I'd never thought about the question, but now I have a theory. Santa uses Santa magic to transform his poop into energy and store it. This is why NORAD is well-advised to keep track of him. When he gets back, the energy is used for light, heat, and transportation (possibly some of it is used to power the sleigh), and whatever is left is transformed into toys, but most of the matter for toys is from local snow and rock.
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