Mattel Inc (MAT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to our Mattel second quarter 2010 earnings call.

At this time all lines are in a listen-only mode.

Later we will conduct a question-and-answer session and instruction also be given at that time.

(Operator Instructions).

As a reminder, this being recorded.

I would like to introduce Mrs.

Dianne Douglas.

Please go ahead.

Thank you, Mary.

As you know this morning we reported Mattel's 2010 financial results.

In a few minutes, Bob Eckert and Kevin Farr will provide comments on the results and then the call will be open for your questions.

Certain statements Bob and Kevin make during the call may include forward-looking statements relating to the future performance of the brands and product lines.

These are based on current information and they're subject to a number of significant risks and uncertainties which could cause our actual results to differ materially from those projected on the forward-looking statements.

We describe these in the risk factor section of our 2009 annual report on Form 10-K as well as in our quarterly report on Form 10-Q and in other filings we make with the SEC from time to time.

Mattel does not update forward-looking statements and expressly disclaims any obligation to do so.

Information required by regulation G regarding non-GAAP financial measures is available on the investors and media section of our corporate website www.mattel.com under the sub heading financial information and earnings release.

Now I would like to turn the call over to Bob.

Thank you, Dianne and good morning everyone.

What a difference a year makes, last year at this time, Mattel along with many other retailers was how focused on much further the economy was going to decline.

While reports remain mixed on whether or not we are out of the woods, I can tell you that I am very pleased with the Company's performance for the quarter with worldwide net sales of 13% reflected good performance in the US as well as internationally, and continued improvement in our profit margins.

Our positive top line sales trend this quarter in both the US and abroad benefits from our newest entertainment properties, Toy Story 3, World Wrestling and Thomas and Friends as well as solid growth from core brands such as Barbie and Hot Wheels.

As it relates to Barbie, the core fashion, beach and accessory product lines continue to perform well.

In our spring entertainment offering, Barbie A Mermaid Tale nicely out performed last year's movie.

Our line driven by a spring promotional program continues to perform well at retail and I am proud to report that the Barbie leadership team hasn't missed a beat and continues to drive the brand to deliver on fashion, aspiration and cultural relevance.

I know there's a lot of interest in our monster franchise which has just begun.

Girls are becoming engaged as evidence by the millions of episodes down loaded from the website.

Justice apparel program is just out to more than 900 stores nationwide and the monsters will make YouTube's home page with an all new monster video.

Toy advertising begins around back to school which coincides with sales of the first Little Brown chapter book which hits retail in September.

In the wheels isle, Hot Wheels performance has been solid driven by core play with basic cars and track sets as well as with feature product lines like custom motors and color shifters.

We are excited about the Matchbox launch of Stinky the Garbage Truck following on the successful launch of Rocky the Robot Truck last year.

These characters are now part of the new Big Rig Buddies line which we are introducing to kids this fall via CGI animated episodes being packed with the products.

There's the incredible success of this year's summer movie Toy Story 3.

Not surprisingly, our Toy Story 3 lines are selling well across all businesses including infant and preschool, action figures, collectibles, play set, vehicles, role play, Barbie and Ken dolls and games.

Now that Spain has taken home the World Cup title, the movie will be hitting theaters in key European markets.

In the World Wrestling, WWE sales continues to be strong, driven not only by our core line but appeals to collectors, but by FlexForce toys, which are more kid focused and feature driven.

As I said before, what's most exciting about the newest license properties is we expect them to perform more akin to evergreen toy brands than one-hit wonders, which is well for our business not only in 2010 but beyond.

In the infant and preschool isle our Fisher-Price friends business performed well with Dora the Explorer rebounding nicely and of course the addition of Thomas and Friends.

We look forward to Dora's 10 year anniversary which Nickelodeon is kicking off this fall.

The summer American Girl launched the Shine On Now program, a new charitable initiative that harnesses the collective power of girls to help others in need.

To further encourage and inspire girls, American Girl is also launching a brand new virtual campus Innerstar University, a fun, safe web site for girls.

Access to the new virtual world comes with [each] 18-inch My American Girl doll, the Company's newly enhanced contemporary product line, which is currently available.

From our time honored brands to our newest entertainment partners, I am encouraged by the strong momentum in the first half of the year as we begin the count down to the all-important holiday season.

We remain committed to maximizing long term value for our shareholders.

As you know, we are focused on controlling costs and effectively deploying capital.

Over the last seven years we have repurchased about 114 million shares of our stock, at a total cost of $2.2 billion, including repurchasing about five million shares this quarter, and distributed $1.6 billion in dividends.

Effective capital deployment combined with solid top line growth and improving margins will allow us to win in the marketplace and for our shareholders.

At this time I would like to introduce Mattel's Chief Financial Officer, Kevin Farr, who will take you through our financial review of the quarter.

Kevin?

Thank you, Bob.

Good morning, everyone.

I will begin my review for the second quarter with a discussion of worldwide gross sales shown on exhibit two of today's press release.

Today worldwide gross sales for the quarter were up 13% including a three percentage point negative impact from changes in exchange rates.

US sales were up 17%.

International sales were up 9%, including a five percentage point negative impact from foreign exchange.

On a regional basis, sales in Europe were up 7% including a seven percentage point negative impact from exchange rates.

Sales from Latin America were up 1% including a 10 percentage point negative impact on foreign exchange.

Sales in Asia Pacific were up 28% including a six percentage point positive impact in changes in exchange rates.

I will now review our core business and brands for the second quarter.

Mattel girls and boys brands.

Worldwide sales from Mattel girls and boys brands segment were up 21% including a three percentage point negative impact from changes in exchange rates.

On a regional basis, domestic sales were up 37% and international sales were up 11% including a five percentage point negative impact from changes in exchange rates.

Worldwide Barbie sales were up 6% including a four percentage point negative impact from foreign exchange.

Barbie sales in the US were up 16% while Barbie sales in international market were up 1% including a six percentage point negative impact in foreign exchange.

Worldwide sales of other girls brands were up 3% including a three percentage point negative impact from exchange rates.

Continued good growth in Disney Princesses was partially offset by international declines in High School Musical, Hannah Montana and Poly Pocket.

Sales of other girls brands in the US were up 15% and international sales were down 7% including a five percentage point negative impact from foreign exchange.

World wide sales in Wheels increased 5% including a two percentage point negative impact from changes in currency exchange rates.

The growth in Wheels was led by strong worldwide sales of Hot Wheels.

Hot Wheels increased 11% worldwide including zero impact from foreign exchange.

Hot Wheels sales increased 19% in the US and were up 5% internationally including a one percentage point negative impact from foreign exchange.

Worldwide sales in entertainment business which included games and puzzles was up 60% including a five percentage point negative impact from changes in foreign exchange.

Sales were up 90% in the US and up 40% internationally including an eight percentage point negative impact in changes in foreign exchange.

Sales increases were primarily driven by our new Toy Story 3 products and continued momentum from other new entertainment property, WWE Wrestling as well as good growth in the core games business.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were up 4% including a two percentage point negative impact from changes in currency rates.

On a regional basis, domestic sales of Fisher-Price brands increased 4%, and international sales increased 5% including a five percentage point negative impact from foreign exchange.

Worldwide core Fisher-Price was flat including a two percentage point negative impact in changes in exchange rates.

International sales were up 1% including a five percentage point negative impact in foreign exchange.

And US sales in Fisher-Price Core were down 1%.

Fisher-Price Friends worldwide sales increased 35% including a five percentage point negative impact from foreign exchange rates.

International sales were up 25% including a 10 percentage point negative impact in foreign exchange while sales of Fisher-Price Friends in the US were up 45%.

The growth at Fisher-Price Friends was driven primarily by the addition of products supporting a new Thomas and Friends property as well as growth in Dora, the Explorer and Disney products.

American Girl brands, sales of American Girl brands were down 4% primarily as a result of last year's second quarter launch of Rebecca and the slightly earlier Easter this year partially offset by continued strong sales of Lanie, the 2010 Girl of the Year, and good performance from our new Denver store.

Now let's review the P&L which is shown on exhibit one.

Gross margin was 48.1% compared to 45.2% last year.

The improvement was primarily due to lower product costs, price increases, and savings from global cost leadership initiatives partially offset by higher royalties.

We continue to expect input cost pressures in our gross margin beginning in the second half of this year, given the current commodity and labor cost environments relative to year-ago levels.

Advertising expense is $101.9 million, or 10% of net sales compared to $89.8 million or 10% of net sales in 2009.

Selling, general and administrative expenses increased approximately $34.5 million to $318.3 million.

As a percentage of net sale, SG&A expenses were 31.3% compared to 31.6% last year.

The year to year dollar increase primarily reflects decreased legal related costs , employee related costs including incentive accruals and merit increases as well as severance costs partially offset by savings related to the global cost leadership program.

For the first half of the year, SG&A expenses are up $10 million or 2% and represent 32.2% of net sales compared with 35.7% for the first half of 2009.

For the quarter, our global cost leadership program delivered overall gross savings before severance of about $12 million.

The growth savings includes about $4 million in SG&A, $5 million in gross margin, and $3 million in advertising.

For the quarter, we recorded severance charges of $9 million.

The net year-over-year incremental savings related to the global cost leadership program is about $3 million for the quarter.

We remain on track to deliver cumulative net savings at the high end the target range for the program of $180 million to $200 million by the end of 2010.

Operating income during the quarter was $69.4 million compared to $32.5 million in 2009.

The year to year improvement was primarily due to higher sales in gross margins, partially offset by higher SG&A and advertising expense.

Interest expense of $13.4 million was down from $17.5 million last year reflecting lower average borrowings as well as lower average interest rates.

Interest income was $2.8 million versus $2.5 million last year.

The higher interest income was due to higher average invested cash balances during the quarter.

Other nonoperating income was $3.3 million during the quarter versus $6.3 million in 2009.

The income in both periods relates to foreign currency exchange gains.

The quarters income tax provision of $10.5 million includes discrete tax benefits of $4.6 million.

This compares to prior year's provision of $2.3 million which included the discrete tax benefits of $2.5 million.

For the year, we continue to expect the worldwide effective tax rate to be about 24% to 25% based on current tax laws.

Overall, we reported net income of $51.6 million or $0.14 per share versus last year's net income of $21.5 million or $0.06 per share.

Now, turning the cash flow and balance sheet.

Year-to-date cash flow use for operations was $372 million compared to $350 million in the first half of 2009.

Our cash on hand at the end of the quarter was $545 million, up $122 million from prior year.

The increase in cash is primarily due to higher beginning cash balances of $1.1 billion this year versus $618 million last year partially offset primarily by a lack of short term borrowings and capital deployment.

During the second quarter, the Company repurchased approximately five million of its shares of common stock at an average price of $22.05 per share for a total cost of approximately $111 million.

I am pleased with our management of working capital, especially in light of 13% growth in the business.

Receivables were $805 million or 71 days sales outstanding four days lower than last year.

Factoring decreased from $81 million to zero.

Prior to factoring days of sales outstanding decreased 12 days.

During the first half of 2010, we made the decision not to factor receivables due to the current cash position and availability of lower cost funding alternatives.

Inventory at $598 million were up $8 million or 1% versus 2009.

Our total balance sheet debt was $710 million a decrease of $344 million from the prior year, reflecting the lack of short term borrowings and the pay down of maturing long term notes.

Our debt to total capital ratio ended the quarter at 22.1% versus 32.7% for last year's second quarter.

Capital expenditures were $33.4 million down from last year's $41.7 million.

So to summarize, we are pleased with this quarters results.

But there's a lot of work to be done between now and year-end to deliver on our priorities, continued core brand momentum, maximize the opportunity surrounding our new entertainment property, maintain cost and expense controls and deliver another strong year of profits and cash flow.

That concludes my review of the financial results.

Now we'd like to open the call to questions.

Thank you.

(Operator Instructions).

Our first question comes from Linda Bolton-Weiser from Caris.

Hi.

How are you?

Great.

Can you just elaborate a little bit more on the other girls sales performance because that was really strong in the first quarter, and I know FX is a little bit more negative but is it the Polypocket decline or some other decline got a lot worse or exactly what?

And then my second question would be just on incentive compensation accruals, I know you don't like to disclose a lot but can you give maybe year-to-date or something, what the dollar increase in compensation accruals is for the first half versus first half of '09, like how much the delta increase is year-over-year?

Thank you.

Hi, Linda.

It is Bob.

I will start with other girls and then Kevin can talk about the incentive accrual.

I think in constant dollars our other girl's business was up 6% in the quarter.

Maybe it was 3% in actual dollars so there was a little bit of ForEx and we have generally had pretty good trends in the other girl's business.

Clearly Disney Princess continues to have very strong momentum and we are excited about this fall's Tangled movie which is the story of Rapunzel.

Monster High is in the other girls segment, it is a very small business in the second quarter but obviously we are quite hopeful on that.

Polly has seen improved results more recently recent in the US including during the quarter.

But we still have some work to do internationally with Polly.

We are also facing some declines from the prior year and things like High School Musical and Hannah Montana which we distributed outside of the US.

So it's a portfolio of brands generally speaking more continue to do well than not, but they cycle through.

And then on the incentive compensation, we don't disclose the quarterly detail for incentive comp, you may recall that given the seasonality of the business, the vast majority of the accrued incentive compensation is recorded in the second half of the year, driven primarily by the achievement of our annual performance goals in the Q season and that being said accounting rules require a higher accrual in the second quarter versus last year due to year to date performance improvements.

Maybe I will take the opportunity as a result of the question, really to get into the SG&A increase for the quarter.

For the quarter SG&A expenses increased approximately $35 million to $318 million.

As a percentage of sales, SG&A expense was 31.3% or down 30 basis points compared to the prior year.

The year-over-year dollar increase primarily reflects $12 million of legal related cost, $16 million of employee-related costs and $7 million of incremental severance which was partially offset by approximately $5 million of gross savings related to the global cost leadership program.

About one-third of the higher employee related costs was due to merit increases effective in March and the other two-thirds was due to the timing of incentive accruals.

As I said, that during the seasonality, where really most of the incentive compensation was accrued in the second half.

But as I said, the accounting rules requires our performance are to accrue more in the second quarter versus last year.

In the second quarter of 2010, we incurred higher incentive costs of $9 million versus $2 million in the prior year related to global cost leadership program.

So it was $9 million of severance in the second quarter versus $2 million last year.

Thank you.

You're welcome.

Our next question comes Sean McGowan from Needham.

Hi.

Thank you.

I also have a couple .

Bob, could you could you comment on -- I just want to clarify something.

Barbie sales inclusive of the Toy Story SKUs or exclusive?

Does Toy Story include the Barbie SKUs and vice

Yes.

Toy Story is spread throughout the product line.

So there is Toy Story like the Barbie and Ken dolls are in Barbie numbers, there are some Fisher-Price shake and go as an example in the Fisher-Price numbers.

So those things that are within our main stream categories are within the category numbers.

Okay.

Thank you.

And can you comment on Barbie sales excluding the Toy Story SKUs?

Is that still showing as mid single digit increase there?

Well, we probably won't get that granular but I can tell you that the core fashion and beauty and the Aspiration or the IF&B segments, the spring entertainment, they continue to perform well.

Barbie is continuing to gain share.

We have good plans in place to carry the momentum through the holiday like the Video Girl Barbie and we are seeing improved momentum outside of the US.

For those of who you saw the Toy Story 3 movie, clearly Barbie and Ken stole the show.

And not surprisingly those dolls are selling well.

But we are seeing continued good momentum around the globe in Barbie POS.

Okay.

Thanks.

Another question, and I don't know if it is for you or Kevin.

But on the legal expenses and I assume that's being driven by your friends up north, can you give us an update on what's going on there?

Yes.

Let me start, and Kevin, if you want to chime in, feel free.

You recall back in December, the Ninth Circuit Court heard arguments surrounding the trial courts orders from the phase one of the case which had resulted in a unanimous jury verdict in favor of Mattel.

The Court hasn't yet issued any opinion on that.

So nothing has changed from that front but you will recall it did issue an order staying the equitable relief, which included the transfer of the Bratz copyright registrations and trademarks to Mattel.

So, there's nothing new on phase one of the case other than we are still awaiting the circuit court's opinion.

We are now moving forward with phase two of the case, at the district court level.

That's the phase that alleges among other things that MGA systematically stole Mattel's trade secrets and there hasn't been a trial date set yet for phase two.

Overall I would say we continue to have faith in the judicial system and confidence in our claims and the evidence, just as we did in phase one.

We will pursue this as long as we need to.

It is really phase two then that's driving the $12 million increase in spending?

Yes, it is virtually all phase two as we are preparing for trial and we are ready to go at any time the Court is ready to start the trial.

A little more clarity, Sean, on sort of how legal fees and settlements have impacted the first quarter and the first half results.

In the second quarter of 2010 we incurred incremental legal fees of approximately $8 million primarily related to preparing for phase two of the trial.

Which could occur in 2010.

If you look at the first half of 2010, we incurred incremental legal fees of approximately $14 million again primarily related to preparing for phase two of the MGA trial.

And then moving on to these settlements, legal settlements related to the recall.

If you remember in the first quarter of 2009, we took a $21 million charge for a legal settlement reserved for product liability related to litigation and then in the second quarter of 2009 we adjusted this charge down by $5 million primarily due to insurance recovery.

In the first half of 2010, we reversed $9 million of the recall related charges to reflect the action settlement amounts approved by the court in 2010.

So all together for the first half of 2010, the total year-over-year improvement pertaining to the 2009 recall related legal settlement was $25 million.

If you look at both legal fees and legal settlements for the first half of 2010, we incurred incremental legal fees of $14 million primarily related to MGA.

These incremental fees were more than offset by the year-to-date favorable change in recall settlement charges of $25 million.

Okay.

That's a helpful clarification.

Last question for you, Kevin.

Can you comment on whether or not any additional shares have been bought back since the end of the quarter?

We don't comment on activity after the quarter.

Okay.

The you very much.

Thanks, Sean.

Our next question comes from Robert Carroll from UBS.

Hi guys, how are you doing?

Well.

Good to hear.

I was hoping you might be able to comment on the progression during the quarter.

I mean given the time line of the release around Toy Story 3, are you guys able to comment if there was a ground swell after the movie for the Barbie and Ken products as well as Toy Story 3 in general?

Yes, I would say overall, the momentum built not surprisingly.

We had pretty good sales early in the quarter, as retailers were gearing up for Toy Story 3 and then POS did very well for Toy Story 3.

But I would also tell you that the POS momentum was more broadly based than just Toy Story.

If you looked at the quarterly flow of the point of sale, clearly the momentum is picking up broadly around the globe.

Today, I am probably more concerned about supply than demand.

In China, we'd see labor supply tightening, the rates are up, shipping containers are in short supply.

Freight is taking longer to move than it sometimes does.

In Mexico there's a hurricane near one of our facilities in Monterrey and there has been floods from essentially Monterrey to Laredo, Texas.

So all of this was occurring while our business was picking up and orders were strong, the good news is we have a long history of overcoming supply chain obstacles like this, so as always we're continuing to focus on getting the right toys, at the right place at the right time.

Right now and certainly in the near term, in my view, the supply chain is relatively more important than POS momentum which continues to be quite strong.

Thank you.

Focusing just on Barbie, given that Barbie's role in the movie was probably a little more common than many people expected going in.

Was there an pronounced uptick in Barbie POS given the last couple of weeks in the quarter?

I would say POS has been strong fairly consistently for over a year on Barbie.

Obviously week to week it does change a little bit but we have seen good momentum before the Toy Story 3 products hit.

We clearly saw good success for the Toy Story 3 products, which wasn't a surprise.

We have been in pretty good stock on those products.

So I would say that there's no question, that the Toy Story 3 Barbie and Ken have done well.

But there's broad based strength across the line and Barbie POS momentum has looked good even in markets where Toy Story 3 has yet to air.

Great.

Thank you.

Our next question comes from Drew Crum from Stifel Nicolaus.

Great.

Thanks.

Good morning, everyone.

Bob, could you comment a little further on Toy Story 3 overseas?

I think you alluded to the fact that the film has been delayed in order to avoid the competition from the World Cup.

Can you talk about the opportunities you see there in terms sell in and given the ability of a film release?

There's no question Toy Story 3 has been a home run broadly speaking not just for our product line but I am sure for others in the toy business who have Toy Story 3 licenses or for other categories and consumer products.

The movie as you all know did very, very well.

From our vantage point, it is an incredibly [toy-edic] movie.

The business has done well in response to the movie and the response to retailer's promotions surrounding the movie.

I think there are some key European markets that air the movie in July, I believe by the end of July, all the key European markets, Italy, France, Germany, Spain, will have aired the movie.

I don't have any reason to believe it won't be a home run outside the US as well.

I think we are ready for it.

The inventory is in place, retailer promotions are set up and I would not be surprised if it does well outside of the US like it has done well in the US.

Bob, let just ask this.

Has the timing of the film release impacted the timing of your sell-in for the product overseas?

Meaning is there more in the third quarter or could it be balanced in the second quarter domestic versus international?

More balanced than not and it really didn't affect, the timing of the movie has not affected our shipment calendar of the products.

Okay got it, and then just shifting gears, the Thomas and Friends, doing our channel checks, we still see a lot of legacy product from the predecessor licensee, are you seeing that in your results and at what point do you think that corrects itself?

I think we are pretty close on that.

I visit enough stores that I'm starting to see our product appear, particularly in the die-cast segment, so I think we've finally cycled through the sell off period from someone else's product line and generally speaking some of our products are a little slower to come through the pipeline than we expected, but the business is doing well and is tracking everywhere where we thought it would be.

Okay, and Kevin, a question for you, the advertising spend as a percentage of revenue, 10% in the quarter.

I think you are below the historic average of the percentage of revenue, where do you see that going the balance of the year or can you give us an update as far as your thoughts are concerned for 2010?

The advertising expense as a percentage of sales for the quarter is consistent with last year and I think in 2009, advertising expense is 11.2% of net sales, which was on the low end of our historical range, reflecting the benefit of GCL initiatives as well as the challenging environment.

Our rate has historically been in the 11% to 13% range and we expect to be at the lower end of the range for 2010.

Okay.

Just last question, housekeeping item, you have got $250 million of long term debt classified as short term, can you just give us a sense as to the timing of those repayments?

Yes, I think they become due next year.

They're actually due next year in June, $240 million of the $250 million and $10 million of it is actually due this fall in October.

Great.

Thanks, guys.

Our next question comes from John Taylor from Arcadia Investments.

Hi.

Good morning.

I got a couple of questions if I may.

So in the way the order book looks for Toy Story 3, in the US, I guess I want to focus on, do you see anything different about the pacing of the way retailers want to bring that product in that might be different from what you've seen with entertainment properties and some are entertainment properties in the past, any forward, backward weighted, anything that's different from the norm?

No, JT.

I wouldn't describe it as being unusual in any way.

Clearly, a lot of people and retailers everywhere thought Toy Story 3 would be a great toy movie.

The great news is it has turned out to be a great toy movie but I don't think their pacing was unusual.

Okay.

And then, you bought back some shares in the quarter, I know there's been talk about buybacks versus dividend increases versus whatever in terms of maximizing shareholder value.

Have there been any sort of recent in depth discussions, studies, whatever that might help you figure out which way to lean on that because it seems that the share buybacks while they have done a good job in decreasing the share base over a period of time, they haven't been that effective.

So maybe any update on that?

Not particularly.

As I mentioned I believe or Kevin may have mentioned last quarter, this is a Board-level decision, the Board continues to be actively engaged in the discussions, particularly after last year, when you recall that given the macro environment we were sort of in hunker down mode.

We said our priorities last year were going to be for having a stronger balance sheet, increasing cash, reducing debt and we also wanted to protect the dividend.

We did all of that and improved our credit metrics and improved our credit ratings.

So this year, we reengaged in discussions at the Board level, reaffirmed the capital investment framework that I think we went public with in early 2003 or thereabouts, Kevin.

Correct.

And so, Kevin and the Board and the rest of us continue to look at what's the highest and best use of capital in our judgement at any given point in time, and we also talk to investors about their preference for dividends and share repurchases and what tax rates might, what implication there might be from tax rates and those sorts of things.

But from an overall strategic macro sort of basis, there's no real change in our strategy or approach.

Like you said, consistent with our frame work in the second quarter when we repurchased 5 million shares of our stock at a total cost of about $111 million and as Bob said, we remain committed to deploy capital to build shareholder value pretty much as we've done for the last ten years.

Okay.

Then last question, on the Chinese labor front.

So the contracts in place are pretty firm at this point in terms of allowing you to predict what your input costs are going to be on the labor side, or is there some variability there that you might have to take some pricing moves to protect margin from?

Well, go ahead.

Just from the perspective of what's going on I think that as expected in 2010, China announced the minimum wage would go up 20% in our key provinces effective May 1.

If you look at our 2010 price and we assume a majority of this double digit increase in wages and we're keeping an eye on further roll out of wage increases in our key manufacturing processes -- or providences.

That said, we continue to execute our global cost leadership program and other cost and manufacturing efficiency programs in 2010 and we priced our products consistent with making progress against our long term manufacturing goal of 15% to 20% operating margins.

We are really, JT, not looking at additional price increases this year, we haven't yet priced next fall's line and given the labor cost, given oil today is probably $76, $75 versus a $67 maybe a year ago.

Given what's going on in the supply chain and costs and currencies and those sorts of things, its more likely than that that we will be pricing next year and at least, my current point of view is that we will probably be pricing more aggressively as we did in 2009 than we have in 2010.

It is a next year issue not a this year issue.

Right, okay good.

And then, can you give us any sense of the sentiment of major retailers in Europe in terms of their outlook and their willingness to stock up for holiday?

Last year was a low water point.

We are trying to find out what the new normal is.

Can you give us any insight into the what they're telling you?

I would say in general we have seen good momentum across the portfolio and around the globe.

The business has actually done pretty well in markets like Italy, Portugal, Spain, southern Europe.

We continue to have a good quarter.

I think we remain cautious and conservative.

Retailers remain cautious and conservative.

My view is they are going to continue to be tight through this holiday season, not surprising to us and that was baked into our expectations for the year.

But the business in general has held up pretty well and I don't know whether or not yet we are at the new norm, but there's no real change in sentiment, Kevin, I'd say in the last three or six months.

Right.

I'd agree, Bob.

Great.

Thank you.

Our next question comes from Michael Kelter from Goldman Sachs.

Hi, guys.

First maybe you could just follow on what you were just talking about with respect to the holiday season, when you said you thought that retailers might remain tight on inventory, were you referring to southern Europe or were you referring to more broadly all of Europe, United States, et cetera?

I am referring more broadly to all around the globe.

Retailers continue to be tight on inventory, that's not surprising to us.

I don't think they're going to broadly rebuild inventory anywhere around the world.

That's just their view of the marketplace, its consistent with our view of the marketplace.

So similar to last year, people are going to be cautious and they tend to buy what they're selling as opposed to buying a lot in advance of selling.

If we look at the US is our best data.

If we look at retail inventories in the US which we calculate from shipments and point of sale information that we receive from retailers, on a year to date basis, the inventories today let me put it that way.

The inventories today in the US at retail are up maybe the low to mid single digits but most of that -- all of that is really due to the natural build for these entertainment properties that are very strong right now.

If you exclude the entertainment properties, the retail inventories are down below year ago and people were pretty tight with inventory last year, and so my view is that trend is going to continue this year.

I don't think retailers anywhere that I'm aware of are looking to rebuild inventories.

It is when the consumer buys it we will buy more.

That's helpful.

The next question I have was on gross margins, what I am surprised about I guess is gross margins normally go up at least 100 basis points from first to second quarter on seasonality and this time they went down 100.

You mentioned a lot of that was from higher royalties from the entertainment properties but the only thing new in the quarter was Toy Story, which would be less than 10% of sales.

How -- is there anything else going on as to why gross margins would have gone 200 basis points different than the normal seasonality in the business.

Well, again I think -- we did improve by 290 basis points to 48.1% compared to last year.

And as I said earlier, gross margin benefited from favorable product costs, price increases, and savings from the global cost leadership program, partially offset by mix due to higher royalties related to our new entertainment properties.

I think your focus on royalties are correct this quarter versus the first quarter.

In that we did see more entertainment license property sales in the second quarter, but also this quarter we continued to benefit from lower commodity costs, that occurred last year when we were buying inputs and manufacturing to our 2010 spring line relative to the near record high input costs that we experienced in late 2008, when we were purchasing inputs for the manufacturer of our spring 2009 product line.

In our 2010 gross margin also improved due to continuous improvement programs related to our global cost leadership program and other manufacturing programs across our supply chain.

So I think we made good progress again at rebuilding our gross margins and our goal is to sustain gross margins consistent with our long-term goal.

Okay.

And then--?

Go ahead.

No, I think again, I think royalties was part of that, I think also cycling through to commodity costs as we were building 2010 product.

Those commodity costs got more expensive as we move from the second quarter to the third quarter or I'm sorry, the first quarter to the second quarter.

Lastly on the capital structure, debt share repurchases, et cetera, you said you had $250 million coming due.

Is there any reason why you wouldn't refinance that amount or do you plan on paying it down and then even beyond that maybe have you considered refinancing for a greater amount and taking on a more aggressive capital structure and deploying cash back to shareholders?

I'd say overall it is a little early to have those discussions.

As Kevin always talks about this is a Board level decision and we review those things with the Board and try and use capital as best we can at the time.

So I just would go back to the capital and investment frame work, which we have articulated publicly and there's no reason to believe we are going to come off of that set of guidelines.

The important thing in those guidelines is supporting our credit metrics and ratings and I think that's key to having year end cash of $800 million to $1 billion target and the debt to capital ratio of around 25%.

So I don't see that changing.

Thank you very much.

Our next question comes from Hayley Wolff from Rochdale Securities.

Hi guys.

Hey.

A couple of questions.

Bob, you and I think David Stockton have been quoted in some publications as being failry upbeat about the holiday period.

Can you elaborate on that?

Well, I think in general if you look at what we all thought in the industry a year ago, we were all fairly pessimistic, we had come off a tough Christmas in 2008 when the global economy tanked and retailers and manufacturers like us were all anxious about what the holidays would look like in 2009.

We were pretty cautious about inventories going into 2009, retailers were quite cautious about inventories.

The good news is the market cleared, everybody did well, products sold and holidays were good.

So if you fast forward now our view of the world this year is okay from a POS and consumer standpoint we are hopeful the worst is behind us.

We don't have that pessimism that we had a year ago at this time.

That being said, I don't think anybody thinks we are back to good growth in the macro economy and I don't think anybody is building inventories in anticipation of renewed consumer spending, so I think we are going to continue with sentiments we've probably had for the last six to eight months.

So as we go through this current slow down, do you have internally any major reset expectations or are retailers more conservative maybe pushing back a little bit?

No, I'd say retailers continue to be conservative.

I wouldn't describe them broadly as more conservative.

I think if you look at how we calculate their inventories they have been tight with toys for some period of time now and I really don't expect that to change much one way or the other.

A lot of retailers saw the market clear pretty quickly last year and I'm sure they're hopeful to continue that again this year.

They are not going to get ahead of themselves.

In the other girls segment how much longer do we have tough comps of High School Musical and the Hannah Montana and then regarding Polly Pocket!

I know there has been a relaunch, a retooling, what's been the response to that, and do we think Polly can turn around?

I think we are about done with some of the older Disney properties that have cycled through, Polly has shown pretty good momentum of late here in the US but it is early.

So we will have to see how the holiday season goes.

We still have opportunities to do a better job overseas with Polly.

Last question, on the legal expenses, so you're now building up with the expectation of going to trial on phase two of the Bratz, so as we think about, I know you don't like to give any guidance, but as we think about legal, as getting in the way of any kind of SG&A improvement, how should we think about the legal expenses going foward?

Probably the only thing I can give you is a look back in history, when in full year 2008 we incurred legal incremental litigation fees related to primarily the MGA trial which occurred in May through June, July of 2008.

Those incremental legal costs were about $37 million for 2009 when we weren't in trial and we're not preparing for trial, litigation related legal costs decreased by $33 million, that primarily related to MGA.

That's probably the guidance I can give you, and while we reduced expenses in 2009, we will continue to make the appropriate level investments in legal fees until the legal matters are resolved.

Okay.

Thanks a lot.

Our next question comes from Margaret Whitfield from Sterne Agee.

A few questions, if you could comment on how your inventories are overseas relative to point of sale, Bob?

Also, I wondered -- I have seen a few holiday lines popping up at retail as well as a few SKUs for Monster High at Justice if you could give us your thoughts on the early read there and finally, two small questions, when will the Toy Story 3 DVD debut and what was the ForEx impact to the bottom line in Q2?

Thank you.

Let me start, Margaret, with inventories overseas.

The data isn't as good as it is here in the US but broadly speaking I would say the trend is consistent.

So, without going through numbers I would say in general retailers remain tight with inventories.

We are certainly tight with credit, continue to be tight with credit and I don't think that the United States is atypical of what's going on around the world in terms of retail trends.

I haven't yet seen Monster High at Justice, so you are ahead of me, frankly I haven't seen Monster High toys on the shelf either.

So you're ahead of me.

I have been out looking for them.

It is too early, but clearly we have got high expectations for Monster High at least in terms of starting to build a franchise, which we are committed to do.

So the Justice programs appearing now.

I have heard that toys are starting to appear but I haven't seen any.

In general I think that some of the fall toys coming out of either Mattel or some of our competitors are starting to appear at retail and my sense is based on the POS over the last several weeks, things are off to a pretty good start.

In answer your question on the Toy Story 3 DVD.

My recollection is it comes out around Thanksgiving or some time in the November time period in time for the holiday season.

And then on your final question on ForEx, ForEx was negative 3 percentage point impact on worldwide gross sales for the quarter and had no impact on EPS for the quarter as well as to the first half.

Does that answer your question?

I was wondering Bob if you had any more specifics on the holiday toys, Thingamajigs or the Video Cam Barbie or anything else that's out in terms of yearly read along with the Barbie entertainment line for Q4?

It is very early, Margaret.

Things that you have seen I haven't yet seen on the shelves and I go to retailers every weekend at this time frame of year.

So I'd say, it is too early to get excited one way or the other, but we have got good momentum, retailers are supportive of some of these key lines that you have mentioned, like Thingamajigs or like Video Girl Barbie, I have heard they're selling but I wouldn't get excited one way or the other.

If you just look at the absolute number of pieces out there, it is just not material yet.

Okay.

Thanks.

Operator, we have time for one more question.

Our next question comes from Felicia Hendrix from Barclays Capital.

Hi, guys.

Kevin, just back on the SG&A, you had said obviously the incentive accruals happen more in the second half of the year but because of accounting you accrue them somewhere in the second quarter, does that mean that the typical and the timing of incentive accruals are changed for the whole year, should we accept less in the second half?

That's going to depend upon our performance in the second half.

But again the majority of the incentive accrual occurs in the second half of the year.

It has been reasonably split between the third and fourth quarters based upon history.

Okay.

So it's not really like a material pull forward into the second quarter?

That's what I was trying to figure out.

No, no.

Then Wal-Mart has seen some leadership changes.

I am just wondering it might be too early but if you are seeing any changes there and particularly, how they're assigning shelf space to things like toys and other items.

No.

We haven't seen any change at all.

There hasn't been any impact on the folks who work in the toy business.

I'm not aware of any change in strategy broadly because of the change in leadership.

That's good.

Just wondering affected core Fisher-Price in the quarter?

It seeme to underperform a lot of the other line items.

I'd say in general, Felicia, from a POS standpoint, as we talked for probably the last eight months or a year, we are a little bit disappointed in the POS trends on Fisher-Price last year.

A lot of that was driven by price points on key drivers which we rectified this year.

Some of those products are just starting to sell right now.

I did see ISL, for example.

I did see -- I did find one of our products out there.

I saw ISL the other day.

So I think in general, Fisher-Price -- well, if you go back over the last ten years, has probably been the best performing major brand in the toy industry.

Certainly one of the best.

Fisher-Price is a terrific franchise but from a core product standpoint, we have been a little disappointed in the POS, fortunately if you look at recent weeks, the momentum is improving a bit.

We are also hampered in that segment by things like Power Wheels which is a very large expensive item.

So when you, it is disproportionate because of the retail dollars involved and Power Wheels have not done particularly well since the economy started to contract.

So those reasons just seem kind of fundamental to your specific business in general.

I am wondering if you are seeing any kind of uptick competitively as well?

There's always competition.

Certainly the infant preschool category over the decade that I've been looking at the numbers has been a growth category, within the toy business.

Fisher-Price has led that growth, has gained share more times than not in the ten years I have been looking at the data.

It is a competitive category.

We do see new competitors come in all the time, but Fisher-Price has held its own and continues to hold its own and is continuing to build share as we speak.

Okay.

Great.

Thank you.

Thank you, Felicia.

Thank you for participating in our call today.

There will be a replay of the call available beginning at 11:30 AM.

Eastern time today.

The number for the replay is 706-645-9291 and the pass code is 79744049.

Thank you all.

Ladies and gentlemen, this does conclude today's program.

You may now disconnect and have a wonderful day.