Mattel Inc (MAT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Mattel's first quarter 2011 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 would now like to turn the conference over to your host, Mr.

Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations.

Please go ahead.

Thanks, Ali.

As you know, this morning we reported Mattel's first-quarter financial results.

As we did with our fourth-quarter call, we have provided you with a slide presentation to augment our discussion on the call today.

In a few minutes, Bob Eckert, Mattel's Chairman and CEO; Bryan Stockton, Mattel's Chief Operating Officer; and Kevin Farr, Mattel's CFO, will provide comments on the results and then the call will be open for your questions.

Certain statements Bob, Bryan, 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 2010 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.

The slide presentation and the information required by Regulation G regarding non-GAAP financial measures is available on the investors and media section of our corporate website, mattel.com, under the subheadings financial information and earnings releases.

Additionally for your reference, we have added quarterly and annual revenue growth trends for key businesses, brands, and markets to the other information that is available under the subheadings financial information and financial history.

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

Thank you, Drew, and good morning, everyone.

Before we begin the business portion of this morning's call, I would like to take a few moments to address some changes.

As many of you are aware, Dianne Douglas has moved on to new opportunities within the Mattel organization and if she is listening bright and early this morning, I would like to take this opportunity to thank her for the value she has brought to Mattel investor relations function.

With that, I would also like to welcome Drew Vollero to the call and to his new position heading our investor relations team.

Drew has been with Mattel for more than 10 years working in the finance and strategy roles for both the brand and corporate groups.

And in addition to hearing from Kevin and myself this morning, I have asked Mattel's Chief Operating Officer, Bryan Stockton, to join today's call.

As announced in the beginning of the year, Bryan now oversees all the day-to-day operations of the business.

So I would like to officially welcome both Drew and Bryan to the call.

While the first quarter is typically not significant for the toy industry, I am pleased to report that we are beginning the year with solid results, as evidenced by the performance of our industry-leading and diverse portfolio of brands and countries and in spite of difficult comparisons to last year's first quarter.

The Barbie brand really led the way for Mattel in the first quarter, particularly in international markets.

Barbie achieved the highest first-quarter sales -- gross sales since 2004 and it's the first time the brand has had double-digit sales growth in the first quarter since 1997.

The brand is strong.

Global retailer support is good, and the momentum continues.

Brands like Monster High and Disney Princess also were standouts in the quarter.

Equally encouraging as our brand performance is our global momentum.

Across our entire portfolio of brands, we experienced international growth in all regions of the world.

Overall, Mattel continues to be well positioned to benefit from its scale advantage.

Moving down the P&L, we have delivered on gross margin expansion despite current cost challenges including the high cost of oil and labor and against the continued inflationary economic landscape.

Our first-quarter gross margins are in line with our long-term expectations.

And by delivering on our first strategic priority of achieving consistent, solid revenue growth, and positioning ourselves well for improving our operating margins, our second priority, we expect to achieve our third priority of generating solid cash flow and continuing our disciplined, opportunistic, and value-enhancing deployment.

As we have said before, when it comes to capital deployment, we will pursue smart growth by focusing on areas that deliver high returns and we will continue to return excess cash to shareholders.

As we told you in New York, we use a TSR framework to measure our progress and we benchmark top-tier performance.

Historically our dividend has been an important driver of shareholder return.

As such, we have delivered annualized double-digit dividend growth in each of 2010 and 2011 and we plan to continue benchmarking a 50% to 60% payout ratio.

Beyond the dividend, we have opportunistically executed share repurchases.

For the first quarter that included share repurchases on 4 million shares at a cost of approximately $100 million.

As I've said before, the first quarter is a bit like spring training and for a business like ours what is key in the early part of the year is preparing the business for the year ahead.

That said, I am pleased with our performance for the first three months of the year and look forward to building on the platforms that will help us accelerate our performance through the all-important holiday season.

Thank you.

At this time, I would like to introduce Mattel's Chief Operating Officer, Bryan Stockton, who will provide additional color on the quarter.

Bryan?

Thank you, Bob, and good morning, everyone.

I'm pleased to be joining you this morning to provide additional insights regarding our progress during the first quarter.

This is the third role I have had in the Mattel organization since joining the Company just over 10 years ago.

Today marks my 101st day on the job as Mattel's Chief Operating Officer.

And I feel that we have already made solid progress during a very short amount of time.

This morning I want to focus my comments on the Company's top priority, which is to deliver consistent growth by continuing the momentum in our core brands, optimizing entertainment partnerships, building new franchises, and working to expand and leverage our international footprint.

Barbie is a great example of continuing the momentum as the brand enters another year of growth.

In fact, Barbie has now delivered six consecutive quarters of worldwide growth.

In 2011, Barbie continues to stay top of mind and culturally relevant with the launch of the very successful Ken campaign, Will Barbie Take Him Back?

-- a fully integrated 360 degree global campaign.

The initial campaign engaged brand fans by having them vote on Barbie and Ken getting back together.

After hundreds of thousands of votes being tabulated, it concluded with Barbie taking Ken back on Valentine's Day.

In fact, on February 14, the words Barbie and Ken were tweeted every 18 seconds.

Overall, Barbie continues to be reenergized and sales are responding as positive momentum continues to build in 2011.

For more than 40 years, Hot Wheels has been passionate about bringing thrilling vehicle experiences through innovative product and content.

In 2011, we are taking this passion to new heights, harnessing the power of boy's imaginations with the launch of a multiyear multiplatform campaign designed to extend the Hot Wheels experience into the real world.

Core to the campaign is Team Hot Wheels, professional stunt drivers from four driving disciplines fusing the imagination of Hot Wheels play with the reality of action sports.

If you read the New York Times this week, you undoubtedly saw that Team Hot Wheels will attempt to break the world record distance jump at the Indianapolis 500.

This stunt will culminate by revealing the mystery driver's true identity following the race on Sunday, May 29.

A 30-minute special on a major network is in the works to air on race day.

In 2011, we will also leverage storytelling and content across multiple platforms with digital media, television ads, product packaging, social media, and premier partnerships.

American Girl celebrated its 25th anniversary year with a solid first-quarter performance.

The launch of the 2011 girl of the year, Kanani, along with two stores in Denver and Kansas City, are fueling the brand's performance.

We are excited about the opening of two more stores this summer, one in Washington, DC and the other in Seattle.

For Fisher Price, we still have work to do, but the opportunity is sizable.

As we continue to globalize the Fisher-Price brand, we are reviewing how to best optimize our message to meet the needs of new parents regardless of country, culture, or language.

During the quarter, we had solid international growth and our goal is to bolster our performance in the US.

The next tenet of our growth priority is to optimize entertainment partnerships and we are well positioned to deliver again in 2011.

First, our CARS business has continued unprecedented strength for a film-based property now going into its sixth year and the brand remains strong as consumers and retailers anticipate CARS 2 merchandise.

The merchandise will be on shelf in mid-May in advance of the movie's release on June 24.

We are releasing almost 70 new characters as well as all new track sets that will allow kids to play out the World Grand Prix races featured in the film.

The new Spy Adventure storyline brings all new good versus evil play into the world of CARS and as a result, we are developing a new line of vehicles and play sets called Action Agents for kids to play out the spy story.

For Toy Story, we continued to be very pleased with the sales performance of the Toy Story 3 line as it transitions from a phenomenal movie year in 2010 to a well-rounded line that confirms its status as a solid evergreen property.

Disney will keep the brand energized by launching new content in the form of Toy Story 2s, a series of animated shorts that will maintain brand engagement.

2011 is the breakout year for Green Lantern, the next superhero from the DC Entertainment portfolio.

We are launching a comprehensive line featuring action figures, vehicles, role play, and collector product celebrating over 50 years of heritage behind this property.

The film launches domestically June 17 and internationally throughout the summer.

Green Lantern toys will be on shelves starting May 1.

A third tenet is to build new franchises and we are doing just that with Monster High, which continues to resonate with girls, debuting as the number one new fashion doll in 2010 according to NPD.

For 2011, the franchise continues to expand with the introduction of four new characters, two new books, and an hour-long TV special.

We have also expanded our partnership with Claire's and Justice, our Macy's T-shirt program launched in early January delivered strong sellthrough and next month, check out our Monster High program at Walmart, which includes the dolls, books, and T-shirts.

Brand offerings will be further expanded to include apparel, accessories, cosmetics, and activities for back to school.

And we launched the brand in more than 15 new markets this year including France, Australia, Portugal, Turkey, and Poland, to name a few.

Which is a great segue to my next point of our efforts to expand and leverage our international footprint.

For the quarter, our performance in the more mature international markets has been solid, with Europe growing low single digits for the quarter.

Our longtime efforts in Latin America continue to pay off with Mexico and Brazil, our two largest markets in the region, continuing to grow at strong double-digit rates.

And our investments in developing markets like India and China continue to flourish as we experienced strong double-digit growth momentum from last year.

I spent the last eight years developing, building, and challenging our international teams to redefine our strategies and translate the business of Mattel to the diverse international markets in which we compete.

I look forward to the next phase of Mattel's future as we deliver consistent growth by continuing the momentum in our core brands, by optimizing entertainment partnerships, building new franchises, and working to expand and leverage our international footprint.

With that, I would like to turn the call over to Mattel's CFO, Kevin Farr, for the financial review of the quarter.

Kevin?

Thank you, Bryan, and good morning, everyone.

Our last call and in our February analyst meeting we said we aimed to deliver consistent growth by continuing momentum in our core brand's business, optimizing our entertainment partnerships, building new franchises, and working to expand our international footprint.

In addition to that, we said we want to build on the progress we made in improving our operating margins through sustaining the gross margin and delivering another round of cost savings.

Finally, we said we expect to generate significant cash flow and continue our disciplined, opportunistic, and value-enhancing cash deployment.

While recognizing we all are very early in the year, our solid first-quarter results built upon the progress we made towards our profitability goal in the face of a challenging cost environment and a continuation of a difficult economic climate.

For the quarter, our portfolio approach was once again proven to be successful with worldwide revenues up 8%, reflecting solid growth both domestically and internationally and in core brands, entertainment licensing, and our new franchise, Monster High.

In addition to revenue success, we improved our gross margins by 60 basis points to 49.7% as we maintained strong pricing discipline and continued to seek efficiencies in our supply chain.

Starting on page five of our slide deck, you can see our worldwide gross sales are up 8%.

Adjusting for Easter timing, we continue to feel good about sellthrough trends domestically as well as internationally.

Based on 2011 NPD data for the first two months, we continued to experience good momentum in the US as the toy industry overall is growing and we are gaining share.

As expected, retail inventories are up when compared to what we were very light levels this time last year.

We believe this is largely due to the positive momentum we have had at retail and also due to the timing of the Easter holiday.

Overall, we remain comfortable with inventory levels.

Let's turn to page six and seven of the slide presentation to see the segment perspective on sales.

Worldwide sales for Mattel girls and boys brand segment were up 15% for the quarter.

Barbie sales continue to improve, driven by our Ken campaign, more fashion lines, and the introduction of our new family platform.

Hot wheels continues to be driven by increased world-wide demand in die cast cars and its new Rev Ups line.

Monster High and Disney Princess drove growth in our other girls business.

Growth in our entertainment business was primarily attributable to sales in toys gears to CARS, Toy Story 2, and Green Lantern.

Worldwide sales for Fisher-Price brands were down 2% for the quarter.

Our Fisher-Price core business, including Baby Gear was flat for the quarter.

Fisher Price (inaudible) was also flat excluding the discontinued Sesame Street license with solid performances in Thomas, Dora, and Mickey Mouse Clubhouse.

For Fisher-Price overall, we saw some softness domestically but are very encouraged to see growth internationally.

American Girl continued to deliver strong results with sales in the first quarter up 4%.

Our girl of the year, Kanani, and our popular My American Girl line are off to a strong start and we see good momentum in our retail operations.

Our international business as seen on page eight continues to improve with growth across all regions for the quarter.

We saw considerable strength in Latin America, particularly with Brazil and Mexico, and continue to be encouraged with performance in Europe in light of the economic climate.

Asia-Pacific continues to deliver strong double-digit growth, although off a much lower base.

Now let's review the P&L starting on page nine of the slide presentation.

For the quarter, gross margin was up to 49.7%, an improvement of 60 basis points from last year.

The favorability was primarily due to pricing as we continued to be challenged by an inflationary cost market.

Looking forward, we have executed a high single price, single digit price increase effective April 1, 2011, and we continue to closely monitor the commodity markets and look for efficiencies in our supply chain and manufacturing facilities.

As seen on page 10 of the slide presentation for the quarter, selling, general, administrative expenses increased approximately $42 million to $335 million.

As a percentage of net sales, SG&A expense was 35.1%, up 190 basis points compared to the prior year's rate of 33.2%.

As expected, more than half of the year-to-year dollar increase in SG&A or $26 million is due to higher litigation and legal settlement-related costs.

The remainder is primarily due to employee-related costs including merit as well as the impact of the expansion of American Girl retail stores.

For your reference, we have updated and included a historical trend summary of our incremental MGA and recall-related legal and settlement costs in the appendix to the slide presentation.

In addition to the $18 million of incremental costs you see on the slide, we recorded a $7.5 million charge in the first quarter related to the proposed settlement of litigation related to the Gunther-Wahl production lawsuit, which was summarized in our 2010 10-K

Page 11 of the presentation summarize the performance of our two-year global cost leadership initiative and our early lead on the timing of what is now called Operational Excellence 2.0 cost savings program.

As you know, we exceeded our stated commitment on the global cost leadership program by delivering cumulative net savings of approximately $212 million, equating to a run rate of $225 million coming into 2011.

We have already recognized Operational Excellence 2.0 gross savings of $5 million in the quarter with a goal of $150 million of sustainable cumulative savings to be achieved by the end of 2012.

The primary drivers of these savings are expected to come from $75 million of legal expense reductions and $75 million of structural savings executed through a handful of important initiatives, some of which are outlined at the bottom of the page.

These initiatives are designed to simplify and align our business.

While some of the positive impact will be seen this year, the majority of the benefits will be generated in 2012, giving the timing of investment costs and the timelines required to complete the more complex initiatives.

Turning to page 12, operating income in the first quarter was $36.8 million or 3.9% of net sales, down 120 basis points compared with last year's first quarter.

While our business fundamentals continue to improve with higher sales and gross margins, higher legal spending and the impact of legal settlement activities discussed earlier resulted in a year-to-year decline.

Turning to page 13, earnings per share for the quarter was $0.05.

Higher sales and gross margins were offset by higher legal and settlement-related activities, which impacted operating income.

In addition, higher interest expense more than offset a lower tax rate in the quarter.

We discuss cash flow on page 14.

Cash flow for operations for the quarter was $42 million compared to $245 million in the first quarter of last year, driven primarily by our decision not to factor domestic receivables at the end of last year resulted in incremental collections of $300 million in the first quarter.

Capital expenditures for the quarter were $45 million, up $21 million from last year, reflecting the timing of tooling investments and the expansion of our manufacturing plants.

For the year, we expect to spend about $165 million to $175 million in capital as we continue to invest to increase capacity at our own manufacturing plants, expand our retail operations at American Girl, and make strategic IT investments to improve our effectiveness and efficiency.

The improvement in operational cash flow was partially offset by our capital deployment initiatives, namely our share repurchases and our quarterly dividend payment.

Our cash on hand at the end of the quarter was $1.1 billion, up $178 million from the prior year's first quarter, primarily due to a higher beginning cash balance of $1.3 billion this year versus $1.1 billion last year.

Inventories were up $178 million compared to last year.

The increase in inventories was expected given low inventories last year and our need to improve customer service, the higher cost base due to rising input costs, and the build of product to support the upcoming CARS 2 and Green Lantern theatrical releases.

We expect inventories to continue to be higher in the first half of this year, driven by our push to improve our customer service levels to support POS momentum and new entertainment properties as well as higher input costs.

We continue to have a strong balance sheet and a business that generates strong cash flow, which we deploy to enhance shareholder value.

In addition to repurchasing 4 million shares of our stock in the first quarter, today we announced our second-quarter dividend of $0.23 reflecting the annualized dividend of $0.92 per share which represents an 11% increase to 2010's annual dividend.

So in summary, we are pleased with our solid quarterly results but recognize we are in the early stages of the year.

Our fundamentals are strong.

Our management experience and we remain keenly focused on consistent value creation for our shareholders.

As Bob mentioned, we believe we can achieve this by executing our three overarching global strategic priorities.

To deliver consistent growth by continuing the momentum of our core brands, by optimizing entertainment partnerships, building new franchises, and working to expand and leverage our international footprint.

To build on the progress we made in improving our operating margins through sustaining the gross margin and delivering another round of cost savings.

And to generate significant cash flow and continue our disciplined, opportunistic, and value-enhancing deployment.

That concludes my review of the financial results now.

We would like to open the call to questions.

Operator?

(Operator Instructions) Sean McGowan, Needham & Co.

Thank you, a couple of quick ones, either Bob or Kevin.

Do you think that the high single-digit price increase announced for April 1, do you think that caused some inducement to early buy on the part of retailers?

Sean, this is Bob.

Not really.

Historically there isn't -- the economics aren't great in this business to buy in advance.

It's not like my experience in the food business or in packaged goods.

So we didn't see any special pattern during the quarter that would indicate that that I haven't heard anything from retailers that would indicate that.

Okay, so the price increase that you did get that helped with margins in the first quarter is not the high single-digit price increase, right?

Just because (multiple speakers)

That's right, it was really kind of the carryover from last year's much more modest price increase.

Our price increases this year globally really are effective April 1.

There were a couple of markets internationally that priced a little earlier because that's their tradition.

But generally speaking, it was the carryover of last year's more modest price and more modest cost.

I know CARS is an ongoing line.

Green Lantern is not.

Was there much movie-related shipments in the first quarter tied to those two properties?

Not particularly.

You know, some retailers are buying, particularly CARS.

CARS is now in its sixth year.

It continues to do really well at retail, so I think retailers are pretty excited about that.

But it wasn't a big factor in the quarter.

Most of those shipments will fall in the second quarter.

Okay, great.

The last question, how much of the -- to the extent that you can share this with me -- how much of the American Girl's growth is from new stores rather than from the catalog?

The growth has been pretty broad-based.

The stores have done well and the catalog has done well, which is now really the Internet, not the catalog.

New characters are doing well.

We do get some [WIP] from the new stores, but really for the last two or three years, it's been pretty consistent across the portfolio.

Okay, great.

Thank you very much.

Robert Carroll, UBS.

Just one quick follow-up on Sean's question.

I guess alluding to the high single-digit price increase from April 1, based on the orders that you guys had taken during Q1, how effective has that been in passing through to retailers?

Well, you know, they didn't buy products at the new prices in the first quarter.

I would just tell you our discussions with retailers have been reasonable.

Nobody wants to raise prices.

We've worked very hard and continue to work very hard on cost reductions to offset inflation in commodities.

I think oil is probably 35% higher than it was a year ago.

Labor in China, the minimum wage is up 20% on top of last year's 20%.

So the costs are real.

We haven't been able to offset them fully with cost reductions, so we have priced.

We are not alone in this.

If you look at other goods, whether it's food products or clothing products, certainly anything with a petroleum base, costs are up and our prices have had to go up.

So it's not -- these are cost-justified price increases.

So despite the fact that none of us likes to go up in price, I think everybody understands it.

Right, so retailers have been call it receptive to understanding why they are going up and passing through?

Yes, I don't know if I would use the term receptive.

They are understanding.

A lot of them make private label toys.

They deal with Asian manufacturing and all sorts of goods and they understand the costs are higher.

Cost of labor are higher.

Costs of transportation are higher.

Costs of anything based in plastic are higher, so that's the environment we are in and again, it's unfortunate, but we are not alone in this.

Then I guess just the inventory that is on your balance sheet, it's obviously up versus a low base year over year, but are you guys comfortable with the levels?

Like is it higher than normal just because of the buildup in anticipation of the entertainment properties or anything --?

There's really three things, Rob, that are driving it.

First, our inventories were too low last year.

We had service issues, as many of you will remember, customer service issues.

They had out of stocks on our products.

So unfortunately we did not have sufficient inventory last year.

And if you look at our inventory, one way to look at it as I know some of you do is a percent of sales, it is about where it was two years ago.

Last year was too low.

Secondly, I think as Kevin mentioned in his remarks, the absolute cost increase that we are seeing in products inflates the value of the inventory.

And third, we do have high expectations for our entertainment properties this spring.

So do our retailers.

We have built products in anticipation of strong demand.

Great.

Thanks, guys.

Tim Conder, Wells Fargo Securities.

Thank you and again, thanks since the beginning of the year for the increased disclosure.

It's much appreciated.

A couple things and I think you guys touched on this already.

But the channel inventories year-over-year and sequentially, can you just maybe review those, the US, North America, international, just to kind of give us an update there?

And then you talked before in your analyst meetings and so forth about some of the other properties that you are working on, Max Steel, Master of the Universe, obviously you talked a little bit about Monster High here this morning.

But can you give us a timeline on the Max Steel, Masters of the Universe potential timeline, when we may see some media related support of that, looking out over the next couple of years?

Let me start, Tim, and then I will turn it over to Bryan for some additional perspective.

The retail inventory is more visible to us in the US than it is in international markets just because we have more robust data in the US, but I think we have a perspective around the world.

I would start by again reminding you that last year not only were our inventories too low but the retailer's inventories of our products were too low.

They were out of stock, as you know, in some key categories and so that was a problem.

So our inventory levels at retail now reflect better customer service from us.

According to NPD, the toy business is growing.

We are gaining share, so our business is growing and retailers need inventory to support how the business is doing.

And third, I tell you Easter is three weeks later.

We are seeing now the ramp up of point-of-sale supporting Easter.

That's obviously later this year than it was last year.

So the inventories are a little higher just for Easter.

Bryan, international.

Thanks, Bob.

Hi, Tim.

On the international front, we didn't see inventories build quite as much as we did here in the US and from a retail standpoint, there's still a little bit of carry over, a little more than I think most of our customers would've liked to have seen.

But you have the same dynamics that we have here in the US, where we are building inventories in anticipation for CARS 2, Green Lantern.

Easter definitely plays a role in some of our countries where that is an important gift-giving occasion.

So it's very similar.

Regarding your question on our own intellectual property, I will start first with Max Steel.

As you recall, we've been selling Max Steel in Latin America for almost 10 years now and that's a business that we built into the number one brand of action figures in Latin America primarily through DVDs, almost similar to the same model that we've used with Barbie here in the US.

So it's been very successful and we're going to continue to support the brand with that kind of entertainment.

We had been in discussions with Paramount on that one, but we are moving on now with Max Steel with Brad Weston.

He is beginning to work on that.

That is likely a 2013 or later event for us.

Other things such as Major Matt Mason, Masters of the Universe, those are probably 2013 or 2014 as well.

So we have a lot of exciting things going on when we talk about new brands like Monster High.

We've got a lot of activities going on that.

As you know, we've got a lot of webisodes going on.

This year alone we are going to have almost triple the amount of minutes of webisodes on Monster High.

And as I mentioned in my comments, we're going to have a one-hour TV special as well.

So we are going to continue to look at multiple screen experiences, whether it be computer screens, television screens, movie screens, to get our messages out.

Okay and the Masters of the Universe, Bryan, and then, gentlemen, on the sequential retail channel inventories, it sounds like they are up also sequentially, but just to clarify that and then again the Masters of the Universe.

I will let Bryan do Masters of the Universe.

I don't look at retail inventory sequentially so in the data isn't that great, so I just look at this year versus last year.

I could guess.

Do you have a guess, Kevin?

I don't keep the numbers that way.

Sorry, Tim.

No problem, no problem.

Tim, did you have the follow-up on Masters?

Yes, yes, the way -- any timing of anything there, Bryan, as far as entertainment (inaudible)?

Yes, 2013 at the earliest.

Okay, great.

Thank you, gentlemen.

Gerrick Johnson, BMO Capital Markets.

Good morning.

I was wondering if you could comment on the litigation, what's the timing on the current trial in terms of a verdict?

And then after that, what's next?

What do we have next in the pipeline?

The antitrust trial and anything else beyond that, thanks.

Gerrick, let me start with the MGA case.

I think it's most important for everybody to remember that we brought this litigation because of the critical principle at stake.

This is about protection of our intellectual property which is at the very heart of the Company's creative work.

The jury has the case now.

They started deliberating on Monday of this week.

When they have a verdict, they will have a verdict.

No one knows when that is.

But whatever the verdict is, our first priority is and always has been to make and sell the best toys in the world, and we will continue to do just that.

I think whatever plays out from the verdict will play out from the verdict.

I don't know that any of us knows what exactly the next steps will be.

I'm sure there will be appeals of the verdict and that will play out.

But I think until we have a verdict, I don't think anybody has any real insight into what the future is going to be in terms of that litigation.

As you know, my goal is to put this behind us.

I have been clear for some time now that I would like to figure out a way to move on from this case, but it takes two to agree to that and we haven't found that place yet.

So in the meantime, we will continue and we will await the verdict.

Okay, previously it was all about the Bratz property and potential damages that you would be awarded.

But now with the countersuit claiming corporate espionage, is there a possibility that there could be damages that you guys would have to pay to MGA?

Sure.

There is essentially three things the jury is considering.

One is copyright claims that we have against MGA.

Secondly is interference of contractual obligations that we have against MGA.

And third, each of the two companies is alleging trade secret theft from one another, and so those are the three things, broadly speaking, that the jury is contemplating as we speak.

Okay.

Just lastly on that issue on page 17 of your deck, you show $18 million in total legal and litigation settlements.

But I think it's on page 10, you have $26 million.

What is the difference there between $18 million and the $26 million incremental in the quarter?

Yes, Kevin.

What's the difference between $18 million and $26 million incremental in the quarter?

Yes, I think that -- that would be the $8 million reversal of legal settlements that we had a reversal in 2010 of $8 million related to the recall litigation settlement.

This year there's an absence of that reverse.

Okay, I see.

Thank you very much.

I knew you'd know that, Kevin.

Thanks, Bob.

John Taylor, Arcadia Investment.

Good morning.

I've got three questions, I guess.

First, CARS has been kind of an unusually good performer for a long time and I'm wondering if you might be able to talk a little bit about -- give us a sense of what the base is in 2010 so we can make some guesses about growth.

If you don't want to do that, maybe talk about Toy Story 3 and CARS together or just give us some sense of kind of what's going on with the growth potential on the Pixar side.

That's the first one.

Second, I wonder if you can talk a little bit about the Fisher Price domestic business and what you see as low hanging fruit if there is any and kind of want changes are likely to be there?

And third, I guess this is for you, Bryan.

Maybe talk a little bit about Monster High.

How culturally relevant is that to markets outside of here, given the thematic matter or whatever maybe sort of put that into a global perspective for us?

Thanks.

Well let me start, JT, because I will be the most evasive.

You know, CARS is a big deal.

This is the sixth year.

The movie comes out June 24.

The product is going to be on shelves in the middle of May.

We've got more characters, as Bryan mentioned, with 70 new characters.

It's got more global appeal with World Grand Prix races in Japan and Italy and the UK.

There are new play patterns with the spy adventure.

So it's a big deal.

Disney knows it's a big deal.

We believe it's a big deal.

Our retail customers believe it's a big deal, and I think you are going to see a lot of cars in stores based on the fact that we've got a six-year track record now with this IP that Disney created.

So it's hard -- I don't want to quantify -- Toy Store is holding up very nicely.

It's an evergreen property, so this is a great year for us in terms of Pixar stuff.

But we don't provide a lot of insight into the size of that box.

Bryan?

Thanks, Bob.

Regarding Fisher Price, JT, I guess the way that I would think about it is it's a tremendously strong brand with global appeal.

And with that, we face very different competitive situations in different parts of the world.

The reason I mention that is our goal of Fisher Price is to really sharpen its consumer positioning so that moms, whether they are in the UK, Mexico, US, Japan really clearly understand what Fisher Price can do for them.

So as we think about that with the US, we're going to start -- we are trying to sharpen how we speak with moms about the importance of Fisher Price and how important Fisher Price is for the development of their children.

So we are working on that.

Secondly in terms of low fruit, we're going to be also focusing more on retail execution this year and making sure that we're really partnering well with our retail customers to make sure that we have terrific displays at Fisher Price.

We have usually great space with our customers, but we need to take better advantage of that and communicate our benefits to consumers.

So for low fruit, I'd say those are the two things that we are focusing on.

Can I follow up on that real quick?

Those are mostly sort of umbrella sort of approaches as opposed to product-specific or category-specific kind of things.

Well, we are going to be looking at a whole variety of things, but in terms of short-term things that we can impact tomorrow, we can certainly impact how we are communicating to moms and we can certainly impact how we are executing at retail.

The Fisher Price product line has a lot of great things going for it at the moment.

Sing-a-ma-jigs is still selling very well.

I think you saw the I Can Play case for smartphones where we are bringing Fisher Price into technology in an interesting way.

So again from a short-term low fruit standpoint for this year, we are really focusing on our communication with moms.

Also remember, JT -- this is Bob -- Fisher Price gained share last year in a growing segment of the toy business.

So we want to -- we clearly want to do better in Fisher Price, but it's not as if we are digging out of a hole in Fisher Price.

We're just not doing as well as we would like to do when we look across the rest of the portfolio.

Regarding the appeal of Monster High globally, it's doing very well outside the United States.

If you look at the timing I would say on average we are probably two to three months behind the US in terms of the timing of the rollout.

And as you recall, we were talking about being short on inventory and product.

We elected last year to slow down the global rollout of Monster High so that we could really deliver product well in select countries early on rather than have a massive global shortfall.

That would not be a good way to launch a new product.

So we are seeing positive momentum outside of the US and we are doing essentially a lot of the same things in countries outside the US as we are here in terms of promotions and webisodes and things like that.

Okay, great.

So the promotions -- the webisodes are basically the same ones we're using here?

Are you doing anything specific for any markets outside the US?

Well, short of translating them into local languages, no.

There will be different vocal promotions that take place just as we do with Barbie or Hot Wheels or Fisher Price.

The core of the content is applicable in almost every culture.

Okay, so let me go back to your evasive answer, if I can.

So CARS was a pretty good sized base in 2010 and I think there's just a lot of curiosity, a lot of questions about sort of how big that base is relative to what the growth potential is.

If there's any way to scale that with any shred of anything, it would be most appreciated, thanks.

I get the question, JT.

But I guess the only thing I can tell you is we all know it's a great business and it has been a great business consistently now for six years.

We are going to see a lot of promotional support around this movie.

It is a great movie and I think if you go back to when the when first movie ran, we all know we left some business on the table and we all want to take advantage of it.

So how much of it is incremental?

Since it's already got a big base, well, we will all find out.

I can just tell you that Disney is high on it.

We are high on it.

Retailers are high on it and I don't have any reason to believe consumers aren't going to be high on it.

Okay.

Thank you.

Michael Kelter, Goldman Sachs.

I just want to ask -- coming up in the spring and early summer, there are several boy's movies between CARS and Green Lantern and Thor and Captain America and Transformers.

How do you see the retailers treating that kind of environment where they're going to have to make inventory choices?

Frankly I can't imagine where all the shelf space is going to come from.

So can you talk about how the trade-off might play out?

That's a great question to ask them.

But like we do, we've got a portfolio of dozens of brands around here and we make decisions every day on what inventory we're going to make, just as our competitors do, and retailers do the same thing.

They have been around a long time.

They've seen the impact of movies.

There's sort of large, medium, and small toy movies and they make their decisions on what they want to promote and what they think is going to sell.

So if you really look at the grand scheme of the thousands is SKUs in the toy aisles, figuring out which brand to promote around a movie, I don't think is all that challenging for them.

And then on Barbie, which did phenomenally well, I'm wondering what your outlook is on the brand for kind of the rest of the year as you start to anniversary the bump you got from Toy Story.

Do you think you could still grow off that base or is the compare just too difficult given the movie support last year?

We're feeling positive about the momentum that Barbie has.

As we look at POS here in the US, it's been pretty consistently growing high single digits throughout the first quarter.

As you know, Easter plays havoc with week on week during this time of the year but the momentum is strong.

The momentum in international, they've really done a terrific job of carrying the momentum they built in the second half last year through the first quarter.

But when you think about what we are doing with Barbie, everything focuses on fashion aspiration and cultural relevance.

And whether it's the Barbie and Ken promotion that they are back, or new Barbie, A Very Secret Movie, that's doing extremely well.

The DVD sales are tracking towards equaling last year's DVD, A Mermaids Tale.

That movie is going to be on Nickelodeon on April 17.

Fashionistas continues to grow.

I Can Be continues to grow.

Barbie launched her 127th career of being an architect.

So if you look at all the various components of Barbie, we have really done, we think, a good job of staying true to the essence of Barbie, which is again fashion, aspiration, and cultural relevance.

If we stick to our knitting, we feel like we're going to carry the momentum through the year.

And then on the price increases, I just want to follow up on a question from earlier in this call.

Obviously you guys aren't planning for just a straight take 8% to 9% on top of your current sales and roll it forward.

I mean there is some sort of elasticity or leakage out somewhere, how would you help us frame how you might realize in total that price increase?

And what -- where might it leak out?

Well, we can't do the arithmetic for you or make the assumptions for you, but there clearly is some elasticity of demand on all products.

So we build that into how we think about the business.

That said, historically the toy business has held up well in tough economic times.

It grew last year, as well as it's grown in the 10 years I've been in the business.

It's off to a good start so far this year.

So there's a lot of stuff going on in the toy business.

There's good innovation.

There's good entertainment properties.

There's good core brand momentum.

You know, in tough times people want to make sure their kids are in good shape and I am bullish on the toy business and we've got the momentum right now.

We are gaining share.

One last question.

On SG&A, the new program, Operational Excellence 2.0, what are the big -- you listed some of the programs or initiatives you're going to be undertaking.

Which might be the biggest one or biggest one or two that you think is going to be most impactful to the financials?

I think the primary drivers of the $150 million program versus obviously legal spending of about $75 million.

And then we've got $75 million of structural savings which we executed through a handful of important initiatives including SKU productivity and rationalization initiatives, global brand teams in our North American division reorganization, continuation of the global procurement process, and we are also looking at packaging optimization.

And which one of those do you think might be the biggest source?

I think the SKU productivity as well as the global brand teams of the North American division reorganization will be some of the biggest initiatives.

Okay.

Thank you very much, guys.

Margaret Whitfield, Sterne, Agee.

Good morning.

I wondered if you could discuss the entertainment outlook for 2012.

Will there be a Monster High movie and anything from Disney to carry on with the success you've enjoyed lately?

Hi, Margaret, it's Brian.

In 2012, we've got several things coming up.

We've got Batman, Superman, Madagascar, and a new movie from Disney called Brave, so we're excited about those.

With Monster High, as I mentioned earlier, we are probably looking at 2013 at the earliest for a movie there, but again, the key with Monster High is we have been able to build this brand essentially through webisodes and web activities and not necessarily through what we would consider more traditional toy brand building on television.

So we're going to continue to work with Monster High.

We have two more books coming out this year, as you know, with American Girl.

Books are a very, very important part of that, so we have two books coming out this year, so we're going to continue to build that brand in what we would consider kind of nontraditional ways.

And the uptick in the Disney line in the quarter, was that Tangled or was there something else factored into the growth?

Well, Tangled, there's two things going on there.

As you will recall, Tangled was launched in the US in the fourth quarter and has been gradually rolled out as a theatrical release throughout international this year.

And the Tangled DVD I believe is out in the US.

So we've got some good momentum behind Tangled at the moment.

Finally, with Neil Friedman arriving at Toys "R" Us as president, might that mean a change in their private label stance?

Any thoughts there?

No, that would probably be a better question for Neil than for me, but I'll tell you, I am thrilled for Neil.

I think Neil is the right person for the job and I think the job is the right one for Neil right now.

So I think he will do incredibly well with Toys "R" Us.

I'm really happy for him.

Thank you.

Greg Badishkanian, Citigroup.

Great, thanks.

Bob, you guys did a really nice job in the quarter, particularly given the headwinds at the end of holiday.

I'm just wondering for 2Q setup, are your competitor inventory levels at retail more normalized or do you think the retailers would have to discount any more to kind of clear out some of your competitor inventories in the channel?

I don't have great visibility into that, but based on the discussions we have had with retailers, I think they are making progress on getting rid of the carry over that they had this year.

They ended the year with a little bit higher inventory than they wanted and they knew that is was going to -- could take the spring to get it done.

Exactly which day they are going to be more bullish, I don't know.

It's probably going to vary by retailer.

But again, the good news is the toy category is growing at retail.

That's a good thing for all of us, so it's a growing business.

We are gaining share.

Our shipments have been up despite the overhang that is out there because retailers have to buy the toys that are selling and we've got our fair share of those.

So the overhang is -- it was a little bit of an issue, but I don't think it was a real deal breaker here.

All right, good.

Sometimes you give a little bit more color on POS particularly because it's not always consistent with NPD.

Your internal is a lot more accurate.

Can you maybe give a little bit more of a range on maybe how Q1 turned out?

It's really hard, Greg, because of Easter.

Easter is the second biggest toy season and with Easter being in the first quarter last year and the second quarter this year, we can make some assumptions and do some arithmetic, but now we're getting to a level that I just wouldn't feel comfortable giving external perspective on it.

I think in general, again, the toy business is growing.

We are doing fine.

The feedback we're getting from retailers is good.

And we've got the momentum right now.

Good, thanks a lot.

Operator, we have time for one more call.

Drew Crum, Stifel Nicolaus.

Okay, I'll just ask one question here.

Kevin, can you give us the profit growth in the international business?

And the cash balance overseas, did that have any impact on the share buyback activity during the quarter?

Thanks.

Yes, Drew, at this time we can't give you the profitability of the international operations.

That will be in our 10-Q that we file in a week or so.

We've got cash all around the world.

Having access to that cash where we need it, when we need it is not an issue, but we do have cash offshore.

Thanks, guys.

Thank you.

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