Mattel, Inc. (MAT) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Mattel's First Quarter 2011 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to your host, Mr. Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations. Please go ahead.

Thanks, Ally. As you know, this morning, we reported Mattel's first quarter financial results. As with did with our fourth quarter call, we have provided you with a slide presentation to augment our discussion on the call today. In a few minutes, Bob Eckert, Mattel's Chairman and CEO; Bryan Stockton, Mattel's Chief Operating Officer; and Kevin Farr, Mattel's CFO, will provide comments on the results, and then the call will be opened for your questions. Certain statements Bob, Bryan and Kevin make during the call may include forward-looking statements relating to the future performance of our overall business, brands and product lines. These statements are based on currently available operating, financial, economic and competitive information, and they are subject to a number of significant risks and uncertainties, which could cause our actual results to differ materially from those projected in the forward-looking statements. We describe some of these uncertainties in the Risk Factors section of our 2010 annual report on Form 10-K, as well as in our quarterly reports on Form 10-Q and in other filings we make with the SEC from time to time. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so. The slide presentation and the information required by Regulation G regarding non-GAAP financial measures is available on the Investors & Media section of our corporate website, mattel.com, under the subheadings Financial Information and Earnings Releases. Additionally, for your reference, we have added quarterly and annual revenue growth trends for key businesses, brands and markets to the other information that is available under the subheadings Financial Information and Financial History. Now I'd like to turn the call over to Bob.

Thank you, Drew, and good morning, everyone. Before we begin the business portion of this morning's call, I'd like to take a few moments to address some changes. As many of you are aware, Dianne Douglas has moved on to new opportunities within the Mattel organization, and if she is listening bright and early this morning, I'd like to take this opportunity to thank her for the values she has brought to Mattel Investor Relations functions. And with that, and I'd also like to welcome Drew Vollero to the call and to his new position heading our Investor Relations team. Drew has been with Mattel for more than 10 years working in the finance and strategy roles for both the brand and corporate groups. And in addition to hearing from Kevin and myself this morning, I've asked Mattel's Chief Operating Officer, Bryan Stockton, to join in today's call. As announced in the beginning of the year, Bryan now oversees all the day-to-day operations of the business. So I'd like to officially welcome both Drew and Bryan to the call. While the first quarter is typically not significant for the toy industry, I'm pleased to report that we're beginning the year with solid results, as evidenced by the performance of our industry-leading and diverse portfolio of brands in countries and in spite of the difficult comparisons to last year's first quarter. The Barbie brand really led the way for Mattel in the first quarter, particularly in international markets. Barbie achieved the highest first quarter sales, gross sales, since 2004, and it's the first time the brand has had double-digit sales growth in the first quarter since 1997. The brand is strong, global retailer support is good, and the momentum continues. Brands like Monster High and Disney Princess also were standouts in the quarter. Equally encouraging as our brand performance is our global momentum. Across our entire portfolio of brands, we experienced international growth in all regions of the world. Overall, Mattel continues to be well-positioned to benefit from its scale advantage. Moving down the P&L. We've delivered on gross margin expansion despite current cost challenges, including the high cost of oil and labor, and against the continued inflationary economic landscape. Our first quarter gross margins are in line with our long-term expectations. And by delivering on our first strategic priority of achieving consistent solid revenue growth and positioning ourselves well for improving our operating margins, our second priority, we expect to achieve our third priority of generating solid cash flow and continuing our disciplined, opportunistic and value-enhancing deployment. As we’ve said before, when it comes to capital deployment, we'll pursue with smart growth by focusing on areas that deliver higher returns and will continue to return excess cash to shareholders. As we told you in New York, we used a TSR framework to measure our progress, and we benchmark top-tier performance. Historically, our dividend has been an important driver of shareholder return. As such, we've delivered annualized double-digit dividend growth in each of 2010 and '11, and we plan to continue benchmarking a 50% to 60% payout ratio. Beyond the dividend, we've opportunistically executed share repurchases. For the first quarter, that included share repurchases of 4 million shares at a cost of approximately $100 million. As I’ve said before, the first quarter is a bit like spring training, and for a business like ours, what is key in the early part of the year is preparing the business for the year ahead. That said, I'm pleased with our performance for the first three months of the year and look forward to building on the platforms that will help us accelerate our performance through the all-important holiday season. Thank you. At this time, I'd like to introduce Mattel's Chief Operating Officer, Bryan Stockton, who will provide additional color on the quarter. Bryan?

Thank you, Bob, and good morning, everyone. I'm pleased to be joining you this morning to provide additional insights regarding our progress during the first quarter. This is the third role I've had in the Mattel organization since joining the company just over 10 years ago. And today marks my 101st day on the job as Mattel's Chief Operating Officer. And I feel that we've already made solid progress during a very short amount of time. This morning, I want to focus my comments on the company's top priority, which is to deliver consistent growth by continuing the momentum in our core brands, optimizing entertainment partnerships, building new franchises and working to expand and leverage our international footprint. Barbie is a great example of continuing the momentum as the brand enters another year of growth. In fact, Barbie has now delivered sixth consecutive quarters of worldwide growth. In 2011, Barbie continues to stay top of mind and culturally relevant with the launch of the very successful “Ken Campaign – Will Barbie Take Him Back?” a fully integrated 360-degree global campaign. The initial campaign engaged brand fans by having them vote on Barbie and Ken getting back together. After hundreds of thousands of votes being tabulated, it concluded with Barbie taking Ken back on Valentine's Day. In fact, on February 14, the words Barbie and Ken were tweeted every 18 seconds. Overall, Barbie continues to be re-energized, and sales are responding as positive momentum continues to build in 2011. For more than 40 years, Hot Wheels has been passionate about bringing thrilling vehicle experiences through innovative product and content. In 2011, we're taking this passion to new heights, harnessing the power of boys’ imaginations with the launch of a multi-year, multi-platform campaign designed to extend the Hot Wheels experience into the real world. Core to the campaign is Team Hot Wheels, professional stunt drivers from four driving disciplines using the imagination of Hot Wheels play with the reality of action sports. If you read the New York Times this week, you undoubtedly saw that Team Hot Wheels will attempt to break the world record distance jump at the Indianapolis 500. The stunt will culminate by revealing the mystery driver's true identity following the race on Sunday, May 29. A 30-minute special on a major network is in the works to air on race day. In 2011, we will also leverage storytelling in content across multiple platforms with digital media, television ads, product packaging, social media and premier partnerships. American Girl celebrated its 25th anniversary year with a solid first quarter performance. The launch of the 2011 Girl of the Year, Kanani, along with two stores in Denver and Kansas City, are fueling the brand's performance. We're excited about the opening of two more stores this summer, one in Washington D.C. and the other in Seattle. For Fisher-Price, we still have work to do, but the opportunity is sizable. As we continue to globalize the Fisher-Price brand, we're reviewing how to best optimize our message to meet the needs of new parents regardless of country, culture or language. During the quarter, we had solid international growth, and our goal is to bolster our performance in the U.S. The next tenet of our growth priority is to optimize entertainment partnerships, and we are well-positioned to deliver again in 2011. First, our Cars business has continued unprecedented strength for a film-based property now going into its sixth year. And the brand remains strong as consumers and retailers anticipate Cars 2 merchandise. The merchandise will be on shelf in mid-May in advance of the movie's release on June 24. We’re releasing almost 70 new characters, as well as all new track sets that will allow kids to play out the world Grand Prix races featured in the film. And the spy adventure storyline brings all new good versus evil play into the world of Cars. And as a result, we're developing a new line of vehicles and play sets called Action Agents for kids to play out the spy story. For Toy Story, we continued to be very pleased with the sales performance of the Toy Story 3 line, as it transitions from a phenomenal movie year in 2010 to a well-rounded line that confirms its status as a solid evergreen property. Disney will keep the brand energized by launching new content in the form of Toy Story Toons, a series of animated charts that will maintain brand engagement. 2011 is the breakout year for Green Lantern, the next superhero from the DC Entertainment portfolio. We are launching a comprehensive line featuring action figures, vehicles, role-play and collector product, celebrating over 50 years of heritage behind this property. The film launch is, domestically, June 17 and, internationally, throughout the summer. Green Lantern toys will be on shelves starting May 1. Our third tenet is to build new franchises, and we're doing just that with Monster High, which continues to resonate with girls, debuting as the number one new fashion doll in 2010 according to NPD. For 2011, the franchise continues to expand with the introduction of four new characters, two new books and an hour-long TV special. We have also expanded our partnership with Claire's and Justice. Our Macy’s T-shirt program, launched in early January, delivered strong sell through. And next month, check out our Monster High program at Wal-Mart, which includes the dolls, books and t-shirts. Brand offerings will be further expanded to include apparel, accessories, cosmetics and activities for back-to-school. And we launched the brand in more than 15 new markets this year, including France, Australia, Portugal, Turkey and Poland to name a few, which is a great segue to my next point of our efforts to expand and leverage our international footprint. For the quarter, our performance in the more mature international markets has been solid, with Europe growing low-single digits for the quarter. Our long-time efforts in Latin America continue to pay off with Mexico and Brazil, our two largest markets in the region, continuing to grow at strong double-digit rates. And our investments in developing markets like India and China continue to flourish, as we experience strong double-digit growth momentum from last year. I spent the last eight years developing, building and challenging our international teams to redefine our strategies and then translate the business of Mattel to the diverse international markets in which we compete. I look forward to the next phase of Mattel's future, as we deliver consistent growth by continuing the momentum in our core brands by optimizing entertainment partnerships, building new franchises and working to expand and leverage our international footprint. Now with that, I'd like to turn the call over to Mattel's CFO, Kevin Farr, for the financial review of the quarter. Kevin?

Thank you, Bryan, and good morning, everyone. Our last call and in our February Analyst Meeting, we said we aim to deliver consistent growth by continuing the momentum in our core brands business, optimizing our entertainment partnerships, building new franchises and working to expand our international footprint. In addition to that, we said we want to build on the progress we've made in improving our operating margins through sustaining the gross margin and delivering another round of cost savings. And finally, we said we expect to generate significant cash flow and continue our disciplined, opportunistic and value-enhancing cash deployment. While recognizing we’re very early in the year, our solid first quarter results build upon the progress we made towards our profitability goal in the face of a challenging cost environment and a continuation of a difficult economic climate. First quarter, our portfolio approach was once again proven to be successful with worldwide revenues up 8%, reflecting solid growth both domestically and internationally and in core brands, entertainment licensing and our new franchise, Monster High. In addition to revenue success, we improved our gross margins by 60 basis points to 49.7% as we maintain strong pricing discipline and continued to seek efficiencies in our supply chain. Starting on Page 5 of our slide deck, you can see our worldwide gross sales are up 8%. Adjusting for Easter timing, we continue to feel good about sell-through trends domestically, as well as internationally. Based on 2011 NPD data for the first two months, we continued to experience good momentum in the U.S. as the toy industry, overall, is growing, and we are gaining share. As expected, retail inventories are up when compared to what we were very light levels this time last year. We believe this is largely due to the positive [ph] momentum we've had at retail and also due to the timing of Easter holiday. Overall, we remain comfortable with inventory levels. Let's turn to Page 6 and 7 of the slide presentation to see the segment perspective on sales. Worldwide sales for Mattel Girls & Boys brand segment were up 15% for the quarter. Barbie sales continue to improve, driven by our Ken campaign, core fashion lines and the introduction of our new family platform. Hot Wheels continued to be driven by increased worldwide demand in diecast cars in its new Revs-Ups line. Monster High and Disney Princesses drove growth in our Other Girls business. Growth in our Entertainment business was primarily attributable to sales in toys geared to the Cars, Toy Story 2 and Green Lantern. Worldwide sales for Fisher-Price brands were down 2% for the quarter. Our Fisher-Price core business, including Baby Gear, was flat for the quarter. Fisher-Price Friends was also flat, excluding the discontinued Sesame Street license, with solid performances in Thomas, Dora and Mickey Mouse Clubhouse. For Fisher-Price overall, we saw some softness domestically but are very encouraged to see growth internationally. American Girl has continued to deliver strong results with sales in the first quarter up 4%. Our Girl of the Year, Kanani, and our popular My American Girl line was off to a strong start, and we see good momentum in our retail operations. Our International business, as seen on Page 8, continues to improve with growth across all regions for the quarter. We saw considerable strength in Latin America, particularly with Brazil and Mexico, and continue to be encouraged with performance in Europe in light of the economic climate. Asia Pacific continues to deliver strong double-digit growth, although off a much lower base. Now let's review the P&L, starting on Page 9 of the slide presentation. For the quarter, gross margin was up to 49.7%, an improvement of 60 basis points from last year. The favorability was primarily due to pricing, as we continue to be challenged by an inflationary cost market. Looking forward, we have executed a high-single price -- single-digit price increase effective April 1, 2011. And we continued to closely monitor the commodity markets and look for efficiencies in our supply chain and manufacturing facilities. As seen on Page 10 of the slide presentation, for the quarter, selling, general, administrative expenses increased approximately $42 million to $335 million. As a percentage of net sales, SG&A expense was 35.1%, up 190 basis points compared to the prior year's rate of 33.2%. As expected, more than half of the year-to-year dollar increase in SG&A were $26 million as due to higher litigation and legal settlement-related costs. The remainder is primarily due to employee-related costs, included merit, as well as the impact of the expansion of American Girl retail stores. For your reference, we've updated and included a historical trends summary of our incremental MGA and recall-related legal and settlement costs in the appendix to the slide presentation. In addition to the $18 million of incremental cost you see on the slide, we recorded a $7.5 million charge in the first quarter related for full settlement of litigation related to the Gunther-Wahl production lawsuit, which was summarized in our 2010 10-K. Page 11 of the presentation summarized the performance of our two-year Global Cost Leadership initiative and our early read on the timing of what is now called Operational Excellence 2.0 cost savings Program. As you know, we exceeded our stated commitment on the Global Cost Leadership program by delivering cumulative net savings of approximately $212 million, equating to a run rate of $225 million coming into 2011. We have already recognized Operational Excellence 2.0 gross savings of $5 million in the quarter, with the goal of $150 million of sustainable cumulative savings to be achieved by the end of 2012. The primary drivers of these savings are expected to come from $75 million of legal expense reductions and $75 million of structural savings executed through a handful of important initiatives, some of which are outlined at the bottom of the page. These initiatives are designed to simplify and align our business. While some of the positive impact will be seen this year, the majority of the benefits will be generated in 2012, giving the timing of investment costs and the timelines required to complete the more complex initiatives. Turning to Page 12, operating income in the first quarter was $36.8 million or 3.9% of net sales, down 120 basis points compared to last year's first quarter. While our business fundamentals continue to improve with higher sales and gross margins, higher legal spending and the impact of legal settlement activities discussed earlier resulted in a year-to-year decline. Turning to Page 13. Earnings per share for the quarter was $0.05. Higher sales and gross margins were offset by higher legal and settlement-related activities, which impacted operating income. In addition, higher interest expense more than offset a lower tax rate in the quarter. We discussed cash flow on Page 14. Cash flow for operations for the quarter was $42 million compared to $245 million in the first quarter of last year, driven primarily by our decision not to factor domestic receivables at the end of last year, resulting in incremental collections of $300 million in the first quarter. Capital expenditures for the quarter were $45 million, up $21 million from last year, reflecting the timing of tooling investments and the expansion of our manufacturing plants. For the year, we expect to spend about $165 million to $175 million in capital as we continue to invest to increase capacity at our own manufacturing plants. We expand our retail operations at American Girl and make strategic IT investments to improve our effectiveness and efficiency. The improvement in operational cash flow was partially offset by our capital deployments initiatives, namely our share repurchases and our quarterly dividend payment. Our cash on hand at the end of the quarter was $1.1 billion, up $178 million from the prior year's first quarter, primarily due to a higher beginning cash balance of $1.3 billion this year versus $1.1 billion last year. Inventories were up $178 million compared to last year. The increase in inventories was expected given low inventories last year and our need to improve customer service, the higher cost base due to the rising input costs and the build of products to support the upcoming Cars 2 and Green Lantern theatrical releases. We expect inventories to continue to be higher in the first half of this year, driven by our push to improve our customer service levels to support POS momentum and new entertainment properties, as well as higher input cost. We continue to have a strong balance sheet and a business that generates strong cash flow, which we deploy to enhance shareholder value. In addition to repurchasing 4 million shares of our stock in the first quarter, today, we announced our second quarter dividend of $0.23, reflecting the annualized dividend of $0.92 per share, which represents an 11% increase to 2010's annual dividend. So in summary, we are pleased with our solid quarterly results but recognize we are in the early stages of the year. Our fundamentals are strong, our management experience, and we remain keenly focused on consistent value creation for our shareholders. And as Bob mentioned, we believe we can achieve this by executing our three overarching global strategic priorities: to deliver consistent growth by continuing the momentum of our core brands; by optimizing entertainment partnerships, building new franchises, and working to expand and leverage our international footprint; to build on the progress we've made on improving our operating margins through sustaining the gross margin and delivering another round of cost savings; and to generate significant cash flow and continue our disciplined, opportunistic and value-enhancing deployment. That concludes my review of the financial results now. We'd like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from Sean McGowan of Needham & Company. Sean McGowan - Needham & Company, LLC: A couple of quick ones to either Bob or Kevin, do you think that the high-single-digit price increase announced for April 1, do you think that caused some inducement due to early buy on the part of retailers?

Sean, this is Bob. Not really. Historically, there isn't -- the economics aren't great in this business to buy in advance. It's not like my experience in the food business or in packaged goods. So we didn't see any special pattern during the quarter that would indicate that, and I haven't heard anything for retailers that would indicate that. Sean McGowan - Needham & Company, LLC: Okay. So the price increase that you did get that helped with margins in the first quarter is not the high-single-digit price increase, right? Just to clarify.

That's right. It was really kind of the carryover from last year's much more modest price increase. Our price increases this year, globally, really are effective April 1. There were a couple of markets internationally that priced a little earlier because that's their tradition. But generally speaking, it was the carryover of last year's more modest price and more modest costs. Sean McGowan - Needham & Company, LLC: I know Cars is an ongoing line. Green Lantern is not. Were there much movie-related shipments in the first quarter tied to those two properties?

Not particularly. Some retailers are buying particularly Cars. Cars is now in its sixth year. It continues to do really well at retail. So I think retailers are pretty excited about that. But it wasn't a big factor in the quarter. Most of those shipments will fall in the second quarter. Sean McGowan - Needham & Company, LLC: Okay, great. And then last question, how much of the -- to extent that you can share with us, how much of the American Girl's growth is from new stores rather than from the catalog?

The growth has been pretty broad-based. The stores have done well, and the catalog has done well, which is now really the Internet, not the catalog. New characters are doing well. Yes, we do get some lift from the new stores. But really, for the last, gosh, two or three years, it's been pretty consistent across the portfolio. Sean McGowan - Needham & Company, LLC: Okay, great.

Our next question comes from Robert Carroll of UBS.

Just one quick follow-up on Sean's question, I guess, alluding to the high-single-digit price increase from April 1, I mean, based on the orders that you guys had taken during Q1, I mean, how effective has that been in passing through to retailers?

Well, they didn't buy products at the new prices in the first quarter. I would just tell you, our discussions with retailers have been reasonable. Nobody wants to raise prices. We’ve worked very hard and continued to work very hard on cost reductions to offset inflation in commodities. I think oil is probably 35% higher than it was a year ago. Labor in China, the minimum wage is up 20% on top of last year's 20%. So the costs are real. We haven't been able to offset them fully with cost reductions, so we have priced. We're not alone in this. If you look at other goods, whether it's food products or clothing products, certainly anything with a petroleum-base, costs are up and our prices have had to go up. So it's not -- these are cost-justified price increases. So despite the fact that none of us likes to go up in price, I think everybody understands it.

Right. So retailers have been, call it, receptive to understanding why they're going up and passing through?

Yes, I don't know if I'd use the term receptive. They are understanding. A lot of them make private label toys. They deal with Asia manufacturing and all sorts of goods, and they understand that costs are higher, cost of labor are higher, cost of transportation are higher, costs of anything based in plastic are higher. So that's the environment we're in. And again, it's unfortunate, but we're not alone in this.

Right. Then, I guess, just the inventory that's on your balance sheet, it’s obviously up versus a low base year-over-year. But, I mean, are you guys comfortable with the levels, like is it higher than normal just because of the buildup in anticipation of the entertainment properties or anything?

Well, there's really three things, Rob, that are driving it. First, our inventories were too low last year. We had service issues, as many of you will remember. Customer service issues, they had out-of-stocks on our products. So, unfortunately, we did not have sufficient inventory last year. And if you look at our inventory, one way to look at it is, I know some of you do, is as a percent of sales, it's about where it was two years ago. Last year, it was too low. Secondly, I think, as Kevin mentioned in his remarks, the absolute cost increase that we're seeing in products inflates the value of the inventory. And third, we do have high expectations for our entertainment properties this spring, so do our retailers, and we have built products in anticipation of strong demand.

Great.

Our next question comes from Tim Conder of Wells Fargo Securities.

A couple things, and I think you guys touched on this already, but the channel inventories, year-over-year and sequentially, can you just maybe review those, the U.S., North America, International just to kind of give us an update there? And then, you'd talked before in your Analyst Meetings and so forth about some of the other properties that you're working on, Max Steel, Masters of the Universe, obviously, you talked a little bit about Monster High here this morning. But can you give us a timeline on the Max Steel, Masters of the Universe potential timeline, when we may see some media-related support of that looking out over the next couple of years?

Well, let me start, Tim, and then I'll turn it over to Bryan for some additional perspective. The retail inventory is more visible to us in the U.S. than it is in international markets just because we have more robust data in the U.S. But I think we have a perspective around the world. I'd start by, again, reminding you that last year, not only were our inventories too low, but retailers’ inventories of our products were too low. They were out of stock, as you know, in some key categories, and so that was a problem. And so our inventory levels at retail now reflect better customer service from us. According to NPD, the toy business is growing. We're gaining share. So our business is growing, and retailers need inventory to support how the business is doing. And third, I'd tell you, Easter is three weeks later. We are seeing now the ramp up of point of sale supporting Easter. That's obviously later this year than it was last year. So the inventories are a little higher just for Easter. Bryan, international?

On the international front, we didn't see inventories build quite as much as we did here in the U.S. from a retail standpoint. There's still a little bit of a carryover, a little more than I think most of our customers would have liked to have seen. But you have the same dynamics that we have here in the U.S. where we're building inventories in anticipation for Cars 2, Green Lantern. Easter definitely plays a role in some of our countries, where that's an important gift-giving occasion. So it's very similar. Regarding your question on our own intellectual property, I'll start first with Max Steel. As you recall, we have been selling Max Steel in Latin America for almost 10 years now. And that's a business that we built into the number one brand of action figures in Latin America, primarily through DVDs, almost similar to the same model that we have used with Barbie here in the U.S. So it's been very successful, and we're going to continue to support the brand with that kind of entertainment. We had been in discussions with Paramount on that one, but we're moving on that with Max Steel with Brad Weston. He is beginning to work on that. That's likely a 2013 or later event for us. Other things such as Major Matt Mason, Masters of the Universe, those were probably 2013 or 2014 as well. So we have a lot of exciting things going on when we talk about new brands like Monster High. We've got a lot of activities going on then. As you know, we've got a lot of webisodes going on. This year alone, we're going to have almost triple the amount of minutes of webisodes on Monster High. And as I mentioned in my comments, we're going to have a one-hour TV special as well. So we're going to continue to look at multiple screen experiences, whether it be computer screens, television screens, movie screens to get our messages out.

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

I'll let Bryan do Masters of the Universe. I don't look at retail inventories sequentially, and the data isn't that great. So I just look at this year versus last year.

Okay.

And I could guess. Do you want to have a guess, Kevin?

I don't keep the numbers that way.

Sorry, Tim.

No problem. No problem.

Did you have a follow up on Masters?

Yes. Any timing of anything there, Bryan, as far as entertainment is related?

Yes, 2013 at the earliest.

Okay, great.

Our next question comes from Gerrick Johnson of BMO Capital markets.

I was wondering if you could comment on the litigation. What's the timing on the current trial in terms of a verdict? And then after that, what's next? What do we have next in the pipeline, the anti-trust trial and anything else beyond that?

Well, Gerrick, let me start with the MGA case. I think it's most important for everybody to remember that we brought this litigation because of the critical principle at stake. This is about protection of our intellectual property, which is at the very heart of the company's creative work. The jury has the case now. They started deliberating on Monday of this week. When they have a verdict, they'll have a verdict. No one knows when that is, but whatever the verdict is, our first priority is, and always has been, to make and sell the best toys in the world. And we'll continue to do just that. I think whatever plays out from the verdict will play out from the verdict. I don't know that any of us knows what exactly the next steps will be. I'm sure there will be appeals of the verdict, and that will play out. But I think until we have a verdict, I don't think anybody has any real insight into what the future's going to be in terms of that litigation. As you know, my goal was to put this behind us. I have been clear for some time now that I'd like to figure out a way to move on from this case. But it takes two to agree to that, and we haven't found that place yet. So in the meantime, we'll continue, and we'll await the verdict.

Okay. Previously, it was all about the Bratz property and potential the damages that you would be awarded. But now it’s a countersuit claiming corporate espionage. Is there a possibility that there could be damages that you guys would have to pay to MGA?

Sure. There is essentially three things the jury is considering. One is copyright claims that we have against MGA. Secondly is interference of contractual obligations that we have against MGA, and third, each of the two companies is alleging trade secret theft from one another. And so those are the three things, broadly speaking, that the jury is contemplating as we speak.

Okay. And just lastly, on that issue on Page 17 of your deck, you show $18 million in total legal and litigation settlements. But on -- I think it's on Page 10, you have $26 million. What's the difference there between the $18 million and the $26 million incremental in the quarter?

Yes. Kevin, what's the difference between $18 million and $26 million incremental in the quarter?

Yes, I think the -- No, that would be the $8 million reversal of legal settlements that we had reversal in 2010 of $8 million related to the recall in litigation settlement. And this year, there's an absence of that reversal.

Okay, I see. All right. Great.

Our next question comes from John Taylor of Arcadia Investment.

I got three questions, I guess. First, I want -- Cars has been kind of an unusually good performer for a long time. And I'm wondering if you might be able to talk a little bit about -- give us a sense of what the base is in 2010 so we can make some guesses about growth. And I don't -- if you don't want to do that, maybe talk about Toy Story 3 and Cars together or just give us some sense of kind of what's going on with the growth potential on the Pixar side. That's the first one. Second, I wonder if you could talk a little bit about the Fisher-Price Domestic business and what you see as low-hanging fruit, if there is any, and kind of what changes are likely to be there? And third, I guess this for you Bryan, maybe talk a little bit about Monster High. I mean, how culturally relevant is that to markets outside of here given the thematic matter or whatever, maybe sort of put that into a global perspective for us?

Well, let me start, J.T. because I'll be the most evasive. Cars is a big deal. This is the sixth year. The movie comes out June 24. The product's going to be on shelf in the middle of May. We've got more characters as Bryan mentioned, with 70 new characters. It's got more global appeal with World Grand Prix races in Japan and Italy and the U.K. There are new play patterns with the spy adventure, so it's a big deal. Disney knows it's a big deal. We believe it's a big deal. Our retail customers believe it's a big deal, and I think you're going to see a lot of Cars in stores based on the fact that we've got a six-year track record now with this IP that Disney created. So it's hard to -- I don't want to quantify it. Toy Story is holding up very nicely. It's an evergreen property. So this is a great year for us in terms of Pixar stuff. But we don't provide a lot of insight into the size of that box. Bryan?

Regarding Fisher-Price, J.T., I guess the way that I would take about it is, it's a tremendously strong brand with global appeal. And with that, we face very different competitive situations in different parts of the world. The reason I mentioned that is, our goal with Fisher-Price is to really sharpen its consumer positioning so that moms, whether they're in the U.K., in Mexico, U.S., Japan, really clearly understand what Fisher-Price can do for them. So as we think about that with the U.S., we're going to start with trying to sharpen how we speak with moms about the importance of Fisher-Price and how important Fisher-Price is for the development of their children. So we're working on that. Secondly, in terms of low fruit, we're going to be also focusing more on retail execution this year and making sure that we're really partnering well with our retail customers to make sure that we have terrific displays of Fisher-Price. We have usually great space with our customers, but we need to take better advantage of that and communicate our benefits to consumers. So, for low fruit, I'd say those are the two things that we're focusing on.

Can I follow up on that real quick? So those are mostly sort of umbrella sort of approaches, as opposed to product-specific or category-specific kind of things?

Well, we're going to be looking at a whole variety of things. But in terms of short term things that we can impact tomorrow, we can certainly impact how we're communicating to moms, and we can certainly impact how we're executing at retail. Now the Fisher-Price product line has a lot of great things going for it at the moment. Sing-a-ma-jigs! is still selling very well. I think you saw the I Can Play case for smartphones, where we're bringing Fisher-Price into technology in an interesting way. So, again, from a short-term low-fruit standpoint for this year, we're really focusing on our communication with moms.

And also remember J.T., this is Bob, Fisher-Price gained share last year in a growing segment of the Toy business. So we clearly want to do better in Fisher-Price, but it's not as if we're digging out of a hole in Fisher-Price. We're just not doing as well as we'd like to do when we look across the rest of the portfolio.

Yes.

Okay.

And regarding the appeal of Monster High globally, it's doing very well outside the United States. If you look at the timing, I would say, on average, we're probably two to three months behind the U.S. in terms of the timing of the rollout. And as you'll recall, we were talking about being short on inventory in product. We elected last year to slow down the global rollout of Monster High so that we can really deliver product well in select countries early on, rather than having massive global shortfall. That would not be a good way to launch a new product. So, we're seeing positive momentum outside the U.S., and we're doing, essentially, a lot of the same things in countries outside the U.S. as we are here in terms of promotions and webisodes and things like that.

Okay, great. So the promotions or the webisodes are basically the same ones we are using here? You'll do anything specific for any markets outside the U.S.?

Well, short of translating them into local languages, no. There'll be different local promotions that take place just as we do with Barbie or Hot Wheels or Fisher-Price. The core of the content is applicable in almost every culture.

Yes, so well Bob, let me go back to your evasive answer, if I can. So, Cars was a pretty good size base in 2010. I think there's just a lot of curiosity, a lot of questions about sort of how big that base is relative to what the growth potential is. If there's any way to scale that with any shred of anything, it would be most appreciated.

I get the question, J.T., but, I guess, the only thing I'd tell you is, we all know it's a great business, and it has been a great business consistently now for six years. And we're going to see a lot of promotional support around this movie. It is a great movie, and I think if you go back to when the first movie ran, we all know we left some business on the table, and we all want to take advantage of it. So, how much of it's incremental since it's already got a big base? We'll all find out. I can just tell you that Disney is high on it, we're high on it, retailers or high on it, and I don't have any reason to believe consumers aren't going to be high on it.

Our next question comes from Michael Kelter of Goldman Sachs.

Just wanted to ask, coming up in the spring and early summer, there are several boys' movies between Cars and Green Lantern and Thor and Captain America and Transformers. How do you see the retailers, they're treating -- that kind of environment, where they're going to have to make inventory choices? And, frankly, I can't imagine where all the shelf space is going to come from. So, can you talk about how the trade-off might play out?

Well, it's a great question to ask them. But like we do, we've got a portfolio of dozens of brands around here, and we make decisions everyday on what inventory we're going to make, just as our competitors do, and retailers do the same thing. They've been around a long time. They've seen the impact of movies. There is sort of large, medium and small toy movies, and they make their decisions on what they want to promote and what they think is going to sell. So if you really look at the grand scheme of the thousands of SKUs in the toy aisles, figuring out which brand to promote around a movie, I don't think is all that challenging for them.

And then on Barbie, which did phenomenally well, I'm wondering what your outlook is on the brand for kind of the rest of the year. As you start to anniversary the bump you got from Toy Story, do you think you could still grow off that base? Or is the compare just too difficult given the movie support last year?

Well, we're feeling positive about the momentum that Barbie has. As we look at POS here in the U.S., it's been pretty consistently growing high-single-digits throughout the first quarter. As you know, Easter plays havoc with week-on-weeks during this time of the year, but the momentum is strong, the momentum in international, they've really done a terrific job of carrying the momentum they've built in the second half last year through the first quarter. But then when you think about what we're doing with Barbie, everything focuses on fashion, aspiration and cultural relevance. And whether it's the Barbie and Ken promotion that they're back or a new Barbie A Fairy Secret movie, that's doing extremely well. The DVD sales are tracking towards equaling last year's DVD, A Mermaid Tale. That movie is going to be on Nickelodeon on April 17. Fashionistas continues to grow. I CAN BE… continues to grow. Barbie launched her 127th career of being an architect. So, if you look at all the various components of Barbie, we've really done, we think, a good job of staying true to the essence of Barbie, which is again, fashion, aspiration and cultural relevance. And if we stick to our knitting, we feel like we're going to carry the momentum throughout the year.

And then on the price increases, I just want to follow up on a question from earlier in this call. Obviously, you guys aren't planning for just a straight take 8% to 9% on top of your current sales and roll it forward. I mean, there is some sort of elasticity or leakage out somewhere. How would you help us frame how you might realize in total that price increase and what the -- where might it leak out?

Well, we can't do the arithmetic for you or make the assumptions for you. But there clearly is some elasticity of demand on all products. So we build that into how we think about the business. That said, historically, the Toy business has held up well in tough economic times. It grew last year, as well as it's growing in the 10 years I've been in the business. It's off to a good start so far this year. So, there's a lot of stuff going on in the Toy business. There's good innovation. There is good entertainment properties, there is good core brand momentum. In tough times, people want to make sure their kids are in good shape, and I'm bullish on the Toy business, and we've got the momentum right now. We're gaining share.

And one last question, on SG&A, the new program, Operational Excellence 2.0, what are the big -- I mean, you listed some of the programs or initiatives you're going to be undertaking. Which might be the biggest one, or biggest one or two, that you think is going to be most impactful to the financials?

Yes, I think the primary drivers of the $150 million program, first is, obviously, legal spending of about $75 million. And then we've got $75 million of structural savings, which we executed through a handful of important initiatives, including SKU productivity and rationalization initiatives, global brand teams in our North American division reorganization, continuation of the global procurement process, and we're also looking at packaging optimization.

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

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

Our next question comes from Margaret Whitfield of Sterne Agee. Margaret Whitfield - Sterne Agee & Leach Inc.: I wondered if you could discuss the entertainment outlook for 2012, what would be a Monster High movie, and anything from Disney to carry on with the success you've enjoyed lately?

It's Bryan. In 2012, we've got several things coming up. We've got Batman, Superman, Madagascar and a new movie from Disney call Brave, so, we're excited about those. With Monster High, as I mentioned earlier, we're probably looking at 2013 at the earliest for a movie there. But again, the key with Monster High is we've been able to build this brand essentially through webisodes and Web activities and not necessarily through what we would consider more traditional toy brand building on television. So we're going to continue to work with Monster High. We have two more books coming out this year as you know, with American Girl, books are very, very important part of that. So we have two books coming out this year. So, we're going to continue to build that brand in what we would consider kind of nontraditional ways. Margaret Whitfield - Sterne Agee & Leach Inc.: And the uptick and the Disney line in the quarter, was that Tangled? Or was there something else factored into the growth?

Well, Tangled, there's two things going on there. As you'll recall, Tangled was launched in the U.S. in the fourth quarter, and it's been gradually rolled out as a theatrical release throughout international this year. And the Tangled DVD, I believe is, out in the U.S. So we get some good momentum behind Tangled at the moment. Margaret Whitfield - Sterne Agee & Leach Inc.: Finally, with Neil Friedman arriving as Toys"R"Us as President, might that mean a change in their private label stance, any thoughts there?

No. That'd probably be a better question for Neil than for me. But I'll tell you, I am thrilled for Neil. I think Neil is the right person for the job, and I think the job is the right one for Neil right now. So, I think he'll do incredibly well at Toys"R"Us, so I'm really happy for him.

Our next question comes from Greg Badishkanian of Citigroup.

So Bob, you guys did a really nice job in the quarter, particularly given the headwinds at the end of holiday. I'm just wondering, for 2Q setup, are your competitor inventory levels at retail more normalized? Or do you think the retailers would have to discount anymore to kind of clear out some of your competitor inventories in the channel?

I don't have great visibility into that, but based on the discussions we've had with retailers, I think they are making progress getting rid of the carryover that they had this year. They ended the year with a little bit higher inventory than they wanted, and they knew that it was going to take the spring to get it done. Exactly which day they're going to be more bullish? I don't know. It's probably going to vary by retailer. But again, the good news is, the toy category is growing at retail. That's a good thing for all of us. So it's a growing business. We're gaining share. Our shipments have been up despite the overhang that's out there because retailers have to buy the toys that are selling, and we've got our fair share of those. So the overhang is, it was a little bit of an issue, but I don't think it was a real deal-breaker here, right?

And sometimes, you give a little bit more color on POS, particularly because it's not always consistent with NPD. Your internal is a lot more accurate. Can you maybe give a little bit more of a range on maybe how Q1 turned out?

Well, it's really hard because of Easter. Easter is the second-biggest toy season. And with Easter being in the first quarter last year and the second quarter this year, we can make some assumptions and do some arithmetic, but now we're getting to a level that I just wouldn't feel comfortable giving external perspective on it. I think, in general, again, the Toy business is growing. We're doing fine. The feedback we're getting from retailers is good, and we've got the momentum right now.

And our last question comes from Andrew Crum of Stifel, Nicolaus. Andrew Crum - Stifel, Nicolaus & Co., Inc.: I'll just ask one question here. Kevin, can you give us the profit growth from the International business. And the cash balance overseas, did that have any impact on the share buyback activity during the quarter?

Yes. Drew, at this time, we can't give you the profitability of the international operations. That will be in our 10-Q that we'll be filing in a week or so. And we've got cash all around the world. Having access to that cash for where we need it, when we need it is not an issue, but we do have cash offshore.

Thank you. There will be a replay of this call available beginning at 11:30 a.m. Eastern Time today. The number for the replay is area code (706) 645-9291, and the passcode is 51468985. Thank you for your participating in today's call.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.