Mattel Inc (MAT) 2001 Q1 法說會逐字稿

Good morning and welcome to the Mattel first quarter earnings release conference call. All participants will be able to listen only until the question and answer session. This call is being recorded. If there are objections, you may disconnect at this time. Now, I would like to turn the call over to Ms. Diane Douglas, Vice President of investor relations for Mattel. Ma'am you may begin when ready.

Thank you. Good morning and welcome to Mattel's first quarter conference call. I am Diane Douglas, Vice President of investor relations and joining me today are Bob Eckert, Chairman and Chief Executive officer, Kevin Farr, Chief Financial officer, and Adrienne Fontanella, President of our girls' division. This is my first official conference call as Mattel's new Vice President of investor relations and although I have spoken to many of you personally over the last few weeks, I would like to tell everyone listening how excited I am to be a part of the Mattel team. Earlier this morning, before the market opened, we issued a press release, which detailed our first quarter financial results. This morning's agenda, Bob will provide an overview of progress as it relates to our strategy while Kevin will provide a comprehensive financial review of the quarter and Adrienne will present an overview of the girls' business. Much like last year on future quarterly call, you will hear from Neil Friedman and Matt Bousquette, Presidents of our infant and preschool and boys and entertainment division. After our formal remarks today, there will be an opportunity for questions. Before we begin the call, let me note certain statements made today may include forward-looking statements about management's expectation, strategic objectives, anticipated financial performance, and other similar matters. Forward-looking statements in today's call will include statements regarding strengthening core brand momentum through increased U.S. and international sales. The company's financial realignment plan,

supply chain and customer service improvement, employee development, brand and product sales availability, gross margins, debts to capital ratio, capital expenditures, and inventory levels and interest expense. A couple of ideal factors which may, which are beyond our control affect the operation, performance, business strategy, and results of Mattel and could cause actual results to differ materially from those projected in such forward-looking statements. Some of these factors are described in our 2000 report on Form 10-K filed with the SEC and Mattel's other filings made with the SEC from time to time as well as Mattel's other public statements. Now, I would like to introduce Bob Eckert.

Thank you Diane. As many of know Diane joined us just 6 weeks ago and has already become an essential member of the Mattel team. Diane's main objective is to serve as an effective and manageable resource to the investment community, particularly you, our valued investors as you continue or begin your relationship with Mattel. We transitioned into the New Year with the momentum and energy from our very successful fourth quarter. This is evident in, not only our financial results but also in our commitment to an enthusiasm for achieving our vision of being the world's premiere toy brand for today and tomorrow. During the first quarter, we made substantial intangible strides on both the brand and corporate level for achieving our key strategies, improving execution, globalization, extending our brands in the core sketching new trend. Allow me to recap our first quarter progress as is relates to each strategy. During the quarter, we have proved execution has crossed our existing toy business through continued implementation of the previously announced financial realignment program. Earlier this month, we made the very difficult but necessary

decision to sudden motion a phase closure of one of our North American distribution and manufacturing facilities. Over the next 24 months, production from the Murray Kentucky facility will be consolidated into existing Mattel owned and operated facilities in North America with the final shutdown Murray expected in late 2002. These realignment measures are necessary to lower cost and keep the company competitive in today's global market place and we made positive advancements in our second core strategy to globalize our brand. As you may know, we saw improvement in international sales in both the third and fourth quarters of 2000 and the momentum continues in the first quarter of 2001. For almost a year now, each of Mattel's divisional presidents have had global responsibilities. Under their direction, we tightened and improved communication between our U.S. based design and marketing teams and our international subsidiaries. As a result, international needs are considered and incorporated during the early stage of the product development as well as marketing allowing for better global execution, and most importantly, results were seen in the market place are reflected in our continued progress of which Kevin will provide the details. While I am certainly encouraged by our most recent international successes, my optimism is tampered as we still have a lot of work ahead of us. We've also taking time for each steps to extend our brands as I touched on during our last conference call. In January we completed phase two of our interactive strategy when we teamed up universal publishing and THQ. These interactive industry heavyweights will now develop software titles based on Mattel brands for the PC, Mac, console, and Gameboy platforms. In February, we announced another exciting partnership when our infant

and preschool division adds Barney to its already rich portfolio brand. This alliance with Barney into the hands of the same talented Fisher Price team that change the face of Sesame Street toys forever with the introduction of Tickle Me Elmo. One of the most innovative extensions is taking place within the Barbie brand. Barbie will make her movie debut in a feature length computer generated imaginary production, Barbie & The Nutcracker, which will air this thanksgiving on CBS television. The special will be also be available on home video and of course there will be a full a dedicated toy line to support the premiere and as evidenced by our recent successes at this years American International Toy Fair, New York, the girl's division is not only the group teething with innovation. We are catching and creating new trends across all toy categories. Our real business continues to build upon our core franchise by capitalizing on the hottest trends for boys. This year Hot Wheels introduces a combined track and play set. Focusing on the hot robotics scene is the Cyborg City play set. Fisher Price is the industry leader when it comes to marrying traditional play with appropriate levels of technology and this year is no different with the introduction of the Pixter, a PDA specifically designed for kids with an incredible array of software based functions and creative effects. Pixter is also delivered at a great price. As the master toy licensee for Harry Potter our entertainment division has created one of the most exciting interactive toys. A pet dragon named This interactive toy reacts to the touch and comes to life in many different ways. As you can see, we have made progress on all fronts because we remained focused on our key strategies but there is more work to be done. As a management team, we have set priorities for the

year. I would like to take you through those priorities so you can follow our progress as we continue to the rest of the 2001. Priority one, to strengthen core brand momentum both the U.S. and internationally. Two, to execute the financial realignment plans and deliver the cost savings we announced last September. Three, to improve supply chain performance and customer service levels and finally, to develop our people and improve our employee development processes. And our company wide goals for the coming year are consistent with these priorities. To strengthen our core brand, the main goal is to continue driving strong U.S. point of sale growth across all major brands. We will also continue to turn around our European performance while building upon our existing strong business in Canada, Mexico, and Australia. As it relates to the financial realignment plan, our goal is to successfully implement the first stages of our North American manufacturing strategy. Presumed transition of products from Murray Kentucky is this year's most important project. Our supply chain objective is to improve performance and customer service levels by lowering manufacturing cost and improving customer order fill rates. We are currently collaborating with customers to better align ourselves with their needs all at a lower cost and finally as it relates to our people, our goal is to successfully launch our new developmental strategy with an emphasis on having every manager throughout the world aligned with our corporate objectives and compensated for achieving their part of the equation. We are also launching our Mattel leadership center as we begin to into practice corporate wide training programs. I am encouraged by our progress with the quarter and look forward to continuing down the road to achieving sustainable

profitable growth for the company and for you, our shareholders. I am confident that our vision of being worlds premiere toy brands for today and tomorrow, will leave Mattel to continued success and at this time, I would like to introduce Kevin Farr, our Chief Financial Officer who will take you through our financial results.

Thank you Bob and good morning everyone. Before I discuss the results for the quarter I wanted to point out some changes we have made in an effort to better align our financial reporting with how we run the business. In our segment reporting, there are two changes worth noting. First, we will report company results as part of the girls' division, which is consistent with management responsibility for this business. Second, toy manufacturing, will be managed the cost center rather than at the profit center. As a result, it will no longer be reported as a separate segment. Consistent with our prior practices, we will provide the detailed segment results as part of the quarterly and annual SEC filings. Also, in response to investors' requests, we have included a new exhibit page with the press release to summarize our key financial highlights. As we previously indicated, over the next three to five years, our goal is to grow our worldwide sales by mid single digits, and grow our earnings per share in the low double digits at the low end of the range and mid teens at the high end of the range. Our first quarter sales and earnings per share are consistent with our full year expectations and our longer-term goals. As Bob said earlier, globalization is the strategic focus for the company and our first quarter results demonstrate our efforts are beginning to pay off. We had good geographical balance with the U.S. sales up 5% and

international sales up 7% in U.S. dollars and 13% local currency. This represents the third consecutive quarter that international has grown in local currency. On a regional basis, Europe was down 1% in U.S. dollars but up 7% in local currency. Latin America continued to show strong growth at 46% driven primarily by Mexico. Asia Pacific was down 8% or up 1% local currency with good growth in Australia and New Zealand offset by lower sales in Japan and Taiwan. Canada was up 26%. Reviewing or four categories in brands, worldwide sales through the girls' division experienced a 7% increase or 9% in local currency. Excluding pleasant company, worldwide sales for the girls' division were 5.5%. Worldwide Barbie sales were flat, were up 2% in local currency. Barbie sales in the U.S. declined 8% in the quarter due to changes in the retail buying patterns. Consumer demand for the brand continues to be strong as evidenced by healthy growth in over-the-counter sales. International sales for Barbie were up 16%, or 23% local currency reflecting a benefit of early product availability and stronger alignment of worldwide sales and marketing plans by girls' division management. Performances of Poly Pocket, Diva Stars, and pleasant company drove the growth in the sales from the girls' division. We will hear more about the girls' business later from Adrienne. Worldwide sales for boys' entertainment division were up 9% or 11% in local currency. Domestic sales grew by 14% and international was down 2% or up 4% in local currency. We had double-digit growth in the wheels business driven by Hot Wheels and Tyco R/C. The entertainment business decreased slightly with strength in Max Steel games and puzzles offset by weakness in Disney movie related properties.

Worldwide sales returned infant and preschool were flat in the quarter or up 2% in local currency. Domestic sales were 1% and international was down 4% but up 2% in local currency. Worldwide sales in core Fisher Price were up 8% including double-digit growth internationally. Strong growth in core Fisher Price and Power Wheels was offset by continued weakness in licensed character brands as retailers managed their inventories. We expect this sales trend to reverse in the second half as our new character brand products are introduced at retail. However, for the first quarter, we were pleased with over-the-counter sales at core Fisher Price, Power Wheels, Blues Clues and Sesame Street. Now let us review the P&L. I will focus my comments on the performance of our continuing operations excluding the impact of non-recurring charges. I will discuss these charges later in the context with an update under financial realignment plant and the implementation of FAZ 133. Please refer to exhibit 1 of the press release. Gross margin was 45.6%, which increased by three tenths of a percentage point versus last year. Gross margin was positively affected by product mix and lower distribution cost, partially offset by the negative impact of the weaker Euro. Advertising expense was 96.6 million or 13.2% of sales consistent with last year in a full year expected rate of 15%. Dolling general administrative expenses of 205.2 million for the quarter represented 28% of sales down from 29% last year. Operating income of 18.2 million was up 15% versus prior year reflecting sales gross, gross margin improvement and SGNA leverage. Interest expense was 34.9 million compared with 24.4 million in the first quarter of last year. However, this increase

is primarily due to the allocation last year of 8.2 million interest expense and discontinued operations where as, in first quarter 2001, interest expense was allocated entirely to continuing operations. In full year 2000, the reported interest expense of 153 million was after the allocation of 36 million to discontinue the operations. Since we assumed that that is discontinued operations, this years interest expense is expected to be approximately the same as the 189 million of expense incurred in 2000. So to summarize, the P&L for the quarter, we reported a loss in continuing operations of 12.1 million or 3 cents per share excluding any impact of non-recurring charges, since higher operating income was offset by higher interest expense. Now, let us review the balance sheet. Our receivables at 891 million or 96 days sales obtaining improved by three days versus last year reflecting our increased focus on managing working capital. Inventories at 574 million represented 98 days of supply, which is up one day versus last year. About half of the 52 million increase is driven by prebuild initiatives to prepare for the closing of the Murray Kentucky plant. Excluding the prebuild, days of supply would have improved by 1 day to 96 days compared to last year. Our plan is to continue to build inventory levels for pre school products throughout this year in order to execute our North American manufacturing strategy. The North American manufacturing strategy will leverage our existing plants in Mexico and our vendor base in the far east by reallocating production in order to lower manufacturing cost. When completed these actions will result in the closure of the Murray Kentucky manufacturing facility. Looking at total debt

outstanding at the end of the first quarter, our debts to total capital ratio is about 56%. Our goal is to reduce the debt ratio to about one third of total capital with substantial progress towards this goal by the end of this year. Capital expenditures for the quarter were approximately 39 million. This model is in line with our expectation that cap ex will be in the range of a 190 to 200 million for full year 2001. Cap ex will be up from last year due to investments in the consolidation of facilities in order to implement the North American manufacturing strategy. Now let me update you on the status of the financial realignment plan. If you look at exhibit 2, you can see that in the first quarter, we recorded a 12.5 million pretax charge of which 7 million was related to the financial realignment plan. The details of the charge are as follows. A 6.6 million charge to gross margin was related to accelerated depreciation resulting from the planned closure of the Murray Kentucky plant and a 400,000 dollar charge to advertising SGNA, larger than related to exiting certain product lines. Since we have announced the financial realignment plan last September, we have taken approximately 132 million in pretax charges, we will expect to record the remaining 118 million over the next two years. Of the after tax charges taken thus far, 60 million were cash. We anticipate that approximately 100 million of the total 170 million after tax charge will be cash. We are focused on executing this alignment plan and our expectation is to generate 200 million of pretax savings over the next three years. We told you, we expect 55 of million savings to come this year and I am pleased to tell you that we have completed over three quarters of activities that will drive the

savings for this year and finally as required this quarter, we adopted a new accounting principal FAZ133 accounting for derivative instrument and hedging activities. As a result of the adoption of the statement and consistent with our closure in the 10K for 2000, we recorded a one time transition adjustment of 12 million net atax for the quarter. In addition in the first quarter, recorded a 5.5 million pretax non-reoccurring loss on derivative instruments in other expense. These instruments were related to sale of Cyber Patrol in 2000, a discontinued business. The 5.5 million charge reflected a decline of fair value of the instrument during the first quarter. Prospectively, we do not expect to incur any additional charges related to these instruments. I want to close by the saying the results for this quarter reflect our focus on the priorities, Bob discussed earlier. As we look forward, we will continue to focus on executing these initiatives. That completes my review of the quarter. Now I will turn the call over to Adrienne Fontanella who will give you an update on the girls' division. Adrienne.

Thank you Kevin. As you heard earlier, the girls' division had a good third quarter. Our efforts to grow our business globally focusing on driving consumer demand and improving product availability, continue to prove successful. First, I would like to review the quarter. As you will see, our core brands remain healthy throughout the world and international is responding positively, the same factors that drove growth in the U.S. over last year. It would be clear that extending into new brands and extending existing brands, into new categories is providing incremental growth for our overall girls' business. I

will then wrap up with how we plan to ensure growth for the year. The girls' division sale which includes Barbie, other girls' and pleasant company were up 7% worldwide, 9% in local currency. Barbie was flat worldwide and up 2% in local currency. Other girls' which include Diva Stars and Polly Pocket was up 60% worldwide, 70% in local currency. Pleasant company was up 14%. As I mentioned, Barbie was flat worldwide, up 2% in local currency. In the U.S., Barbie was down 8%. Softness in Barbie shipments reflect more on a shift in retain buying pattern than the overall health of the brand. In fact, NTD retail sell through data, through February shows overall fashion doll category growth in the double digits with Mattel out performing the category. As a result, we are gaining share. We continue to believe that a segmentation and relevancy are key to our success. Strong first quarter performers targeting our three to six year old core younger audience include bedtime Barbie and Krissy, Loving Care Telly, and Flying Butterfly Barbie, all are exceeding our expectations. Key performers targeting a broader audience include Picture Pockets Barbie, Kitty Fun Barbie and Mary Kate and Ashley Olsen. In addition, our accessory and new Barbie studio line continues to perform well driven by the VW Bug, Lip-gloss Maker, and Glitter and Skit Jewelry Kit launched this January. Our partnering with retailers to drive consumer demand and increase retail presence continues to prove successful. Wall-Mart is an ideal example with their January, February license counter program, stealing sell through. While shipments and even retail sell through performance were varied month to month

or quarter to quarter, we are confident based on the programs in place and the response that we have had from retailers, that we will see sales and retail sell through growth for the year in the U.S. International continued its growth in Barbie showing a 16% increase, 23% in local currency. This follows the growth posted last year fourth quarter with Barbie up 8%, 20% in local currency. We are further encouraged to see double-digit growth across Europe, Asia, Latin America, and Canada. This gives validation to our local brand management strategy and our ability to manage our business globally. In our other growth category, worldwide sales were up 60%, 70% in local currency. This growth is the result of our focus on extending core brand, building new brands, and leveraging our knowledge of girls' to capture share beyond the fashion doll category. In the U.S. the sales more than doubled. This is consistent with exceptional category growth led by Mattel brand including Diva Stars and Poly Pocket. In fact, Mattel's market share in the small doll category more than doubled through February capturing 56% market share. Internationally, other girls' was up 9%, 16% in local currency. This growth is a result of a continued strength in Poly Pocket and the initial launch of Diva Stars. This is most encouraging as Diva Stars has yet to launch in any international market. American girls' saw14% increase with strong growth in catalogues, book publishing, and American girl play sales. Growth was led by strong sales in Kitt the new American girl introduced last fall as well as Angelina Ballerina and A G Mini. In addition, American girl plays, our retail store in Chicago has provided

incremental growth to the franchise in both retail and catalogue sales. This is evident by our catalogue sales in the Midwest, outpacing growth in other regions of the U.S. As you see, can see, we continue to manage our business as a whole and on a global and annual basis. Going forward, we will continue to focus on four key strategic initiatives. They are improving the execution of our core business, globalizing, and extending our brands and strategically developing new brands. In terms of improving the execution of our core brands, we have made significant progress, particularly in the Barbie business and improving product availability on a worldwide basis and recognizing operational efficiencies. This year, we continue to focus on improving speed to market efficiency and profitability. In the first quarter, we implemented a new a girls' design and development process moving a portion of our design group to Hong Kong. This integration of product development and manufacturing will result in a shorter developing cycle and improved product cost. The benefit will be realized on an annual basis this year. Regarding globalization, a year ago the business units were given international responsibility. Last July the girls' business unit implemented a significant organizational change and realigned the marketing strategic planning and research function to operating globally. The focus of this change has been to improve the execution of our strategies outside the U.S. and in short, a consistent brand image throughout the world. Basically, one vision, one voice. An example of the impact of this new structure will be felt this fall with the worldwide launch

of Barbie and The Nutcracker. Extending our core brand into new categories, remains key to our growth. As you may know, this October marks the brands' first entrance into the entertainment area. Barbie and The Nutcracker is the largest integrated product and marketing program in the brand's history. The film represents the most advanced all motion captured computer graphic imaging video ever created. Barbie will come to life and engage girls like never before. This advance is supported by a world of product, including doll's accessories, license product, and publishing. Major events and promotions are scheduled in all our key retailers worldwide. Our video distribution partner in the U.S. and Canada is Artisan Entertainment. What you may not know is that Barbie and The Nutcracker will all also be a feature holiday television special this thanksgiving on the CBS network. Entertainment rights, a leading London-based global intellectual property rights group will handle the distribution of both television and video outside of the U.S. and Canada. We will also enter anther new category this fall with Barbie Perfectly Plush. Applying our knowledge of girls', we have created the first girl targeted plush line. The focus is on fashion, glamour, and style. A plush category represents close to half a billion dollars in spending annually with our target audience. With the strength of this category combined with the power of Barbie and our products unique features, we believe we will capture immediate market share and new revenue for the brand. In addition to these new category opportunities, we are seeing a seamless transition of our girls' division media

product under our new relationship with the universal publishing. Leveraging their technical creation and distribution expertise, we will bring seven new products to market this year. The universal publishing will also expand our titles across all relevant platform including Gameboy, Nintendo and Playstation 2. Extending the Barbie brand through licensing has been being critical to keeping a brand relevant to girls. The worldwide Barbie licensing business was close to 800 million dollars in wholesale dollars last year. In the U.S. and international, we have had particular success with Barbie fashion driven apparel, accessories, home décor and stationary. This fall, we are most excited to launch the first advertising campaign including television and print, promoting the hottest Barbie license product in a fun fresh new way. Last, we were looking to increase our market share in both the small doll and large doll categories with the introduction of innovative new brands, specifically What's Her Face in small dolls and Miracle Baby in large dolls. We know girls love activity and What's Her Face introduces a totally unique way to combine activity play with doll play, allowing girls to express their creativity in a whole new way. This introduction follows last years successful Diva Stars launch providing us with increased share in the small doll market. Miracle Baby represents true innovation in the traditional baby doll category. This brand incorporates technology into beautiful product design featuring soft flat skin and unique facial movements. Miracle Baby combined with Scooter Shannon, a follow-up to 1999s number one selling Skateboard

Shannon, with further strengthen our large doll category presence. In closing, we have strong programs in place in the girls' division this year across all four brands and all around the world. I am confident in our strategy and our expectation for another good year for the division. Thank you.

Operator, we are ready for questions.

Thank you. At this time, we will begin the question and answer session. If anyone wishes to participate, please press star 1 on you telephone touch pad. If you are using speaker equipment you may need to lift the handset prior to pressing star 1. I will remind you, that it is star 1 if you wish to ask a question. Please standby while questions register. Our first question comes from Jill Crudith from Solomon Smith Barney.

Thank you. Good morning. I was hoping you could clarify for us a little bit, the shift in buying pattern that you are seeing on the girls' side in a little bit more detail. We have seen this before with Toys 'R' Us and typically these things can develop a life of their own and become, you know, much greater pressure on the company as the year unfolds. What is different about it this time around, are you seeing it across the board with other retailers and how about, would you characterize to the current retail climate and whether we might, you know, generally be seeing more inventory reductions just given retailers this year. Thank you very much.

Hi Jill, this is Adrian. I will start, we are definitely focused on managing shipments to retail sell through and inventory with retailers and it is important to note that each retailers has a different goal regarding the appropriate amount of inventory they want to carry and we are working with them to meet those goals.

Jill, this is Bob. Let me amplify at least from my prospective. If you look at last year shipping pattern with Barbie domestic sales up 17% in the first half, it indicates that retailers took inventory early. We then saw less

robust growth in Barbie shipments in the second half. This year, we are seeing some retailers not taking as much inventory this early in the year. How much of that is due to the economy or the decline in consumer confidence or their own situation, I think you're better off asking them than us but from the company prospective, we look across our brand and around the world and we think that mid single digit revenue growth is the right target for the company and we are on track to deliver that.

Could I just follow up please Bob in terms of, are you seeing it really across the board with the all the various retailers are there are any sort of single retailers, not to name them but are you seeing it in a more pressure at one or two specific retailers and are you seeing it for a specific product line? Thank you.

I really do not want to get into individual customer trends or those sorts of things. Again, Jill, I think you're better off talking to them instead of us but I do think that the situation in terms of, if you look at last year's sales patterns compared to this year's, is beyond Barbie. We had very strong shipment performance across all of our brands, not only in the first quarter but particularly in the second quarter. So, I think it is a reasonable conclusion to make across the brands that we shipped earlier last year than we are this year.

Thank you very much. Thank you. Our next question comes from Brian with Morgan Stanley Dean Witter.

(inaudible):) Great, thanks very much. I think it is actually Morgan's family now. But that is okay. I have a couple of questions. The first is in light of the retailers moving more and more towards private label. I was hoping you can update us in your effort to sell more direct and I guess specifically where you have had success in brands other than American girl and that, where you see the greatest opportunity.

Well I can comment on the American girl business, on the direct business we had a very successful year in 2000 and we're forecasted for growth this year, we continue to develop efficiencies in terms of catalog distribution and direct marketing.

Yeah, on that Brian, our strategy in direct is really to provide a service for those consumers who are really interested in dealing directly with us. We have said now for many months, group partnering in our real strength, particularly on the internet is with our sites like barbie.com which has just been a tremendous success and our objective is to partner with those people who do a good job of filling direct orders and filling orders in general. They get products to consumers.

(inaudible):) Okay. That is fair. The other question I had for you was with regards international. In that, over the past couple of years, we have seen both sales and margins just slip internationally. It has been pretty steady and now there is about a 500 basis point spread in between where margins are internationally now versus where they were, say, back in 1997. Well now sales are starting to turn, and you've got a pretty big lever there you can pull. Are there any barriers standing in your way to get margins back above double digits?

Yeah, I think Brain, this is Kevin Farr, I think the biggest issue with regards to margins in international is the continuing decline in the Euro. As we entered 2000 the Euro was at a dollar 5, and as we entered 2001, it is, you know, between ninety cents and eighty-eight cents. So, that is, I think, the biggest barrier since those are low inflation economies, we can't, you know, put those price increases onto our customers.

) Okay, thank you.

Thank you, our next question comes from Melissa Williams with Gerard Crowler.

Hi, I was wondering if you could comment more specifically on your inventory position, and beyond the closing of the Murray facility, how do you feel about your inventories and what do you expect to see happened throughout the year?

) Yeah, Melissa, I think we're in good shape with regard to the inventories if you look at it this quarter versus the first quarter 2000. If you exclude the prebuild, we actually improved by one day. So, I think we are good in shape as we look forward in the year but I think also as we have mentioned earlier, we are looking at supply chain and I think overall, we can continue to improve on our inventory position.

Okay, and how do you expect to see the cost savings this year roll out through the year?

Yeah, I think as I have said earlier that we expect to generate 55 million dollars of cost savings this year and we have achieved 75% of the activities to put those in place and we expect that those savings will be more back ended in the second half of the year also.

Okay, and last, if you could just comment on Harry Potter, what you have seen in current trends and how you feet about it.

Melissa, this is Bob. As you know we are managing the Harry Potter brand for long-term viability. We are not going to get into projections by brand of products but clearly we have managed our own expectations to line up with the launch of the movie, which comes in November, and the trailers are just starting now. I think, as I have said before, the way you might want to think about Harry Potter is being an offset to revenues lost on other discontinued entertainment properties as the year goes on.

Great, thanks. Thank you. Our next question comes from Linda with (inaudible)

) Hi, thank you. I guess I have a question on the gross margin, it was a little bit lower than what I had projected and I expect that's because Barbie was a little lower in growth that I had expected so mix impacted it. Can you just comment on what you expect going forward given that Barbie is expected to be, you know, maybe slight or modestly up for the year and do you think there, the cost saving initiatives can sort of offset that mix factor so that you can achieve growth margin improvement for the full year?

Well, Linda this is Bob. Let me start with, we do expect to achieve growth margin improvements for the year, and we are on track for that. Probably the single biggest issue that hit us in the first quarter was not mix, it was the Euro. That hits us in the growth margin line and as Bryan asked earlier, that's where it shows up. I was actually pleased with the improvement in the gross margin over a year ago despite the continued weakness in the Euro.

) Okay, thank you. Also I have a question on the interest expense. I guess it was quite a bit lower than what I have projected and I am just wondering at 35 million dollars in the first quarter, can you just comment on, sort of the seasonality of the business and how it would breakup by quarter because it seems that your projection for the year is, seems like it will be lower than what your guiding through for the year.

) Yeah, I think I can comment on that. I think if you look at it as we entered the year we had approximately at the beginning of 1999, we had about 1.5 billion of outstanding debts versus 1.5 billion of outstanding debt as we entered 2000. The mix of this debt at the end of 2000 is due to long-term debt with higher interest expense, rates, or interest rates. And the higher long term rates will be somewhat offset by lower, short term interest rates. However, when we look at our seasonal working capital leads, you will see as we move through the year we will continue to borrow in the second, third and finally pay it back in the fourth quarter as we collect cash. So it will build through the year, and I think what you have to do is really look at your models with regard to how you are flowing earnings and cash flow through the

year to more or less come up with the interest expense. I think what I want to point out is that yes when we look at the year, there are cash savings in the beginning of the year with regards to not paying dividends and not funding TLC. However those savings are offset by restructuring expenses, cash out flows and the normal build and the working capital needs as we move to, beyond the first quarter.

(inaudible):) Okay, and I guess I have a question in terms of the business segment in the boys' category. I was very impressed with the whole performance of the boys entertainment category and especially wheels, the worldwide growth there I believe was 15%, was very, very strong. Could you comment on what portion of that growth was related to entering new categories versus growth in categories that you are already in and I am thinking of for example your entry into the trucks area with the different, with a brand, can you give us some sense of that.

This is Bob, it's both things going on. It starts with our wheels business, which is not a new business for us, has done very, very well. I think Matt Bousquette and his team did a very good job of getting a good product out early into the market place. We have got great merchandising programs and very strong point of sales growth in our core wheels business. We have also had success in other new things like Max Steel and some of our games and puzzles. So there is not just, sort of a one trick pony that's driving wheels and entertainment, I think it is just good performance across the board.

(inaudible):) Okay, thank you, that was very helpful.

Thank you, our next question comes from Marina Jacobson with inaudible

Hi, just two questions. Could you talk a little bit more about the changes taking places with the American, with the Kentucky plant and

how you expect to see the savings over the next 24 months? Also if you could talk a little bit more about the licensing during the quarter, do you expect to see, you said in the back half, is that most related to the Disney movie that's planned in the second half of the year?

Well, let me start with the licensing and then Kevin can talk about the Murray facility. The licensing difference really falls, I guess what I am talking about is in the entertainment category, if you look at the year ago time period, there was a Disney movie called Dinosaurs, early lat year and our final Disney property, Atlantis comes in, I believe at the second quarter is when it launches this year. So we had more Disney a year ago than we have this year. Offsetting Disney would be Harry Potter over time, and you know we have a limited product line out now in Harry Potter as we did in the fourth quarter of last year's and that product line will be building as the year goes on as you know prior to the movie launch which I think is scheduled for November 21st.

With regard to the Murray Kentucky plant, for 2001 we don't expect savings to be generated from the plant as we transition the business in over 2001 and 2002 to Mexico. So I think you will see savings begin in 2002 and then you will see the full savings from it in 2003.

MARINA JACOBSON Okay great, thanks. Thank you, our next question comes from John Taylor with Arcadia.

Good Morning I got a couple of questions. First of all I wonder since we met, many of us met with you at Toy Fair, you guys had you're the trade down to Arizona, I am curious, did you get any feedback from major retailers that would cause you to change your relative expectations for strength or weakness by brand, I guess

what I am looking for is you enter the year with a certain set of expectation and then you got some feedback. Are any of the brands looking like they are going to be stronger from a retailer perspective than what you would have thought before?

John this is Bob. No, we did have retailers with us down in Tuscan , they went through the product line in a great deal of detail. I think they shared our optimism and enthusiasm about this year's product line but I wouldn't pick out one or two brands at the expense of others.

Okay, so everybody is pretty much on the same page there. Could you talk a little bit more about the implementation of the changes that you want to put in place internationally to realize the sort of one line, one voice, one message kind of thing. Is that all pretty much done or you do you still have to do a couple of things yet and if so when do you expect that to be completed?

Well, let me start and then maybe Adrienne can comment on it. I feel good about the progress that we are making. We have been encouraged by the increase in sales over the past couple of quarters. I think the product line is as strong as it has been in many years internationally, we clearly have stronger alignment of worldwide marketing and sales plan. Adrienne and Matt and Neil have worldwide responsibility and they spend a lot of their time around the globe and the incentive plans across the company are now based on worldwide results. So I think the things that we have been doing over the last year are starting to pay off broadly.

I will just add that in terms of our structural changes in our organizational creating more of a global business unit, it's had a tremendous impact obviously on all our brands from a global basis and it's been very motivating to everybody and I think the significant increases that you are seeing in

international are in direct relation to that and to the improved product availability.

Okay I will also pose to you, reiterating what I have said for a couple of quarters, we are nowhere near to declaring victory in international. We have got a lot of work ahead of us, the business has declined over the past several years and is going to take a good effort to continue to rebuild it.

From a structural organizational standpoint though, are you feeling like you got most of what you need to do done?

Yeah, you know that's one of those things where you ever hate to say structural changes are over because then, you know how the world works, next week something changes and you reorganize something and then you say, "but you said it was over!". I think it is fair to conclude however, but I am pleased with the relationship that we now have between the international subsidiaries and our domestic operations headed by Adrienne and Neil and Matt. I think that's going well, we have made some changes in some countries at the general manger level and I think that's going well and you know, without trying to predict the future, I think that I can tell you that I am comfortable with our current international arrangement.

Okay and then I got a question about the financial implications of the, all the media stuff going on with Nutcracker, whether you guys participate in any of that and also what the financial implications of the licensing deals with THQ, are given that you were doing that internally before, can you talk about you know, those are two separate things, I guess I am looking for maybe a swing factor on the THQ, you know external versus internal things and then whatever your participations that may or may not be from an investment stand point and from a word stand point on the Nutcracker property.

I will just comment quickly in terms on the financial implications in

terms of the media related to The Nutcracker and basically our arrangement with Artisan and entertainment rights is a royalty basis. So we have calculated revenue associated with the sales of video domestically and internationally.

Okay and does that pretty much come off the dollar one or do you have to burn through a bunch of stuff first?

It comes off of dollar one.

Okay great and Kevin maybe on Viviandi thing?

Yeah, I think if you looked at the sales line the sales have been restated for prior period. They include any of the media products, and discontinued operations, so in going forward looking at the sales line will increase to the extent that we generated licensing revenues from Viviandi and THQ and obviously we are not making investments in there, they have actually taken on a risk with regard to those businesses. So this year is a transition year as we move the business from Mattel to Viviandiband to THQ so I think we are really becoming online next year with, seeing revenue growth on licensing etc.

Okay so to clarify that the discontinued represented both TLC last year and Mattel interactive or Mattel media for all line items?

Right.

Yeah, okay, thank you.

Thank you, our next question comes from Roger Lab with Marketing International.

Good Morning, just a couple of house keeping questions, its probably premature but any flavor for what's happening at the learning company and the potential for residual streams going forward? And the second question is, am I correct in assuming that there will be tax loss carried forward that will reduce your actual cash taxes, this year and next?

Okay, let me comment on the transaction, I guess we are pleased that reported positive results through learning company. As you know our financial interests are aligned with and they are managing the company to maximize value so, we will participate in their future value. Before we look so

complicated with regards to this, its safe to say we have not recorded any income from this investment. As I previously stated, the net worth value in this investment is zero. On the net operating loss question, there is 1.1 billion dollars of net operating losses and for cutting income tax purposes we will try to utilize those losses over the next five years.

So therefore, if there's 1.1 billion of operating losses, is it safe to assume that you wont be paying very much taxes the next couple of years?

That will be correct. It's subject to certain limitations due to, you know, some of them are pre-acquisition TLC, that we are working to fully utilize those in

inaudible ROGER Thank you very much.

Okay we have time for one more question.

Thank you, our next question is from Gene from J.P. Morgan.

Hi, just a couple of quick questions. Is the whole charge to cog a result of shutting down the plant?

Yes, accelerated depreciations related to looking at the net book value of the plant, that's what we think we are going to realize in the sale and then depreciating that over the two years its going to take us to shut it down. (inaudible):) Okay, great, and just a couple of quick questions for Adrinne, is there anything planned to try to sort of re-ignite the Diva Stars craze as we get closer to Christmas and then secondly, is part of the Barbie issue, that it looked like year your shipments were a little bit higher than sell through and now you are just, kind of managing it a bit to equal that out. FONTANELLA:) I will start with the Diva Stars, good question. Diva Stars met with a great success last year, this year there are a number of things that we are doing to keep the brand hot, we launched a small collectible line of Diva Star dolls, we are also launching a new line of Diva

Pets, as you know, in the fall, as well as a new line of Diva Dolls. We will continue to have very innovative gorilla marketing and public relation efforts supporting Diva Stars as well as innovative merchandising at point of sale. In terms of Barbie I think that last year we focused on managing shipments with sell through and believe that we were careful in doing that. (inaudible):) Okay, and is there any way anybody can tell us how much Harry Potter stuff was shipped this quarter?

Well, we really don't get into by brand, by quarter, results on individ/ual product lines like that.

Okay, very well, this is also a great disclosure that you guys have given out. Thanks a lot.

You bet, thank you. Thank you, that does conclude today's teleconference. Thank you for attending and have a good day.