Mattel Inc (MAT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Mattel's third-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'd 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, operator.

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

As we did with our second-quarter call, we provide you with a slide presentation to help guide our discussion 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 the call will be open for your questions.

Certain statements made during the call may include forward-looking statements related 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 risk factors section of our 2010 annual report on Form 10-K, in our 2011 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've added quarterly and annual revenue growth trends to the other information that is also available at Mattel.com.

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

Thank you, Drew, and good morning to everyone.

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

As we move into the all-important holiday season toy industry gurus, as well as our retail customers, have named Mattel and Fisher-Price toys to their must-have holiday toy lists, including Hot Wheels Wall Tracks, Fijit Friends, Barbie Designable Hair Extensions, Hot Wheels Video Racer, Fisher-Price Laugh & Learn Apptivity Case which lets toddlers enjoy their very own apps while protecting mom or dad's iPhone or iPod, the Fisher-Price Kid-Tough See Yourself Camera and Rock Star Mickey.

In fact, Fijit is listed on all the top retailer lists including Walmart, Target, Toys "R" Us, Kmart and Tesco where it hit number one.

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

We continue to experience strength across our portfolio of brands in all regions of the world.

Not only have we continued to benefit from the strength of our core brands, but this year's big entertainment property, CARS 2, is also fueling momentum.

Our girls' portfolio is the strongest we've had in years including Barbie, which boasted its highest percentage gain in more than a decade.

The brand is performing well worldwide across all product platforms, from fashionistas to family to fairytale.

Additionally, Barbie's fall entertainment offering, Princess Charm School, is performing well versus last year and will be broadcast this November on Nickelodeon leading into Thanksgiving weekend.

We're also releasing an incremental holiday theme Barbie DVD, A Perfect Christmas, which will hit store shelves in November.

Monster High continues to perform exceptionally well on a global basis across every major product category.

And it's not just the toy brand but it's also a consumer franchise with strength that lies in its deep and rich content which continues to drive engagement for our fans.

MonsterHigh.com continues to be an effective way to connect with girls boasting 33 million visits since the website launched.

We recently launched a Monster High app and a global Facebook page with localized content for our top markets.

The Monster High THQ video game will debut on October 25 in more than 10 international markets.

And in time for Halloween, Nickelodeon will air another Monster High Halloween TV special on October 30.

For American Girl, its 25th anniversary has been a great success.

MyAG continues to show strong growth as we approach the anniversary of the relaunch.

The 2011 Girl of the Year, Kanani, is pacing to be the best-selling girl of the year of all time.

In addition, we opened two new stores, Seattle and Washington DC, and both are performing quite well.

And just this week we revealed St.

Louis as the location for our 12th American Girl store which is scheduled to open in spring 2012.

In the boys aisle the overall marketing program behind Team Hot Wheels has been strong with millions of consumers engaging with the content.

Hot Wheels Wall Tracks and Hot Wheels Video Racers' break frame innovation is resonating with retailers and consumers, especially moms.

The CARS 2 business continues to be strong, specifically die cast cars, play sets and track sets and is on track to deliver our best single sales year globally for the brand.

And we know from experience and research that about 40% of the target audience has not yet seen CARS 2, but will see it once the DVD is released in early November.

For its part Disney continues to support the franchise as an evergreen brand through the planned release of new Cars Toon animated shorts in 2012 leading up to the planned release of Planes, an all new direct-to-video in 2013.

Finally, we're holding our own with Fisher-Price.

That said there's more work to be done.

We're making good progress on the new positioning with the goal of driving a more premium and differentiated position for the brand long-term.

This fall we debuted the new Joy of Learning TV campaign which started airing in the last weeks.

And we're working to improve retail execution, build a stronger international business and solidify our connections with today's digital savvy mom.

Kevin will take you through the financial performance, but I just want to say that I'm encouraged by our operating margin expansion and our double-digit earnings growth despite a challenging retail environment.

And Mattel's Board continues to pursue its value enhancing capital deployment program including the quarterly dividend and enhanced share repurchase program.

As we enter into the all-important last quarter 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.

At this time I'd like to introduce Mattel's Chief Financial Officer, Kevin Farr.

Thank you, Bob, and good morning, everyone.

Entering into the key 2011 holiday season we continue to see positive business trends and have momentum in the face of a challenging economic environment.

We remain focused on delivering consistent growth by first continuing the momentum in our core business.

I'm pleased to report that each of our top brands grew in the third quarter.

Barbie, Hot Wheels, Fisher-Price core and American Girl all enjoyed top-line gains.

Second, working to expand our international footprint.

As Brian will discuss later, our strong double-digit international sales continue to highlight our global strength.

Third, optimizing our entertainment partnerships, we continue to see strong results in CARS 2 and Disney Princesses.

And finally, building new franchises.

Monster High continues to exceed expectations as it rolls out across the world.

Additionally, we remain committed to improving our operating margins and delivering strong gross margin and executing another round of cost savings through our Operational Excellence 2.0 programs.

And as we continue to achieve these priorities we expect to generate significant cash flow and continue to deploy it in value enhancing strategies.

Let's review each of these drivers in more detail starting with page five of the deck.

As you can see, our worldwide gross sales are up 9% for the quarter.

We continue to feel good about sell-through trends domestically as well as internationally and our retail inventories are returning to more historical levels.

Let's turn to page six and seven of the slide presentation to see the revenue performance of our global brands.

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

As Bob outlined earlier, our girls business had a really strong quarter with Barbie sales momentum continuing and Monster High and Disney Princesses continuing to drive growth in our other girls business.

On the boys side the strong growth in our entertainment business was primarily attributable to continuing success of CARS 2 which is meeting our high expectations.

As you know, our toy lines have supported the core play patterns for this evergreen franchise for the past six years.

And we continue to see great support from our retail partners resulting in strong sell-in and sell-through.

In the wheels category Hot Wheel trends are starting to improve and we and our customers are optimistic about our new fall drivers.

We're also seeing continued success in our RC business with Hot Wheels Stealth Rides and the newly introduced Nitro Speeders range of mini vehicles.

In the games category UNO sales continue to be strong in its 40th anniversary year and Fijit, our new girls' interactive animatronic friend has resonated well in her initial launch.

Worldwide sales for Fisher-Price brands continue to hold up and were up 1% for the quarter.

Our Fisher-Price core business, which includes Baby Gear, was up for the quarter driven by solid results in our infant, girls, boys and newborn categories.

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

American Girl continued to deliver strong results with sales in the quarter up 4% driven by continued success in our retail channels.

Our international business as seen on page eight had another standout quarter.

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

We continue to see 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.

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

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

For the quarter gross margin was 47.8%, down 330 basis points versus the prior year rate of 51.1%.

The primary driver of the decline was currency related.

The rapid appreciation of the US dollar in late September of 2011 against key foreign currencies like the euro, the Mexican peso and the Brazilian real negatively impacted gross margins by approximately 180 basis points in the quarter.

Excluding the negative impact of foreign exchange, gross margins were 49.6%, consistent with our longer-term targets.

Excluding the negative impact of ForEx, consistent with our expectations, gross margins were down 150 basis points in the quarter.

The decline was primarily due to higher product costs, other product-related expenses, freight and distribution and higher royalty expenses due to our increased sales and our entertainment licenses partially offset by our high single-digit price increase and our ongoing OE 2.0 supply-chain initiatives.

As seen on page 10 of the slide presentation, for the quarter selling, general and administrative expenses decreased by approximately $39 million or 10% to $339 million.

As you see, we continue to get good leverage on our sales gains for the quarter.

As a percentage of net sales SG&A expense was 16.9%, down 370 basis points compared to the prior year's rate of 20.6%.

The decrease in SG&A was due to lower incentive and equity compensation expenses compared to last year's accrual, savings from our Operational Excellence 2.0 initiatives including reduced legal spending, as well as a benefit from the absence of prior year asset impairment charges partially offset by increased employee-related expenses, strategic growth investments and foreign exchange.

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, Operational Excellence 2.0.

We are making good progress on this new initiative.

We recognized Operational Excellence 2.0 savings of $34 million in the quarter including $16 million of structural savings and approximately $18 million in legal savings.

$27 million of the savings are in the SG&A line, $7 million of the savings are included in gross margin and $1 million of savings are in advertising.

Year-to-date gross savings are $48 million with net savings of approximately $31 million after considering investments of $17 million.

We continue to be on track to realize $150 million of sustainable (inaudible) savings by the end of 2012.

The primary driver of these savings continues to be expected to come from the production of $75 million of legal spending and $75 million of structural savings executed through a handful of important initiatives.

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

As you can see from the slide in our appendix, we are seeing the near-term benefits in our SG&A since we are not prepared for trial like we were last year at this time.

Regarding the first case, the costs to support an appeal are significantly less than going to trial.

In regards to the second case, MGA's antitrust suit, we're awaiting the judge's final ruling on our motion to dismiss.

Turning to page 12, operating income in the third quarter was $397.6 million, up 11% for the quarter.

Operating income was 19.9% of net sales, up 30 basis points compared with last year's third quarter.

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

Turning to page 13, earnings per share for the quarter were $0.86, up 12% versus the prior year which included a discrete tax benefit of $0.05 per share.

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

We discuss cash flow on page 14.

For the first nine months of the year cash flow used for operations was $322 million compared to $428 million last year driven primarily by our decision not to factor domestic receivables at the end of last partially offset by higher working capital usage.

Year-to-date capital expenditures were $145 million, up [$50] million from last year.

For the year we are forecasting to spend approximately $185 million to $195 million in capital.

In addition to higher purchases of tooling due to increased volume we are increasing our spending this year with initiatives that will help to maintain or grow margin including investments to increase capacity of our own manufacturing plants, make strategic IT investments to improve our eCommerce and overall effectiveness and efficiency, and continue expanding our retail experiences at American Girl.

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

Our cash at hand at the end of the first nine months was $255 million, down $706 million from prior year.

The variance is primarily attributable to additional share repurchase activity and the payment of quarterly dividends this year.

As expected, inventories were in line, up just $23 million compared to last year which compares favorably with prior quarters.

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

Year-to-date through September we've repurchased approximately 16.3 million shares of our stock with 6.6 million in the third quarter alone.

In addition, we announced our fourth-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 continue to have good momentum and strong fundamentals and are pleased with our quarterly results, and recognize we have more work to do since we are just beginning to execute on our key holiday season.

As Bob mentioned, we believe we are well positioned to continue to create 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 made on improving our operating margins through sustaining the gross margin and delivering another round of cost savings.

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

That concludes my review of the financial results.

I would now like to introduce Bryan Stockton, Mattel's Chief Operating Officer.

Bryan.

Thank you, Kevin, and good morning.

Last quarter I talked to you about our entertainment strategy and this quarter I will focus my comments on our international business.

As Kevin said, we continue to be very pleased with our strong performance internationally with eight straight quarters of positive growth.

Simply stated, Mattel has the most significant international business in the toy industry.

We bring play to children around the world by hosting the largest and most robust international footprint of any toy company.

We sell toys in more than 150 countries and support those efforts through 43 local offices.

And we've been at this for a long time with a track record of success.

Over the last decade our international business has driven most of the Company's growth.

As international has grown it's become an increasingly more important part of the portfolio.

Today international sales represent approximately 50% of Mattel revenues excluding the American Girl brand.

As we look at the business today, it's our longevity, scale and our unmatched in-market experience combined with our momentum that allows international to be a key growth opportunity.

Connect that with the size of the international market and you have an incredible growth opportunity.

For example, Europe is not only large and important, but it's growing faster than the US.

In developing markets such as Latin America and Asia, the population of children in the burgeoning middle class is expected to grow by approximately 50% in the next five years.

This new and emerging middle class will create the opportunity for us to broaden engagement with our brands as discretionary income and spending grow.

So why do we think we have a strategic advantage in the international marketplace?

One, we have local consumer insights that allow us to build our brands.

Two, we have a solid infrastructure; we're on the ground and we know these markets better than anyone else.

Three, Mattel has strong market specific retail partnerships.

We have expertise in partnering with a wide range of retail customer types including hypermarkets, small chains, toy specialists, electronics stores, department stores and kiosks just to name a few.

And four, our global reach and unmatched local market expertise give our licensing partners the scale to build their brands globally.

Let's talk about brand building.

Like other leading global consumer products companies, we've been able to grow most of our brands to be larger outside of the US.

International represents more than 50% of gross revenues for most of our key brands including Barbie, Hot Wheels and Monster High.

And we've made significant progress in growing the Fisher-Price Brands in this target.

In fact, the Fisher-Price international business has more than doubled in the last 10 years.

Our deep-rooted experience in these markets is a key competitive advantage because we have established a connection with consumers that in many cases is multi-generational.

Moms have grown up with our brands and are now buying those brands for their own children.

In fact, more than 80% of international sales are in markets where parents had the opportunity to grow up with Barbie, Hot Wheels and Fisher-Price.

But it's not just moms we're connected to.

We take great pride in our successful efforts to develop long-term relationships with retailers, distributors, governments and trade agencies alike.

Our second competitive advantage is our long-term disciplined approach to building a business in the market.

I call it the brick-by-brick model.

We start with a distributor, as we gain scale we partner with the local distributor to increase sales and marketing investments.

When we gain sufficient scale and our brands are established as aspirational brands in the market we advance to a wholly-owned subsidiary model.

At this point in the investment time line we have the growth and scale and advertising and marketing dollars to create sustainable profitable growth.

This vast global footprint also creates a diversified customer base.

In the last decade retailers like (inaudible), Tesco, Rihappy in Brazil and in Mexico Wal-Mart's Bodega de (inaudible), just to name a few, are now a part of the Mattel lexicon.

We are able to translate our vast retail experience across channels and countries to the benefit of our retail partners.

And our broad and deep retail penetration also allows Mattel to leverage non-toy space for consumer products which further expands opportunities for brand engagement with consumers.

More and more our retail partners are supporting cross category brand promotions.

For example, we now see more Barbie promotions that include both toys and consumer products such as apparel, jewelry and stationery.

And this leads me to our fourth competitive advantage, which is the ability to attract the top licensing partners.

Mattel's vast global footprint allows us to develop a retail presence in toy aisles all around the world concurrent with the global rollout of entertainment properties making us a one-stop shop for licensors.

Our global reach and approach 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're now responsible for Disney Princess virtually around the globe.

And most recently we've also partnered with one of the premier global preschool properties, Thomas & Friends, as well as with the WWE to support their efforts to expand their franchises globally.

Our third-quarter results, as well as our year-to-date results, show strength and room for more expansion in every region.

Europe is an exciting and evolving story.

Considered a mature market, we're experiencing sales gains across much of the toy aisle including two key areas, dolls and die cast cars.

For example, across both Western Europe and Eastern Europe, Monster High has captured the imaginations of girls.

The unique launch in the digital space helped to communicate and connect the story to an older girl target audience and allowed them to truly engage with and discover the brand.

In Spain Monster High is on fire, capturing double-digit category share in only 10 months.

In Eastern Europe we leveraged top female pop icon, Ewa Farna, to communicate the story which is localization at its very best.

Ewa is a Polish phenomenon and she made own Monster High music video in Polish connecting girls to the brand in their language.

We're also very well-positioned and growing in all markets in Latin America.

In fact, if our Latin American business was a standalone toy company it would be ranked by sales as the fifth largest toy company in the world.

In Asia we're replicating the brand building process that made Latin America such a success.

We're creating a strong distribution base and positioning our brands as the aspirational brands in the marketplace.

In China, for example, we know that today's Chinese consumers are learning more about the ability of toys to enhance their child's development.

As a result we see great potential for Barbie as an engaging learning tool for today's girl.

Mattel China has been leveraging many of Barbie's 126 careers to help girls build social interaction skills, independence and their imaginations through fun and engaging Barbie themed activities.

We've also launched the Barbie Dream Bus, a 20 plus city program that takes all of the great experiences to Barbie to many more consumers, broadening the reach of the brand across China.

This has proven to be very successful and our retail partners are actively supporting our efforts as well.

Even though we're the clear leader in international we are not resting on our laurels.

Our new global brand team structure will support the building of our brands even more seamlessly across both the US and international markets.

Our new model will enable these teams to spend even more time on brand building efforts and unique product introductions.

Our in-country marketing and sales teams will ensure consumer and customer relevance for their marketplace and then lead local market execution.

Ultimately Mattel's international strength is unique in the toy industry, very important to our business and will remain a primary growth focus for Mattel.

We know how to grow businesses around the globe and we're making investments for the long term by adhering to four core principles.

First, continue to capitalize on local consumer insights in order to allow us to appropriately invest in our brands and establish them as the premier brands in the market.

Second, build local market presence and infrastructure to support growth.

Third, develop and grow the right retail partnerships through flawless execution.

And fourth, the licensing partner of choice.

And with that I would like to turn the call over to the operator so that we can open the line for questions.

(Operator Instructions).

Robert Carroll, UBS.

Just two quick ones, one on inventory.

Given the 3% increase year over year, I wanted to see if you guys would be able to talk about that in terms of how you feel it positions you into all-important Q4?

And then I have just another quick follow-up on FX as well.

Yes, I think as we said last quarter, we expected the inventories to come in line in the back half of 2011 and they did.

Inventories at the end of the third quarter were $764 million, up $23 million or 3% versus last year.

Our inventories at the end of the third quarter are in line with historical averages.

Our Q3 inventories as a percentage of sales for the past 10 years are at 39%, Q3 2011 was 38%.

We were able to bring our 2011 third-quarter inventory levels in line with historical averages by managing our production in the third quarter of 2011.

We're comfortable that our inventory levels at the end of the third quarter of 2011 will support our customer service levels and the positive momentum of our brands in the all-important fourth quarter of 2011.

So, if we were to back out the pricing increases put in place earlier in the year, are unit numbers actually down year over year?

From the perspective of inventory on our balance sheet, yes.

And then just on the currency, I was just wondering, the magnitude of the gross margin impact seemed a little bit higher than some of the sensitivities I'd kind of been working on in the past.

So I just wanted to see if you can work through some of the specific logistics of how the swings actually impacted gross margin?

Yes, I think GAAP accounting rules require the adjustment of cost of goods sold for certain fluctuations in currency exchange rates.

And the impact of these (inaudible) accounting rules resulted in a 180 basis points negative year-over-year impact to gross margins due to the rapid strengthening of the US dollar against all key foreign currencies.

And due to the seasonal nature of our business, the rapid appreciation of the US currency in September 2011 had a significant impact to gross margin in the third quarter since it occurred when we were building and holding our peak inventory to support our fall shipping.

So is that a function of the transactions between the country specific subsidiaries?

Or given most manufacturing is in Asia and Mexico, was it primarily those currencies or was it kind of the basket overall?

Yes, I think it did relate to the seasonal movement of inventory.

So if you look at our business and the seasonal nature of business, we're building and holding our peak inventories to support our fall shipping.

We're required to move that inventory around the world to position the goods to meet customer service levels to support buying by retailers for the all-important holiday season.

And the movement of that inventory between our manufacturing operations and our sales and distribution operations creates an accounts receivable to our manufacturing operations and a corresponding accounts payable from our sales and distribution operations.

And if the functional currency of the manufacturing operations or the sales and distribution operations are not the same as the currencies in accounts receivable or the accounts payable, at the end of each quarter accounting rules require an adjustment to cost of goods sold to reflect fluctuation in currencies between the time of creation of the accounts receivable or accounts payable and the end of the quarter.

And due to these accounting rules and the rapid appreciation of the US dollar in September of 2011 we incurred a negative 180 basis point adjustment to cost of goods sold in the third quarter of 2011.

That's helpful, guys thanks, guys.

Gerrick Johnson, BMO Capital Markets.

I was wondering if you could comment on domestic fulfillment versus FOB fulfillment.

Are retailers looking for more domestic fulfillment these days and how does that affect you guys?

Gerrick, it's Bryan.

No, we're not really seeing any change in customer mix in terms of what they're ordering.

I think our customers are really focused on in-store execution and making sure they get customers into the stores.

And we're obviously trying to support them with great product and merchandising.

So, no, we're not really seeing any changes.

Okay, thank you.

And if I could just ask one on SG&A.

You had increased employee-related costs yet lower incentive accruals.

Can you explain the difference?

What were the increased employee-related costs?

That's generally merit and benefits, so it's just the annual increase that you give to employees globally.

Okay, great.

And if I could just sneak one more in there.

You have $539 million remaining on your repurchase authorization; does that include the new $500 million authorization?

Yes.

Okay, great.

Thank you.

Margaret Whitfield, Sterne, Agee.

So can I assume that maybe since the seasonal business is strongest in September/October that we might see a similar effect from currency starting out here in Q4?

Margaret, it's impossible to predict movements in foreign currency, particularly with the volatility in global markets today.

However, in the fourth quarter our manufacturing and inventories are much lower than in prior quarter.

So the impact, positive or negative, would likely be lower given the same timing and same magnitude of the fluctuation in major currencies that we experienced in the third quarter of 2011.

Okay.

Could you comment on how Barbie performed in the US?

I know you gave the worldwide number.

Hi, Margaret, this is Bob.

Barbie has done well globally including in the US.

Our point of sales momentum is strong.

The Princess Charm School is performing well; that's the fall entertainment segment.

Both the dolls and the DVD sales are up versus prior year.

I Can Be is doing well, it's the aspirational segment.

Fashionistas is doing well and core Barbie, the Camper, Barbie Sisters, the Designable Hair product all look good.

So our POS momentum is strong around the world including in the United States.

But was it up double-digits in line with the worldwide total in Q3 in the US?

We don't generally go through the totals, but the POS was up everywhere and shipments were up in the US at a pretty good clip.

I think they were up double-digits, but --.

Yes, they were up double-digits in the quarter.

Up 13%.

Okay.

And could you give us an update on the first case with MGA, what's going on there?

Well, we were disappointed by the verdict late last spring.

We strongly believe that the outcome of the trial wasn't supported by the evidence of the law, so we have filed a notice of appeal.

That preserves our right to appeal all of the decisions of the court and the jury on this case.

Okay, thank you.

Sean McGowan, Needham & Company.

Thank you; I also have several here.

First is what should we read into the fact that incentive compensation is down?

Are we looking for a bummed out workforce in the fourth quarter?

Sean, this is Bob.

Not necessarily.

We don't make predictions along those lines.

But I think you will recall that last year our incentive accruals were robust as we performed quite well.

And as we expected this year, the accrual will come down even if we perform well just because we're up a higher base.

Yes, just to add to that, for 2010 total incentive costs were $106 million and total equity compensation was $67.1 million as we delivered strong results.

For perspective heading into 2011 over time we generally expect incentive compensation to be in the range of $75 million to $80 million and equity compensation to be in a range of $50 million to $55 million.

So you should consider the incentive compensation accruals, you estimate SG&A for the second half of 2011, particularly for the fourth quarter.

And we usually don't begin to accrue a significant amount of incentive compensation to the second half of the year.

In a typical year that would be split relatively equally between Q3 and Q4.

And last year was it skewed more to the third quarter?

Was there also a timing function going on?

Well, we were continuing to perform well through the third quarter last year.

So when you look at the accruals, there were significant accruals in the third and fourth quarter to get to the $106 million that we accrued for incentive and also equity compensation was higher in the third quarter.

Okay, next question.

Is Monster High up in the US in the third quarter?

Yes it is, Sean.

There's no question this is a home run and it is global.

The international business is now even bigger than the US business, but the US business is performing well everywhere.

It looks great on the shelf, the new products like Miss Spectra and Abbey characters are doing well.

We've got 35 Webisodes this year, we've launched things like the app and the THQ video game is coming up soon.

And what I've seen in stores, and I'm sure several of you have as well, is that several of the big retailers have seen really good performance by combining the dolls and the consumer products in one merchandising solution.

It really looks good on the shelf and it's performing well.

Agreed.

A couple other questions.

Did I hear you right, Bob, saying that this would be the CARS franchise's best year ever -- in terms of the Mattel shipments --.

Yes.

-- Mattel (inaudible) products are higher than the previous movie?

Yes.

As the current trends continue based on our sell-in and what we're seeing at POS, this should be, by the time we're done with the year, the biggest year for our CARS franchise.

I'm going to make a note here -- Bob Eckert makes a prediction, okay, okay.

Last question.

(Laughter).

Okay, Bryan, you better start shipping it.

(Laughter).

I'll be right back, Bob.

[Sounds] like guidance, I don't know.

The last question I had --

That was a prediction, not guidance.

That's true, that's true.

Last question -- now you commented on currency in response to Margaret's question regarding currency impact to gross margin, but you also were looking at mid-year, we saw a pretty big increase in a lot of those input costs.

Those costs I guess are sitting in some inventory of unshipped products.

How much gross margin pressure do you think we'll see in the fourth quarter from input costs?

Again, I think at least year to date our price increases seem to be well matched with product cost increases that we experienced in Q3.

I think, as you know, we don't give guidance with regard to our gross margin.

But as we said before, we make detailed cost assumptions for pricing including input costs for resins, smart packaging, labor rates, currency and freight rates with the goal of sustaining our gross margins of around 50%.

We manage these margins and deliver around 50% on an annual basis.

Importers can have fluctuations created by a number of factors including the timing of price increases, higher input costs, currency fluctuations, etc.

And excluding the negative impact of foreign exchange, our 2011 third-quarter gross margins were 49.6% which was consistent with our expectations and is very much in line with our longer-term targets.

And to your point, so far we are pleased to see a less volatile commodity market this year than what we had experienced in the past and continue to monitor our input costs closely and execute on our Operational Excellence 2.0 and manufacturing efficiency initiatives to fully or partially offset any current or future cost headwinds.

Over the long-term our goal is to sustain the progress we've made in delivering gross margins around 50% which we achieved in the last two years.

Thank you very much.

Tim Conder, Wells Fargo Securities.

Thank you.

Let's just continue on that line of the gross margin.

Kevin, with what you see now in the pricing that you're getting, in the commodity cost and then in what you see if things -- if nothing else changes on FX for the balance of the year is that maintenance of the 50% gross margin attainable?

Again, we don't provide guidance.

I think in the last question I answered the fact that with regard to our cost assumptions we haven't seen a significant runway of cost from us.

So right now it looks like our price increases seem to be well matched with product cost increases that we experienced in the third quarter.

We were impacted by other product-related costs and royalties.

But overall our longer-term goal is to achieve margins of around 50%.

And from the pricing perspective, so far you feel that everything that you've instituted at this point of the year is sticking and any thoughts as to the flow-through on pricing that you're looking to take in 2012?

Yes, hi, it's Bryan here, Tim.

In terms of pricing we worked very, very hard with our retail partners back in April when we announced the price increase.

And as you know, no one wants to take prices up, but with all the upward movement in commodities, not just in toys but in other parts of retail, it was quite a challenge.

But we're there.

Now it's too early to talk about pricing for 2012, but as you know, we're still in an inflationary environment as it relates to a lot of the inputs for toys.

So we'll continue to look at pricing and price so that we can cover costs and try to maintain our long-term margin goal.

And I think, as I said, our price increases seem to be well matched with product cost increases that we experienced in Q3.

And if you exclude the impact of foreign exchange, our gross margins in the third quarter were 49.6%, consistent with our long-term goals.

Okay, okay.

And then regarding -- I just wanted a little bit of a clarification.

And Bryan, maybe -- I think you alluded to this earlier.

Are you seeing retailers take more or less on a comparable basis in the third quarter or are we seeing a little bit of further compression this year or taking a little bit less relative comparable inventory here?

Well, every retailer has different flows.

And when you look at retailers across the globe, everyone is on different timing in terms of when they convert from a spring to a fall set up.

But we're not seeing anything that's unusual.

Is there a retailer here and there that might be adjusting their strategy?

Yes.

That happens every year, but we're not seeing a seismic shift in forward shipments or delay of shipments.

Okay.

And then finally, retail sales across the quarter, any additional detail/color you can give there on a global basis, US basis what you're seeing as it came across third quarter at POS?

Well, as you know, we're in the middle of fall Toy Fair season and we've had a chance to talk with a number of customers.

I would say our customers are all feeling pretty positive about the holidays coming up.

They feel like they're well-positioned.

Many of them have talked about their back-to-school business was pretty good, so I think they're feeling like they're well-positioned to have a good holiday.

Okay.

So no notice of any slowing in the month of September on a year-over-year basis by various geographics?

Not that we have seen or heard, no.

Great.

And if I may, I did have one other to ask here on Monster High.

Can we assume that that's greater than $100 million at this point as far as your contribution to revenue?

Well Tim, this is Bob, you can make any assumption you want (laughter), but we don't disclose sales by brand.

Having said that -- and congratulations on the Cardinals.

Having said that, Monster High is a big deal and we have said previously and continue to believe that if this were an entertainment property, that is intellectual property that someone else held like a movie studio or a TV property, it would be a big deal.

So it happens to be our IP and we're doing the entertainment and we're selling the toys and licensing the consumer products, it is a big deal.

Okay, great.

And as you said, more work to do.

We'll say the same for the Cardinals (laughter).

Michael Kelter, Goldman Sachs.

I was curious, I know we haven't yet had this year's Christmas, but just kind of looking forward -- I think going into 2011 it's pretty clear that Monster High and CARS were going to be the big drivers.

And I think for 2012, at least for me, I kind of lack some of that same clarity.

So I was curious what you guys are excited about looking out into 2012?

Well, I think, Michael, we would start with our core brands are performing well in the marketplace across the board and around the world.

And that's been a high priority of ours for a long time.

So we'll be talking more I think in a couple of weeks at Analyst Day about some of our plans for next year and then I'm sure in February we'll talk about specific products.

But it all starts with our core.

As we even said going into this year, the core products would be really important.

From an entertainment standpoint obviously Batman is going to be our big movie next year and it's historically performed well.

And then on gross margins, which I know people have talked about various parts.

One thing I was curious about was within the gross margin line I know last quarter royalties were up about 70 basis points versus the prior year.

How about this quarter, what was the royalty impact on gross margins?

Yes, we don't get that specific as to the percentage.

But yes, royalties were up this year reflecting the strong sales of our licensed entertainment properties, CARS 2.

And the SG&A number, which we've talked a bit about as well, if you gave this number I missed it.

What is the dollar difference on the compensation expense this year in the quarter versus last so we can better understand the current run rate?

Yes, we don't give you quarterly amounts.

I've given you the total amounts that we accrued for 2010; incentive was $106 million and equity comp was $67 million.

And as I indicated that those are generally -- most of it accrued in the third and fourth quarter of each year.

And in a normal year, and last year we outperformed, you would expect some compensation to be between $70 million to $80 million and equity compensation to be $50 million to $55 million.

So I think I've given you enough numbers for you to estimate where you think the impact would be in the third and fourth quarter.

Okay.

And then lastly on the MGA stuff, I'm curious.

I know you guys are appealing the ruling, but if the ruling does stand as it is today and you have to pay I guess $300 million or $400 million in cash, where would that -- is there any place where that would come from outside of cash flows?

Would you take on more debt or what might there be a year?

I look at your free cash flow post dividend, I mean that's an entire year's cash flow where we don't have buybacks or we aren't able to deploy cash in the shareholder friendly way that you currently are.

Well, I wouldn't want to speculate on anything, Michael, that has anything to do with that.

Our belief is that the judgment in that first case is not supported by the evidence or the law.

So the reasonable course of action here is to challenge the damages and the fees through the appeal and we'll let that play out.

And then maybe you could help us understand what the time line is for something like that and whether there might be an increased expense in the future or what -- how this will play out from here?

Well, as we've said, the expense associated with an appeal is quite a bit lower than the expense associated with preparing for trial or an actual trial.

I suspect that the appeal, I'm guessing, might be heard sometime next year.

And when the appellate court renders its decision I don't think any of us knows.

Okay, thank you very much.

Greg Badishkanian, Citigroup.

Just two questions here.

First is kind of on POS and I guess in the press release it talks about retail inventory in line and consistent with the POS momentum.

Two parts to that; just the first is, is it consistent in Europe and the US?

And then if you look at the broader toy industry, is that pretty consistent or do you see a little bit of inventory being built up?

Hi, Greg, it's Bryan here.

Regarding POS, we've had great brand strength in the quarter and all year on our core brands, as Bob talked about.

So the POS is pretty consistent across countries to support the inventory and obviously the shipments.

So again, we market global brands and we execute them locally and I think the POS is in good shape.

Regarding the industry, we're seeing the industry grow a little faster in Europe this year, I think it's up about 5%, it's down just a little bit here in the US so far.

And we're seeing continued growth in the industry and Mattel and places like Latin America and Asia as well.

And finally, maybe Bob, just give us your thoughts on as we look out to the fourth quarter, if you look at last year the toy category started out strong and then softened a little bit.

What are kind of the puts and takes that we should think about as we're looking out to the fourth quarter and kind of looking at your comparisons and then looking at your momentum going into the quarter?

Well, I think as Bryan mentioned, in general but not across all categories back-to-school was pretty strong for retailers, so they are anticipating a reasonably good holiday season.

That said, they are managing their inventories overall pretty tightly this year, especially vis-a-vis last year when the inventories probably went up a little ahead of what they expected broadly speaking for the toy industry and so they had to work that off at the beginning of this year.

But I think it's going to be a strong competitive holiday among the retailers.

Several of them want to do well and we know, based on our product line, that they've got strong programs to support the growth they anticipate.

Okay, thank you.

Drew Crum, Stifel Nicolaus.

Good morning, everyone.

So on the legal, guys, the antitrust claim that's pending, what is contemplated in the $75 million in savings you're anticipating for 2012?

Well, as we said before, Drew, in the absence of a trial or preparation for a trial we expect those savings to flow through.

So we don't know exactly what the timing will be.

As you know, our motion to dismiss the antitrust case was heard earlier this week, it was -- I think it was Tuesday I believe.

And we continue to believe that the claims in that antitrust suit duplicate the claims that have already been raised by MGA in prior litigation.

They sued us in 2005 alleging unfair competition, that was dismissed.

In 2010 they sued us with a RICO claim which was also dismissed.

And because of the duplicative nature of this current case we're hopeful that it will also be dismissed.

And just to add to that, we remain committed to the $75 million reduction in legal spending related to our OE 2.0 initiative by the end of 2012.

In the third quarter of 2011 our legal spending related to litigation decreased by $18 million.

In Q4 of 2010 we incurred incremental legal fees of about $15 million because we were getting ready to prepare for trial -- for the first trial.

With respect to the first trial, we expect to continue to see savings as we proceed with the appeal compared to last year when we were prepping for trial.

With respect to the second trial, we're waiting for the federal judge to issue the final decision on dismissing the antitrust motion.

As a result we'll update our savings and legal fees and timing at a later date.

And then moving on to Fisher-Price, the Friends component was down 16% in the quarter.

Absent Sesame Street or the absence of the license, can you talk about what's working, what's not working within that piece of the business?

Sure, it's Bryan here.

We're pleased with where Fisher-Price is from a short-term standpoint.

As we told you I think in a prior call, we had two priorities this year for Fisher-Price in the market.

One was to get our new brand positioning really sharpened up to be more consistent with Gen Y moms and to communicate with them digitally.

And as Bob mentioned, the new advertising has just launched in the last week or so.

Secondly, we really wanted to focus hard on retail execution.

And if you're getting out in the stores I think you'll see that Fisher-Price is well represented in the promotional plans that we've been working with as our retail partners look to be very strong.

So we've done that.

And then lastly, we're also working on some breakthrough products.

So how this all relates to Friends is we're doing quite well on things like Thomas, for example, which is just really completing its first 12 months of launch globally, that's going quite well.

And we're continuing to work very hard on things like Dora the Explorer, for example, with Dora's new kitchen, it's going to be a big item this year as well.

So we're feeling very good about it.

Okay, and two last ones from me.

Any update, Bryan, on a theatrical release for Monster High?

And for Kevin, what was the FX benefit on EPS for the quarter?

Well, regarding Monster High and the theatrical release, the earliest that we can see something happening would be probably in 2013.

As you know, we're working with Universal on that.

But I'd say that's the earliest you would see something.

But remember, Monster High is a brand that's been launched very effectively digitally.

We've hardly run any advertising at all on it.

It's all Web pages and social media, telling a story every way we can on package, etc., the line is great.

So it's truly a brand and if we get it moving we'll be thrilled about it, but the brand is doing quite well even without a theatrical release.

And on your FX question, it -- FX had a 2 percentage point favorable impact on gross sales, had a negative $0.06 per share on EPS for the third quarter.

For the first nine months they had a 3% favorable impact to gross sales and a negative $0.03 unfavorable impact on EPS year to date.

Okay, great.

Thanks, guys.

Operator, we have time for one more question.

James Hardiman, Longbow Research.

Good morning, thanks for taking my call.

A couple quickies here.

First on Monster High, where do you think you stand from an inventory perspective?

You had to play a little bit of catch-up late last year and early this year and then with the international rollout.

Are we now at a steady state where ultimately the growth of that brand is going to be driven entirely by what happens at retail or is there still a lot of shelf space to be gained here in the near term?

Yes, Jim, it's Bryan.

We're feeling very good about Monster High, we did have to play some catch-up earlier in the year from an inventory standpoint.

But the POS is quite strong globally, the brand is working well globally, again, in large part due to the digital nature of the communication that we're doing.

In terms of gaining space, booking spaces this brand continues to succeed.

So we're feeling very positive about it.

Great.

And then in terms of CARS 2, I don't think you really touched on it.

You touched on -- in the last quarter you talked about how it was trending ahead of Toy Story 3 from last year.

I don't think you mentioned the year-over-year comparison on this call, although you did mention that royalties are up.

Is it safe to say that CARS 2 is still outperforming Toy Story 3?

And if so what do you take from that?

Is it an issue of just better fundamental demand for that brand, is it function of retail support, is it something internationally?

How should I think about that?

So, CARS 2 is continuing to do quite well, as Bob mentioned, and it's really driven by the Universal boys vehicle play pattern that works well in every country and across multiple segments of the business.

As we said, our die cast and play set business is doing very, very well.

It's been a part of the core play pattern ever since the original movie was launched.

So we're feeling very positive about that and we think we'll expect to see continued success with this.

Toy Story continues to do well for us as well in terms of its year after the movie.

So both properties are doing well, but CARS 2 will continue to grow.

Great, thanks, guys.

Thank you.

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Thank you for participating in today's call.

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

You may all disconnect and have a wonderful day.