Mattel Inc (MAT) 2012 Q3 法說會逐字稿

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

Sir, you may begin.

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

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

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, 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 the call will be open for your questions.

Certain statements made during the call may include forward-looking statements relating to the future performance of our overall business, 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 forward-looking statements.

We describe some of these uncertainties in the Risk Factors section of our 2011 annual report on Form 10-K, our quarterly reports on Form 10-Q, and in other filings we make with the SEC from time to time as well as in other public statements.

Mattel does not update forward-looking statements and it 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.

When I headed last quarter's call I said the second half of the year was all about executing as we transitioned from preseason to the season.

And we are now officially in the season.

The global economy is still challenged.

It is driving volatility in both input costs and currencies, and is contributing to a continuation of the cautious global retail environment.

That said, I am very pleased with our third-quarter results.

The quarterly results reflect our success in building momentum in the marketplace through share gains and solid sales across our portfolio of brands and countries.

Worldwide revenues were up 4% including a 4% unfavorable impact on currency, while operating income grew 23%.

Let me touch briefly on a couple of the key drivers.

We experienced continuing global momentum in most of our core brands and I want to give a special call out to American Girl brands, which grew 16% for the quarter due to strong execution of McKenna, the new Girl of the Year, as well as solid performance at retail and in our online direct-to-consumer business.

Our Monster High brand also performed particularly well in the quarter.

The franchise continues to resonate strongly with our consumers, and as a result, the dolls are now featured on many must-have toy lists.

We also experienced growth across all of our regions, including solid growth in North America.

Although currency fluctuation continues to be a major challenge in 2012, when you exclude the impact of currency our three major regions -- Europe, Latin America, and Asia -- each grew revenues in the quarter.

Our global POS was consistent with our shipments.

In addition, we gained share in both the US and Euro Five toy markets through August versus last year according to NPD, as our POS continues to outpace the overall toy market in each of those regions.

We also experienced NPD share gains across a number of our key brands.

Let's go into a little more detail on our core brands.

Barbie performed well considering the incredible momentum with Monster High, as well as the introduction of our new fashion doll line for the hit Disney Pixar movie, Brave.

Not only did Barbie grow NPD share in toys, we continued to build the brand outside of the toy aisle.

For example, the release of the brand's 24th direct-to-DVD movie, Princess and The Popstar, it's off to a great start.

Our consumer products licensing team has worked closely with our retail partners to create and feature compelling fashions in the strategically important apparel category.

With the support of the overarching brand campaign See What Happens When You Play With Barbie, the brand has established placement with apparel with retailers around the world reaching more than 10,000 outlets.

Monster High continues to fire on all cylinders.

It is the number two selling Fashion Doll property in both the US and the Euro Five toy markets through August according to NPD.

Recently in the US, Monster High became a top 10 property among all toys when ranked by (inaudible).

This now gives Mattel six of the top 10 properties in the US toy industry through August.

Monster High just released its first-ever DVD movie, Ghouls Rule, through our partnership with Universal Studios.

We are also set to release a second console game this November for multiple platforms including DS, 3DS, and Wii.

Revenues for Hot Wheels grew double digits in North America in the quarter driven by stronger in-store merchandising and our new approach to advertising and promotion.

This year the North America division leveraged a great idea that our Mexico and Australia teams had successfully implemented.

The campaign called Collect and Compete showed boys a whole new way to play with Hot Wheels cars and it is working.

The highly effective Collect and Compete campaign has created positive momentum, not only for the basic car business but for the overall brand as well.

This is just one example of how our new structure provides increased opportunity for best practice sharing across all of our subsidiaries, including the US.

We continue to believe that Fisher Price is one of Mattel's best growth opportunities.

As we have mentioned before, Fisher-Price is one of the few Mattel brands where international sales are less than 50% of total brand revenues.

In the quarter we made good progress in a few strategic areas, mainly with our international business and our consumer messaging.

For the quarter the international business grew substantially, up 8%.

On the consumer front Fisher-Price is really focused on connecting with today's moms through its Joy of Learning campaign.

We recently relaunched the US website and have seen a nice bump in the number of visitors.

International versions of the website have been rolled out to 32 different markets in 27 languages.

Our award-winning television advertising is now in its second season in the US and it will be launched this year in many markets across the world.

Our new global package, which will be launched in the spring of 2013, will help reinforce the key joy of learning messages.

I am confident that the foundation of the turnaround is starting to take shape as we are seeing positive momentum in core Fisher-Price.

We are also pleased with the strategic progress of the Fisher-Price Friends business.

Approximately half of Fisher-Price Friends revenue is now generated by Mattel-owned intellectual properties, like Thomas and Friends.

These brands lay a strong foundation in evergreen properties, which helps to balance our portfolio.

Additionally, we continue to build out our Friends portfolio by having strong relationships with robust properties, such as Dora the Explorer from Nickelodeon and Jake and the Never Land Pirates from Disney.

To that point, we have also made substantial progress on the integration of HIT Entertainment.

We are well-positioned and ready to launch our new Thomas wood line for a 2013 global rollout.

And what is really exciting is that for the first time in recent history one company, Mattel, will be managing the entire toy and content portfolio for the brand.

Thomas & Friends launched its fall entertainment tent pole, Blue Mountain Mystery, in September with strong support at retail.

We have recently wrapped up the 17th consecutive year of our National Day Out With Thomas tour, which reached nearly 1 million consumers, and the 17th television series is well on its way.

In fact, Thomas & Friends is currently airing in the US on PBS Kids and was rated the number one show for kids ages two to five in the month of August.

As I mentioned earlier, American Girl had a spectacular quarter.

The Miami store opened two weeks ago joining St.

Louis and Houston which opened earlier in the year.

To date these store openings have been extremely strong.

We have good momentum heading into the peak season and you will begin to see television advertising for the brand which builds on our successful test of TV commercials last year.

Additionally, we continue to reap the benefits of our credo -- partner with the best and be the best partner.

In the quarter we experienced growth across a number of our licensed entertainment brands -- Disney with the new movie Brave, Warner Bros.

Batman The Dark Knight Rises, Disney's new Jake and the Never Land Pirates, and, of course, WWE.

Look beyond revenue, Mattel achieved solid overall third-quarter results as we continued to complement our focus on brand building with a disciplined approach that emphasizes gross margins, tightly managing costs, and reinvesting in growth initiatives.

We continue to work very hard to manage our overall basket of costs, including commodities, currency, and labor, through manufacturing efficiency programs and Operational Excellence 2.0 initiatives.

And we look to optimize our sales mix to deliver gross margins consistent with our expectations.

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

As we move into the final quarter of the year, we know that retailers will continue to manage inventories tightly as they execute their holiday season strategies.

That said, in the US some retailers have started their layaway programs and other toy promotions earlier in the year, no doubt in part to help consumers ensure access to hot toys.

Overall, our belief is this is positive for the toy industry, particularly higher-priced toy items, and may help drive incremental traffic.

We have worked hard to partner with retailers on these and other initiatives and believe we are well positioned to deliver the must-have brands and toys.

The key dynamic that remains consistent is retailers continue to buy what is selling.

With retail support programs in place we feel good that inventory levels, both at Mattel and at our retail partners, position us well for success is the holiday season.

So as we continue to execute the last 12 weeks of the year we have the brands of momentum -- Barbie, Monster High, Hot Wheels, Fisher-Price, Thomas & Friends, and American Girl.

We also have the evergreen licenses with scale such as Cars, Disney Princess, and WWE.

We have sales momentum in key countries and regions, and we are well aligned with customer plans and promotions.

As we are keen on saying at Mattel, there will be a Christmas.

It will come on or around December 25 and I am confident there will be more Mattel toys under the tree than any other toy company in the world.

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

Thank you, Bryan, and good day, everyone.

As you know, execution is critical in the toy business and, as you can see from our third-quarter performance, Mattel continues to execute well.

While there are many ways to measure our performance to date, the most encompassing venture may be to look at the bottom line.

Year-to-date our net income is 18% higher than last year.

Moreover, our operating profit is up 19% and our operating margins have expanded 230 basis points, which was driven by revenue gains and expansion of gross margins.

As we shared with you, our goal has been to move up higher in our targeted range of 15% to 20% operating profit and we are well-positioned to do that in 2012.

Now let me touch briefly on a few of the key drivers for the quarter.

Even with significant currency headwinds we were able to grow our revenues 4% in the quarter.

Global execution at retail has been very strong with each region of the world growing sales in the quarter substantially in local currency.

And all but one grew after considering the negative impact of foreign currency exchange.

Execution across our brand and product portfolios is strong as well.

We continue to see outstanding performances with our new Monster High franchise.

We are happy with the results at Fisher-Price where we saw improvement in our core business, especially internationally, and excellent results in our Friends business which includes our newly acquired brand, Thomas & Friends.

Finally, American Girl continues to grow across its product portfolio and range of distribution channels.

Although our gross margins expanded nicely in the quarter, about one-third of the improvement was related to foreign exchange.

We benefit from the positive comparison to last year's rapid appreciation of the US dollar in late September of 2012 which negatively impacted 2011 third-quarter gross margins by 180 basis points.

Product mix was another significant reason for our gross margin improvement with a shift towards our owned intellectual properties, particularly in dolls.

Strong performance in the quarter from Monster High and American Girl, as well as the addition of the HIT licensing business, were key drivers of improved product mix.

Another significant factor in the improvement in gross margin was better-than-expected results from our OE 2.0 cost savings programs and manufacturing efficiency programs due to the use of lean principles in our design and manufacturing process and the implementation of more automation and manufacturing.

Pricing actions that were effective January 1, 2012, partially offset by increased input costs, which were less volatile than in prior years.

Our SG&A expenses met expectations as we integrate the new HIT organization and invest in strategic growth initiatives.

Our global cost leadership and OE 2.0 savings programs have generated about $225 million in sustainable SG&A growth savings since 2008, part of which we have reinvested in the business to drive the results you see in this quarter.

Let me touch on a couple of investments made to date.

You see the double-digit sales growth American Girl posted in the quarter.

Our investment in retail expansion continued to pay big dividends, particularly this year as our Houston, Miami, and St.

Louis stores are enjoying outstanding opening results.

On the information technology front, we are investing in upgrading American Girl's e-commerce infrastructure to support further growth and 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 to our consumers and customers.

Also, our investments in the expansion of fashion doll [planned] capacity have been critical to meet the growing global demand for Barbie, Monster High, and Disney Princess.

As said previously, certainly the growth of dolls in our products mix continue to have the additional benefit of helping drive growth in operating margin expansion.

We are also investing in a new product lifecycle management system to improve our design, development, and manufacturing processes, which will provide better collaboration between functions and greater cost transparency.

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

As you know, our two priorities in 2012 are the successful transition to our new North American Division structure and the integration of HIT Entertainment.

And both priorities continue to exceed our expectations.

Let me touch briefly on both.

The North American division continues to deepen its relationships with its retail partners, as well as focus on better retail execution.

We are seeing this evidenced by our improving consumer take away trends in the quarter, as well as increased NPD share in the US across a number of our key categories.

Next, the integration of HIT continue to progress as planned, and we are all ready working to reap the benefits of adding its organization and core competencies in licensing and content development to Mattel.

As we have previously said, growing the Thomas brand around the world is a key focus for us and in the quarter Thomas shipments grew double-digits outside the US, so we are starting to get good global traction here.

So to summarize, as we enter the fourth quarter we are in good position to deliver another year of solid performance in 2012.

That said we still have a lot of work in front of us, and as Bryan mentioned, we need to continue to execute well in the fourth quarter to keep the momentum going.

Now let's focus on where we have been, specifically the third-quarter results in the slide deck.

Starting on page four of the slide deck you can see that our worldwide gross sales are up 4% for the quarter with growth coming in both our North American and international regions.

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

Despite retail cost [in this] and a continued focus on inventory management, we are seeing better alignment of shipping, consumer take away, and retail inventories.

And we are comfortable with the current state of both our inventories and those of our retail partners as we enter the all-important holiday season.

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

Worldwide sales for Mattel's girls and boys brands were up 3% for the quarter despite a moderate impact of currency exchange and a tough (inaudible) comparison.

Our Fashion Dolls business did extremely well driven by significant growth in Monster High and Disney Princesses.

We also showed growth in our core Barbie and Hot Wheels brands, excluding the negative impact of foreign exchange.

And we continue to see good results in our evergreen Batman and WWE properties.

Worldwide Fisher-Price sales were up 6% for the quarter, aided by the addition of HIT and good performances of Disney properties.

We are also very encouraged to see solid results in categories where we are putting additional focus, including our infant and playset categories.

American Girl delivered another strong results for the quarter with sales up 16%.

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 for the US and Canada.

Overall sales for the region were up 6%, which is a solid result that builds on the strong 6% growth in the third quarter last year.

Our international business, as seen on page seven, continues to show strength growing 2% in the quarter despite a 9 percentage point negative impact from foreign exchange.

We remained very encouraged with our performance in Europe where revenues were up 3%, despite a 7% unfavorable impact from foreign exchange.

In Latin America revenues were down 1%, including an 11 percentage point unfavorable impact from currency with strong growth in local currency across the entire region.

In Asia Pacific revenues were up 10%, including a 3 percentage point unfavorable impact with currency with growth in China, India, and Australia.

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

Gross margin for the quarter were 53.7%, 590 basis points higher than last year.

Key drivers were favorable foreign exchange, favorable product mix including the HIT licensing business, manufacturing efficiency programs and OE 2.0 cost savings, and price increases partially offset by increased input cost.

On page nine selling, general, and administrative expense increased approximately $55 million to $393 million.

Higher incentive and equity compensation accruals and ongoing HIT organization and acquisition-related costs [were] over three-quarters of the dollar increase in SG&A in the third quarter.

As you know, Mattel's short-term and long-term compensation is based on pay for performance which aligns with shareholder interests.

Consistent with pay for performance, the increase in incentive accruals is directly tied to the improved year-to-date performance as compared to last year.

As a percentage of net sales, SG&A expense is 18.9%, up 200 basis points compared to the prior year's rate of 16.9%.

Excluding HIT acquisition integration costs and HIT's ongoing SG&A, Mattel's SG&A is up about 3% year-to-date in absolute dollars.

Page 10 of the presentation summarized the performance of our two-year global cost leadership initiative and continuing efforts on our ongoing Operational Excellence 2.0 program.

We have delivered incremental Operational Excellence 2.0 growth savings of $20 million in the quarter, and I think we have got a good shot of exceeding our $175 million target of cumulative savings by the end of 2012.

Turning to page 11, operating income in the third quarter was $487.4 million, or 23.5% of net sales, up 360 basis points compared with last year's third quarter.

The increase in operating income was driven by solid sales growth and the expansion of gross margins partially offset by higher SG&A.

Turn to page 12, earnings per share for the quarter were $1.04, driven by improved operating income that was partially offset by higher interest expense and share count.

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

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

For the quarter acquisition integration expenses were $3 million and should 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 occurred about $1 million in expenses related to amortization of intangibles.

For the year these expenses should be about $5 million to $6 million.

As you can see on page 14, for the first nine months of the year cash flow used for operations was $101 million compared to $322 million last year.

The decrease was driven primarily by higher net income and lower working capital usage.

Year-to-date capital expenditures were $156 million -- $157 million, up $12 million from the last year.

For the year we expect to spend about $215 million to $225 million in capital.

[So to recap] cash flow for the first nine months of the year we increased capital deployment for the acquisition of HIT Entertainment and our higher quarterly dividend payments, which were partially offset by the improvement in operating cash flow, lower share repurchases, and lower debt repayments.

As a result, our cash on hand at the end of the first nine months was $282 million, up $28 million from the prior year.

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

We will continue to manage excess cash appropriately and look to deploy it opportunistically for dividends, targeted acquisitions, and share repurchases over time.

In summary, we are pleased with our solid third-quarter performance.

We are well positioned for success this holiday season and, finally, we recognize that we have more execution work to do in the fourth quarter to deliver another solid year of financial performance.

That concludes my review of the financial results.

Now I would like to open the call to questions.

Operator?

(Operator Instructions) Jaime Katz, Morningstar.

Nice quarter, guys.

Can you guys talk a little bit about the data point that was in your press release on accounts receivable days outstanding?

It looks like it went a little bit higher.

I was just curious if there were any terms from the retailers that had changed and if that would be a more permanent thing going forward.

No, I don't think there is any change.

I think accounts receivable increased primarily due to the timing of sales volumes that happened later in the quarter.

Okay.

Then any thoughts on price increases in the future?

I know you guys don't want to gouge anybody, but anything for the upcoming 2013 year.

And maybe if there were any pricing increases that you guys were thinking of passing through.

Yes, I think we continue to operate in the inflationary environment with a lot of volatility as the economy slowly recovers and the input costs continue to rise.

Our goal is to offset as much of the increase in input costs as we can through a continued focus on cost efficiency programs.

As you know, our last lever is to take pricing actions to sustain gross margins of about 50%.

Our customers are in right now to see our 2013 products so it is too early to really talk about 2013 pricing actions.

Okay, thank you.

Michael Kelter, Goldman Sachs.

I wanted to ask just broadly about the toy industry, which is off 5% to 10% year-to-date.

You guys are outperforming by a mile, but as a leader in the industry I would just really love to get your take on why the industry weakness is as pronounced as it is and whether you think it will persist.

Good morning, Michael.

We are still very positive about the toy industry as we look at data sources, for example, like Euromonitor.

They continue to forecast a toy category growth globally of, I think, it is around 6%.

The numbers in the US have been a little weaker than probably anyone would like this year, but as you recall the US is only about one third of the global toy business.

When you peel the layers of the onion back on the US business, the softness is really in categories where you could argue there has not been as much innovation has there had been in others.

For example, the categories in which we compete primarily are outperforming the industry on average.

So we are still positive that when there is integration this industry can grow, particularly here in the US.

As you look at Europe, frankly, we are quite pleased with the toy business in Europe.

It is down only about 1% and Europe, as you know, has a very challenging economic environment.

Outside of Europe, as we look at the information that we get with our boots on the ground all over the world, we see growth in Eastern Europe, Latin America, and Asia.

And then I guess finally, this is more of a short-term comment than a longer-term strategic comment, we have had customers here last week and this week to talk about what is happening this year and start planning for next Christmas, believe it or not.

And our customers continue to have, we think, a positive outlook not only for this year but for the future as well.

And you mentioned some of the international regions; maybe you could talk about not just the absolute numbers of toy demand but maybe the derivative, the direction of toy demand.

Going around the world, Europe first; Latin America versus Asia given the recent macro slowdown.

It is something that has obviously not shown up in your results to date, but might it in the Christmas quarter, or do you expect continued strength?

As we look out for this year, based on the promotional plans and merchandising plans that we have with our customers and I would say the positive outlook our customers have, as we say, there will be a Christmas this year.

As you look out and sort of take the tour around the globe, our customers in Eastern Europe still look forward to continued category growth.

In Latin America that is a basket of countries and every year some countries are slowing down, some are speeding up.

Our businesses continue to be robust in Latin America.

Same thing in Asia.

And I think one of the things as it relates to Mattel is when we look at either the development of the category or the development of our market share -- our market shares, for example, in Western Europe are still quite low.

They are only about 10%, and that is about half of what we are here in the US.

So we look at both the trajectory of the category and our ability to try to grow our market share as our category share is measured by NPD or other resources.

So that is why we are still bullish on toys.

And then one last one.

The gross margin numbers were fantastic and you mentioned that ForEx was a part of that.

But even if you adjust for the ForEx, it seems like the underlying run rate post the HIT ideal and the OE savings is above the 50%, which is your long-term guidance.

So I guess now that you are solidly above that 50% line what is holding you back from raising that prior guidance?

I think as we look at the future I think over the long term we believe that targeting gross margin 50% is the right approach to managing our business.

But when we look at our P&L on an annual basis we focus on two key goals -- growing operating income by 6% to 8%, which is consistent with delivering top third to top quartile performance, and sequentially improving our operating margins consistent with our targeted range of 15% to 20%.

As we develop our annual financial plan we balanced several levers -- sales growth, gross margins, advertising, SG&A, and investments.

Our goal is to deliver improved operating margins while achieving 6% to 8% growth in operating profits.

And gross margin is an important element in that equation.

This approach aligns with our goal of consistently delivering top third to top quartile total shareholder returns.

So what would make you reevaluate the gross margin guidance?

Again, I think we look at it on an annual basis.

Over the long term we look at the fact that we think 50% is the right approach to managing our business.

But we have opportunities to grow our margins; we have got a lot of moving pieces with respect to it.

I see opportunities to grow margins through our HIT licensing business and our overall licensing business for our core brands, as well as continued growth in Barbie, Monster High, and American Girl -- all of which should have a positive impact on our gross margins.

But we also have a great opportunity to grow Fisher-Price on a global basis since it is underdeveloped outside the US and this will put pressure on our margins.

So, Michael, looking forward -- it is always a challenge to predict margins since there is a lot of moving pieces, like forecasted sales mix, as well as market-based items like foreign exchange and input costs which have been volatile over the last several years.

So, again, I would focus in on we manage our P&L on an annual basis with a key focus of two goals.

As I said earlier, operating income by 6% to 8% which is consistent with delivering top third to top quartile performance and sequentially improving our operating margins consistent with our targeted range of 15% to 20%.

And we look at all the leverage in the P&L really to deliver that with a goal of delivering 6% to 8% in operating profits.

This aligns with our overall goal of really delivering top third to top quartile TSR.

Thank you very much.

James Hardiman, Longbow Research.

Yes, thank you.

This is Phil Anderson for James.

Just looking at the Barbie results, I know things were up excluding the currency drag there, but it looks like it was a difficult comp.

Just wondering if you could kind of refresh our memories on why things were up so much in third quarter last year and then maybe talk about what your expectations for that business are in the holiday season here.

Good morning.

We are feeling actually quite positive about Barbie, as I mentioned in my comments and I think Kevin did in his as well.

There is a lot of activity in the fashion doll aisle and we manage a portfolio like we do, for example, in the vehicle aisle, so we are constantly trying to optimize properties like Disney Princess and Monster High and Barbie.

So as we look at the Barbie business exiting the third quarter the reason we feel still pretty confident about Barbie is POS continued to build positive momentum in the third quarter despite all this heavy competition, if you will, from our own brands.

So we like where Barbie exited the third quarter.

As we look at the third quarter -- I am sorry, the fourth quarter, we think Barbie is pretty well positioned.

If you look from a product standpoint we had Photo Fashion Barbie, which will be a big hit.

We had the Barbie Holiday doll which is off to a very good start.

We have got this new fall entertainment called Princess and the Popstar, and we always love movies that have two feature dolls in them.

That is off to a good start, both from a toy sales standpoint and also a DVD standpoint.

And as always, we have worked extraordinarily hard this year because of all the complexity in the portfolio and our desire to succeed across the portfolio with our retail partners to make sure we had the right merchandising and we had the right promotional programs in place.

It was a tough comp in the third quarter.

As you recall, international I think was up around 20% for Barbie and domestic was up about 13%.

But, again, we like where Barbie is.

The POS is building in the third quarter, exited with positive POS momentum, and we think Barbie is well positioned to succeed in the fourth quarter.

Okay.

And then second question, I have seen a lot of the ads recently here for Fisher-Price.

I know you guys are in the process of rebranding and launching a new ad campaign around that.

Just wondering if you could kind of give us an update on where that stands and then just sort of the sustainability of this quarter's growth going forward for Fisher-Price.

Thanks.

Sure, thank you.

The objective we have for Fisher-Price is to make sure that we really reach the full potential of Fisher-Price.

As you will recall, Fisher-Price revenue is less than half from our international business.

It is one of the few brands that is less than half.

We have always believed that there is great growth potential for Fisher-Price, not just here in the US but particularly in our international business.

As we have gone through this transition process over the past few years, we have really worked hard to come up with a message that resonates not just with the US mother but with mothers around the world.

Because as we told you before they are different than the baby boomer moms, they have a different way of thinking about things.

The commercials have been successful.

We are expanding their airing to more countries this fall.

Fisher-Price from the POS standpoint was exiting the third quarter with positive momentum, so we feel very, very good about that.

We think there is some more opportunities to continue to build this business whether it is through the new packaging in 2013, continued promotional support with our retailers.

So we know there is more work to be done on Fisher-Price but we are feeling like we are beginning to build some solid momentum on the core.

The other thing that I mentioned in my remarks is we are also very pleased with the Fisher-Price Friends business.

That portfolio used to be exclusively licensed property with intellectual property owned by others.

About half of that portfolio now is from our IP with the acquisition of HIT, so we think we have done a very good job of balancing out that portfolio, not only for growth but also for the ebbs and flows of licenses.

So when we look at Fisher-Price, even from the Friend's standpoint or from the core standpoint, we think we are making solid progress.

Okay, great.

Thanks.

Great quarter, guys.

Thank you.

Linda Bolton Weiser, Caris.

I was wondering if you could talk about your dividend policy, because you have raised your dividend quite a bit higher than earnings growth in the last couple of years.

Are you where you want to be in terms of payout ratio and the other metrics that you are looking at?

That is my first question.

My second question has to do with, can you just remind us some of the key entertainment kind of driven things coming up in 2013 and 2014?

Even though your core brands are becoming more and more important it seems, but I seem to recall that we have Pixar's Planes movie next year and there have been other movies mentioned in the past.

Can you just update us on that?

Not to steal your thunder away from the analyst meeting, but a little color would be helpful.

Thanks.

Good morning, Linda.

I will start and then turn it over to Kevin to talk about our dividend policy.

We have, we think, a pretty solid lineup next year, both in terms of movies and evergreen properties.

Next year for 2013 we will be supporting Superman from Warner Bros., DreamWorks new movie Turbo, and Disney Pixar's Planes movie.

Those are probably the three big things for next year.

From an evergreen standpoint, we are going to be continuing to support both Dora, Jake, and Disney Clubhouse.

And Disney is also coming out with a new show called Sofia the First, Once Upon a Princess, which will be on Disney Jr.

TV and we think that has got some interesting potential as well.

So both from an evergreen standpoint and a movie standpoint we think we have a solid lineup for next year.

Kevin, do you want to comment on the dividends?

Yes.

Linda, dividends are a Board-level decision and over the last few years profit growth has equaled the dividend growth and we caught up when we announced our dividend in 2012, January of this year, of $1.24.

In future years we expect that our dividend would increase consistent with our growth in earnings and within our targeted payout ratio of 50% to 60%, resulting in a dividend yield that is consistent with top quartile yields of best-in-class consumer goods peers.

The Company intends to maintain a strong balance sheet with target year-end cash of $800 million to $1 billion.

And we will continue to work with credit rating agencies to maintain our A ratings.

Thank you.

You are welcome.

Gerrick Johnson, BMO Capital Markets.

Good morning, guys.

I would like to go over gross margin real fast and strip out the FX impact.

If we add 180 basis points to last year's 47.8% and subtract 200 from this year's 57.3%, is that the right way to look at it?

200 basis points of true gross margin improvement excluding FX?

No, I don't think so, Gerrick.

I think that it is up 590 basis points and I think when you look at stripping out the 180 basis points related to ForEx it is more like a 400 basis point improvement.

And that two-thirds improvement in gross margin relates to improve mix, better than expected savings for our manufacturing efficiency and OE 2.0 savings programs, our pricing actions, partly offset by increased input costs which were less volatile than prior years.

Okay, thank you for the clarification.

And Monster High has that now launched in every international geography that it is supposed to go into?

Yes.

There may be one lurking out there someplace, but Monster High is essentially global now and continuing to succeed, even in the early markets like the US.

Okay.

One last question, 2013 when will your wooden Thomas hit the market?

Does Tomy have a sell-off period for the first half or anything like that?

Well, our products will be available for sale on or about January 1, so you should expect to see our products out in the marketplace in January/February as it goes through the distribution channels.

All right.

Great, thanks a lot, guys.

Felicia Hendrix, Barclays.

Good morning, guys.

Bryan, I just wanted to talk about the point of sales trends in the quarter.

I just had some questions around that.

At the beginning of your prepared remarks you said that point of sales was in line with shipments, so if your sales were up about 4% should we assume that your point of sales was about there?

We looked at our point of sales and shipments both globally and, where we can, by region.

If you look at our global shipments and POS, they are roughly in line.

I'm not going to give you the nits and nats, but they are roughly in line.

As we look at the US business, particularly in the third quarter, our POS was positive and momentum is building in the US with our POS as we exit the third quarter, which we think positions us well for the fourth quarter.

So you are in the ballpark.

Okay.

And internationally was positive as well?

I'm sorry, can you repeat that?

Internationally was POS positive as well?

Yes, it was.

And then just digging down a little bit further, you said for Barbie and Fisher-Price that POS was showing positive momentum.

So can we infer that those numbers are not positive yet?

No, you can infer that they are positive.

Okay, great.

Thank you.

Then just I will take another stab at gross margins.

If we -- excluding HIT, would your gross margins still be over 50%?

Yes, yes, HIT had a small impact on gross margins for the quarter.

Okay, great.

That is very helpful, thank you.

Sean McGowan, Needham & Company.

Three housekeeping questions and then a question on Batman.

On the housekeeping, how much of the American Girl growth is new stores versus increased sales in the product?

Yes, we are not going to quantify that, Sean, but let's just say that most of the growth came from McKenna and existing stores.

Okay, that is what I figured.

Second question -- [the next to] you, Kevin.

If FX stays where it is now, can you quantify what you expect the impact to be in the fourth quarter?

It is impossible to predict ForEx, so I usually give you a rule of thumb and that rule of thumb relates to looking at the US Dollar Index.

For every 1% movement in the US Dollar Index it should impact annual EPS by $0.01 to $0.02 and impact revenues by about 0.5 percentage point.

That said I think as you look at our fourth quarter last year we had an 80 basis point reversal in the fourth quarter of last year that was positive.

So when we look at gross margins for the fourth quarter this year we have got a comp that will be positive that we will be lapping.

Great.

And also housekeeping, tax rate forecast any reason to expect the fourth quarter to be different from the year-to-date number?

Yes, I think when we look at it full year we expect the tax rate to be in about 21% to 22%.

Year-to-date the tax rate is about 20.1% and that benefited from some discreet period items which is a timing issue from the perspective of a full-year tax rate.

So at year-end the tax rate will be again I think around 21% to 22%.

Thanks.

Bryan, on your comments on some product performance during the quarter, I think I heard you say that you were pleased with Evergreen performance of products like Batman.

Would you put Batman in a year when there is a movie in the evergreen category?

Did it not get a big boost from the movie?

No, we would say that the movie properties for us performed very solidly.

Okay, but did Batman -- I mean, in the past, we kind of talked to about Batman being one of those big kid products.

Does it live up to your expectations?

Yes, yes, I would say that our toy sales in Batman met our expectations.

Okay, great.

Thank you.

Margaret Whitfield, Sterne, Agee.

Congratulations on a strong quarter.

I wondered if you could comment, Bryan, or elaborate on your comment about the early layaway leading to earlier sales benefiting high ticket items.

I'm wondering what you are seeing there; at Mattel, what toy brands are resonating and might this lead to some early reorders compared to prior years.

Also, I wondered if you could provide us with information on what categories grew share in quarters or through August.

And any comments on retail response to that new Barbie construction line through Mega Bloks?

Good morning, Margaret.

Let me start first with the Barbie Construction line.

As you know, Mega Brands is going to be selling that in and we expect that there will be some distribution of that product probably in late December, based on what we hear from Mega Brands.

The response from retailers -- our understanding is it has been pretty positive so we will wait and see what happens with that.

As regards to the earlier promotions and specifically layaway, as I said, we think it is a positive thing for the industry.

When you think about the structure of the programs this year, the number of months that layaway is available has been extended by a month.

The cost of the programs has been reduced to consumers.

And so when you look at higher ticket items, for example, for us things like the Barbie Dream House, you would expect that them an item like that is probably something that would be a popular layaway item.

It was last year; we would expect that this year it should be similar.

So I guess the way I would view this it's quite early; layaway has been in place for just a few weeks.

We have got last year's layaway to comp here in the next few weeks.

As you know quite well, every year at Christmas consumers change their buying patterns.

There is always a delay for one reason or another.

I believe, for example, this year Hanukkah is 11 days earlier than it was last year.

So there is always shifting momentum with consumers, but in the end is where we say there is Christmas on December 25.

To your question on categories responding to innovation, for us in particular, dolls and infant/preschool are performing better than the category average.

There is a lot of activity there.

Fisher-Price has been growing its share of total toys there.

The vehicle category is going up against a very strong Cars 2 comp from last year, so you would expect that category is behind last year.

But when we look at the core of our business, particularly the basic car business with this new promotion that we have started, it looks quite strong.

So, again, when we look at the core categories that we tend to compete in around the world globally those are the ones that tend to be outperforming the total.

One follow-up, how is Cinderella being received at retail?

Well, we think pretty well.

We think it is going to be a good, solid initiative by Disney and by us.

Again, we are very good, we think, at managing our portfolio of brands and so we think that this is going to be another strong initiative for us in the fall.

Thank you.

Eric Handler, MKM Partners.

Thanks for taking my question.

It looks like HIT Entertainment seems to be probably outperforming the Street expectations.

Can you talk a little bit about what degree your Mattel-specific initiatives for HIT or items that they didn't have last year in terms of distribution or products have helped out this year?

And then secondly, when you look at their full portfolio what are some of your thoughts behind maybe some of the other brands in terms of whether that is a focus for next door or maybe sell off some of those brands, like a Barney or Bob the Builder?

Good morning, Eric.

We are pleased with our performance on HIT.

As you will recall, we said this year we had really a couple of objectives.

The first was to work hard on getting that business integrated into Mattel and I think we are well on plan to have that accomplished by the end of the year.

We feel quite good about that.

We also said our second overall objective was to improve the execution of the business, and I think there is a couple of examples of where we have tried to do that.

I mentioned this new DVD called Blue Mountain Mystery.

We are very excited to have that out; that is a big thing for us.

As we look at how to execute the DVD business, we have found from our experience on Barbie that selling Barbie DVDs by the toys in the toy department has a much better execution than selling it exclusively where retailers sell DVDs.

So we are improving the execution of not only having a great DVD, but executing it better in store.

The other example I would give you would be TV placement for Thomas, particularly in Latin America.

I think we have given you the example in Mexico, for example, where historically Thomas has been on there on TV Azteca, which is a smaller network with much narrower reach than Telavisa, and we have been successful in transitioning Thomas from TV Azteca to Telavisa.

And that is an important execution [element].

So those are two examples of what we tried to do to strengthen execution.

I would also say that retailer response to the new wooden line has been very positive.

The toy line looks great.

The sets look great.

Retailer response, as I said, has been positive so that is something we will see next year.

As it relates to the HIT global brands, the non-Thomas brands; Mike the Knight we always talked about as our gift with purchase.

That continues to do well on Nick here in the US and on the BBC.

We have got it placed in a number of countries now and are excited about the opportunity for that next year.

So HIT is, I think to your point, at least on plan and we feel very positive about it.

And I think for 2013 we expect it to be increasingly accretive beyond 2013 by owning the Thomas brand.

As we look at it next year we won't have the acquisition costs and we will have substantially lower integration costs.

We have got the addition of the Thomas wood business in 2013.

We are launching a toy business for Mike the Knight in the fall of next year.

We will have cost synergies, so those things will drive accretion and EPS from the acquisition in 2013 and beyond.

Thank you.

Tim Conder, Wells Fargo Securities.

Thank you and again congratulations on a great quarter, gentlemen.

A couple of items here.

Back on the gross margins, Kevin, you touched on and you pointed out in the slide deck the 80 basis points comp.

Correct me if I am wrong, that is the reversal of what we saw with the intercompany.

It was from third quarter of 2011 to fourth quarter 2011, so there will be a little bit of a headwind correct as you are pointing out for the fourth quarter.

But my real question on the gross margin is this year you are tracking 52%; have to deal with that FX headwind in the fourth quarter, but it appears this year you will track above that approximate 50% guidance.

Are you saying, based on a prior comment, that next year, given Fisher-Price should start to accelerate on a relative basis here, that that will keep you closer back towards that 50%, all else equal?

Tim, we really don't give line item guidance and I think there is a lot of moving pieces in gross margins.

So when we look at near term we really manage our P&L on an annual basis, as I said, with two key goals -- to grow operating profits by 6% to 8% and sequentially improve our operating margins up the range of 15% to 20%.

As we develop our plan for next year, we are going to look at delivering improved operating margins while achieving 6% to 8% growth in operating profits by really looking at all of our levers -- sales growth, gross margin, advertising, SG&A, and investments.

And gross margins is an important element in that equation.

But, overall, what we are trying to do is consistently deliver top third to top quartile total shareholder returns.

Okay.

And the track record is good, so thank you on that.

The licensing, can you remind us where that stands as a percent of revenue?

And now with the addition of HIT going forward and a couple of other things that you are doing with Monster High and soon to be new IP, any goals or anything on licensing as a percent of revenue on a go-forward basis here?

We haven't specifically called out the percentage of sales that it is and the growth rate, but again it is an important part of our business.

We are focused on growing our licensing business.

As Bryan said, HIT gives us more capabilities with the licensing business.

And, I think with regard to HIT, there is an opportunity, since it is underdeveloped on a global basis, an opportunity to continue to grow.

So overall we like the licensing business.

I think it is a tailwind to our gross margins as we look at the future and it is a focus of the Company.

Okay.

Then one last clarification here, more housekeeping.

You have thrown out before about $75 million to $80 million ballpark-ish on incentive comp.

Is that incentive and equity or just one of those two buckets?

It is one of two buckets, so if you look at the target level of incentive for our short-term incentive program it is about $75 million to $80 million.

And when you look at our equity compensation the target is $50 million to $55 million.

Okay, great.

Thank you again, gentlemen.

Operator, we have time for one last question.

Mike Swartz, SunTrust.

Good morning, everyone.

Just wanted to touch real briefly on some of the comments or the comment you made around OTE 2.0, maybe the savings from that program coming in above $175 million.

Could that be north of $200 million when all is said and done by the end of the year?

And then how do we think about where the incremental savings goes?

Is that going to be reinvested into the business or would that fall to the bottom line?

Through the end of 2012 or through the third quarter 2012 we have delivered cumulative gross savings of about $173 million against our target of $175 million.

At this point we expect to exceed our goal by 2012 by about $5 million to $10 million, and that will likely drop to the bottom line.

Okay, great.

Thank you.

Thank you.

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