Mattel Inc (MAT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Mattel second-quarter 2012 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 follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations.

Please begin.

Thanks, operator.

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

We've provided you with a slide presentation to help guide our discussion today.

This 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, corporate.

Mattel.com.

In a few minutes, Bryan Stockton, Mattel's CEO, 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 related to the future performance of our overall business, brands and product lines.

These statements are based on currently available information and 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 2011 annual report on Form 10-K and our 2012 quarterly reports on Form 10-Q and in other filings we make with the SEC from time to time, as well as in other published statements.

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

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

Thank you, Drew, and good day, everyone.

Looking at our second-quarter results, we executed well and delivered solid performance despite the backdrop of a very challenging global economic climate that is driving volatility and input costs and currencies, as well as creating a very cautious global retail environment.

Additionally, we faced a difficult sales comparison with the release of the CARS 2 movie last year.

We met the challenge of delivering a comparable level of sales by focusing on our priorities, including growing our core brands, Evergreen Entertainment properties, our most recent franchise, Monster High, and key international markets.

For the first half of 2012, we experienced solid progress in core brands and markets.

Overall shipments were up for the quarter, resulting in improved alignment of shipments, consumer takeaway and retail inventories for the first half.

And I believe we are well-positioned for the second half and the all-important holiday season.

While we continue to absorb the impact of the strengthening US dollar, our international business, including countries such as Brazil, Mexico, the UK, China and India, is growing when you exclude the impact of currency.

I am optimistic about the growth prospects for the global toy industry.

For perspective, about one third of the global toy category is in the US.

While NPD data shows the US total toy category down mid-single digits through May 2012, that trend is not consistent across all categories.

Most of the categories in which we play are outperforming the total category growth rate through May 2012.

Additionally, Mattel continues to gain share in important categories such as infant/preschool, dolls and vehicles during the same time period.

NPD data also indicates that Europe, despite its recent economic challenges, remains relatively stable through May 2012, reinforcing our belief that the toy industry holds up well in tough economic times.

Using NPD data that represents about half of the total toy industry and our global end-market experience, we continue to see overall global toy industry growth due to positive demographic trends and toy spending in emerging and developing markets.

As I have said on several occasions, one of Mattel's greatest assets and points of difference is our diverse portfolio of brands, countries and customers.

And for the quarter, we experienced strength across all areas.

While still early in the year, we experienced good momentum across many of our core brands -- Barbie, Hot Wheels and American Girl -- as well as strong growth in our Monster High franchise.

And we saw positive momentum across a number of our licensed entertainment brands -- Disney Princess, with the new movie Brave; Batman -- The Dark Knight Rises; Disney's new Jake and the Never Land Pirates; and WWE.

Let's start with the Barbie brand, which experienced a strong second quarter.

According to NPD through May 2012, Barbie continues to gain doll super-category share both in the US and the Euro Five.

We continue to see strength in Barbie's core fashion lines and this year's spring entertainment, Mermaid Tale 2, which was also a growth driver in the quarter.

In addition to spring entertainment, we debuted an extensive brand campaign that has been activated across toys, apparel and accessories in more than 70 countries.

The campaign invites girls of all ages to see what happens when they play with Barbie.

This May, we launched our first older girl content with Barbie's Life in the Dream House, with 15 episodes that give girls a glimpse into Barbie's life with her sisters, pets, friends, and, of course, her boyfriend, Ken.

The campaign launched in 21 languages on Barbie.com and on YouTube, and since early May has generated 5 million views across the website and YouTube globally.

Feedback with older girls has been incredibly positive.

Staying within the doll category, Monster High continues to perform very well as the number two selling fashion doll through May 2012, according to NPD.

On Friday, April 13, Monster High's computer-animated film, Escape from Skull Shores, premiered on Nickelodeon.

Rolling out throughout the year, the film will be shown around the world on a variety of key broadcasters.

And finally, Disney Princess did very well this quarter and we are encouraged with the early performance of the new movie, Brave.

The American Girl brand continues to perform well due to the momentum of the 2012 girl of the year, McKenna, and we've been very pleased with our performance at retail, including the recent store opening in St.

Louis.

Our Hot Wheels brand also made significant progress in the second quarter, not only at retail, but also in the cultural marketplace.

As many of you know, two drivers for Team Hot Wheels recently set a Guinness World Records title at the X Games Los Angeles for successfully racing through a 60-foot-tall double vertical loop, which was a recreation of the plastic orange track emulating our spring TV driver, Double Dare Snare.

The life-size orange track set defied gravity with a first-of-its-kind two-driver challenge.

The publicity from this event has generated more than 2.2 billion global impressions and counting.

Staying with vehicles, the CARS line continues to perform very well as an Evergreen property.

As we've always said, our entertainment strategy continues to be partner with the best and be the best partner, which includes not only licensing and exciting and current movie releases and properties like Batman -- The Dark Knight Rises, Disney Pixar's Brave and Disney's Jake and the Never Land Pirates, but also Evergreen properties like Disney Princess, WWE, Dora the Explorer, Mickey Mouse Clubhouse and more.

For Fisher-Price, overall shipping was positive, including Fisher-Price Friends.

We continue to see encouraging signs of progress on the fundamentals of repositioning the Fisher Price core brands.

As I've said before, 2012 remains a transition year as we continue to strengthen Fisher-Price on a global basis and focus on communication building blocks, like television advertising and an expanded digital presence, while preparing to launch new packaging and more innovative products for 2013.

In fact, during the quarter, we relaunched our website in the US, designed precisely with today's moms in mind.

International versions of the new Fisher-Price.com design will be rolling out through the summer, reaching 38 different markets in 33 different languages.

Fisher-Price Friends also launched a new line of products to support the hit back Disney property, Jake and the Never Land Pirates.

Early rates of POS and shipments are encouraging.

As it relates to HIT Entertainment, we are very pleased with the progress we've made welcoming this very talented team to the larger Mattel organization.

Thomas and Friends is performing well at retail, and we are making good progress on preparing the launch of the wood line for 2013.

We are also very encouraged with what we see from Mike the Knight, both in the UK and the US, and as a result, we are investing in a second season of Mike the Knight content and are planning a full consumer products and toy line rollout over the next 12 months.

Looking beyond revenue, Mattel achieved solid overall second-quarter results because we continued to complement our focus on brand building with a disciplined approach and an emphasis on cost and gross margins.

We continue to work very hard to manage our overall basket of costs, including commodities, currency and labor, as well as optimize our sales mix of countries and brands to deliver gross margins consistent with our long-term goal of about 50%.

And we remain on track to deliver our Operational Excellence 2.0 savings target of $175 million.

So we finished the first half with positive momentum.

That said, we have much work ahead of us to succeed in 2012.

Looking ahead, we believe we have the opportunity to continue to build momentum as we roll out our innovative products and brand-building promotional programs around the world.

First, we are well-positioned in the dolls category.

For fall, the Barbie brand is releasing its first musical in seven years with Princess and The Popstar.

From an innovation standpoint, the brand is blending the best of digital play with fashion play with the launch of Barbie Photo Fashion Doll, where girls can take more than 100 digital pictures with Barbie and display those images as a T-shirt design on the doll.

For Monster High, we are introducing more content, dolls, new characters and segments throughout the line.

Monster High is launching a new extension to the Create A Monster line, which is a lab that allows girls to customize all parts of the doll, including the face, through the application of body art.

And Monster High is releasing its first DVD, Ghouls Rule!, in the fall through a newly-created universal DVD alliance.

In American Girl news, a McKenna-themed video, McKenna Shoots for the Stars, was released on DVD on July 3 and aired on NBC's Family Movie Night last Saturday, July 14.

We are also opening two stores in the second half, Houston in September and Miami in October.

And on September 4, American Girl is launching a new historical character, Caroline Abbott, whose story takes place in 1812.

In the third quarter, Mattel will support the platinum DVD release of Cinderella with a broad line of dolls, accessories and fashions to maximize this historic event.

And in time for the holiday, the DVD of the Disney Pixar film Brave is slated to be released.

In the wheels aisle, we will be introducing a brand-new Hot Wheels segment called Ballistics, which are balls that transform into cars.

These are completely unique to the market.

We will continue to focus on building and aligning the Fisher-Price brand behind the Joy of Learning campaign, both with television advertising and the new digital support programs.

As we [report] into 2013, we are also working on other building blocks, including enhanced product innovation, new packaging and expanded retailer support.

Our newest top-five brand, Thomas and Friends, will launch its fall entertainment tentpole, Blue Mountain Mystery, set to be released in September with strong support at retail.

And when it comes to the digital space, I think about the role of digital in three ways.

First, digital serves as an excellent delivery system for brand-building with consumers, whether through websites, apps or engagement.

Second, and perhaps in its most powerful form, it serves to amplify existing play patterns.

Our new Hot Wheels Apptivity product, which launched exclusively in Apple stores at the end of June, is a great example, as it allows boys to play out the classic Hot Wheels play pattern right on the iPad, making play more portable and dynamic.

We'll have an entire portfolio of Mattel Apptivity products supporting Mattel brands and Fisher-Price this fall.

Third, digital is a source of intellectual property.

We continue to see success with the analog execution of Angry Birds and are adding to our line of digital to physical this year.

While we are happy with where we are positioned with our customers, looking ahead, we will continue to work with them to manage shipments, consumer takeaway and retail inventories.

Toys remain an important holiday driver for retailers across a number of channels and store types, and we are confident that we have the momentum, the products and the marketing programs in place with our retailers for the all-important holiday season.

Overall, we delivered a good quarter and a solid first half, and we are focused to execute well as we transition from the preseason to the season.

From a headwinds perspective, we don't expect the second half to look much different from the first.

We anticipate a challenged global economy that could continue to drive fluctuations in both input costs and currencies and a continued cautious global retail environment.

Nonetheless, we have the power brands, like Barbie, Monster High, Hot Wheels, American Girl, Thomas and Friends and Fisher-Price that kids and moms want.

We have a slate of Evergreen Entertainment properties, like Batman, Disney Princess, CARS, WWE and newcomer Jake and the Never Land Pirates that balance out the portfolio.

And we have a strong track record of successfully executing in the all-important holiday season.

With that, I would like to turn it over to Mattel's CFO, Kevin Farr.

Thank you, Bryan, and good morning, everyone.

Our second-quarter performance continued to demonstrate the strength of our portfolio of brands, countries and customers and our discipline to deliver solid, profitable results to our shareholders.

In the second quarter, Mattel delivered a 20% increase in operating profit and a 19% increase in net income.

These strong results were anchored by gross margin gains that offset a tough entertainment comparison, considerable currency headwinds, turbulent economic news and a cautious retail environment.

Core brands performed well in the quarter, with positive sales growth in Barbie, Hot Wheels and American Girl.

Monster High was also a standout in the quarter, and we are encouraged by the initial sales of Batman and Brave.

Our international portfolios demonstrate continued strength despite a tough global economy and foreign exchange rates that worked against us.

Brazil, Mexico, Eastern Europe, China, India and the UK all had strong growth, excluding the impact from foreign exchange.

That said, we know that our great portfolio of brands and countries is only as good as our execution, and we continue to focus on our need to deliver against key business drivers.

We have two key priorities in 2012, the successful transition to our new North American division structure and the integration of HIT Entertainment.

Let me give you an update on each of these.

For the quarter, the North American division focused on new retail executions and deepened its relationships with its customers.

We saw tangible results of this improved alignment as we grew sales as well as increased NPD share across many categories.

With HIT Entertainment, we continued its integration into Mattel.

As you know, we acquired HIT with the goal of growing its brand portfolios, and we have made good progress in adding its organization in core competencies and licensing and content development to Mattel.

We continue to leverage Mattel's global infrastructure to grow the HIT brands across the world, and this is very evident as we prepare for the launch of Thomas entertainment this fall with Blue Mountain Mystery.

For the first time, this will be a retail tentpole event, with coordinated marketing programs across consumer products, content and toys.

This launch strategy emulates our successful go-to-market approach that has worked well for Barbie fall tentpole events.

And we continue to prepare up for the launch of the Thomas wood line in 2013.

In the second quarter, we began (inaudible) the line through our retailers and it was well-received.

In addition to these key priorities, we continue to execute our Operational Excellence 2.0 cost-savings initiatives, delivering an incremental gross savings of $23 million for the quarter.

As we announced earlier this year, we have increased our goal from $150 million to $175 million for 2012, and we will use some of the program savings to reinvest on strategic growth initiatives.

Let me give you a quick update on some of these investments.

One of HIT Entertainment's newest brands, Mike the Knight, continues to show promise, recording strong ratings both here in the US on Nickelodeon, as well as in Western Europe on stations like CBeebies in the UK and super RTL in Germany.

Accordingly, we are green-lighting a second season to begin airing later next year.

And with this ratings and distribution success, consumer products will be hitting the shelves, primarily in Western Europe, later this year.

Fisher-Price will be the global toy manufacturer for Mike the Knight, with the first item scheduled to launch in the US and Canada in fall 2013.

We are also making investments to grow core brands faster or yield additional cost savings.

For example, given the consistently strong results of the American Girl brand, we continue to invest in the proven online and retail distribution business model.

Our newest American Girl store in St.

Louis opened in April, and is exceeding expectations, and will be followed up with two new store openings in Houston and Miami this fall.

On the information technology front, we are investing in upgrading American Girl's eCommerce infrastructure to provide further growth and potentially leverage it to support our other core brands.

This technology should allow us to better align with how consumers are buying products today, while improving Mattel's overall global capabilities to market digitally.

We are also investing in new product lifecycle management systems to improve our design, development and manufacturing processes, while providing greater cost transparency.

When fully implemented, this system should help us to continue deliver against our gross margin target by improving design and toy value and potentially help to offset future input cost increases.

One final example we mentioned on our call last quarter, our investment in our new subsidiary in Russia has already begun to contribute to our international growth.

The incremental SG&A [spend increased] investments I just described is around 70 basis points year to date and should yield significant payback down the road.

The additional savings from our OE 2.0 savings will continue to fund these investments, as well as other investments, such as the launch of new franchises.

As we have shown with Monster High, we can bring new franchises to market for a modest investment.

We are currently investing in a new franchise that will be launched in 2013 that we will tell you more about later this year, and we continue to evaluate other ideas for future franchise launches.

So now let's go into detail around some of our results for the second quarter.

Starting on page four of the slide deck, you can see that our worldwide gross sales are roughly flat for the quarter, as growth in our North American region was partially offset by our international region.

Based on the latest NPD data, we gained category share in both the US and the Euro Five.

And retailers continue to tightly manage their inventories due to concerns about consumer spending and the uncertain global economy.

We work closely with our retail partners to ensure that shipping, consumer takeaway and retail inventories were better aligned across our portfolio of brands.

As we enter the second half of 2012, we are pleased with the current state of both our inventories and those of our retail partners.

Turning to page five of the slide presentation, you can see the sales by brand.

Worldwide sales for Mattel Girls and Boy brands were down 1% for the quarter, impacted by currency exchange and a tough entertainment comparison.

There was strong growth in our core properties, with Barbie sales up 5% and Hot Wheels up 11%.

Monster High contributed to drive growth in our Girls business, while Disney Princesses, Batman, CARS and WWE remained strong Evergreen properties.

Worldwide Fisher-Price sales were up 2% for the quarter, aided by the addition of HIT and good performances in Disney properties like Jake and the Never Land Pirates, partially offset by declines in other brands.

American Girl continued to deliver strong results, with sales up 3% for the quarter.

Our girl of the year, McKenna, is performing extremely well, as is the My American Girl line.

And we continue to see good momentum in our retail operations, especially with our new store openings.

On page six, we highlight the performance of our North American region, which includes American Girl and our North American division, which consists of operations in the US and Canada.

Overall sales for the region were up 1% despite a tough entertainment comparison.

Our international business, seen on page seven, continues to show strength, remaining relatively flat despite currency impacts.

We are current with our performance in Europe, where revenues were down 2%, including a 10 percentage point unfavorable impact from currency.

In Latin America, revenues were down 1%, including a 13 point unfavorable impact from currency, with strength across the entire region.

In Asia Pacific, revenues were up 1%, including a 4% unfavorable impact from currency, with growth in India and China in local currency.

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

Gross margins for the quarter were 51.3%, 340 basis points higher than last year.

To date, we've benefited from favorable product mix, including lower sales of royalty-related entertainment properties, our price increases, and OE 2.0 cost savings, partially offset by higher input costs.

As expected, the HIT acquisition also had a positive impact in margins this quarter.

As seen on page nine of the slide presentation, for the quarter, selling, general and administrative expenses increased approximately $20 million to $351 million.

As a percentage of net sales, SG&A expense was 30.3%, up 180 basis points compared to the prior-year rate of 28.5%.

Legal savings, the positive impact of currency and OE 2.0 savings partially offset the impact of HIT, higher employee-related expenses and the strategic investments that we discussed earlier.

Excluding the HIT acquisition and integration costs and HIT's ongoing SG&A, Mattel's SG&A is down slightly year-to-date in absolute dollars.

Page 10 of the presentation summarizes the performance of our Global Cost Leadership initiative and continuing efforts in our ongoing Operational Excellence 2.0 program.

As I mentioned earlier, we delivered incremental Operational Excellence 2.0 growth savings of $23 million for the quarter.

We are on track to deliver the $175 million in cumulative savings by the end of 2012.

Turning to page 11, operating income in the second quarter was $131.4 million or 11.3% of net sales, up 190 basis as compared with last year's second quarter, despite flat sales.

The increase in operating income was driven by strong gross margins, partially offset by higher SG&A.

Turning to page 12, earnings per share for the quarter were $0.28, driven by improved operating income that was partially offset by higher interest expense.

As we did last quarter, we wanted to give some additional information that will help you to continue to understand the impact of HIT on our business in 2012.

We continue to expect the acquisition should not have a material impact on our business in 2012, but should be accretive to our business going forward.

We expect operating profit for the business this year to be offset by acquisition and integration costs, as well as intangible amortization and interest expense.

Page 13 outlines both the estimated integration and amortization costs of HIT.

For the quarter, acquisition and integration expenses were $1 million, and we expect these expenses to total between $25 million and $30 million for the year.

These expenses include acquisition fees, consulting fees, severance and IT infrastructure costs.

In addition, we also incurred about $1 million in expenses related to amortization of intangibles.

For the year, we expect these expenses to be about $5 million to $6 million.

As you can see on page 14, for the first six months of the year, cash flow used for operations was $61 million compared to $227 million last year, driven primarily by improvements in accounts receivable and inventory.

Year to date capital, expenditures were $107 million, up $5 million from last year.

For the year, we continue to expect to spend about $215 million to $225 million in capital as we make investments primarily to increase capacity at our own manufacturing facilities, expand our retail operations at American Girl and to fund the upfront costs of acquiring software, hardware and system design work, primarily for our strategic IT projects.

Year to date, cash flow used for financing activities and others decreased mainly due to the prior-year payments on long-term debt borrowings.

So to recap cash flow for the first half of the year, we increased capital deployment through the acquisition of HIT Entertainment and our higher quarterly dividend payments, which were partially offset by the improvement in operating cash flow and fewer share repurchases.

As a result, our cash on hand at the end of the first six months was $372 million, down $46 million from the prior year.

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

Today, we announced our third-quarter dividend of $0.31 per share, reflecting the annualized dividend of $1.24, which represents a 35% increase to our 2011 dividend of $0.92.

We remain committed to our capital deployment strategy to maintain $800 million to $1 billion in year-end cash, to maintain a year-end debt to total capital ratio of about 35%, and to return excess funds to shareholders through dividends and share repurchases.

In 2012, we expect to end the year with cash and debt levels consistent with our capital framework, and there will be three key drivers for cash deployment in 2012 -- the acquisition of HIT Entertainment for $680 million; an increased dividend payout to an annualized dividend of $1.24 per share, which will return approximately $430 million back to shareholders; and capital expenditures of about $215 million to $225 million, reflecting increased investments in Company growth initiatives.

The balance of excess cash will be deployed over time opportunistically for share repurchases and targeted acquisitions.

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 momentum in most of the same key areas that drove our strong financial performance in 2011.

And we remain committed to executing our growth plans for key brands like Fisher-Price and key retailers around the globe.

We believe that our fundamentals are strong and the investments made this quarter will allow us to continue to create value for our shareholders.

That concludes my review of the financial results.

Now we would like to open up the call to questions.

Operator.

(Operator Instructions) Gerrick Johnson, BMO Capital Markets.

Good morning.

I was wondering if you guys could talk about currency and how it impacted your income statement; particularly, it looks like it helps gross margin.

And if there is any benefit from hedging activities and where that might have fallen.

Thank you.

Okay, Gerrick, with regard to overall -- with regard to ForEx and our results, there was a 5% unfavorable impact to our worldwide growth sales, and there was a 2% unfavorable impact to EPS.

So that was the overall impact to gross -- to our operating results.

With regard to ForEx and hedging, we do -- given the significant manufacturing and marketing operations outside the US, we hedge about 50% of our transaction exposure as we look out over the next 12 to 18 months.

We use this strategy for our transaction exposure designed to protect the downside and take advantage of opportunities in the market if possible.

I won't comment on the impact of foreign exchange specifically on gross margins, but it comprises a good rule of thumb for estimating the impact of ForEx to sales and EPS for the second half of the year.

All else being equal, a good rule of thumb is every 1% change in the US dollar index should impact annual EPS by about 1% to 2% and impacts revenues by about a 0.5 percentage point.

With respect to -- if you look at it with respect to ForEx for the first half, basically for the quarter and the first half, foreign exchange had a minimal impact on gross margins.

Okay.

When you guys do report a benefit or let's say a loss from hedging, what line does that fall in?

To the extent that -- well, it falls into gross margin, if it [replies] to hedging for inventory.

Okay, great.

That makes sense.

And one more for me.

Brave toys, where are you filing those?

Are those in Entertainment or in the Other Girls segment?

It is in Disney Princesses, so it is Other Girls.

Okay, great.

Thank you very much.

Tim Conder, Wells Fargo.

Just a couple pieces here.

The manufacturing, you mentioned that is going to be one of your ongoing focuses here of investments.

Again, you've mentioned that before.

Can you kind of give us a little bit of a framework where you stand on the portion that you will own of your own manufacturing at the end of '12 and '13?

And then in relation to that and HIT, how is the integration of the diecast and plastic business going -- on plan, ahead of plan?

If you could -- just a little bit of color there.

Good morning, Tim.

It is Bryan here.

Let me start with our overall manufacturing strategy has been pretty consistent over the past decade, and we like where we are.

We are about 50-50 in terms of what we produce internally versus what we use with outside vendors.

We think that gives us a couple of distinct advantages.

Number one, we really have our fingers on the pulse of what is happening in the toy industry with issues like labor costs and testing and things of that nature.

And because we have such dynamic and powerful brands like Barbie, it also gives us the kind of scale to be able to support a dedicated operation to that.

So we like that strategy.

We don't see that really changing drastically in the future.

So I think you can look forward to that.

As it relates to HIT, we are pleased on a number of fronts with where we are with that.

As I've told you before, it is a tremendously talented organization.

One of the things we've been working on is trying to see how we can work together on things like content production, content creation, content distribution.

We are happy with that.

Related to your question about bringing their products in, we will be bringing the diecast into our plants.

As you know, we have a very strong presence in diecast operations.

So we are always looking at scale and opportunities to bring things into our plants where it makes sense, but we will probably stay about 50-50 long-term.

Yes, and I think with regard to that, we are on track to bring the diecast manufacturing in through to our plants effective 2013.

And it really shows what we've been doing over the last couple years of really sweating our existing asset base with regard to our plans.

We've been working on productivity improvements through low-level automation.

We've been using lean to make us more efficient.

That has freed up floor space, and as we've freed up that floor space, we are making investments in plant expansion.

Not new plants, but we are really getting more out of the plants that we have through investing in expansion, in things like fashion doll capacity and diecast capacity.

Okay, thanks, gentlemen.

So the diecast will be in-house at the beginning of '13, just to clarify there.

And then the plastic, is that already in-house or is that also on the same timetable?

That is where the line is a little more complicated.

We will be looking at the best use of our assets regarding plastic.

Okay.

And then Bryan, in relation to all the manufacturing and so forth there, a gentleman talked about you've got the price increase.

We're hearing from some other industries that towards the back half of the year, and I would think more for the toy industry it would be fourth quarter and beyond, that assuming commodities stay where they are and transportation costs, that diesel and everything has come down, could you potentially start to see some -- a little bit of a tailwind from that say fourth quarter and beyond, given everything else is pretty well already locked in?

Well, if you can predict what the cost of commodities are going to be in the second half, come see us later today.

But it is going to be a very dynamic environment, we think, in terms of commodities.

Kevin, you want to comment?

Yes, just I'd like to talk about where we are at at the half.

In the first half, gross margin rate at 51.2% was up 250 basis points from the 48.7% in the first half of 2011.

And as I said, the key drivers were favorable product mix, including lower royalties related to entertainment, our price increases and OE 2.0 savings, partially offset by higher product costs.

In the first half of the year, we are really benefiting from lower royalties in CARS shipping, which was significantly lower in the first half of 2012, as we expected.

The favorable impact from lower royalties is expected to be less pronounced in the second half of the year due to higher sales of Batman, Brave and Cinderella, as well as the fact that our royalty-related entertainment business is a smaller portion of our total business in the second half of the year.

HIT also had a positive impact in gross margins for the first half, but given the modest seasonality of their business, we expect less positive benefits in the balance of the year there, as well as we continue to operate in an inflationary environment, as the economy slowly recovers and the input costs continue to rise.

And although commodity costs have come down recently, our input costs increased in 2012, including higher overall raw material costs, Chinese and Asian labor rates, Chinese currency, tooling and freight and distribution costs.

We are currently entering our peak production period, which requires us to continue to procure raw materials and other input costs.

And as you know, the majority of our input costs can't be hedged.

So at this point, it is impossible to predict our future input costs due to high volatility in commodity costs and foreign exchange rates.

So our priority continues to be to sustain the progress we've made delivering gross margins of at least 50%, which we've achieved for the last three years.

Thanks, gentlemen.

Margaret Whitfield, Sterne, Agee Capital.

Good morning.

I wondered if you could comment on what you are seeing in southern Europe -- you mentioned the UK was strong -- and what the outlook might be.

For Kevin, that second-quarter tax rate was lower than the first.

What should we expect for the year?

And Bryan, I wondered if you could comment on your strategies for the wood line since you've shown it to retailers and gotten some of their feedback.

Thank you.

Good morning, Margaret.

Let me start first with Europe.

Where we always start when we try to assess what is going on in any given geographies, we start with the category and POS.

As I mentioned in my comments, we are very pleased to see the toy category essentially flat in Europe.

And again, we think that is another positive sign that this category tends to be fairly resilient to economic crises, and Europe has certainly had a lot of unease in terms of economics lately.

So things vary by customer and by country, but generally, I would say retailers there are cautious, as they are here.

They are supporting brands that have momentum, which we have.

And I think they, too, are looking forward to a positive holiday season.

Let me comment on wood, then I will turn it over to Kevin to wrap up your questions.

Our plans for wood are -- we are going to do what we always do best, which is make sure we have the best product and we have the best packaging.

We translate that into strong retail execution across the globe and support it with great what we like to call statements in storage, whether that is in the form of DVDs or advertising or some other way of engaging the brand to consumers.

So I would say we are just going to do what we do best, and we will make it a success.

Kevin.

Yes, finally, Margaret, your question on the tax rate.

The tax rate in the second quarter of both 2011 and 2012 benefited from some discrete period items, which is a timing issue from the perspective of the full-year tax rate for both years.

For 2012, we believe the worldwide effective tax rate will be around 22% to 23%.

Robert Carroll, UBS.

Congrats, and just a quick question on the commentary for the POS, the retail inventories and the shipments.

I know other than when you guys said things have -- the alignment has improved in each one, does that imply any sort of bounceback during Q2 relative to what is seen during Q1?

Hi, Rob.

Good morning.

I think there is a couple things going on.

We look at our business really kind of first half, second half, and there are a lot of dynamics in the first half.

We are always dealing with the timing of Easter and how good or bad was the carryover from Christmas.

So the first quarter can be a little bit choppy, and I think we experienced it and I'm sure others in other industries may have as well.

What we see is we see a lot of activity, I would say at retail engagement, particularly in the post-Easter period.

You've seen our POS essentially almost across-the-board start to pick up positive momentum, which we think is good.

Retailers seem to be responding to that as well as to making sure we are well-positioned for events like the movie Brave and Batman -- The Dark Knight Rises.

So there is a lot of good things going on out there.

So we are feeling like we are in better balance exiting the first half, and we are carrying some momentum into the second half.

Okay, I guess just to clarify that, if we were -- saw a workdown in Q1 and then we're in better balance, like -- so there may have been -- obviously, we are getting into the more important season of the year.

But it may have been just a little bit of a bounceback to get things back in line.

I would say given the level of caution that we see across the board with most of our retailers, retailers are buying what is selling.

And that is why I say I was pleased to see our POS begin to pick up more positive momentum in the last half of the quarter.

When you have strong POS, that generally helps in the shipping area.

So we felt good about that.

So I would say we are getting in better balance and we are feeling pretty positive right now.

Great.

One other, I guess somewhat follow-up to that.

You guys had cited the North American reorganization as reason for some of the strong recent performances in retail in terms of deepening relationships and share gains.

I guess anything more granular you guys could give in terms of recent wins or how that is helping or how it can continue to help going forward?

This new organization was put in place, as we've always said, to drive decision-making closer to our retail customers and our consumers.

And I think what you are seeing is there is not a silver bullet in here anywhere.

It is just stronger alignment with our customers, stronger execution of great plans with our customers, and I think we are beginning to see the benefit of that through the second quarter.

There is a lot of work ahead of us in the second half.

So this organization is off to a great start.

We have a lot to prove with this organization and our customers in the second half.

But we feel like, as Kevin mentioned, this is one of our big priorities.

It is off to a solid start.

Great.

Thanks, guys.

Felicia Hendrix, Barclays.

Just a quick follow-up to the last question, just on point of sales.

You said that it picked up kind of at the end of the quarter.

But in the quarter was it up?

What I would say is our POS is generally in line with our shipments overall, when you look at the first half.

So we are, I think, actually feeling pretty good about this, especially with the exiting momentum.

We are seeing strong improvements in Fisher-Price, for example, in the last half of the quarter.

So I would say that we are feeling like we are pretty well-aligned and well-positioned for the second half.

Great.

And actually, while we are on Fisher-Price, because that was one of my questions, you did discuss some of the data points.

Just wondering when exactly we should expect to see the benefit of your restructuring.

Is it more next year or do you think it will be sooner?

This is something where we always are very careful about what we say about Fisher-Price, because Fisher-Price is still gaining share of the total toy category in the infant/preschool category in the US and in Europe.

So the brand is still successful.

What we believe we are trying to do is we are trying to help this brand achieve its global potential.

That is why we are working so hard on the building blocks, like the advertising and the digital space and our website, as well as working on other things for next year.

So as you recall, we've already said this is a mom-driven brand which tends to respond a little more slowly than a kid-driven brand.

So I would hope that as we continue to work on these building blocks that we will begin to see some improvements in the near future.

Okay, great.

And then just finally, on Other Girls, it seems like it was mostly Monster High.

But I just wanted to confirm that, because obviously Disney Princesses and Brave was in there.

So two-parters.

One, was it mostly Monster High?

And then the second, how should we think about the back half shipments for Other Girls, especially given how strong it was in this quarter?

I think when you look at Other Girls, the key driver of that was Monster High.

We did see benefits from Disney Princesses, but that was the key driver.

With regard to the balance of the year, we are not going to project what we are going to do there.

But we do see a great trajectory with regard to Monster High continuing.

And with respect to Disney Princess, we do have the Cinderella DVD release in the second half of the year.

And we have momentum in 2012 behind both those brands which is very similar to the momentum that we are building off of coming out of 2011 into 2012.

So good momentum in overall fashion dolls and particularly in things like Monster High and Disney Princesses.

Okay, great.

Thanks a lot.

Linda Bolton Weiser, Caris.

Just kind of thinking about some of the long-term objectives you have, you've done a really great job in the last few years on both OE 1 and OE 2. So I'm kind of wondering what your rough thinking is going forward after 2012 when OE 2 is completed.

Most of the big, high-quality consumer product companies like Colgate or Kimberly-Clark kind of report to analysts on annual productivity, cost-cutting.

Some of them even give how much productivity was in gross margin versus SG&A.

And your cost reductions seem to correlate -- the calculation is about 2% productivity in the last few years annually.

And most of those other companies have a little bit higher, more on the order of 3% annual productivity, even higher for some companies.

Are you going to transition to thinking of annual productivity in that way, or do you plan another multiyear restructuring program that is very discrete?

Can you just give some idea about your long-term cost-reduction goals?

I guess I would say I think we have been very focused in on improving the effectiveness and efficiency of the business over the last couple of years.

We started out in 2009 and 2010 and we delivered cost-savings initiatives.

And to date, with both our Global Cost Leadership program and now we've been executing OE 2.0, we've delivered over $350 million of savings to date.

And we are on track to deliver under OE 2.0 $175 million of savings cumulatively at a run rate coming out of 2012.

So we do have a culture of continuous improvement, trying to be more effective and efficient.

And we do see more opportunities in things like packaging and the supply chain.

So we will continue our focus in on really improving our effectiveness and efficiency, and that should result in continued cost savings as we look out to the future.

Great.

And then can I just ask about HIT?

You had said I think last call -- maybe you said something again this time -- about $0.07 of integration costs maybe roughly for the year.

And I believe there were $0.04 in the first quarter and very little in this quarter, if I remember what you said.

So is that still accurate, that you expect maybe three pennies more for the remainder of the year, and any idea how that would break out between the third and fourth quarter?

And is HIT's seasonality of sales and profit, operating profit, similar to the overall Company?

On the seasonality, HIT is a little less seasonal than we are.

Our seasonality is about one third, two thirds, first half, second half.

But with respect to the integration and deal costs, again, in the slide deck we provided today, we reiterated our expectations and have $25 million to $30 million of integration and restructuring charges.

I'm not going to give the timing of third quarter/fourth quarter, but we would be looking to later in the back half of the year.

Thanks.

And then on Monster High, that has done really great as a new franchise you've developed internally.

Our store checks indicate that there is actually shortage in some of the big retailers of certain SKUs that are just not on the shelf.

Are you experiencing any supply shortages there?

And secondly, in terms of the new franchise for next year, would you be able to say is it going to be a Boys or a Girls property?

Great questions.

Monster High is selling extraordinarily well, and I'm sure there are pockets out there somewhere where there is a little dislocation of inventory due to the high demand that is being created by all the great marketing efforts that are out there.

We are operating the plants -- if we could go 28/8, we would; but we are operating almost 24/7 to make sure we supply all of our fashion dolls, because we do have momentum on Barbie, on Disney Princess and on Monster High as well.

So we are working very hard on that.

Regarding the next property, as I mentioned, we are not really ready to talk about that.

When we see you all in October, we are planning to tell you a little bit more about that.

I can tell you that it will be either a Girls or a Boys property.

Okay, thank you very much.

Eric Handler, MKM Partners.

Thanks for taking my question.

Just trying to dig into your gross margin a little bit more.

If you took out your hedging gains that you got in the quarter, how much of an improvement would you have actually seen your gross margin?

I think I said earlier that when we look at first-half results, both for the quarter and for the first half, foreign exchange had a minimal impact in gross margins.

Okay, so the hedging gains was actually rather insignificant then?

From the perspective of the improvement in the gross margin rate, it had a minimal impact.

Okay, thank you.

Mike Swartz, SunTrust.

Good morning, everyone.

A question around some of the investments and some of the commentary you made earlier in the call.

I think you said that there is about 70 basis points in incremental SG&A spend year-to-date.

How should we look at that for the full year?

Is that a good number to kind of run rate for the year?

Should it be more than that, less than that?

We really don't give guidance.

I think with regard to the first half, that has been at the run rate.

And with regard to really the second half of the year, it is probably a good way to estimate it.

But again, we continue to look at opportunities to invest in strategic growth initiatives that are going to have a good payback.

Okay, great.

Thank you.

Sean McGowan, Needham & Company.

Two questions.

One, can you give us an update just on where things stand regarding the appeal, the Bratz issue?

Good morning, Sean.

Because it is ongoing litigation, I am not going to go into a lot of detail about it, other than to say that, as you know, the appeal has been fully briefed by both sides in the Ninth Circuit.

The next step is an oral argument before the ninth circuit court of appeals.

No date has been set yet for the oral arguments, but we anticipate it should occur towards the end of this year possibly or the first half of 2013.

Okay.

Then we start another meter as to how long it will be until that decision is made?

As I think we've said before, the cost of appeals is significantly lower than (multiple speakers).

I didn't mean the cost meter; I meant the time meter.

Like that just starts another whatever months process until the decision is made after the oral arguments?

As you can imagine, it is a complex process, and we could see the appeal carrying on in through 2013 or even 2014.

Okay, thanks.

And then Kevin or Bryan, if you can give us some indication of what the impact was of revenue from HIT, what would Fisher-Price look like without it.

Is all the revenue from HIT in Fisher-Price?

We are not going to get into splitting hairs on Fisher-Price, but I think Kevin has given you some numbers before on the size of HIT.

Kevin, you might want to repeat those again.

I think with respect to the full year, I think we -- when we bought it, they were doing about $180 million of revenues.

And we think for the full year that the revenues are going to be lower due to two major factors -- the Fisher-Price royalty payment on plastic and diecast products will no longer be recorded as revenue, but a reduction to royalty expense; and 2012 will only include 11 months of operations.

So expect both of these adjustments to be lower by -- result in lower revenues by $30 million to $35 million for the year.

And if you look at those numbers, and I think we've given you before that the first half/second half is a little less seasonal than Mattel, and our first half/second half is one third to thirds.

So I think you could back into a number for the first half based upon that.

And with respect to Fisher-Price, if you do exclude HIT, it is down, and you can see detail on Core and Friends in the information we provided you.

Okay.

And HIT is tracking to your expectations?

So far, so good.

Okay, great.

Thank you very much.

Michael Kelter, Goldman Sachs.

I wanted to ask about the US toy industry trends overall.

As you mentioned, NPD is down mid-single digits through May.

And while you guys are taking share and growing internationally, I wanted to understand your view on what's going on in the domestic toy market.

Some people are concerned about secular shift in play patterns for younger children away from traditional toys and games.

And I was just hoping to get an understanding from your perspectives whether there is credence to that idea or whether -- and do you have any evidence that the slowdown is driven by something else and what that something else might be.

Thank you very much.

Good morning, Michael.

Thanks for the question.

I guess our point of view is we are still positive about the toy industry even in the US, despite sort of the slowish start to it this year.

We look at the categories that we compete in and those categories are outperforming the overall average growth rate for toys.

This is an industry, as you know, that responds to innovation.

And when you look at the growth, for example, in fashion dolls, we believe what is driving a lot of the category growth is all the great activities on things like Barbie and Monster High and Disney Princess.

So there is a lot of branding things that we believe we are doing.

We need to have strong retail execution.

Our customers still believe it is going to be a positive holiday season.

So we have not heard anything nor have we seen anything that would indicate there is some sort of secular decline in the toy industry.

If there was, I think you would see it more consistently across other countries as well.

And one of the things that we try to do is we always talk about is our portfolio of brands and our portfolio of customers and our portfolio of countries, we work very hard that when we have kind of a bit of a rough patch from a category standpoint here in the US that we are working even harder in places like Latin America and Eastern Europe and Asia to drive our revenues.

Is there any risk given the slowdown overall in the industry that retailers might stock less toys or shrink the square footage overall over the near or midterm?

Is that something you are dealing with, or is that taking it a step too far?

I would ask retailers directly that question.

I don't think we are in a position to really comment on what they are thinking.

But as you know, we work very closely with the retailers far in advance and we are planning on having a good, positive holiday season and I think they are as well.

And there is nothing that we are seeing or hearing that would indicate otherwise.

And one other quick question.

The advertising and promotion line is down in dollars about 5% year-to-date.

Is that something you are just realizing the savings of nonworking media, or is there a shift and you will be spending more in the back half than you had in the first half?

Or what else is going on that is driving that line item down?

I think the fact that HIT hasn't been integrated into our operations and they do less advertising, because it is more of a license business and the licensees do advertising.

I think what we've said is we target 11% to 13%, and over the last couple years, we've been at that lower end of the range, and we expect again to be at the lower end of the range.

In the total year, HIT won't have that much of an impact on the total rate, and we will be making the same amount or more impressions this year than we did last year.

So no real change in our level of investment around media.

We are trying to get more for the same amount of money with regard to impressions, and we are looking at new media opportunities and other ways to connect with consumers, particularly on things like Fisher-Price, where we know digital is the place to be because that is where mom's at.

Operator, we have time for one more quick question.

Drew Crum, Stifel Nicolaus.

I think there was a question asked on overhead and I maybe want to ask in a different way.

I think you mentioned that ex-HIT, you are seeing that line down year to date.

Do you see that as sustainable?

Maybe you can talk about some of the factors that would move that line item in the second half or through the balance of 2012.

I think with regard to our OE 2.0 savings, we've been looking at opportunities to save costs, and I think we've been successful over the years.

When you look at it for the balance of the year, though, I think you have to think about the fact that there is going to be a drop-off from legal savings going forward as we begin to comp non-trial time periods.

I think you also need to think about the continued HIT acquisition and integration expenses that we talked about that will be in the back half of the year.

One of the things that you really need to focus in on is the ongoing SG&A associated with the HIT organization.

We acquired HIT for its capabilities and content and licensing, and that infrastructure is in place.

We are over time going to take the back office functions and integrate that to our back office functions, but that is going to occur over time.

And then I think we continue to see with respect to our employee-related expenses, such as merit increases and rising benefits.

And we are going to continue to make investments in growth that we talked about earlier.

So we are going to continue to tightly manage our costs.

As we talked about earlier, we are looking for ongoing opportunities to reduce costs across the supply chain in things like packaging.

But we are also going to be making the appropriate investments in SG&A to grow the Company, consistent with our goal of growing over the long term at mid-single-digit rate.

If I could just sneak just one more in.

There was a question asked earlier about the ad promo line, and you addressed that with respect to HIT Entertainment and the mix there.

There has been a lot of change or I guess ratings declines, viewership trends downward on some of the key kids cable networks.

Is there potentially any benefit there -- make-goods flowing to you guys in the second half -- any opportunities there to see that line item lower as a percentage of revenue?

We are constantly working across all of our countries to monitor our media plans and media execution.

And there is always a portfolio of networks that are overdelivering, underdelivering, et cetera.

So we work on that almost on a daily basis in each of our operating units, both in the US and outside the US.

So that is just something you kind of just do as a matter of course.

Yes, I think our media plans are to get the same impressions.

So we will be out there getting the same impressions this fall and working with our media partners to achieve that.

Very good.

Thanks, guys.

Thank you.

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