Currency’s Impact on the Income Statement
Gerrick Johnson – BMO Capital Markets: I was wondering if you guys could talk about currency and how it impacted your income statement. Particularly it looks like it helped gross margin and if there is any benefit from hedging activities in where that might fall on?
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Kevin Farr – CFO: Gerrick, with regard to overall – with regard to ForEx in our results there is a 5% unfavorable impact to worldwide gross sales and there is a 2% unfavorable impact to EPS. So that was the overall impact to gross, to our operating results. With regards to ForEx and hedging we do, given the significant manufacturing and marketing operations outside the U.S. we hedge about 50% of our transaction exposure as we look out over the next 12 to 18 months. We use this strategy for our transaction exposure design to protect the downside and take advantage of opportunities in the market with possible – I won’t comment on the impact of foreign exchange, specifically on gross margin, but it comprises the goodwill that comes from estimating the impact of ForEx, to sales, and EPS for the second half of the year, all else being equal, goodwill impairment to every 1% change in the U.S. dollar index should impact annual EPS by about 1% to 2% and impacts revenues by about half percentage points. With respect to – if you look at it, with respect to ForEx for the first half, basically for the quarter and the first half, foreign had a material impact on gross margins.
Gerrick Johnson – BMO Capital Markets: When you guys go report a benefit or let’s say, a loss from hedging, what lines does that fall in?
Kevin Farr – CFO: To the extent that falls into the gross margin, if it replies to hedging for inventory.
Gerrick Johnson – BMO Capital Markets: One more for me, Brave Toys, where are you following those, were those entertainment or in new girls – other girls segment?
Kevin Farr – CFO: It is in Disney Princess, so it not in girls.
Timothy Conder – Wells Fargo Securities: Just a couple of pieces here, the manufacturing, you had mentioned that that’s going to be one of your ongoing focuses here of investments, again you have mentioned that before. Can you kind of give us a little bit of a frame work where you stand on the portion that you will own of your own manufacturing, that at the end of ‘12 and ‘13 and then in relation to that and HIT, how is the integration of the die-cast and plastic business going on plan ahead of plan, if you could, just a little bit of color there?
Bryan G. Stockton – CEO: It is Bryan here. Let me start with our overall manufacturing strategy has been pretty consistent over the past decade and we like where we are. We are about 50-50 in terms of what we produce internally versus what we use with outside vendors. We think that gives us a couple of distinct advantages; number one, we really have our fingers on the pulse of what’s happening in the toy industry with issues like labor cost and testing and things of that nature. Because we have such dynamic and powerful brands like Barbie, it also gives us a kind of scale to be able to support a dedicated operation to that. So, we like that strategy and we don’t see that really changing drastically in the future, so I think you can look forward to that. As it relates to HIT, we are pleased on a number of fronts with where we are with that. As I told you before, it’s a tremendously talented organization one of things that we’ve been working on is trying to see how we can work together on things like content production, content creation, content distribution we are happy with that. And related to your question about bringing your products in – (we will be) bringing die cast into our plants. As you know we have a very strong presence in die cast operation. So, we are always looking at scale and opportunities to bring things into our plants where it make sense, but we will probably stay about 50-50 long term.
Kevin Farr – CFO: I think with regard to that. We are on track to bringing the die cast manufacturing into our plants effective 2013. It really shows what we’ve been doing over the last couple of years of really sweating our existing asset base with regard to our plants. We’ve been working on productivity improvements through low level automation. We’ve been using Lean to make us more efficient. As freed up (more) space and as we freed up that (more) space we are making investments in plant expansion, not new plants by really getting more out of the plants that we have through investing in expansion things like fashion doll, capacity and die cast capacity.
Timothy Conder – Wells Fargo Securities: So the die cast will be in-house at the beginning of ’13 just to clarify there and then the plastic is that already in-house or that also on the same time table?
Bryan G. Stockton – CEO: That’s over the line is little more complicated, we will be looking at the best use of our assets regarding plastic.
Timothy Conder – Wells Fargo Securities: And then Bryan, in relation to all the manufacturing and so forth there. (You) talked about you got the price increase, we’re hearing it from some other industries that towards the back half of the year and then we will think more for the toy industry would be fourth quarter and beyond that assuming commodity stay where they are and transportation cost, the diesel and everything has come down. Could you potentially start to see some little bit of a tailwind from that say fourth quarter and beyond, given everything else is pretty well already locked in?
Bryan G. Stockton – CEO: Well, if you can predict what the cost of commodities are going to continue in the second half (come see) us later today, but it’s going to be a very dynamic environment we think in terms of commodity. Kevin, you want to comment?
Kevin Farr – CFO: I’d just really like to talk about where we’re at the half. In the first half gross margin rate of 51.2% was up 250 basis points from the 48.7% in the first half of 2011 and as you said the key drivers were favorable product mix including lower royalties related to entertainment, our price increases and OE 2.0 savings partially offset by higher product cost. In the first half of the year, we are really benefiting from lower royalties and card shipping which was significantly lower in the first half of 2012 as we expected. The favorable impact from lower royalties expect to be less pronounced in the second half of the year due to higher sales of Batman, Brave and Cinderella, as well as the fact that our royalty related entertainment business is a smaller portion of our total business in the second half of the year. HIT also had a positive impact on gross margins for the first half, but given the modest seasonality of their business, we expect less positive benefits in the balance of the year there, as well as we continue to operate in an inflationary environment as the economies slowly recovers and input cost continue to rise. Although commodity cost has come down recently, our input costs has increased in 2012, including higher overall raw material cost, Chinese and Asian labor rates, Chinese currencies (truly) inflate the distribution costs. We are currently entering our peak production period, which requires us to continue to procure raw materials and other inputs costs and as you know, a majority of our input costs can’t be hedged. So at this point, it is impossible to predict our future input cost through the high volatility and commodity costs and foreign exchange rates. So our priority continues to be to sustain the progress we made delivering gross margin at least 50%, which we had achieved for the last three years.