Mattel Inc (MAT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to Mattel's third quarter 2010 earnings conference call.

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

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

(Operator Instructions).

As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Ms.

Dianne Douglas, Senior Vice President of Investor Relations.

Please go ahead.

Thanks, Ali.

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

In a few minutes, Bob Eckert, Mattel's Chairman and CEO, and Kevin Farr, Mattel's CFO will provide comments on the results and then the call will be opened for your questions.

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

These statements are based on currently available operating, financial, economic and competitive information and they are subject to a number of significant risks and uncertainties which could cause our actual results to differ materially from those projected in the forward-looking statements.

We describe some of these uncertainties in the risk factors section of our 2009 annual report on Form 10-K, as well as in our quarterly reports 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 investor and media section of our corporate website, Mattel.com, under the subheading Financial Information and Earnings Releases.

Now, I'd like to turn the call over to Bob Eckert.

Thank you, Dianne, and good morning everyone.

We continue to be pleased with the performance of the business, while the all-important holiday season still lies ahead.

We remain on track to deliver solid revenue and profit growth driven by our portfolio of brands across various countries and regions.

That said, there are still some challenges ahead in relation to the biggest selling season for toys.

After scrutinizing what was written about the back-to-school season, the consensus seems to be that sales came but they came late with analysts surmising that consumers are still cautious about the economy and therefore purchasing closer to the actual event or need than in previous seasons.

As such, retailers remain guarded with inventories and several are betting on a late holiday season this year.

So anticipating the question I'm asked most often during this time of year, yes, there will be a Christmas and Mattel toys will be under the tree and we'll likely sell more toys than anyone else.

That said, I suspect it will play out later than we're accustomed to.

As we move into the all important holiday season, toy industry gurus as well as our retailer customers have named Mattel and Fisher-Price toys to their must have holiday toy lists, including Barbie Video Girl, Monster High doll, Sing-A-Ma-Jigs, Loops, Hot Wheels Stealth Rides, Dance Star Mickey, IXL, Imaginext Big Foot and a variety of toys from the Toy Story 3 line, as well as My American Girl and the 2010 Girl of the Year doll, Lanie.

Speaking of American Girl, beginning the week of October 18th, the brand's first ever product-focused national television commercial is scheduled to air and features the new My American Girl line of contemporary dolls, books and accessories, as well as American Girl's new interactive online world, innerstarU.com.

In Barbie's world, our I Can Be campaign continues to excel worldwide, and our new Barbie entertainment strategy which is focused on more relevant and contemporary stories and themes has proven quite successful this year.

Our spring release, Barbie and A Mermaid Tale resonated with girls, and our fall offering, Barbie, a Fashion Fairy Tale, is just starting to hit shelves.

Monster High sales are off to a strong start across multiple categories including toys, apparel, accessories and costumes.

Both the Justice and Party City retail chains report strong sell-through of Monster High merchandise, and Party City reports that Monster High costumes are in its top 10 for kids costumes.

The Monster High hardcover tween chapter book, written by New York times best seller, Lisi Harrison, is now number five on the New York Times children's best seller list, and that's only after one month of being on the shelves.

On Halloween, Nickelodeon will be airing a special 22 minute episode of Monster High, featuring the music of American Idol contestant Allison Iraheta.

Disney Princess is having an excellent year driven by an expansion in themes and play patterns as well as a full line supporting Disney's next major Princess theatrical release, Tangled, which hits theaters this November.

Disney Pixar's Toy Story 3, now the biggest animated film of all time in global box office, continues to drive strong sales across figures, vehicles, playsets, role play dolls and games.

Toy Story 3 will release on DVD November 2nd and we expect retailers to continue to strongly support the property through that period and well into 2011 as Disney continues to drive the franchise as an evergreen property.

Sales in Hot Wheels have been strong on the basic car, Monster Jam and Color Shifters lines.

And this year we're seeing growth for our cars across a broader array of accounts than ever before including grocery and drug stores.

Business overseas is also doing well.

Our overall games business is up, and we're experiencing good momentum on all our core brands like Uno, Apples-To-Apples, Blokus, Mad Gab and Pictionary And I'd like to highlight the strong performance of our kid and preschool games led by Whack-a-Mole, Rock 'Em Sock 'Em Robots, and our Thomas the Tank engine games.

Included in games is Radica which is experiencing nice growth driven by strong second year sales of Mind Flex as well as new entries like Puppy Tweets and Loops which is off to an incredible start and is showing up on almost every hot toy list in the US so far.

In the world of Fisher-Price there's some bright spots as Thomas and Friends is performing above expectations globally.

Dora the Explorer has rebounded nicely in the US during Nickelodeon's tenth anniversary celebration which kicked off on television and at retail in August.

Additionally, Fisher-Price is running a more focused television ad campaign this fall in the US which we've shifted later.

In fact, it's just starting to debut now, as we believe consumers will be shopping later than usual for this holiday season.

And as I said last year and still rings true today, I appreciate that many families will have to make choices this year when it comes to buying toys for their children.

I'm convinced that Barbie, Hot Wheels, Fisher-Price and American Girl and some of our newer introductions like Monster High Sing-A-Ma-Jigs and Loops will provide superior value for parents and great play experiences for the kids.

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

Kevin.

Thank you, Bob, and good morning everyone.

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

Total worldwide gross sales for the quarter increased 2% including a three percentage point negative impact from changes in foreign exchange rates.

Total worldwide gross sales on a year-to-date basis increased 7%, including a two percentage point negative impact from changes in foreign exchange rates.

US sales were up 3%, and international sales were up 2%, including a seven percentage point negative impact from foreign exchange driven primarily by exchange rate changes in Venezuela.

On a regional basis sales in Europe were up 3%, including an eight percentage point negative impact from exchange rates.

Sales in Latin America were down 6% including an 11 percentage point negative impact from foreign exchange driven primarily by exchange rate changes in Venezuela.

Sales in Asia-Pacific were up 13% including a three percentage point positive impact from changes in exchange rates.

I will now review our core categories and brands for the third quarter.

Mattel girls and boys brands.

Worldwide sales for Mattel girls and boys brands were up 8% including a four percentage point negative impact from changes in exchange rates.

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

Barbie sales in the US were up 16%, and Barbie sales in international markets were flat including a seven percentage point negative impact from foreign exchange.

Worldwide sales of other girls brands were up 7%, including a four percentage point negative impact from exchange rates.

Sales in the US were up 12% while international sales of other girls brands were up 3% including a six percentage point negative impact from foreign exchange.

The worldwide sales increase was driven primarily by higher sales of Disney Princesses and the launch of Monster High, partially offset by sales declines in Little Mommy, Polly Pocket and High School Musical.

Worldwide sales in the wheels category were down 5%, including a two percentage point negative impact from changes in currency exchange rates.

Worldwide sales reflected sales declines in Tyco R/C.

For core Hot Wheels, worldwide sales were down three percentage points(Sic) including a three percentage point negative impact from foreign exchange.

Domestic sales decreased 7% driven primarily by declines in sales of track sets and play sets.

Sales in international markets increased 1%, including a five percentage point negative impact from foreign exchange.

Worldwide sales in our entertainment business which includes games and puzzles and Radica increased 23% including a six percentage point negative impact from changes in foreign exchange.

The overall increase in entertainment business was primarily attributable to sales of toys geared to Toy Story 3 and WWE Wrestling.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands decreased 5% including a two percentage point negative impact from changes in currency exchange rates.

International sales of Fisher-Price brands decreased 1%, including a six percentage point negative impact from foreign exchange.

And sales in the US declined 7%.

Worldwide core Fisher-Price decreased 10% including a two percentage point negative impact from changes in exchange rates.

US sales of Fisher-Price core declined 13%, while international sales were down 5%, including a six percentage point negative impact from foreign exchange rates.

Worldwide sales for Fisher-Price Friends increased 16%, which included a four percentage point negative impact from changes in foreign exchange rates.

Sales of Fisher-Price Friends in the US were up 19%, while international sales were up 12%, including a 10 percentage point negative impact from foreign exchange.

The overall increase in Fisher-Price Friends was primarily driven by sales of products supporting Thomas and Friends and the launch of Sing-A-Ma-Jigs, partially offset by sales declines of Sesame Street and certain smaller licensed properties.

American Girl Brands.

Sales of American Girl Brands were up 2%, primarily reflecting strong sales of Felicity dolls, Lanie, the Girl of the Year doll and the benefit of two new store openings in Denver and Kansas City.

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

Our gross margin in this year's third quarter was 51.1% as compared to last year's margin of 51.3%.

The decline was primarily due to higher royalties and input costs partially offset by price increases and mix.

Advertising expense was $201.6 million, 11% of net sales, flat with third quarter last year.

Selling, general and administrative expense decreased by $7.7 million to $377.3 million.

As a percentage of net sales, SG&A expenses were 20.6%, compared to 21.5% last year.

The year to year decrease is primarily driven by lower severance charges and savings related to our global cost leadership initiative, partially offset by higher employee related costs and asset impairments of $8 million for the house of Barbie.

In SG&A, global cost leadership savings of $8 million were partially offset by a severance charge of $2 million.

In the quarter, our global cost leadership program delivered overall net savings of approximately $12 million, bringing the cumulative net savings to $194 million.

In addition to the $6 million net savings reflected in SG&A, there were savings of roughly $1 million in cost of goods sold, and $5 million in advertising.

We are on track to deliver cumulative net savings slightly above the high end of our target range of $180 million to $200 million from this program by the end of 2010.

Operating income during the quarter was $358.6 million, compared to operating income of $336.5 million last year.

The improvement was driven by higher sales and lower SG&A expenses partially offset by product recall impact of $7.6 million, and higher advertising.

Interest expense was $13.8 million versus $19.3 million in 2009.

The decrease in interest expense versus last year is primarily due to lower average rates and lower average borrowings.

As you know, on September 28th we issued $250 million senior unsecured notes due 2020 and $250 million senior unsecured notes due 2040.

We'll use these funds for general corporate purposes including paying off $260 million of long-term debt maturities over the next year.

Interest income was $1.8 million versus $1.5 million last year.

The higher interest income was due to higher average invested cash balances during the quarter, partially offset by lower average investment rates.

Other nonoperating income expense was zero versus an expense of $14.1 million in 2009.

This quarter's income tax provision was $63.3 million, compared to prior year's expense of $74.8 million.

This quarter's income tax provision included net discrete tax benefits of $16.8 million, or $0.05 per share.

We currently estimate the 2010 full year effective tax rate to be 23% to 24%, excluding discrete items.

Overall we reported net income of $283.3 million or $0.77 per share versus last year's net income of $229.8 million or $0.63 per share.

Now, turning to the cash flow and balance sheet.

Year-to-date cash flow used for operations was $428 million, as compared to $319 million for the first three quarters of 2009.

The higher use was primarily driven by the decision not to factor domestic receivables and higher working capital requirements, partially offset by higher net income.

Our cash on hand at the end of the quarter was $961 million, up from $324 million in the prior year.

The higher cash balance at the end of the third quarter of 2010 was primarily due to a higher beginning cash balance of $1.117 billion this year, versus $618 million last year, and higher long-term borrowings partially offset by lower short-term borrowings and the decision not to factor receivables.

During the quarter, the Company repurchased approximately two million shares of its common stock at an average price of $21.49 per share, a total cost of approximately $42 million.

Receivables were $1.55 billion, or 76 days of sales outstanding, three days higher than last year.

Factoring of domestic receivables decreased from $126 million in 2009, to zero in 2010.

Prior to factoring, days sales outstanding decreased four days.

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

At this point, we do not expect the to factor domestic receivables in the fourth quarter.

Inventories at $741 million were up $135 million or 22% versus 2009.

Our third quarter inventories were more in line with levels experienced in 2007 and 2008 prior to the global economic decline.

Our total balance sheet debt increased by $296 million from the prior year, reflecting a recent debt issuance of $500 million, partially offset by a payment of $50 million of maturing, medium term debt, and $154 million reduction of short-term borrowings.

Our debt to total capital ratio ended the quarter at 29.8% as compared to 27.6% at the end of last year's third quarter.

Capital expenditures during the quarter were $37.6 million, up from last year's third quarter of $28.6 million.

To summarize, as Bob mentioned, we remain on track to have a good year.

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 opportunities surrounding our new entertainment properties, maintain costs 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.

Operator?

(Operator Instructions).

Our first question comes from Drew Crum of Stifel Nicolaus.

Please go ahead.

Thanks.

Good morning, everyone.

Bob, I want to start with some of the moves that retailers have made, at least announced, during the third quarter to add square footage.

Did that have any impact on your third quarter performance or is that something you're anticipating more for the fourth quarter?

I think it's probably a little bit more in the fourth quarter.

A lot of these pop-up stores haven't yet opened and the shipments are just starting to flow into the retailers as we speak.

Okay.

And could you comment on your inventory position entering the fourth quarter, both domestic and international?

Yes, I think, Drew, let me take this chance to put both the sales and the inventories in perspective.

Our shipments into retailers here in the States were a bit soft late in the quarter.

That wasn't the case in international markets.

And from a supply side standpoint, we're still struggling a bit with a few lines, mostly in Fisher-Price, but overall our inventories have returned to normal levels, if you go back over the past couple of years.

We do continue to see good performance in POS data.

The NPD reports indicate that the toy industry's holding up well and we're continuing to gain share.

I also think, as I mentioned in my remarks, that we'll have our share of the best selling toys this year, based on the various holiday toy lists.

But if you look at our inventory levels at retail in the US, they've now fallen below year-ago levels, despite last year being a tight year for us all.

And the fact that we have some new growing brands in our portfolio, like WWE, Toy Story, and Thomas.

So how the holiday season's going to play out is still up in the air.

We do know that some key retailers are betting on a late Christmas, based in part on their experience during back-to-school.

We also know that we're in good shape, that advertising and shelf space and merchandising commitments.

So my own belief is the inventories will move, Christmas will come, consumers will show up and buy toys and we'll gain share both here and abroad.

Okay.

Just a follow-on to the inventory position and specific to Barbie, could you assess your inventory position with Bratz now returning to the category and starting to pick up some shelf space?

Well, I don't want to comment on competitors' positions, but we continue to see continued good momentum on Barbie.

The brand's rejuvenation is spreading around the globe.

We've had good success in the core areas of aspiration with I Can Be, or fashion with the new Fashionistas dolls or the collector dolls like Twilight and the black dresses.

The doll category is growing.

We're gaining share in both Barbie and Disney Princesses which continues to perform superbly.

And you'll recall the "Tangled" movie launch is later this fall.

So overall the doll category is growing.

And we're continuing to gain share.

Okay.

Two last quick ones for me.

Kevin, what was the impact on earnings from FX in the quarter?

And can you give us any sense as to the timing on the debt re-fi?

Yes, FX for the quarter was at 3% negative impact on worldwide gross sales and $0.01 unfavorable impact on EPS for the quarter.

And we did basically issue $500 million of debt in September.

We'll be repaying down debt in 2011 in June of $240 million, and in October of $10 million in 2011.

So those are 2011 events?

That's correct.

Okay.

Thanks, guys.

Our next question comes from Robert Carroll of UBS.

Please go ahead.

Hey, everybody.

Just on the inventory, is there any way you could break out how much of the increase is due to higher material cost versus higher actual levels?

We really don't provide that level of detail.

There is a bit related to higher cost but most of this is building in anticipation of the fourth quarter.

Okay.

And then two semi related questions.

One, would you be able to just break out the gross margin impact from shipping costs, royalties.

I know you guys don't normally do it in the Q.

But if you had any color on that now, it would be grade.

On that same vein, along with shipping expenses, were there any delays in moving product that might have moved some shipments into Q4 that would have normally come in Q3 if the shipping environment wasn't so tight?

Let me start with the second one, Rob, and then I'll have Kevin do the first one.

That was not a big deal in the quarter.

We certainly experienced, as we commented on the second quarter call, some supply chain disruptions and shipping delays earlier in the year but we've overcome most of that, not quite all of it.

We're still a little slow, as I mentioned, on some Fisher-Price items, but broadly speaking the supply chain's flowing pretty well right now.

As I indicated in the script, third quarter gross margin was relatively flat at 51.1% compared to last year's third quarter gross margin of 51.3%.

The 20 basis point decline in gross margin was primarily due to higher input costs and royalties, partially offset by price increases and favorable mix.

With regard to higher input costs, part of that related to higher shipping costs, and we expected higher royalties due to the increased sales of entertainment properties but we don't go to the next level of detail.

Thanks.

Our next question comes from Tim Conder of Wells Fargo.

Please go ahead.

Thank you.

Just wanted to follow on one of those questions there.

Bob, on the supply chain and then the potential impact in the quarter on Fisher-Price, how much of the decline in Fisher-Price, or just any color you can give us on that, was related to the supply chain issue that you're alluding to versus just some issues in the core Fisher-Price category?

I don't have a quantification, Tim, of the answer.

Supply chain is a little tight on Fisher-Price, but qualitatively I'd tell you the majority of the sales decline in Fisher-Price was not related to supply chain issues.

As you know, our core Fisher-Price POS has been a bit soft, really dating back to last year's holiday season, and so we have retooled the price/value architecture of this fall's key driver products.

They're now hitting shelves.

And recognizing what both we and retailers think will be a late Christmas, we delayed the timing of our marketing programs on Fisher-Price.

For example, last year in September we ran 17 product ads on Fisher-Price and this September we ran five.

So the marketing support has now kicked in.

I've seen ads on TV for Fisher-Price in the last couple of days.

The retail sales are a bit more encouraging in recent weeks but it's still very early and I would describe it as the jury's still out until we read the holidays on Fisher-Price.

Would the decline in Fisher-Price that you noted in your revenue breakdown, do you anticipate that being more of a timing issue given just what you laid out here or -- and given that you've retooled for this Christmas holiday season for the lower price points?

So is it the combination of those two or is there something beyond that that you're worried about that you should say, hey, we may have to look at some additional issues once we get through fourth quarter?

No, Tim, I don't think there are additional issues that we're worried about today.

That said, Fisher-Price products tend to be pretty seasonal.

They're some of the higher priced items in the fourth quarter, those key drivers that, as we've talked about for the past year, make up a big chunk of the incremental holiday volume.

And that movement is still in front of us.

So while we're not overly anxious right now, we have to see how this plays out.

We have retooled the line.

We have changed the marketing spend and we'll see what happens when it happens.

I can't really predict what we might learn from the holidays yet.

Okay.

And feeding into that question, should we anticipate for the full year much of a change in your total ad spend as a percent of sales?

I think you guys have previously commented on prior calls that to remain in the 11% to 12%, 13% area but probably toward the lower end on an annual basis, is that still fair?

Yes.

Yes.

Okay.

Another question here is looking forward, good gross margin performance here in the quarter despite the disappointment on the sales side, I think, from versus Street expectations.

But how do you see that?

Do you think the combinations that you've seen in this quarter impacting gross margin, will some of the negatives start to become more apparent going forward or should we somewhat expect a little bit of a good balancing act here on an annual basis?

Yes, I think we made good progress in rebuilding our gross margin in 2009 and year-to-date through the first nine months of 2010, delivering gross margins consistent with our long-term gross margin goal of 50%.

As we said, our overall basket of product costs for 2010 are consistent with our cost assumptions used to determine our pricing for our 2010 product lines.

We're delivering on our manufacturing efficiency programs and global cost leadership initiatives.

But as I always say, predicting gross margins is very difficult due to the complexity of all the moving pieces including mix, product costs, foreign exchange and royalties.

While we don't give guidance, it's our goal to maintain and sustain the progress we've made in rebuilding gross margins, continue to deliver top line growth and progress our cost cutting initiatives in order to achieve operating margins consistent with our long-term annual goal of 15% to 20%.

Okay.

You've had some visibility into meetings with large retailers, looking into next year.

How are you thinking about pricing now that you've had those meetings and that impact looking into next year?

Or should we anticipate some pricing that you're able to take?

I think the answer to that, Tim, is yes.

We believe costs are going up, whether you look at component costs, raw material costs, labor costs, shipping costs.

And as we're beginning to have those discussions about next year's line with retailers, we haven't finalized the pricing plans but I am anticipating that the price of toys will be higher next year than it is this year.

Okay, great.

I'll get back in the queue.

Thank you.

Our next question comes from Margaret Whitfield of Sterne Agee.

Please go ahead.

Good morning.

Bob, I noticed some out-of-stocks, Monster High, Toy Story 3 seems limited, Tangled is just coming in.

What are you expecting for Q4?

Do you think you can match the demand that's out there?

And do you expect -- the retail inventory situation below last year despite new lines, is this widespread or confined to one or two retailers?

Let me start with the back end of the question, Margaret.

It's reasonably widespread across the major retailers.

If we look at our overall retail inventory position as we measure it, based on what we ship into retailers and the POS data that we get from them, our inventories are now down low to mid single digits versus year-ago.

And last year's inventories at retail were quite low compared to normal years.

If you exclude some of the new properties that we have like Toy Story and WWE, the retail inventories right now are down double digits below what they were last year, and again last year was pretty tight.

I wouldn't isolate it to one or two retailers.

I think several of the major retailers are betting on a late Christmas this year.

We've aligned with them in terms of our support and our programs and I think that's how it's going to play out.

And as the first part of your question, we're in the position that we're in a lot at this time of year where we do have some SKUs and some products where we're just not going to be able to fulfill demand.

Monster High is a good example.

It's gotten off to a terrific start.

Justice has done well with it.

Party City's done well with it.

The toy retailers have done well with it and it's unlikely that we're going to be able to keep up with demand for Monster High this year.

There's always that handful of brands on the one side of the normal distribution curve where we don't have enough of them.

And we don't talk much about the other end of the normal distribution curve where we made too many of something.

But overall we tend to do well in the middle of the product line.

And for Kevin, could you comment on legal costs, and during--?

Yes, I think for the quarter we incurred incremental legal fees of approximately $11 million, primarily related to the MGA trial set for January of 2011.

These incremental legal fees were partially offset by year-over-year favorable changes in recall related settlement charges of about $10 million.

That relates to about a $5 million charge in Q3 of 2009 for higher recall related legal settlement charges and a $5 million legal insurance cost recovery in the third quarter of 2010.

Thank you.

Our next question comes from Felicia Hendrix of Barclays Capital.

Please go ahead.

Hi, good morning, guys.

Kevin, you mentioned at the end of your prepared remarks that you repurchased 2 million shares.

It wasn't in the release.

So I'm just wondering, was that just done to offset stock option expense dilution or was that an incremental buyback?

That was an incremental buyback related to our capital investment framework.

Maybe I could talk a little bit about capital deployment here.

First, I'd like to help you with year-end cash.

Here's how we're thinking about our cash position at year-end 2010.

We started the year with about $1.1 billion of cash on our balance sheet.

As you know, in late September we issued about $500 million of senior unsecured notes given the attractiveness of the debt markets and knowing that we intend to pay down $260 million of long-term debt that matures over the next year, which as I previously stated is in June of '11 and October of '11.

Additionally at this point we do not expect to factor domestic receivables in the fourth quarter.

In past years we have typically factored about $300 million of domestic receivables each fourth quarter.

The net impact of the recent debt issuance and our decision not to factor receivables in 2010 should result in a favorable impact to our year end 2010 cash balances of approximately $200 million.

And again, we intend to pay down $260 million of long-term debt that matures over the next year.

Moving on to capital deployment for 2010, we have continued to execute based upon our capital investment framework.

We can use our excess cash to reinvest in the business, make strategic acquisitions or return funds to our shareholders in the form of dividends and share repurchases.

Consistent with this framework, in the first nine months of 2010, we repurchased 7 million shares of our stock at a total cost of $153 million, and that included 2 million shares in Q3 for $43 million.

As most of you probably know, our Board of Directors will consider the payment of the dividend in November.

We remain committed to deploying capital, build shareholder value, just as we've done for the last 10 years.

Thanks.

And then on the tax benefit, I was just wondering if you could elaborate on what that was from?

Sure.

It really relates to the foreign tax credit carryovers that we have.

We have approximately $209 million of foreign tax credit carry forwards as of December 31, 2009.

Previously we've not recognized the full benefit of these foreign tax credits forwards for financial purposes since it was not likely that we would utilize them in the carry forward period on our US tax returns.

In August of 2010, the US enacted legislation that had the impact of providing Mattel with greater capacity in future years to utilize excess foreign tax credit carryovers from prior years.

In the third quarter of 2010, Mattel formalized a plan to repatriate earnings from certain foreign subsidiaries in order to be able to fully utilize excess foreign tax credits.

As a result, Mattel recognized net discrete tax benefits of $16.8 million in the third quarter of 2010.

Is there any way for us to forecast how you'll use that in the future?

Those credit carry forwards?

Yes.

Yes, I think we'll be using the credit carry forwards, the credits start in 2000 and we'll start utilizing them in 2010 until we fully utilize them.

So when you think about our US tax position, we will be utilizing these credits as allowed by the tax laws which there's specific requirements with regard to you can use them to the extent that you generate foreign source income.

So it's fairly complicated but you should see over the next five to ten years our utilization of those credits.

Okay.

Great.

And just getting to your business, the actual operations, Bob, on Fisher-Price I thought you gave us a good explanation of what was going on there because it was lower than what we were looking for but I get it.

I'm just wondering, should the winding down of Sesame Street have any material impact?

In Kevin's prepared remarks, it did have some of an impact, so I was just trying to wonder how we should think about that, because as it's been posed to us, Sesame Street wasn't really that much of an impact for you guys on a positive recently.

Sesame Street has been a declining business for us for some time.

And it is being more than offset by things like Sing-A-Ma-Jigs, we're having great success right now with Dance Star Mickey.

That's a product we're not going to have enough of.

Dora's holding up.

So some of the smaller properties in the Fisher-Price Friends portfolio are declining.

Sesame's still declining.

But it's not a material impact on the business.

Okay.

Good.

And as you think about pricing in the fourth quarter, you've mentioned, and we all know, that the consumer is price sensitive.

I was just wondering, a range, what you think the sweet spot of pricing for the consumer is.

And, really, the crux of my question is what percentage of your product is above that?

In general toys, broadly speaking, are really good value.

Most toys cost under $20 at retail.

And certainly the best selling toy on an individual unit basis is a Hot Wheels car that for many retailers still sells for less than $1.

The sweet spot for toys tends to be in that $10 to $20 range.

The majority of toys are in that range.

But on an incremental basis, particularly late in the year, right as we get close to Christmas, the big track sets go, the big Fisher-Price items go, the big doll houses go, and those tend to be the things in the $50 to $100 range.

As we look backwards, remember last year we had, in our judgment, based on our analysis, too many of those Fisher-Price items priced in the $60 to $100 range, the majority of the key drivers were.

This year we're down to a couple in that range.

Things like the Big Foot which is a big seller, we'll probably run out of that.

IXL, which is a big seller.

And, really, those are the only couple of items at the really highest price point.

The majority of the key drivers in Fisher-Price have been retooled, they have been reengineered to sell for lower prices at still attractive margins.

That's great.

And then actually you mentioned track sets, and Kevin or Bob, I was just wondering, in wheels we did see a slowdown in track sets in the quarter, I was wondering if that was price or if you're just transitioning to something else there?

We are transitioning.

The basic cars business was fine, and as I mentioned the alternate channels segment is growing nicely for Hot Wheels.

But the higher priced track sets were a little slow.

Remember last year, we were featuring core track sets.

I think in the US our shipments in the third quarter a year ago were up 25% on Hot Wheels.

This year, we've been featuring Trick Tracks so far.

It hasn't been as effective as last year's program, so for Christmas we're going to return to a core track focus with the Criss Cross Crash.

And I think that will help us a bit.

And also on Hot Wheels, remember international continues to do quite well.

That's right, okay.

And just my final question is, just wondering if you could give us some color on Cars, since Pixar Cars, since we're all excited about that for next year including a four year old who is living under my roof.

I'm just wondering, can you remind us what Cars did in 2006 for you and maybe what it is on an evergreen basis?

I can't believe you've got a four-year-old child.

I remember walking through New York City on Michigan Avenue, would have been four-and-a-half years ago, talking about this, so congratulations.

Anyway, I won't specifically answer size of business and individual lines but Cars is a big deal.

Let me put it in some perspective for you.

Toy Story's a big deal.

We and Disney and retailers have had high expectations for Toy Story and, as you're seeing, those are being realized.

That said, on a nine month year-to-date basis this year, our Cars shipments are this year, four years after the movie, only about 10% lower than what we've shipped on Toy Story.

That gap will widen in the fourth quarter because of the DVD release for Toy Story 3.

But in fact, four years after we've had the big entertainment, Cars is still a big deal.

And despite all the attention, Toy Story and a lot of other entertainment properties, that business is still growing at POS.

The year-to-date POS this year is up on Cars.

So the bottom line is Disney and Pixar create terrific brands and we're thrilled to partner with them and I think Cars is going to be a big deal next year just like it already is today.

Okay.

That's helpful.

Would have loved some specific numbers there but that's very helpful.

Thank you.

7, 4, 9, and 12.

Great.

Thanks.

Our next question comes from John Taylor of Arcadia Investment.

Please go ahead.

Good morning.

I've got a couple of questions.

One, let me take a stab at inventory again.

I wonder if you could characterize whether the buildup this year is just restocking, whether you guys are making sure you've got it on hand if and when the orders come in for late delivery and that sort of thing?

How much of this is just stopping with you a little bit longer than being shipped on to retailers?

It's all of the above, JT.

Number one, as you know, we started this year and finished last year in the fourth quarter with insufficient inventories.

We just weren't sufficiently filling orders certainly at the beginning of this year for our customers.

And that's our responsibility, is to have enough goods to fill the orders.

And so we've been in catch-up mode with our inventory.

Number two, as we talked about last quarter, the supply chain was slower and it's taken us longer to get the goods in but we've now got the goods.

Number three, there are at least some retailers who are really betting on a late Christmas and they want the goods later this year than normal and we're holding the goods for longer than normal.

Number four, if you really go back to I'm going to say 2008, 2007, our inventories are right about in line with where they were then.

We've got more business today, particularly as we picked up things like WWE and Toy Story and Thomas.

But our inventories are back to what I would think of as a reasonably normal level.

So some of it is clearly related to, in the tight times, with all the anxiety about last year's holiday season, we didn't make enough goods.

This year we have.

Okay.

All right.

And then Kevin, the tax benefit, the specific benefit you're calling out is, I gather, the total -- I think your guidance is 23%, 24% without it.

So the total we're going to get is what happens in Q3 and Q4; is that right?

There's nothing in the first half related to stuff like that?

I think there's a little bit in the second quarter related to discrete period items.

It was about, in total I think it's about 3%.

And the previous one was related to year-to-date, that is related to the reassessment of prior year tax liabilities based upon the status of current audits and tax filings in various jurisdictions.

That amount was, I think -- I don't have the amount, JT.

It was about $4 million.

So it's probably about a total of $20 million for the year.

Okay.

Is that a year-to-date number?

Yes, that's a year-to-date number.

And we can't predict what's going to happen in the fourth quarter with regard to discretes, but at this point it's around $20 million year-to-date.

Okay.

And then on the product side, Bob, in terms of core Fisher-Price number being down 13% in the US, so obviously there's a lot of things going on here but is there anything competitively, or is there anything category-specific like maybe a shift towards electronics, away from basic plastic things, or how much of this is timing?

Can you give us any color on that?

JT, at this point I can't give you a lot of color other than the infant-preschool category continues to hold up well.

Fisher-Price's share is holding up well based on an August year-to-date basis, which is what we have for NPD.

It's been that way for the ten years I've been reading the NPD data, the infant and preschool category has done relatively well and Fisher-Price has done quite well within that category.

There's no change in that so far this year.

So my read based on where we sit today is there's not a pronounced competitive issue in the infant and preschool category.

That said, a lot of people know that category is doing well.

A lot of people know that Fisher-Price is a strong brand so we have a lot of competition in that category.

Okay.

Thank you.

Our next question comes from Greg Badishkanian of Citigroup.

Please go ahead, sir.

Hi, good morning, this is Alvin Concepcion for Greg.

Regarding the retail inventories, going back to that, I know you mentioned some products were out-of-stock.

How much do you think that impacted sales?

Not an abnormal amount.

At this time of year, the hot toys are starting to sell.

And I do think, based on everybody else's list, that we've got our fair share of more of the hot toys and so those toys are not going to be around and they're already starting to disappear.

Things like Dance Star Mickey, Sing-A-Ma-Jigs, those products, Monster High, those products are already hard to find.

But at this time of year, that's not that unusual.

Great.

And then could you quantify what the retail sales were in the US and internationally in the quarter?

We don't really provide data on retail sales.

We have point of sales data from some of our customers, not all of our customers, and we don't disclose their data.

Okay.

It sounded like you were gaining market share.

Do you have a range?

Was it mid single digits POS?

Do you have sort of a range?

I'd say the POS has been improving quarter on quarter as the year has progressed.

We are up in POS.

I don't want to quantify it but the trend has been our friend on POS this year.

Great.

Thank you.

Our next question comes from Sean McGowan of Needham.

Please go ahead.

Thank you.

One question I had is regarding Monster High.

So you mentioned the 22 minute episode coming up on Nickelodeon.

Are there any plans for other TV support for that property?

Yes, Sean, we are looking at it.

The brand's off to a terrific start.

Let me give you some of the online traffic numbers.

The MonsterHigh.com website has had over 7.5 million visitors.

The music video was the most watched video on YouTube for the weekend of Friday, August 13th when we ran it.

The Facebook page has over 100,000 fans.

This thing has not been broadly advertised.

We're just starting to television advertise it now.

The chapter book, as I mentioned, has done well.

We're getting good reports from both Justice and Party City.

So the brand certainly has some traction.

We think investing behind the brand makes sense.

We are going to do something with Nickelodeon, one of our strong network partners, here for Halloween.

And we are certainly looking at entertainment, both television and theatrical for Monster High as we build out the franchise.

I know you mentioned the prospect of something theatrical well into the future but no definite plans or anything in the works for TV?

No definite plans but again, I'd just tell you, it is something we're actively exploring.

Okay.

Thank you.

Could you remind us, Kevin, what was the other expense item, the $14 million last year?

Yes, related to foreign exchange loss in our Venezuelan subsidiary, primarily.

That's what I thought.

Okay.

And I just want to circle back to the Fisher-Price core, that's one of the more surprising things I thought in the quarter.

Do you think there's a demographic angle to this as well?

Birth rates have been down but do you think -- is it that nature of the product, the infant and the juvenile product?

No, I really don't, Sean.

Certainly, the birth rate which was favorable to us the last couple of years has subsided with the recession.

But again, looking at the NPD data, and we only have it for the first eight months, not for the most important four months of the year, but the infant and preschool category has held up well and Fisher-Price has, as well.

Okay.

Thank you.

Our next question comes from Tony Gikas of Piper Jaffray.

Please go ahead.

A couple questions.

Just as it relates to two properties, is Toy Story 3 product performing better than you expected?

There wasn't a lot of mention in the press release.

Similarly, WWE was kind of absent in your press release.

Is that performing better than your expectations?

And lastly, any comment on MGA?

It seems like there's a lot of noise around the litigation there and costs.

Any kind of update you have there would be helpful.

Well, I would say that all three of the major new properties for this year, that is, Thomas, Toy Story, WWE, all three of those we've had high expectations for and we're at least achieving those expectations.

As it relates to MGA, as you remember, the Ninth Circuit decided that some of the aspects of the first phase of our case against MGA in which we had a favorable outcome will need to be retried.

So the new judge, the judge from the first part of the case, has retired from the bench.

And the new judge has combined what was Phase I and Phase II, Phase I being the intellectual property and Phase II primarily being trade secret theft into one trial that starts I believe on January 11.

We think that with the trial that has -- it's comprehensive and puts everything together in one place in front of one jury, we think that gives us an even more compelling case than was possible with a divided trial.

And I have great confidence in the judicial system and the ability of the jury to right the wrongs that Mattel has suffered.

So we're going to continue pursuing this for as long as we need to.

It is expensive but we have an obligation to the owners of the Company, to the employees of the Company to protect our intellectual property and our rights and we're going to do so.

Okay.

Last question, then.

This is the time of the year when all the retailers are talking about discounting of toys.

Just for the record, does it appear to be any more aggressive this year than it has in the past few years?

No.

It's still a little bit early.

So it remains to be seen.

There's clearly some market share shifts among retailers but I wouldn't describe it at this point in time as being abnormal competition based on retail price.

Okay.

One more if I could squeeze it in.

With Toys R Us having a lot of these new pop-up stores, a lot more than last year, does that really grow overall toy sales in the industry or do you view that really as just redistribution of sales?

I suspect it's going to be a little bit of both.

Providing more convenient access to products is good for the entire category, the toy category.

Also, to me, Toys R Us must have concluded that they have an opportunity to gain some share by doing so.

So I suspect it's a combination of both things.

Good luck, guys.

Thanks.

Our next question comes from Gerrick Johnson of BMO Capital Markets.

Please go ahead.

Hi, good morning.

I was hoping you could talk a little bit about some things going on at Wal-Mart.

Perhaps the flexing of their space year-over-year looks down pretty significantly, thanks to Project Impact.

I was wondering how that impacts your sales as well as your inventory position out there at retail.

What would, say, inventory at retail be excluding Wal-Mart at the other mass discounters, or retailers?

Gerrick, I'm sensitive to not wanting to go down the slippery slope here of isolating customer information.

I'd just respond by saying, broadly speaking, our retail inventories are down and it's not confined to one customer.

That said, certainly if you look at, starting last year, particularly infant and preschool section, Wal-Mart has added some house brands in that department and that's cut into our Fisher-Price business.

At the same time, my expectation is Wal-Mart's going to be quite aggressive for this holiday season.

We've seen what they did down in Mexico where we have a significant toy business and a significant toy business with them, and I think they're going to flex their space this fourth quarter and be strong in the toy business.

But we'll have to see how it plays out.

Okay.

The house brand Garanimals was part B of that question, so thank you for answering that.

Where do you think you have too much inventory?

You mentioned before where you have too little.

Where do you think you have too much inventory right now?

I don't think we have too much right now.

But I'm sure that if you ask me that question in 90 days I'll be able to answer it.

But we're not at this point in time -- we're not particularly long in one segment or in one brand.

Okay.

And switching back over to the legal department.

Can you give us some ballpark figure as to how much you've spent cumulatively over the last five years or so on this legal expedition?

No, we haven't and we won't and we just don't go into that kind of fine line detail.

We have talked about the expense goes up in anticipation of trials or in years when there is a trial, and the expense comes down following those.

We're clearly in ramp-up mode right now.

It is Phase I and Phase II of the trial together that starts January 11.

We've been working very hard this entire year.

We'll continue working very hard up until the trial.

So we're clearly in ramp-up mode on the expense.

The trial starts January 11, and we'll have to see what happens following that.

So if you're spending a lot in ramp-up mode should we assume that in 2011 the incremental legal expense -- that question we'll ask every single quarter -- will the incremental expense be up or down in 2011?

We're not going to give guidance on anything but specifically as it relates to legal expense.

We're going to have to see how the case plays out.

We're going to have to see how long the case lasts and what we need to do during the case and what happens after the case.

I don't even know if I can predict it right now.

All I can tell you is we'll continue making the investment to protect our intellectual property, to right the wrongs that happened.

Finally, on that topic, there have been new charges that MGA's brought out, corporate espionage, stuff like that.

Will that be part of the overall January 11, trial or is that something separate?

As we've said about this, we believe that MGA's 11th hour counter claims, if you will, are a cynical attempt to deflect attention from their own wrong-doing.

So the answer we filed in response to those counter claims, which I think was filed very recently, speaks for itself.

I'm not going to get into the specifics of the case other than to say that we're ready to go in front of a jury.

Right.

But is that a separate issue, is it a separate trial?

Or are those all going to be combined into the one January 11, trial?

Well, I don't know exactly what's going to be in and out of the trial but I do believe that there will not be a separate trial on those claims.

Okay.

Are there any pretrial motions or anything that we should be concerned about between now and January 11?

There are.

There are in this case an incredible number of motions being filed.

I think the key thing between here and there are motions for summary judgment on some of the claims to really define what will go in front of the jury.

Okay.

All right.

Thank you.

Our next question comes from Linda Bolton-Weiser of Caris.

Please go ahead.

Hi, how are you?

I actually was down in Arkansas at the Wal-Mart analyst meeting a few days ago and they definitely talked about taking a cue from what they did in Mexico and flexing the space and creating additional space.

And I thought they said in December it would be like a doubling of space, and I know you don't want to get too detailed.

But did I misunderstand them?

And also on the inventory issue, they are actually reversing a lot of the inventory reductions they had made over the last few years as part of almost a reversal of strategy.

So are you saying that you don't expect or that toys is not getting that bump-up in inventory build at retail and that it's going more toward other categories?

Could you just elaborate on that a little bit?

No, Linda, you're talking directly to them so I don't want to get in between you and one of our customers.

I'd just say that I think they're gearing up and they have plans to have a good holiday season, as do several other major retailers.

And my sense is by the time Christmas comes, their stores are going to have a good selection of toys and I'm hopeful we have our fair share of that selection.

Okay.

And then just on the Fisher-Price again, given that like the price points and the mix of price points is certainly different, as you've talked about several times, is there any way you can describe what the price mix versus the unit volume growth for Fisher-Price was in the quarter to help us better understand that?

No, other than to just qualitatively say I don't think there's a big impact on price mix.

It's certainly a component when you look at some of these key drivers but right now I would tell you that it tends to be more in the area of what's selling into retailers.

As I've mentioned now since really last holiday season the POS on the core business has been a little soft.

So we have adjusted the price mix but I think that will play out more as the holiday season approaches.

Okay.

And then I think you mentioned in the SG&A that there was $8 million pretax impairment charge for the House of Barbie.

Is that the store in Shanghai and can you just describe why did you need to take that impairment charge?

Is that store not doing what you wanted it to do?

Is there going to be more charges related to it?

No, there won't be more charges.

But the Barbie Shanghai store was opened as part of a marketing strategy that was specific to China to introduce the total brand, if you will, to Chinese girls and moms, most of whom were not familiar with the brand.

And the toy sales have actually been pretty good in that store but the overall retail sales have not performed to our expectations.

So based on the financial performance of the store, we were required to write off substantially all of our leasehold improvements.

Okay.

So then for the time being, you think that's enough of a write-off for now?

I think it's enough of a write-off for now and I can't imagine there's anything or much left to write off in the future.

That's right, Bob.

Okay.

Okay, thanks, that's it.

Our last question comes from Ed Wu of Wedbush Securities.

Please go ahead.

Thank you.

How easy is it for you to be able to chase product this late into the holiday season?

It's going to be hard, Ed, and that's one of the issues here is as retailers think the holidays are going to be late, is they take product later.

When something's running there's going to be less opportunity to chase it.

We're chasing some goods, as we speak.

Even though our inventories are in pretty good shape, we don't have enough of some of the toys.

The later the season is, the harder it is to chase.

Okay.

And also on recall expenses, was there any recall expense for the recent announcement and do you expect any in the fourth quarter?

As you know, we recalled in September 2010, in cooperation with the Consumer Product Safety Commission certain Fisher-Price products.

As a result, we recorded $7.6 million accrual which relates to our estimates of customer sales returns, our obligation to consumers and other related cost.

We think the accrual is appropriate and at this point we don't expect any additional charge in the fourth quarter, but this is one of those accruals that each quarter you true it up to your experience rate on recalls.

Thank you and good luck with the holidays.

Thanks, everyone.

Thanks, everyone, for participating today.

There will be a replay of this call available beginning at 11.30 Eastern time today.

The number for the replay is 706-645-9291.

And the pass code is 96255098.

Thank you, Operator, and thanks for everyone's participation.

Ladies and gentlemen, that does conclude today's conference.

You may all disconnect and have a wonderful day.