Mattel Earnings Call Nuggets: Price Increases, Industry Weakness Insight

On Tuesday, Mattel, Inc. (NASDAQ:MAT) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Price Increases

Jaime Katz – Morningstar, Inc.: Can you guys talk a little bit about the data point that was in your press release on accounts receivable, days outstanding. It looks like it went a little bit higher and I was just curious if there were any terms from the retailers that had changed, if that would be the more permanent thing going forward?

Kevin Farr – CFO: Yeah, I don’t think there’s any change. I think the accounts receivable increased primarily due to the timing of sales volumes that happened later in the quarter.

Jaime Katz – Morningstar, Inc.: Then, any thoughts on price increases in the future? I know you guys don’t want to gouge anybody but, and you think whether the upcoming 2013 year maybe if there were any pricing increases that you guys (indiscernible) cash them through?

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Kevin Farr – CFO: Yeah, I think we continue to operate the inflationary environment with lot of volatility as the economies slowly recovers and the input costs continue to rise. Our goals offset as much of the increase in the input cost that we can through a continued focus on cost efficiency programs and as you know our last leverage is to take pricing actions to sustain gross margins of about 50% and our customers are in right now this year 2013 products, so it’s too early to really talk about 2013 pricing actions.

Industry Weakness Insight

Michael Kelter – Goldman Sachs: I want to do was just poorly about the toy industry which is up 5% to 10% year-to-date. You guys are outperformed by a mile, but as a leader in the industry I just really love to get your take on why the industry weakness is as pronounced as it is and whether you think it will persist?

Bryan G. Stockton – CEO: Don’t worry Michael. We’re still very positive about the toy industry as we look at data sources for example like Euromonitor, they continue to forecast the toy category growth locally as I think it’s around 6%. The numbers in the U.S. have been little weaker than probably anyone would like this year, but as you recall the U.S. is only about third of the global toy business and when you peel the layers of the onion back on the U.S. business the softness is really in categories where you could argue there has not been as much innovation as there had been in others. For example the categories in which we compete primarily are outperforming the industry on average. So, we’re still positive that when there’s innovation this industry can grow particularly here in the U.S. As you look at Europe, frankly we’re quite pleased with the toy business in Europe. It’s down only about 1% and Europe as you know has a very challenging economic environment. Outside of Europe as we look at the information that we get with our boots on the ground all over the world, we see growth in Eastern Europe, Latin America and Asia and then I guess finally this is more of a short term comment than a longer term strategic comment. We’ve had customers here last week and this week to talk about what’s happening this year and start planning for next Christmas believe it or not and our customers continue to have we think a positive outlook not only for this year but for the future as well.

Michael Kelter – Goldman Sachs: You mentioned some of the international regions maybe you could talk about not just the absolute numbers of toy demand but maybe the derivative the direction of toy demand going around the world Europe versus Latin America versus Asia given the recent macro slowdown, it’s something that’s obviously not shown up in your results today, but maybe in the Christmas quarter or do you expect continued strength?

Bryan G. Stockton – CEO: As we look at for this year based on the promotional plans and merchandising plans that we have with our customers and I would say the positive outlook our customers we have as we say there will be a Christmas this year, as you look out and to sort of take the tour around the world, our customers in Eastern Europe still look forward continued category growth. Latin America that’s a basket of countries and every year some countries are slowing down some are speeding up, our business has continued to be robust in Latin America, same thing in Asia. I think one of the things as it relates to Mattel is when we look at either the development of the category or the development of our market share. Our market share for example in Western Europe are still quite low they are only about 10% and that’s about half of what we are here in the U.S. So, we look at both the trajectory of the category and our ability to try to grow our market share as category share is measured by NPD or other sources. So, we’re still bullish on toys.

Michael Kelter – Goldman Sachs: Then one last one. The gross margins numbers were fantastic and you mentioned that ForEx was a part of that, but even if you adjust for the ForEx, it seems like the underlying run rate post the HIT deal and the OE savings is above the 50%, which is your long-term guidance. So, now that you’re solidly above that 50% line, what’s holding you back from raising that prior guidance?

Kevin Farr – CFO: I think as we look at the future, I think or the long-term, we believe that targeting a gross margin of 50% is the right approach to managing our business, but when we look at our P&L on an annual basis, we focus on two key goals; growing operating income by 6% to 8%, which is consistent with delivering top third to top quartile performance and sequentially improving our operating margins consistent with our targeted range of 15% to 20%. As we develop our annual financial plan, we balance several others, sales growth, gross margins, advertising, SG&A and investments. Our goal is to deliver improved operating margins, while achieving 6% to 8% growth in operating profits. Gross margin is an important element in that equation, it’s to approach in line with a goal of consistently delivering top third to top quartile total shareholder returns.

Michael Kelter – Goldman Sachs: So, what would make you reevaluate the gross margin guidance?

Kevin Farr – CFO: Again, I think we look at it on an annual basis. Over the long-term, we look at the fact that we think 50% is the right approach to managing our business, but we have opportunities to grow our margins. We’ve got a lot of moving pieces with respect to it. I see opportunities to grow margins through our HIT licensing business and our overall licensing business for our core brands as well as continued growth in Barbie, Monster High and American Girl all of which should have a positive impact on our gross margins. But we also have a great opportunity to grow Fisher-Price on a global basis since its out underdeveloped outside the U.S. and this will put pressure on our margins. So Michael, looking forward it’s always a challenge to predict margins since there’s a lot of moving pieces like forecasting sales mix, as well as market based items like foreign exchange and input costs which have been volatile over the last several years. So, again I would focus in on — we manage our P&L on an annual basis with a key focus on two goals. As I side growing operating income by 6% to 8% which is consistent with delivering top third to top quartile performance and sequentially improving our operating margins consistent with our targeted range of 15% to 20% and we look at all the leverage in the P&L really deliver that with a goal of delivering 6% to 8% in operating profits and this aligns with our overall goal of really delivering top third and top quartile PSR.

A Closer Look: Mattel Earnings Cheat Sheet>>