Mattel, Inc. (MAT) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Mattel’s Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Martin Gilkes, Vice President, Investor Relations. You may begin.

Thank you, operator and good afternoon everyone. Joining me today are Chris Sinclair, Mattel’s Chairman and Chief Executive Officer; Richard Dickson, Mattel’s President and Chief Operating Officer; and Kevin Farr, Mattel’s Chief Financial Officer. As you know, this afternoon we reported Mattel’s second quarter 2015 financial results. We will begin today’s call with Chris, Richard and Kevin providing commentary on our results and then we will take your questions. To help guide our discussion today, we have provided you with a slide presentation. Both our earnings release and slide presentation, include non-GAAP financial measures. The information required by Regulation G regarding non-GAAP financial measures is included in these materials and both documents are available in the Investors section of our corporate website, corporate.mattel.com. Before we begin, I would like to remind you that certain statements made during the call may include forward-looking statements relating to the future performance of our overall business, brands and product lines. These statements are based on currently available information and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ materially from those projected in the forward-looking statements. We describe some of these uncertainties in the Risk Factors section of our 2014 annual report on Form 10-K, our 2015 quarterly reports on Form 10-Q and other filings 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. Now I would like to turn the call over to Chris.

Thanks, Martin and good afternoon everyone. I would like to thank you for joining us today. To begin with, I can report that we made some solid progress on our number of strategic and operational fronts in the second quarter. As we continue to move quickly to put the company back on track for growth and improved profitability. And while it is still early in our turnaround, our overall second quarter results were generally in line with our expectations. In constant currency, world-wide gross sales were up by 1% in the quarter and are up 3% year-to-date. We also saw progress in our operating results where we are managing our margins effectively and we are generating ample liquidity to fund our turnaround efforts and to maintain our $0.38 a share quarterly dividend. From a strategic perspective, we've continued to drive our cultural change agenda. We have also made some solid progress against our six core priorities. Our emphasis continues to be on rebuilding our culture to embrace brand building, creativity and innovation. And we streamlined our organization and made some incentive changes to incur faster decision making and more personal accountability and early signs here continue to be positive. We've also continued to make some progress strengthening our core brands with good results on Hot Wheels, Thomas and Ever After High. A solid quarter on American Girl and improvements in restoring in power and momentum on Barbie and Fisher-Price. Further we strengthened our Toy Box unit with some recently announced core licensing deals with Warner Brothers and DreamWorks and an important renewal within our Disney partnership. We also continue to broaden our innovation and invention pipeline. In addition, we continue to execute better retail and to better align our marketing and merchandizing programs. The progress here can be seen with increased shelf space productivity and improved inventories. Encouragingly our performance was also broadly balanced across geographies and we achieved some good gains in a number of developing and emerging countries despite some difficult macroeconomic issues with some noteworthy growth in China and in Russia. And finally, we are very encouraged by our cost improvement initiatives where we've made some strong progress in both our global supply chain and our SG&A expenses. We've also began to accelerate several broad initiatives targeting input and packaging costs. As we reported earlier, we remain on track to deliver at the high end of our target cost reduction range of $250 million to $300 million in gross savings by the end of next year. So on balance as we exit the first half, we’re continuing to move things forward, and to see some real positives. Based on the results today, and our go forward outlook, we do remain on track with our strategic priorities. We also remain on track to fund our turn around initiatives fully, and we continue to be comfortable with our cash position and our commitment to the current dividend. Having said all of this, I want to assure you that we are not complacent. We recognize that we still have a lot to do to rebuild the business and to successfully navigate through a very competitive second half equally challenging set of economic headwins. Our core brand and Toy Box is still a work in process. Stabilizing modest or high fully rejuvenating Fisher-Price and Barbie and restoring a vibrant licensing business will all take time. We also still have a lot of retail space to regain and merchandising to improve in the months ahead. Now certainly before access very a drag in many of our important markets, so I do want to maintain an appropriate level of caution and framing where we are in our road to recovery. I can assure you, we are very much in the game and we’re committed to making progress. We believe we have an effective plan and we’re moving rapidly across a number of fronts to rebuild and as Franklin our ability to compete and grow. I continue to be impressed by the vibrancy of our industry and equally impressed by the resiliency and talent in our company. A company that isn’t bracing change and in my view is very much up to the challenges and opportunities ahead. Now, I would like to turn it over to Richard, he is going to provide you a little bit more detail on some of the progress that we’ve made today.

Thank you, Chris, and good afternoon everyone. We are making headwind, the new metal that we’ve been shaping has begun to emerge. As Chris said, there is still a lot of work to be done but we’re confident that we have the ability and determination to restore the company to a path of sustainable and profitable growth. While, we’ve been retouring the business overall my priorities continue to be centered under vitalizing the iconic global brands which are the heart beat of metal. And on accelerating the work of our innovative Toy Box, the entrepreneurial business unit we created to drive invention and build the strongest pipeline of hit toys and licensed ventures in the category. Today, I’ll focus on recent progress in those important areas. We continue working to give our brands strategic autonomy and resources they need to compete more effectively. Our new approach to global brand management is beginning to make an impact. And yes, we are making progress with Barbie. Our research shows that the brands relevance and interest among girls has been improving as a result of more effective marketing and more exciting products. In addition to diagnosis which suggest the potential of the direction we are taking the brand Barbie POS is up globally. We are seeing solid consumer takeaway in the U.S. but we have been able to better leverage the new marketing campaigns and do more extensive program integration with our largest retail partners. The second wave of our Barbie B super brands strategy emphasizing diversity with a new fashion easters line is proving to be a success. A comprehensive marketing program including a music video, blogging, social media, and PR created tremendous buzz and momentum for the recent fashion easters product launch and the effectiveness of this program is inspiring new best practices for the brand. Getting Barbie back on the trajectory we want will take time but we’re working hard to extent our domestic momentum on the brand to all key markets worldwide. Monster High is a big exiting brand that continues to have great potential and significant challenges. Importantly, the brand concept continues to resonate with girls and we believe we can make it even more on trend and relevant. We’ve been doing a great deal to get brand stabilized and re focused on it’s strengths. We are already seeing some promising early performance from key retailers in the new vital line and large scale dolls we shared with you in the last call. There is much more work ahead here, and there are important developments to come on this brand. American Girl continues to improve in line with our strategy for refreshing each of the key components of the business. For example in Q1 we launched the truly need personalized line just strengthen brand relevance and it’s doing well and just this month we had a another important milestone in our international growth strategy for American Girl with the successful opening of our first store within in a store in Mexico city and it sales have been exceeding projections. Our extensive work to restore power and momentum to the Fisher-Price business has two primary strategic priorities. The first is to strengthen the baby business which represents about half of Fisher-Price and has historically been a momentum driver for the entire unit. Here we continued to see solid progress. In Q2 shipping for Fisher-Price baby was up more than 10% in North America and internationally in constant currency. And we are seeing strong peerless takeaway particularly in the key international markets we have targeted for growth. Second is to reestablish Fisher-Price as the premier brand in early childhood development. Our focus for achievement oriented, millennial parents worldwide who are the brands primary consumer. We have extensively reorganized Fisher-Price to meet this objective and we are investing in the discovery of breakthrough inside then enable us to capitalize on the significant opportunities we have identified for the brand. Thomas & Friends had a strong first half consumer takeaway in the international market shipping which validates our strategy to leverage the brands untact global potential, particularly in Brazil, Mexico, Russia and China will be building on this momentum in the second half aided by the international heavy up of Thomas’s 70th anniversary marketing initiatives in Q3 and Q4. Hot Wheels continues to be a strong performer and we believe it represents a big opportunity in our portfolio not only doesn’t have the great potential to seamlessly integrate physical and digital. It has the strategic opportunity to evolve from simply cars and trucks to a greater system of purposeful play that parents will appreciate as much as kids will love. These are opportunities we are working very hard to develop and explode, laying the foundation for accelerated brand growth in 2016. Well our core brand portfolio regains its footing and begins to show important progress we are concurrently building formidable capability in the fas paste more entrepreneurial component of our industry which is drive largely by hit to its licensing and partnerships. We have created our Toy Box unit from the ground up to be a leader in this growing segment and are seeing important signs of progress here as well. One priority of our Toy Box strategy is to build a stronger licensing pipeline into the future by both acquiring and renewing important licenses, I’ll focus on that today. We are determined to be the best in the business at retaining and growing the important relationships we already have its is why we are particularly prior to announce the renewal of our partnership with Disney on the iconic toy story franchise with the global rights for the blockbuster toy story for film in 2017. This renewal represents and encouraging new chapter in our partnership for Disney, our relationship we are determined to see become even more valuable to both partners. Our all new DC superhero girls license with Warner Brothers not only represents a game changing new segment girls action figures but also a state of the art content driven property. The characters DC’s female superhero’s and super villains as teens are at the heart of the girl’s impairment trend something we know a great deal about. Warner brother is putting a large amount of content behind this initiative and our products will be available in stores early 2016. The latest collaboration in our strong ongoing partnership with Nickelodeon plays in the monster machines is already a breakthrough show. It has quickly risen to the number two ranking on all TV among boy’s two to five and the number one app on the kids and education charts and as a results early toy sales are exceeding projections. In June we announced had another important new license, a partnership with DreamWorks animation and their new on trend mash up series Daimler Trucks content will soon begun to air on Netflix and our product will follow in 2016. Toy Box is also leveraging entertainment partnerships to drive growth in the key construction segment of our MEGA brands business, we are encouraged to see construction doing well including important gains in the MEGA pre-school business largely attributable to the continued success of our SpongeBob license toys that tie into their big new Minions movie and coming next year Teenage Mutant Ninja Turtles. Take it as a whole this represents a lot of solid progress across many important brands and our strategic priorities. Beyond what we are achieving in brand management, product innovation and licensed entertainment, we are continuing to accelerate global development of our brands. There is much upside opportunity for us in emerging and developing markets and we are moving strategically to seize it. We continue to invest ahead of the growth in China and are seeing very strong results there and we are encouraged by POS trends overseas. We also continue to make progress as Chris noted on strengthening our retail relationships and our inventories in key markets to lay the groundwork for Q4. Overall we are much more dynamic and purposeful Mattel than we were only a year ago and the transformation underway in our strategic priorities and our culture while neither easy nor painless is beginning to shape a much more creative, aligned and nimble organization. We are laser focused on the strategic priorities Chris mentioned, we’re confident in our plans to get Barbie and Fisher-Price back on track, we are encouraged by our recent success in building valuable strategic partnerships and focusing on continuing that success. We are determined to execute flawlessly at retail and we are committed to accelerating growth in emerging markets. We are confident we will success because there is a renewed passion to lead among our talented people and Mattel is beginning to feel more like the global leader with the heart of a challenger, our founders first envisioned 70 years ago. I look forward to sharing our progress with you in the quarters to come and now I will turn the call over to Kevin Farr, Mattel CFO.

Thank you, Richard and good afternoon everyone. As Chris said we continue to make solid progress on our strategic priorities and our overall second quarter results were in line with our expectations. As a reminder to provide better visibility in the underlying business performance while we execute the turnaround, I will be discussing our results in constant currency and referring to adjusted financial measures that has got certain items related to our acquisition of MEGA as well as severance expense. In constant currency, world-wide sales were up 1% or down 6% as reported as foreign exchange translation continues to have a negative impact on revenues. Year-to-date world-wide sales gross sales were up 3% in constant currency or down 4% as reported and our overall global POS which was up low single digits was aligned with shipping and excluding MEGA in both time periods. From a brand perspective in constant currency, world-wide sales from Mattel girls and boys brands were down 3% in the quarter and down 1% year-to-date driven by declines in Monster High, certain license entertainment properties in Barbie which is partially offset by growth in Hot Wheels, Disney Princess and Minecraft. World-wide sales for Fisher-Price brands were up 9% in the quarter and up 7% year-to-date driven by continued strength of our Baby Co business which includes baby, newborn and infant toys and [indiscernible] as well as Thomas was up too, which was partially offset by other Fisher-Price brands properties. American Girl continues to gradually improve up 1% in the quarter and year-to-date driven by the relaunch of Be Forever historical lines late last year as well as the beginning of a refresh for the Truly Me product line. On a global basis, MEGA shipping was $65 million in the quarter and $103 million year-to-date as reported. The performance of the construction business was in line with our expectations for the first half of 2015. We are building a solid foundation in 2015 to drive growth in the construction industry on a global basis in terms of leveraging our brands, new licensing and our global supply chain as well as our marketing distribution and sales capabilities. However our RC Craft business was down as we deemphasized non-strategic lower margin product lines. As Chris mentioned, our overall growth is fairly broad based across geographies in constant currency. Sales in the North American region were down 2% in the quarter primarily due to lower sales of Monster High but up 3% year to date reflecting a much improved retail inventory position as we exited 2014. Sales in our European region were up 4% in the quarter and down 1% year to date, driven by strong growth in Russia in other emerging Europe, which was partially offset by core brand softness and some western European markets. We also made good progress against our European retail inventory over a hang in the quarter, and expect to have cream retail inventories heading into the holidays season. Sales in our Latin America region were down 3% in the quarter, and up 1% year to date in constant currency with growth in our two largest markets Mexico and Brazil, being offset by several smaller countries that face very difficult macro economic environments. Sales in our Asia Pacific region were up 22% in the quarter, and up 20% year to date in constant currency driven by fairly broad based growth which was lead by China. Looking at the P&L, we continue to invest in retail promotions and strategic pricing to improve top line momentum, and our adjusted gross margin remains solid at 47.9% in the quarter, up 70 basis points versus 47.2 in 2014. Our adjusted gross margin was 48.3% on year to date basis which was down 60 basis points versus 48.9% in the prior year. As it relates to the key drivers of gross margin in the quarter and year to date, our price increases and our cost savings initiatives were offset by a higher product related cost. Year-to-date adjusted gross margins were negatively impacted mixed primarily related to the acquisition of Mega. And our overall basket of product league cost is roughly consistent with our forecast as we enter peak production. Finally the currency impact of the timing of inventory movement and the hedging gains had a positive effect in gross margin rate in the quarter and year-to-date. We continue to anticipate a negative impact in the second half of 2015, related to foreign currency including the year-over-year impact on intercompany sales inventory from the significant strengthening of the U.S. dollar. Our advertising rate remains higher reflecting our investments to support key core brands throughout the year, including additional spending in China, in Russia, we’re investing ahead of growth in shipments and POS. SG&A was down versus the prior year in absolute dollars on both the reported and their adjusted basis, as we continue to streamline our organizations to facility faster decision making. Importantly, with [indiscernible] business for two months in 2014, the impact of our cost saving initiatives is becoming more apparent. And we continue to execute aggressively on our funding our future cost savings programs where we delivered $29 million in overall gross savings in the quarter in $48 million year-to-date, which was split roughly even between gross margin and SG&A and other. We are on track to deliver a $125 million of gross savings in 2015 waited to the second half, and remain committed delivering at the high end of our two year target of $250 million to $300 million. In the quarter, our adjusted operating profit was $23 million and $8 million year to date. Adjusted EPS for the quarter was one set and year to date was a negative $0.07 per share. Now let’s review our POS and shipping performance by core brand in more detail. Above is my remarks in the first half which we believe provides the best indication of underlying including in both time periods. Overall POS was up low-single digits with international POS was up mid single digits and U.S. POS down slightly. We are very early in the year, we’re encouraged to see continued positive global POS for all of our core brands with the exception of Monster High. For the first half, Barbie POS was up slightly on a global basis, with double digit gains in the US, partially offset by a mid single digit decline in international markets. Worldwide shipping from Barbie was down 8% in constant currency year to date with North America down 6% and international down 9%. We believe U.S. POS trends are aided by a better retail inventory situation and our ability to integrate our new brand campaigns more quickly in this market. We are pleased to see the continued improvement in Barbie particularly in the U.S. and we expect to see shipments and POS more closely aligned as the year progresses as retailers buy what is selling. International POS is still impacted by frozen, the slower rollout of our new brand campaign and less clearance activity in 2015 in Latin America. Overall international POS in shipping for Barbie are relatively aligned. As it relates to our high school franchises, monster high POS in shipping remains challenged as we continued to work to stabilize the business and ever after high continued to gain attraction in most existing international markets with global POS in shipping both up in the quarter in constant currency. Global POS for total Fisher-Price brands including Thomas was up mid single digits driven by positive POS for the baby biz in the U.S. and importantly double-digit gains in international markets. Global shipping for Fisher-Price brands were up 7% in constant currency with North America 5% and international up 9%. For Thomas we continued to see solid gains for POS and shipments in both the U.S. and international markets in constant currency and we saw similarly strong trends for Hot Wheels. Turning to the balance sheet our balance sheet continues to be strong, our owned inventory was down about $30 million year-over-year and consistent with our expectations we ended the quarter with about $300 million of cash in our balance sheet as we continued to tightly manage our seasonal working capital needs and reduced our owned inventory levels. Our second quarter results also reflect our ongoing commitment to discipline capital deployment. As Chris said dividends remain a first priority after reinvesting in the business and the board declared third quarter dividend $0.38 per share which is flat compared to the third quarter of 2014. As we continue to execute aggressive cost reduction initiatives we believe we can make the investments necessary to grow our business will continuing our current dividend, clearly as we done historically will evaluate capital deployment priorities quarterly with the board. Looking forward we continued to monitor the currency markets and macroeconomic outlook closely especially given the recent economic events in the year also. Overall based upon our year-to-date financial results we continued to believe that 2015 outlook that we provided in last quarter’s investment call remains achievable. In closing well we recognize we have got lot of work to do we continued to see signs of stabilization of revenues and POS on at underlying basis as well as improving financial performance across the P&L in the first half of 2015. We’re pleased that our turnaround remains untracked. With that we’ll now open the call to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Mike Swartz of SunTrust. Your line is now open.

Hey, good evening everyone.

Hi Mike.

Just one of the touch on Barbie real quick in, it sounds like POS is started the turn in, I think Richard had made some commentary just about getting that brand back on track, I mean is there any timeline we should be thinking about is that back half of this year going into ’16 because I think the lot of what we’ve heard and what’s out there is that the competitive environment in dolls is getting little more difference differ as we go through ’15?

Hey Mike, it’s Richard and I think we’re pleased as I mentioned with the progress that we’re making on the brand. I think most evident with our U.S. performance in the first half POS all indicating great momentum but we are going into a very competitive second half. Now we’re poised in a better place then we been in a while and certainly all the research and indicators that we have in terms of girl consumer interest in the brand is back in the right trajectory. There is obviously a lot of interest in the programming that we have for the back half. We’re continuing on a daily basis to be - that programming in line with the competitive landscape that we have and we are encouraged with early signs of momentum based on the first half. We continued to reemphasize internationally all the programs that we have, we were working very hard around the world to continued to execute against the new creative and we will continue to slugged out on a daily basis.

Thanks for the color and then if I can just ask one more for Kevin, I think you mentioned in the first half you had a benefit from just the impact I guess timing of inventory from FX is that right and then as we think about the back half of the year, how much of a flip do we see as that turns to the negative?

Yes I think as we looked at the first half of the year, we are impacted 4X in absolute dollars but when you look at it at a rate perspective the change in strengthening of the U.S. dollar impacted sales more because if you use the current rates of translation and with regard to inventories we are really seeing inventories flow through from a couple of quarters ago when they repurchased by foreign subsidiaries and those subsidiaries both with respect to the translation that use was not as weak as it is today as well as our hedging related to that was better than the rates today. So we saw a benefit from a rate perspective but as we look forward we do expect that the rate with expect to we have given a forecast of 46% on the top line for the full year due to translation. We expect that to mitigate as we get to the second half of the year because we are down minus seven at this point in translation for the first half and then with regard to gross margins we expect that impact to be higher because the fact that the translation is going to occur when the dollar already strengthened in the first half of this year as well as our hedging in the back half of the year isn’t at the rates that we were at earlier in the year. So we should see an impact of 30% to 35%, $0.35 per share on EPS in the back half of the year and year-to-date that impact is only about $0.02 a share.

Okay, great. Thank you so much for the color.

Thank you. And our next question comes from the line of Eric Handler of MKM Partners. Your line is now open.

Yes thanks very much for taking the question. When I look at your Fisher-Price business this was the first time since the fourth quarter of 2012 that you actually had an up quarter I believe back then you had the benefit of the acquisition of HIT Entertainment, so do you think we have turned the corner here where you can be - you can shelve several quarters in a row of positive growth at Fisher-Price or is there something that you know specifically help 2Q?

Across the board, we are seeing early signs and good positive results from many of the initiatives that we have been working on the Fisher-Price brand for quite some time mainly I would say there has been an incredible amount of innovation in our product New Aesthetics, Baby Gear as well as new marketing campaigns that have been tested and arguably some of most effective work that the brand has done in several years. I think it is a combination of many things as we see product being more embraced, retailers get more excited about the pricing strategies and retail execution that we have had recently and again marketing initiatives that the brand has done are starting to really take shape. So we are encouraged with the momentum that we are building with Fisher-Price but this is a long-term strategy obviously with lots of hurdles ahead but we are encouraged with the early signs in many parts of the brand.

One thing that amplify Eric, when you look at Fisher-Price’s performance a lot of the things Richard talked about clearly driving it but we are also seeing enormous traction in emerging markets and we would certainly expect that to continue and build.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Drew Crum of Stifel. Your line is now open.

Okay, thanks. Good afternoon everyone. So 26% growth for - the constant currency was there anything there is specific that drove that growth, how much impacted the Marvel and Star Wars on performance and is that something we should expect to continue in second half?

Do you want to pick that up on Hot Wheels?

So yes our licensing initiatives with Hot Wheels has really helped drive additional sales in the Hot Wheels brand notably though to recognize that our basic card business is also healthy and growing, so we have leveraged licensing and as we have initiated with our strategic priorities, partnership as the way to infuse relevance, top culture relevance and additional incremental business for the brand, we obviously are very excited about Star Wars and being part of the momentum that that property will have and enjoying some great Hot Wheels momentum in partnership with Star Wars as well as our other licensed initiatives within Hot Wheels is starting to really show the power of strategic partnership when leveraging a big platform brand like Hot Wheels.

I think we are also seeing more traction with Hot Wheels in emerging markets like China.

Got it. Okay and just one more from me guys, I think you would now let some lost shelf space in the fall last year and if your spring line this year, what are your expectations for the second half of this year, any additional detail or color you can provide there would be helpful. Thanks.

I’m sorry, we had a hard time hearing you on that Drew, but I guess you were talking about shelf space, right?

Yes. That’s shelf space, Chris.

Look, I think we’ve talked about this before but now we lost quite a bit of space between last fall, the Spring sets, that’s largely in the numbers we are contenting with, that’s been some other issues on managing inventory and shipments that we’ve been dealing with. We think we probably have a little bit more to go in spots for the fourth quarter. But we put in place a lot of activity to get secondary is to build our promotional inventories and things like that. And our shelf productivity is an retailer profit turns have been excellent over the last few months. So we’re selling hard to make sure we don’t see any more slippage and hopefully we can offset with our secondary’s any remaining space loss, I think we’ll be getting at least [indiscernible] that issue and turn the tide a little bit.

And I think Drew, as I mentioned in the first quarter investor call, we really have reflected in our plan for the year higher sales adjustments than our average rate historically and that was really put in place to combat that short spaced laws by having the ability due at - displays and do more promotions so those are one of the things along with we put more advertising dollars we’ve said that we’re going to be at the high end of the range of advertising so we can advertise and promote more to support that additional space productivity.

Okay. Got it. Thanks, guys.

Thank you, and our next question comes from Taposh Bari of Goldmann Sachs. Your line is now open.

Hi, good afternoon. I had a question on Mega, surprised by the revenue there, it seems like there is some strategic lower margin cleanup happening there. If you can help kind of size up that part of the business, it looks like Mega was doing about $350 million LTM since you acquired it. How much of that piece is going away as part of the strategic initiative?

I’ll take this one. Mega actually have disaggregated a bit but there is a few things going on. One, there is no doubt we had some integration issues and some delays and startup particularly in Europe for some labor reasons and so forth. So we got off to a little bit of slow start there, we’ve also been focusing heavily on the core construction part of the business and de emphasizing a little bit the arts and crafts piece, which you are really seeing in the results right now is the arts and crafts is what’s been pulling things down a bit and construction is actually performing quite well. Certainly as we gotten through the integration issues, I would tell you the last six weeks we’ve had very positive momentum on Mega and if you look at the license properties in the activity we have coming forward in the next six months we’re actually feeling very good about that business, lot of optimism going forward. But we’re going to continue to do some clean up on the arts and crafts business.

Yes, I think the one of things we are really excited about now is the success of minions movie which is a license that we have and I think also in the back half of the year, [indiscernible] was launching their latest games that we’ve also got that from tail wind in the back half of the year and then obviously we’re very excited about next year trajectory from Teenage Mutant Ninja Turtles. So making good progress, as well as we are launching Monster High on that platform here in the fall.

Great. And then just two more, and I’ll pass it along, one Kevin for you. Can you quantify the impact that VFX timing and inventory receipt timing and hedging et cetera had on second quarter gross margins and then the second question, is this related to the Disney revenue piece. First congrats on renewing the license for the Toy Story license but on the actual princess loss next year, you’ve given us some parameters around what that business has done in the past but can you give us some sense on what the margin is related to that or what the incremental margin is on that whatever it is at the revenue piece ultimately this was to help size up the earnings whole?

I think as I said for the first half of the year, in absolute dollar terms ForEx was a hit to gross margins as a percentage of the rate, I’m not going to get in the details of that but it was the driver of the increased in the quarter offset by higher royalties and then with regard to the Disney Princess subject - it’s a good margin business, its higher on average then our average overall rate.

Okay, thank you.

Thank you. Our next question comes from the Felicia Hendrix of Barclays Capital. Your line is now open.

Hi, thank you. Good afternoon. So in your prepared remarks then in the Q&A and you all cost out and the Barbie POS last shipment and balance. I was just wondering if you could talk about any other lines that based similar in balance and where do you standing getting close there?

Yes, there are too many of the other businesses that have quite the same in balance. We still have some issues on the high as which were dropping inventory faster, our shipments I should say faster than POS but lot of that’s related to cleaning up inventory on places like Europe. Barbie is probably been the most pronounced in terms of the mismatch but part of that if I can explain a little is, is related to what we measure in POS and what we actually include in shipments DVD sales and consumer product sales are reflected in shipments those were actually the bigger part of the imbalance the of the core Barbie business which is actually tracking quite well in terms of shipments in POS.

Okay, thanks and then should we just talk about so American Girl improved sequentially just given that see stores that opened at the end of this year and then you had Nashville open at the end of May, I would have thought, I would have done a little bit better as may be you could talk a bit about what’s happening in American Girl?

We’ve been working obviously that to drive some refreshes that the launch, relaunch of our be forever historical line late last year as well as the newly refreshed truly new line which is the largest piece of the business and all of these are showing signs of improvement, the new retail stores are meeting an exceeding expectations and obviously I’ve mentioned a successful launch and expansion of our first store within in a store in Mexico City. We recently rebranded My Gline to Truly Me and so that there has been a lot of really great refresh work that were starting to see the results, the new product line in the market is beginning to show improvement and that’s frankly been the objective that were starting to see pronounced, that’s said we have more work to do to reinforce American Girl’s point of differentiation, personalization, even our in store experience and all of that is top of mine worked on by the brand. We’ll have more news to come throughout the year on this one.

Great, thank you. And then just Kevin from my final question as far as on the balance sheet so in the quarter your cash balance is $300 million and seasonally that in the third quarter that cash typically goes down so I was just wondering if you could talk about your comfort with the cash balances because if you look at recent history, kind of add, the lower end of the range where you’ve been?

I think we’re comfortable with the $300 million level that’s actually a little bit better than our plans, so we track me had and we’re also tracking in head on the usage of cash flow. So we’re very comfortable at this point where we stand on cash.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Tim Conder of Wells Fargo. Your line is now open.

Thank you. Just a couple of clarifications just wanted to make sure, they heard properly from a broad global channel inventory perspective, you continued to expect to have that cleaned up by the end of the third quarter and then would you also if I I’m interrupting your commentary right, we should kind of expect a wholesale trough here in Barbie in the second or third quarter is that correct?

I don’t know if I quite understood your second question Tim, can you try that again on the trough on Barbie?

Yes, I mean if we look at the way Barbie is trending with the wholesale trends should we expect that may be still to be negative but on a year-over-year basis but potentially less negative here going forward so maybe we’re seeing the trough that the inflection point at the wholesale level.

Yes, I got it. The answer to that question is yes we do think it’s going to start to align better we should start to see that mitigate as in the first question remind me?

Clean up of the broad channel pockets of inventory.

Yes sorry no I think we’re feeling, we’re getting that pretty well under control Tim, Europe still has some issues but I think we’re working through those, so we should be okay I think Latin America has done a pretty good job of cleaning things up.

Okay. And then on the funding of future Kevin you’ve given some good guidance here on the growth savings and some historical perspective of that one in a quarter this year largely weighted and you said to the back half and then 250 by the end of 2016, any color or commentary you can say about what we should expect from a net number perspective?

Well I think I’m not going to give you an net number perspective but I think you’ve got the couple of components, we’ve laid out in 2014 what the integration and acquisition charges are for MEGA and then I think the other thing we’ve laid out is severance in 2014 and we expect severance last year it was $51 million, it’s likely that severance is going to be above that number next year or this year I’m sorry.

In 2015, okay and then expect that to decline in 2016.

Yes.

Okay. Okay. Lastly you’ve talked about some key hires that you’ve done over the last six months, how do you feel at this point about the team that assembled or you pretty well done having the team set across the organization?

Actually Tim, I think we’ve said before we have made some key hires, we’ve obviously reorganized and put people in different positions but we still have a number of active searches going on right now which we’ll probably have more to talk about on the coming months but clearly I think flagged in the past we have some more marketing talent we’re looking at, we’re certainly working on content and e-commerce and a number of other areas, so no we’re not done with recruiting at this point.

Okay. Thank you.

Thank you. Our next question comes from the line of Linda Bolt Weiser of B. Riley.

Hi Linda.

Hi you gave quite a bit of commentary on Barbie, POS, I think you said it was up double-digit in the U.S. in the first half. Can you give just a little bit more and tell us was it actually better like an acceleration of growth in the second quarter or about the same or a little slower growth in terms of POS in the U.S. for Barbie? Thanks.

Yes Linda I think it’s challenging because in 2015 Easter was in the first quarter and in 2014 Easter was in the second quarter, so as we look at POS it’s better to look at it from the perspective particularly in the U.S. on a first half basis and we did see it being dip up double-digits in the first half for Barbie.

Okay. And then just on the gross margin you said input cost were higher or product related cost, can you give a little more color on are you actually experiencing lower resin cost year-over-year and what about other commodity inputs and then also I would expect labor cost are probably up, can you give a little more color on the actual commodities in labor?

Yes I think commodities we are seeing lower resin cost but we do see other input cost outside of resins being impacted as the challenge but the biggest issue is labor cost, direct labor cost and that’s going up in double-digits and again that’s why we’re very focused in on our systemic cost savings initiatives particularly with regard to automation to try to take direct labor out and we’re progressing on that I think year-to-date we’ve taken out about 2500 of the 3000 people that we had targeted for this year. So we’re making progress there.

Linda just one clarification on resin it’s worth noting too, that came down lot slower than we would have anticipated and primarily in Asia resin that started to turn finally but we didn’t get a lot of help on resin even coming through the first half that should get little better as we go forward.

I think as I stated, I think our overall basket of cost are above what we expect them to be so when you look at the fact we take mid single digit price increase right now we’re pretty comfortable that’s going to be reflective in what our expected costs are in the second half of the year during our peak season.

Thank you.

Operator, we have time for one last call or one last question.

Thank you. Our next question comes from Jaime Katz with Morningstar. Your line is now open.

Thanks for squeezing me in. Just a quick question on speed to market, you guys had mentioned and I’m curious how the organizational changes that you’ve made have impacted that and maybe how you think about where inventory turns go, do they stay the same and you have more frequent product launches or is there room to make significant impacts in that metric.

We’ve been working very closely with the global supply chain and putting sort of stealth efforts into streamlining product development processes, ranking and prioritizing within our brands as well as Toy Box particular products that we want us fast track, there are specific initiatives with names for these initiatives that are now being executed, it’s early days but the results of these initiatives are proving incredibly effective and frankly inspiring the organization overall to believe that we can really change the paradigm of the way that certainly the product development process works overall with additional speed to market that’s frankly, it’s to some extent price of entry today in terms of what consumer expectations are. So we are encouraged with the early signs and we believe that this will only get better and more effective as time moves on.

And I’d just to add, I think it’s a huge opportunity for us with regard to our global supply chain. We’re very focused on cutting down on lead times, materials just about every aspect of shortening the time from ideation to get into the store shelves. We’re working on in some form of fashion.

Are you guys utilizing the Quirky relationship for that in some way, shipper form that may be is a lot larger than we think.

We are very active on a day to day basis leveraging the Quirky relationship and I think we’ll probably incoming calls have more updates in terms of the results some of which speed to market and product development new ideation and certain challenges that we’ve given the Quirky community. All of which is active and frankly quite exciting and I think we’ll have some news to share as calls come in.

Thanks.

Okay. Are we done. Well, listen thank you very much everybody for joining us, I know that Kevin is going to be available for some follow up discussions with some of you and we look forward to following up in the coming months. Thanks again.

There will be a replay of this call available beginning at 8 PM Eastern Time today. The number to call for the replay is 404-537-3406 and the pass code is 67921610. Thank you for participating in today’s call.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may now disconnect. Have a great day everyone.