scale and expertise, you know, we have joint business plans with all the key, you know, retailers, right? In terms of, you know, price, promotion, shelving, product, and, you know, they're all optimistic, you know, about the upcoming, you know, holiday season.
And just taking a step back, thinking about the investment thesis overall, you have the core toy business, which we believe will grow. The company used to generate over $1.4 billion of EBITDA, primarily from toys ten years ago, and we believe we're a better toy company today than we were back in the day. So, this is just in toys. Industry is stable. Physical play is here to stay. Parents will always prioritize spending money on quality product, and the toy industry is a strategic category for retailers. So, this is a healthy, stable, growing part of the economy that we believe will continue to gain share in and generate more value in the toy side of the company.
And then when it comes to entertainment, given the strength of our portfolio and the proven success, the incredible execution, both financially but also culturally, that we've demonstrated, we believe we can capture significant value outside of the toy aisle across multiple categories or multiple verticals and across multiple brands. In success, this will be transformative for the company. When we started the journey, this was a bit sounded aspirational or not yet proven at the start of the journey. It used to be the question: Can your brands translate to success outside of toys? Then the question was: Can you do that? Because you've tried before and didn't, were not successful in making movies. Now, the question is: Can you do more of it?
Not whether your brands work or whether you can do it, but can you do more of it? This is exactly the inflection point where we are today. This is about now scaling the model and capturing more opportunities outside of the toy aisle. With the proven and success and track record we've had so far, we believe we are very well-positioned, with the right executive talent in the company, with the right relationship to continue to grow the entertainment side of the business as well.
Awesome. Thank you very much.
Thank you. Thank you for coming.