Mattel, Inc. - Shareholder/Analyst Call

| About: Mattel, Inc. (MAT)
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Mattel, Inc. (NASDAQ:MAT) February 10, 2012 1:30 PM ET


Bryan G. Stockton - Chief Executive Officer and Member of The Board of Directors

Kevin M. Farr - Chief Financial Officer


Gregory R. Badishkanian - Citigroup Inc, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

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

Lawrence J. Haverty - Gabelli Entertainment & Telecommunications Acquisition Corp.

Unknown Analyst

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

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

Robert W. Carroll - UBS Investment Bank, Research Division

Bryan G. Stockton

Good afternoon, everyone, and thank you for joining us in person or via the webcast. I want to start off by saying how excited I am to be the 6th CEO in the 67-year history of Mattel and how honored I am to be continuing the legacy of such visionaries as company founders, Ruth and Elliot Handler, as well as Herman Fisher and Irving Price, the new fix [ph] of Fisher-Price; and of course, President Raymond, who continues to inspire us today.

I also want to acknowledge and thank Bob Eckert, whose contributions to the company have been tremendous over the last decade. He's a friend and a great business partner, and I'm excited to be working closely with him, as he continues in his role as Chairman of the Board.

Now I've had a lot of fun over the past 11 years both here at Mattel and in the toy industry. Speaking as a father of 4 and a grandfather of 1, there's no cooler job in the eyes of kids than working for the world's largest toy company. When I joined Mattel back in 2000, my first role was leading business planning and development, but I learned the [ph] international division and most recently served as the company's COO. And for the past 8 years, I've been a board member of the Toy Industry Association and have served as Chairman of the TIA since 2010. These experiences have given me some very different perspectives. As a result, I continue to believe in the potential of this industry and the power of Mattel's employees to keep delivering a great investment opportunity for Mattel's shareholders.

Since I was appointed to this position, there are handful of core questions that I am asked repeatedly. Having just come from Nuremberg Toy Fair in Germany, 3 questions were top of mind: what's going to change now that you're CEO; what will remain the same; and finally, how does Mattel plan to achieve its vision?

Let's start with what will remain the same. One thing that will remain the same is our commitment to achieving consistent growth and financial performance. So as an investor, that means that Mattel will continue to strive to be a very well-run consumer goods company. In fact, we've delivered a strong 3-year trend of margin expansion, cash flow, earnings and share price growth, as well as disciplined capital deployment, which resulted in strong gains in total shareholder return, and we've accelerated growth in the last 2 years. We'll also continue to be a company that can weather economic storms by not only boasting the best brands, but also best in the industry's most expansive global sourcing, manufacturing and distribution organizations, as well as the best commercial country and customer management system in the industry. When we look at our portfolio of brands in countries, the discipline of our strategy is to grow, and the quality of our organization, we are a company that is well positioned for future growth.

We'll also continue to execute the Mattel strategies that the leadership team and I have crafted and are beginning to execute. Mattel will focus on the 4 key growth strategies, namely, delivering consistent growth through continuing momentum and core brands, building new franchises, optimizing our entertainment partnerships and continuing to expand our international footprint. We also aim to build on our operating margin progress through sustaining gross margins of about 50% and delivering on our cost savings targets.

We'll also continue to generate significant cash flow and deploy it in a disciplined, opportunistic and value-enhancing manner by optimizing the continuum of dividends, share repurchases and targeted acquisitions. When it comes to expectations regarding commitment to financial performance, in a word, it's continuity.

Now having said all that, one thing I have learned in my 11 years at Mattel is that the toy industry is always changing. I call it the continuity of change. In the last decade, we've seen changes in the retail landscape, as retailer strategies have evolved and online shopping has become the true channel of distribution for the toy industry. Countries and economies are ever changing. The burgeoning middle class in Latin America and certain parts of Asia is creating a whole new generation of toy buyers. And children are always changing. I know this from comparing how my own kids play to how my granddaughter plays.

The play patterns may be tried and true, but toys need to keep pace with changes in technology, fashion preferences and cultural trends. And Mattel is always changing and evolving, which is why we remain the #1 toy company in the world, and the latest change includes the acquisition of HIT Entertainment and its centerpiece brand, Thomas & Friends.

So what's going to change now that I'm CEO? Well, one of my guiding principles in life is to be happy but never satisfied, and that's the approach I'm taking in my new role at Mattel. I'm happy with the current trends in our business. We have incredible brands, a great franchise launch with Monster High, a great acquisition with HIT Entertainment, great entertainment partners, an incredible global infrastructure and an organization that's never satisfied with standout results that Kevin will review in just a few minutes.

What I'm not satisfied with and what I want us to achieve is our full potential in the marketplace. We have the brands, the entertainment partners, the global scale and the drive to improve our performance. We also have the momentum. We have the resources, and we have the scale. In essence, we have the opportunity to do better.

So how do we plan to achieve this? As we move forward today, we remain focused on 4 keys to delivering success and approaching our full potential: develop and execute a plan for growth, develop the structure to enable that growth, nurture our talent base and intensify innovation in an already innovative culture. Our growth plan has 4 components to focus our efforts. They are to grow our core businesses, driving brands and countries; launch new brands like Monster High; optimize entertainment partnerships by living our credo, partner with the best and be the best partner; and finally, expand and strengthen our international footprint.

As you know from our year-end financial update, our core brands are strong. For the second year in a row, Barbie consumer takeaway grew, resulting in share gain and increased shipping, and the brand continues its reign as the #1 property in the U.S. toy industry for the holiday season for the fifth consecutive year. Consumers responded well to the innovations in Hot Wheels with Wall Tracks, which was a complete sellout this last holiday, and American Girl reached the milestone for the brand, hitting $0.5 billion in sales. And we're making progress on Fisher-Price and expect to continue that trajectory into 2012. We believe we have the right properties and the strategic vision to take advantage of the global opportunity for the Fisher-Price brand.

When it comes to new franchises, Monster High is performing beyond anyone's expectations. In the U.S., not only was it the fastest-growing fashion doll, but it ended 2011 as #2 in the category according to NPD. In international markets, Monster High was a tremendous success in 2011, and to date, we've launched the brand in more than 35 countries.

Our proven leadership and brand management, whether it be a 50-year-old iconic brand like Barbie or an up and comer like Monster High, combined with our global reach, makes us the strategic partner of choice for anyone owning toyetic intellectual property. We want to partner with the best and be the best partner. This strategy is paying huge dividends for the company. The business is growing, and entertainment currently comprises about 1/4 of our revenues.

We manage a diverse and evergreen entertainment portfolio, and we treat these entertainment licenses as if they were our own brands. We constantly innovate the product and work with our customers to maximize their global reach. That's why you see such strong evergreen brands in our portfolio, properties like Cars, Disney Princess, Toy Story, Mickey Mouse Clubhouse, Batman, WWE and Dora the Explorer. These are properties that never leave the shelf. In 2011, Disney Princess had another strong year driven by our continuous innovation of the core Princess line and the continued success of the hit movie Tangled, as it rolled out around the world.

The Cars property had the single biggest year in the history of the brand. For 2011, Cars was the #2 vehicle brand at retail, behind only Hot Wheels.

As we just announced, Thomas & Friends has made the transition from licensed property to Mattel intellectual property, as we welcome the entire portfolio of brands from HIT Entertainment into Mattel. Thomas & Friends is the centerpiece of the acquisition, a 60-year-old brand with a loyal following of kids and moms. The Thomas & Friends brand will now become one of our top 5 brands in the Mattel portfolio.

Not only are we excited about the brands included in the acquisition, we're equally excited about the new employees and new ideas that are joining Mattel. And our Latin American business has reached the sweet spot where growth and scale intersect. In fact, they have achieved a major milestone. This thriving region of the world now represents almost $1 billion of revenue to Mattel after growing 14% in 2011. According to our estimates, if our Latin American business was a standalone toy company, it would be the fifth largest toy company in the world. The middle class continues to expand in this region, which is important to the growth of the toy industry. In fact, Brazil and Mexico are now the second and third largest countries after the U.S. in the Mattel global portfolio.

Asia had another solid year performance. We're particularly pleased with the development of our businesses in China and India. Both countries represent examples of patient and disciplined investments in brands and infrastructure to create a strong foundation for growth.

The second component of our growth strategy is to structure for growth. During 2011, we began the process of evolving to a new organization structure by creating a new North American division and global brand teams. This new structure recognizes the opportunity to move decision making for the U.S. business closer to the retail customer and our toy consumers. Additionally, it gives our brand teams the ability to approach the business and create a process more globally, recognizing the growth potential outside the U.S., as more customers join the middle class in Latin America, Eastern Europe and Asia. We're on day 41 of this new structure, and we look forward to providing you with updates on our progress throughout the year.

The third component is to nurture our talent base. This is a very creative industry, and we recognize that even with the best brands in the industry, people drive results. Think about it. Because of our short product development cycle and the need to create hot new toys each and every year, great talent has the ability to quickly and significantly impact the business. Looking at our results over the last 3 years, we say with confidence that we believe we have the best people in the industry, and that's clearly evidenced by our results.

We're an innovation leader in the toy space, over indexing in top toys each and every year. In fact, 4 of the top 5 toy properties for the 2011 holiday season in the U.S. came from Mattel, and we're well positioned to continue to attract and retain the best talent. And one very important reason is that we are consistently rated one of the top 100 companies to work for. In fact, we were just named one of Fortune Magazine's 100 Best Companies to Work For, for the fifth consecutive year.

Going forward, to succeed in some of the new category growth areas and initiatives, we'll need to complement our existing talent with additional skills through training and where needed, bring in new talent to Mattel, recognizing the fast pace of change in brand management, toy technology and the digital world.

The HIT acquisition brings us not only great brands like Thomas but also core licensing and content skills that will help us think differently about our own brands. Brands like Thomas generate about as much retail revenue outside the toy aisle as inside the toy aisle. We want to leverage this non-toy expertise and experience across our global brand portfolio, especially our core brands.

We're fortunate to have world-class talent across all functions and geographies at Mattel. But to remain the leader, we know we need to grow the creative and business leaders of tomorrow, and we remain committed to that end.

The fourth component of our growth strategy is to further develop a layer of growth culture at Mattel. We've been successful in evolving our culture over the last decade. Like all great companies, to remain the leader, we will need to further evolve our culture to remain competitive in the marketplace. As we look forward, I like to compare our culture to the creation of a pearl. A pearl starts off as a tiny grain of sand and over time, layer upon layer forms growing something insignificant into something of great beauty. Each year, we must add a new layer or dimension to the Mattel pearl. We know we have a pearl built on strong brands, financial discipline and a global business system. But in the spirit of happy but never satisfied, we must now build on these strengths and nurture an environment to drive more consistent levels of growth and create a larger and more valuable Mattel pearl.

We are always experimenting with cross-campus and cross-functional ways to encourage innovation. For example, as 2011 was winding down, I had the opportunity to sit in on the finals for an internal design competition. The program, which is in part competition and part brainstorming, is based on the assumption that big ideas, unexpected ideas and extraordinary ideas come when you give talent free reign to develop their vision their way. But these programs always aren't just innovation for innovation's sake. Our open innovation initiatives always start with the company priority as outlined by senior management.

The continued success of Mattel will be based on finding the optimal balance between continuity and change. We remain committed to financial discipline by delivering more consistent growth, building on the progress we made on our operating margin through achieving our long-term gross margin target of about 50% and by working on simplifying our work processes while improving the scale of how we operate. We also remain committed to generating significant cash flow and continuing our disciplined, opportunistic and value-enhancing deployment of capital.

We'll support this effort by applying the TSR lens, which is guided us well not only in capital deployment but also in terms of how we set strategic priorities. But we'll also keep pace with where the toy industry and kids are going through cross-campus initiatives to address how we can work together as one company, leveraging our insights, our creativity and knowhow across divisions and geographies.

In summary, we'll tap into the continuity we already have in our operating goals and objectives, but push the organization to achieve our full potential in driving against the 4 keys: develop and execute a plan for growth, structure for growth, nurture our talent base and add innovation to an already innovative culture.

My experiences over the last 11 years at Mattel have taught a number of important things about our company. Our brands are our strength, but they must be simultaneously nurtured and challenged to remain successful in a competitive environment. And our employees are the company. They have the insights. They have the creativity, and they have the ability to turn magic into a product. And finally, they are the basis for all of our relationships with customers, consumers, business partners and the community.

This is an exciting time to be at Mattel, whether as an employee, a partner or an investor, and I hope that you're looking forward to the journey just as much as I am.

Thank you, and I would like to introduce our Chief Financial Officer, Kevin Farr. Kevin?

Kevin M. Farr

Thank you, Bryan, and good afternoon, everyone. Before I get started, I want to say how excited I am to partner with Bryan, as we begin another chapter at Mattel. I worked with Bryan for the past 11 years and have come to know him as a very strategic and effective executive. I would also be remiss if I didn't say thank you to Bob Eckert for his support over the years. Bob's leadership and energy will be missed, but he can enjoy his retirement knowing that Mattel is well positioned and stronger than ever from both a business and financial perspective, and he's left the keys to the car in some pretty good hands. Bryan and I look forward to continuing a strong working relationship with Mattel's Board of Directors, as -- and Bob, as he continues on as Chairman of the Board.

My speech today focuses on 2012. However, I will briefly highlight our 2011 accomplishments since they helped set the stage for 2012 and beyond. Mattel achieved a series of highs for the top line in 2011. We generated record revenues for both the total company and for our international division. We scaled our Latin America business to about $1 billion in sales, and we surpassed $500 million in sales at American Girl. And as positive revenue growth was seen around the world, as we grew sales in every major country and we grew category share in the U.S. and Europe. And for 2011, we did an outstanding job of converting our sales into profit, earning a record $1 billion in operating income.

I was particularly pleased to see that we delivered these sales and profits by delivering consistency in a number of areas. Over the last 3 years, Mattel has delivered gross margins at or above 50% despite a volatile cost environment. We continue to drive down costs, generating over $300 million of sustainable savings from our Global Cost Leadership and Operational Excellence 2.0 programs. And we expanded our operating margins, which improved by 310 basis points to 16.6% of net sales. This consistent and disciplined operational strategy allowed us to execute on our capital deployment framework, where last year alone, we deployed over $850 million back to shareholders through dividends and opportunistic share repurchases.

In 2011, we also set a solid foundation for the company's future. We successfully executed the global launch of our new franchise, Monster High, providing a roadmap for how to launch future franchises, and we signed the deal to acquire HIT Entertainment. Delivering consistent growth, building operating margins and generating and deploying significant cash flow remain our global strategic priorities. These priorities are our keys to deliver consistent value creation for our shareholders. We continue to use total shareholder returns or TSR to guide our actions. Our goal remains to deliver top third, top quartile TSR.

Over the past 10 years, in 5-year periods, Mattel has delivered a TSR of 8%. And over the past year, Mattel has delivered a TSR of 13%. As you can see, when compared to the S&P 500, Mattel remains a consistent performer in an inconsistent world.

So now let's look ahead. As we said last October, we believe the toy industry is a great place to invest and continues to be recession resistant. This is clearly evident as we look at what recently happened in Europe. In the midst of turmoil, where a number of countries were challenged economically and many believe a number of the regions were possibly on the verge of another recession, the toy industry grew and so did Mattel. But as Bryan said, we're happy but never satisfied. Now that Bryan has laid out his vision for the company, I want to speak about some of our near-term initiatives.

For 2012, our key initiatives will be to continue to build on the solid foundation of the Fisher-Price brand. We made really good progress in 2011 on a strategic vision for Fisher-Price. As we said on our earnings call, we were pleased to see 2011 full year sales essentially flat for Fisher-Price, excluding Sesame Street. We're also encouraged to see improving consumer takeaway trends in the back half of 2011, as we focused on our new brand messaging and improved retail execution. Fall 2011 was the start of our investment and activation against Fisher-Price's new strategic brand vision and the Joy of Learning campaign. The strategic vision for the brand, including the related campaign, is to drive a more premium and differentiated position while better communicating and connecting and engaging today's mom. With the initial rollout of this vision just beginning in the fall of 2011, Fisher-Price will continue to make progress in 2012, with the goal of fully activating the new brand strategy internationally where we see the biggest opportunity.

In 2012, many exciting initiatives are underway to build on the strong foundation of the Fisher-Price brand including continuing to expand brand communication with moms beyond traditional TV. Fisher-Price will engage better with today's and tomorrow's moms through multichannel digital platforms whenever and wherever she chooses, developing new products to focus on introducing new innovative technology of the baby gear and preschool lines that leverage the important connection between mom and her child; beginning to rollout new packaging with a uniform look, which will translate into a strong brand statement at retail; and continuing to leverage our entertainment partnerships with Disney and Nickelodeon by expanding the Disney classics characters to products for the infant and toddler categories, launching new lines of toys based on the immensely popular Disney's Jake and the Never Land Pirates and continuing to build Nickelodeon's evergreen Dora the Explorer brand. We believe that these initiatives are the right area of focus in 2012 to ensure that we capture the global opportunity for the Fisher-Price brand for years to come.

Next for 2012, we need to successfully integrate HIT Entertainment into our company. We closed the deal to acquire HIT Entertainment on February 1. We're excited about the acquisition and the potential of its brands, particularly Thomas. As we look ahead, our opportunities are twofold. First, we need to unlock the global potential of Thomas; and second, we need to integrate HIT and its brands smartly into Mattel. With Thomas, we know from consumer research that Thomas is a very strong brand, wherein many cases mom and children want to engage with the brand in more ways than there are available today. As brand owners, we can better align content creation and product development in new and exciting ways. We can maximize revenues and kid appeal by developing new stories, focusing and more toyetic themes, introducing new characters, developing new play patterns and even introducing new geographies like Thomas traveling to India or to Japan.

In the world of content placement and distribution, we know most of the world's major broadcast partners through our media buying relationships and our efforts to place Mattel content around the world. As we go forward, we see opportunities align with more global broadcast partners with greater household penetration, making great Thomas content available to more people in more places around the world. And given our proven ability to grow the Thomas plastic and die-cast business, we know there's a great opportunity for us to leverage our scale when we take back the wood rights in 2013. We have already begun to make good progress in designing and developing our wood product line to be ready for shipping next year.

With the HIT acquisition now closed, we are making great progress executing our integration plan. The near-term priority for the integration team remains threefold: to leverage and retain talent to ensure we improve our existing business capabilities, to leverage Mattel's global infrastructure to grow HIT and to optimize our manufacturing expertise. HIT Entertainment has a great talent base with strong competencies in content production, management and licensing. By leveraging the best talent from the Mattel and HIT organizations, we'll improve our collective licensing business, augment our capabilities on the content production and realize efficiencies in our back office. There is a significant opportunity to grow HIT internationally where we have the advantage of size and scale, especially in the developing and emerging markets in Latin America where, for example, HIT sales are only a very small piece of its current revenues. And finally, we plan to move Thomas plastic and die-cast manufacturing in-house. This will allow us to leverage our existing asset base and manufacturing expertise, which should result in lower cost.

A third priority for Mattel in 2012 is to maximize the opportunity of Monster High globally. Monster High has exceeded all of our expectations, and now we're asking ourselves how can we make this brand even bigger and better. In 2011, Monster High was introduced to 25 new countries around the world. With the brand now performing very well in 34 countries in both toys and consumer goods, we have incredible global momentum as we enter 2012. To build on this momentum, we're increasing our investments in this franchise to continue to accelerate growth on a global basis. In 2012, Monster High will have its first innovation segment, Create a Monster, allowing girls to customize and monsterize their dolls. We'll have an additional 3 hours in television entertainment, 30 new webisodes, it's first CGI production bringing the Monster High characters to life in a way that fans have never seen before. It's first ever DVD, Ghouls Rule!, will be released in the fall of 2012 through a newly created DVD alliance with Universal; and finally, it's fourth book.

A fourth important priority for Mattel in 2012 is our new global brand teams in North American division to execute under the new structure. As Bryan said earlier, our global brand teams have more time to approach the business and create a process with a global perspective. And our new North American division has moved the decision making of the U.S. business closer to retail customers and our consumers.

Additionally, as part of our normal course of business, we'll continue to deliver cost savings from our Operational Excellence 2.0 initiatives. As many of you pointed out, we're tracking ahead of our stated goals of delivering $150 million in sustainable savings at the end of 2012. While happy with these results, we aren't quite satisfied. We're now targeting a goal of $175 million by the end of 2012. We expect to invest these incremental savings in strategic initiatives that will over time make our operations more effective in supporting growth, including infrastructure investments for American Girl and IT investments to improve our design, development and manufacturing processes.

All of our key initiatives are filtered the a TSR lens, which will enable us to achieve our long-term strategic targets, which remain unchanged: 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%.

Now I'll take a few minutes to give you some thoughts on our key financial drivers for 2012. When we talk about 2012, the most frequently asked question that we get is how will Mattel grow revenues after the strong performance of Cars 2's products in 2011 due to the release of the movie. Every year, we always have a few puts and takes, but like good consumer product companies, our goal is to grow each and every year. At Mattel, revenue growth begins with our core brands, which account for about 2/3 of our worldwide sales. This is the engine that fuels our growth. For 2012, we expect to continue to execute our successful strategies and leverage the momentum we have in our core brands, including Barbie, Hot Wheels and American Girl. And as I said, we expect Fisher-Price to continue to execute its new strategic vision globally in 2012.

The company's other brands and entertainment are integral part of our overall sales mix. They account for about 1/3 of our total business, and we believe we have a number of opportunities in 2012. As I said, Monster High has clear momentum, which we'll build on with new content and new toy and consumer products in 2012. Batman, a great evergreen brand that historically gets a lift from a theatrical release, will have The Dark Knight Rises set to debut this July. Disney Princesses established itself as a solid evergreen property for 2011. In 2012, Disney Princesses will also benefit from a theatrical release when Pixar's Brave hits the big screen in June. Cars without a doubt was a great story for Mattel in 2011. While we saw significant incremental business with the release of Cars 2 movie the last year, the brand will continue to deliver as a strong evergreen property just like it did in 2007, 2008, 2009 and 2010. And 2012 sales will also benefit from the acquisition of HIT with its $180 million of additional revenues including a royalty payment. And all these brands, all these licenses and the acquisition of HIT will leverage our international sales and distribution capabilities where we have unprecedented scale and momentum.

Finally, with respect to revenues, it's important to consider the business seasonality that Mattel experienced in 2011. We had strong early support from retailers across the world for the launch of the Cars 2 movie in June of 2011, and that support certainly continued for the year, but it was more meaningful impact in the first half of the year where total Mattel shipping volumes are seasonally lower. We expect Cars seasonality and our total company seasonality to come back to more historical trends in 2012.

As we work our way down the P&L, we'll continue to target 50% gross margins just like we achieved for the last 3 consecutive years. We're operating in an inflationary environment. We're experiencing input cost increases, including resins, labor, foreign exchange and transportation expense. To offset these cost increases, we remain focused on designing or product lines appropriately and leveraging in our ongoing manufacturing efficiency in O.E. 2.0 cost savings programs.

However, these programs will only partially offset these cost headwinds, so we executed a mid-single-digit price increase, which was effective on January 1, 2012, with a goal of sustaining our gross margins at around 50%.

With respect to advertising, we will continue to target the low end of our advertising goal of 11% to 13% of sales, as we continue to invest in growing our brands on a global basis. Also, assuming no changes in tax laws, we estimate that our tax rate will be about 23% -- 22% to 23% for 2012 and 2013.

There will also be a number of puts and takes in SG&A expense in 2012. Barring any changes to the current legal proceedings in the courts, we should realize reduced legal spending, especially in the first half of 2012. Reduced legal spending and continued savings in our O.E. 2.0 initiatives should help offset planned increase in employee-related costs from annual merit increases and rising benefit costs.

Also, we'll be absorbing the acquisition and integration costs associated with the HIT acquisition as well as HIT's SG&A expenses. As for the impact of HIT on our operating performance in 2012, we've already told you that we don't believe the acquisition will have a material impact on our 2012 earnings. We expect operating income to be offset by restructuring charges, field costs and interest expense. We continue to believe it will be increasingly accretive with the addition of Thomas wood in 2013.

As we move forward, we'll continue to pursue smart growth, focusing on investments in our business that will deliver higher returns for investors. We plan to invest additional savings that we expect to generate in 2012 from new O.E. 2.0 initiatives to help grow and make our business more efficient. In 2012, there's a couple of prioritized investments that will have a longer-term profit focus, including we'll continue to invest in the American Girl brand, having recently announced the opening of the store in St. Louis in the spring of 2012. And we expect to announce a couple more openings of stores soon, but we continue to be very disciplined with respect to opening American Girl stores to ensure that each new store delivers a strong return on our investment.

We will also be upgrading our existing American Girl e-commerce infrastructure to new multichannel system that allows our consumers to engage with the brand whenever and wherever they choose. Also, we will invest in a new product life cycle management system to support our product design, development and manufacturing process, which will improve our effectiveness and efficiency.

We expect 2012 capital spending to be in the $215 million to $225 million range, which reflects the higher cost to manufacturing tooling and the upfront cost of acquiring software, hardware and system design work for the 2 strategic IT projects. We anticipate spending will decrease to around $190 million to $195 million in 2013, as we progress our strategic IT initiatives.

So as we look at 2012, we'll continue to execute against our strategic priorities to deliver consistent growth, build operating margins and generate strong cash flow.

We also remain committed to our capital employment framework. Today, our balance sheet is in great shape, and we remain focused in maintaining a strong balance sheet with year-end cash of $800 million to $1 billion and maintaining A credit metrics. We'll continue to return excess cash to shareholders through dividends. Recognizing dividends are a proven driver of total shareholder returns for both the overall market and Mattel. As we recently announced, Mattel's Board of Directors raised the dividend by 35% to better align with recent EPS growth. And over the longer term, we see dividends continuing to grow in line with the EPS.

We also remain committed to making opportunistic purchases of our stock, where over the last 2 years we've repurchased about $1 billion in stock and have reduced our shares outstanding by about 7%. And we'll continue to consider targeted acquisition, asking the same 3 questions: Is it the right thing, at the right time and at the right price? The strength of our balance sheet allows us to grow through targeted acquisitions if it meets our investment criteria.

We consider ourselves a well-run consumer products company, which is supported by our strong financial performance. We believe Mattel offers something for every investors. The bear should like the stability, cash flow in the dividends, and the bull should see opportunities in our brands, our global footprint and our global growth possibilities.

In summary, the progress we made in 2011 and the momentum that we have in our brands play a strong foundation for the company's growth in the future. Our brands, our strategies, our scale, our balance sheet, our management team and our employees continue to be aligned and are focused on accelerating consistent profitability and cash flow to shareholders.

Thank you. And now I'd like Bryan to join me to start Q&A. Thank you.

Question-and-Answer Session

Bryan G. Stockton

Okay. We'll take questions. When you the ask question, I'll repeat it just to make sure those listening on the webcast can hear your questions. Yes?

Gregory R. Badishkanian - Citigroup Inc, Research Division

Greg Badishkanian, Citigroup. Just wondering, as you look at your entertainment lineup, looks pretty good. How do you think it compares with last year's entertainment lineup with Cars?

Bryan G. Stockton

The question is how do we feel about the entertainment lineup for 2012 relative to the entertainment lineup for 2011. We think it's a very solid lineup with Batman. We have that. I think one of the things that we're also looking at is Monster High. It's our intellectual property, but that's going to be growing quite quickly, as we think about things that are new and growing. So as we look at 2012 versus 2011, it's a different mix. It's going to look a little bit different, but if you look at what Kevin talked about with the core brands growing and Monster High, new franchises and the exciting properties we do have, we're feeling pretty positive about it.

Kevin M. Farr

Yes. I'd also add the HIT Entertainment, the acquisition of HIT Entertainment will bring $180 million of incremental revenues to Mattel in 2012 including the royalties that they're currently paid on toy products by us.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to -- excuse me, Mike Kelter of Goldman Sachs. I wanted to ask about the cost savings. You raised your target today. What -- can you maybe talk about the $175 million of savings? What are some of the bigger buckets? Where did the incremental savings come from? And to what extent is it labor reductions? And how that plays into, for example, the fact that you said your employee costs, your labor costs are going up, what's, I guess, more than normal this particular year?

Bryan G. Stockton

The questions are we thinking about our labor -- our savings overall, what are the components of the savings and what are the major buckets of those savings and how we feel about the labor component. Kevin, I'll ask you to take that.

Kevin M. Farr

Again, I think, it's -- as we look to 2011, we've achieved about $94 million of savings. $53 million of those savings came from structural activities and we worked on being more effective and efficient, and about $41 million came from lower legal spending. As we raised our goal from $150 million by the end of 2012 to $175 million, it is really focusing in -- on those structural savings of really working on our reorganization in North America of our NRD -- NAD and global brand teams. We're looking at processes to be more efficient and effective. We continue to work on SKU efficiency. We're working on a packaging initiative to standardize our packaging, as well as lower the cost of the packaging by looking at sustainability, opportunities to use different type of materials and to simplify the packaging. And we continue to look across the company with regard to activities including global procurement to drive our costs down. With regard to the employee-related expenses, that's really something that we incur every year. One of the biggest expenses at Mattel is the cost of employees, and this is a normal merit increase that we see each and every year. And of course, the benefit costs go up every year. So what we're really trying to do is we're trying to -- when we look at SG&A -- I said there's a couple of puts and takes when you look at 2012, but as we look at savings from legal costs and savings from our O.E. 2.0 programs, we're trying to offset those increases in employee-related costs, as well as make additional investments to grow in the future.

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

Tim Conder, Wells Fargo. Bryan or Kevin, whoever wants to take this, so regarding Fisher-Price, when do you see, at this point, that playing out, so you're getting to where you want it to be, number one? And on HIT entertainment, it appears that you're going to have a year or so getting everything integrated. And I think, Kevin, you might have mentioned something about getting close to that 40% out margin in '13 or EBITDA margin, I should say. But looking at the other brands, when do you see the potential to start activating those other brands under the HIT umbrella?

Bryan G. Stockton

Thanks, Tim. Let me see if I can rephrase that. The first question is on Fisher-Price, I think, is essentially how are we feeling about Fisher-Price and when will we start to see some more progress as that brand is in transition. The second question is with the acquisition of HIT Entertainment and its primary centerpiece, Thomas, we've purchased a portfolio of other brands, how are we feeling about those or when might we do something there. Let's start first with Fisher-Price. We felt very good about the progress that we made on Fisher-Price in 2011. We said at the beginning of the year, there were really 2 areas of focus. The first one was we want to make sure we sharpened our message with consumers. As you recall in October, we launched the Joy of Learning advertising campaign, which we felt very good about, and we got some recognition from various agencies on. The second thing we said we wanted to do was improve retail execution. We felt like we had very good retail execution at the end of the year. As a result, as we saw Fisher-Price POS progress throughout the year, we made very good progress, had positive POS from the core brands in the last couple of months, the important holiday period, so we felt very good about the progress. 2012 will be another transition year for Fisher-Price, as we take that ad campaign and digitize it and connect with moms on the web in a more meaningful way. We're going to be looking at a variety, of other things including packaging and messaging on the packaging and reconstructing the packaging for example. So there's a lot more exciting things ahead on Fisher-Price. So 2012, I think, will still be a transition year.

In regards to HIT Entertainment, we love Thomas. I think one of the things that Kevin talked about is there's a lot of core brand growth left just on the Thomas brand. If you look at Latin America, just sort of scratching the surface there, and with the scale that we have with this $1 billion size business and the relationships we have in the media area, we think that we can do a terrific job on the core brand trying to grow that. There's a portfolio of other fantastic brands. We're in the process of working with the HIT people to try to understand what we have. We just recently got a program called Mike the Knight on Nickelodeon that seems to have some pretty encouraging early signs of success. So -- now there's a ways to in that, but as we said, I think, when we announced the acquisition, Thomas will be our number one priority as we then look at the rest of the portfolio. Yes?

Lawrence J. Haverty - Gabelli Entertainment & Telecommunications Acquisition Corp.

Larry Haverty, GAMCO. As distribution channels change to online, online gaining share, how do you go about changing what you do, your messaging, your product or is this something that you just watch and don't do anything?

Bryan G. Stockton

The question is as the online channel develops, are we doing anything different in terms of communication or how we're thinking about products, I think, with that channel. Online, we have a lot of experience on online because of American Girl. We've been doing that for about 15 years with that brand, so we feel very good about the online business. We've got a great partnership with most of our major customers around the world with their online business. Amazon is rapidly becoming a very large and important customer for us, not just in the U.S. but around the globe as well. So as that evolves, we're trying to take a look at what do we need, do we communicate more sharply with our consumers, whether it's the Fisher-Price mom or Hot Wheels boy and trying to look at how we can best deliver that product to our consumers, whether through a customer's e-commerce system or someone like Amazon.

Kevin M. Farr

And I guess, I'd just to add to that, we create a lot of content. We've got a lot of websites. We've got a lot of digital opportunities, I think, to connect with our consumers and also connect up with our e-retailers to drive business to them, so that should drive our underlying toy business. Linda [ph] has been very patient.

Unknown Analyst

Just to go back to your cost projections for this year, you usually throw up a chart of ABS polymer and the chart of that, I think, is like it's been going down recently, creating possibly a favorable comparison for the Christmas cost. Can you confirm that? And secondly on HIT, are the restructuring and other types of charges and costs going to be kind of even or kind of lumpy? That would help us project your earnings by quarter if you're going to include all that.

Bryan G. Stockton

So the question is, is there something that we're seeing in ABS cost or other resin costs that suggests there's an opportunity for those to go down. And the second message is are the integration costs on HIT going to be lumpy? You want to start with the second -- both of those?

Kevin M. Farr

Yes. I will start first. I think first, we're pleased to deliver gross margins at or above 50% for 3 consecutive years, and that's been despite of volatile cost environment. And when you look at resins, we've seen a lot of volatility over the last couple of years in the price of oil. Last year, it was from $80 to $112, and it's back, I think, in the high 90s. So as we look out, we project that input costs are going to be increasing, continuing to increase like it has over the last 7 or 8 years. And we're seeing increases in resin prices. We see expect to see increases in packaging costs. ForEx, the Chinese currency's getting stronger, labor, so what we do is we have a projection of what those costs will be. And we work very hard every year to try to offset those costs as much as we can through manufacturing efficiency programs and our Operating Excellence 2.0 initiatives. And as we look at 2012, we don't think those activities are going to be enough to offset the cost increases that we're expecting. So again, we implemented effective January 1, 2012, another price increase of about a mid-single-digit range on a global basis. So our goal, again, is to sustain our gross margins at 50% going forward.

And then second on HIT, we just closed the HIT deal on February 1, so we will have deal costs in the first quarter. Those deal costs will be legal fees and banker fees, and we did incur about $10 million of acquisition costs last year that we disclosed in SG&A. As far as integration costs, we're still working on that. And with respect to that, we're looking at the consolidation of back-office functions. This thing, the HIT acquisition, isn't really built on cost synergies. It's really built on their base business and they're capabilities, but we will incur integration costs, still, more work to do on that. Later, we'll give you a better idea about the magnitude of that, and if we can give you a quarterly flow of that, we'll give you a quarterly flow at the end of April.

Bryan G. Stockton

Other questions? Margaret?

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

[indiscernible] toy drivers for '12, I wondered if you could give the audience an overview of what key to products we should be looking at. And as regards '13, could you give us an update on the entertainment outlook as well as thoughts on when we might see a new franchise development?

Bryan G. Stockton

Well, let me -- the question is what areas do we want you to focus on as you look at the products later this afternoon and how are we feeling about the entertainment calendar for 2013. I would open your minds to the experience of everything in our portfolio. I have 4 wonderful children and a wonderful granddaughter, and they are all equally loved. They're different. I hope you love all of our products and find them different. I just came back from the showroom during the lunch break and the things look really great, so I think you'll see a lot of great stuff.

Kevin M. Farr

Yes. Now we have 5 wonderful children with American Girl, HIT with Thomas & Friends and Hot Wheels and Barbie and Fisher-Price. So I think you need another grandchildren -- child.

Bryan G. Stockton

Yes, there we go. I've got enough for now. As it relates to 2013, we look at basically what's going on across our entire portfolio. One of the things we're particularly pleased with is the momentum we have on our core businesses. Barbie, Hot Wheels, Fisher-Price, by then, we think they'll be in great shape. Thomas as well and American Girl, new franchises that we're thinking about in 2013 will be there. So there's really going to be specifics in terms of movies. We'll have another solid year like we do in 2012, but it's really going to be driven by our core businesses, new franchises and then entertainment as well. But as you know, our entertainment portfolio is solid with evergreen properties like Cars and Disney Princess and WWE, so it will be another solid year. Other questions? Sean?

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

I have -- Sean McGowan from Needham. I have 2 questions. First, given your expectations for sales -- and I know you won't tell them -- tell us what those are -- but for Monster High and the investments that you expect to be making, do you expect Monster High to contribute more operating profit dollars in 2012 than in '11? And secondly, and a kind of follow-up on Margaret's question, there have been a couple of film things that have been dangled out the last couple of years. I just want to get an update on have they been reeled in or canceled or still going forward, specifically He-Man and what's up with Ghostbusters, and there was an unnamed Universal family-oriented, live-action musical that was referenced some time long ago. Are these things in turnaround? Or what's going on?

Bryan G. Stockton

The first question is Monster High, given the investments that we're talking about making, do we think the operating profit will grow in 2012. I think that's your question. Do want to start with that one, Kevin?

Kevin M. Farr

Yes. The doll category is a very profitable category. I think we've seen good global momentum on it. We're really seeing it in 35-plus countries around the world. We're making these investments really to drive the brand higher, and that will deliver profitable growth in 2012.

Bryan G. Stockton

The second question is regarding our intellectual property. We occasionally discuss potential movies and things like that. I think the history that we have at Mattel is we've really been closer to, I'd say, the DVD direct business. With -- Barbie has I think 22 movies now direct to DVD, and with the success of Monster High, we found another way to communicate content to girls. We're doing similar kinds of things on Hot Wheels. The Fisher-Price team is going to be doing similar things digitally. So when we think about our properties and do they translate into a movie or not translate into a movie, it would be great to have a movie, but we're not going to hang the future of a brand on a movie. Monster High is a great example where, yes, there's discussions in and out all time, but the core of that brand is the webisodes. It's grown to the point where now it's attractive enough to have TV specials around it. We're building that line to be as innovative as we possibly can throughout the year. So we don't view the future of our intellectual property as hanging on a movie.

Kevin M. Farr

I think we got time for one more question.

Bryan G. Stockton


Robert W. Carroll - UBS Investment Bank, Research Division

Rob Carroll from UBS. I guess just 2 quick ones. One, on gross margin, I guess the big question is, how do you guys define roughly 50% because it seems like there's a tremendous amount of tailwinds coming in for 2012? I mean, low royalty expense from kind of the entertainment properties potentially being a little bit lower year-over-year. The netting out of the royalty paid to HIT previously, which are now going to obviously be beneficial to margins; the inflow of the remaining HIT revenue, which is probably at a higher gross margin than legacy, I mean, pricing to offset input costs. I mean, should we be thinking that there's upside potential longer-term to that roughly 50%? Or should we think eventually retailers will start pushing back a little bit on pricing?

Bryan G. Stockton

The question is on gross margins. Do we feel there are some tailwinds behind gross margins and some opportunities to, I think, exceed the about 50% long-term target that we always talk about?

Robert W. Carroll - UBS Investment Bank, Research Division

50%, upper 52% [ph] . I think there's roughly 50%, over 52% [ph] .

Kevin M. Farr

Look, we've got strong brands, and I think HIT adds another strong brand with Thomas & Friends. But when we look at 2012 and beyond, our target remains the same as I said today. We're targeting gross margins at or above 50%. And as I said, we look at our costs assumptions. We work very hard to do things we can do internally to offset those costs, and we're pricing -- deliver gross margins at or above 50%.

Bryan G. Stockton

Great. Thank you very much, and that concludes the webcast portion of today's presentation. We want to thank everyone on the web and wish you all a very good day.

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