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Mattel, Inc. (NASDAQ:MAT)

October 24, 2011 11:00 am ET

Executives

Bryan G. Stockton - Chief Operating Officer

Drew Vollero -

Kevin M. Farr - Chief Financial Officer

Robert A. Eckert - Chairman, Chief Executive Officer and Member of Equity Grant Allocation Committee

Analysts

James Hardiman - Longbow Research LLC

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Gregory R. Badishkanian - Citigroup Inc, Research Division

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Gerrick L. Johnson - BMO Capital Markets U.S.

Edward Woo - Wedbush Securities Inc., Research Division

Per E. Ostlund - Jefferies & Company, Inc., Research Division

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

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

Michael Kelter - Goldman Sachs Group Inc., Research Division

John Taylor - Arcadia

Eric O. Handler - MKM Partners LLC, Research Division

Robert W. Carroll - UBS Investment Bank, Research Division

Operator

Good day, ladies and gentlemen, and welcome to Mattel Announces Acquisition of HIT Entertainment Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Drew Vollero

Good morning, everyone, and thanks for joining us on short notice to discuss Mattel's agreement to acquire HIT Entertainment. Our press release was issued a few hours ago and is now available on the investors and media section of our corporate website mattel.com. After the call, a replay and a transcript of today's remarks will be available on our website.

In a few minutes, Bob Eckert, Mattel's Chairman and CEO; Bryan Stockton, Mattel's Chief Operating Officer; and Kevin Farr, Mattel's Chief Financial Officer, will provide comments on the acquisition and then the call will be opened to your questions.

Certain comments made during the call may include forward-looking statements relating to the operation of the businesses of Mattel and HIT Entertainment and the timing, plans, benefits and Mattel's expectations for the proposed transaction. These statements are based on the current beliefs and assumptions of Mattel and HIT Entertainment management with respect to future events and they are subject to a number of significant risks and uncertainties, which could cause our actual results to differ materially from those projected in the forward-looking statements.

Additional factors that may cause results to differ materially from those described in the forward-looking statements are described in the Risk Factors section of our 2010 annual report on Form 10-K, in our 2011 quarterly reports on form 10-Q, and in other filings that 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.

And with that, I'd turn it over to Bob.

Robert A. Eckert

Welcome, everyone. I'm pleased to announce that Mattel has signed an agreement to acquire HIT Entertainment and its portfolio of globally recognized pre-school properties, including Thomas & Friends, Barney, Bob the Builder, Fireman Sam, Angelina Ballerina and others. We're very excited about the proposed acquisition and believe that it complements our existing business, as it fits well with our strategy to own, develop and grow world-class brands and intellectual properties.

As I've always said when we consider acquisitions, we have the same 3 questions. Is it the right fit, at the right time, at the right price? We believe that this acquisition fits the bill on all 3 accounts. Let me talk about why this acquisition is the right thing for Mattel.

The centerpiece of this acquisition is Thomas & Friends, a great heritage brand for preschoolers, which has been around for more than 60 years that is consistently ranked as one of the top toy brands in the U.S. and abroad, and is loved by generations of moms and kids around the globe. Quite frankly, brands with the great track record and evergreen nature of Thomas rarely come up for sale.

At Mattel, we're the custodians are some of the most iconic brands in the toy industry. If you look at Barbie, Hot Wheels, American Girl and Fisher-Price, we've nurtured and grown these brands over the decades, both in the toy aisle and consumer products.

Adding Thomas will only strengthen our position as the #1 toy company in the world and solidify one of premier preschool licenses as a Mattel brand in the perpetuity.

When I think the Thomas franchise, I think about 2 distinct but related lines of business: Toys and consumer products. We consider both businesses to be in our wheelhouse. Thomas is one of the most toyetic brand in the industry. In 2010, we commenced a 5-year license agreement for the rights to manufacture the die-cast and plastic business, and today is a major player in our Fisher-Price portfolio with more than $150 million in worldwide revenues annually.

Additionally, Mattel will gain access to a number another important toy category for the brand, wooden toys. The right to manufacture and market the wooden toy products will revert to Mattel when the current license expires at the end of 2012. Historically, the sales of wood-based toys have been around half the size of the plastic and die-cast business.

With more than half of Thomas' revenues coming outside the toy aisle, we believe that depth and experience of its consumer products licensing team fits well with Mattel's key growth strategy to build and create franchises.

And content is an important component of the Thomas franchise. We already know kids entertainment. This year marks the 10th anniversary of Mattel's highly successful Barbie entertainment series, which has grown into 22 chart-topping DVDs, selling 100 million copies. Max Steel, the #1 boys' action figure in Latin America, has been supported with entertainment since its introduction more than 10 years ago. And the highly successful launch of MONSTER HIGH was centered around content, from webisodes, to music videos, to TV specials around the globe.

The one component of HIT Entertainment we're not acquiring is its ownership rights to the Sprout network. Ownership of a television network is not a strategic priority for Mattel.

All in all, the acquisition of HIT Entertainment is absolutely consistent with our strategy to market the world's premier toy brands, develop powerful intellectual properties and cultivate global franchises.

I'll now pass it over to Bryan who will talk about why this is the right time, and how we intend to realize value from this asset.

Bryan G. Stockton

Thank you, Bob. As you've just heard, there are a number of compelling reasons why this acquisition is the right thing for Mattel. What I want to touch on is why this acquisition couldn't come at a better time from Mattel. The brand is for sale and our balance sheet is strong. And as we reviewed in our third quarter conference call, our core brands had momentum in the marketplace. Adding Thomas & Friends to the portfolio serves to bolster that momentum in toys, as well as consumer products. In fact, Thomas & Friends will become one of our top 5 core brands joining Fisher-Price, Barbie, Hot Wheels and American Girl.

And we know Thomas. Through our partnership with HIT Entertainment, we've experienced firsthand the strength of this franchise and have been able to expand the sale of Thomas-branded toys substantially compared to the levels predating our partnership.

When the prospect of acquiring HIT Entertainment came along, it was evident to us that there was an opportunity to realize substantial value over and above the current base business. First, by expanding Thomas into more relevant and different product categories, and second, by exploiting our global footprint to build the brand around the globe, especially in Latin America and Asia.

HIT Entertainment's business primarily revolves around brand development through content creation and management and brand monetization through licensing arrangements. HIT currently has distribution and licensing agreements in place with several other partners for various categories, including toys.

As these deals expire, we'll have the opportunity, where appropriate, to expand Mattel's product lines to incorporate these products and realize additional value by optimizing our manufacturing and distribution capabilities. As Bob mentioned, the very attractive wood license is scheduled to expire at the end of 2012, which provides us the opportunity to further build the business.

This acquisition also comes at a great time when you consider the number of key licenses within the portfolio that will be coming up for renewal, including the content distribution rights to the Thomas & Friends entertainment franchise, which come up for renewal over the next 2 to 3 years in various markets. That timeline will give us ample opportunity to develop a game plan that maximizes the brand's global reach.

While Thomas is the centerpiece of the acquisition, we're acquiring a host of well-recognized brands like Barney, Bob the Builder, Fireman Sam and Angelina Ballerina. Each of these brands is unique in its own right and has its own strengths. Our strategy continues to be the development of franchises and we'll evaluate each brand on a case-by-case basis to either develop them internally or manage them through the right partnerships with the objective of maximizing value.

And most importantly, HIT Entertainment has a great talent base with strong competencies and content production, management and licensing. We work in a creative business and we understand the value of strong and talented leaders, teams and people. By leveraging our global infrastructure and the best talent from both organizations and the addition of the HIT Entertainment team will complement our licensing business and also augment our capabilities on the content side.

So as Bob said, Mattel is absolutely the right home for Thomas & Friends and now is the right time to add this iconic brand to our portfolio.

Now I'd like to turn it over to Kevin, who will talk about why it was the right price. Kevin?

Kevin M. Farr

Thank you, Bryan. It's very clear to us that the acquisition of HIT Entertainment is the right thing at the right time, and we believe it is being purchased at the right price. This acquisition aligns well with Mattel's strategic priorities. Thomas will immediately become a core brand and should be another catalyst to drive growth worldwide.

HIT's high gross margins should allow us to continue to build our operating margins and generate significant cash flow, which we intend to use to continue our disciplined, opportunistic and value enhancing-capital deployment strategy. Being a #1 toy company means we see almost every major acquisition opportunity in the industry. And we evaluate all deals through a number of common valuation techniques, including discounted cash flow analysis and comparable transaction multiples.

The result of this thorough and disciplined approach is readily apparent. If we can't build a reasonable and achievable business case to make an acquisition, it simply doesn't happen. Based on our assessment of this deal, we believe that this acquisition should drive long term value for Mattel shareholders. This acquisition is not only on strategy, but also makes sense for us financially.

The HIT business is relatively straightforward. HIT revenues are over $180 million, driven mostly by licensing of their IP in key categories like toys, consumer products and home entertainment, with some revenue generated by video distribution deals done mainly through third parties.

HIT's gross margins are strong. Given they may primarily license their IP, they have lower cost of goods sold in Mattel incurring some variable cost to manufacture, market and sell videos as well as pay inventor and TV placement royalties on some of the core equities.

Their SG&A is very focused, primarily supporting a global licensing organization and managing their outsourced content production efforts.

Finally, HIT creates new programming each year for some of its core brands. These investments are typically monetized to home entertainment and TV placement.

The key terms and highlights of this transaction are as follows. We'll pay $680 million in cash for ownership of HIT and we'll finance the transaction using a mix of cash on hand and debt. The acquisition includes all rights to HIT's intellectual properties, including Thomas & Friends, but does not include HIT's ownership stake in the Sprout cable network channel.

HIT's existing business has already good size and global reach with revenues in excess of $180 million. The price for the acquisition is about 9.5x trailing EBITDA. This figure does not include Mattel's manufacturing and marketing profits for the die-cast and plastic license nor from the wood license which will be added in 2013.

We don't believe the acquisition will have a material impact in our 2012 earnings, but it will be increasingly accretive as the benefits of owning these brands are reflected in our results, including the addition of Thomas wood business in 2013 and the retention of Thomas plastic and die-cast business from 2015 onwards. The deal is slated to close in early 2012.

The value drivers for the acquisition focus primarily on Thomas, although we see opportunities and synergies across the entire business. First, with Thomas, we acquire a long-standing robust licensing business that spans multiple categories, similar to our existing Barbie, Hot Wheels and Fisher-Price licensing businesses. Second, the right to the attractive wood license will revert back to us after 2012. And third, we'll retain the right of the die-cast and plastic toy license past 2004.

We see multiple opportunities for synergies. To highlight a few: First, our experience in multiple toy categories should allow us to expand this brand into more relevant and different play patterns now that we own the intellectual property and can better align content creation and product development. We expect to grow this business globally where we bring to bear our unprecedented international scale. We believe we should be able to optimize Thomas' current entertainment placement and expect to leverage additional opportunities for content placement internationally. Finally, beyond the opportunity for further growth, we should be able to benefit from some cost efficiencies as we integrate 2 organizations.

In short, these are great brands, and we believe we can invest and grow them. We are the premier global toy brand management company and our experience, resources and scale should undoubtedly make this brand even stronger than it is today as we build the brand on a global basis.

Moving forward, Mattel intends to continue execute the capital deployment framework that we've shared with you in the past. Specifically, we will continue to benchmark low-right consumer product companies with our dividend, and we are still targeting top quartile payment levels with a 50% to 60% payout ratio. Similarly, we'll continue to evaluate and execute share buyback opportunities when they present themselves. And as demonstrated by today's news, we will make acquisitions that we believe will generate long-term shareholder values.

With this, I turn the call back to the operator, who will open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Robert Carroll from UBS.

Robert W. Carroll - UBS Investment Bank, Research Division

Just 2 quick housekeeping questions and then a strategic one. In terms of just clarifying the total consideration, is that $680 million all-in purchase price? Is there any sort of assumption of underlying debt or anything in there?

Kevin M. Farr

No, $680 million is all-in. There's no debt assumed in the transaction.

Robert W. Carroll - UBS Investment Bank, Research Division

And for the strategy with the content creation and the media production assets that are coming in as part of HIT, I guess, how do you guys see those developing over time, how aggressive you will be with them, and what sort of CapEx requirements are needed to fund those?

Bryan G. Stockton

Rob, it's Bryan Stockton. A couple of things. First of all, as you know, HIT has a great stable a brands. And to create great brands, you have to have great creative people. And when you marry their great creative people up with the folks on our end who've created Barbie movies and Max Steel movies and MONSTER HIGH, we think that getting all that experience together will help us leverage the creative part of the content business quite well. So we're very excited and anxious to bring those groups together and see what kind of synergies and creativity we can get out of that relationship. The second thing is, as you know from a content standpoint, we have global relationships with networks all over the world. We think that marrying our experience with their experience in placing media will also help us from a content distribution standpoint, so we think there's a lot of synergy there. In terms of investing in content, you have to think of creative investment a little bit like advertising. Historically, if you look at the level of investment that HIT has put into their creative, it runs just maybe slightly lower than a typical advertising rate for one of the larger companies in toy. And as we get into it, we'll understand a bit more, but I think about that rate is about right for the future.

Operator

Our next question comes from Sean McGowan from Needham & Company.

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

I also have a couple of questions. So what do you think will be the timing regarding maybe closing this thing in sometime in early '12. At that time, will Sprout be completely separated? Do you have to wait until that actually gets sold?

Robert A. Eckert

No. We expect to close early in the first quarter. And we expect that Sprout will not be part of this transaction.

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

Okay. How long do you think it would take to -- as you examine things and look at where the there might be some cost synergies, how long would you expect it to take to kind of get right-sized in terms of overhead and other spending, in terms of -- let me make the comparison, how long do you think that'll take to get it right-sized?

Robert A. Eckert

Sean, this is Bob. Typically, in these things, we probably count on a year or 2. We'll probably be looking at the organizations quite heavily and looking at what we need to do to make sure the business is on track for the long term. But I suspect it'll be within the first year or 2.

Kevin M. Farr

Yes, and I think with regard to that, we'll expect some restructuring, integration charges. But we're still studying the integration opportunities and identifying synergies. Retaining key talent and preserving the essence of HIT's current organizations are key priorities in this integration --

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

Okay. And if I could jump back to Bryan's response to Rob's question in terms of investment. It take it, then, that you expect to continue to be directly involved in the production of the TV programming. And, Bryan, when you said normal advertising rates, is that a percentage of HIT's revenue or the total revenue that Mattel would derive from this?

Bryan G. Stockton

Yes, Sean, 2 things. We do expect to as soon as we can, and as Bob said, we're just getting started on integration planning, we need to identify the key creative talent at HIT and understand how we can leverage that talent across our brands and, in particular, with Thomas. One of the things we're excited about with the Thomas brand, as well as the other brands, is to really get a deeper understanding of how we can take that brand to the next level. It's got a rich history, as you know, but we think we can make Thomas even more relevant from the content standpoint, which will then extend into toys. Now regarding the investments, my analogy was to advertising rates for large toy companies. So if you think about investing at about that level for content creation, that we think is probably pretty close to where we'll end up.

Kevin M. Farr

Yes, and I think that's based upon net sales with total enterprise.

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

Okay. All right. That's helpful. I presume that the $180 million figure -- you clarify that doesn't include the manufacturing profits that Mattel is not realizing, but I assume that does include the royalties that Mattel is currently paying to HIT as part of that revenue mix?

Kevin M. Farr

That is correct, Sean.

Operator

Our next question comes from Felicia Hendrix from Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

Just wondering how many, if you could walk us through, how many households the top brands currently reached? I guess you're really focusing on Thomas as the top brand. And just trying to see, you mentioned a little bit in the prepared remarks, but what you view the geographic opportunity to be, and how much you think you can increase that?

Bryan G. Stockton

Felicia, it's Bryan. It's hard at this point to quantify households exposed to Thomas. But I can tell you that Thomas is a very global brand. It's on about 80 channels globally. Our estimate would be, roughly, about 50 million households, is probably where Sprout is. But the key thing with Thomas is that we're going to expand it in our core markets by rejuvenating the brand and expanding the new businesses, like wood. But we're also excited about trying to grow it at a higher rate, for example, in geographies like Latin America and Asia, where the brand has historically been underdeveloped, and where we have a very sizable footprint and are going to be able to leverage that brand into what we think is a great success.

Felicia R. Hendrix - Barclays Capital, Research Division

Great. And then as a mom of 2 Sprout addicts, I'm just wondering why you're just -- maybe you see Thomas as the biggest opportunity, but from my perspective, there's a lot of other brands that HIT has that they just haven't exploited at all, well at all. And I'm just wondering -- they seem to be perfect fits for your entire line. Can you maybe discuss some of the other opportunities you see there?

Bryan G. Stockton

Sure. We love brands at Mattel, and HIT has a great portfolio of brands and we mentioned some of them like. For example, Bob the Builder is a great one. So we're going to take a look at Thomas, first of all, and figure out how we can make Thomas even bigger and better. Then we'll go to the portfolio, literally, one by one. With the HIT Entertainment teams, we get our teams our teams together, and really understand what are the opportunities. We're very good at doing local research to understand the local geographic strengths of a particular brand, and then try to understand how we can take that and expand it globally. So we think there's a lot of exciting work ahead of us on that, and we're looking forward to it.

Felicia R. Hendrix - Barclays Capital, Research Division

Great. And then just finally, when you're going through this whole process, and I don't know if this is a question both for you, Bryan, or Bob or Kevin, or maybe you all could just jump in. Some people are wondering why you actually are acquiring the whole company. Obviously, it was [indiscernible] versus just trying to win the licenses?

Robert A. Eckert

Well, the first thing is, again, we love brands and we think Thomas is a terrific brand. And with our experience in developing content, and we think that the great team at HIT, we think there are more ideas for Thomas to have new and exciting content to drive toy sales and consumer product sales. So we start with that. And by owning the brand, it gives us the ability to really control the content, drive the content and take Thomas into new categories and new experiences, whether it's different worlds and things to that nature. The other thing that's consistent is Thomas is one of the top intellectual properties in the toy business. It's certainly #1 or 2 in infant preschool. And we think that's really, really important for us to have and to own. So we're very bullish on owning the property.

Operator

Our next question comes from Gerrick Johnson from BMO Capital Markets.

Gerrick L. Johnson - BMO Capital Markets U.S.

I was wondering if you could comment on HIT's sales and EBITDA. What portion is from licensing and what is from content production?

Kevin M. Farr

Yes. I think with regard to the Licensing business, a big part of the business is in the P&L with regard to HIT, it is the licensing business. It's about over 2/3 of the business from the perspective of licensing. And the balance is with regard to TV and digital and live events.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay, great. And then of the licensing revenues, how much comes from toys and how much from other products?

Kevin M. Farr

Well we're not going to get into that level of specifics, but there is, obviously, with regard to toy licensing and with regard to wood, it's more than half consumer product licensing.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay. And of the other big brands, Barney, Bob, Angelina and Sam, I guess, can you tell us who has the master toy licenses right now and when do those roll off?

Robert A. Eckert

Well, it varies around the globe. And so there are relationships typically like there are with a Mattel Master toy license. The properties tend to be smaller, the relationships are a little bit smaller, and it does vary by geography.

Operator

Our next question comes from Linda Bolton-Weiser from Caris.

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Just, Kevin, a few questions on the financial side of this. Do you think that you'll curtail and not do share repurchase in fourth quarter, because you had sort of ramped it up a little bit lately. And if you don't do it, I'm thinking you might have about $300 million extra cash. Do you still want to have at least $800 million to fund working capital? And if all that's true, then maybe you will borrow about $400 million. And given that the EBIT of HIT looks like it's at least around $50 million, $60 million, I guess I'm having a hard time seeing why you're saying this is neutral to earnings in 2012 and not accretive?

Kevin M. Farr

So again, with regard to capital deployment, I'm not going to speak to exactly what we're going to do in the fourth quarter. But I think we'll continue to follow our capital deployment framework consistently, which has been in place since 2003, with the goal of maximizing shareholder value. As I said, the key tenants of this framework remain the same. We target year-end cash of $800 million to $1 billion to fund the seasonal portion of our working capital. We make appropriate capital investments to maintain and grow the business, and we deploy excess cash through regular quarterly dividends, as well as opportunistic execution, strategic acquisitions and share buybacks. That, we believe, the transition fits well with this, and we'll continue to execute consistent with that going forward. With respect to the deal, with regard to financing it, we're going to finance it with cash on hand as well as debt. The specifics of the debt, we really can't get into. With respect to integration costs, the integration cost and deal costs will, essentially, be offset by the EBITDA that will be adding. So it's going to be not much of an impact in 2012 due to the fact that we've got deal costs and integration costs and amortization going forward.

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Okay. And can I just ask, I guess for Bob, I just remember over the years bob always saying that he seems reluctant about big deals because he points to all the ways that they really don't create shareholder value, or very few of them do. And it just seems like you've had a lot of success developing internally MONSTER HIGH. So is the value in HIT to you the ability to develop content, but you've already proven that? Or is it just the value of the Thomas brand? Or is it gaining better competency in being able to do licensing and expand that capability more to the other brands? I'm trying to determine, what do you view as the true value that you're getting here?

Robert A. Eckert

Well, you touched on all of it, Linda. And that's the key here is there is no one answer to your question. It is a tremendous toy business in both plastic, die-cast and wood. It's an International business. It's a franchise, it's a brand, it's beyond toys to consumer products. So if you think about what we've done internally with creating a brand like MONSTER HIGH, what we've been able to do with Barbie and with other brands, historically, just fits very well. We don't see these at all as being mutually exclusive. This is a franchise, just like Barbie is a franchise or MONSTER HIGH is a franchise. And now we're in a position to own it and control it in perpetuity.

Operator

Our next question comes from Greg Badishkanian from Citigroup.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Just a question here on 2012 about neutral, 2013 that's accretive. What are you assuming to be neutral in 2012? Any synergies there, or is just kind of operating the company as it is and just integrating? Is there anything that -- synergies that you're expecting to kind of achieve those goals?

Kevin M. Farr

Yes, I think we're assuming we would grow Licensing business in 2012, as well as we would be, obviously, starting to realize integration savings. But those are going to be offset by deal costs, integration costs, and some amount of amortization of intangibles. And then as you look forward to past 2012, you get the benefit of the wood business, and accretion from the wood business in 2013. And as you look past 2014, we continue to generate the profits from the die-cast and plastic business.

Gregory R. Badishkanian - Citigroup Inc, Research Division

And any way you can kind of give us a range of how maybe accretive it could be in 2013 or '14 and beyond?

Robert A. Eckert

No, Greg, we, as you know, it's sort of consistent with our philosophy of not making too many projections.

Kevin M. Farr

Yes. I think we've given you the size of the plastics and die-cast business, which is about $150 million and we've said, also, the wood business, historically, has been about half of the size of the die-cast and plastics business. So I think you can use those as foundations for your assumptions going forward, as well as what you think the synergies are from a cost perspective in this deal.

Gregory R. Badishkanian - Citigroup Inc, Research Division

Just thought I'd ask, though. For some of the smaller licenses, I know that it's not as -- obviously, there's a lot smaller relative to Thomas. But could that be -- how big could those be in terms of when you bring those in-house and the licenses exit, you exit those licenses?

Bryan G. Stockton

Greg, we're not going to speculate on the size of the growth of these licenses. But we're confident that, as we go to this on a case-by-case basis, we're going to find some opportunities for some of these brands. And as I said, we're going to be looking at what can we do with them. We may be looking at different partnerships, with some external partners who may have some different ideas on what to do with the brand. But we like the portfolio brands. Our challenge is to figure out how we optimize and maximize the value out of the portfolio.

Operator

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

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Just to stay on the 2012 neutral and beyond to earnings. It would seem that the wooden products have a little bit better margin than plastics and die-cast, so is that part of your assumption in as far as the ramping in 2013 and beyond?

Kevin M. Farr

Well, I think the toy business has good margins. I think the wood business, also, has good margins. We will, though, see, compared to HIT, we'll see wealthy savings from the wood business. So when you look at it with respect to currently HIT recognizes royalties from the licensee, and when we go forward, we'll not be paying royalties. So essentially, you'll see good flow-through from the wood business because we own the intellectual property and don't pay royalties.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay. And I mean, just from the toy perspective from yourselves with the die-cast and the plastic relative to what's achieved on the wooden side, it would seem that those margins could be higher, so that could also be a benefit to you as you bring that in-house?

Kevin M. Farr

Again, we're not going to get into the gross margins on a product-line-by-product-line basis. But these are premium brands with good margins.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay. And then, Bryan, relating to the investment that you talked about and used the analogy to advertising. Would you, from your perspective and what you guys understand about the business at this point, would you say that -- has there been a modest underinvestment in the content side and you're looking to take that up and then, therefore, then that will generate more benefit out of these overall purchase?

Bryan G. Stockton

Yes, Tim, I think the team at HIT has done a terrific job in running their portfolio of brands, and Thomas in particular. So I think it's one of those things, as we get into it and really understand the brand to an even deeper level and do some more research with moms and kids, we'll have a better understanding of where we want to take the brand and how much more or less investment we need to make. But understanding we're early on in the whole process and, as we understand more, we'll be able to share more with you.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay. And then the other piece would be back to what HIT is getting currently and what you're paying HIT as far as the license. Is the licensing revenue, how much of that, I guess -- could we assume it's higher than the 40% EBITDA margin that's implied here, flows down, and then other pieces of the business have a lower margin. Just any additional color you could give on the compilation of HIT's licensing and -- excuse me, HIT's total revenue, and then how that flows down to the EBITDA. What buckets may be a little bit more profitable than others?

Kevin M. Farr

Well, I think our role in total Licensing business is very profitable. When you look at HIT's cost of goods sold, the cost of products isn't very high because these things, like the making of DVDs, as well as they also pay inventor royalties and some commissions for selling their products globally. So the business, overall, has very high margins due to the fact that it's a licensed model. That's offset with regard to SG&A as you support those businesses. But it's not a complex business, it's pretty streamlines, so that's how you get to the 40% EBITDA margin.

Operator

Our next question comes from Eric Handler from MKM Partners.

Eric O. Handler - MKM Partners LLC, Research Division

Just curious with the media side of the business with the TV and the direct-to-video items, it helps keep the content fresh. How much new production or how many production hours are created each year now with all of their titles? And is that something you continue to look to maintain going forward?

Robert A. Eckert

Well, I don't think we want to get into that level of detail on how many hours they're doing today. But I guess what I would say is, as we look forward and go to the brands on a case-by-case basis, we'll continue to really understand where we can take the brand. And obviously, to create content, we need to create a number of episodes to be able to strip things, et cetera. So all in all, we expect, we'll probably be looking at quite probably a large number.

Bryan G. Stockton

Yes, I think to build on that, I think today there's some number, like 360 or 370 episodes and 120 active titles for Thomas alone, let alone for the other properties. So it is sort of a content-driven and content-rich library, and we are going to continue to invest in the content. That's what keeps the brand fresh and relevant and performing well.

Kevin M. Farr

I think we talked about orders and magnitude, and, obviously, Bryan talked about how we want to do additional research and make sure we're making the right investments in content. But we've sized that up to be sort of the equivalent of net sales of major toys companies. When you look at it as a percentage, advertising is percentage net sales.

Operator

Our next question comes from John Taylor from Arcadia Investment.

John Taylor - Arcadia

I got a couple of questions, too. Let me start with programming to follow-up on the last question. So do you guys pick up the rights to the library of episodes that are already created?

Kevin M. Farr

Yes.

John Taylor - Arcadia

Okay. And as you -- well, I guess this is for you, Bryan, maybe. As you think about these brands, how relevant is the sort of traditional positioning and storyline -- or storyline is going to be the same, but sort of how relevant is the traditional sort of perception of Thomas for growing the business in Latin American and China? I guess what I'm asking is, can you just kind of take the content that's there and leverage it elsewhere, or do you feel like it's going to require localization or updating?

Bryan G. Stockton

I'd say TV, again, the first response will be, this is a brand that's got tremendous strengths with moms and kids for over 60 years. So we want to make sure, whatever we do, we build off that strong base and make sure that we understand where we want to take this. It's also a great opportunity for us to expand the storylines and play patterns with Thomas as we look and even the markets where Thomas is strong, like the U.K. and the U.S., but also in particular the markets for Thomas is a newer brand, like Asia and Latin America. So we'll build off a strong base, but we don't need to figure out where we want to take the brand.

John Taylor - Arcadia

Yes, the brand is strong here in established markets. Nobody -- well, nobody -- people in China and Latin America may know less, so you can start from scratch with your library and leverage that, the existing one, or you could sort of take it in a new direction. That's kind of what I'm asking.

Bryan G. Stockton

Well, as you look at the Thomas library across the world, it's selling relatively well. And with Thomas, we're going to continue to keep moving it forward and try to figure out how we want to grow the business and meet the wishes of moms and their kids.

John Taylor - Arcadia

Yes. Okay. All right. And can you give us any sense of the sort of administrative or operating footprint at HIT in terms of number of offices and employee headcount or anything like that?

Kevin M. Farr

Well, we can give you the, really, the number of offices. And, really, our 2 significant offices is New York and the U.K. It's a relatively simple organization. It's really focused around managing the Licensing business and exploiting that on a global basis.

John Taylor - Arcadia

Okay. All right. And this is going to be a weird question, but I'm going to throw at you anyway. In some ways, the similarities between Mattel's acquisition of HIT and Fisher-Price in that both HIT and Fisher-Price are really well-established in the west, as a percent of total emerging markets or whatever, new markets are smaller number. Obviously, Fisher was a manufacturer, this is a licensing company. But I wonder from a value creation standpoint, if there is any way you can kind of compare and contrast those two, or is that just too out of left field?

Robert A. Eckert

Well, I don't think that's so far out left field, J.T. I mean, it's very consistent, when we started contemplating the opportunity here, it does remind us of global powerhouse brands that have opportunities to expand. I mean, today, Thomas is already a big deal in Asia. And you know we are increasingly becoming a big deal in Asia. So when we think about 20 or 30 years from now, the way our predecessors thought about 20 or 30 years from now when the Fisher-Price acquisition was made, I think this will be quite helpful to us. And it's consistent with acquisitions like Fisher-Price that were done historically.

John Taylor - Arcadia

Of course, Fisher had the benefit of being a manufacturer, so you found a ton of synergies on the cost side, as well, which this doesn't seem to have.

Robert A. Eckert

Well, there will be synergies on the cost side. As an example, as a licensee of HIT today, we don't manufacture Thomas toys in our own production facilities because when we're looking at a 3 or 4-year time horizon, that doesn't make sense. But now that you're thinking about it as a brand, we make a lot of die-cast and plastic products today. And over time, I'm sure we'll move those products internally into our facilities, where we demonstrated that we make toys more efficiently than anybody else when it's a core category for us, that this now becomes.

Kevin M. Farr

I think as we said the, really, the value drivers here in the deal is growing their licensing business, growing the wood business, continuing to grow the die-cast and the plastic business on a global basis. But there are synergies from a cost perspective as we look at their organization and our organization. So there is value there, too, J.T.

Operator

And our next question comes from Per Ostlund from Jefferies & Company.

Per E. Ostlund - Jefferies & Company, Inc., Research Division

I think it was Felicia's question from earlier, I'd like to follow-up on. Bob, if we kind of rewind and go back to toy fair. I think that you had suggested that you may have rather had one of your partners buy HIT and you'd be the one to go ahead and make all the toys. So I think you've painted a pretty compelling case today as to why you've taken on this deal, but maybe give us a little bit of background of maybe what might have changed since the beginning of the year. Is it just the situation where the price became that much more compelling, or sort of the thought process, I guess?

Robert A. Eckert

Well, quite frankly, I don't remember ever implying that we had a preference to just license the property. This is world-class intellectual property, it's a consumer franchise, it's toys and beyond. It's consistent with our strategy for the company. And it was for sale. It's huge IP. And now we can control the IP. We already see opportunities to develop new play patterns, new content, expand into new categories. So it is absolutely consistent with being one of our power brands, if we can own the property. And we've had the opportunity to do so on what we think is an attractive price.

Per E. Ostlund - Jefferies & Company, Inc., Research Division

No, I certainly agree with the thought process here. I just was thinking back to that point in time. Did you start having discussions with HIT? I assume probably had discussions with them earlier this year when you. . .

Robert A. Eckert

Well, we don't want to get into the timeline at all, that's really not something we can talk about publicly.

Per E. Ostlund - Jefferies & Company, Inc., Research Division

Sure, that's fair. Can you talk at all about the growth of the HIT business that you've acquired here over just whether it's 1-, 2-year period, or more elongated if you prefer?

Robert A. Eckert

Well, we've had the Thomas & Friends brand globally now for just about a year and a half. And what I would tell you is we are very pleased with the launch of it globally. We've expanded the distribution base of the Thomas brand in the core markets. For example like the U.S. and U.K. We feel good about the POS on Thomas on a year-to-date basis. So we're feeling pretty positive about the results so far. But we can't look at pre Mattel relationship levels and comment.

Operator

Our next question comes from James Hardiman from Longbow Research.

James Hardiman - Longbow Research LLC

Just as a quick follow-up to the last question, actually. You spoke to the momentum in your own licensed Thomas business. Can you just give us some color on the $180 million revenue number for HIT, what's the trajectory on that over the past few years since Apax bought the business? And I guess, sort of along those same lines, they bought the business for what it looks like more that you have now bought the business for? Or is that just a function of a lower multiple given a more difficult economic environment? Is that a function of the Sprout exclusion? Or was there some deterioration of fundamentals that put the company at a lower price to you guys?

Kevin M. Farr

The company is sound, but really beyond that, we can't comment on anything associated with previous ownership, or what its performance was under somebody else's watch. We know we're heading with the brand. We're quite optimistic about its future. But we really can't talk about its past.

James Hardiman - Longbow Research LLC

Fair enough. And then just sort of thinking outside the box on some of the potential synergies here. Obviously, there's some manufacturing capabilities and retail relationships that HIT would be able to leverage that you've built over the years. As you think about the ways in which HIT can benefit your existing brands, are there particular geographies that they do really well? And I know that Thomas does really well in China, does that help you build your Chinese business? And ultimately, it seems that this is going to make you just a bigger player in terms of branded TV entertainment. Do you think that you can leverage that in terms of getting some of your other brands, like MONSTER HIGH, some television support?

Robert A. Eckert

Well, geographically, I mentioned Asia already and it's just China, it's also Japan, the second largest toy market in the world, and it underrepresented market for Mattel in general. So we do see opportunities throughout Asia to have a better performance of both portfolios. As we think about content, the HIT entertainment people have done a magnificent job building and running a consumer franchise. And we've certainly enjoyed the partnership we've had with them in a short period of time on the toys side, but they do a lot more than toys. And if you look at our Barbie business and if you look at MONSTER HIGH, if you look at Hot Wheels on television today, that's increasingly attractive and important to our business. So we do see opportunities for the 2 organizations to help one another beyond just the toy business.

Operator

Our next question comes from Michael Kelter from Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I have some start-up and basic questions to make sure I understand what you guys are buying. Is Thomas more than 50% of the EBITDA of the business that you're acquiring? And also, what is the second biggest after Thomas?

Robert A. Eckert

Well, we're not going to get through, Michael, sort of line item P&L. As we, I think, mentioned already, Thomas is about 2/3 of the HIT portfolio. It is a broad portfolio, but Thomas is obviously the key.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And what's the international footprint on the business that you're buying?

Kevin M. Farr

It's pretty broad. It tends to do particularly well in some of the markets, like the U.K. and the like. Generally speaking, it's around 50-50 U.S. and international, maybe just a little bit more U.S. than international. So it's reasonably consistent with the Mattel toy business, although there's probably a little bit more opportunity to expand internationally.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And does it come with any manufacturing facilities or hard assets, or nothing like that at all?

Robert A. Eckert

Correct. No manufacturing.

Kevin M. Farr

The major assets is, obviously, the library of Thomas and the other brands.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And Mike, do I understand it correct that they do their own production for their -- all of their TV shows, or is it a portion thereof? Or help me understand, if you would, just kind of what capabilities they bring to the table in terms of production of their brands?

Robert A. Eckert

Yes, like in our situation, they're producers, that they outsource a lot of the production, just as we do. If you look at our Barbie DVDs, we are the producers of those DVDs, but we outsource most of the production itself.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And is there any element of their business strategy that you're going to import, or are you going to take the brands that you're buying and just put them into the Mattel model, which would include manufacturing all of these brands more or less in the future, at least anything toy-related, not doing necessarily production? I mean, really just kind of take them and fitting them in your existing model, or is there an element here where you could adopt the part of their business model?

Robert A. Eckert

Well, again, our business models are quite similar, except that we tend to manufacture toys and they don't. But they run a global franchise, we run global franchises. They develop content, we develop content. They have partnerships, we have partnerships. So it's not as if they're just going to somehow change someday and -- because they're owned by Mattel. That said, they do some things really well. And I'm sure that the Mattel portfolio will benefit from some of the things that HIT folks have done successfully.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then maybe if I try one more time on a question I asked earlier about what the second biggest was after Thomas. I mean, whether it's that or another way to ask it would be, is there anything else in the portfolio that maybe if we look 3 to 5 years out, you are really excited about and you see a lot of potential for?

Robert A. Eckert

Well, there certainly may be, but again, we're not going to go through sort of brand-by-brand where the business is today. Obviously, it's a portfolio. Obviously, Thomas has done really well. Historically, some of the brands had done well. But it's a pretty broad portfolio, and I think as Bryan mentioned, we'll go through it case-by-case with the team on the ground to see what opportunities there might be.

Operator

Our next question comes from Drew Crum from Stifel, Nicolaus.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

So a couple of questions on television. With some of the content deals that are coming up, what kind of abilities that you guys have to move those off of Sprout to other kids cable network, like Disney Junior? And the follow-up is, I think, Kevin, you mentioned you have rights to the library content. Do you guys have the opportunity to do SVOD type deals? I know Amazon Prime just picked up PBS.

Bryan G. Stockton

Drew, it's Bryan. Obviously, as we start looking at when various content distribution agreements begin to expire, we're going to be looking on a country-by-country basis to really understand where we believe we need to be. As you know, we have a strong and broad footprint from a media standpoint and great partnerships of a lot networks across the globe. And we'll use our context and our relationships there to really try to understand where we think we need to get the content placed. And it's a similar situation here in the U.S. where we have terrific relationships with the networks here, and we'll take a look at where we think the best fit is for the brand that works for both of us and the network and the brand. And we'll lay out a strategy and go execute it.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And, Kevin, you mentioned that HIT has very limited COGS and very high gross margin. Any thoughts on the gross margin target for the company, which I think the longer term target has been 50% for some time now?

Kevin M. Farr

Yes. I think we continue to focus in on delivering gross margins around 50% due to the business model that HIT has with the strong licensing business. Their margins are higher than our company average. So it should be positive to continuing to achieve gross margins around 50%.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And last question, guys. Any cost synergies you see with adding the production of wood or adding wooden toys to the portfolio?

Robert A. Eckert

No. It's probably a little early to speculate on that. We'll have to look at various opportunities in producing the products to see what's the most efficient way for us to do so. But it already a profitable, nice business.

Kevin M. Farr

Yes, and I think there's when you look at advertising across the product line, I think having more sales allows you to advertise across the product line which benefit our businesses.

Robert A. Eckert

Operator, we have time for one more question.

Operator

Our final question for today comes from Ed Woo from Wedbush.

Edward Woo - Wedbush Securities Inc., Research Division

Is there any contingencies other than anti-trust clearance on this deal?

Robert A. Eckert

No, there are no final contingencies. And going through the regulatory process is clearly one of the important elements right now.

Edward Woo - Wedbush Securities Inc., Research Division

And then just to clarify, you guys get full ownership controls of Thomas, Barney, Bob, Sam and Ballerina, and there's no reciprocal payments to anybody?

Robert A. Eckert

No. I mean there are inventor agreements that they have, and just as we do with many of our own properties, but nothing outside of the ordinary.

Robert A. Eckert

Thank you. There will be a replay of this call beginning at 2:00 p.m. Eastern Time today. The number for the replay is area code (404) 537-3406 and the passcode is 21259901. Thank you for participating in today's call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.

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