Mattel Inc (MAT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mattel second-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, this is being recorded.

I would now like to introduce Mr.

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

You may begin.

Thanks, Mary.

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

As we did with our first-quarter call, we have provided you with a slide presentation to help guide our discussion of 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 made during the call may include forward-looking statements relating to the future performance of our overall business.

These statements are based on currently available 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 risks factor 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.

Additionally for your reference, we have added quarterly and annual revenue growth trends to the other information that is available at Mattel.com.

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

Thank you, Drew, and good morning, everyone.

I'm very pleased with our record performance in the quarter.

While the second quarter is typically all about the big entertainment properties and certainly CARS 2 was big for us, our global portfolio of core brands is also fueling momentum.

Our girl's portfolio is firing on all cylinders including Barbie, which posted its largest second-quarter growth in more than a decade.

We've seen strong performance across the board including in the Barbie Family, Fashion and Beauty, Princess, and I Can Be lines.

Additionally, Monster High continues to build momentum globally and has earned itself a starring role in our girl's portfolio.

We are excited about the Monster High fall product line and marketing plans, which include a one-hour TV special debuting in the US later this fall on Nickelodeon.

Disney Princess continues to perform very well across all regions, driven by strong sales of dolls, accessories, and play sets based on the film Tangled, which released on DVD in several territories during the quarter.

In 2012, Mattel will be developing a range of products in support of the next Disney Pixar film, Brave, a fairy tale that features Merida, a Scottish princess and archer.

The film is slated to release in June 2012.

American Girl kicked off its 25th year celebration with a resounding start.

Since its founding in 1986, American Girl has sold more than 135 million books and nearly 20 million American Girl dolls.

The American Girl Magazine has a circulation of more than 470,000, ranking it among the top 10 children's magazines in the nation.

Since the first store opened in 1998, American Girl's proprietary retail stores have welcomed nearly 40 million visitors.

To celebrate this milestone occasion, American Girl is offering special in-store events and limited-edition merchandise as well as a first of its kind cruise for fans, which sold out in three days.

In the boy's aisle, Hot Wheels launched a brand-new positioning of thrilling vehicle experiences which will broaden the vision from being a toy brand to a boy brand for vehicle-loving boys of all ages.

The overarching brand campaign is designed to capture the attention of boys of all ages around the world with Team Hot Wheels, a team of mystery drivers that perform outrageous vehicle stunts for real.

The first for real stunt was setting a new world record with a 332-foot distance jump at the Centennial Indianapolis 500.

For those of you who missed it live at Indie or on TV immediately following the 500, checking it out on YouTube.

It was spectacular.

While Hot Wheels shipments were down for the quarter primarily due to strong retailer support and buy-in of CARS 2, we remain optimistic on Hot Wheels given improving POS trends, continued strong international performance, and new innovative product in the fall including Wall Tracks, Video Racer, and the continuation of the Rev-Ups line.

As we have said, our entertainment strategy continues to be partner with the best and be the best partner.

That means alliances with entertainment powerhouses like Disney, Pixar, Warner Bros., DreamWorks, WWE, Nickelodeon, and HIT, to name a few, and we kicked off the summer with two great movie properties, CARS 2 and Green Lantern.

Driven by the global box office success of CARS 2 and significant promotional support at retail, we have experienced strong selling on the line and we are encouraged with sellthrough.

We expect the CARS franchise to continue to perform as an evergreen entertainment property.

We are also pleased with initial sales of our Green Lantern line and as children become more familiar with the character range and unique world, we expect to continue to see good performance as the animated series will premiere in November on Cartoon Network.

For Fisher Price, we see significant strategic opportunity to leverage the brand globally.

As we work toward that goal, the brand is meeting expectations with a solid second-quarter performance for Fisher Price core driven by strength in the infant and preschool categories and Baby Gear.

Fisher Price Friends was down as expected due to the departure of Sesame Street but we are very pleased with the performance of Thomas and Friends on a worldwide basis.

As we enter the all-important second half of the year, we continue to build positive momentum in the marketplace and we remain keenly focused on delivering consistent growth by continuing to strengthen our core brands, working to expand and leverage our international footprint, optimizing entertainment partnerships, and building new franchises.

And we are also focused on building on the progress we have made on improving our operating margins and generating significant cash flow and deploying it effectively.

At this time I would like to introduce Mattel's Chief Operating Officer, Bryan Stockton, who will talk a little bit more about our overarching entertainment strategy.

Thank you, Bob, and good morning, all.

As Bob mentioned, there were many contributors to our strong second-quarter results.

No doubt one of them was the success of our entertainment business, which was up 41% in the quarter.

While certainly the early success of CARS 2 was a significant piece of this growth, the story is larger than that.

So I would like to spend some time discussing our entertainment strategy and sharing some of the recent successes.

Simply put, our goal is to be the partner with the best and be the best partner.

As a part of that strategy, we treat others intellectual property as our own, meaning that we marry our deep knowledge, experience, and innovation in toys and play to outstanding intellectual property.

Our global scale really gives us a strategic advantage in the entertainment space enabling us to build meaningful partnerships with the best companies.

These relationships can be both strong and deep, covering not only global toy licenses but also areas like media spending and content placement for Mattel intellectual property as well.

And because of our portfolio approach to brand management, we are the destination for top entertainment brands, which allows us to translate entertainment brands to toys better than anyone in the industry.

Entertainment partners look to Mattel for two reasons, to help optimize their intellectual property into long-term sustainable evergreen properties, and to take advantage of our vast global footprint that allows Mattel to develop a retail presence in toy aisles all around the world concurrent with their rollout of their intellectual property.

This global reach and approach also enables our entertainment partners to gain full access to consumers around the world to leverage their content.

A great example is Disney Princess.

As you may recall, due to our stellar performance in the US and Latin American markets, we are now responsible for Disney Princess virtually around the globe and we have also partnered with one of the premier global preschool properties, Thomas and Friends, as well as with the WWE, which is expanding its own franchise globally.

As Bob mentioned, Mattel makes toys for some of the biggest entertainment companies around, Disney, Pixar, Warner Bros., DreamWorks, WWE, Nickelodeon, and HIT, just to name a few.

Our Disney relationship is a long-standing and multidimensional from infant, preschool, and boys and girls.

And for this summer, the standout is obviously CARS 2.

As Bob mentioned, our CARS 2 line is off to a strong start with good sell in and sellthrough.

To date the launch of CARS 2 is even outperforming the launch of last year's much anticipated Toy Story 3.

We are well-positioned with the right licenses in areas like diecast cars and track sets, categories that have historically driven the business and help support the creation of an evergreen brand in non-movie years.

These core play patterns are prominently featured in the second movie which showcases hundreds of new characters, new settings, multiple races, and the all-news spy action theme which all help drive collectability and new ways to play.

And the promotional support at retail on a global basis is phenomenal.

Disney will continue to support this franchise with new content including new CARS Toon shorts that will air on the Disney Channel throughout 2012.

Additionally Disney Toon Studios announced Planes, a full-length CG animated movies set high above and inspired by the world of CARS.

Planes will be available on Blu-ray and DVD in spring 2013.

Toy Story products continue to sell well and we were excited about the inclusion of Barbie and Ken in the newly released Toy Story short cartoon Hawaiian Vacation, which is being shown at the beginning of all CARS 2 screenings.

We created a dedicated range of products based on the Hawaiian Vacation theme and we will continue to support Toy Story this fall with new collectible segments and play sets featuring a new space theme.

Disney will continue to support the franchise with new cartoon shorts throughout 2011 and 2012 including an all-new short airing at the beginning of the Muppets feature film this fall.

In line with Disney's strategies to continue to sell great stories, I am confident that the CARS franchise, like Toy Story, will continue to be a true evergreen property for both Mattel and Disney.

As I mentioned earlier for Disney Princess, our rights extend to most of the world now.

Tangled sales have been outstanding and the property continues to perform very well.

We are excited that Disney will be releasing an all-new Tangled animated cartoon short in 2012 featuring the wedding of Rapunzel and Flynn, which will firmly establish her in the Princess family.

As Bob mentioned, Disney Pixar will also produce its first Princess feature film, Brave, releasing summer 2012 worldwide and we will have a full range of dolls, accessories, and play sets to support Brave.

Our Disney partnership continues to build beyond the boys and girls aisles and into the infant and preschool aisle with Disney Junior properties.

We will feature Rock Star Mickey in the back half of 2011 and expand the Minnie line in early 2012.

As we look forward to 2012, we will be launching a new line for Jake and the Neverland Pirates, a Disney Junior property for preschoolers based on the world of Neverland from Peter Pan.

The product will hit stores in the fall of 2012 in the US and globally in 2013.

Our Warner Bros.

DC Comics alliance continues to strengthen with the theatrical release of Green Lantern, which is the next superhero star from the DC entertainment portfolio.

This quarter we launched a comprehensive line featuring action figures, vehicles, role play, and collector products celebrating more than 50 years of heritage behind this property and Warner Bros.

has announced it plans to extend the Green Lantern franchise, which will be supported by the theatrical DVD release and the launch of the animated series, both slated for fall 2011.

In spring 2012, the Green Lantern animated series joins the new Cartoon Network DC Nation Block that will feature multiple characters from the DC universe.

The next major Warner Bros.

feature film will be the new installment in Christopher Nolan's Batman series, Batman - The Dark Knight Rises, releasing worldwide in July 2012.

Warner Bros.

has also announced an all-new Superman feature film for holiday 2012.

We are excited to support both movies with a full range of product.

WWE is continuing to sell well in all countries in which its programming airs, driven by WWE's strong, consistent TV programming and our continued innovation across the range like Flex Force.

On the entertainment circuit, the Summer Slam Event is coming to Los Angeles in August, which is one of WWE's biggest live events in the second half.

And for spring 2012, Wrestlemania 28 will be in Miami.

If you follow wrestling, you know that Wrestlemania is the Super Bowl of wrestling, so it's already big news.

However what will make it even more exciting is that The Rock will square off against John Cena in a match.

This will be our first show to shelf opportunity as we know the match up far enough in advance to create some really exciting [profit].

Mattel recently entered into an exclusive licensing relationship with DreamWorks Animation in which the company will service the worldwide Master toy licensee for a number of DreamWorks animation theatrical film releases and television series.

The DreamWorks animation theatrical releases featured under the licensing relationship include Puss in Boots, The Croods, Madagascar 3, and Rise of the Guardians, as well as the television property Kung Fu Panda - Legends of Awesomeness.

Nickelodeon continues to boast one of the longest running and most successful preschool properties with Dora the Explorer who recently celebrated a 10-year run.

The Dora the Explorer Fiesta Kitchen will be a key driver for us this holiday season as well as the Magical Fairy Dora.

For our new Thomas and Friends partnership with HIT, we are encouraged by our second-quarter retail performance and promotions.

New introductions in the preschool targeted Discover Junction segment, the diecast Take-n-Play sets, and the motorized Track Master category will engage consumers throughout the second half of the year and further drive sales supported by solid retail promotional programs.

These days, entertainment can happen anywhere a web-enabled device or smartphone is, so when we think of partnering around great content, we are not constrained to the box office.

When a great digital property makes sense as an analog toy, we can translate digital play into on the carpet play.

A great example is Angry Birds, the number one smartphone game app in the world.

Our new children's action game, Angry Birds, Knock on Wood, is just hitting shelves and is off to a great start.

The success to each of these entertainment partnerships is in our deep understanding of the ways toys can enhance the cherished relationship the children have with characters on the big and small screens.

Our toys serve to enhance and build upon that connection so that children can turn their 2-D relationship into a 3-D one, bringing it to life through play.

Our partners also know that when they choose Mattel as their partner they have instant access to children around the globe.

That's why Mattel is and will continue to be the partner of choice in entertainment.

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.

Recognizing we are just entering our peak season, our strong second-quarter and first-half results continue to validate the progress we're making towards our profitability goals in the face of a challenging cost and economic environment.

We remain focused on delivering consistent growth by continuing the momentum in our core business, working to expand our international footprint, optimizing our entertainment partnerships, and building new franchises.

We see topline growth as an important piece of our profit growth strategy.

In addition, we remain committed to improving our operating margins through sustaining our gross margin and delivering another round of cost savings.

As we continue to achieve these priorities, we expect to generate significant cash flow and continue our disciplined, opportunistic, and value-enhancing cash deployment.

In the quarter, we continued to see success across our entire brand and geographic portfolio with worldwide revenues up 15%.

The strong performance was anchored by solid growth both domestically and internationally and in entertainment licenses, core brands, and our new franchise Monster High.

In addition to momentum in our topline revenues, we are continuing to ensure sales gains are translating into profit increases.

Central to this strategy is [more] active management of gross margins.

Gross margins continue to meet expectations and were essentially flat for the quarter.

We are pleased with this result given the strong mix of entertainment properties.

For the first half of the year, gross margins are up slightly despite a challenging input cost environment.

The key drivers have been both the implementation of a price increase this quarter and supply chain efficiencies we realized through our global cost leadership and Operating Excellence 2.0 cost-saving programs.

Starting on page 5 of our slide deck, you can see our worldwide gross sales are up 15% for the quarter.

We continue to feel good about sellthrough trends domestically as well as internationally.

Based on year-to-date 2011 NPD data, the US toy industry continues to grow and we continue to gain share.

As expected, retail inventories are higher than a year ago but the primary drivers here remain light inventory levels from a year ago and supporting our momentum in consumer takeaways.

For the quarter, retail inventory levels came down on a percentage basis versus the first quarter and are in line with historical averages.

Overall, we remain comfortable with retail inventory levels as we enter the second half of the year.

Let's turn to page 6 and 7 of the slide presentation to see the segment perspective on revenues.

Worldwide sales for Mattel girls and boys brand segment were up a robust 22% for the quarter.

As Bob outlined earlier, our girl's business really had a strong quarter.

Barbie sales momentum continues, driven by our core fashion and I Can Be lines and the introduction of our new Barbie Family platform.

Monster High and Disney Princesses continue to drive growth in our other girl's business.

On the boy's side, the strong growth in our entertainment business was primarily attributable to CARS 2, which is meeting our high expectations.

We had excellent support from our retail partners and we have seen strong sell in and initial sellthrough.

Green Lantern provided a boost to sales are meeting expectations.

In the wheels category, while Hot Wheels performance for the quarter was down slightly due to strong retailer support at CARS 2, we continue to see strong demand in diecast cars and our new Rev-Ups line.

In the games category, we saw strong growth in our UNO brand in the quarter.

Worldwide sales through Fisher Price brands were up 4% for the quarter.

Our Fisher Price core business, including Baby Gear, was up for the quarter driven by solid results in our Baby Gear, infant, preschool, and boy categories.

Fisher Price Friends was down in the quarter with decline being driven by the discontinued Sesame Street licensing.

Normalizing for that, Fisher Price Friends sales would be up in the quarter driven by Thomas, our new license agreement with DreamWorks, and Sing-a-ma-jigs.

American Girl continues to deliver strong results with sales in the quarter up 13%.

The second-quarter results benefited slightly from the earlier Easter timing shift and overall the brand is doing very well as we are seeing solid performance in both our direct and retail channels.

Our international business, as seen on page 8, had a standout quarter.

All of our regions, including Europe, Latin America, and Asia Pacific had strong revenue growth in the quarter.

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

Also Asia-Pacific continues to deliver strong growth although off a much smaller base.

Now let's review the P&L starting on page 9 of the slide presentation.

For the quarter, gross margin was 47.9%, down slightly by 20 basis points from last year.

The quarter was impacted by higher input costs and royalty expense associated with the increased revenues in our licensed entertainment properties, which was almost completely offset by our pricing actions and supply chain efficiencies as we continue to proactively manage our business in this inflationary cost market.

As seen on page 10 of the slide presentation, for the quarter, selling, general, and administrative expenses increased by approximately $12 million or 4% to $331 million.

As you can see, we got good leverage on our sales gains for the quarter.

As a percentage of net sales, SG&A expense was 28.5%, down 280 basis points compared to the prior year's rate of 31.3%.

Looking at the cost drivers for the quarter, foreign-exchange accounted for almost two-thirds of SG&A increase in the quarter.

To help offset those increased expenses, we are starting to see the benefits of Operational Excellence 2.0, which contributed $7 million in gross SG&A savings in the quarter and $10 million for the first half.

Other benefits in the quarter were lower incentive and equity compensation expense and reduced legal settlement spending, which dropped $4 million year-over-year in the second quarter.

For your reference, we continue to include an updated historical trend summary of our incremental legal and settlement costs in the appendix to the slide presentation.

Page 11 of the presentation summarizes the performance of our two-year global cost leadership initiative and a summary of our progress on our new initiative, Operating Excellence 2.0.

We are making good progress on this new initiative and have already recognized Operational Excellence 2.0 gross savings of $9 million in the quarter.

As I mentioned earlier, $7 million of the savings are in SG&A line, but areas of focus also include gross margin and advertising.

Our goal continues to be realized $150 million in sustainable cumulative savings by the end of 2012.

The primary drivers of these savings continue to be expected to come from a reduction of $75 million of legal spending and $75 million of structural savings executed through a handful of important initiatives.

Some of these initiatives are outlined at the bottom of the page.

The structural savings 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 given the timing of investment costs and the timelines required to complete the initiatives.

With regard to legal expense reductions, we remain committed to achieving these savings.

We will be better informed on timing once the judge rules on the post-trial motions and we determine our next steps in the ongoing MGA litigation.

As you can see from the slide in our appendix, spending is significantly reduced when we are not preparing for or at trial.

Turning to page 12, operating income in the second quarter was $109.3 million, up 57% for the quarter.

Operating income was 9.4% of net sales, up 260 basis points compared with last year's second quarter.

As you can see, our business fundamentals continue to improve with good sales momentum, strong gross margins, and continued focus on cost savings initiatives.

Turning to page 13, earnings per share for the quarter was $0.23, up 64% versus the prior year.

The quarter's improvement was due to higher sales and operating profit along with a lower share count and the benefit of foreign currency.

We discuss cash flow on page 14.

For the first six months of the year, cash flow used for operations was $227 million compared to $372 million last year driven primarily by our decision not to factor domestic receivables at the end of last year resulting in incremental collections of $300 million in the first quarter.

Year-to-date capital expenditures were $102 million, up $45 million from last year reflecting investments to expand our manufacturing plants, American Girl retail expansion, and higher purchases of tooling due to timing.

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

Year-to-date cash flow used for financing activities and other increased due to our capital deployment initiatives, namely our share repurchases and our quarterly dividend payment as well as a scheduled pay down of long-term debt maturities.

Our cash on hand at the end of the first six months was $418 million, down $127 million from the prior year.

As expected, inventories were up $186 million compared to last year.

The increase in inventories was equally attributable to the higher cost base due to rising input costs, supporting growth -- reflects our momentum in consumer take away, and our need to improve customer service levels versus 2010.

We expect inventories to continue to be higher in the third quarter driven by our push to continue to improve our customer service levels to support POS momentum as well as the impact of higher input costs.

However, we expect that the magnitude of these increases to be more moderate year-over-year.

On capital deployment, we continue to have a strong balance sheet and a business that generates strong cash flow, which we utilize to generate enhance shareholder value.

Through the end of June, we've repurchased approximately 9.8 million shares of our stock with 5.8 million in the second quarter alone.

In addition we announced our third-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 strong quarterly results and recognize we have more work to do since we are just entering our peak season.

We continue to have good momentum and strong fundamentals.

As Bob mentioned, we believe we are well positioned to continue to create total shareholder value by executing our overarching global strategic priorities.

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

Second, to build on the progress we have made on improving our operating margins through sustaining the gross margin and delivering another round of cost savings.

Third, 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.

Good morning, guys.

Thanks.

I have a couple of housekeeping questions for you, Kevin, and then one for Bob.

First, was there any of the revenue from CARS included in the Hot Wheels?

I think that was a little cloudy last time CARS was around but I was just wanted to be clear on that.

There's no revenue from CARS that's included in Hot Wheels?

No, I think you are confusing Speed Racer with CARS.

You're right, you're right.

I don't think there has ever been any CARS in Hot Wheels.

Second question, how much of the inventory increase was the result of the weak dollar?

It had a minimal impact on inventory.

And that is primarily, Sean, because our input costs are mostly dollar-based, so it really does -- (inaudible) doesn't have a major impact on inventory costs.

So the Chinese Yuan increasing doesn't really have much of an impact?

It has some.

So I think that is -- as we said equally, it was basically equally supporting growth, our POS momentum, supporting sales levels, and also higher input costs.

And the ForEx piece would be in that higher input cost.

Okay, and commentary on the tax rate in the quarter and what to expect going forward?

Yes, I think the tax rate in the quarter benefited from some discreet period items but when we look at 2011 and beyond, I think the tax rate is expected to be around 22%.

Okay, and then the last question, Bob, can you just comment on what you are hearing in terms of retail or tone and how they are feeling about current business and their outlook for the second half of the year?

Not specific to Mattel, but just general and if you want to get specific to Mattel, I'd welcome that.

Well, I think generally retailers remain cautious about the economy and the environment and the noise around the world.

That said, the toy business has now demonstrated that it's grown in tough times.

It has grown in the current environment.

It continues to grow today.

We have the momentum in the marketplace.

We are gaining share, so our business looks pretty good but I would characterize the retail environment as substantially similar to what we have seen over the last 18 months.

Okay, thank you, gentlemen.

Drew Crum, Stifel Nicolaus.

Okay, thanks.

Good morning, everyone.

The COGS in the quarter were up midteens.

I wonder if you could comment on receptivity to pricing by retailers and perhaps the necessity or need to increase pricing again in the second half to offset some of those pressures?

Hi, Drew, it's Bryan Stockton.

We are constantly looking at where we are from a value standpoint at retail.

And we've worked very, very hard over the last three or four years to make sure we get our pricing right and our value right at retail and in part that is why we think our momentum has been as strong as it has been in the first half so far this year.

So we are constantly evaluating pricing and where we are, but it's one of those situations where we have to be very fluid in a dynamic environment but at the moment as our margins show, we are in pretty good shape.

I would say, Drew, that we think we are pretty well aligned right now between pricing and costs and at this point, we don't anticipate making any changes for the second half of this year.

The pricing we plan to affect for the year is already in place.

Okay, thanks.

That's helpful.

On the legal front, guys, I know you're not giving any guidance for the second half of 2011 but can you give us an update as to what the next step in the process is and any thoughts around the timing on the MGA antitrust claim?

Well, we are clearly disappointed with the recent verdict.

But we remain focused as a Company on making and selling great toys and the verdict is by no means final.

We strongly believe that the outcome at the trial level wasn't supported by the evidence or by the law and we filed and argued our post-trial motions in front of the judge.

So right now we are waiting to see what his rulings are before we can evaluate our next steps.

As it relates to the pending litigation, we really can't discuss the merits of that case other than to point out that we believe those claims are duplicative.

We have filed a motion to dismiss which is currently pending and the judge has set an October date to hear our motion to dismiss.

I will tell you, this isn't the first time that MGA has claimed Mattel would be liable for a lot of money.

In 2005, they filed an unfair competition claim which was dismissed; again in 2010, they filed a RICO claim which was dismissed.

So we feel reasonably good about our prospects here.

Okay, thanks.

And my last question either for Bob or Bryan relates to the Pixar properties.

Bryan, I think you mentioned that CARS 2 had outperformed Toy Story 3 last year.

Is that sell in, sellthrough or both?

You also mentioned Planes being released on Blu-ray in the spring of 2013.

Will you guys be making the toys for that?

And then my final question relates to Brave.

Can you give us a sense as to what the product line maybe in terms of SKU count looks like relative to some of the other Pixar properties?

Thanks.

That's a lot to cover.

I think first in terms of CARS 2, we are very pleased with where CARS 2 is at the moment.

The sell in to retail has been quite strong and that's not just from the shipment standpoint, but importantly from a retail placement in retail promotion standpoint.

We have had terrific partnerships from retailers around the world, so we are very happy with that.

We are also as we think about that, we think one of the reasons we're doing so well is that our toys are really core to what's going on in the CARS 2 movie.

We were very successful with CARS 1.

We helped to make that brand an evergreen brand by keeping the play patterns close to the original movie and so our products today we think are responding well.

So we are very happy and the sellthrough today is well over Toy Story 3, so we are quite pleased with that.

Related to Planes, yes, we will be making the product for Planes.

We are excited about it and we are working with them at the moment to try to get that line put together.

As it relates to Brave, we are working closely with Disney.

It's a little early to predict how broad the line will be and what the various products will be, but we will be consistent with the rest of that.

We suspect that Braved is likely to be more like Tangled in terms of the opportunity that we are looking at, but we are very positive about it.

Okay.

Thanks, guys.

Tim Conder, Wells Fargo.

Thank you, gentlemen, and congratulations again on the execution.

A couple of items.

On the inventories, you talk about how third quarter you anticipate the inventories still being up year-over-year, but basically the magnitude of the increase coming down.

Can you go through a little bit more of those components?

And then some things in the press obviously about some of your suppliers, Disney's suppliers, other suppliers in the Orient talking about that their orders from their main customers being down 10% to 15%.

Can you bridge us between where your inventories are, retailer's planning, are they planning a flattish as far as heading into the Christmas holiday season?

And the statements there in the press by some of the suppliers.

Tim, this is Bob.

I would start by saying our inventory is in line with historical averages.

As a percent of sales in the second quarter, our inventory was 67%, which compares to a 10-year average of about 66% and clearly last year was one of the lowest levels on record.

You will recall that our customer service levels were not acceptable last year.

So this year we are experiencing higher costs.

We are taking in more inventory.

Our service levels are up and our market share is growing and the inventories support the business.

Those inventories here I'm talking about being our inventories as well as retailers' inventories.

We have seen good stability in manufacturing this year.

We have seen a little less volatility in both the cost line and the service line, so we feel good about how the supply chain is running this year.

Just as we get towards the holiday season as we started to improve the position last year, the magnitude of the year-over-year increase should come down this year.

I think, Kevin, if memory serves me correctly, our inventory in the first quarter was up 41% and in the second quarter, it is some number like 32%.

31%, yes.

31%, so I think we'll continue to see a reduction in the rate of decline, but we still anticipate having higher inventories this year to support the business and the supply chain is delivering those inventories to us.

When I think about the third and fourth quarter, when you think about 2010 or you look at 2010, those levels were more in line with our historical average inventory levels.

So we would expect the year-over-year increase to moderate but we will still see components related to higher costs going up as well as we will continue to have higher inventories to support growth, that is the POS momentum go in the holiday season.

Yes.

Also remember, Tim, that half of our inventory roughly is out of our own plants and certainly a lot of growth has come from product lines represented by our own plants like in our girl's area.

So you won't see those trends reflected in whatever sentiment you might pick up from contract manufacturers.

Okay, then you all commented about your POS you feel very comfortable as a whole and strong POS you said for CARS 2.

Can you give us a little more granularity?

I think there have been some concerns about the burn down of the box office on CARS 2 relative to CARS 1.

Maybe give us a little bit more granularity on sellthrough domestically, contrast that with international for CARS in particular.

And then also just on some of the other key product lines, domestic versus international from a retail POS sellthrough perspective.

Hi, Tim.

It's Brian.

First of all, on CARS 2 as we said, we are very pleased with the POS.

It is higher than Toy Story 2 right now or 3, sorry, and that is consistent globally across all of our geographies.

It's doing very, very well.

It is continuing to build.

We still view it that it's early in the sales of the movie and we are continuing to see our momentum build and we expect this property to do quite well this year.

So that is strong.

As you look at some of our other brands and I will start with the girl's category, we're feeling very positive about where we are with girls.

The entire portfolio if you look at Barbie and Disney Princess and Monster High.

If you look across that portfolio, our POS is up very strong double-digit levels.

And despite all of the activity in that category with both the terrific Disney efforts and Monster High, Barbie POS continues to be a very solid mid single digit in the US and slightly higher in international.

So we feel very good about that.

When you add American Girl on top of that to round out the girl's portfolio, as you know they had a terrific first half of the year.

Kanani continues to do very well.

We are also just opening up our second store for the year in Washington.

We're feeling very positive about that.

That opens up this weekend.

So we are feeling positive about the portfolio.

Bob mentioned earlier on Hot Wheels that the POS is continuing to improve at a very competitive environment again as we look at our portfolio with all the CARS 2 activity going on.

Fisher Price, the POS continues to improve.

And as we mentioned on Fisher Price, we are really focusing in on retail execution for the second half of the year because these products are very responsive to in-store activity and so we will be pushing on that.

So I would say POS from both the US standpoint and international standpoint looks very similar and all positives.

I guess I would just add to that, Tim, a fun fact that I always look at is if you look at our top SKUs from the POS standpoint here in the States last week, I think three of our top five performing SKUs at retail last week were CARS.

And if you think about our product line within CARS, we have a basic play pattern that has proven to be sustainable over time going back to the first launch of the movie, so we're feeling pretty good about the momentum on CARS at retail.

The other point I would make is whether you look at CARS or even our own intellectual property like Monster High, those properties have both now at least from a shipment standpoint, they are over 50% outside the US already, so the international momentum is also there on these entertainment kinds of properties.

Okay.

Lastly here, gentlemen, one kind of a housekeeping item.

Kevin, how are you guys thinking about repatriating cash in light of some of the discussions that there may be another quasi tax holiday to do that?

Then, Bryan, no comments made on Max Steel or Masters of the Universe.

Anything there that you can talk about or -- it doesn't sound like anything in '12.

You already talked about that, but maybe in '13 or so?

Okay, let me cover the first question.

Tim, we always look at the benefits of tax legislation.

Clearly in 2005 we took advantage of that.

So we would look at that.

I think cash from a cash perspective as a global company, Mattel generates cash all around the world.

Our cash management strategy related to cash balances, working capital funding, and capital deployment consider a number of factors including interest rates, exchange rates, and as you pointed out, tax implications.

I just want to make you aware we have the ability to access offshore cash, use it where and when we need it, which is potentially subject to tax.

But our goal really is to balance these factors in order to optimize returns on the utilization of cash.

Regarding both Max Steel and Masters of the Universe, Max Steel continues do very well in Latin America.

As you know, it's the number one male action figure brand in Latin America and has been for some time.

But we will continue to do what we have been doing so well on Max Steel, which was continue to support it with another movie in the fall and create some great product around that.

So Max Steel is continuing the solid momentum we have had in the past.

As it relates to Masters of the Universe, it is continuing to be in development at Sony.

The absolute earliest we would see something on the Masters would be 2013, but that is still in development and we are continuing to work with Sony on that.

Thank you, gentlemen.

Robert Carroll.

Congrats again.

Bang up quarter.

The one -- I guess two quick questions, one on pricing and then the other on raw material procurement.

I guess on pricing, during the quarter I guess one of the major retailers out there had started talking about being willing to compromise their gross margin as a way to [catalize] sales growth or comps growth.

And I guess I just wanted to check if your relationships with them have changed at all during the quarter?

Have they gotten less receptive to the price increases that you guys had already began putting through in April?

And then just a quick follow-up on raw materials.

No, individual retailers make their own strategic decisions on how they want to manage their business and what prices they want to charge and what merchandising they do and the like.

And our strategy is to utilize pricing along with cost reductions to protect our gross margins, which we have been successful in doing, and I wouldn't characterize there having been any change in our strategy or in our retailer relations certainly in recent time.

Then just on the raw material procurement, I know the spike in crude prices north of 110 was normally during the period where you guys are procuring product for the holiday season.

I just want to check -- is the normal schedule intact or did you guys take any I guess preventative measures to maybe buy earlier in the first half of the year or I guess any reaction to oil having temporarily spiked?

It's not significant.

That is what we can do.

We don't really procure oil.

We procure resins.

I think barrel oil is probably up around 35% this year.

If you just look at this year versus last year, if you look at labor in China, the minimum wage is up about 20%.

If you look at the currency, it's up.

So the cost inputs have risen generally speaking as we have expected and consistent with what we have expected for the year and consistent with what we assumed when we did our price increases for the year.

And there isn't a lot of protection that we do, if you will, in that standpoint.

We certainly try and buy a little bit ahead when we can, but I wouldn't describe it as really significant in our business.

I would say so far we are pleased to see a less volatile commodity market this year than we have experienced in the past.

And I think when we look at our gross margins for the first half of 2011, our gross margin improved slightly to 48.7% versus 48.5% in 2010.

We do continue to monitor input costs closely and we are executing Operational Excellence 2.0 and we work on manufacturing efficiency initiatives to fully or partially offset any cost headwinds in 2011.

So as we said at the beginning of the year and we continue to say, our priority is to sustain the progress we have made for the last two consecutive years where we delivered gross margins of at least 50%.

Great.

Thanks, everyone.

Per Ostlund, Jefferies & Co.

Thanks.

Good morning, everybody.

I wanted to follow up on Tim's question I think it was earlier about POS and at the brand level, maybe a little bit here, Bryan.

You did comment on a couple of the brands.

Thinking about Barbie specifically here, with the mid-single digit POS domestically here this quarter and I think last quarter, it was at least the same and maybe a little bit better.

But to sell in was I think flat the last two quarters.

Can you sort of talk about sort of where that brand is in terms of retail inventories just with it specifically at what the dynamics maybe are there as far as launches and whatnot?

Sure, the Barbie POS has been strong, remains strong mid-single digit.

Recall that last year Barbie was up 16% for the quarter.

So we're going up against a very, very strong comp year ago.

So we feel very confident about it.

International, the standard of the Barbie sales were up 10%, so I think the most important thing is consumer takeaway continues to be strong on Barbie as I think our retail customers are dealing with the ebb and flow of retail inventories and other pressures that they are feeling.

Regarding what's happening for Barbie in the near future, we are going to continue to support her with DVD releases.

Our new one this fall is Barbie and the Princess Charm School.

That will be out and we are expecting that to air on Nickelodeon as the historical movies have run.

Also this year we're going to have a second DVD called Barbie the Perfect Christmas, so we'll actually have two DVD releases for Barbie.

And one of the key items that we will be focusing this year will be a Barbie camper that will be for Barbie and her sisters and her pets.

So there is a lot of activity on Barbie going on in the second half, so we are expecting that we'll continue to see strength in Barbie POS.

Excellent.

Maybe also to follow up on another previous question on CARS 2, it sounds like it's doing very, very well both domestically and internationally.

Has the mix of domestic versus international revenue changed with this one versus CARS 1 given the different international theme with the international races?

Yes, it has.

As we expected, it has become more international.

Half or more, more than half of our shipments right now are outside the US and also remember when the first movie came out, we were in very short supply.

The toys took off in advance of the movie and with the movie, so we had a hard time filling orders particularly outside the US.

But it has been consistent with our expectations that it would be more of a global property and have new play patterns, which is good for us.

And the film, too, has more of a global story too to it and a global settings.

So I think that helps too.

Right.

That's what I figured.

That makes perfect sense.

Thanks.

Congratulations.

Greg Badishkanian, Citigroup.

Thanks.

Obviously 2011 very strong year for entertainment properties, particularly movie-related properties.

You gave some color on 2012 some of those entertainment properties.

Just wondering if you kind of just segregate movie-related toys, do you think you will see growth in 2012 versus 2011?

No, Greg, that would probably fall in the area of guidance, which we don't do.

But I think there is an important point to make, which we have been making hopefully for several years now that we run a portfolio of brands and countries and in any given quarter or any given year, some part of the portfolio may be doing better than another part of the portfolio.

But if you look at how we have performed over the past several years and if you look at our objectives, we aim to deliver good, consistent, solid growth in this Company and that has been key at generating the cash flow we have been generating.

Good.

All right, thanks, guys.

Linda Bolton-Weiser, Caris.

Congratulations.

Great quarter.

Can I ask you about -- I don't know if we have heard anything or there's been anything released, but has there been any news about the outcome of the other piece of the Thomas license, the wooden piece?

When would you expect the timing?

No, I think RC2 has that through 2012.

So if there were any change in the wood portion of the Thomas business, I think it would be effective in 2013.

Okay, my understanding would be that there would be some decision reached about a year prior to the expiration of the license.

Is that not correct?

Well, that is not a decision we would be making.

We certainly have a recommendation, but we don't really control the timing on that.

Okay, just a second question.

You had talked a little bit about the legal process with MGA.

I seem to recall that there was an expectation that the judge's decision on the case where we already heard the verdict from the jury.

I thought that his decision would be announced really soon, like in a few weeks or a month or so.

It's been quite a while.

What kind of timeframe should we expect for that judge's decision?

We don't know.

He is I am sure going through whatever process he goes through to deliberate, make his decision, and that ball is in his court and I'm sure he is working with speed and alacrity.

But it's really in his camp right now.

Okay, thanks.

That's all I had.

Jeff Blaeser, Morgan Joseph.

Good morning, thank you for taking my questions.

You mentioned that CARS is ahead of Toy Story from last year.

How is CARS and Toy Story combined doing year-over-year?

Jeff, it's Bryan.

We're actually very pleased with both.

Toy Story continues to perform well.

It's a very strong, evergreen property for us.

So we are going to continue to build on that.

As I mentioned that Disney is going to continue to support that into the future, so we are expecting to continue to build on that.

So when we look at the portfolio between both Toy Story and CARS, we are very pleased with the performance.

Okay, quickly on the WWE side, you mentioned ongoing strength.

Is that domestic, international?

Are you growing the kid's product line versus the collectors a little bit more kind of color on where that growth is coming from?

The good news on WWE is we have been very successful in expanding that product internationally and we are selling it both in and selling it through quite well in all the countries in which WWE is on the air.

That was one of the key reasons I think WWE reselected Mattel to be the partner.

Again, we partner with the best and be the best partner.

I think we are proving that with them so we are pleased with that and we continue to work with them on how we can expand this very successful property more broadly throughout the world.

Okay, just one final on the overall growth trend.

It certainly has been and seems to be international is growing much faster than domestic.

Is that primarily emerging markets?

Is it market share gains?

Is it international consumers becoming more entrenched with your US product lines?

Is there any kind of drivers there that you see versus the domestic slower growth pace?

I think the good news is that this quarter and so far this year what we have seen is we have seen very strong growth across all regions.

We always talk about our core businesses.

I think we've talked to you all about our top 10 countries in international, so we are seeing very strong both sell in and sellthrough activity across the product lines virtually in all corners of the world.

Great.

Thank you very much.

Felicia Hendrix, Barclays Capital.

Hi, guys -- squeeze in there.

A lot of my questions have already been asked.

I just have a very few housekeeping questions.

Can you just tell us what the impact of FX was on EPS?

For the quarter, it was $0.01.

For the first half, it's $0.02.

Okay, great.

Thanks.

Kevin, can you just talk about -- there was also an increase in accounts receivable both on an absolute basis and then also as a percentage of sales.

Can you just discuss that for a second?

Yes, for the second quarter, accounts receivable increased by about $207 million and it was primarily due to higher sales volume, a shift in sales later in the quarter, and a shift in sales mix to countries with longer sales terms.

That is consistent with terms customary in those countries, so that really is what drove the increase in accounts receivable.

Is that a trend that we should expect to persist?

You know, timing, we don't determine the timing of shipments in the quarter.

So if it's later in the quarter, this trend would continue to exist.

Also I think as these countries that are more emerging market countries grow, we are going to see that their sales terms at least in the near term are going to be longer and that would impact our days sales outstanding.

Okay, and then just to clarify on the legal front, there's some changes that have happened since you reported a quarter last time.

Just the savings that you outlined for the second half, are those still intact or are those up in the air a bit?

If we want to talk about Operational Excellence 2.0 and then talk about legal savings within that, we remain committed to $150 million of savings under 2.0.

We've got strong plans in place.

We are actively working against some key initiatives to simplify and align our business.

We have already started to see progress in '11 in key areas including international clustering, a global brand team in North American division, and indirect procurement.

But the balance of savings is expected to be realized in 2012.

When we talk about the legal fees, we remain committed to achieving the $75 million in legal savings as well.

As you can see in the appendix of our earnings presentation, we incur significant incremental legal expenses when preparing for and at trial.

In 2008, that was about $37 million in incremental fees.

In 2010, that was about $40 million.

And when you look at the first quarter this year, we continue to incur incremental legal fees given the trial started in January; that was about $11 million.

With the trial concluding in April, we started to see legal expenses decline in Q2 2011 by about $5 million and if you look at the second half of 2010, we incurred legal fees that were incremental of about $26 million.

So as we said earlier as of today, we are waiting for the judge's ruling on the post-trial motions.

We are preparing to present our motion to submit the antitrust litigation in October, which we have already filed.

And as a result, we will be better able to assess the savings later this year.

Assuming we can bring this matter to final conclusion, we expect to realize the $75 million of savings by the end of 2012.

Great, last quickie just the share count at the end of the quarter.

344 million.

Okay, great.

Thanks.

Thank you.

There will be a replay of this call available beginning at 11.30 a.m.

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

You may now disconnect and have a wonderful day.