Mattel's CEO Hosts Analyst Day Conference (Transcript)

| About: Mattel, Inc. (MAT)

Mattel, Inc. (NASDAQ:MAT)

Analyst Day

February 08, 2013 1:30 pm ET


Bryan G. Stockton - Chairman, Chief Executive Officer and Member of Equity Grant Allocation Committee

Kevin M. Farr - Chief Financial Officer


Sean P. McGowan - Needham & Company, LLC, Research Division

Linda Bolton-Weiser - B. Riley & Co., LLC, Research Division

Unknown Attendee

Good afternoon, everyone, and welcome to Mattel's Analyst Day at the New York Toy Fair. Before we begin, I wanted to outline

[Technical Difficulty]

Bryan G. Stockton

Good day, everyone, and thank you for braving the weather here in New York and joining us for toy fair. And for those of you who are joining us via webcast, welcome to Mattel.

Before I share my thoughts on our recent performance and the outlook for the future, I want to take a moment to thank and recognize Bob Eckert for his years of service to Mattel as its Chairman and CEO. His leadership has prepared Mattel for its next phase, which is the growth phase. He will be missed. He is missed, and we wish him well in his new endeavors.

As we reflect on our history and lessons learned, we know it's not enough to plan for growth. We must also plan to grow profitably because it's a combination of planning for growth and financial discipline that will always lead to success. That balance of growth and financial discipline continues to serve us well, with a 3-year annual total shareholder return or TSR of 27%, which puts us in the 91st percentile of the S&P 500. And over those 3 years, Mattel has generated about $2.5 billion in cash from operations and deployed over $2 billion in dividends and share repurchases and acquired HIT Entertainment, one of the best infant/preschool-branded companies in the world.

Similar to the last few years, our performance in 2012 is another great example of how Mattel can grow and grow profitably. We had record sales for both the total company and the international division, had eclipsed the $7 billion in total gross sales for the first time. We grew NPD share, both in the U.S. and in the Euro 5, and we had strong gross margins, all of which resulted in our second year of over $1 billion in operating profit and adjusted EPS growth of 13%.

We accomplished all of this while investing in our future with investments like our acquisition of HIT Entertainment and its collection of great brands and talent, the expansion of our American Girl retail stores, updating our manufacturing and IT infrastructure, which allows us to continue to deliver strong margins, expanding digital, which helps us to broaden the appeal of our brands and improve our connection with our consumer, whether it be in toy innovation, content, websites, webisodes, games, apps or social media.

Last year, I laid out a long-term roadmap on how we would continue the success that we had to-date. This roadmap on how we will grow requires us to develop and execute a plan for growth, develop a structure to enable that growth, nurture our talent base and develop a culture of innovation.

I also outlined areas upon which we will focus our growth, the -- where we will grow, which are -- grow our core businesses, launch new franchises, optimize our entertainment partnerships and expand and strengthen our international footprint. Our great portfolio of brands, countries and customers allow us to adjust these levers every year as we work to deliver our long-term goals.

And as I look at our 2012 performance in more detail, I am pleased with the progress that we made along this journey. Our momentum was led by our own brands and driven by the momentum in our girls portfolio.

Well, according to NPD, Barbie continues to be the #1 doll property. In 3 short years, Monster High has become the #2 doll property worldwide and in 2012 grew to a $1 billion brand at retail.

American Girl grew double digits in 2012 despite a challenging economy here in the U.S., and all of the brands in our fashion doll portfolio are bigger today than they were in 2010 before we launched Monster High.

Also in 2012, Hot Wheels grew with its successful Team Hot Wheels campaign and continued to focus on core vehicles, play sets and track sets.

Fisher-Price continued its transition from a U.S.-centric business to a global brand leader, with sales growing faster internationally in 2012.

Our acquisition of HIT Entertainment in February 2012 gave us our fifth core brand, Thomas, which is accelerating growth within our Fisher-Price portfolio.

And internationally, where gross sales grew 4% to $3.1 billion, we achieved over $1 billion in gross sales in Latin America, continued our growth in Asia, anchored by China and India, and grew the European region despite the difficult economic challenges the economy [ph] faced.

And while all of those results are impressive, we also continued to make progress in our organization structure, our talent and our culture. Following the lead of our international division, we recently reorganized our North America operations and created our global brands team and our North America division, all of which helped us to deliver our results.

The GBT worked together with international and the NAD to build deeper brand relationships with our consumers globally. This allowed the NAD and international organizations to work even more closely with our retail partners, especially during the all-important holiday season.

I often say that Mattel is the home to the best talent in the toy industry. In 2012, we added or rotated some outstanding leaders to our executive team. In February, we promoted Jean-Christophe Pean, a proven leader in our international business, to lead the transition of our U.S. operations into the North America subsidiary.

Also in February, we added the incredible team at HIT Entertainment to our Mattel family, allowing us to leverage their talents in content creation, distribution and consumer product licensing.

In April, we announced the promotion of Jean McKenzie, a long-time Mattel and Disney Executive, to run our American Girl business upon the retirement of Ellen Brothers.

And in September, we announced the hiring of Jessi Dunne, a long-time Disney Licensing Executive, to head up our consumer products business.

Last Tuesday, we announced internally that due to family reasons, David Allmark, EVP of Global Brands Team Fisher-Price, has decided to move back to the U.K. David has been a tremendous asset to the organization, first, in various roles of increasing responsibility in international, ultimately leading to him taking over the most senior role at Fisher-Price where he initiated Project Propel. So I am pleased to share with you that David will assume a new role as EVP responsible for our global insights, digital initiatives and vendor relations, innovation programs and all of HIT Entertainment.

We also announced that Geoff Walker, who currently jointly leads Europe as our SVP and General Manager, will be returning to the U.S. to assume the leadership role at Fisher-Price as the EVP Global Brands Team Fisher-Price. Geoff's successful background in brand management, combined with his international experience, makes him uniquely qualified to lead Fisher-Price.

Now while all of this change is going on, Mattel was once again voted one of the best places to work by Fortune Magazine. This is the sixth year in a row that we've had this honor, and it's a testament to our commitment and our focus on our employees around the world. We continue to strive to develop a culture of innovation and growth where our employees have the opportunity to reach their full potential. All of this was accomplished by focusing on growth and financial discipline. This combination has been instrumental in delivering 4 strong years of sales growth, margin expansion and earnings growth. Our commitment to total shareholder return, as well as disciplined capital deployment, has resulted in a 4-year TSR of 27%.

Now I know, over the past year, there's been a lot of discussion about the toy industry. So I'd like to take a few minutes and provide some context. We remain bullish on the toy industry and see continued growth opportunities. First, according to Euromonitor, the global toy industry has grown about 4% annually in recent years. It grew again in 2012 despite significant economic headwinds, and Euromonitor projects the toy industry will grow 6% annually over the next 3 years.

Here in the U.S., where much of the discussion has been focused, we now have more robust industry data. According to NPD's retail tracking service, December 2012 toy sales were up 1.3% year-over-year and were essentially flat for the year, which is consistent with historical performance for the U.S. market.

There are favorable demographic trends for the toy industry, such as global growth in the middle class. The global middle class is expected to grow from 569 million households in 2011 to 766 million households in 2020. We also know that this is an industry that responds to innovation. We've seen this with the tremendous success of Monster High.

Four years ago, Monster High was an idea in our design center. Today, it's a billion-dollar brand at retail and growing.

And finally, the toy business is a great cash business. This cash generation is driven by 2 consistent metrics: the toy industry has strong gross margins and is typically a lower investment business, it isn't capital intensive; and it's also a short-cycle business, meaning we go from ideas to cash in about 18 months.

Similarly, there's been a lot of discussion about the growth in digital. In fact, I get asked a lot about how this digital age is affecting the toy world. Clearly, digital is a competitor for children's time, particularly older children. The core toy buyer that we target remains younger in age. And for them, toy play has remained largely unchanged over the past 3 years at about 30 minutes a day, even with the growth of digital.

Although toy play tends to be more social and digital play tends to be more solitary, we ultimately see them being complementary in many ways. Toy play is better suited for friendship interactions, imaginative play, storytelling, as well as active play. Digital is an often more portable play pattern that children use to multitask or to fill in empty moments like riding in the car or waiting at the doctor's office. Still, the growth in digital is an important development. And while the term digital can mean many things to many people, here at Mattel, we think about digital very broadly. Just being digital is not an end into itself or a guarantee of being a success. Ultimately, all of our marketing efforts are targeted to building our brands, and digital is one of those means that we use to achieve the goal of building our brands.

Our advantage is that we already have strong brands. We know how to create strong brands. So we view digital as a way to deepen the engagement of consumers with those strong brands. We're embracing digital devices and the opportunities they represent for brands and toys.

The rise in penetration of digital devices has increased the ease and the number of ways that consumers can engage with our brands any day, any way. Whether they're posting on social media sites, watching videos, playing games, downloading apps, our brands are continuing to grow in the digital world.

And the continued decline in cost of digital technology enables us to amplify existing and time-tested play patterns, expanding our brands into the digital space through traditional play. From our fall 2012 line, both the Barbie Photo Fashion doll and the Fisher-Price Apptivity Monkey, are great examples of blending digital technology with traditional toy patterns.

Now overall, our 2012 Apptivity line had mixed results. But what we did learn is it did better when we applied technology to traditional play patterns. And we're going to take that lesson learned forward and incorporate more digital technology into traditional patterns in 2013.

And finally, digital is not just a way to play, it's also a way to shop. We recognize that the trend of the expanding channel is growing in importance. We dedicated resources early on, supporting both pure online retailers, as well as major brick-and-mortar retailers. And that has given us strong competitive advantage and positioned Mattel well for success in this space. This early adoption is one reason why Mattel brand performance over-indexes compared to other toy players in this channel. We benefit from our strong brand recognition because when consumers can't touch the toy, they depend on reputation and quality to make their selection.

So going forward, we're excited about our portfolio and our ability to appropriately adopt technology to drive play value. We're continuing to invest in digital space to ensure that our brands are leveraging the true power of the opportunities that digital provides, to engage our consumers, to amplify play patterns, leverage our brand strength and our e-commerce capabilities. There is no question digital will become increasingly important and no question that Mattel will be at the forefront of integrating it.

So as I start thinking about the future, specifically 2013, Mattel feels well-positioned for success. When I think about where we were at this time last year, we were facing a 2011 comparison that had a very strong entertainment base because of the Cars 2 movie property.

Now as I look forward to 2013, we don't have that headwind, and we're excited about the tailwinds that we think support growth.

Within our strong portfolio, we have a great breadth of opportunities on where we will grow in 2013, within our core brands, our new franchises, in our entertainment partner brands and in international.

Consider the following: we believe that Fisher-Price will plan for growth in 2013, as the work we've been doing to refocus Fisher-Price and leverage its international opportunity should begin to pay off. We've improved our messaging and relationship with moms around the world, and we completed our brand communication overhaul globally across the entire portfolio. We're now talking to mom with the new ad campaign, a relaunched website and rolling out a whole new global packaging statement.

Within Fisher-Price Core, we'll build on the momentum behind our versatile and underpenetrated Imaginext and Little People brands, which had strong growth in 2012. We had success in adding licensed properties to these brands with Little People Disney Princess Song Palace and Batman Imaginext Bat Cave, and we'll continue this strategy in 2013. In addition, we'll be adding digital content to support the Imaginext brand.

In baby gear, for the first time, we'll be launching a new feeding line. Globally, this is an attractive $1 billion business where Mattel currently does not play.

Our friends portfolio is better than it's ever been, growing 40% in 2012. This portfolio now has a comprehensive array of play patterns to offer consumers including plush, play sets, dolls, knights, trains and pirates. Its great brands and time-tested play patterns, along with the addition of our Thomas line, the Wood line, which is already hitting the shelves; the launch of Mike the Knight; the new property, Octonauts; and a full year of Jake and the Never Land Pirates, will continue this momentum and be even better in 2013.

Also in 2013, in addition to the launch of Thomas Wood, Thomas will see a significant lift in awareness globally, with the content placement in key regions and on key networks, content placement that includes not only the highly successful television series, but new digital assets and websites to allow engagement with Thomas all day long. In addition, Thomas will have a much more aligned marketing campaign, including the first mom-targeted messaging, allow us to increase our penetration to a younger audience.

We'll also have the global launch of Fisher-Price's Mike the Knight toy line in fall of 2013. The animated series continues to deliver great ratings here in the U.S., the U.K. and many other countries around the globe. Adding this play pattern to Fisher-Price Friends is sure to be a hit with kids.

In summary, we've made a lot of progress on Fisher-Price in 2012, and we have a clear path for growth in 2013.

Within our girls portfolio in 2013, and we'll see Barbie continue to engage with girls around the world with expanded content around the very successful Barbie's Life in the Dreamhouse digital series. And as I hope you heard yesterday, Barbie listed her Malibu house for sale and is conducting a worldwide search for a new home, being supported by local country brand promotions and an innovative toy line. Barbie will also have 3 DVD releases in 2013 as opposed to 2 in 2012, and Barbie will continue the expansion into new NPD categories, including construction and arts and crafts.

In 2013, American Girl will continue to expand its retail footprint, opening stores in both Columbus, Ohio, and Palo Alto, California. We'll leverage our content into new digital platforms and entertainment, and we'll build on the success of our 2012 Girl of the Year, McKenna, with our 2013 Girl of the Year, Saige, who will also be the first TV advertised Girl of the Year doll.

And rest assured, we have not forgotten about Monster High. As Tim Kilpin outlined to you in November, 13 is our lucky number, and we don't fear the year when it comes to Monster High. We're planning for this incredible franchise to be bigger and better in 2013, and we'll continue to support it with more digital content, TV specials, DVD releases, a very innovative toy line and an expanding merchandise business.

Shifting the focus to boys. In 2013, Hot Wheels will continue to evolve the successful Team Hot Wheels theme and launch a brand-new campaign called Go For It!. We'll have new Team Hot Wheels content, new innovations like Spinshotz and the car maker, new NPD category opportunities in construction and write-ons [ph] that will continue to build on the success of this brand in 2013 as we continue to move forward from a toy brand to a boy brand.

2013 will see the launch of our newest franchise, Max Steel. We'll be building up our Latin American foundation with a global launch of an all-new animated TV series and a comprehensive multi-platform digital launch this spring. This will be followed by an extensive toy and consumer products line launch in the fall of 2013. And as I told you last November, we look forward to sharing more news with you later in the year regarding another new franchise to be launched this fall.

Our 2013 entertainment portfolio will be stronger, both in theatrical releases, as well as television properties. Disney recently announced Planes, the upcoming spin-off of the Pixar Cars property, which will now be launched theatrically around the world this summer. And Disney is continuing to build their incredible Disney Princess franchise with the theatrical release of Frozen in the fall. Warner Bros. is set to relaunch their Superman franchise with a Christopher Nolan-produced adaptation of Superman that is already getting a lot of buzz. And DreamWorks Animation continues its great legacy of storytelling with its summer film, Turbo.

Then on the small screen, let's not forget that in 2013, in addition to the popular Jake and the Never Land Pirates, Mickey Mouse Clubhouse, Minnie, WWE and Dora the Explorer, we will also have the addition of Octonauts and the launch of Disney Sofia the First, a very well-received animated series that will include a strong Mattel toy portfolio in the fall. We'll leverage all of these opportunities on a global scale through our international business.

In 2013, we'll continue to plan for growth in all of our regions and build on our success in Latin America, as well as the emerging and developing markets in Eastern Europe and Asia.

As I look beyond 2013, I have one final thought to leave you with. While it's important to reflect on what Mattel has accomplished over the past few years, we believe we have a solid foundation and potential for growth.

Consider the following: we have yet to realize the full potential of the Fisher-Price brand and the opportunities to expand this brand around the globe. Our girls portfolio, which we believe is the most competitive and attractive in the toy industry, has great momentum and the potential to be even better. The potential of our successful franchise management team that built Monster High is launching Max Steel and is ready to deliver more innovative and creative franchises to the global market. Our international business is about 50% of sales and has the potential to grow to 60%. The potential of the entire portfolio that came with the acquisition of HIT Entertainment not only ended our fifth core brand, Thomas, but gives us the opportunity to leverage strong heritage brands like Bob the Builder and Fireman Sam and the opportunity to launch new properties like Mike the Knight around the world. We have the potential to deepen consumer engagement with our brands through digital, the potential to grow and develop new leaders within our businesses and the potential in the continued transformation of our culture to a culture of higher growth and greater innovation married with financial discipline.

So as you've heard, I believe we have laid a great foundation to grow our business in an industry that we continue to believe has the ability to expand globally. We plan to grow our brands long-term, whether our core brands, new franchise brands, partner brands, both here in the U.S. and even faster internationally. And we'll continue to execute our proven strategies and continue to refine our roadmap as we plan to deliver consistent, profitable growth.

Thank you. And now I'd like to introduce Kevin Farr, our Chief Financial Officer, who will take us through the financial portion of the presentation. Thank you. Kevin?

Kevin M. Farr

Thank you, Brian. Good morning, everyone, and welcome to our 2013 New York Toy Fair presentation. Today, I'd like to spend a few minutes covering 3 topics: First, I'd like to add a little more perspective on our 2012 performance. Second, I want to review our stated long-term financial goals and operating targets and how we performed against them. And finally, I'd like to highlight a couple of future key financial drivers with a spotlight on 2013 and how we plan to build on the success we've delivered to-date. So let's start with a deeper dive into 2012.

As you know, we begin each and every year with the same 4 strategic priorities, which are the foundation of our financial framework: to deliver consistent growth; to build on the progress we've made on improving our margins; to generate significant cash flow and continue our disciplined, opportunistic, value-enhancing deployment of that cash; and finally, to deliver top third to top quartile total shareholder returns or TSR.

With regards to 2012, I'm happy to report that we executed very well across all of our goals. As you heard last week, we delivered another year of consistent growth in 2012, with 3% top line growth, 11% adjusted operating profit growth and adjusted EPS growth of 13%. More importantly, this builds an impressive trend with 2012, marking the fourth consecutive year of strong financial performance. Let me expand.

Since 2009, Mattel has grown the top line 19%. We delivered on the fourth straight year of gross margins at or above 50%. And adjusting for 2012, we've grown operating margin each and every year, and we've grown net income and EPS double digits each and every year. That's 4 years of consistent growth in a challenging global economy. I believe that speaks volumes about the strength of Mattel's portfolio and our commitment to deliver to shareholders.

The key to this consistent performance has been the success that we've had in both top line and in the middle of the P&L. 2012 marked the first year we exceeded $7 billion in gross sales. This revenue growth was driven by a significant shift in mix to our own intellectual properties, specifically the strength of our girls portfolio, our Hot Wheels and games brands and our Fisher-Price Friends portfolio, driven by the acquisition of HIT Entertainment and Thomas & Friends.

2012 was not just a good year for our brands, it was also a good year for us globally. We saw growth in all 4 regions: North America, Europe, Latin America and Asia Pacific. And our growth outpaced the industry as we gained share in the global toy market. According to NPD, we gained share in both the U.S. and the Euro 5 and in many of our key brands and regions around the world.

We also made progress on our second goal of improving margins. In 2012, we achieved gross margins of 53.1%, a 290-basis-point improvement over 2011. We did this by leveraging our mix, executing our manufacturing efficiency and Operational Excellence 2.0 programs and overcoming a volatile cost environment. The combination of revenue growth and gross margin expansion resulted in the second consecutive year of exceeding $1 billion of operating income. As a result, we moved up our operating margin scale with an 18% adjusted operating margin, a 140-basis-point improvement over 2011. Simply put, Mattel proved once again to be a consistent performer in an inconsistent world.

As many of you know, our third goal is to generate and deploy cash flow, which is central to everything we do at Mattel, and we've proven once again the strength in Mattel's business model to generate cash and execute our disciplined approach to deploying cash in value-enhancing ways.

In 2012, we generated about $1.3 billion in cash from operations and deployed about $1.4 billion. We invested over $200 million in capital expenditures to grow our business, with investments in tooling, plant expansion, American Girl retail expansion, international expansion and IT projects aimed at improving our growth rates and our margins.

We started this year by announcing a 35% increase in our dividend, raising the annual payout to shareholders to $1.24. Shortly after that, in February, we closed a transaction to purchase HIT Entertainment. And throughout the year, we opportunistically repurchased over 2.3 million shares of our stock.

And finally, we delivered on our fourth goal in 2012 with another strong year of TSR. Our annual TSR was 37%, including equity appreciation and reinvested dividends, which was in the 86th percentile of the S&P 500. So that's some perspective on our 2012 results.

As Bryan shared with you earlier, we're excited about the growth opportunities ahead of us, and we'll continue to focus on profitable growth and strong cash flow. We always plan to grow and use our financial framework as our guide to develop goals in 4 important areas: TSR aspirations, P&L operating targets, balance sheet goals and capital deployment framework. Let's start with TSR aspirations.

As most of you know, our stated goal has been to deliver top third to top quartile for the S&P 500, which historically would equal to annual returns between 11% and 13% over the long term. For Mattel, that's likely a combination of equity appreciation of high-single digits, coupled with a 3% to 4% dividend yield.

So how have we done? As you can see, we've exceeded our goal over the past 1-, 3- and 5-year periods.

Now let's look at how we performed against our long-term P&L targets, which are revenue growth in the mid-single digits, gross margins of about 50%, advertising spend in the 11% to 13% range, SG&A spend in the range of 21% to 22% and operating margins in the range of 15% to 20%. Our sales have grown to over $7 billion, representing a 6% compounded average growth rate over the past 3 years, well within our stated range.

As I said earlier, we achieved gross margins of 53.1% in 2012, the fourth consecutive year we've been at or above our 50% target. This is a testament to the strength of our brands and our ability to deliver great innovation and play value to our customers and to our consumers. Over the past 4 years, the company has managed to mitigate commodity, labor and currency inflation through various supply chain initiatives, as well as balance the mix of owned and licensed brands.

Moving to advertising. 2012 also marks the fourth consecutive year we've seen advertising at or above 11% of net sales, which is on the lower end of our targeted range.

SG&A remains an opportunity for Mattel, and we continue to focus on cost savings through effectiveness and efficiency programs, like Global Cost Leadership and Operational Excellence 2.0. Also, we believe that the quality of our SG&A spending has improved, given that recent higher spending is partially driven by our investments in future growth, like the acquisition of HIT Entertainment, the rollout of our very profitable American Girl retail business, international expansion and our continued investment in e-commerce and IT infrastructure are all found in SG&A.

We believe these investments will deliver a good payback to our shareholders by helping to deliver more consistent growth and stronger margins.

Finally, in regard to our operating margin, we've seen a steady rise, with 2012 marking the third year of upward movement within our stated range of 15% to 20%, achieving an 18% adjusted operating margin.

With respect to the third part of our financial framework, we have a number of clear goals for our balance sheet. A strong balance sheet gives us the flexibility to invest in our future and to provide access to commercial paper markets to fund our annual working capital needs. To achieve this, Mattel targets single A credit metrics, $800 million to $1 billion in year-end cash and a 35% debt to total capital ratio. As you can see, we've managed our balance sheet well against these goals.

And finally, let me touch on the capital deployment framework. Our first priority is to reinvest in our business, and we target annual capital spending at about 3% of revenues.

Our second priority is dividends, as we continue to believe that dividends are a time-tested way to return cash to our shareholders. We target dividend payout ratios of 50% to 60% of prior year earnings and benchmark S&P companies to ensure we deliver a top-quartile dividend payout and yield.

Finally, we look at acquisitions, which can mean acquire ourselves, acquiring other people's IP or whole companies, like HIT Entertainment. While active in M&A world, finding opportunities that provide long-term results is challenging. Over the last decade, we found that one of the best opportunities out there continues to be buying Mattel by repurchasing our shares.

We've proven that opportunistic share repurchases can be an effective way to return excess cash to the shareholders and drive value. Over the past 3 years, we've repurchased over 1.1 billion of shares at an average price of $25.69, with an internal rate of return of 25%.

So I believe that Mattel has done a good job historically of delivering our financial framework targets.

Now I want to take a moment to talk briefly about how our framework may evolve in the near future. I have said before, when thinking about how Mattel approaches each and every year, we work backwards from our TSR goal of 11% to 13%. We break that down further into goals for operating profit growth and cash flow yield, where we target 6% to 8% and 4% to 6%, respectively. And as you can see that we've delivered higher than our targeted range.

A piece of the recent gains in TSR is also driven by multiple expansion, likely the result of our strong portfolio of global brands, markets and customers, consistent financial performance and a top-quartile dividend payout and yield. Today, our valuation is more consistent with the S&P 500. While we don't actively manage our multiple, we continue to benchmark ourselves against well-run consumer goods companies, many of which trade at multiples well in excess of Mattel's current valuation.

Looking forward, our most important goal is that we consistently deliver 6% to 8% operating profit growth. To do that, we manage our balance sheet in a series of levers across the P&L. And while we never focus on just 1 lever, I want to make a couple of points about 2 of the levers that's discussed most often: gross margin and our cost-savings programs. Strong gross margins are the key to our business and have been a tremendous value driver for our company. We'll continue to work diligently to drive profitability consistent with our yearly goals, and we'll focus keenly on gross margins.

As I told you in November, we believe that our gross margin outlook is equally balanced between opportunities versus challenges and the unknown. While it's always a challenge to balance these things, assuming the tailwinds we've been experience continue, like the positive impact from mix and lower volatility with input cost and ForEx, we should see gross margins within the low- to mid- 50% range in the near term.

Critical to reaching our gross margin goal will be the successful execution of our latest cost-savings program, Operational Excellence 3.0. Operational Excellence 3.0 is our third global cost program, which will build on the successful execution of Global Cost Leadership and Operational Excellence 2.0.

As you know, we've exceeded our expectations on both of these programs, where we have delivered over $400 million of sustainable gross savings to date across the entire P&L. These programs have focused on not just cutting cost, but more importantly, on how to operate more effectively and more efficiently. After 4 years, as you can imagine, we have created a continuous improvement culture at Mattel that leaves us well positioned to successfully execute OE 3.0, while parts of OE 3.0 would be similar to other programs with projects around indirect procurement, operational efficiency, enhanced international clustering but will focus more on gross margin.

The key initiatives will be manufacturing effectiveness and efficiency through automation, lean, design for manufacturing, enterprise quality and packaging optimization.

Taking a page out of Bryan's playbook and in the spirit of being happy but not satisfied, I'm happy to announce today that we're increasing our commitment on OE 3.0 from $125 million to $150 million in sustainable savings over the 2-year program. About 1/3 of the savings will happen this year, with the balance of the savings in 2014.

We're continuing to refine the individual programs, but we think about 70% of these savings will be realized in gross margin, some of which will be reinvested in play features and product innovation.

With that said, let me get more tactical here and share with you some considerations for 2013. Looking at 2013 specifically, we're planning on growing in a very financially disciplined manner, allowing us to continue to invest in our future, as well as reward our shareholders. And as Bryan pointed out, we've got a number of incremental opportunities and continuing tailwinds in all of the growth areas, our core brands, new franchises, entertainment and international.

We're excited about the tailwinds that support consistent growth for Mattel in 2013. It's important to point out that many of the incremental opportunities will be rolled out during the spring or summer and, subsequently, have a greater impact on the second half of the year.

I've already mentioned that we should see gross margins with the low- to mid-50% range in the near term, so let's work our way down the income statement and look at advertising. We'll continue to target the lower end of advertising goal of 11% to 13% as we leverage our scale and invest in content and market our brands to grow them on a global basis.

As for SG&A, it's important to keep in mind that you should see a year-over-year benefit in regards to the acquisition and integration costs associated with HIT Entertainment. These costs were $24 million in 2012, with many of the costs expensed in the first quarter of the year. We do anticipate some modest integration expenses remaining. We estimate $5 million to $10 million in cost still to come in the first quarter of 2013.

Since the deal closed in February of 2012, we'll also be absorbing a full 12 months of the ongoing HIT P&L, which will mean a slight increase in incremental licensing revenues and SG&A expenses in January. Additionally, we'll continue to fund strategic growth initiatives already underway, like our American Girl retail expansion, new franchise development, targeted IT strategic projects and international expansion. Historically, spending on these investments have ranged between 60 to 100 basis points of net sales.

Going forward, we'll continue to evaluate these on a case-by-case basis to ensure a good payback for the future. In addition, the size of these investments in any 1 year is generally made in the context of delivering 6% to 8% operating profit growth for that year.

Our 2012 capital expenditures totaled $219 million, and we expect them to be between $220 million and $230 million in 2013. We'll be right around our spending target of around 3%.

That said, we'll be above our historic averages in capital spending, primarily the result of the higher cost of building tooling and more tooling as our business grows, the continued expansion of American Girl retail locations, the expansion of capacity in our manufacturing facilities, the cost of acquiring hardware and system design work at our American Girl e-commerce platform and the continued cost of implementing our new product life cycle management system.

So let's look now at taxes. And assuming no significant changes to tax laws, our tax rate guidance will remain between 22% to 23% for 2013. And we'll continue to follow our capital investment framework for 2013 focused on maintaining a strong balance sheet and achieving single A metrics. We began the year with $1.3 billion in cash, more than our long-range target of $800 million to $1 billion.

We also remain committed to returning excess cash to our shareholders through dividends. Last Friday, we announced that our board raised our quarterly dividend by 16% to $0.36, representing an annual dividend payout of $1.44. This is consistent with our long-term goal of top-quartile dividend payout and yields and represents a 58% payout off of our 2012 adjusted EPS. Our 2013 dividend also reflects the confidence we have in our business and our commitment to dividends.

We continue to believe that one of the best acquisitions out there today is our own company. As a result, we'll continue to optimistically repurchase our stock. Based on our 2012 year-end cash of $1.3 billion, we currently plan to buy more of our stock in 2013 than we did in 2012. And of course, we'll continue to consider strategic acquisitions by asking the same 3 questions: Is it the right thing? Is it the right time? And is it the right price? And again, we'll be very disciplined about acquisitions to ensure that they create value for Mattel shareholders.

So, in summary, we continue to believe Mattel offers something for every investor. In the near term in a bad economy and in the long term and one that is growing, the bull should see opportunity in our brands, our global footprint and our global growth possibilities. And the bear should like our stability, our cash flow and the dividends.

Where I sit, we're bullish on our future. Bryan talked to you about our future potential. I also see financial potential; the potential of our strong balance sheet and starting 2013 with $1.3 billion of cash; the potential to build on the momentum of our industry-leading portfolio of brands, markets and customers; and our continuous improvement culture; the future potential of our margin momentum; the flexibility of a short-cycle business that's capital-light; and finally, the potential of our strong and consistent annual cash flow.

I believe all these things, combined with Bryan said -- shared with you earlier, should give us the flexibility to execute on Mattel's full potential.

Thank you. And now I'd like to ask Bryan to join me so we can ask -- or answer some of your questions. Thank you.

Question-and-Answer Session

Bryan G. Stockton

Kevin and I will also repeat the question so that those listening in on the webcast can also hear the question. Yes?

Unknown Analyst

Can you indicate how much were your price increases on average last year, what they are anticipated to be this year? And on a different note, how much of your business is shifting to online retail, such as Amazon?

Bryan G. Stockton

The question is what kind of pricing increase did we take in 2012? What are we looking at in 2013? And the follow-up question was how much of our business is being shifted into the .com channel? Do you want to take the pricing one, Kevin?

Kevin M. Farr

Yes, I'll take -- I'll be happy to take the pricing one. So in 2012, we raised our prices mid-single digits. As we look out to 2013 and look at where we think commodity costs are, we are continuing to operate in an inflationary environment, and we look to cost-efficiency programs to offset as much as we can with respect to those headwinds. But that being said, we took a low single-digit price increase for 2013 effective January 1 this year.

Bryan G. Stockton

In regards to our channel sales, we really don't split up publicly what our sales are. But what I would tell you is that our sales are pretty representative of what you read about it, and they're growing at a double-digit rate. We're very bullish on the .com channel, again, as I mentioned in my remarks. We have great strong brands that do well in that channel, and we're working very closely with both the brick-and-mortar retailers who are being quite successful in .com, as well as .com dedicated retailers, to make sure we have the right offerings and the right packaging and the right programs to build those programs into the success that we, in a partnership, believe that they can be.

Next question. Yes, in the back.

Unknown Analyst

Two questions. Could you be a little bit more specific on how you continue to grow Monster High in terms of either new SKUs? And there was some speculation about a Monster High movie coming from Universal that was in development and whether -- where you are on that, if anywhere? And then secondly, on HIT, what's the potential to refresh or bring new characters on an annual basis into the market?

Bryan G. Stockton

Sure. The question is, do we believe that the momentum of Monster High can continue? And if so, why is that? And the second question is in the portfolio that we have in HIT Entertainment, what opportunities do we have to refresh some of the brands that we have? I'll start and ask Kevin to fill in, as he always does so well. As it relates to Monster High, this whole concept started with the insight that we got talking to girls, these older girls or the 6- to 10-year-old girl. And as you recall, the insight was at that age, they begin to start thinking about what it's like to be in middle school or in high school and all the social things that are fun and some of the social things that are little stressful that go on there, boyfriends, girlfriends, what club are you in, et cetera. And as they begin to think about that and being a father of 4, and 2 of those 4 are girls, so I'm using their words, not my words, they start to think about their word flaws. My hair is too curly, my hair is too long or whatever it is, and how those flaws may affect them. And so our creative group came up with a really interesting idea to try to address this issue with girls, which is why don't we make these flaws outlandish. And after all, monsters are basically a personification of human flaws. Right? And in developing this concept, they were able to come up with essentially a never-ending set of stories about all the drama that goes on as a preteen and a teenager through junior high and high school, that has continued to really strike a chord with these girls. And so the stories continue, the characters continue. Because the characters are flawed, you can't imagine how much fun the creative people have coming up with more flawed characters. So we think the momentum has been strong. We had strong momentum exiting 2012 as we look to the content. The stories that are out there is really can how we execute it. We feel very good about it. I know you asked a specific question about a movie, but one of the things that we get asked about a lot is TV shows and movies, et cetera. We're always open to it. But the reality is we made Monster High a $1 billion brand at retail globally, essentially by using webisodes and a few TV specials. So that formula seems to work for that brand, and we like that quite a bit. Kevin, do you want to take the HIT question?

Kevin M. Farr

Yes, I think with regard to HIT, that we are focused on growing Thomas & Friends. And we are launching Mike the Knight, which we're calling a gift with purchase because we really put all the value around Thomas & Friends and the potential of Thomas. And we've done a great job in 2012 integrating HIT into Mattel and really getting more awareness around Thomas & Friends. To answer your question specifically, we are launching Mike the Knight this year globally, with both toy products and consumer products. We launched successfully last year in the U.K. by a licensee of HIT. So we're working on that. And I think we are also working on investing in a couple of other brands, which were in the HIT portfolio of global brands. We like Fireman Sam, and we also like Bob the Builder. We think there's traditional play patterns around that, and we're investing in those brands to launch in the future.

Bryan G. Stockton

Next question. Yes?

Unknown Analyst

Bryan, when you were talking about Fisher-Price Core earlier, you talked about you're going to do launch or this is -- I interpret, you're going to launch a new feeding line. You haven't been in that before. Are there -- as you look at Fisher-Price Core, are there other areas of growth that you would like -- that you aren't in now, that you would like to be in? Where are the other kind of gaps you see in Fisher-Price Core and maybe you could talk a little bit beyond what was in your prepared remarks about how you're trying to grow that part of Fisher-Price? And then I have a follow-up question.

Bryan G. Stockton

Sure. Well, if you look at the Fisher-Price brand, particularly in well-developed markets like in Canada, U.S., Australia, U.K., for example, that brand has the ability to span a whole number of categories. And if you go back to, gosh, it must be about 10 years ago, we launched Fisher-Price baby gear, feeding chairs, bouncers and things like that. That was incredibly successful, and we rolled that whole concept out globally. So that was sort of the first foray into that for us. As we began to look at other opportunities, we thought feeding fit in well. Because, as you recall, one of the things that David Allmark shared with us a few years ago is the fact that a mom who buys Fisher-Price baby gear buys more Fisher-Price products over her lifespan with the brand than someone who doesn't. So we thought that feeding would be -- it's a big category. It's a growing category, and it's another way to really seal that bond with mom early on with baby gear. I can't tell you other categories we're looking at because, obviously, we're looking at it and that would be a secret. But with a brand like that and with all the different categories that you can imagine in infant and feeding and younger kids, there's a lot of places we think the brand can grow, and that's why we're excited about all the work we've put into repositioning the brand as really a premier kids brand.

Unknown Analyst

And then on American Girl, I found it interesting that you're going to start advertising in TV with the new doll of the year with Saige. What was behind that decision?

Bryan G. Stockton

It's quite interesting. We dabbled a little bit with advertising in American Girl in the past, and one of the things that we have decided to do is to put a little bit more marketing effort behind it. This brand has been incredibly successful by marketing primarily through either the physical catalog or online. There's tremendous buzz about this. And of course, the retail stores are a great connecting point with the consumer. But some of the work that Gene and team did earlier suggest that when we do some advertising on something like Saige, we see a response. And in fact, they incorporated some of those lessons learned in how Saige was launched just this month, and Saige appears to be off to a pretty strong start. So I think you'll see American Girl do a little bit more on the marketing front because, really, there's big opportunity for that brand to continue to grow.

Yes, Sean?

Sean P. McGowan - Needham & Company, LLC, Research Division

I have a couple of product questions, 2 product areas that we've heard about before but haven't heard about lately. Major Matt Mason, I think that's a Mattel property. Where is that? I haven't seen it. It's one of my favorites from when I was a kid. And Ghostbusters, is there anything going on with Ghostbusters? And then separately, maybe a bit more strategic, construction has been a very strong category for several years now. And it's really like saying Lego has been very strong company because not all construction has been strong. But is your involvement with MEGA Brands, is that as far as you're going to go in construction? Or would you consider getting a bit more direct and more deeply involved?

Bryan G. Stockton

Well, let me start with the easy question, which is Major Matt Mason and the Ghostbusters. Major Matt Mason is something that our franchise management team looks at, along with a lot of other properties. And we always get asked about Masters of the Universe as well. So we've got a portfolio of brands that this team is trying to take a look at, as well as the new ideas, a la Monster High, for example. So I can't really comment on those, but you can appreciate that there's a whole number of different things that we have that, that team looks at, tries to build great stories around and tries to understand, is this viable or do we need to have some more work? Regarding construction, it has been a growing category. It's an attractive category. Lego has done a terrific job in that space. As we look at things like Barbie, for example, and expanding Barbie into other things like construction, which, historically, has not been a "girls" segment in the toy business. We like that. The response to Barbie has been pretty positive. It's still way too early. It's only been out, I think, about 6 or 7 weeks. So we're going to kind of dabble in it and see if we like it and see how Barbie responds to it. And then based on those lessons learned, we'll figure out what we want to do.


Unknown Analyst

I wanted to ask, one of the first things, Bryan, you said when we all sat down was that Mattel is entering a new growth phase of the company. And that actually struck me because it means you're probably going to be doing some things differently than in the past, if you're in some sort of a new phase of this company. So could you elaborate on what that means? What incremental things you're going to do with them [ph] before in terms of capital allocation, investment decisions, hiring decisions, anything else that you think is distinctive about this phase?

Bryan G. Stockton

Sure. The question is as we talked about entering a new growth phase, what are we doing differently than we've done in the past? And to be more specifically, are there some examples we could use. I am going to ask Kevin to tag team with me on this one. We start with -- I look at the history of Mattel, I started in 2000, so that's when we started. But if you look at what was going on at that time, we call that the righting the ship period, kind of 2000 to 2003. We had made the Learning Company acquisition. We were bleeding $1 million a day in cash. Kevin will tell you that was 7 days a week, not 5 days a week. And we had a number of cultural things we needed to address and talent things we needed to address. And so we really had the ship righted and floating in about 2003. Then about that time, through '03 to '10, that's really when you see a lot of the discipline that we've put in place. So we started talking about net operating profit after capital charges, the way to think about our brands and our countries. We started really talking about things like total shareholder return. We did Global Cost Leadership as a big initiative. In international, we took a much more disciplined approach into how we approached the markets by going to a distributor model, a managed distributor model with a full subsidiary. So we built this disciplined machine, that at the end of 2010, we've had gross margins for 2 consecutive years. We liked where we were from a cost-structure standpoint. What we decided, as we were transitioning from Bob to me, is this company is ready to grow at a more consistent rate, which would be higher and more consistent because we got a pretty strong engine here. So as we look at that and some of the investments that Kevin was talking about, and I'll ask Kevin to comment on again, we're making very specific investments. They're visible inside the company. Kevin shared a few of them with you, that we're serious about trying to increase our growth, some of the discussion we just had about Barbie and construction. That's dabbling in some new areas, Fisher-Price going into infant feeding. But we're making conscious investments. Some will pay out, some won't payout. But we're trying to be very disciplined about how we approach it. Do you want to build on that, Kevin?

Kevin M. Farr

Yes, I'd build on OE 2.0. A portion of the OE 2.0 was to improve our margins, but it was also to help us fund these growth investments. As I said, we've made growth investments over the last couple of years, anywhere between 60 and 100 basis points from net sales. And we've been focusing on things that can help us to grow more consistently at a higher rate. And also, I think what we're doing from a perspective of growth is looking out more long term. We're planning for growth in '13, '14, '15 and '16. As we work on these franchises, it takes a number of years to develop. It also takes more time to coordinate consumer product launches with toys. So as we look out to and make the strategic investments, we're looking out on a more long-term basis to deliver consistent growth and -- at a higher rate. And I think this year is a good example of when you look at what's new for this year, including the Max Steel franchise launch and potentially another franchise launch later this year. That's a good indication of how our focus has changed to look outward and to deliver more consistent growth at a higher rate.

Bryan G. Stockton

Okay, I've been told we have time for one more question. Linda had her hand up, and the microphone is right there.

Linda Bolton-Weiser - B. Riley & Co., LLC, Research Division

So now that you're talking about sort of more consistent and higher growth, I wonder, does that feed into some just sort of ideas about how much leverage you would carry, maybe you should lever up a little bit more? And related to that, I mean, you do you have the excess cash on the balance sheet and you're going to generate at least a couple of hundred million more in 2013. So it seems to me that the share repurchase will not just be higher than 2012, it seems like it would be quite a bit higher, so correct me if I'm missing something on that. And then my second question is just on the educational learning toy category. That's one category that you guys have dabbled in, I think, over the years but you don't have a big presence. Is that something that we want to address more in the future? Or is it an attractive category do you think?

Bryan G. Stockton

Do you want me to start it on the educational and turn it over?

Kevin M. Farr


Bryan G. Stockton

Let me start with the educational piece. One of the things that we think about with the Fisher-Price repositioning with moms is these new young moms don't think about education the way the baby boomer moms did. It's not just ABC 123. It's really about child development milestones. And we sort of joke about this, but it's true. And even things like potty training, young moms today view as educational development. So when we look at what we're doing at Fisher-Price, one of the things we really like is the Laugh & Learn line that's been incredibly successful for us and really focuses on infant. It focuses on all sorts of physical and mental development kinds of things, cognitive kind of development, so we like that. We're going to continue to put a lot of effort into that. You can imagine with the play lab that we have in Buffalo, there's a lot of things that we look in terms of education, trying to think about, where else we can take the Fisher-Price brand? So we think it's an interesting space. We like where we are, and we'll continue to evaluate other opportunities. Kevin?

Kevin M. Farr

Okay. And the first question was, are you going to borrow more and lever up your balance sheet more? And also, you ended the year with $1.3 billion of cash. How much more stock are you going to buy in 2013? So with respect to our balance sheet, we do have a strong balance sheet. I think that strong balance sheet gives us the financial flexibility to invest in the future, and I think it served us well. Our capital investment framework has been in place since 2003, and we target year-end cash of $800 million to $1 billion, debt to total capital about 35%. That's gives us basically single A metrics. And the reason that we're trying to deliver single A metrics is we're not capital intensive. We're working capital intensive. And the most efficient way to fund our business is through the issuance of commercial paper, so we're really focused on that investment grade rating. With regard to the deployment of cash in 2013, again, I would point you to our historical capital investment framework, that we're going to target to end the year with $800 million to $1 billion of cash and a debt to total capital of about 35%. And we'll be opportunistic about buying back our shares. And I'm going to give you specific parameters or specific amounts, but we are going to buy more in 2013 than 2012, or bought less in 2012, obviously, due to the acquisition of HIT Entertainment for $680 million in the first quarter.

Bryan G. Stockton

Great. Thank you, Kevin. For those of you listening on the webcast, thank you very much for joining us. We're going to close down the webcast and take about a 10-minute break. So if you could return at 2:50, we'll get on with the rest of the session here in New York. Thank you, all, for joining us.

Kevin M. Farr

Thank you.

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