Mattel, Inc. (MAT) Q3 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Mattel Incorporated Third Quarter 2016 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 introduce your host for today's conference; Mr. Martin Gilkes, Head of Investor Relations. Mr. Gilkes, you may begin.

Thank you, Andrea, 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 2016 third quarter financial results. We'll begin today's call with Chris, Richard, and Kevin providing commentary on our results, and then we'll take your questions. To help guide our discussion today, we have provided you with a slide presentation. Our discussion and our slide presentation will reference non-GAAP financial measures, such as gross sales, adjusted selling and administrative expense, adjusted operating income and loss, adjusted earnings and loss per share and constant currency. Our earnings release also includes non-GAAP financial measures. The information required by Regulation G regarding non-GAAP financial measures is included in our earnings release and slide presentation, and both documents are available on the Investors section of our website, corporate.mattel.com. Before we begin, I'd 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 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 2015 Annual Report on Form 10-K, our 2016 Quarterly Reports on Form 10-Q, and other filings we make with the SEC from time-to-time, as well as in our other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so. Now I'd like to turn the call over to Chris.

Thank you, Martin, and welcome everybody, thanks for joining us today. As usual, I will lead things off with a brief perspective on the quarter and the full year, and then Richard and Kevin will each provide some additional details. And as Martin pointed out, we'll open things up at the end for any questions that you might have. All right, so let me begin by saying that in the quarter we continue to make some very good progress across all of our strategic priorities. We were especially encouraged by the momentum of our top client. Our positive consumer takeaways aligning nicely with shipping. This increases our confidence as we get stuff for the holiday season and as we look to deliver on our challenging 2016 top line objectives. Now also encouraging is the fact that our positive top line results were very broad based. We continue to see real strength in our core brands with Barbie, Fisher-Price, Thomas and Hot Wheels, all growing. And the results also reflected a number of turnaround initiatives at American Girl including the first full quarter of Walt [ph]. The initial set of our expanded distribution strategy and the signing of a new international licensing opportunity. We also saw some excellent traction in our Toy Box with our games and entertainment properties and with MEGA Brands. Our geographic performance was also broad based and we continue to perform especially well in the priority emerging markets like Russia and China; markets which are setting up extremely well for continued rapid growth. Finally I'd like to highlight the effectiveness of our commercial team which is performing superbly and making some very real gains in space of merchandising and in building broader strategic partnerships with many of our key customers. So on balance, a lot of very good progress and performance which is helping to drive the top line. Shifting to the middle of the P&L, we also made good progress this quarter and we do remain on-track to deliver on our cost targets. We've been realizing some very significant supply chain savings and efficiencies. Despite some very aggressive targets, our efforts to streamline and prioritize SG&A spending are also progressing well. As pointed out previously, the offset of course continue to be negative foreign exchange and some unfavorable shifts in our brand mix which have pressured our gross margins. And we expect these factors will remain a challenge as we navigate through the balance of the year. Kevin is going to provide a little bit more perspective on this short. To sum up, our third quarter results provided some very solid momentum as we entered the holiday season and they reflected encouraging progress across many fronts. As we look ahead, the picture for the year is largely the same as what we've previously outlined. We have solid topline momentum, that's being aided by great customer support and well developed consumer programs. Additionally, foreign exchange should begin to moderate some and we'll continue to push through cost savings to offset any mix effects. We'll also be working to achieve our aggressive SG&A cost. Overall, I'd say that our strategies continue to gain traction and are helping us to drive the top line to right size our cost structure and to fund investments in brand building, commercial excellence, emerging market expansion and our exhibit [ph]. While we always have to caution that we have a lot of work ahead with a critical quarter to still execute. I'm proud of the progress that we've been making and I remain very optimistic about the year and our future, something we hope will shed a little bit more light on when we host our Analyst Day event early next month. With that, let me now turn things over to Richard to highlight some of our top line progress and our and core initiatives. Richard?

All right, thank you, Chris. As Chris mentioned, we are pleased with the quarterly results as we build solid momentum going into the important holiday season. Our work on core brand positioning refreshed products marketing, renewed licensing executions and surgical retail execution globally is obviously paying off. Our third quarter results clearly demonstrate significant progress on overcoming this year's revenue challenges with worldwide gross sales essentially flat at actual and up 1% in constant currency. As you know, POS is the true parameter of a brands success with shipping ultimately aligning to it overtime. And our turnaround efforts focusing on consumer demand creation and better global commercial alignment are clearly gaining traction. Excluding the impact of Disney Princess, Global POS continues to be up mid-single digits for the quarter and year-to-date, with solid results across the majority of our brands. And gross sales excluding Disney Princess are aligned to POS with sales in constant currency up low-double digits for the quarter and up single-digits year-to-date. Our third quarter momentum is very broad based reflecting continuing end in some cases accelerating growth across the number of brands, licenses, and geographies. So let me briefly touch on some specifics starting with our core brands and let's start with Barbie which continues to exceed our expectations. With Global POS up in the high-teens for the quarter and gross sales in constant currency is up 17%. Year-to-date, POS is up high single-digits with gross sales in constant currency up 14% reflecting increased retailer confidence in the brand as they restock and expand our recent shelf space. Barbie is playing an incredibly fast-moving trend based business which requires us to be nimble and act like a leader but think like a challenger. We knew going into this year that our Barbie strategies had to work almost perfectly, so far they have. We're seeing very broad based performance from the new styling in our Fashionista line, the I Can Be segment that exemplifies the brands positioning and to our new Dreamtopia that is capturing imagination of younger girls. Now orchestrating all of this simultaneously is quite an accomplishment and we are particularly pleased with the significant turnaround in our international results. For the quarter, Barbie's International POS was up mid-teens and gross sales in constant currency are up 16%. Fisher-Price, with its renewed emphasis on the early childhood development continues to grow with gross sales in constant currency up 8% in the quarter and up 7% year-to-date. Global POS remains solid with very strong POS internationally. We continue to build strength in our baby business, especially in key international markets and we're seeing a nice turnaround on our Friends business driven by Nickelodeon. Hot Wheels, which is a likely a concern for some of you this quarter given the Star Wars comp continues to do well. With gross sales in constant currency up 3% in the quarter and up 6% year-to-date. POS trends remains solid with global POS mid-single digits in the quarter and double-digits year-to-date. Thomas remains strong as we accelerate growth in international markets with global gross sales in constant currency up 6% in the quarter and up 3% year-to-date. POS remains particularly strong internationally. And despite its impressive numbers, as it does remain top three fashion doll brands globally, we continue to have our challenges with Monster High. The new DVD that essentially kicks-off the reboot of the brand came out recently and is being supported by product offerings that emphasize the core characters and the origin story but watching the performance with this brand closely during the holiday period. And finally, American Girl, where we saw solid turnaround in the quarter. While we did see solid results from our recent introduction of the WellieWishers line and the introduction of our latest historical character Melody. The third quarter results really reflect the impact of our strategies to expand the brands distribution. This includes the initial shipping to support our new exclusive store within the store partnership with Toy [ph]. Our new retail execution as well as the new franchise licensing agreement to expand the brand into the Middle East. We're very excited about all of the strategies now in place to provide new ways for girls and their families to engage with the brand and look to see continued progress in the fourth quarter. Briefly moving onto the Toy Box. The key driver in the third quarter here is MEGA with gross sales and constant currency up 6% in the quarter and up 23% year-to-date, primarily driven by continued international expansion. Separately continued success with our Warner Brothers DC Universe executions are evidenced by our DC Superhero Girls results and continuing strong demand for our Batman versus Superman products. And the Toy Box organization has also been busy developing and recently sharing with our retail partners a number of exciting new products that will support the strong lineup of entertainment properties coming out next year including Wonder Woman, Justice League, an additional content for DC Superhero Girls from Warner Brothers, Universal with Fast and Furious and Minions, and of course, Disney with Cars 3. The third quarter results provided glimpse to the power and breadth of our portfolio and how this organization and properly align and given the right resources can achieve great things. I continue to believe that our success this year will largely be a function of Mattel's ability to overcome a unique and significant revenue gap. Yes, a number of headwinds remain but we are meeting this head-on and moving forward with a lot more confidence and purpose. We will continue to build on our progress and create major new opportunities for growth in 2017 and beyond. I'm looking forward to continuing this discussion in a few weeks here at Analyst Day at Mattel. And now I'd like to turn the call over to Kevin Farr. Kevin?

Thank you Richard, and good afternoon everyone. Overall our third quarter results with shipping better aligned with positive POS which positions us well to execute the fourth quarter and deliver our challenging top line objectives for the year. We continue to focus on managing the P&L, leveraging sales and POS momentum and cost savings initiatives to help offset continued Forex headwinds and short-term calendars [ph]. Before going further, I want to remind everybody that unless otherwise noted, I'll be referring to gross sales in constant currency in order to provide better visibility into the underlying topline trends. And in order to provide more transparency into the fundamentals of the business, I will also reference some adjusted financial results that exclude certain non-recurring items related to the acquisitions of MEGA, Fuhu and Sproutling; as well as severance related to our business transformation and cost saving initiatives. As always, reconciliation to GAAP numbers are provided in our press release and the slide deck. So let's briefly get into some of the details. As Richard said, our third quarter top line results demonstrate significant progress. Third quarter gross sales were up 1% constant currency and despite a significant Disney Princess comp essentially flat on a reported basis. On a year-to-date basis POS pro-sales are now flat and constant currency are down 3% as reported. We did see great sales acceleration in the quarter to our Asia Pacific business, we also saw sequential improvement and our challenging Latin American business along with very strong growth in key emerging markets like China and Russia. And excluding Disney Princess, the underlying trends are even more compelling. Other revenue stories due to better commercial execution as we invest with the retail partners to turn the business around. Sales adjustments were 9.1% in the quarter versus 9.6% in the prior year. Our reported gross margin in the third quarter came in as expected at 48.5%, while Forex represented less of a headwind than in the first half of the year, it was still the major driver of the year-on-year decline. Unfavorable mix was also a headwind as our less accretive businesses continue to grow at a nice cliff [ph]. We continue to partially offset these headwinds by strategic pricing and our successful cost savings initiatives. Moving beyond gross margin, much like sales adjustments, our advertising rate was lower in the quarter as we moved closer to 12% for the year. And we remained disciplined in SG&A with adjusted SG&A down approximately $5.2 million or 2% year-over-year for the quarter. Year-to-date, adjusted SG&A was down by $48.3 million or 5%. Our continuing efforts to aggressively reduce costs, particularly in SG&A are reflected in quarterly results and are helping to offset the additional SG&A related to our recent technology acquisitions and increase incentive accrual in the quarter as year-to-date we're attracted to higher incentive payout as compared to the prior year. Importantly, we are still on-track to deliver at the high end of the $250 million to $300 million range for our two-year funding at our future cost savings program. We delivered approximately $31.4 million in gross savings in Q3 and $108.3 million year-to-date. Finally, adjusted EPS for the third quarter was $0.70 per share or $0.68 per share as reported. Now turning to the balance sheet and cash flow, we ended the first nine months of the year with $297 million of cash, in-line with our expectations and about equal to last year as we continue to tightly manage working capital. As expected, we did issue $350 million of long-term debt in the quarter which we'll use to repay $300 million of long-term debt maturing in November. The additional funds will be used for general corporate purposes. The timing of the issuance is a reason why interest expense for the year will be slightly higher than last year. Not surprisingly, owned inventory and balance sheet was up year-over-year as we positioned the business to deliver in the fourth quarter. Finally, we continue to reward our shareholders by deploying capital in a disciplined manner and maintaining the dividend. As expect, capital expenditures were up slightly as we invest in incremental dye cast [ph] capacity to support growth in our business and labor saving automation technologies. And dividends remain our first priority after re-investing in the business, with the board declaring a fourth quarter dividend of $0.38 per share which is flat compared to fourth quarter of 2015. Looking ahead as Chris said, as we enter the fourth quarter, we don't see any significant changes to our full year 2016 outlook. We have a lot of work to do to execute the fourth quarter, and our focus remains on delivering operating profit by balancing our top line and managing the middle of the P&L. As expected, the unfavorable impact of Forex did lessen in the third quarter which we believe will continue. And giving our third quarter results, our revenue outlook has not changed. We gained confidence with our results to-date and believe we are well positioned to meet our challenging 2016 revenue objective of relatively flat net sales and constant currency. At the same time we work hard to achieve a full year gross margin of about 48.5%. This continues to be important area of focus as we still face Forex mixed headwinds but we do expect to be in the range with this target. It means that we need to achieve a fourth quarter gross margin rate around 51% which is a challenge but well within the ranges we have achieved in the past. The sequential improvement in gross margin is supported by incremental volume, improved mix and stronger trends in our Girls properties with American Girl, Barbie and DC Superhero Girls; a smaller Disney Princess impact and by incremental flow-through from our supply chain and other cost savings initiatives. Now shifting to the other lines of our P&L, we'll continue to manage both advertising and SG&A for achieving our operated profit goals. Specifically with advertising, we expect to continue to move to the mid-point of our 11% to 13% guidance. We also expect continued progress in SG&A, likely finishing the year closer to low end of our $55 million to $65 million savings range for adjusted SG&A. As a reminder, we set very aggressive targets here at the beginning of the year including the full absorption of incremental overheads from our first quarter acquisition of Sproutling and Fuhu, which were not contemplated when we set our original savings targets and expected higher accrual for incentive compensation assuming we hit our performance targets. So a lot of tightening and cutting on the cross front as we work hard to achieve a full year adjusted SG&A of about $1.4 billion. As an additional note on the P&L, I also wanted to remind you of our tax rate assumptions. While the year-to-date tax rate has been positively impacted by some discrete tax items, we still expect a full year tax rate including discrete items to be around 21% for 2016 and beyond assuming no changes in current tax laws. Our tax rate including discrete items for the fourth quarter is expected to be about 24%. And finally, we expect our fourth quarter diluted share account to be slightly above our third quarter of 344 million shares. Turning to our balance sheet; we expect to end the year within our targeted range of $800 million to $1 billion in cash as we will continue to take the advantage of working capital. Looking beyond 2016, we expect to see ongoing brand momentum driven by the rollout of new initiatives. Continuing tailwinds related to our strategic investments in emerging markets, and benefits related to leveraging the technology acquisitions across our portfolio. We also have the tailwind and topline revenues from a much more robust entertainment display including the Cars 3 Movie in 2017. And as previously stated, we remain diligent in our efforts to approach more normal operated margins of 15% to 20% in 2017 and beyond. And 2018 brings additional revenue and profit growth with [indiscernible] like Toy Story 4, Jurassic World in our entertainment line-up. I'll look forward to provide more details at Analyst Day in a few weeks. In closing, let me repeat what Chris and Richard have already said. We are very pleased with the progress reflected by our year-to-date results and while we still have a lot of work to do, we believe we are poised to deliver a solid holiday season and a solid year for our shareholders. We'll now open up the call to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Greg Badishkanian with Citi. Your line is now open.

Great, thanks. It seems like you've had some pretty consistent POS in that what's called positive mid-single digit range excluding Disney, how should we think about fourth quarter and are there any issues that could derail that momentum?

Greg, it's Richard. I think we are quite pleased obviously with the POS thus far this year, particularly on core brands. We're seeing more attraction, actually and the international markets accelerate as we had a good run this year in the U.S. and we continue to be quite confident in our go-forward, the commercial group has done a brilliant job executing promotional space, additional advertising, online presence as well as our own media strategies which will end up in the fourth quarter. So we think we're poised to continue the momentum and certainly recognize that this is where the ducks lie if you will but we're excited about our programming being executed.

And also there is a press release put our very recently, maybe Richard could you provide some more color on the Toy Box Series and maybe that the opportunity from Mattel from a branding or product sales perspective, what's the opportunity of that series for you?

Sure. So we were -- thank you for asking that question, actually we're very excited about our partnership with ABC since launch what is going to be a new Toy Show television reality series called the Toy Box. In partnership with ABC, it will be an exploration frankly of the trials, tribulations and excitement around what it means to be a Toy inventor. And frankly, the entertaining process that most of the world doesn't get to see, what it takes to actually bring a creative idea to market. So we're really thrilled with the idea of the concept and certainly the details of the show will be revealed as the show gets launched in 2017. We are at this point in [indiscernible] working through our international distribution rollout of the channel and it will air in 2017 as the date will be announced soon. It also is a great opportunity for us to highlight that. When we started the division called the Toy Box, we reiterated that it was about invention, creativity and the idea of sort of a free flow back to the origins of the company; and I think the television show named Toy Box is going to do just that and it represents the new platform for us to find great new product and ideas around the world in an entertaining new way for the consumer and the company.

Okay, thank you.

Thank you. Our next question comes from the line of Arpine Kocharian with UBS Investment Bank. Your line is now open.

Thank you, thanks very much. Richard, I wanted to address Barbie, this comes very -- this comes in above expectations in terms of sort of a double-digit growth for the quarter, just trying to understand how your customers are thinking about the brand heading into Q4? Are you seeing considerable shelf-based increase? And then I have a follow-up question on DC Superhero's; if you were to seize the opportunity for you in the back half of this year, could you -- anything you could give us in terms of quantifying what that brand could mean this year? And then I have a quick follow-up.

Sure. So the first question related to Barbie, so the back half year -- our shelf space gains in Barbie are commensurate with our performance with POS and with performance comes additional space assuming you have the retail credibility and relationships to get that space and we are quite pleased with the increments that we have in the back half and with the momentum that we had continue to have all year. We're quite confident that we'll be able to maintain this great trend with the Barbie brand. As you also recall, international was little slow to catch up to the U.S. as we execute much of our program work in the U.S. first and we're seeing the buildup if you will and reaction as our programming product marketing in international that has had some terrific POS results, frankly across the world and we anticipate that that will also continue. Most pleased with the three segments that we've been talking about in marketing, the Fashionista collection which of course has the new scalps and shapes; the I Can Be segment which of course is the career aspirational segment of the brand that we focus a lot of advertising demand [ph]; and as I mentioned Dreamtopia, a new segment to capture younger girls. Not only has the POS been improved but also our brand equity scores have improved significantly and in particular with girls of younger mom -- younger -- moms of younger girls between the ages of two to five we've seen the scores jump significantly as they've enjoyed much of the purposeful play messages that exemplify the brands positioning statement. So that's the answer to your first question. As it relates to DC Superhero Girls, we are thrilled the early reads and in fact, it's shaping up to be one of the big fashion top brands of the year. The programming in place, the content being rolled out, the additional marketing at Warner Brothers, DC is working on with Mattel; ensures if you will, the consistency of this important new girls franchise and we believe that it will remain a top five brand fashion doll business for us in the future and we're really quite excited about it. In addition to that, as you know Wonder Woman is coming out with movie in the first half of 2017 and there is already a lot of buildup around that brand and the implications of that for the entire collection, so we're quite bullish on it.

That's great, thank you. And then I have a question to the team, sort of Walmart is making some aggressive price investments to generate same-store growth; it seems like part of this dollar re-investments are going to come from both suppliers and Walmart, this is obviously your largest customer. As we look into '17 could you frame what this could mean for the Toy Isle and for Mattel perhaps? Thank you.

Arpine, it's Chris. Walmart continues to be a seller partner with us. We've been expanding space and merchandising and we're starting to do a lot of experiential things to test that out with them. We are frankly not seeing anything in ordinance that's coming out in terms of your question related to extra economic pressure or whatever. We're actually working quite well and trying to manage the line effectively for margins for both sides. So we have nothing but very good thing to say about partnership and how it's unfolding.

Thank you.

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

Thank you. I just wanted to continue on a little bit the Barbie international component. Richard, if -- you alluded to that the international just in general would lag the U.S. as far as you guys looking at wholesale versus retail. And international -- correct me if I'm wrong, is 60%, 65% of Barbie; so we're seeing that disproportionately reflected and driving that wholesale. Is that part of the dynamic also here?

No, not quite actually. Well, that the percentages you've got, you've got right but the catch up in international was really just a function of the ability for us to execute programs a little bit faster in the U.S. As you recall, again, the three segments that we've really been concentrating on have been Fashionista which at an early rollout in the U.S. with significant PR and marketing which points the international markets have lagged. The I Can Be segment which had an enormous amount of mom-directed marketing if you recall, that piece of communication rolled out in the U.S. earlier and now is rolling out significantly around the world. And the last piece which is Dreamtopia, which is gaining more and more distribution if you will from a content perspective in the international and getting traction. So all of it has been really kind of timed around programming and I think that what you're seeing is just the rest of the world catch up to you what was the beginning of the trend in the U.S. and now we see a really complete picture of great global momentum for the brand overall.

Tim, just a little bit of a follow-up too on that; if you look at the numbers we've actually reached pretty nice equilibrium on Barbie now in the third quarter. And it's being frankly driven by a snap ad [ph], both the North America and international. So last year as you know we were kind of out of balance the other way, I think it's come back. And actually the third quarter was pretty much on the number of POS and shipping it both sets of geographies.

Okay, very helpful, thank you. Any comment gentlemen early on here with the American Girl POS and WellieWishers as the first full quarter and then there -- anything very early on here with the Toy [indiscernible]?

Tim, I'll take a stab at this one, Richard can jump in. But it is early days, I think we're feeling very good about the take on Wellie's, that looks like it is helping to build the base. The distribution build has just frankly started through late September and the TRU enfolds. Early reads by the way certainly very positive on both fronts but I think a lot will play out over the coming next couple of months. We start the content with Amazon as you know next week, and I think the distribution will be in full force by this month. So right now a lot of is kind of the buildup but the underlying business seems to have picked up with the addition of WellieWishers.

Okay, okay. And then more so Kevin or whoever wants to take this; as we looked at '17, you've given us some goal that you guys early on are still targeting, that really hasn't changed since the beginning of the year but if we had this sort of parse between gross margin and SG&A, given that you're going to have the Wonder Woman, given that you're going to have Cars 3; would it be fair to say that maybe you'll get little more leverage on SG&A relative to gross margin as we -- if we look at what's really going to be driving 17 operating margins on a year-over-year basis, '17 versus '16?

I think that's fair, I think the increment sales we've talked about that Cars have an incremental $350 million, that will give a scale both on gross margins and SG&A but I think also with regard to the cost cutting, we're going to continue to lean into our supply chain, as well as into SG&A but I think you're -- the conclusion is in ballpark.

Okay. Gentlemen, thank you and congratulations.

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

Hi, thanks for taking my question. For my first question, I apologize if you already said this but I don't remember hearing it; so did you mention what U.S. point of sales was in the quarter? I know you said global.

It should be in the document, isn't it; but I can tell you the North America number sort of -- it excludes the principal stuff, 2%, North America. And down modestly with just the system there.

Okay, thank you. So just speaking on the topic of gross margins and Kevin you kind of gave color and we could have backed in to kind of what you need to see for the first quarter and kind of highlighted that it's challenging. But just given all of those -- given all the inputs, the puts and takes to get to that number for the fourth quarter, take into consideration if there is challenging, I was just wondering how comfortable are you with your full year gross margin outlook? What could go wrong?

Yes, I think with regards to -- we don't control things like Forex and there is a lot of moving pieces like mix but we look at it, we feel pretty confident with regard to the 48.5% target and we are working hard to achieve that and it's difficult to predict but we are working on a lot of the moving pieces including Forex mix and incremental revenues, and we also expect to improve mix from our girl's properties, American Girl, Barbie and Disney for DC Superheroes; there is going to be a smaller impact from the Disney Princess. And then we do see incremental flow-through from our supply chain and other cost saving initiatives.

Okay, that's helpful, thanks. And then just getting to American Girl, I was just trying to understand how the branded -- kind of an apple-to-apple basis so, X WellieWishers and it's the new distribution initiative?

Probably just to modestly better than it has been trending before you put all the incremental stuff in there -- it would be a fair way to think about it Felicia. Some of the Wellie impact -- I mean it's kind of hard to separate out how much is cannibalization but I think that's probably a fair way to look at things.

Okay. And then just finally and I'm sure you're probably going to talk about this more in your Investor Day but I was wondering if you could just give us a road map for the improvement in Monster High. I know it's something that you guys have been working on since the transition but can you just kind of help us understand how to think about that going forward a bit?

Sure, Felicia its Richard. We've been very transparent in our efforts to get this brand back on the right track and as I have mentioned many times, our encouragement is really based on engagement that we see with girls having with the brand and frankly, new consumers coming into the franchise; we have significant web traffic, increasing content viewership and great brand loyalty; despite our POS challenges it still is one of the top fashion doll brands in the world, and we are still trying to find that base business. There are a lot of success stories within that mix of business for Monster High, Mini's are doing very well and some of the new products that we're featuring out is also doing well. There is -- as I mentioned the DVD which is the origin story, there is refreshed packaging and content that is also included this year. We recently announced a partnership with Lady Gaga, we're coming out with a new zombie Gaga and have partnered with her to feature a new character within the Monster High franchise. There is actually going to be a music video associated with that character that will debut on Nickelodeon. There is an increased amount of media associated with that piece of context as well as other forms of new engagement that we are pretty confident on. We are taking our best swings at sort of reviving this business. So when you come out here we'll certainly give you more detail in product and marketing, and hopefully share some continued improved results on the franchise.

Great, that's very helpful, thank you.

Thank you. Our next question comes from the line of Gerrick Johnson with BMO Capital Markets. Your line is now open.

Good afternoon, I have two questions here. First, Forex impact on gross margin in basis points please, if you can provide that? And second, are you gaining share? Is your POS keeping up with overall industry growth? The POS is good but how strong is the industry right now?

Let me take the share one, I'm going to let Kevin take the margin one. If you strip out Disney Princess and look at our base performance, we are -- I would say holding and in some cases gaining share.

And on your second question regarding the gross margin impact of Forex the negative impact of Forex on the year-over-year gross margin rate was about 130 basis points for the quarter which was significantly less than what we saw in the first half of the year.

Great, thank you very much.

Thank you. Our next question comes from the line of Trevor Young with Jefferies.

Hi, thanks for taking my question. Just to expand on an earlier question actually, could you provide some details around when you began to ship into Toys of Russ and Cole for American Girl? Was it kind of midway through the quarter? Was it just strictly September after the press release?

No, it was September and probably the back half of September for most of the setup.

Okay, great. And then shifting to free cash flow; it looks like free cash flow year-to-date hasn't been as strong as last year, primarily driven by working capital. Is that mostly on the AR side of things?

It's a little bit on the AR side as well as the inventory. Inventory is up about $40 million and again, we continue to work on tightly managing important capital and our accounts payable is actually up too. So overall working capital is up but again we've got a plan as we get through the fourth quarter to tightly manage that and hit our $800 million to $1 billion year-end cash targets.

Okay, so kind of performing in line with your expectations so far?

Yes, we're pretty much in line with where we expected to be given that we started the year with $80 million less in cash. We did have a write-down of cash, delayed demand as well due to devaluation, and again all that is on-track to deliver $800 million to $1 billion in cash at year-end.

Great, thanks so much.

Thank you. Our next question comes from the line of Linda Bolton-Weiser with B. Riley. Your line is open.

Thanks. So just to stick on the working capital topic, thinking about next year with your higher earnings that we're expecting for next year; you should have better cash flow unless the higher revenue growth is going to require more working capital investment. And then, so can you just comment on kind just in a very rough way what you generally expect on that? And then secondly, can you think -- talk about how you think about prioritizing share repurchase potentially next year versus dividend increase? Thanks.

Yes, I think with regard to cash flow next year we expect to have cash flow next year that's greater than 2016 as we have incremental revenues and as we approach more normal to operating profits margins, so that should exceed the amount that we have to pay the dividend. And then with respect to prioritizing that excess cash flow on share repurchases or other investments in the business I think again we'll be looking at that at the time we generate the cash and look at what the best alternative is with regard to investing in emerging markets or investing and buying other brands or actually investing in ourselves and buying back our shares. So we'll make that determination when we get to 2017. That said, I think when you look at increasing the dividend I think we're really looking to get back into overtime which we think will grow into it at 50% to 60% dividend payout ratio and get our yield back more in line with the S&P500 consumer goods companies.

Thanks. And then can I ask a few Christmas's ago when you had some of this execution across the company what are the issues? Was that you didn't anticipate shifting to online sales from bricks and mortar and you didn't strategize correctly and you spent too much on bricks and mortar investment. Can you -- I think Richard touched on that but what are the specifics things you've done to make sure that you're prepared for that continued shift to online purchases of toys?

Linda, I'm not quite sure where the comment was that we over invested in brick and mortar but we've been pretty aggressive for the last year and a half here building up our e-commerce capabilities and starting with our own sites, as well as some -- strategic partnerships with major operators out there. We've hired some terrific folks in that arena, we're doing -- I think a stellar job with people like Amazon, with some of the big players in China starting to move around with some of our Omni-channel folks in Europe and places like that. So I think we're actually doing a great job on the e-commerce site to be honest with you and we've continued to invest obviously heavily with our brick and mortar customers on building out the business there, we're working with them on their Omni-channel efforts as well. So I think we are feeling pretty balanced about this at this point and I don't think we're feeling we're under or over investing it at this stage.

Okay, thanks very much.

Thank you. Our next question comes from the line of Michael Swartz with SunTrust.

Good afternoon, guys. I just wanted to follow-up on Monster High, just maybe from -- looking at it from another perspective I guess, I'm sorry, not Monster High, American Girl; and just some of the distribution gains -- I mean, how should we think about just the shape of the year now that you have a part of that business in wholesale going through wholesale and some retail partners. And then secondly, how do you ensure that I guess from a cannibalization standpoint, that you have your fixed cost structure around your -- kind of direct restore model in the right place?

So our expectation as we've said for American Girl would be a rebound on the core business in the fourth quarter. As we've said much of the surgical reworks of the brand and relations architecture and product marketing, and even in store execution services and so forth; really should start to hold in the back six weeks to eight weeks of the year. WellieWishers certainly is a major new introduction on the brand at a price point in particular a fresh aesthetic appealing to a younger girl. We can't necessarily guarantee that there won't be cannibalization, we're studying the brand and its performance very carefully. At this point we're pretty pleased with it and we anticipate that we'll continue to get some traction. As Chris mentioned, a lot of the marketing and new content that we're launching with American Girl is yet to be seen, in fact this week we've got at the sales group, WellieWishers, Melody, the girl of the year character is going to come out of the next week I believe. At the end of November, we have Mary Allen [ph] which is also another character that Amazon is going to be featuring; so we anticipate that in the next couple of months we'll see a nice rebound if you will on the overall franchise. And early days on our brand extension reads but we continue to be pretty excited and pleased not only from a volume perspective but frankly exposing the brand to new audiences and new ways through these partners that have been carefully crafted, strategically with the brand group and our retail partners. So we'll have a lot more to update you on the results of course and perhaps when you're out here we can give you more detail on that in the Analyst Day.

Thanks, Richard. And then maybe for Kevin, it looks like you haven't changed your full-year expectations, I think revenue came in well ahead with most people are looking for. So I mean would that imply that sales in the fourth quarter would be down year-over-year in a sense, is that -- I guess why would that be the case if the momentum behind us -- I guess in the POS side of it [ph]?

Yes, I think when we say this we expect incremental revenues in the fourth quarter, a little bit higher than historically too relative to the third quarter. So that's -- I think what we've stated here couple of times.

Okay, thank you.

Thank you. Our next question comes from the line or Eric Handler with MKM Partners. Your line is open.

Yes, thanks for taking my question, two questions for you. First, can you talk about your licensing business a little bit in the sense of how significant is it at this point? How much growth are we seeing year-over-year and where you -- how high you think you can get with this business? And then secondly, a number of entertainment publications have listed a Barbie movie for May of next year through Sony. And just wondering it's been very quiet in terms of everything other than the script. Wondered if you could get some comments on that?

Okay Eric, I'll take the question and my friends here can fill-in if they wish. From a licensing perspective there is really two components to our licensing business; there is certainly the licensing in business which is the Disney's Universal Nickelodeon's of the world where we make and manufacture and market their toys associated with their properties. And as we've reiterated, that has been a big strategic focus for us to regain relevance in that community, and I think its evidenced by the recent awards if you will of some of those properties mentioned. So we are very, very bullish around our renewed relationships in the entertainment community and then some extending to Microsoft and other forms of partnerships that we're getting really pronounced in; and I would say we're projecting significant growth over the next several years in that space. Then of course there is the licensing outfit which were better known as consumer products where we've -- over the years enjoyed some great business out of our own branding license out. That business frankly is a little bit of a catch-up if you will, so the core Toy business and in particular, the Barbie licensing business which is generally been a pretty large engine for us of great revenue, margin and profit is in catch-up mode. And as we see the brand gain more and more traction and relevance, particular on the core side, we anticipate and see the traction not too far behind on the Barbie licensing front. I will say one of the challenges of course we have had in consumer product is -- has been Monster High, and that's been certainly a challenge for us as well although there are some pretty terrific categories out there that maintain traction, continuity, we're doing a lot more work in that space as well. Generally speaking, again during our time here at Mattel if you could join us, we'll certainly add a lot more color to the consumer product business and the strategies that we have going forward.

Okay. Just as a quick follow-up to that before the Barbie movie question; from what you're seeing this year from Barbie, from Thomas, and the other head entertainment properties -- how much of the growth has been from the consumer products business? It's pretty negligible or is this something that's really starting to grow significantly?

Yes, I think it's really been driven by the Toy business.

Great.

On the last piece which was the Barbie movie question; I think perhaps why you're not hearing anything is because we don't have anything to share as of yet. We continue to work closely with the creative partners at Sony and various other experts in the industry if you will to craft what we believe should be an epic Barbie story. And when we have further information around what that is and when the release date will be for that movie, we will certainly be excited to share that but at this point there is no news.

Thank you.

Operator, I think we probably have time for one last question.

Absolutely. Our last question comes from the line of Drew Crum with Stifel. Your line is open.

Okay, thanks, good afternoon everyone. So Kevin can you remind us how Cars and the theatrical release here impact some of your own vehicle brands like Hot Wheels? And the separately juts a progress update on Brazil, it looks like Latin America was left bad in the third quarter relative to the year-to-date so that function of Brazil getting a little better or is it the steel raw strength that you're seeing in Mexico? Thanks.

Okay, well Drew I'll start the chat and then Chris will -- I mean -- well, do you guys want to take this one or. Okay, sorry the first question is associated with cars. So generally speaking, we see obviously the whole vehicle category driven by a contest filmed like Cars. Hot Wheels in particular has currently great momentum as you know and the extension of that particular franchise using licenses to drive its relevance has been very useful. We've got some great licenses within Hot Wheels that continue to fuel and drive growth that we anticipate will continue to keep that brand and in that world pretty fresh and exciting. Cars really will bring a lot of attention to the vehicle category. Generally speaking, it will grow the entire category itself, it will certainly be the dominant voice in the vehicle category but there is a lot of on rebrand in vehicles; say blaze and the Monster machine from Nickelodeon that addresses our younger audience for vehicles; and certainly we have Hot Wheels and now we'll have cars. So we're really looking at it as a category leader anticipating that the category itself will grow significantly and certainly cars will be the leader of the trend.

Drew, let me quickly just hit on you question on Latin America, it's really kind of a combined story. Brazil has gotten a little better, and obviously the foreign exchange has improved which has helped some of our programs, made it stronger at this point. So Brazil is doing a bit better but still challenged but the rest of the southern cone and Mexico are performing extremely well. So given the scale they are more than compensating for any of the weakness we still have in Brazil but essentially all elements are looking better than they did.

Okay, great. Thanks guys.

Thank you. This concludes today's Q&A session. I would now like to turn the call back to Martin Gilkes for any closing remarks.

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