Mattel Inc.
Moderator: Alan Hilowitz
02-28-2014/9:00 a.m. ET
Confirmation # 6306737
Page 8
Mattel Inc.
Moderator: Alan Hilowitz
February 28, 2014
9:00 a.m. ET
Operator: Good day, ladies and gentlemen, and welcome to the Mattel Media Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.
If you would like to cue up for a question, please press star-one. If your question is answered or you wish to remove yourself from the queue, you may press the pound key. If anyone should require operator assistance during the conference, please press star then zero on your touchtone telephone.
As a reminder, today's conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Alan Hilowitz, senior director, corporate affairs. Mr. Hilowitz, please begin.
Alan Hilowitz: Great, thank you, (Jean) and good morning everyone and we apologize for being a little bit late this morning.
I do want to welcome all of our colleagues from Canada and from the U.S. and want to thank you for joining us this morning to discuss Mattel's agreement to acquire Mega Brands.
Our press release was issued a few hours ago and is now available on the Mattel news room at news.mattel.com. After the call, a replay and transcript of the call will be available on our news room as well.
In a few moments, Bryan Stockton, Mattel's chairman and CEO will provide brief comments on the acquisition and then the call will be opened up for your questions.
Certain statements made during the call, may include forward-looking statements relating to the operations of the businesses of Mattel and Mega Brands and the timing, plans, benefits, and Mattel's expectations for the proposed transaction.
These statements are based on the current beliefs and assumptions of Mattel and Mega Brands' management with respect to future events and they are subject to a number of significant risks and uncertainties which cause -- could cause our actual results to differ materially from those projected in the forward-looking statements.
Additional factors that may cause the results to differ materially from those described in the forward-looking statements are described in today's press release, the risk factors sections of our 2013 annual report on Form 10-K, in our 2014 quarterly reports on Form 10-Q and in other filings that we make with the SEC from time to time as well as in our other public statements.
Mattel and Mega Brands do not update forward-looking statements. And the companies expressly disclaim any obligations to do so.
With that, I'd like to turn it over to Bryan. Bryan?
Bryan Stockton: Thank you, Alan, and good day everyone. I am very pleased to be able to speak with you today about Mattel's acquisition of Mega Brands.
We think this is a terrific opportunity to provide growth for both companies in a fast-growing and expanding the construction as well as in the arts and craft business with Mega Brands Rose Art and Board Dudes brands.
This is really about doing the right thing at the right time and the right price for Mattel and Mega. We think this is a fantastic opportunity to take a group of people in a facility in Montreal, that's well run with great marketing, design, manufacturing skills and leverage all those skills in our global infrastructure.
So with that, I'd like to open it up for questions. Thank you.
Operator: And as a reminder, if you would like to ask a question, please press the star then the number one key on your touchtone telephone. And our first question is from (Nick Van Pratt) of National Post. Please go ahead.
Nick Van Pratt: Good morning, Bryan. I wonder if you can provide a little bit color -- of color on is this transaction that's been a long time in the making? Have you thought about this combination for awhile? Or was it a more recent thing?
Bryan Stockton: Good day, Nick. This is a -- this is really something that's been in the work for some time. And what I mean by that is, a few years ago we started thinking about how we wanted to grow the company, meaning Mattel, at a faster and a more consistent rate. And to do that we knew we needed to begin to enter other toy categories that we did not compete in.
So as you can imagine, looking at our strength in dolls and vehicles, and then for pre-school, there are other parts of the business that we thought might be attractive. Certainly construction is one. It's a very large category. It's been growing rapidly, both in mature markets like Canada and the U.S., as well as emerging markets like China and Mexico and the rest of Latin America.
And as we looked at that, we decided that we really wanted to sort of test -- we have a theme here called "Test and Expand" and we started the test by doing a licensing arrangement with Mega Brands with our Barbie brand.
We liked that test. We learned a lot about the business. We learned a lot about Mega. We were very impressed with the company and with the leadership there and the creativity. And it only made sense to us to -- in order for us to maximize the opportunity for both companies, we really wanted to marry the engineering and creative and manufacturing skills that we saw in Mega with our ability to be a global partner on distribution and marketing and sales, and really bring the strengths of the two companies together.
So it's been going on for some time.
Nick Van Pratt: So years then?
Bryan Stockton: Yes.
Nick Van Pratt: Yeah. And, just to be clear, is Mega management staying?
Bryan Stockton: Well, you know, we're just going into discussions with the two brothers, Vic and Marc, about what the best approach is to marry the best of their people with the best of our people and to help grow this business.
This acquisition is all about growth. It's all about how we can make their business stronger and more global.
I'm pleased to say that I am thrilled that the brothers are going to be staying engaged with the business. They are staying on as advisors for a year with us, and we're thrilled about that because they have so much knowledge that we want to make sure that we take advantage of to make this transition as smooth and seamless and productive as we can.
Nick Van Pratt: OK. Was it difficult for you to convince them? I mean, money talks but this is their business?
Bryan Stockton: Well, you know, our business is really a collection of family-owned businesses. We started off as a family-owned business with Ruth and Elliot Handler.
We bought a number of family businesses, Fisher-Price, American Girl, for example, so we have great respect for families, and what their needs are and so it does take some time to work through it.
But I can tell you that, you know, we're happy with the transaction. They're happy with the transaction. And now we're all thinking about how we take this great business and make it even better.
Nick Van Pratt: OK, thanks.
Bryan Stockton: Thank you.
Operator: As a reminder, to ask a question, please press the star then the number one key. If your question is answered or you wish to remove yourself from the queue, you may press the pound key.
And our next questioner is Matt Townsend of Bloomberg. Please go ahead.
Matt Townsend: Hi, sorry, I was -- I think I was placed in the wrong call. So I was -- I just got on, so I might -- hopefully, I'm not asking something that already was, but I might be.
I just wanted to double-check something. When you -- you guys said Mattel have less than a 1 percent market share in construction, was that for U.S. or U.S. and Europe? What region was that?
Bryan Stockton: That would be as measured by NPD and that is what's called the Euro 5 and the U.S. market.
Matt Townsend: OK.
And can you say what Mega Brands was or what this acquisition -- where that will place you guys now in -- as far as market share?
Bryan Stockton: Well, you know, we don't own Mega Brands yet so I really can't share that number. But you know they are a solid, you know, number two player and we think we can make them a larger, stronger and more profitable business.
Matt Townsend: Can you give a range? I mean, do they have like 25 percent of the market, 15 percent, 10 percent, something like that?
Bryan Stockton: No, again, because we don't own them I don't have the ability to give you that number. I can be a lot more helpful after close.
Matt Townsend: OK. And you said on the call with the analysts that, you know, you guys kind of got your feet wet with the licensing of the Barbie brand and I guess Hot Wheels.
What struck you about that? I mean, did you guys see tremendous growth in those products, or were they -- were they really successful? What was it about that relationship that led you to say, OK, well, this could really work across many more of our brands?
Bryan Stockton: Well, it was a couple of things. You know, we did a lot of consumer testing to make sure that our brands were working the space and they do. And we've seen that with Barbie.
But it was more than just a marketing test. It was really to get a better understanding of the dynamics of the category, the dynamics of how they compete in this category, and really to get a better sense of what it takes to work.
And we realize that we didn't have all the capabilities that we needed to succeed and that we needed to get those capabilities and so Mega Brands was a great opportunity to get the skills and experience that we need.
And again, in the test with the -- with licensing, we also discovered that, you know, our strength could really help this business, particularly internationally because we are so strong internationally, in terms of how to execute the brand globally.
So those are really the two lessons learned at the end of licensing. And based on that, we decided that it was a good opportunity to start discussions with the Bertrands on, you know, is there the potential to make a marriage here?
Matt Townsend: What specifically did you guys realize that you couldn't do or you needed to, you know, -- that led you to have the acquisition talks? Like what capabilities you didn't have that you felt like, you know, you would need to acquire through the deal?
Bryan Stockton: So they have years of experience in this category and it is very difficult to replicate years of experience, whether it's in design, or manufacturing, in marketing, with a start-up.
And the other option was for us to do this on our own, and it's just -- it was a faster way, a more scalable way and we think a more sustainable way and frankly, a lower risk way for us to enter this category, because they have a strong ongoing business.
Matt Townsend: Right. Yeah, that kind of leads me to my next question, just what -- yeah, why -- I mean, your biggest competitor, Hasbro, I mean, they've tried to launch their own construction line. Could you guys consider that at all, or did you look at that -- looked at what Hasbro tried and said, well maybe that's not the way to go because it hasn't been too successful for them?
Bryan Stockton: Well, we've obviously looked at, you know, the first question is, is this the category that we'd want to be in, and we said yes, because it's large growing -- very high gross margins, very high operating profit, responds to segmentation of brands and themes and innovation. So we liked that a lot.
And then the next question is what's the best entry strategy and we evaluated both and fortunately, because we had this terrific experience with Mega Brands, you know, it made the decision relatively simple because it's a faster way to enter the market, it gives us scale, it gives us momentum. And frankly, it also gives us $50 million of EBITDA which you would not have other start-ups.
So there is a lot of very positive things for acquisition versus an internal initiative.
Matt Townsend: And couldn't you guys have just ramped up your licensing? I mean, just licensed more brands (to them)? And done it that way. You know, you could have just said, OK, let's do 10 brands next -- you know, in the next two or three years and you know, expanded the category that way instead of buying the whole company?
Bryan Stockton: I go back to the lessons learned, and the lessons learned were that they have some great skills and design and engineering and marketing in this category. We have the ability to execute extraordinarily well anywhere in the world.
Matt Townsend: Yeah.
Bryan Stockton: And the licensing arrangement really didn't let us leverage the best of both of the companies. And that's why we think this acquisition makes sense. We're merging strengths because it's really -- you know, we think it's good for growth and it's good for both.
Alan Hilowitz: So Matt, could I drop in here.
Matt Townsend: OK.
Alan Hilowitz: We actually have to end the call if there's no other questions. We're meeting up to the 6:30 time here, so if there's no other questions on the line, I'd like to thank everybody for joining us today.
There will be a replay of this on our news room. And I appreciate you joining us today.
Operator: And ladies and gentlemen, thank you for joining today's telephone call. This does conclude the conference and you may all disconnect. Everyone have a great day.
END