Mattel Earnings Call Nuggets: Encouraging Share Performance and Payout Ratio

Mattel, Inc. (NASDAQ:MAT) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Encouraging Share Performance

Sean McGowan – Needham & Company: First, can you give us a little bit more clarity on exactly what you saw, POS domestically, as well as outside the U.S.? Was it down, was it up? The industry seems to be down a bit in 2012. How did you guys perform?

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Bryan G. Stockton – Chairman and CEO: I’ll start with we’re pleased with our share performance overall. If we look at the toy category in general, we were pleased with it, particularly in the U.S. in the fourth quarter. We think the performance of the toy category was particularly encouraging, especially in light of I think, I call it the 1-2-3 punch of a declining GDP, fiscal cliff anxiety on the part of consumers and also declining consumer confidence. So from a category standpoint, we feel pretty good about that, and in Europe in particular, very difficult consumer and economic situation. The fact that the category was down a couple of points was encouraging and frankly if you take Spain out, which is probably one of the most challenged economies, the category is only down about a point I think. So we felt about the category in terms of POS. Our analysis shows that if you look at the Entertainment-heavy year, I will call it for 2011 that probably contributed a point or two of growth to the category in ’11. So overall, we feel good about the category. Our performance, we feel good about from a POS category, as I had mentioned, share grew; in the U.S. POS was positive in the fourth quarter. If you strip out the impact of CARS 2 on us, it was little bit more positive for the year and for the quarter. So we like that. So we felt very positive about it and our shares in Europe grew over the 2012. So we think our position is pretty strong leaving the year.

Sean McGowan – Needham & Company: When you were going through the list of the things that you have coming up in 2013, do you guys not have the rights to Monster U?

Bryan G. Stockton – Chairman and CEO: We do, Sean, that’s on the list.

Sean McGowan – Needham & Company: Could you just tell us now, your cash flow from operation is really strong in the quarter, ended the year with more cash than expected, but the buyback not as robust as it’s been in the past. What are your thoughts on that?

Kevin Farr – CFO: I will comment on that. Over the last three years, Sean, we’ve repurchased over $1.1 billion of stock including $78 million in 2013 and if you look at 2012 repurchases, we’re lower, principally due to the acquisition of HIT in the first quarter for $685 million. But as you mentioned, record revenues and operating margins and tight management and working capital equaled record cash flow from operations. As you know, we collected a substantial portion of that cash flow in the — late in the year. Based upon our consistent historical disciplined deploy excess cash over the last decade; you know that over time as we look forward, we’ll deploy cash consistent with our framework. So over time, you can expect that we’ll deploy our excess cash consistent with our capital investment framework. The target is year-end cash of $800 million to $1 billion and debt to total capital of about 35%. Deploying cash for dividends and share repurchases is essential to achieving total shareholder returns in the top third to top quartile in the S&P 500.

Payout Ratio

Timothy Conder – Wells Fargo Securities: Again gentlemen, great execution in the overall back-drop environment, so congratulations on that. A couple of things here. To follow on the cash question, you’ve kept that above the $1 billion here now for three years. Granted, the HIT acquisition at this point last year had not closed, but obviously now it has, and you’re sitting at $1.3 billion. You’ve raised the dividend, you’ve repurchased some stock. Kind of talk to us why you’re sustaining at above that high-end of your framework, number one? Sort of in relation to that, you give the 50% to 60% pay-out ratio, yet you kind of kept towards the lower end of that range. Is that the intent still going forward?

Kevin Farr – CFO: Yes. I think I’d answer the second one first. When you look at the payout ratio, we’re really looking at it versus 2012 actual EPS. So when you look at our dividend payout ratio for the increase today of 16% to – from $0.31 to $0.36, which translates into a $1.44 dividend, if you look backwards, based upon adjusted EPS, that’s about 58% payout ratio. With respect to going to year end cash, again, as I just mentioned, we did purchase less shares this year, principally due to the acquisition of HIT. Also, the cash flow reflected the fact that we collected that cash late in the year. If you look at the balance of $1.3 billion this year, yes, we’ve been over that $1 billion range the last two years. That has included pre-funding of debt at the end of 2010, I think, of about $250 million. When you look at 2011, we pre-funded the acquisition of HIT, which included about $600 million that was on the balance sheet at the end of the year. So if you back those amounts out of 2010 and 2011, we’d be back in that $800 million to $1 billion range.

Timothy Conder – Wells Fargo Securities: Bryan, with Barbie, you guys have – you got it dialed in, the last several years, you had a good run here with Barbie. I guess, do you feel comfortable with the good problem of tough comps, do you feel comfortable with ongoing growth here? You already talked about Monster High, but from that perspective, and then I guess, as it plays into also, the gross margin, with the tough comps on Barbie, Fisher-Price looking to grow, do you feel comfortable kind of sustaining slightly above the peers, that 50% long-term goal?

Bryan G. Stockton – Chairman and CEO: When we think about Barbie, we always think about Barbie in the context of our total Girls’ portfolio. Our total Girls’ portfolio has had quite a run over the past couple of years. We’ve been growing the category. Our share has been growing. Monster High as you know has been an incredible success. It’s now $1 billion brand at retail. Disney Princess grew double-digits last year. So when we think about Barbie’s performance, we are actually pretty pleased with what I would call a solid year, per share of the total toy category was flat. If you take out the impact of currency in international, Barbie shipments for the year was essentially flat and we think that’s quite a performance given all the activity that we’ve been generating around the brand. As we look to our plans for next year, I am not going to give guidance on growth on Barbie, but what I can tell you is that we are pretty pleased with the programs. I mentioned Barbie Life in the Dreamhouse in my comments. That’s something that has taken off and has pleased us in terms of the engagement with girls, particularly older girls and because of the success of that content, we are now building on that and we will have a more complete promotional and toy line around that. I think I have Kevin maybe comment on your gross margin question.

Kevin Farr – CFO: Tim, in 2012, we delivered operating income of 11% and operating margin of 18% excluding the impact of the litigation charge. We delivered gross margin of at least 50% for the last four consecutive years. Our goal is to grow operating income 6% to 8%, which is consistent with delivering top third to top quartile CSR over time. So we said we’ve got many levers that we can use to work towards achieving growth in our operating income and essentially expanding our operating margins. As I told you in November, assuming the mix tailwinds continue in our portfolio of brands, coupled with lower volatility input costs and foreign exchange, we could see gross margins above 50% over the near term. This approach aligns with delivering top third to top quartile TSR.

A Closer Look: Mattel Earnings Cheat Sheet>>