Mattel, Inc. (MAT) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Mattel Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations. Please begin.

Thanks, operator. As you know, this morning, we reported Mattel's second quarter financial results. We provided you with a slide presentation to help guide our discussion today. The slide presentation and the information required by Regulation G regarding non-GAAP financial measures is available on the Investors & Media section of our corporate website, corporate.mattel.com. In a few minutes, Bryan Stockton, Mattel's CEO; and Kevin Farr, Mattel's CFO, will provide comments on the results, and then the call will be opened for your questions. Certain statements made during the call may include forward-looking statements related to the future performance of our overall business, brands and product lines. These statements are based on currently available information. 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 2011 annual report on Form 10-K and our 2012 quarterly reports on Form 10-Q and in other filings we make with the SEC from time to time, as well as in other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so. Now I'd like to turn the call over to Bryan.

Thank you, Drew, and good day, everyone. Looking at our second quarter results, we executed well and delivered solid performance despite the backdrop of a very challenging global economic climate that's driving volatility in input costs and currencies, as well as creating a very cautious global retail environment. Additionally, we faced a difficult sales comparison with the release of the Cars 2 movie last year. We met the challenge of delivering a comparable level of sales by focusing on our priorities, including growing our core brands, evergreen entertainment properties, our most recent franchise, Monster High, and key international markets. For the first half of 2012, we experienced solid progress in core brands and markets. Overall shipments were up for the quarter, resulting in improved alignment of shipments, consumer takeaway and retail inventories for the first half. And I believe we are well positioned for the second half and the all-important holiday season. While we continue to absorb the impact of the strengthening U.S. dollar, our international business, including countries such as Brazil, Mexico, the U.K., China and India, is growing when you exclude the impact of currency. I am optimistic about the growth prospects for the global toy industry. For perspective, about 1/3 of the global toy category is in the U.S. While NPD data shows the U.S. total toy category down mid-single digits through May 2012, that trend is not consistent across all categories. Most of the categories in which we play are outperforming the total category growth rate through May 2012. Additionally, Mattel continues to gain share in important categories such as infant/preschool dolls and vehicles during the same time period. NPD data also indicates that Europe, despite its recent economic challenges, remains relatively stable through May 2012, reinforcing our belief that the toy industry holds up well in the tough economic times. Using NPD data, that represents about half of the total toy industry. And our global and market experience, we continue to see overall global toy industry growth due to positive demographic trends and toy spending in emerging and developing markets. As I've said on several occasions, one of Mattel's greatest assets and points of difference is our diverse portfolio of brands, countries and customers. And for the quarter, we experienced strength across all areas. While still early in the year, we experienced good momentum across many of our core brands: Barbie, Hot Wheels and American Girl, as well as strong growth in our Monster High franchise. And we saw positive momentum across a number of our licensed entertainment brands: Disney Princess, with the new movie Brave; Batman, The Dark Knight Rises; Disney's new Jake and the Never Land Pirates; and WWE. Let's start with the Barbie brand, which experienced a strong second quarter. According to NPD through May 2012, Barbie continues to gain doll supercategory share, both in the U.S. and the Euro 5. We continue to see strength in Barbie's core fashion lines and this year's spring entertainment, Mermaid Tale 2, which was also a growth driver in the quarter. Addition to spring entertainment, we did an extensive brand campaign that's been activated across toys, apparel and accessories in more than 70 countries. The campaign invites girls of all ages to see what happens when they play with Barbie. This May, we launched our first older-girl content with Barbie's Life in the Dreamhouse with 15 episodes to give girls a glimpse into Barbie's life with her sisters, pets, friends and, of course, her boyfriend, Ken. The campaign launched in 21 languages on Barbie.com and on YouTube and, since early May, has generated 5 million views across the website and YouTube globally. Feedback with older girls has been incredibly positive. Staying within the doll category, Monster High continues to perform very well as the #2 selling fashion doll through May 2012, according to NPD. On Friday, April 13, Monster High's computer-animated film, Escape from Skull Shores, premiered on Nickelodeon. Rolling out throughout the year, the film will be shown around the world on a variety of key broadcasters. And finally, Disney Princess did very well this quarter, and we're encouraged with the early performance of the new movie, Brave. The American Girl brand continues to perform well due to the momentum of the 2012 Girl of the Year, McKenna, and we've been very pleased with our performance at retail, including the recent store opening in St. Louis. Our Hot Wheels brand also made significant progress in the second quarter, not only at retail, but also in the cultural marketplace. As many of you know, 2 drivers for Team Hot Wheels recently set a Guinness World Records title at the X Games Los Angeles for successfully racing through a 60-foot-tall double vertical loop, which was a recreation of the classic orange track, emulating our spring TV driver, Double Dare Snare. The life-size orange track set defied gravity with a first-of-its-kind, 2-driver challenge. The publicity from this event has generated more than 2.2 billion global impressions and counting. Staying with vehicles, the Cars line continues to perform very well as an evergreen property. As we've always said, our entertainment strategy continues to be: Partner with the best and be the best partner, which includes, not only licensing of exciting and current movie releases and properties like Batman The Dark Knight Rises, Disney Pixar's Brave and Disney's Jake and the Never Land Pirates, but also evergreen properties like Disney Princess, WWE, Dora the Explorer, Mickey Mouse Clubhouse and more. For Fisher-Price, overall shipping was positive, including Fisher-Price Friends. We continue to see encouraging signs of progress on the fundamentals of repositioning the Fisher-Price core brands. As I've said before, 2012 remains a transition year as we continue to strengthen Fisher-Price on a global basis and focus on communication building blocks like television advertising and an expanded digital presence while preparing to launch new packaging and more innovative products for 2013. In fact, during the quarter, we've relaunched our website in the U.S. designed precisely with today's moms in mind. International versions of the new Fisher-Price.com design will be rolling out through the summer, reaching 38 different markets in 33 different languages. Fisher-Price Friends also launched a new line of product to support the hit Disney property, Jake and the Never Land Pirates. Early reads of POS and shipments are encouraging. As it relates to HIT Entertainment, we are very pleased with the progress we made welcoming this very talented team to the larger Mattel organization. Thomas & Friends is performing well at retail, and we're making good progress in preparing the launch of the wood line for 2013. We're also very encouraged with what we see from Mike the Knight, both in the U.K. and the U.S. And as a result, we are investing in a second season of Mike the Knight content and are planning a full consumer products and toy line rollout over the next 12 months. Looking beyond revenue, Mattel achieved solid overall second quarter results because we continued to complement our focus on brand building with a disciplined approach and an emphasis on costs and gross margins. We continue to work very hard to manage our overall basket of costs, including commodities, currency and labor, as well as optimize our sales mix of countries and brands to deliver gross margins consistent with our long-term goal of about 50%. And we remain on track to deliver our Operational Excellence 2.0 savings target of $175 million. So we finished the first half with positive momentum. That said, we have much work ahead of us to succeed in 2012. Looking ahead, we believe we have the opportunity to continue to build momentum as we roll out our innovative products and brand-building promotional programs around the world. First, we are well positioned in the dolls category. For fall, the Barbie brand is releasing its first musical in 7 years with Princess and the Popstar. From an innovation standpoint, the brand is blending the best of digital play with fashion play with the launch of Barbie Photo Fashion doll, where girls can take more than 100 digital pictures with Barbie and display those images as a T-shirt design on the doll. For Monster High, we're introducing more content, dolls, new characters and segments throughout the line. Monster High is launching a new extension to the Create-a-Monster line, which is a line that allows girls to customize all parts of the doll, including the face, through the application of body/hair [ph]. And Monster High is releasing its first DVD, Ghouls Rule!, in the fall through a newly created Universal DVD alliance. In American Girl news, a McKenna-themed video, McKenna Shoots for the Stars, was released on DVD on July 3 and aired on NBC's Family Movie Night last Saturday, July 14th. We're also opening 2 stores in the second half: Houston in September and Miami in October. And on September 4, American Girl is launching a new historical character, Caroline Abbott, who's story takes place in 1812. In the third quarter, Mattel will support the platinum DVD release of Cinderella with a broad line of dolls, accessories and fashions to maximize this historic event. And in time for the holiday, the DVD of the Disney Pixar film, Brave, is slated to be released. In the Wheels aisle, we'll be introducing a brand-new Hot Wheels segment called Ballistics [ph], which are balls that transform into cars. These are completely unique to the market. We'll continue to focus on building and aligning the Fisher-Price brand behind the Joy of Learning campaign, both with television advertising and the new digital support programs. As we look forward into 2013, we're also working on other building blocks including enhanced product innovation, new packaging and expanded retailer support. Our newest top-5 brand, Thomas & Friends, will launch its fall entertainment tentpole, Blue Mountain Mystery, set to be released in September with strong support at retail. And when it comes to the digital space, I think about the role of digital in 3 ways. First, digital serves as an excellent delivery system for brand building with consumers, whether through websites, apps or engagement. Second, and perhaps in its most powerful form, it serves to amplify existing play patterns. Our new Hot Wheels activity product, which launched exclusively in Apple Stores at the end of June, is a great example as it allows boys to play out the classic Hot Wheels play pattern right on the iPad, making play more portable and dynamic. We'll have an entire portfolio of Mattel activity products, supporting Mattel brands and Fisher-Price this fall. And third, digital is a source of intellectual property. We continue to see success with the analog execution of Angry Birds and are adding to our line of digital [indiscernible] this year. While we're happy with where we're positioned with our customers, looking ahead, we will continue to work with them to manage shipments, consumer takeaway and retail inventories. Toys remain an important holiday driver for retailers across a number of channels and store types, and we're confident that we have the momentum, the products and the marketing programs in place with our retailers for the all-important holiday season. Overall, we delivered a good quarter and a solid first half, and we're focused to execute well as we transition from the preseason to the season. From a headwind's perspective, we don't expect the second half to look much different from the first. We anticipate a challenged global economy that could continue to drive fluctuations in both input costs and currencies and a continued cautious global retail environment. Nonetheless, we have the power brands like Barbie, Monster High, Hot Wheels, American Girl, Thomas & Friends and Fisher-Price that kids and moms want. We have a slate of evergreen entertainment properties like Batman, Disney Princess, Cars, WWE and newcomer Jake and the Never Land Pirates that balance out the portfolio. And we have a strong track record of successfully executing in the all-important holiday season. And with that, I'd like to turn it over to Mattel's CFO, Kevin Farr.

Thank you, Bryan, and good morning, everyone. Our second quarter performance continues to demonstrate the strength of our portfolio brands, countries and customers and our discipline to deliver solid, profitable results to our shareholders. In the second quarter, Mattel delivered a 20% increase in operating profit and a 19% increase in net income. These strong results were anchored by gross margin gains that offset a tough entertainment comparison, considerable currency headwinds, turbulent economic news and a cautious retail environment. Core brands performed well in the quarter with positive sales growth in Barbie, Hot Wheels and American Girl. Monster High was also a standout in the quarter, and we're encouraged by the initial sales of Batman and Brave. Our international portfolios demonstrate continued strength despite a tough global economy and foreign exchange rates that worked against us. Brazil, Mexico, Eastern Europe, China, India and the U.K. all had strong growth, excluding the impact from foreign exchange. That said, we know that our great portfolio of brands in countries is only as good as our execution, and we continue to focus on our need to deliver against key business drivers. We have 2 key priorities in 2012: the successful transition to our new North American division structure and the integration of HIT Entertainment. Let me give you an update on each of these. For the quarter, the North American division focused on new retail executions and deepened its relationships with its customers. We saw tangible results in this improved alignment as we grew sales, as well as increased NPD share across many categories. With HIT Entertainment, we continued its integration into Mattel. As you know, we acquired HIT with the goal of growing its brand portfolios, and we have made good progress in adding its organization and core competencies in licensing and content development to Mattel. We continue to leverage Mattel's global infrastructure to grow the HIT brands across the world, and this is very evident as we prepare for the launch of Thomas entertainment this fall with Blue Mountain Mystery. For the first time, this will be a retail tentpole event with coordinated marketing programs across consumer products, content and toys. This launch strategy emulates our successful go-to-market approach that has worked well for Barbie fall tentpole events. And we continue to prepare for the launch of the Thomas wood line in 2013. In the second quarter, we began showing the lines to our retailers, and it was well received. In addition to these key priorities, we continue to execute on our Operational Excellence 2.0 cost savings initiatives, delivering an incremental gross savings of $23 million for the quarter. As we announced earlier this year, we've increased our goal from $150 million to $175 million for 2012, and we will use some of the program's savings to reinvest on strategic growth initiatives. Let me give you a quick update on some of these investments. One of HIT Entertainment's newest brands, Mike the Knight, continues to show promise, recording strong ratings, both here in the U.S. on Nickelodeon, as well as in Western Europe on stations like CBeebies in the U.K. and Super RTL in Germany. Accordingly, we are greenlighting a second season to begin airing later next year. And with this ratings and distribution success, consumer products will be hitting the shelves, primarily in Western Europe, later this year. Fisher-Price will be the global toy manufacturer for Mike the Knight, with the first item scheduled to launch in the U.S. and Canada in fall 2013. We're also making investments to grow core bands faster or yield additional cost savings. For example, given the consistently strong results of the American Girl brand, we continue to invest in improving online and retail distribution business model. Our newest American Girl store in St. Louis opened in April and is exceeding expectations and will be followed up with 2 new store openings in Houston and Miami this fall. On the information technology front, we are investing in upgrading American Girl's e-commerce infrastructure to provide further growth and potentially leverage it to support our other core brands. This technology should allow us to better align with how consumers are buying products today while improving Mattel's overall global capabilities to market digitally. We're also investing in new product life cycle management system to improve our design, development and manufacturing processes while providing greater cost transparency. When fully implemented, this system should help us to continue to deliver against our gross margin target by improving design and toy value and potentially help to offset future input cost increases. And one final example we mentioned on our call last quarter, our investment in our new subsidiary in Russia has already begun to contribute to our international growth. The incremental SG&A spend increase investments I just described is around 70 basis points year-to-date and should yield significant payback down the road. The additional savings from our O.E. 2.0 savings will continue to fund these investments, as well as other investments such as the launch of new franchises. As we've shown with Monster High, we can bring new franchises to the market for a modest investment. We are currently investing in a new franchise that will be launched in 2013 that we'll tell you more about later this year, and we continue to evaluate other ideas for future franchise launches. So now let's go into the detail around some of our results for the second quarter. Starting on Page 4 of the slide deck, you can see that our worldwide gross sales there were roughly flat for the quarter as growth in our North American region was partially offset by our international region. Based on the latest NPD data, we gained category share in both the U.S. and the Euro 5. And retail has continued to tightly manage their inventories due to concerns about consumer spending and the uncertain global economy. We worked closely with our retail partners to ensure that shipping, consumer takeaway and retail inventories were better aligned across our portfolio of brands. As we enter the second half of 2012, we're pleased with the current state of both our inventories and those of our retail partners. Turning to Page 5 of the slide presentation, you can see the sales by brand. Worldwide sales for Mattel girls and boys brands were down 1% for the quarter, impacted by currency exchange and a tough entertainment comparison. There was strong growth in our core properties, with Barbie sales up 5% and Hot Wheels up 11%. Monster High contributed to drive growth in our girls business, while Disney Princesses, Batman, Cars and WWE remained strong evergreen properties. Worldwide Fisher-Price sales were up 2% for the quarter, aided by the addition of HIT and good performances in Disney properties like Jake and the Never Land Pirates, partially offset by declines in other brands. American Girl continued to deliver strong results with sales up 3% for the quarter. Our Girl of the Year, McKenna, is performing extremely well, as is the My American Girl line. And we continue to see good momentum in our retail operations, especially with our new store openings. On Page 6, we highlight the performance of our North American region, which includes American Girl in our North American division, which consists of operations in the U.S. and Canada. Overall, sales for the region were up 1% despite a tough entertainment comparison. Our international business, seen on Page 7, continues to show strength, remaining relatively flat despite currency impacts. We're current [ph] with our performance in Europe, where revenues were down 2%, including a 10-percentage-point unfavorable impact from currency. In Latin America, revenues were down 1%, including a 13-point unfavorable impact from currency, with strength across the entire region. In Asia Pacific, revenues were up 1%, including a 4% unfavorable impact from currency, with growth in India and China in local currency. Now let's review the P&L, starting off on Page 8 of the slide presentation. Gross margins for the quarter were 51.3%, 340 basis points higher than last year. To date, we've benefited from favorable product mix, including lower sales of royalty-related entertainment properties, our price increases and O.E. 2.0 cost savings, partially offset by higher input costs. As expected, the HIT acquisition also had a positive impact in margins this quarter. As seen on Page 9 of the slide presentation, for the quarter, selling, general, administrative expenses increased approximately $20 million to $351 million. As a percentage of net sales, SG&A expense was 30.3%, up 180 basis points compared with the prior year rate of 28.5%. Legal savings, the positive impact to currency and O.E. 2.0 savings partially offset the impact of HIT, higher employee-related expenses and the strategic investments that we discussed earlier. Excluding the HIT acquisition and integration costs and HIT's ongoing SG&A, Mattel's SG&A is down slightly year-to-date in absolute dollars. Page 10 of the presentation summarizes the performance of our Global Cost Leadership initiative and continuing efforts in our ongoing Operational Excellence 2.0 program. As I mentioned earlier, we delivered incremental Operational Excellence 2.0 gross savings of $23 million for the quarter. We're on track to deliver the $175 million in cumulative savings by the end of 2012. Turning to Page 11, operating income in the second quarter was $131.4 million or 11.3% of net sales, up 190 basis points compared with last year's second quarter despite flat sales. The increase in operating income was driven by strong gross margins, partially offset by higher SG&A. Turning to Page 12, earnings per share for the quarter were $0.28, driven by improved operating income that was partially offset by higher interest expense. As we did last quarter, we want to give you some additional information that will help you to continue to understand the impact of HIT on our business in 2012. We continue to expect that the acquisition should not have a material impact in our business in 2012 but should be accretive to our business going forward. We expect operating profit for the business this year to be offset by acquisition and integration costs, as well as intangible amortization and interest expense. Page 13 outlines both the estimated integration and amortization costs of HIT. For the quarter, acquisition and integration expenses were $1 million, and we expect these expenses to total between $25 million and $30 million for the year. These expenses include acquisition fees, consulting fees, severance and IT infrastructure costs. In addition, we also incurred about $1 million in expenses related to the amortization of intangibles. For the year, we expect these expenses to be about $5 million to $6 million. As you can see on Page 14, for the first 6 months of the year, cash flow used for operations was $61 million compared to $227 million last year, driven primarily by improvements in accounts receivable and inventory. Year-to-date capital expenditures were $107 million, up $5 million from last year. For the year, we continue to expect to spend about $215 million to $225 million in capital as we make investments primarily to increase capacity in our own manufacturing facilities, expand our retail operations at American Girl and to fund the upfront costs of acquiring software, hardware and system design work, primarily through our strategic IT projects. Year-to-date, cash flow used for financing activities and others decreased mainly due to the prior year payments on long-term debt borrowings. So to recap cash flow for the first half of the year, we increased capital deployment through the acquisition of HIT Entertainment and our higher quarterly dividend payments, which were partially offset by the improvement in operating cash flow and fewer share repurchases. As a result, our cash on hand at the end of the first 6 months was $372 million, down $46 million from the prior year. Looking forward, we continue to have a strong balance sheet in a business that generates consistent cash flow which we'll continue to deploy to enhance shareholder value. Today we announced our third quarter dividend of $0.31 per share, reflecting the annualized dividend of $1.24, which represents a 35% increase to our 2011 dividend of $0.92. We remain committed to our capital deployment strategy to maintain $800 million to $1 billion in year-end cash, to maintain a year-end debt-to-total-capital ratio of about 35% and to return excess fund to shareholders through dividends and share repurchases. In 2012, we expect to end the year with cash and debt levels consistent with our capital framework, and there will be 3 key drivers for cash deployment in 2012: the acquisition of HIT Entertainment for $680 million; an increased dividend payout to an annualized dividend of $1.24 per share, which will return approximately $430 million back to shareholders; and capital expenditures of about $215 million to $225 million, reflecting increased investments in company growth initiatives. The balance of excess cash will be deployed over time opportunistically for share repurchases and targeted acquisitions. So in summary, we are pleased with our strong quarterly results and recognize that we have more work to do since we are just entering our peak season. We continue to have momentum in most of the same key areas that drove our strong financial performance in 2011. And we remain committed to executing our growth plans for key brands like Fisher-Price and key retailers around the globe. We believe that our fundamentals are strong, and the investments made this quarter will allow us to continue to create value for our shareholders. That concludes my review of the financial results. Now we'd like to open up the call to questions. Operator?

[Operator Instructions] Your first question is from Gerrick Johnson of BMO Capital Markets.

I was wondering if you guys can talk about currency and how it impacted your income statement. Particularly, it looks like it helped gross margin, and if there is any benefit from hedging activities and where that might have fallen.

Okay, Gerrick, with regard to overall -- with regard to ForEx in our results, there was a 5% unfavorable impact to our worldwide gross sales. And there was a 2% unfavorable impact to EPS. So that was the overall impact to gross -- to our operating results. With regard to the ForEx and hedging, we do -- given the significant manufacturing and marketing operations outside the U.S., we hedge about 50% of our transaction exposure as we look out over the next 12 to 18 months. We use this strategy for our transaction exposure designed to protect the downside and take advantage of opportunities in the market if possible. Now I won't comment on the impact of foreign exchange specifically on gross margins, but I can provide you with a good rule of thumb for estimating the impact of ForEx to sales and EPS for the second half of the year. All else being equal, a good rule of thumb is every 1% change in the U.S. dollar index should impact annual EPS by about 1% to 2% and impacts revenues by about 0.5 percentage point. And with respect to -- if you look at it, with respect to ForEx for the first half, basically for the quarter and the first half, foreign exchange has minimal impact on gross margins.

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

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

Okay. Great. That makes sense. And one more for me. Brave toys, where are you filing those? Are those in entertainment or in the girls -- Other Girls segment?

It's in Disney Princesses, so it's Other Girls.

The next question is from Tim Conder of Wells Fargo.

Just a couple of pieces here. The manufacturing, you mentioned that, that's really going to be one of your ongoing focuses here of investments, and you've mentioned that before. Can you kind of give us a little bit of a framework where you stand on the portion that you will own of your own manufacturing by -- at the end of '12 and '13? And then in relation to that and HIT, how was the integration of the diecast and plastic business going? On plan, ahead of plan? If you could just give a little bit of color there.

Tim, it's Bryan here. Let me start with our -- our overall manufacturing strategy has been pretty consistent over the past decade, and we like where we are. We are about 50/50 in terms of what we produce internally versus what we use with outside vendors. We think that gives us a couple of distinct advantages. Number one, we really have our fingers on the pulse of what's happening in the toy industry, with issues like labor costs and testing and things of that nature. And because we have such dynamic and powerful brands like Barbie, it also gives us a kind of scale to be able to support a dedicated operation for that. So we like that strategy. We don't see that really changing drastically in the future. So I think you can look forward to that. As it relates to HIT, we're pleased on a number of fronts with where we are with that. As I've told you before, it's a tremendously talented organization. One of the things we've been working on is trying to see how we can work together on things like content production, content creation, content distribution. We're happy with that. And related to your question about bringing their products in, we will be bringing the diecast into our plants. As you know, we had a very strong presence in diecast operations. So we're always looking at it at the scale and opportunities to bring things into our plants, where it makes sense, but we'll probably stay about 50/50 long term.

Yes, and I think with regard to that, we're on track to bring the diecast manufacturing into our plants effective 2013. It really shows what we've been doing over the last couple of years of really sweating our existing asset base with regard to our plants. We've been working on productivity improvements through low-level automation. We've been using Lean to make us more efficient. That has freed up floor space. And as we've freed up that floor space, we are making investments in plant expansion, not new plants, really getting more out of the plants that we have through investing in expansion in things like fashion doll capacity and diecast capacity.

Okay, okay. So the diecast will be on -- will be in-house at the beginning of '13, just to clarify there. And then the plastic, is that already in-house or that also on the same timetable?

That's where the line is a little more complicated. We're -- we'll be looking at the best use of our assets regarding plastic.

Okay. And then, Bryan, in relation to all the manufacturing and so forth there, you gentlemen talked about your gap to price increase. We're hearing from some other industries that towards the back half of the year, and I would think more for the toy industry it would be fourth quarter and beyond, that assuming commodities stay where they are and transportation costs, with diesel,everything has come down, could you potentially start to see some little bit of a tailwind from that, say, fourth quarter and beyond given everything else is pretty well already locked in?

Well, if you can predict what the costs of commodities are going to be in the second half, come see us later today. But it's going to be a very dynamic environment, we think, in terms of commodities. Kevin, do you want to comment?

Yes. Just thought you'd like to talk about where we're at, at the half. In the first half, gross margin rate is 51.2%. It was up 250 basis points from the 48.7% in the first half of 2011. And as I said, the key drivers were favorable product mix, including lower royalties related to entertainment, our price increases and O.E. 2.0 savings, partially offset by higher product costs. And in the first half of the year, we're really benefiting from lower royalties in Cars shipment, which were significantly lower in the first half of 2012, as we expected. The favorable impact from lower royalties expected to be less pronounced in the second half of the year, via higher sales of Batman, Brave and Cinderella, as well as the fact that our royalty-related entertainment business is a smaller portion of our total business in the second half of the year. It also had a positive impact in gross margins for the first half, but given the modest seasonality of their business, we expect less positive benefit in the balance of the year there, as well as we continue to operate in an inflationary environment as economy slowly recovers and input costs continue to rise. And although commodity costs have come down recently, our input costs have increased in 2012, including higher overall raw material costs, Chinese and Asian labor rates, Chinese currency, tooling and freight and distribution costs. And we're currently entering our peak production period which requires us to continue to procure raw materials and other input costs. And as you know, the majority of our input costs can't be hedged. So at this point, it's impossible to predict our future input costs through the high volatility in commodity costs and foreign exchange rates. So our priority continues to be to sustain the progress we've made delivering gross margins at least 50%, which we've achieved for the last 3 years.

The next question is from Margaret Whitfield of Sterne Agee Capital. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: I wondered if you could comment on what you're seeing in Southern Europe. You mentioned the U.K. was strong and what the outlook might be. For Kevin, that second quarter tax rate was lower than the first. What should we expect for the year? And Bryan, I wondered if you could comment on your strategies for the wood lines since you've shown it to retailers and gotten some of their feedback.

Margaret, let me start first with Europe. Where we always start when we try to assess what's going on in any given geographies, we start with the category POS. And as I mentioned in my comments, we're very pleased to see the toy category essentially flat in Europe. And again, we think that's another positive sign that this category tends to be fairly resilient to economic crises, and Europe has certainly had a lot of unease in terms of economics lately. So things vary by customer, by country, but generally, I would say retailers there are cautious as they are here. They are supporting brands that have momentum, which we have. And I think they, too, are looking forward to a positive holiday season. Let me comment on wood, then I'll turn it over to Kevin to wrap up your questions. Now our plans for wood are, we're going to do what we always do best, which is make sure we have the best product and we have the best packaging. We translate that into strong retail execution across the globe and support it with what we like to call statements and stories, whether that's in the form of DVDs or advertising or some other way of engaging the brand with consumers. So I would say we're just going to do what we do best, and we'll make it a success. Kevin?

Yes, finally, Margaret, your question on the tax rate. The tax rate in the second quarter, both 2011 and 2012 benefited from some discrete period items, which is a timing issue from the perspective of the full year tax rate for both years. For 2012, we believe the worldwide effective tax rate will be around 22% to 23%.

The next question is from Robert Carroll of UBS.

Just a quick question on the commentary for the POS, your retail inventories and the shipments. I know earlier when you guys said that things have -- the alignment has improved in H1. I mean, does that imply any sort of, I guess, bounce back during Q2 relative to what is seen during Q1?

Yes, I think there's a couple of things going on. We look at our business really kind of first half, second half, and there are a lot of dynamics in the first half. We're always dealing with the timing of Easter and how good was the -- or bad was the carryover from Christmas. So the first quarter can be a little bit choppy, and I think we experienced it, and I'm sure others in other industries may have as well. What we see is we see a lot of activity, I'd say, at retail engagement, particularly in the post-Easter period. And you've seen our POS, essentially almost across the board, start to pick up positive momentum, which we think is good. Retailers seemed to be responding to that, as well as to making sure that we're well positioned for events like the movie Brave and Batman The Dark Knight Rises. So there's a lot of good things going on out there, so we're feeling like we're in better balance exiting the first half, and we're carrying some momentum into the second half.

Okay. So I mean -- I guess just to clarify that, so I mean, if we were still working on Q1 and then we're in better balance, like so there may have been -- obviously, we're getting into the more important season of the year. But I mean, it may have just been a little bit of a bounce back to get things back in line.

No, I would say given the level of caution that we see across the board with most of our retailers, retailers are buying what's selling. And that's why I say I was pleased to see our POS begin to pick up more positive momentum in the last half of the quarter. When you have strong POS, that generally helps in the shipping area, so we felt good about that. So I would say we're getting in better balance, and we're feeling pretty positive right now.

Great. I guess, one other, I guess, somewhat follow-up to that. You guys had cited a North American reorganization as a reason for some of the strong recent performances in retail in terms of deepening relationships and share gains. I guess, anything more granular you guys could give in terms of recent wins, or how that's helping, or how it can continue to help going forward?

Well, this new organization was put in place, as we've always said, to drag decision-making closer to our retail customers and our consumers. And I think what you're seeing is that there's not a silver bullet in here anywhere. It's just a stronger alignment with our customers, stronger execution of great plans with our customers, and I think we're beginning to see the benefit of that through the second quarter. There's a lot of work ahead of us in the second half. So this organization is off to a great start. We have a lot to prove with this organization and our customers in the second half. But we feel like, as Kevin mentioned, this is one of our big priorities, and it's off to a solid start.

The next question is from Felicia Hendrix of Barclays.

Just a quick follow-up to the last question. Just on point of sales, you said that it picked up kind of at the end of the quarter. But in the quarter, was it up?

Well, what I would say is that our POS is generally in line with our shipments. Overall, when you look at the first half, so we're, I think, actually feeling pretty good about this, especially with the exiting momentum. We're seeing strong improvements in Fisher-Price, for example, in the last half of the quarter. So I would tell you that we're feeling like we're pretty well aligned and well positioned for the second half.

Great. And then actually while we're on Fisher-Price because that was one of my questions, you did discuss some of the data points. Just wondering when exactly we should expect to see the benefit of your restructuring. Is it more next year or do you think it will be sooner?

Well, this is something where we always are very careful about what we say about Fisher-Price because Fisher-Price is still gaining share of the total toy category, in the infant/preschool category in the U.S. and in Europe. So the brand is still successful. What we believe we're trying to do is we're trying to help this brand achieve its global potential. And that's why we're working so hard on the building blocks, like the advertising and the digital space in our website, as well as working on other things for next year. So as you recall, we've always said this is a mom-driven brand, which tends to respond a little more slowly than a kid-driven brand. So I would hope that as we continue to work on these building blocks, that we'll begin to see some improvements in the near future.

Okay, great. And then just finally on Other Girls, it seems like it was mostly Monster High, but I just wanted to confirm that because, obviously, Disney Princesses and Brave was in there. So 2 parts: one, was it mostly Monster High? And then second, how should we think about the back half shipments for Other Girls, especially given how strong it was in this quarter?

Yes, I think when you look at Other Girls, the key driver of that was Monster High. We did see benefits from Disney Princesses, but that was the key driver. With regard for the balance of the year, we're not going to project what we're going to do there, but we do see a great trajectory with regard to Monster High continuing. And with respect to Disney Princesses, we do have the Cinderella DVD release in the second half of the year. And we have momentum in 2012 behind both those brands, which is very similar to the momentum that we're building off of coming out of 2011 into 2012. So good momentum in overall fashion dolls, and particularly in things like Monster High and Disney Princesses.

The next question is from Linda Bolton-Weiser of Caris. Linda Bolton-Weiser - Caris & Company, Inc., Research Division: Just kind of thinking about some of the long-term objectives you have. You've done a really great job in the last few years on both O.E. 1.0 and O.E. 2.0. And so I'm kind of wondering what your rough thinking is going forward after 2012, when O.E. 2.0 is completed. Most of the big, high-quality consumer product companies, like Colgate or Kimberly-Clark, kind of report to analysts on annual productivity, cost cutting. Some of them even give how much productivity was in gross margin versus SG&A. And your cost reduction seemed to correlate, the calculation was about 2% productivity in the last few years annually. And most of those other companies have a little bit higher, more on the order of 3% product -- annual productivity, even higher for some companies. Are you going to transition to thinking of annual productivity in that way? Or do you plan another multi-year restructuring program that's very discrete? Or can you just give us some idea about your long-term cost reduction goals?

Well, I guess, let's say, I think we've been very focused in on improving the effectiveness and efficiency of the business over the last couple of years. And we started out in 2009 and '10, and we've delivered cost savings initiatives. And to date, with both our Global Cost Leadership Program and now we've been executing O.E. 2.0, we've delivered over $350 million of savings to date. And we're on track to deliver under O.E. 2.0 $175 million of savings cumulatively at a run rate coming out of 2012. And we do have a culture of continuous improvement, trying to be more effective and efficient, and that we do see more opportunities in things like packaging in the supply chain. So we'll continue our focus in on really improving our effectiveness and efficiency, and that should result in continued cost savings as we look out to the future. Linda Bolton-Weiser - Caris & Company, Inc., Research Division: Great. And then can I just ask you about HIT? You had said, I think, last call, and maybe you said something again this time about $0.07 of integration cost maybe roughly for the year, and I believe there were $0.04 in the first quarter and very little in this quarter, if I remember what you said. So is that still accurate that you expect maybe $0.03 more for the remainder of the year? And any idea how that will break out between the third and fourth quarter? And is HIT's seasonality of sales and profit, like operating profit, like similar to the overall company?

Okay. So on the seasonality, it's a little less seasonal than we are. Our seasonality is about 1/3, 2/3, first half, second half. With respect to the integration and deal costs, again, in the slide deck we provided you today, we reiterated our expectation is to have $25 million to $30 million of integration and restructuring charges. I'm not going to get in the timing of third quarter, fourth quarter, but we would be looking to later in the back half of the year. Linda Bolton-Weiser - Caris & Company, Inc., Research Division: And then in Monster High, I mean, that's done really great as a new franchise you've developed internally. Our store checks indicate that there's actually like shortage in some of the big retailers of certain SKUs that are just not on the shelf. Are you experiencing any supply shortages there? And then secondly, in terms of the new franchise for next year, would you be able to say is that going to be a boys or a girls property?

Great questions. Monster High is selling extraordinarily well, and I'm sure there are pockets out there somewhere where there's a little dislocation in inventory, given the high demand that's being created by all the great marketing efforts that are out there. And we're operating the plants. If we could go 28/8, we would, but we're operating almost 24/7 to make sure that we supply all of our fashion dolls because we do have momentum on Barbie, on Disney Princess and on Monster High as well. So we're working very hard on that. Regarding the next property, as I mentioned, we're not really ready to talk about that. When we see you all in October, we're planning to tell you a little bit more about that. I can tell you that it will be either a girls or a boys property.

The next question is from Eric Handler of MKM Partners.

Just trying to dig in to your gross margin a little bit more. If you took out your hedging gains that you got in the quarter, how much of an improvement would you have actually seen in your gross margin?

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

Okay. So the hedging gains was actually quite -- was rather insignificant then.

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

The next question is from Mike Swartz of SunTrust.

A question around some of the investment commentary you made earlier in the call. I think you said that there's about 70 basis points in incremental SG&A spend year-to-date. How should we look at that for the full year? I mean, is that a good number to kind of run rate for the year? Should it be more than that, less than that?

We really don't give guidance. I think with regard to the first half, that's been the run rate. And with regard to really the second half of the year, it's probably a good way to estimate it. But again, we continue to look at opportunities to invest in strategic growth initiatives that are going to have a good payback.

The next question is from Sean McGowan of Needham & Company. Sean P. McGowan - Needham & Company, LLC, Research Division: Two questions. One, can you give us an update just on where things stand regarding the appeal, the Bratz issue?

Sean, because it's ongoing litigation, I'm not going to go into a lot of detail about it other than to say that, as you know, the appeal has been fully briefed by both sides in the Ninth Circuit. The next step is an oral argument before the Ninth Circuit Court of Appeals. No date has been set yet for the oral arguments, but we anticipate it should occur towards the end of this year possibly or the first half of 2013. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay. And then we'd start another meter as to how long that will be until that decision is made?

Well, as I think we've said before, the cost of appeals is significantly lower than... Sean P. McGowan - Needham & Company, LLC, Research Division: I didn't mean the cost meter, I meant the time meter. Like that just starts another, whatever, months of process until a decision is made after the oral arguments?

Yes, it's -- as you can imagine, it's a complex process. And we could see the appeal carrying on in through 2013 or even '14. Sean P. McGowan - Needham & Company, LLC, Research Division: Wow. Okay. And then Kevin or Bryan, if could you give us some indication of what the impact was of revenue from HIT. What would Fisher-Price have looked like without it? And is all the revenue from HIT in Fisher-Price?

Well, we're not going to get into splitting hairs on Fisher-Price, but I think Kevin has given you some numbers before on the size of HIT. Kevin, you might want to review those again.

Yes, I think with respect to the full year, I think, we've -- when we parted [ph], they we're doing about $180 million of revenues. And we think for the full year, that the revenues are going to be lower due to 2 major factors: the Fisher-Price royalty payment on plastic and diecast products will no longer be recorded as revenue but a reduction to royalty expense; and 2012 will only include 11 months of operations. So we expect both of these adjustments to be lowered by -- result lower revenues by $30 million to $35 million for the year. And if you look at those numbers, and I think we've given you before that the first half, second half is a little less seasonal than Mattel, and our first half, second half is 1/3, 2/3. So I think you'd get back to a number for the first half based upon that. With respect to Fisher-Price, if you do exclude HIT, it is down, and you can see detail on core in Friends in the information that we provided you. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay. And HIT is tracking to your expectations?

So far, so good.

The next question is from Michael Kelter of Goldman Sachs.

I wanted to ask about the U.S. toy industry trends overall. As you mentioned, MPDU [ph] is down mid-single digits through May. And while you guys are taking share and growing internationally, I wanted to understand your view on what's going on with the domestic toy market. Some people are concerned about secular -- your shift in play patterns for younger children, away from traditional toys and games. And I was just hoping to get an understanding from your perspectives, whether there are screeners for that idea or whether you have any evidence that the slowdown is driven by something else, and what that something else might be.

Michael, thanks for the question. I guess our point of view is we're still positive about the toy industry even in the U.S. despite sort of a slower start to it this year. We look at the categories that we compete in, and those categories are outperforming the overall average growth rate for toys. This is an industry, as you know, that responds to innovation. And when you look at the growth, for example, in fashion dolls, we believe what's driving a lot of the category growth is all the great activities on things like Barbie and Monster High and Disney Princess. So there's a lot of branding things that we believe we're doing. We need to have strong retail execution. Our customers still believe it's going to be a positive holiday season. So we've not heard anything nor have we seen anything that would indicate there is some sort of secular decline in the toy industry. If there was, I think you'd see it more consistently across other countries as well. And one of the things that we try to do, as we always talk about, is our portfolio of brands and our portfolio of customers and our portfolio of countries, that we work very hard that when we have kind of a bit of a rough patch from a category standpoint here the U.S., we're working even harder in places like Latin America and Eastern Europe and Asia to drive our revenues.

Is there any risk given the slowdown, overall, in the industry that retailers might stock less toys or shrink the square footage overall over the near or mid-term? Is that something that you're dealing with? Or is that taking it a step too far?

Well, I would ask retailers directly that question. I don't think we're in a position to really comment on what they're thinking. But as you know, we work very closely with our retailers far in advance. And we're planning on having a good, positive holiday season, and I think they are as well, and there is nothing that we're seeing or hearing that would indicate otherwise.

And then one other quick question. The advertising and promotion line is down in dollars, about 5% year-to-date. Is that something that you're just realizing in the savings of nonworking media? Or is there a shift, and you'd be spending more in the back half than you had in the first half? Or what else is going on that's driving that line item down?

Yes. I think the fact that HIT hasn't been integrated into our operations and they do less advertising because it's more of a license business, and their licensees do advertising, I think what we've said is we target 11% to 13%. And over the last couple of years, we've been at that lower end of the range, and we expect at the end to be at the lower end of the range. In the total year, HIT won't have that much of an impact on the total rate. And we will be making the same amount or more impressions this year than we did last year. So no real change in our global investment around media. We are trying to get more for the same amount of money with regard to impressions, and we're looking at new media opportunities in other ways to connect with consumers, particularly on things like Fisher-Price, where we know digital is a place to be because that's where mom's at.

And the final question is from Drew Crum of Stifel, Nicolaus. Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division: So I think there was a question asked on overhead, and maybe I want to ask it in a different way. I think you mentioned that x HIT, you're seeing that line down year-to-date. Do you see that as sustainable? And maybe you can talk about some of the factors that would move that line item in the second half or through the balance of 2012.

Yes. I think with regard to our O.E. 2.0 savings, that we've been looking at opportunities to save costs, and I think we've been successful over the years. When you look at it for the balance of the year though, I think you have to think about the fact that there's going to be a drop off in legal savings going forward as we begin to count [ph] non-trial time periods. I think you also need to think about the continued hit in the acquisition and integration expenses that we talked about that will be in the back half of the year. One of the things that you really need to focus in on is the ongoing SG&A associated with the HIT organization. We acquired HIT for its capabilities and content licensing, and that infrastructure is in place. We are, over time, going to take the back office functions and integrate that to our back office functions, but that's going to occur over time. And then I think we continue to see with respect to our employee-related expenses such as merit increasing, increases in rising benefits. And we're going to continue to make investments in growth that we've talked about earlier. So we're going to continue to tightly manage our costs. We're going to -- as we've talked about earlier, we're looking for ongoing opportunities to reduce costs across the supply chain, in things like packaging. But we're also going to be making appropriate investments in SG&A to grow the company, consistent with our goal of growing over the long term at a mid-single-digit rate. Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And if I could sneak just one more in. There was a question asked earlier today about the ad and promo line, and you addressed that with respect to entertainment, the mix there. There's been a lot of change or, I guess, ratings declines, viewership trends downward in some of the key kids cable networks. Is there potentially any benefit there to make goods flowing to you guys in the second half? Any opportunities there to see that line item lower as a percentage of revenue?

Well, we're constantly working across all of our countries to monitor our media plans and media execution. And there's always a portfolio of networks that are over-delivering, under-delivering, et cetera, so we work on that almost on a daily basis in each of our operating units, both in the U.S. and outside the U.S. So that's just something we kind of just do as a matter of course.

Yes, I think our immediate plans are to get the same impressions, so we'll be out there getting the same impressions this fall and working with our media partners to achieve that.

Thank you. There will be a replay of this call available beginning at 11:30 a.m. Eastern Time today. The number to call for the replay is (404) 537-3406, and the passcode is 91283277. Thank you for participating in today's call.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.