Conference Transcript - MAT 2026-09-15

Stephen Lasik, Analyst — Goldman Sachs

All right, great. Thank you, everyone, for taking the time to join us this morning. My name is Stephen Lasik, and I'm the lead entertainment analyst here at Goldman. We are excited to welcome back to the retail conference this year, Inan Kraiz and Paul Rue, the CEO and CFO of Mattel. Thank you both for being with us today.

Ynon Kreiz

Thank you, Stephen, for inviting us. Always good to be here.

Stephen Lasik, Analyst — Goldman Sachs

Great. Maybe to start us off, Inan, Paul, we'd love to just maybe start with a theme coming out of last quarter's earnings, where you said consumer demand remained healthy. That top-line growth had continued into the third quarter. We'd love just with maybe another five or six weeks more of data behind you to get your latest sense of what you're seeing today in terms of consumer demand and retail ordering patterns.

Ynon Kreiz

Sure. So let's take a big-picture view of the toy industry as a whole, which is having a very strong year. the toy industry as a whole is growing double digit and in fact this is broad based the primary drivers are games trading cards action figures vehicles and building sets and as a whole the industry is growing strongly and in fact according to Serkana which tracks 17 different general merchandise retail categories toys is by far the largest driver and even when you take out trading cards which benefited from the World Cup boys as a category remains a very strong driver and we've talked about it before boys is a growth industry the industry has grown in 23 out of the last 25 years and it has it plays into a fundamental human behavior it's a strategic category for retailers and we expect the toy industry to remain healthy and continue to grow and a growth by the way is driven both by units and price so far here today within this environment we are also seeing growth and momentum in our in our business in consumer demand which is positive a quarter to date we're seeing growth across categories driven primarily for Mattel by vehicles and action figures and in some areas that are importantly becoming a key part of our portfolio, including building sets and Mattel break shop. And we are very confident about continued growth and expect to achieve our full-year guidance in this environment.

Stephen Lasik, Analyst — Goldman Sachs

Great overview. I wanted to dive into a lot of those key themes a bit more. But maybe, Inan, you mentioned the annual guide. Last quarter, you reaffirmed the full-year guidance, and within that, there were some moving pieces. Would love if you could maybe just take a look back on the year and talk a little bit about what you've seen as the biggest drivers, both positive and negative, in terms of how this year has played out.

Paul Ruh, CFO

Sure. Happy to think about how the cadence of the year will evolve. So overall, as we say, we are reiterating guidance. We are confident in what we are seeing in the balance of the year. there are some puts and takes as you will say and it's more a matter of how things will evolve between Q3 and Q4 rather than how the full year will look like if I go down the P&L if I start with with the top line we have a wonderful array of activations for the balance of the year so that will certainly be a driver. On the other side, given the shift in retailer ordering patterns that we observed last year, now they're largely stabilized, but that will shift sales more towards the fourth quarter. So what you will see is more of a backloaded towards Q4 sales momentum, but it's also substantiated with the activations that we're seeing, with the movie slates that we're seeing, So all of that gives us confidence that over the second half of the year, we will be pretty good in terms of the top line. So if I go down the P&L, when it comes to gross margin, there's some puts and takes as well. We have definitely seen on the headwind side, we have seen higher inflation. That's a reality given the Middle East conflict. We've seen higher inflation in commodities, in packaging materials, in labor, in shipping costs. But we also have things going our way, and we have some tailwinds as well. One of them is favorable forex inflation, and also the tariff assumptions that we planned as we went into the year are materializing to be slightly lower. So all of that, puts and takes, gives us promises that we will be within the guidance range of the approximately 50% that we talked about. And then going down further into the P&L, we continue to manage our expenses very judiciously. As you heard us talk in the last earnings release, we are managing the digital advertising spend prudently to make sure that it matches the launch of our digital games and that we are maximizing the return on our investment. So as you can hear, we're progressing well. There's some shifts between Q3 and Q4. There's tailwinds and headwinds, but overall we're confident in the guidance that we just talked about.

Stephen Lasik, Analyst — Goldman Sachs

That's helpful, Paul. Maybe just to put a finer point on that, it sounds like the guide for approximately 50% gross margin this year, puts and takes, but on net, it works out into that range. and then we'd love just any cadence commentary on SG&A and advertising expense in the back half.

Paul Ruh, CFO

Yeah, so in terms of the gross margin, as I said, still targeting approximately 50% for the full year. In terms of cadence, it's worth remembering a couple of things. Number one, we're seeing higher inflation, but remember as we go into the fourth quarter, Last year, we had approximately 500 basis points of higher promotional spend. We do not expect that to happen anymore this year, given a couple of things. Number one is the innovation that we're seeing, the product slate, the movie slate that we're seeing. But equally important, we do not see the highly promotional environment materializing this year any longer. The industry has come in with the proper level of inventory, both the retail inventory and also our inventory are at the appropriate level. So we see less pressure to drive a more normalized in promotional environments. So that's on the gross margin side. On the SG&A side, on the advertising side, as part of our brand-centric model, We have shifted from doing item-based advertising to a much more brand-building, thematic advertising. So that will be spread out more evenly throughout the year. As a result, you will be seeing in Q3 advertising as percent of sales higher than we traditionally see compared to a Q4 that is going to be lower than we traditionally see as percent of sales. So we're managing the business very judiciously, quarter over quarter. We're taking the puts and takes, but it's more about how the cadence will transpire between Q3 and Q4. And overall, given the momentum that we see in the industry, given our products and advertising slate that we see, we are very confident in delivering the full-year numbers.

Ynon Kreiz

And I just want to add one important point is that, as you remember, last year, there was a meaningful impact of the change in retail order patterns from direct import to domestic This headwind was a reason why we had so much needed to do in promotion, especially in Q4, and disrupted most of the year. This has now stabilized, and we don't expect it to return. And this is a key change in terms of headwind and impact on gross margin and other factors that were the headwind last year. This is no longer the case for this year, And it will be particularly important in the second half of the year and more so in the fourth quarter. And that's the cadence Paul was talking about, where most of the improvement you will see in the fourth quarter in terms of gross margin and sales to reach the 50% gross margin number. This is important to say. And again, this improvement already started in Q2 this year, and you'll continue to see that playing to our benefit for the rest of the year. That's helpful.

Stephen Lasik, Analyst — Goldman Sachs

Paul, maybe touching on potentially another benefit that could come into purview this year, tariff refunds. We've seen some of your peers starting to receive tariff refunds. Could you maybe give us an update on what the latest is for tariff refunds for Mattel? And then maybe more broadly, we've heard some retailers investing back into price. Assuming you receive additional tariff refunds, how might you put that money to work?

Paul Ruh, CFO

Just as the rest of the industry, as you well say, we are participating actively in the tariff refund process. So to date, we have received approximately $90 million of IEEPA tariff refunds. we are evaluating closely what we do with the refunds we will definitely prioritize brand building activities that is our first priority and we will do that we will determine and we will share with everyone more in the Q3 earnings how we will be utilizing those and what impact will be to the piano but But so far, we're tracking well. We're receiving the refunds, and we are coming up with very precise plans to continue to build our brands for 2027 and beyond.

Stephen Lasik, Analyst — Goldman Sachs

Maybe zooming out now, Inan, taking a look across your power brands, Hot Wheels is on track to deliver, I think, the ninth consecutive year of consecutive growth. I know you've done a lot of work to expand that brand and to collectibles and to content beyond just the core toys business. What do you think the main drivers looking ahead here are a future growth for Hot Wheels, the drivers and levers worth calling out?

Ynon Kreiz

Hot Wheels has been an incredible success story that is not slowing down. What we've done so well around Hot Wheels is taking a play pattern, continue to expand it, and turn Hot Wheels to become much more about car culture and lifestyle. the brand is driven by incredible innovation in product we continue to broaden the aperture across play patterns more audience demographic extending from young kids all the way to adult fans and collectors and we do that across very broad range of price points for a dollar from a dollar 49 for hot with basic car all the way to 700 for our collector set and as we said we expanded into content, digital games, consumer product and merchandise, location-based entertainment, traveling shows and exhibitions, and it's becoming stronger and broader and having more and more cultural impact. We also continue to expand the play pattern into other categories. So from vehicles, we're now participating in building sets, and this is Mattel Brick Shop, which is itself becoming a runaway hit for the company. Still early days, but getting stronger and stronger, and we expect that to be a meaningful contributor and growth driver for Mattel. Hot Wheels has been our largest brand since 2024. It's on track to exceed $2 billion of sales at a very healthy margin, and we couldn't be more confident about the momentum and the fact that it will continue to grow for years to come. The important takeaway from Hot Wheels is not just the success of this particular brand, but is how we are applying our strategy, our brand-centric strategy in the Mattel playbook to take a strong brand, make it even more relevant in culture, and continue to expand it beyond the traditional toy aisle. And that's the opportunity. There's plenty of headroom to grow, and we're excited to take it to next year and beyond.

Stephen Lasik, Analyst — Goldman Sachs

Could you maybe touch a little bit more on some of those key learnings from Hot Wheels and if you apply it to some other brands in the portfolio where you think there's parallel and opportunity there?

Ynon Kreiz

So when we talk about our brand-centric strategy, it's about two aspects. One is how do you think holistically about the brand ecosystem to create a playbook that expands the brand beyond the toy aisle? And this is about the Mattel flywheel, where we begin our journey in toys. Success in toys drives success in entertainment, and success in entertainment, which is about content, digital games, consumer products, and merchandise, drives even more success in toys. And that flywheel continues to grow and expand. The second aspect is about fandom. We don't just sell toy items off a shelf. We manage brands, and we build on the very strong emotional connections that people have with our brands. That emotional connection is fundamental to what we do because it allows us to continue to expand the play pattern, the engagement, and create multiple touch points for fans to engage and interact with our brands. So between creating a full franchise ecosystem on one side and building fandom on the other is how you continue to strengthen the brand management capabilities and expertise that we have and ultimately drive much more growth for the company, both in top line and in profit.

Stephen Lasik, Analyst — Goldman Sachs

Paul, I wanted to come back to you and maybe touch on the topic of capital allocation and maybe off the back of Enon's comments, investing in the business. Mattel has a strong free cash flow generation outlook. It's a strong balance sheet, multi-year share purchase framework that's been in place now. I'd just be curious for an update on how you're thinking about investing for growth and balancing that against shareholder returns. And I'd be curious looking ahead if you think stronger free cash flow generation could possibly support an acceleration in the buyback.

Paul Ruh, CFO

So Mattel is a strong cash flow generator. And we are also a very disciplined capital allocator. The capital allocation priorities are very, very clear. And number one, we will invest organically in our business. That's exactly what we have done with investments that we have talked about. We're putting more investments to grow, our brands, our toys, our digital games. And that's exactly what we did when we announced the investments that we're doing in 2020. which is an investment year and we will see strong returns in 2027 and beyond so that's exactly what we're doing from a capital allocation priority number one perspective number two we maintain a strong balance sheet that is investment grade and we continue to do that and we will maintain the flexibility that that strong balance sheet gives us, to be able to withstand the cycles of the business throughout the year, but importantly, to continue to invest the cash when we need it. Number three, it's about looking at strategic inorganic opportunities when they make sense, when they advance a strategy, when they create economic value for investors and shareholders, and when it drives acceleration of growth. when when we see an opportunity such as Mattel 163 when we acquired the remaining stake of Mattel 163 we go for it and that's exactly what we did so that is priority number three and capital allocation priority number four is share buybacks to manage our capital structure as you know we have bought back approximately 1.5 billion dollars in shares since we resumed buybacks in 2023 that represents approximately 23 percent of our float and we are still targeting the 400 million dollars of share buybacks in 2026 that we talked about as part of our longer-term capital allocation and buyback program so as you can see we generate strong cash we are very disciplined in terms of our capital allocation priorities to be able to maximize uh our shareholder value great maybe on the topic of investing back in the business you know paul you've spoken throughout the year about some

Stephen Lasik, Analyst — Goldman Sachs

op-backs initiatives 110 million of incremental strategic investments this year in 2026 um where i think some of the 150 maybe that you originally cited for this year uh is getting reallocated to next year maybe you could just talk a little bit about that and then more importantly the brands and verticals you're investing most heavily in, as well as what gives you confidence that these investments will pay back over the next 12 to 18 months.

Ynon Kreiz

These investments are in line with our strategy to grow our IP-driven play and family entertainment business. And this is exactly the first capital allocation priority, which is invest in organic growth. These investments are in our capabilities, in our own brands, in our own IP, in areas where we see high return opportunities within a short period of time, and that can continue to grow and amplify our capabilities to grow the business. Examples that we gave are mobile games, first-party data, direct-to-consumer, trading card, building sets, including Mattel Brick Shop specifically, as well as technology and infrastructure to improve how we work, accelerate our strategy, reduce time to market, lower cost, and as a whole become a stronger company with better capabilities. The investments are tracking to plan. We said that we expect to see a return on these investments within a year. In other words, starting in 2027 and beyond. And as a whole, we do see 2026 as an investment year where we proactively took some of our earnings and put back in the business to drive growth, but we will see a return on these investments in 2027 and beyond.

Stephen Lasik, Analyst — Goldman Sachs

Helpful. And then in terms of maybe things that investors should be paying attention to as we track the rollout of some of these initiatives, Is anything that is top of mind or important for investors to keep in mind?

Paul Ruh, CFO

So the investments that we are putting in place are both for capability building and to drive pros. And we monitor that with very strict KPIs, and we make sure that we maximize the return on our investment. I'll give you an example of the adaptation that we have done. We announced in the last earnings release that the release of our latest digital game will be delayed until the beginning of 2027. To be able to match the investments against that initiative, we also postponed the investment into the beginning of next year. And that is because the window in the end of the year is very cluttered uh from a user acquisition perspective and we do believe it will maximize the return on investments when we launch the game in full in the beginning of 2027. so that's an example of how we're closely monitoring the performance of each one of our businesses how we allocate the investments on the other side we continue to make investments on our dtc businesses we talked about other areas of investments at trading cards that we're very excited about so all of that gets

Ynon Kreiz

measured on a very carefully monitored KPI dashboard and we make the appropriate the proper decisions so that we are judicious in terms of the impact in 2026 but also the longer term impact for 27 and beyond and I'd like to put more emphasis on two areas that are important that we haven't really spoken a lot about before in terms of investment areas one is trading cards which is one of the fastest growing areas in the toy industry and and play this is an area that we haven't participated at all in the best and yet many of our brands lend themselves perfectly to the a collectability play pattern and we also own the number one game in the market which is UNO. So we have the basic capabilities, and getting into trading cards is a natural extension of what we do. It requires some investment because we don't have certain retail capabilities in terms of selling product into hobby stores and other areas where we're not as present today. But with relatively low investment, we can become a meaningful participant in one of the most important areas in the industry. The other one that we did touch on, but I want to put even more emphasis on, is Mattel Brakeshop. Building sets as a category is also one of the key drivers in the industry. One of the most important areas within the category are cars. These are buildable cars, cars that you construct and build as part of the category. When it comes to cars, we know that business is better than anyone. We understand car culture. This is not just about building cars. It's about understanding fans, understanding collectors, and the consumer journey, the fan journey within this sector. When we build cars, or when we design cars that people build, they actually look like cars. They don't look like cars that are designed out of bricks. These are performance cars. And if you look at the Mattel Brick Shop product across different price points and different variations, it's work of art. These are not just toys. And collectors would not be more excited about engaging with this product. And we see this as an important growth right before the company. We've said before that we are struggling to keep up with demand. This is one area where we're investing in capacity because we see tremendous opportunity to grow the business in a very meaningful way. So these are two examples where we are leaning into important growth drivers in the industry, where we see tangible opportunities, where we already have one foot in those areas, but we look to accelerate that and enhance that opportunity in a much more meaningful way.

Stephen Lasik, Analyst — Goldman Sachs

Any other brands, just because you brought up trading cards and collectibles in such an important way, that you feel like would be leverageable in those two categories?

Ynon Kreiz

Well, we haven't announced specific brands and products, but it's not hard to imagine some of the brands where we have particular appeal with adult fans and collectors. As a whole, adult fans is becoming an important part of the industry, driving significant growth. We don't see that as a fad. We see this as a way for people to engage with important brands. We know that play begins in childhood but doesn't end there. And when you expand the concept of play, it's about engaging people in activity that brings them joy. And we see Mattel not just as a toy company, but as a joy company, a company that drives joy and creates excitement for people, leveraging the strength of our brands, which is the initial way we connect and engage with fans. But then we create innovative products and experiences that inspire fans, entertain audiences, and develop children through play.

Stephen Lasik, Analyst — Goldman Sachs

That's helpful. And then maybe with just a few minutes left here to bring the conversation together, Paul, Mattel's at this moment balancing near-term execution around an interesting consumer dynamic, retail dynamic. You have tariffs out there as well, as well as focusing the business on the long-term investing for the business. We spoke a lot about those opportunities ahead. I would just love if you could maybe speak a little bit about what are the one or two milestones you think the company must deliver on over the next 12 months, 24 months, that could maybe increase confidence around the earnings algorithm and the broader strategy moving forward for the business?

Ynon Kreiz

We're focused on achieving our guidance for 2026. This is an investment year, but still obviously important to achieve our guidance. And we do that in the context of high inflation or rising inflation, as Paul said before. This is something that we are watching carefully. Obviously, this will not impact just Mattel or just the toy industry, but the economy as a whole. And this is one area that we are watching carefully and then benefiting from some tailwinds as well. But 2026 is an important year where we look to achieve our guidance. And then we're already turning into 2027, which we expect to be a high growth year for the company, where our investment will play out and, as we said, will achieve positive return, where our brand-centric strategy that we are betting in in 2026 will mature and become full-fledged in 2027 and beyond. Part of the brand-centric model is also how we create demand. And Paul talked a bit about the cadence of A&P, but the broader point is that we're changing how we create demand. We used to be more item-focused or specific product-focused and very weighted towards the back end of the year, the holiday season. And now, as part of our brand management strategy, we are pacing ourselves differently throughout the year. And what we are promoting is the brand more holistically, given that we do so many things around our brands, much more than a toy line or any specific product item. We do that, obviously, in close collaboration with our retail partners. We continue to position Mattel as an important partner for retailers all over the world. And don't forget, we sell product in 500,000 stores, brick and mortar stores, not including online retail and e-commerce. So 27 is where this will come together, and we expect 2027 to be a high growth year for the company. We haven't given specific guidance. We'll do that on Q4 of 26, as we always do. But we are seeing momentum. We expect our key brands to continue to lead the way. We expect our categories to perform well and gain share in key markets, and over time continue to grow and pace ahead of the toy industry.

Stephen Lasik, Analyst — Goldman Sachs

It's a great place to leave it. Ina and Paul, thank you very much for taking the time to join us today. Please join me in thanking Mattel for participating in the conference. Thank you, Stephen. Thank you, everyone.