Drew Vollero - Senior Vice President, Investor Relations and Corporate Strategy Bryan Stockton - Chief Executive Officer and Director Kevin Farr - Chief Financial Officer.

Steph Wissink - Piper Jaffray Felicia Hendrix - Barclays Greg Badishkanian - Citigroup Drew Crum - Stifel Gerrick Johnson - BMO Capital Markets Sean McGowan - Needham & Company Tim Conder - Wells Fargo Securities Linda Bolton Weiser - B. Riley Eric Handler - MKM Partners Mike Swartz - SunTrust Jaime Katz - Morningstar.

Good day, ladies and gentlemen, and welcome to Mattel's second quarter 2014 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's conference call to Mr. Drew Vollero, Senior Vice President of Corporate Strategy and Investor Relations. You may begin, sir..

Thank you, Kevin. As you know, this morning we reported Mattel's 2014 second quarter financial results. We've provided you with the slide presentation to help guide our discussion today.

The slide presentation and the information required by Regulation G regarding non-GAAP financial measures is available on the Investors section of our corporate website, corporate.mattel.com.

In a few minutes, Bryan Stockton, Mattel's Chairman and CEO; and Kevin Farr, Mattel's CFO, will provide comments on results, and then the call will be open for your questions. Certain statements made during the call may include forward-looking statements relating to the future performance of our overall business, our brands and our product lines.

These statements are based on currently available information, and they're subject to a number of significant risks and uncertainties, which could cause our actual results to differ materially from those projected in the forward-looking statements.

We described some of these uncertainties in the Risk Factor section of our 2013 Annual Report on Form 10-K and our 2014 quarterly reports on Forms 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'd like to turn the call over to Bryan..

The Origin of Awesome and another strong fall DVD released for Thomas and Friends called, Tale of the Brave. To maximize the effectiveness of these new innovations, we're working to optimize our media strategy across the globe. We now have a roadmap to follow with our spending mix model.

We have shifted spending to later in the year, to give us more flexibility and funds in the holiday season, aligning our spending with where and when the consumer shop. We'll continue to work closely with all of our retail partners and look to leverage trade spending.

And we'll also look to invest additional moneys to drive consumer engagement on core brands and Monster High on proven platforms like digital search, content and live events, just to name a few.

So as we look to the third quarter, we see continued challenges from some of the current headwinds, including steep shipping comparisons for Monster High, pockets of high retail inventory in certain international markets and shifting of advertising and trade spend into the fourth quarter, as we align with the evolving consumer behavior.

As we move forward, the organization is keenly focused on executing the fall season. We'll make the right decisions and manage the business appropriately, with the goal of ending this year with positive POS momentum and lower inventory, so we can enter 2015 with momentum to drive topline and bottomline results.

We continue to focus on our commitment to grow with financial discipline, our commitment to our capital deployment and investment framework, and our commitment to deliver our total shareholder return objectives. Thank you for your time today and your continued interest in Mattel. And now I'd like to introduce Kevin Farr, our Chief Financial Officer.

Kevin..

first, the acquisition was completed in April, so Mattel's results will only include eight months of revenue from MEGA Brands in 2014; second, we expect lower international sales due to transition of many distributor markets to Mattel subsidiaries; and third, we expect to divest selective non-strategic lower margin product lines in the arts and crafts category.

On Page 6, we highlight the performance of our North American region. Overall sales for the region were down 8% for the quarter and down 5% year-to-date. Our international business as seen on Page 7 was down 9% for the quarter and down 8% year-to-date. We continue to be encouraged by strength in emerging markets in Russia and China.

Softness in our core brands and some pockets of high retail inventory continue to impact our sales in Europe and Latin America. And softness in Australia and India impacted overall results in our Asia-Pacific region. Now, let's review the P&L starting on Page 8 of the slide presentation.

For the quarter, gross margin was 46.4%, down 490 basis points from last year's record of 51.3%. About half or 240 basis points is due to MEGA Brands, which includes an 80 basis points or $8 million acquisition-related fair value inventory adjustment that should wind down by the end of the third quarter.

Excluding MEGA, our gross margin in the quarter declined by 250 basis points. A little less than half of that decline was related to impact of lower volumes on our fixed cost manufacturing base. About a quarter of the decline related to our efforts to cleanup inventories.

And the balance of the decrease primarily related to changes in mix, mostly due to our gross portfolio.

For the most part, the increase in our product cost will be consistent with our expectations and we continue to expect to offset inflationary pressures with our price and actions that were effective January 1, 2014, and savings from our OE 3.0 program. On a year-to-date basis, gross margins are down 420 basis points to 48.5%.

About a-third or 130 basis points for the year-to-date decline is due to MEGA Brands, with 40 basis points or $8 million related to the fair market value inventory adjustment.

Excluding MEGA, gross margins year-to-date declined by 290 basis points, a little less than half of the decline in the first half was related to our efforts to clean up inventories.

About a-quarter declined was related to impact to lower volumes on our fixed cost manufacturing base, and the balance of the decrease primarily related to changes in mix mostly due our Girls portfolio.

We continue to estimate that the overall negative impact of MEGA Brands, excluding the inventory fair value adjustments, which should wind down in Q3, our Mattel's gross incomes will be roughly 100 basis points. As seen on Page 9, selling, general and administrative expenses for the quarter were flat and up only $15 million year-to-date.

Our commitment to manage cost is evident in our SG&A results, where we balanced our investments to fund strategic growth initiatives with ongoing cost to run the business.

Spending in the quarter include $16 million of MEGA Brands acquisition, integration and amortization cost, which are partially offset by the absence of last year's asset impairment charge of $14 million.

For the full year, our objective, excluding MEGA Brands, remains a modest increase in SG&A, including severance and ongoing strategic growth investments. Page 10 of the presentation summarize the performance of our ongoing OE 3.0 program. For the quarter, we delivered incremental Operating Excellence 3.0 gross savings of $25 million.

And we're on track to deliver our full year target of around $115 million in gross savings and our two-year target of cumulative gross sustainable savings of $175 million. Turning to Page 11, operating income in the first quarter was $1 million and $7 million year-to-date.

The decrease in the quarter was driven primarily by lower sales and gross margins, and the cost associated with the acquisition and integration of MEGA Brands. Turning to page 12, our earnings per share for the quarter were $0.08, a decrease of $0.13 compared to the prior year second quarter.

The decrease in EPS was driven by lower operating income, including the cost associated with the MEGA Brand acquisition, partially offset by lower non-operating expenses, lower tax expense including $0.11 benefit from discrete tax items and a reduction in share count.

For the full year, excluding discrete tax items, we expected our income tax rate will be approximately 21% to 22%, assuming no changes to the current tax laws.

Page 13 outlines the costs related to the MEGA Brands acquisition, including the estimated acquisition, integration and amortization expenses, which impact SG&A as well as the inventory fair value adjustment, which impacts gross margins.

We've highlight both the actual cost incurred in the quarter and the estimated annual cost Mattel expects to incur in 2014. For the quarter, these expenses totaled $24 million and we expect these expenses to be between $85 million and $95 million for the year.

The acquisition and integration expense is $11 million, our primary cash cost, include such things as banker, legal and consulting fees. For the year, currently, we expect these expenses to be about $45 million to $55 million.

We also incurred a couple of charges in the quarter related to accounting rules that require that the opening balance sheets state assets at their fair market value. About $5 million in non-cash expense is related to amortization of intangibles and inventory fair value adjustments of $8 million.

For the year, currently, we would expect these non-cash expenses to be about $25 million amortization of intangibles and about $15 million related to the inventory fair value adjustments.

The impact to the inventory fair value adjustments should wind down by the end of the third quarter, but the non-cash amortization costs and some integration costs are expected to continue in 2015 and beyond. We discussed cash flow on Page 14. Year-to-date cash flow used for operations was $79 million compared to $286 million last year.

The decrease is primarily due to changes in working capital. Cash flow used for investing activities increased to $525 million, due to the acquisition of MEGA Brands. We also issued $500 million of additional debt in the second quarter and repurchase 2.6 million shares of stock for a total of $100 million.

In June we paid out our quarterly dividend of $0.38 per share at a total cost of $129 million. Our cash on hand was $518 million, down from $823 million last year. In closing, while we will continue to work through our current headwinds, we remain focused on execution in the all-important holiday season.

Our goal is to enter 2015 with brand momentum to drive topline and bottomline growth. Specifically, our objective is to end the year with POS momentum in our brands and lower retail at Mattel-owned inventory.

Moving forward, we remain committed to growing our business consistently, growing it profitably and deploying the cash generated in value enhancing ways to reward our shareholders. This concludes my review of the financial results. Now, we'd like to open the call to questions.

Operator?.

(Operator Instructions) Our first question comes from Steph Wissink with Piper Jaffray..

Bryan, just one clarification for you, I think you mentioned that POS improved from the first quarter.

Could you help us neutralize the effect of that Easter shift from March to April, is POS still sequentially improved, if you net out that Easter shift? And then Kevin, one for you, on the gross margin, I think you mentioned 48.5% year-to-date with the near-term objective still on that low-to-mid 50s range, it does imply a pretty substantial acceleration with the second half.

So could you give us some of the drivers that you see in that gross or product margin line that we should be thinking about for the second half?.

If I take Easter out, it's the same answer. So in other words, the POS will look even better, if we didn't adjust for Easter in the second quarter. So it's adjusted for last year and this year's timing. So I think that's one reason why we feel pretty positive about our progress and why it's better than Q4 last year and Q1 this year.

Kevin?.

And then with respect to your question on gross margin, with respect to gross margin, our near-term objective continues to be delivering gross margins in the low-to-mid 50s range. And when I say near-term, I mean the next couple of years or so.

As you know, we don't give guidance, our second quarter gross margin declined by 490 basis points to 46.4% versus 51.3% in 2013. And about half of that as I said or 240 basis points is due to MEGA Brands, which includes an 80 basis point acquisition-related fair market value charge that should go away by the end of Q3.

When you look at Mattel's underlying business, excluding MEGA, our gross margin in the quarter declined by 250 basis points and the things that drove that were a little less, and half of the decline was related to the impact of lower volumes on our fixed cost manufacturing base, about a-fourth of the increase is related to our efforts to cleanup inventories and the balance of decline is primarily to change the mix, mostly due to our Girls portfolio and performance.

Consistent with prior quarters, input and labor cost increase remain headwinds, but we've offset tailwinds with pricing in our OE 3.0 program.

As we look forward to the second half of 2014, predicting our gross margin is very challenging due to the complexity of all of the moving pieces, including volatility of market-based cost like input cost and foreign exchange. However, I'll provide a few comments regarding the items that impacted our first half gross margins.

First, in the near-term MEGA has a lower gross margin, which will continue to have a negative impact for the balance of the year, including a $7 million acquisition-related fair market value inventory adjustment yet to come.

Second, excluding MEGA, the change in mix continue to be a headwind and gross margins going forward, and we continue to see current POS trends in Girls portfolio with respect to Barbie and Monster High. Third, the impact of efforts to cleanup inventory should be less of an issue going forward.

And fourth, the impact of lower volumes depends upon your assumption regarding sales for the balance of the year. And finally, we do have some tailwinds in OE 3.0 cost savings, primarily the packaging initiative, and we continue to work on manufacturing efficiency programs, which I said should be a tailwind in the second half..

Our next question comes from Felicia Hendrix with Barclays..

Can we just quickly, one quick question, for the Mattel-owned inventory that you cited in your release and your deck, the $100 million.

How much of that is left for the remainder of the year?.

Again, as we ended the year with about $100 million more of inventory than the prior year, and when you look at the end of June, if you exclude MEGA, inventory were essentially down about $100 million. The actual number is about $98 million.

So we're flat with the prior year with regard to Mattel-owned inventory, so most of the issue with regard to Mattel-owned inventory is behind us, as we exit the second quarter..

So that gives you kind of a clear slate heading into the second half..

Yes. I think that's a fair conclusion..

And then, Bryan, just a bigger picture question for you. When addressing the slowing revenues, you've discussed several times now, the need to make additional advertising and marketing investments, and so better align that with the consumer.

And I'm just wondering in your view, and if maybe you can give us some more color, what you're hearing from the retailers, how much is of the slowing revenues at certain lines, particularly in Barbie, is due to marketing versus innovation? So just wondering that? And then just wondering also what you're doing internally, so that you could have your finger more in the pulse of what the consumer wants?.

That's a great question, and I'll try to keep the answers brief as I can. I could speak for hours on that. Let's first start with how we're thinking about advertising and supporting our brands. We know that innovation is key to the success in this business and we also know that spending the right amount of advertising in trade is important.

So as we think about the year, we've spend a lot of time thinking about what happened last year. Recall last year we said, a number of the promotions that historically worked, did not worked to the degree that they had before. That's why we decided to launch this initiative to look at our spending mix with a very sophisticated model.

That's given us some good insights into what we would say is the ever evolving consumer path to purchase with both online and brick and mortar opportunities to buy. And we took the insights from that and we started validating the results that we got from that study in the second quarter.

And I would say that the validation was a success, and as a result of that, and again remember this is all done on Barbie, we're doing a couple of things. Number one, it gave us the confidence to reinstate the advertising that we had decided to cut earlier in the year, so we're adding more advertising back into the plan for the second half.

We think that's important. And we're going to continue to look at opportunities to do even more of that, in our brands like Fisher-Price and Monster High. And the reason we feel good about it is, one, the validation; and two, we know this model is telling us where to do it and when to do it.

And so that's why we're shifting even more money into the fourth quarter, where we think it will be more effective. So I'll start with, I think we're a lot smarter about our spending than we were last year and we feel pretty confident about that.

And that's why you'll continue to hear us talk about, we're going to spend more than we have planned this year, we think that's a good thing. And because of the, I would say, the more immediate nature of the way that we're doing this testing, we can learn quickly and modify our spending up and down as needed.

In terms of innovation, I'd say, I think we've got some pretty great things going on. I mentioned in my comments, the Barbie Fashion Design Maker, Disney's Fire and Rescue, Planes was a huge success last year. We think it's going to be solid again this year.

It's way too early to make any calls on BOOMco, but BOOMco is getting some pretty positive reviews, if you look on online for reviews on it. We talked about the Hot Wheels Street Hawk. I talked about that fact that we're excited for the first time in our company's history over Star Wars movie and Star Wars with our Hot Wheels license.

And on Fisher-Price, we talked a lot about Fisher-Price, about the communication and innovation. And we showed you the Imaginext Rover last year. We're getting good pick retail with that. And the Smart Stages with Laugh and Learn. So I think we've got some good products.

But I tell you with the organization changes that we put in place, is we're really trying to create a culture of innovation. Geoff Massingberd is a great leader and he is going to do a wonderful job at MEGA Brands to integrate them into Mattel and drive growth there.

I tell you one of the reasons I am excited about Tim taking on the international assignment is Tim is great at connecting brands and countries. And that's really I think the next phase of growth force in the internationals to make that connection and I think that will give us more insights as to what we need and we've had some successes.

The Soothe & Sleep Seahorse is one success and we want to replicate more things like that. That's by the way, the Soothe & Sleep Seahorse in China. And then lastly, I'm thrilled that Richard is coming back. He has got a great history. You all know the success he had in driving the success of Barbie.

And Richard I think is going to drive a culture of innovation and competitiveness, what I think is appropriate for us. So there is a lot going on. But I'd say, we're smarter in spending. We think we've got innovative products and we're creating a culture of innovation..

And next question comes from the Greg Badishkanian with Citigroup..

Just on MEGA Brand.

This $0.06 impact is that all inclusive? Or were there some inefficiencies or extra costs that were not included in that? And then the second part is just, for MEGA Brands, what do you think the topline, when we start to see the topline synergies, because I think those could be pretty significant, but obviously it's going to take time for you to be able to implement some of your marketing and advertising strategies for them?.

I'll cover the first one with regard to $0.06 charge. It really relates to the charges that you see on the slide and those are integration and acquisition expenses. They are the amortization expense and they are the fair market value inventory charge..

And was there anything else, do you think that maybe impacted results or is that pretty all inclusive..

No, I just think it was just, what's included is really the operation, the ongoing operations that is the normal operations for the quarter..

And then synergies?.

I think with regard to sales synergies, I think this year a lot of the opportunities with regard to sales synergies of putting our brands on their platform, we won't see that this year. As well as we're moving through, as I said integration of their international distributors in Mattel, that's probably going to happen early 2015.

So from a synergies perspective, topline, more to come next year, I think from a bottomline perspective, we'll see a little bit of synergies in the back half of the year with regard to SG&A, but more of that will also come on line in 2015 as we incorporate them in our full year results.

But the real synergies here is growing their brands globally, on their platform, as well as putting our brands on their platform and participating in the great category of Arts & Crafts and in Construction.

But we are moving quickly to integrate, given the opportunity here to grow this business on a global basis as well as the competitive nature of these categories..

Our next question comes from Drew Crum with Stifel..

So Bryan, I want to ask about the fashion doll business, and Disney Princess, specifically.

How are you guys viewing Frozen in the back half of the year, once you lap this, around the theatrical release from a year ago? Do you see it as a tailwind still? And do you think that the success of Frozen in anyway is having any impact on Barbie and Monster High? And then, the related question is, where are you with respect to renewing the Disney Princess license?.

So Bryan, I want to ask about the fashion doll business, and Disney Princess, specifically.

How are you guys viewing Frozen in the back half of the year, once you lap this, around the theatrical release from a year ago? Do you see it as a tailwind still? And do you think that the success of Frozen in anyway is having any impact on Barbie and Monster High? And then, the related question is, where are you with respect to renewing the Disney Princess license?.

Sure. Well, I love to talk about our doll portfolio, because we have brands number one, two, three, four and five in the U.S. and one, two, three, four, six in the international, so we like that. Frozen is a huge success. We are thrilled to partner with Disney on that.

And as you can imagine, part of the success with this movie is the fact that the age segmentation is actually a little different. Usually a Disney Princess movie is kind of the younger girl in that three to five age range. Frozen has got broad appeal and the demographics of Frozen look a lot more like Barbie.

So as I look at the success of Frozen, is it having an impact on our Monster High and Barbie, as we always say, it's very difficult to say.

You can certainly imagine as popular as Frozen is that there is some Monster High girls and some Barbie girls who would want to play with Frozen dolls and we think that's great, because we've got the portfolio for it. So that's difficult to say. Frozen is continuing to grow. We're working very hard to literally chase demand on this.

It gets greater and greater every week. So we're working very hard in Asia to produce what we need to satisfy the demand.

But what I'll tell you is this is a portfolio, and one of the things that happens with our doll portfolio, I'm sure like some of your own portfolios, is every year there is some brands that perform a little better than expected, some brands that perform a little less than expected.

And as things continue to evolve with Frozen, we have other things on our portfolio that we feel good about. Ever After High, we talked about that being a solid single. That's continuing to pickup momentum, particularly as we expand in new markets.

When I talk about Barbie POS, it's not positive yet, but I can tell you that we're feeling pretty good about the momentum that we're seeing in Barbie and the improvements. And there is a lot of good stuff going on with Barbie, for the fall. Again, we like this Fashion Design Maker a lot. American Girl, Girl of the Year is doing quite well.

These two shop-in-shops and Indigo stores in Canada are doing quite well and piquing our interest on what else we could be doing in Canada. So this portfolio is always moving around. The key for us is to keep driving POS growth for the portfolio. We did that in the second quarter.

We had solid selling high single-digit POS growth for the overall doll portfolio. So we like that a lot..

And just following-up on the Disney Frozen question with regard back-half comps, really when you look at last year, it was only launched domestically, international was really Q1. We've been chasing demand, so we'd expect that in the back half of the year, we'll have the benefit, the fact that the brand is hot and it is global now.

With regard to your question on licensing on the Disney Princess's, licensing generally are short-term, a few years, they come up every few years and really we don't get into the details about renewals on licenses..

Our next question comes from Gerrick Johnson with BMO Capital Markets..

I want to ask a little bit more about American Girl, up about I think it was $5 million in the quarter. How much of that is incremental from Canada? And then also American Girl has the biggest direct impact from the Easter shift with school vacations shifting into April.

So how should we look at American Girl, if we adjust for that Easter and what would that look like?.

I want to ask a little bit more about American Girl, up about I think it was $5 million in the quarter. How much of that is incremental from Canada? And then also American Girl has the biggest direct impact from the Easter shift with school vacations shifting into April.

So how should we look at American Girl, if we adjust for that Easter and what would that look like?.

Well, I'm not going to get into details on American Girl in terms of some of the things that you're asking about there. But what I would tell you is that, as it relates to Easter, American Girl is all like the rest of Mattel business, if you adjust for Easter, POS is strong and we like where we are.

Canada is a success, but these are small-ish shop-in-shops. So I don't want to get into the detail of how much that is. I'll tell you American Girl, the secret has been, great product, great marketing, store expansion, and because of our success in Canada, as I said, we're evaluating other opportunities in Canada.

We have talked about international for a couple of years on American Girl, and it gives us I think some confidence that maybe we should get a little more serious about thinking about some other countries. Like Canada is a more natural first step, obviously for language and cultural reasons.

But we like where American Girl is and they've been proven performer over the past few years..

Yes. Again, on a comp basis, I think year-to-date it's up mid single-digit. The Girl of the Year is very strong. We're re-launching the flagship historical dolls in last half of the year. We also have two new stores coming. So we've got a lot of momentum and we've had a lot of momentum around American Girl over the last few years..

And Kevin, maybe some comments on payout ratio and the target there? What level you're comfortable with? I have a feeling this is going to be a topic. I'm going to be fielding a few questions on over the course of next couple of days. So maybe you can help me out on that one..

And Kevin, maybe some comments on payout ratio and the target there? What level you're comfortable with? I have a feeling this is going to be a topic. I'm going to be fielding a few questions on over the course of next couple of days. So maybe you can help me out on that one..

We've had this long standing capital investment framework. We've had ended 2013 with a strong balance sheet. And we're at the high end of our $1 billion and our 33% total capital. We do as you indicated, prioritize dividend as a key metric in delivering total TSRs of top-third to top-quartile. Our payout ratio is between 50% to 60%.

And we also target a dividend yield comparable with top-quartile. And at this point in time, our payout ratio is based upon last year's 6%, dividend increase was about 58%. So we still have room to grow there. And this business due to its portfolio of brands, its portfolio of markets and portfolio of customers delivered strong and consistent cash flow.

And we have an opportunity to continue to deploy capital consistent with the investment framework. And so far this year, we've also repurchased 3.3 million of shares for $128 million, with the average price of $38.39. And we've also bought MEGA for $423 million..

The next question comes from Sean McGowan with Needham & Company..

A couple of questions here. The Fisher-Price Brand, would you say that that your performance is significantly below that overall category or do you think the whole category is seeing similar headwinds? And then I have a couple of quick ones on MEGA Brands..

Sure. Well, let me get started here, Sean. I would tell you that we're encouraged by some of the early progress we're seeing on Fisher-Price and I know we've talked about this for a couple of years, and all of us were disappointed that we haven't made more progress on it. What gives me, I think more confidence, is what we're seeing in Baby Gear.

We showed you some of the innovation in New York in February. That's been in the market, the market is responding, we have more innovation coming. And then we've always said on Fisher-Price that if we can get the branding and the innovation right, it works. And this is I think the broadest evidence that that works.

And so our team in both New York with Friends and in Buffalo with the core business are working very hard to try to bring more innovation in what's going on. As I think about the category, the category is continuing to do okay in some preschool. We always get a question, gee, is there something going on with tablets.

Tablets is not impacting Fisher-Price. The tablet business is actually down I think, the last time I looked at NPD data. So it's not any new thing like that. We need more innovation. We need to get the positioning out there. I mentioned the digital ads, I don't know if you've seen them, but they are very, very good. We're getting good response to it.

I'll also tell you, in my comments, I talked about international. International is still the number one growth opportunity for Fisher-Price. And with our new global brand team structure, we are doing a lot more work in local markets, like China, like in Eastern Europe, like in Brazil, for example, to really get the product lines right.

And you see it on the Core, you see it on Thomas, our Thomas business is good. The POS is up. A part of it is wood. A part of it is the better execution that we talked about, for example with content placement.

And the other part is we've got what we call the emerging consumer line in places like China, where we really worked hard with local management to try to come up with the right combination of benefits and pricing to get the brands launch. So we're still optimistic. It's been a longer road than any of us would like, but I think we're making progress..

And then a couple of quick things on MEGA Brands.

First, should we assume that this is all the level of detail that we're going to get in terms of how the two main categories go? And second, can you flush out a little bit more of your comments on distribution agreements? So are you just assuming that you're not going to be shipping to the existing distributors, because you know you're picking on winding those agreements or if they decided they're not carrying the line anymore?.

So let me start with the second part of your question, and I'll let Kevin do the first. We've done enough of these acquisitions over time to understand what happens with the distributor network. They've done a terrific job for MEGA, as they have with some of our other acquisitions.

It takes time to unwind these and get these businesses folded into the Mattel business system. Some things happen quickly, some things take a little longer than we like, but the whole push is to try to get these integrated as quickly as we can, because we know we have this fantastic global footprint with our international business, and our U.S.

business and the sooner we can get them in, the sooner we can grow this business.

You want to take the first part, Kevin?.

Yes. And just to add to the distributor, only [ph] 32% of their businesses is international. So we see this as a big opportunity. And we, as I said earlier, want to move through this as quickly as possible.

It's a case-by-case business, I think impacting sales it's more from the distributor perspective, they are concerned about being left with inventory. So as I said, it's a case-by-case activity, and each of our local markets is working through it as quickly as we can.

With regard to reporting, we have added new revenue line that details out Construction and Arts & Crafts. We'll be reporting that on a regular basis. And again, I think the opportunity is to grow this brand globally, so you'll see that and be able to track that.

And then obviously, you see the impact of the 100 basis points that we think in the future, excluding these fair market value adjustments have on our gross margins. This is a great category with great profitability profile.

And as we look forward, we should expect that we should be able to improve our gross margins and operating margins under this business by applying our manufacturing capabilities and our global scale and procurement, as well as continuing to leverage Mattel's global infrastructure to drive more profitability business.

And when we look at the profitability in this category, particularly Construction, we like the bottomline profitability. And we'd like to move MEGA more in line with that over time, and make it a strong number two player in the construction and a bigger player in arts and crafts..

But will you be sharing with us within that line, how much construction is up or down? The way you do with some of the other brands, within a bigger category, but you called out an individual brand?.

Certainly from a revenue perspective, as far as the detail below revenues..

No.

I mean like within that line, that you're putting in one of the line, Construction and Arts & Crafts, would you say, construction was up X or down X or is it only going to be that one line?.

I think as dictated, it depends upon what the results are to the extent that its material, and that we think you know it, we'll disclose it. So I think we'll use our judgment. But again, I think we try to be pretty transparent in what's moving and that would include within the construction category and the arts and crafts category..

Our next question comes from Tim Conder with Wells Fargo Securities..

Let me start with a couple of clarification questions.

Kevin you were talking about the inventories earlier, what are the total inventories here? You reported $885 million on the company level, what are those x MEGA, I guess, this is the first question on clarity? And then, Bryan, the second clarity question would be, was second quarter international POS down or was it up also? You said on a year-to-date basis international POS was up..

Let me cover the first one. I think what I've said is that if you exclude MEGA, we're essentially flat with last year. And if you do the math, that's about $87 million of MEGA inventory that was added to our second quarter results..

And then regarding POS, what I've said is that the U.S. was down slightly and international was up. So we are feeling good about some of the momentum we've got in international..

During the second quarter, specifically?.

Yes. And recall also in international, Easter is not a big gift giving holiday, so there is less Easter impact in international than you would see, for example, in the U.S..

And then MEGA, just to kind of continue on the prior question a little bit. Kevin, would you anticipate the growth in operating margins on MEGA approaching Mattel corporate here.

Again, you had said over implying the way I would take it, '15, '16, probably somewhere in that area, '16 area, but is that a fair directional way to go with it?.

Well, again, I don't think we would give guidance with regard to MEGA. I look at the category dynamics, and if you look at the construction category dynamics as a leading player. It's a quite profitable business. We do see a great opportunity to grow MEGA's business and also improve the profitability.

I think part of that is growing it and getting scale. I think second is putting our brands on their platform and getting the premiums from our brands to hit the gross margin line. We do intend to put more advertising behind it to create consumer demand. And then this would basically be leveraging our existing scale.

So therefore, we think there's a big opportunity over time through innovation, our brands, global scale, and continuing to working on the manufacturing efficiencies and automation with respect to their global manufacturing operations. So there is plenty of opportunities to improve the profitability of MEGA..

And then lastly, in Monster High, the rolling-over is that faster than expected? And again, saturation, Frozen, the factors, the comparables obviously are difficult, but any other factors that are maybe popping up that you had not anticipated?.

Well, the way we think about Monster High is it's still a very large brand. It's the second largest brand in the fashion doll business. It's got broad appeal. It's got a lot of depth of engagement from a girl's stand point. We know that this is a brand that response to innovation and stories.

I think the Monster makers, one of the most innovative products that we've in a while. As I mentioned, there is a lot of competitive activity out there that might be impacting Monster High. I'll tell you we have our eye on it, because as you recall on the fourth quarter last year POS at Monster High was strong double-digit.

Softened a bit in the first quarter and POS performance this year has really kind of caught our, in this quarter – I'm sorry, it's really kind of caught our attention, so we're paying a lot of attention to it. But I'll also tell you that we're doing a lot of things to support Monster High. I've talked about some of the product.

We've get more characters to coming up, more content, I talked about the fall DVD. I also mentioned that as a part of our spending mix model work, we are going to spend more on advertising and trade on Monster High in the back half, as we are with Barbie and the rest of our doll portfolio, because we know how important that is.

So I think the challenge for us is we've had a great ride on Monster High. We're thinking about how we shift this brand from what was a high-growth brand to an evergreen brand, where it will still have growth, but perhaps at lower levels.

So we have our work cut out for us on this one, but I would just say we're being mindful about the current situation keeping our eye on it. We're not jumping to any conclusions, but we're really trying to understand what's going on.

And we should have the capabilities to do that again, since we had brands number one, two, three, four and five in the U.S..

Our next question comes from Linda Bolton Weiser with B. Riley..

Sorry if you've talked about this, but I was just curious if you had said if Frozen dolls are cannibalizing just your regular Disney Princess line at POS? And then was your Disney Princess sales up or down in the quarter? And then secondly, just curious about Richard Dickson coming back to the company, and I seem to recall that before, when he was instrumental in helping grow Barbie, that he had a more narrow focus in his management responsibilities where this time it seems like he has a much broader responsibility.

So I am just wondering, how quickly we can expect some of these key fashion doll brands to turn around.

I know you don't want to give projections, but would we expect Barbie to start to grow again next year or are you getting any early reads from him that it might be a longer fix in terms of brand strategy?.

Well, let me start with Disney Princess. It's always been a solid and important part of our portfolio. And as I mentioned in my comments, Frozen is doing quite well. There is a lot of competition as I said in our portfolio because we have brands one, two, three, four and five in the U.S. or one, two, three, four, six in Europe.

There is a lot of movement around, and so it's very difficult to determine what the impact is. Our job is to continue to grow the overall doll portfolio and keep it all pushing forward. So that's the hard one, but we're thrilled to have Frozen, we're thrilled to be a great partner with Disney and look forward to continuing that partnership.

As it relates to Richard, as I recall in a meeting with you back in February, you were asking who that fellow was and would we ever consider bringing him back, and we listened to you, and just so he is back.

But no, Richard was running Barbie at the time when he was with us a few years ago, he did a terrific job, went out to Jones as you know, and did a terrific job there. We have always thought highly of Richard and we're thrilled when he was interested in company back.

And so what his job is today is he is really trying to run the strategies for our Girls portfolio, our Boys portfolio and Fisher-Price. And so you can imagine as a strong brand leader, Richard is looking across the entire portfolio. He also knows, as we all do, that the Girls portfolio is one of our most important portfolio.

So he is taking a look at that. So I'm not going to give any crystal ball looks into what Richard is thinking, but I can tell you he is engaged, he is been here I think about three weeks. Tim is fully engaged in international now, which I think is terrific, so we can get a stronger bridge between the brands and the countries.

So I think in terms of leadership, this is a really great leadership that's going to drive innovation and more growth..

Our next question comes from Eric Handler with MKM Partners..

Two quick questions for you. First, when you look at the Fisher-Price business particularly, Friends. A year ago, Thomas was doing really well, and you say, Thomas continues to do very well. Licenses were very strong.

You had added Jake and the Never Land Pirates, and I think there was couple of other licenses that you added, Mike the Knight -- well, Mike the Knight is not a license, but you had some other licenses, I think they are quiet doing well. And now we're seeing very weak shipping, I guess for that Friends business.

Can you talk about some of the dynamics going on within the Friends business? And then secondly, you talked about a number of categories are showing improvement in POS.

Can you just sort of help us reconcile that with some of the NPD data? And are you keeping in line with NPD in most of those categories?.

Into the City! Dora is a really important of the Nickelodeon portfolio. And this is we think great, Nickelodeon is going to put a lot of emphasis behind it. It's Dora and Friends, and since we're pretty in the doll business, any time there is a star like Dora or Barbie and there's friends involved, that's always good for business.

So we think that's good. Julius Jr. is something else. It's been a great show on the Nick. And we're going to be launching that in the fall. So that's a portfolio that has some ebbs and flows to it, driven a lot by the quality of the entertainment. So we think we've got a couple of interesting properties in the fall.

Now, as it relates to POS, we look at POS in a number of ways, we look at POS in terms of dollars, we look at POS in terms of units. And what I would tell you is that both measures are important. We're seeing progress on all fronts. And I think what's encouraging to us is that when we look at our POS relative to shipments, POS is outpacing shipments.

And we like that a lot. That I think reflects a lot of the hard work we put into clearing out inventories at retail. And the key to this for us is to make sure that when the stores convert to fall, both in the U.S. and the international, we've got clean inventory, the shelves are filled with all the great products we've got planned for the second half.

So we like where we are in POS. And we're looking forward to the fall..

Our next question comes from Mike Swartz with SunTrust..

Just wanted to touch on gross margin and some of the commentary around. I understand that you don't give annual guidance, but your expectations of low-to-mid 50% gross margin.

Can you just clarify, I guess what's your expectations in the near-term is in terms of product mix?.

Well again, I think with regard to the product mix, I told you about the tailwinds, which were Frozen and Ever After High and American Girl. And I think we've got headwinds with regard to the Barbie, which have been getting a little bit better from a POS perspective.

And then Monster High, we've seen that go from a tailwind in 2013 to what it's looking like in the second quarter, a headwind, which could impact our sales and our margins in the second half. But as Bryan said, we are working very hard in putting our effort behind Monster High. We intend to advertise more.

We've got innovative product line for the back half of the year. And we're working very hard to turn this brand into an evergreen brand. And we still have a lot of consumer engagement around it and a lot of great things happening at retail this fall with regard to Monster High..

But is it fair to say that we shouldn't see wholesale trailing POS by such as wide of a gap in the back half of the year?.

Again, we're not going to give you guidance on what we think is going to happen with POS in the second half of year..

And then just with kind of, broader general question, just in terms of how retailers are looking at if the holidays, and understanding we're still in July, but as they get ready to reset their shelves in about a month or so, I mean, are they allocating more or less space to the just broader toy category overall?.

Well, I would say the retailers still know the toys are important part of the holiday mix to attract customers into the store. We think that's important. As I think about our broad global customer base, I haven't heard of anybody doing some significant cut in space for toys.

I think what's also important as in a real shift is what's going on with online, because there is a lot fewer constraints in terms of SKUs carried and inventories and things that are online. So we're working very hard. Recall, last year on average about 15% of toy sales were online. You might expect that's likely to grow this year.

So I think we're well-positioned as an industry and the industry is growing. I think Mattel is well-positioned with the initiatives that we have in place. And we're looking forward to partnering with all of our retailers around the world to deliver a solid '14 and get ourselves ready for an even better '15..

Yes. So brick and mortar, I think overall we think there is not any change in shelf space. I do think if you look at year-to-date results for the toy industry, it's holding up pretty well, it's actually up low-single digits. So from that perspective, we don't see a change or headwinds there.

We do see opportunities in the online area, as both brick and mortar retailers, and obviously pure eRetailers emphasize toys, and the trend has been, that's been a growing trend, as Bryan has said..

Our next question comes from Jaime Katz with Morningstar..

I know you guys talked a little bit about how international is still really important, but could you talk about maybe what areas underperformed and how you feel you can better connect with those geographies going forward?.

I would say, I think we feel pretty well-connected in international. International is facing the same kind of challenges that we talked about on the U.S. pockets of inventory that we had to work through. Monster High is slowing down a little bit. So I think that's kind of broadly where we are in international.

What I would tell you is that, our goal there is to get prepared for the all-important holiday seasons in the second half of the year, and they're working very hard to that as they always do. So we're keen on international. If you think about it, the demographics favor more international growth. There is more customers growing in international.

POS remains positive in international, last year and this year. So we feel very good about it. We still like the big countries, in Western Europe like France and the U.K., Germany, Italy, Spain, for example, those are important. But we're also investing quite heavily in the future of international, which is Russia and China.

We were very successful in both markets last year.

I mentioned, I think in an earlier answer that our global brand teams are spending time in these markets to make sure that we are get the right product in these markets, at the right price and right play value and culturally position well, so that we can have more successes like the Soothe & Sleep Seahorse in China.

So we're still very bullish on international, and I'm pleased to have performed it so far..

And then lastly, did you guys offer any color on your sort of initial reaction for BOOMco or do you have any insight to that?.

Well, as I mentioned earlier, it's early on BOOMco. I think we've been on shelf in the U.S. maybe two weekends, I think this is weekend three coming up. It's been in France, Belgium and the U.K. for probably five, six weeks. So it's way early. We like and appreciate the retail support that we're getting on the launch, that's terrific.

If you go online or look at some of the product reviews that are out there from all sorts of folks, the product reviews are we think pretty positive and I think reflect the differentiation that we have in this category, and we think that's important. So it's too early, and we'll I'm sure update you more at the end of the third quarter..

Thank you. There will be a replay of this call available beginning at 11:30 AM Eastern Time today. The number to call for the replay is area code 404-537-3406 and the pass code is 61224509. Thank you for your participation in today's call..

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. And have a wonderful day..