Mattel, Inc. (MAT) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Mattel Second Quarter 2011 Earnings Conference Call. [Operator Instructions] And as a reminder, this is being recorded. I would now like to introduce Mr. Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations. You may begin.

Thanks, Mary. As you know, this morning, we reported Mattel's second quarter financial results. As we did with our first quarter call, we have provided you with a slide presentation to help guide our discussion 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 made during the call may include forward-looking statements relating to the future performance of our overall business. These statements are based on currently available information, and they are subject to a number of significant risks and uncertainties, which could cause our actual results to differ materially from those projected in the forward-looking statements. We describe some of these uncertainties in the 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. Additionally for your reference, we have added quarterly and annual revenue growth trends to the other information that is available at mattel.com. Now I'd like to turn the call over to Bob.

Thank you, Drew, and good morning, everyone. I'm very pleased with our record performance in the quarter. While the second quarter is typically all about the big entertainment properties and certainly, Cars 2 was big for us, our global portfolio of core brands is also fueling momentum. Our girls portfolio is firing on all cylinders, including Barbie, which posted its largest second quarter growth in more than a decade. We've seen strong performance across-the-board including in the Barbie Family, Fashion and Beauty, Princes and I CAN BE... lines. Additionally, Monster High continues to build momentum globally, and has earned itself a starring role in our girls portfolio. And we're excited about the Monster High fall product line and marketing plans, which include a one-hour TV special, debuting in the U.S. later this fall on Nickelodeon. Disney Princess continues to perform very well across all regions, driven by strong sales of dolls, accessories and play sets based on the film Tangled, which released on DVD in several territories during the quarter. In 2012, Mattel will be developing a range of products in support of the next Disney/Pixar film, Brave, a fairytale that features Merida, a Scottish princess and archer. The film is slated to release in June 2012. And American Girl kicked off its 25th year celebration with a resounding start. Since its founding in 1986, American Girl has sold more than 135 million books and nearly 20 million American Girl dolls. The American Girl magazine has a circulation of more than 470,000, ranking it among the top 10 children's magazines in the nation. And since the first store opened in 1998, American Girl's proprietary retail stores have welcomed nearly 40 million visitors. To celebrate this milestone occasion, American Girl is offering special in-store events and limited-edition merchandise, as well as a first-of-its-kind cruise for fans, which sold out in 3 days. In the boys' aisle, Hot Wheels launched the brand's new positioning of thrilling vehicle experiences, which will broaden the vision from being a toy brand to a boy brand for vehicle-loving boys of all ages. The overarching brand campaign is designed to capture the attention of boys of all ages around the world with Team Hot Wheels, a team of mystery drivers that perform outrageous vehicle stunts for real. And the first for-real stunt was setting a new world record with a 332-foot distance jump at the Centennial Indianapolis 500. For those of you who missed it live at Indy or on TV immediately following the 500, check it out on YouTube. It was spectacular. While Hot Wheels' shipments were down for the quarter, primarily due to strong retailer support and buy-in of Cars 2, we remain optimistic on Hot Wheels given improving POS trends, continued strong international performance and new innovative product in the fall, including Wall Tracks, Video Racer and the continuation of the Rev-Ups line. As we've said, our entertainment strategy continues to be partner with the best, and be the best partner. That means alliances with entertainment powerhouses like Disney, Pixar, Warner Bros., DreamWorks, WWE, Nickelodeon and HIT, to name a few. And we kicked off this summer with 2 great movie properties, Cars 2 and Green Lantern. Driven by the global box office success of Cars 2 and significant promotional support at retail, we've experienced strong selling on the line and we're encouraged with sell-through. We expect the Cars franchise to continue to perform as an evergreen entertainment property. We're also pleased with initial sales of our Green Lantern line. And as children become more familiar with the character range and unique world, we expect to continue to see good performance as the animated series will premiere in November on Cartoon Network. For Fisher-Price, we see significant strategic opportunity to leverage the brand globally. As we work toward that goal, the brand is meeting expectations with a solid second quarter performance for Fisher-Price core, driven by strength in the Infant and Preschool categories and Baby Gear. Fisher-Price Friends was down, as expected, due to the departure of Sesame Street, but we're very pleased with the performance of Thomas and Friends on a worldwide basis. As we enter the all-important second half of the year, we continue to build positive momentum in the marketplace, and we remain keenly focused on delivering consistent growth by continuing the strength in our core brands, working to expand and leverage our international footprint, optimizing entertainment partnerships and building new franchises. And we're also focused on building on the progress we've made on improving our operating margins and generating significant cash flow and deploying it effectively. At this time, I'd like to introduce Mattel's Chief Operating Officer, Bryan Stockton, who will talk a little bit more about our overarching entertainment strategy.

Thank you, Bob, and good morning, all. As Bob mentioned, there were many contributors to our strong second quarter results. No doubt, one of them was the success of our Entertainment business, which was up 41% in the quarter. And while certainly the early success of Cars 2 was a significant piece of this growth, the story is larger than that. So I'd like to spend some time discussing our entertainment strategy and sharing some of the recent successes. Simply put, our goal is to be the partner with the best and be the best partner. As a part of that strategy, we treat others' intellectual property as our own, meaning that we marry our deep knowledge, experience and innovation in toys and play to outstanding intellectual property. Our global scale really gives us a strategic advantage in the entertainment space, enabling us to build meaningful partnerships with the best companies. These relationships can be both strong and deep, covering not only global toy licenses, but also areas like media spending and content placement from Mattel's intellectual property as well. And because of our portfolio approach to brand management, we are the destination for top entertainment brands, which allows us to translate entertainment brands to toys better than anyone in the industry. Entertainment partners look to Mattel for 2 reasons: to help optimize their intellectual property into long-term, sustainable evergreen properties and to take advantage of our vast global footprint that allows Mattel to develop our retail presence in toy aisles all around the world, concurrent with their rollout of their intellectual property. This global reach and approach also enables our entertainment partners to gain full access to consumers around world to leverage their content. A great example is Disney Princess. As you may recall, due to our stellar performance in the U.S. and Latin American markets, we are now responsible for Disney Princess virtually around the globe. And we've also partnered with one of the premier global preschool properties, Thomas and Friends, as well as with the WWE, which is expanding its own franchise globally. As Bob mentioned, Mattel makes toys for some of the biggest entertainment companies around: Disney, Pixar, Warner Bros., DreamWorks, WWE, Nickelodeon and HIT, just to name a few. Our Disney relationship is a long-standing and multi-dimensional from infant, preschool and boys and girls. And for this summer, the standout is obviously Cars 2. As Bob mentioned, our Cars 2 line is off to a strong start, with good sell-in and sell-through. To date, the launch of Cars 2 is even outperforming the launch of last year's much anticipated Toy Story 3. We are well-positioned with the right licenses in areas like Diecast cars and track sets, categories that have historically driven the business and help support the creation of an evergreen brand in non-movie years. These core play patterns are prominently featured in the second movie, which showcases hundreds of new characters, new settings, multiple races and the all-new spy action theme, which all help drive collectibility and new ways to play. And the promotional support at retail on a global basis is phenomenal. Disney will continue to support this franchise with new content, including new Cars Toon shorts that will air on the Disney channel throughout 2012. Additionally, Disney Toon Studios announced Planes, a full-length CG animated movie set high above and inspired by the world of Cars. Planes will be available on Blu-ray and DVD in spring 2013. Toy Story products continue to sell well, and we were excited about the inclusion of Barbie and Ken in the newly released Toy Story short cartoon, Hawaiian Vacation, which is being shown at the beginning of all Cars 2 screenings. We created a dedicated range of products based on the Hawaiian Vacation theme. And we will continue to support Toy Story this fall with new collectible segments and play sets featuring a new space theme. Disney will continue to support the franchise with new cartoon shorts throughout 2011 and 2012, including an all-new short airing at the beginning of the Muppets feature film this fall. In line with Disney's strategies to continue to tell great stories, confident that the Cars franchise, like Toy Story, will continue to be a true evergreen property for both the Mattel and Disney. As I mentioned earlier for Disney Princess, our rights extend to most the world now. Tangled sales have been outstanding, and the property continues to perform very well. We're excited that Disney will be releasing an all-new Tangled animated cartoon short in 2012, featuring the wedding of Rapunzel and Flinn, which will firmly establish her in the princess family. As Bob mentioned, Disney/Pixar will also produce its first princess feature film, Brave, releasing summer 2012 worldwide. And we'll have a full range of dolls, accessories and play sets to support Brave. Our Disney partnership continues to build beyond the boys and girls aisles and into the infant and preschool aisle with Disney Junior properties. We will feature Rock Star Mickey in the back half of 2011, and expand the Minnie line in early 2012. As we look forward to 2012, we will be launching a new line for Jake and the Neverland Pirates!, a Disney Junior property for preschoolers based on the world of Neverland from Peter Pan. Product will hit stores in the fall of 2012 in the U.S. and globally, in 2013. Our Warner Bros. DC Comics alliance continues to strengthen with the theatrical release of Green Lantern, which is the next superhero star from the DC Entertainment portfolio. This quarter, we launched a comprehensive line featuring action figures, vehicles, role play and collector products, celebrating more than 50 years of heritage behind this property. And Warner Bros. has announced its plans to extend the Green Lantern franchise, which will be supported by the theatrical DVD release and the launch of the animated series, both slated for fall 2011. In spring 2012, the Green Lantern animated series joins the new cartoon network DC Nation Block, that will feature multiple characters from the DC Universe. The next major Warner Bros. feature film will be the new installment in Christopher Nolan's Batman series, Batman, The Dark Knight Rises, releasing worldwide in July 2012. Warner Bros. has also announced an all-new Superman feature film for holiday 2012. And we're excited to support both movies with a full range of product. WWE is continuing to sell well in all countries in which its programming airs, driven by WWE's strong consistent TV programming and our continued innovation across the range like FlexForce. On the entertainment circuit, this SummerSlam event is coming to Los Angeles in August, which is one of WWE's biggest live events in the second half. And for spring 2012, Wrestle Mania 28 will be in Miami. And if you follow wrestling, you know that Wrestle Mania is the Super Bowl of wrestling. So it's already big news. However, what will make it even more exciting is that the Rock will square off against John Cena in a match. This will be our first show-to-shelf opportunity, as we know the matchup far enough in advance to create some really exciting profit. Mattel recently entered into an exclusive licensing relationship with DreamWorks Animation, in which the company will serve as the worldwide master toy licensee for a number of DreamWorks Animation theatrical film releases and television series. The DreamWorks innovation theatrical releases featured under the licensing relationship include Puss in Boots, The Croods, Madagascar 3 and Rise of the Guardians, as well as the television property Kung Fu Panda, Legends of Awesomeness. And Nickelodeon continues to boast one of the longest-running and most successful preschool properties with Dora the Explorer, who recently celebrated a 10-year run. The Dora the Explorer Fiesta Kitchen will be a key driver for us this holiday season, as well as the Magical Fairy Dora. For our new Thomas and Friends partnership with HIT, we're encouraged by our second quarter retail performance and promotions. New introductions in the preschool targeted Discovery Junction segment, the Diecast Take-N-Play sets and the motorized TrackMaster master category will engage consumers throughout the second half of the year and further drive sales, supported by solid retail promotional programs. But these days, entertainment can happen anywhere a web-enabled device or smartphone is. So when we think of partnering around great content, we are not constrained to the box office. When a great digital property makes sense as an analog toy, we can translate digital play into on-the-carpet play. A great example is Angry Birds, the #1 smartphone game app in the world. Our new children's action game, Angry Birds Knock on Wood, is just hitting shelves and is off to a great start. The success to each of these entertainment partnerships is in our deep understanding of the way toys can enhance that cherished relationship that children have with characters on the big and small screens. Our toys serve to enhance and build upon that connection so that children can turn their 2D relationship into a 3D one, bringing it to life through play. Our partners also know that when they choose Mattel as their partner, they have instant access to children around the globe. That's why Mattel is, and will continue to be, the partner of choice in entertainment. And 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. Recognizing we're just entering our peak season, our strong second quarter and first half results continue to validate the progress we're making towards our profitability goals in the face of a challenging cost and economic environment. We remain focused on delivering consistent growth by continuing the momentum in our core business, working to expand our international footprint, optimizing our entertainment partnerships and building new franchises. We see top line growth as an important piece for profit growth strategy. In addition, we remain committed to improving our operating margins through sustaining our gross margin and delivering another round of cost savings. As we continue to achieve these priorities, we expect to generate significant cash flow and continue our disciplined, opportunistic and value-enhancing cash deployment. In the quarter, we continued to see success across our entire brand in geographic portfolio with worldwide revenues up 15%. The strong performance was anchored by solid growth, both domestically and internationally, and in entertainment licenses, core brands and our new franchise, Monster High. In addition to momentum in our top line revenues, we're continuing to ensure sales gains are translating into profit increases. Central to this strategy is proactive [ph] management of gross margins. Gross margins continue to meet expectations and were essentially flat for the quarter. And we are pleased with this result given the strong mix of entertainment properties. For the first half of the year, gross margins are up slightly despite a challenging input cost environment. The key drivers have been both the implementation of a price increase this quarter and supply chain efficiencies realized through our Global Cost Leadership and Operating Excellence 2.0 cost-saving programs. Starting on Page 5 of our slide deck, you can see our worldwide gross sales are up 15% for the quarter. We continue to feel good about sell-through trends domestically, as well as internationally. And based on year-to-date 2011 NPD data, the U.S. toy industry continues to grow, and we continue to gain share. As expected, retail inventories are higher than a year ago, but the primary drivers here remain like inventory levels from a year ago and supporting our momentum in consumer takeaway. For the quarter, retail inventory levels came down on a percentage basis versus the quarter and are in line with historical averages. Overall, we remain comfortable with retail inventory levels as we enter the second half of the year. Let's turn to Page 6 and 7 of the slide presentation to see the segment perspective on revenues. Worldwide sales from Mattel Girls & Boys Brands segment were up a robust 22% for the quarter. As Bob outlined earlier, our Girls business really had a strong quarter. Barbie sales momentum continues, driven by our core fashion and I CAN BE... lines and the introduction of our new Barbie Family platform. Monster High and Disney Princesses continue to drive growth in our Other Girls business. On the boy side, the strong growth in our Entertainment business was primarily attributable to Cars 2, which is meeting our high expectations. We had excellent support from our retail partners, and we have seen strong sell-in and initial sell-through. Green Lantern provided a boost to sales are meeting expectations. In the Wheels category, while Hot Wheels performance for the quarter was down slightly due to strong retailer support of Cars 2, we continue to see strong demand at Diecast cars and our new Rev-Ups line. In the Games category, we saw strong growth in our UNO brand in the quarter. Worldwide sales for Fisher-Price Brands were up 4% for the quarter. Our Fisher-Price core business including Baby Gear was up for the quarter, driven by solid results in our Baby Gear, Infant, Preschool and Boy categories. Fisher-Price Friends is down in the quarter with decline being driven by the discontinued Sesame Street licensing. Normalizing for that, Fisher-Price Friends sales will be up in the quarter driven by Thomas, our new license agreement with DreamWorks and Sing-a-ma-jigs!. American Girl continued to deliver strong results from sales in the quarter up 13%. The second quarter results benefited slightly from the earlier Easter timing shift. And overall, the brand is doing very well as we are seeing solid performances in both our direct and retail channels. Our International business you see on Page 8 had a standout quarter. All of our regions including Europe, Latin America and Asia-Pacific had strong revenue growth in the quarter. We saw a considerable strength in Latin America, particularly with Brazil and Mexico. And we continue to be encouraged with performance in Europe in light of the economic climate. Also, Asia-Pacific continues to deliver strong growth, although often much smaller based. Now let's review the P&L starting on Page 9 of the slide presentation. For the quarter, gross margin was 47.9%, down slightly by 20 basis points from last year. The quarter was impacted by higher input costs and royalty expenses associated with the increased revenues in our licensed entertainment properties, which was almost completely offset by our pricing action and supply chain efficiencies as we continue to proactively manage our business in this inflationary cost market. As seen on Page 10 of the slide presentation, for the quarter, selling, general, administrative expenses increased by approximately $12 million, or 4% to $331 million. As you can see, we got good leverage on our sales gains for the quarter. As a percentage of net sales, SG&A expense was 28.5%, down 280 basis points, compared to the prior-year's rate of 31.3%. Looking at the cost drivers for the quarter, foreign exchange accounted for almost 2/3 of SG&A increase in the quarter. To help offset those increased expenses, we are starting to see the benefits of Operational Excellence 2.0, which contributed $7 million in gross SG&A savings in the quarter and $10 million for the first half. Other benefits in the quarter were lower incentive and equity compensation expense and reduced legal settlement spending, which dropped $4 million year-over-year in the second quarter. For your reference, we continue to include an updated historical trend summary of our incremental legal and settlement costs in the appendix of the slide presentation. Page 11 of the presentation summarizes the performance of our 2-year Global Cost Leadership initiative and a summary of our progress on our new initiative, Operating Excellence 2.0. We are making good progress on this new initiative and have already recognized Operational Excellence 2.0 growth savings of $9 million in the quarter. As I mentioned earlier, $7 million of the savings are in SG&A line, but areas of focus also include gross margin and advertising. Our goal continues to be realized, the $150 million in sustainable accumulative savings by the end of 2012. The primary drivers of these savings continue to be expected to come from a reduction of $75 million of legal spending and $75 million of structural savings executed through a handful of important initiatives. Some of these initiatives are outlined at the bottom of the page. The structural savings initiatives are designed to simplify and align our business. While some of the positive impacts we've seen this year, the majority of the benefits will be we generated in 2012 given the timing of investment costs and the time lines required to complete the initiatives. With regard to legal expense reductions, we remain committed to achieving these savings. We'll be better informed on timing once the judge rules on the post trial motions, and we determine our next steps in the ongoing MGA litigation. As you can see from the slide in our appendix, spending is significantly reduced when we're not preparing for or at trial. Turning to Page 12, operating income in the second quarter was $109.3 million, up 57% for the quarter. Operating income was 9.4% of net sales, up 260 basis points compared with last year's second quarter. As you can see, our business fundamentals continue to improve with good sales momentum, strong gross margins and continued focus on cost savings initiatives. Turning to Page 13, earnings per share for the quarter was $0.23, up 64% versus the prior year. The quarter's improvement was due to higher sales and operating profit, along with the lower share count and the benefit of foreign currency. We discussed cash flow on Page 14. For the first 6 months of the year, cash flow used for operations was $227 million, compared to $372 million last year, driven primarily by our decision not to factor domestic receivables at the end of last year, resulting in incremental collections of $300 million in the first quarter. Year-to-date, capital expenditures were $102 million, up $45 million from last year, reflecting investments to expand our manufacturing plants, American Girl retail expansion and higher purchases of tooling due to timing. For the year, we continue to expect to spend about $165 million to $175 million in capital as we continue to invest to increase capacity at our own manufacturing facilities, expand our retail operations at American Girl and make strategic IT investments to improve our effectiveness and efficiency. Year-to-date, cash flow used for financing activities and other increased due to our capital deployment initiatives, namely our share repurchases and our quarterly dividend payment, as well as the scheduled pay down of long-term debt maturities. Our cash on hand at the end of the first 6 months was $418 million, down $127 million from the prior year. As expected, inventories were up $186 million compared to last year. The increase in inventories was equally attributable to the higher cost base due to rising input costs, supporting growth, which reflects our momentum in consumer takeaway and our need to improve customer service levels versus 2010. We expect inventories to continue to be higher in the third quarter driven by our push to continue to improve our customer service levels to support POS momentum, as well as the impact of higher input costs. However, we expect that the magnitude of these increases to be more moderate year-over-year. On capital deployment, we continue to have a strong balance sheet and a business that generates strong cash flow, which we utilize to enhance shareholder value. Through the end of June, we've repurchased approximately 9.8 million shares of our stock, with 5.8 million in the second quarter alone. In addition, we announced our third quarter dividend of $0.23, reflecting the annualized dividend of $0.92 per share, which represents an 11% increase to 2010's annual dividend. So in summary, we're pleased with our strong quarterly results and recognize we have more work to do since we are just entering our peak season. We continue to have good momentum and strong fundamentals. As Bob mentioned, we believe we are well-positioned to continue to create total shareholder value by executing our overarching global strategic priorities. First, to deliver consistent growth by continuing momentum in our core brands, working to expand and leverage our international footprint, optimizing entertainment partnerships and building new franchises. Second, to build on the promise we made on improving our operating margins to sustaining the gross margin and delivering another round of cost savings. And third, to generate significant cash flow and continue our disciplined, opportunistic and value-enhancing deployment. That concludes my review of the financial results. Now we'd like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from Sean McGowan from Needham. Sean McGowan - Needham & Company, LLC: I have a couple of housekeeping questions for you, Kevin, and then one for Bob. First, was there any of the revenue from Cars included in the Hot Wheels? I think was a little cloudy last time Cars was around, but I just want to be clear on that. There's no revenue from Cars that's included in Hot Wheels?

No. And I think you're confusing Speed Racer with Cars. Sean McGowan - Needham & Company, LLC: You're right. You're right.

I don't think there's ever been any Cars in Hot Wheels. Sean McGowan - Needham & Company, LLC: Second question, how much of the inventory increase was the result of the weak dollar?

It had a minimal impact on inventory and that's primarily, Sean, because our input costs are mostly dollar based, so it really does -- forex doesn't have a major impact on inventory costs. Sean McGowan - Needham & Company, LLC: Right. So the Chinese yuan increasing doesn't really have much of an impact?

It has, Sean. So I think that's -- as we said, equally, it was basically equally, we're supporting growth, our POS momentum, supporting sales levels and also higher input costs and the forex piece would be in that higher input cost. Sean McGowan - Needham & Company, LLC: Okay. And commentary on the tax rate in the quarter and what to expect going forward?

Yes, I think the tax rate in the quarter benefited from some discrete period items. But when we look at 2011 and beyond, I think the tax rate is expected to be around 22.%. Sean McGowan - Needham & Company, LLC: Okay. And then last question, Bob, can you just comment on what you're hearing in terms of retailer tone and how they're feeling about current business and their outlook for the second half of the year? Not specific to Mattel, but just general. And if you want to get specific to Mattel, I'd welcome that.

Well, I think, generally, retailers remain cautious about the economy and the environment and the noise around the world. That said, the toy business has now demonstrated that it's grown in tough times. It's grown in the current environment. It continues to grow today. We have the momentum in the marketplace. We're gaining share. So our business looks pretty good, but I would characterize the retail environment as substantially similar to what we've seen over the last 18 months.

Our next question comes from Drew Crum from Stifel, Nicolaus. Andrew Crum - Stifel, Nicolaus & Co., Inc.: The COGS in the quarter were up mid-teens, I wonder if you could comment on receptivity to pricing by retailers and perhaps the necessity or need to increase pricing again in the second half to offset some of those pressures?

It's Bryan Stockton. We're constantly looking at where we are from a value standpoint at retail. And we've worked very, very hard over the last 3 or 4 years to make sure we get our pricing right and our value right at retail. And in part, that's why we think our momentum has been as strong as it's been in the first half so far of this year. So we're constantly evaluating our pricing and where we are. But it's one of those situations where we have to be very fluid in a dynamic environment. But at the moment, as our margins show, we're in pretty good shape.

Yes, I would say, Drew, that yes, we think we're pretty well aligned right now between pricing and costs. And at this point, we don't anticipate making any changes for the second half of this year. The pricing we plan to effect for the year is already in place. Andrew Crum - Stifel, Nicolaus & Co., Inc.: Okay, that's helpful. And then on the legal front, guys, I know you're not giving any guidance for the second half of 2011. But can you give us an update as to what the next step in the process is? And any thoughts around the timing on the MGA antitrust claim?

Well, we're clearly disappointed with the recent verdict, but we remain focused as a company on making and selling great toys. And the verdict is, by no means, final. We strongly believe that the outcome at the trial level wasn't supported by the evidence or by the law, and we filed and argued our post-trial motions in front of the judge. And so right now, we're waiting to see what his rulings are before we can evaluate our next steps. As it relates to the pending litigation, we really can't discuss the merits of that case other than to point out that we believe those claims are duplicative. We filed a motion to dismiss, which is currently pending. And the judge has set an October date to hear our motion to dismiss. I will tell you, this isn't the first time that MGA has claimed Mattel would be liable for a lot of money. In 2005, they filed an unfair competition claim, which was dismissed. Again in 2010, they filed a RICO claim, which was dismissed. So we feel reasonably good about our prospects here. Andrew Crum - Stifel, Nicolaus & Co., Inc.: Okay. And my last question, either for Bob or Bryan, it relates to the Pixar properties, Bryan, I think you mentioned that Cars 2 had outperformed Toy Story 3 last year. Is that sell-in, sell-through or both? And you also mentioned Planes being released on Blu-ray in the spring of 2013. Do you -- will you guys be making the toys for that? And then my final question relates to Brave. Can you give us a sense as to what the product line, maybe in terms of SKU count, looks like relative to some of the other Pixar properties?

That's a lot to cover. I think first, in terms of Cars 2, we're very pleased with where Cars 2 is at the moment. The sell-in to retail has been quite strong. And that's not just from the shipment standpoint, but importantly, from a retail placement and retail promotion standpoint. We've had terrific partnerships from retailers around the world. So we're very happy with that. We are also -- as we think about that, we think one of the reasons we're doing so well is that our toys are really core to what's going on in the Cars 2 movie. We were very successful at Cars 1. We hope to make that brand an evergreen brand by keeping the play patterns close to the original movie. And so our products today, we think, are responding well. So we're very happy. And the sell-through today is well over Toy Story 3, so we're quite pleased with that. Related to Planes, yes, we will be will be making the product for Planes. We're excited about it, and we're working with them at the moment to try to get that line put together. As it relates to Brave, we're working closely with Disney. It's a little early to predict how broad the line will be and what the various products will be, but we'll be consistent with the rest of that. We suspect that Brave is likely to be more like Tangled in terms of the opportunity that we're looking at, but we're very positive about it.

Our next question comes from Tim Conder from Wells Fargo.

A couple of items. On the inventories, you talked about how third quarter, you anticipate the inventories still being up year-over-year, but basically, the magnitude of the increase coming down. Can you go through a little bit more of those components? And then, is the -- some things in the press, obviously, about some of your suppliers, Disney suppliers, other supplies in the Orient talking about that their orders from their main customers being down 10% to 15%. Can you bridge us between where your inventories are, retailer's planning, are they planning flattish as far as for heading into the Christmas holiday season and the statements there in the press by some of the suppliers?

Well, Tim, this is Bob. I would start by saying our inventory is in line with historical averages. As a percent of sales in the second quarter, our inventory was 67%, which compares to a 10-year average of about 66%. And clearly, last year, was one of the lowest levels on record. And you'll recall that our customer service levels were not acceptable last year. So this year, we are experiencing higher costs. We are taking in more inventory. Our service levels are up, and our market share is growing, and the inventories support the business and those inventories here, I'm talking about being our inventories, as well as retailers' inventories. We've seen good stability in manufacturing this year. We've seen a little less volatility in both the cost line and the service line. So we feel good about how the supply chain is running this year. Just as we get towards the holiday season, as we started to improve the position last year, the magnitude of the year-over-year increase should come down this year. I think, Kevin, if memory serves me correctly, our inventory in the first quarter was up 41%. And in the second quarter, it's some number like 32%...

31%, yes.

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

Yes, and the one, I think, it's about the third and fourth quarter when you think about 2010, or you look at 2010, they are more -- those levels are more in line with our historical average inventory levels. So we'd expect the year-over-year increase to moderate. But we will still see components related to higher costs going up, as well as we'll continue to have higher inventories to support growth. That is the POS momentum during the holiday season.

Yes. And also remember, Tim, that half of our inventory, roughly, is out of our own plants, and certainly, a lot of growth has come from product lines represented by our own plants, like in our girls area. So you won't see those trends reflected in whatever sentiment you might pick-up from contract manufacturers.

Okay. And then you all commented about your POS. You feel very comfortable as a whole and strong POS you said for Cars 2. Can you give us a little more granularity? I think, there have been some concerns about the burn down of the box office on Cars 2 relative to Cars 1. Maybe give us a little more granularity on sell-through domestically, contrast that with international for Cars in particular. And then also just on some of the other key product lines, domestic versus international, from a retail POS sell-through perspective.

Yes, Tim, it's Bryan. First of all, on Cars 2, as we said, we're very pleased with the POS. It's higher than Toy Story 2 right now -- or 3, sorry. And that is consistent globally across all of our geographies. It's doing very, very well. It's continuing to build. We still view it that it's early in the sales of the movie. And were continuing to see our momentum build, and we expect this property to do quite well this year, so that's strong. As you look at some of our other brands, and I'll start with the girls category, we're feeling very positive about where we are with girls, the entire portfolio, if you look at Barbie and Disney Princess and Monster High. If you look across that portfolio, our POS is up very strong double-digit levels. And despite all of the activity in that category with both the terrific Disney efforts and Monster High, Barbie POS continues to be a very solid mid-single digit in the U.S. and slightly higher in international. So we feel very good about that. When you add American Girl on top of that, to round out the girls portfolio, as you know, we had a terrific first half of the year. Kanani continues to do well. We're also just opening up our second store for the year in Washington, and we're feeling very positive about that. That opens up this weekend. So we are feeling positive about the portfolio. Bob mentioned earlier on Hot Wheels that the POS is continuing to improve at a very competitive environment, again, as we look at our portfolio with all the Cars 2 going on. Fisher-Price, the POS continues to improve. And as we mentioned on Fisher-Price, we're really focusing in on retail execution for the second half of the year because these products are very responsive to in-store activity. And so we'll be pushing on that. So I would say POS from a book-to-U.S. standpoint and international standpoint looks very similar and all positive.

Okay. I guess I'd just add to that. Tim, a fun fact that I always look at is, if you look at our top SKUs from a POS standpoint here in the States last week, I think 3 of our top 5 performing SKUs at retail last week were Cars. And if you think about our product line within Cars, we have a basic play pattern that has proven to be sustainable over time going back to the first launch of the movie. So we're feeling pretty good about the momentum on Cars at retail. And the other point I'd make is, when you look at Cars or even our own intellectual property like Monster High, those properties have both now, at least from a shipment standpoint, they're over 50% outside the U.S. already.

Yes.

So the international momentum is also there on these entertainment kinds of properties.

Okay. And lastly here gentlemen, one kind of a housekeeping item. Kevin, how are you guys thinking about repatriating cash in light of some of the discussions that there may be another quasi-tax holiday to do that? And then, Bryan, no comments made on Max Steel or Masters of the Universe. Anything there that you can talk about or -- it doesn't sound like anything in '12. You already talked about that, but maybe in '13 or so?

Okay. Let me cover the first question. Tim, we always look at the benefits of tax legislation. Clearly, in 2005, we took advantage of that. And we'd look at that. I think cash, from cash perspective, as a global company, Mattel generates cash all around world. Our cash management strategy related to cash balances, working capital funding and capital employment, consider a number of factors including interest rates, exchange rates. And as you pointed out, tax implications. I just want to make you aware, we have the ability to access offshore cash to use it where and when we need it, which is potentially subject to tax. But our goal really is to balance these factors in order to optimize returns on the utilization of cash.

Yes. And regarding both Max Steel and Masters of the Universe, Max Steel continues to do very well in Latin America. As you know, it's the #1 male action figure brand in Latin America, and has been for some time. But we'll continue to do what we've been doing so well on Max Steel, which was to continue to support it with another movie in the fall and create some great product around that. So Max Steel is continuing the sell momentum we've had in the past. As it relates to Masters of the Universe, it's continuing to be in development at Sony. The absolute earliest we would see something on the Masters would be at 2013. But that's still under development, and we're continuing to work with Sony on that.

Our next question comes from Robert Carroll.

One -- I guess, 2 quick questions. One on pricing and then the other on raw material procurement. I guess on pricing, during the quarter, I guess one of the major retailers out there had started talking about being willing to compromise their gross margin as a way to catalyze sales growth or comp growth. And I guess I just wanted to check if your relationships with them have changed at all during the quarter. Have they gotten less receptive to the price increases that you guys had already begin putting through in April? And then just a quick follow-up on raw materials.

No. Individual retailers make their own strategic decisions on how they want to manage their business and what prices they want to charge and what merchandising they do and the like. And our strategy is to utilize pricing, along with cost reductions, to protect our gross margins, which would -- which we've been successful in doing. And I wouldn't characterize there having been any change in our strategy or in our retailer relations, certainly in recent time.

And then just on the raw material procurement. I know that spike in crude prices, north of $110, was normally during the period where you guys are procuring product for the holiday season. I just want to check, is the normal schedule intact? Or did you guys take any, I guess, preventative measures to maybe buy earlier in the first half of the year or -- and I guess, any reaction to oil having temporarily spiked?

Well, it's not significant. That is what we can do. We don't really procure oil. We procure resins. I think their oil is probably up around 35% this year, if you'd just look at this year versus last year. If you look at labor in China, the minimum wage is up about 20%. If you look at the currency, it's up. So the cost inputs have risen, generally speaking, as we've expected and consistent with what we've expected for the year and consistent with what assumed when we did our price increases for the year. And there isn't a lot of protection that we do, if you will, on that standpoint. We certainly try and buy a little bit ahead when we can. But I wouldn't describe it as really significant in our business.

Yes. And I'd say, so far, we're pleased to see a less volatile commodity market this year than we've experienced in the past. And I think when we look at our gross margins for the first half of 2011, our gross margin improved slightly to 48.7% versus 48.5% in 2010. We do continue to monitor input cost closely. And we're executing our Operational Excellence 2.0, and we work on manufacturing efficiency initiatives that fully or partially offset any cost headwinds in 2011. So as we said at the beginning of the year, and we continue to say, our priority is to sustain the progress we've made for the last 2 consecutive years where we delivered gross margins of at least 50%.

Our next question comes from Per Ostlund from Jefferies & Company. Per Ostlund - Jefferies & Company, Inc.: I wanted to follow up on Tim's question, I think it was earlier about POS and at the brand level, maybe a little bit here. Bryan, you did comment on a couple of the brands. Thinking about Barbie specifically here, with the mid-single-digit POS domestically here this quarter, and I think last quarter, it was at least the same and maybe a little bit better. But the sell-in was, I think, flat the last 2 quarters. Can you sort of talk about sort of where that brand is in terms of retail inventories just with it specifically and what the dynamics maybe are there as far as launches and whatnot?

Sure. It's -- the Barbie POS has been strong, remained strong mid-single digit. Recall that last year, Barbie was up 16% for the quarter. So we're going up against a very, very strong comp a year ago. So we feel very confident about it. International standard, the Barbie sales were up 10%. So I think the most important thing is consumer takeaway continues to be strong on Barbie as, I think, our retail customers are dealing with the ebb and flow of retail inventories and other pressures that they're feeling. Now regarding what's happening for Barbie in the near future, we're going to continue to support her with DVD releases. Our new one this fall is Barbie and the Princess Charm School. That will be out, and we're expecting it to air on Nickelodeon as the historical movies have run. Also this year, we're going to have a second DVD called Barbie and the Perfect Christmas, so we'll actually have 2 DVD releases for Barbie. And one of the key items that we'll be focusing this year will be a Barbie Camper. It will be for Barbie and her sisters and her pets. So there's a lot of activity on Barbie going on in the second half. So we're expecting that we'll continue to see strength in Barbie POS. Per Ostlund - Jefferies & Company, Inc.: Excellent. Maybe I'll sort of follow up on another previous question on Cars 2. It sounds like it's doing very, very well, both domestically and internationally. Has the mix of domestic versus international revenue changed with this one versus Cars 1 given the different international theme with the international races?

Yes, it has. As we expected, it has become more international. Half or more -- more than half of our shipments right now are outside the U.S. And also remember, when the first movie came out, we were in very short supply. The toys took off in advance of the movie and with the movie. So we had a hard time filling orders, particularly outside the U.S. so -- but it is -- it's been consistent with our expectations that it would more of a global property and have new play patterns, which is good for us.

Yes. The film, too, it has more of a global story, too, to it in a global setting. So I think that helps, too.

Our next question comes from a Greg Badishkanian from Citigroup.

Obviously, 2011, very strong year for entertainment properties, particularly at movie-related properties. And you give some color on 2012, some of those entertainment properties. Just wondering if you kind of just segregate movie-related toys, do you think you'll see growth in 2012 versus 2011?

No, Greg. That would probably fall in the area of guidance, which we don't do. But I think there is an important point to make, which we've been making, hopefully, for several years now, that we run a portfolio of brands and countries and in any given quarter or any given year, some part of portfolio may be doing better than another part of the portfolio. But if you look at how we performed over the past several years, and if you look at our objectives, we aim to deliver good, consistent solid growth in this company. And that's been key to generating the cash flow we've been generating.

Our next question comes from Linda Bolton-Weiser from Caris. Linda Weiser - Caris & Company: Can I ask you about -- I don't know if we've heard anything or there's anything been -- anything released, but has there been any news about the outcome of the other piece of the Thomas license, the wooden piece? And when would you expect the timing?

No. I think R/C too has that through 2012. So if there were any change in the wood portion of the Thomas business, I think it would be effective in 2013. Linda Weiser - Caris & Company: Okay. My understanding would be that there would be some decision reached about a year prior to the expiration of the license. Is that not correct?

Well, that's not a decision we'd be making. We certainly have a recommendation, but we don't really control the timing on that. Linda Weiser - Caris & Company: Okay. And just a second question, you had talked a little bit about the legal process with MGA. I think you'll recall that there was an expectation that the judge's decision on the case where we are already heard the verdict from the jury, I thought that his decision would be announced really soon like in a few weeks or a month or so. It's been quite a while. What kind of time frame should we expect for that judge's decision?

We don't know. He is, I'm sure, going through whatever process he goes through to deliberate and make his decision, and that ball is in his court. And I'm sure, he is working with speed and alacrity. But it's really in his camp right now.

Our next question comes from Jeff Blaeser from Morgan Joseph.

You mentioned that Cars is ahead of Toy Story from last year. How is Cars and Toy Story combined doing year-over-year?

Jeff, it's Bryan. We're actually very pleased with both. Toy Story continues to perform well. It's a very strong evergreen property for us. So we're going to continue to build on that, as I mentioned, that Disney is going to continue to support that into the future. So we're expecting to continue to build on that. So when we look at the portfolio between both Toy Story and Cars, we're very pleased with the performance.

Okay. And quickly on the WWE side, you mentioned ongoing strength. Is that domestic, international? Are you growing the kids product line versus the collectors? A little bit more kind of color on where that growth is coming from.

Yes. The good news on WWE is we have been very successful in expanding that product internationally. And we're selling it both in and selling it through quite well in all the countries in which WWE is on the air. That was one of the key reasons, I think, WWE selected Mattel to be the partner. Again, we partner with the best and be the best partner. I think we're proving that with them. So we're pleased with that, and we continue to work with them on how we can expand this very successful property more broadly throughout the world.

Okay. And just one final on the overall growth trend. Certainly, it has been and seems to be international is growing much faster than domestic. Is that primarily emerging markets? Is it market share gains? Is it international consumers becoming more entrenched with the -- with your -- the U.S. product lines? Is there any kind of drivers there that you see versus the domestic slower growth pace?

Well, I think the good news is that this quarter and so far this year, what we've seen is, we have seen very strong growth across all regions. We always talk about our core businesses. So I think we've talked to you all about our top 10 countries in international. So we're seeing very strong, both sell-in and sell-through activity across the product lines, virtually in all corners of the world.

Our next question comes from Felicia Hendrix from Barclays Capital.

A lot of my questions have already been answered, just have a very few housekeeping questions. Can you just tell us what the impact of FX was on EPS?

For the quarter, it was $0.01. For the first half, it's $0.02.

Okay, great. And, Kevin, can you just talk about -- there was also an increase in accounts receivable, both on an absolute basis and then also as a percentage of sales. Can you just discuss that for a second?

Yes. For the second quarter, accounts receivable increased by about $207 million. And it was primarily due to higher sales volume, a shift in sales to later in the quarter and a shift in sales mix to countries with longer sales term. And that's consistent with terms customary in those countries. So that really is what drove the increase in accounts receivable.

So is that a trend that we should expect to persist?

Timing, we don't determine the timing of shipments in the quarter so -- but later in the quarter, this trend would continue to exist. Also, I think, as these countries that are more emerging market countries grow, we're going to see that their sales terms, at least in the near term, are going to be longer. And that would impact our days sales outstanding.

Okay. And then just to clarify on the legal front. There's some changes that have happened since you reported the quarter last time. Just the savings that you outlined in the second -- for the second half, are those still intact? Or are those up in the air a bit?

Well, I think, if we want to talk about Operational Excellence 2.0, and then talk about legal savings within that, we remain committed to $150 million of savings under 2.0. We've got strong plans in place. We're actively working against some key initiatives to simplify and align our business. We've already started to see progress in '11 in key areas including international clustering, a global brand team North American division and indirect procurement. But the balance of savings is expected to be realized in 2012. When we talk about the legal fees, we remain committed to achieving the $75 million in legal savings as well. As you can see in the appendix of our earnings presentation, we incurred significant incremental legal expenses when preparing for and at trial. In 2008, that was about $37 million of incremental fees. In 2010, it was about $40 million. And when you look at the first quarter this year, we continue to incur incremental legal fees given the trial started in January. That was about $11 million. With the trial concluding in April, we started to see legal expenses decline in Q2 2011 by about $5 million. And if you look at the second half of 2010, we incurred legal fees that were incremental of about $26 million. So as we said earlier, as of today, we're waiting for the judge's ruling and the post-trial motions. We're preparing to present our motion to dismiss the antitrust litigation in October, which we've already filed. And as a result, we'll be better able to assess the savings later year. Assuming we can bring this matter into final conclusion, we expect to realize the $75 million of savings by the end of 2012.

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

$344 million.

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 (706) 645-9291, and the pass code is 76959260. Thank you for participating in today's call.

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