Mattel Inc (MAT) 2002 Q1 法說會逐字稿

Please stand by, we're about to begin.

Good day and welcome to the Mattel Inc. first quarter 2002 earnings results conference call. Today's call is being recorded.

With us today from the company is the Vice President of Investor Relations, Ms. Dianne Douglas.

Please go ahead, ma'am.

Thank you, Operator.

Good morning and welcome to Mattel's first quarter conference call.

I'm Dianne Douglas, Vice President of Investor Relations. And joining me today are Bob Eckert, Chairman and Chief Executive Officer; Kevin Farr, Chief Financial Officer; and as our special guest, we have Joe Eckroth, Chief Information Officer.

Earlier this morning, we issued a press release which detailed our first quarter results. On the call this morning, you'll hear brief remarks from Bob. Kevin will provide a review of the financial results for the quarter, and Joe will discuss our long-term IT strategy.

Before we begin with formal remarks, let me note certain statements made today may include forward-looking statements about management's expectations, strategic objectives, anticipated financial performance and other similar matters. Forward-looking statements in this morning's discussion will include statements regarding growth in earnings per share, growth in operating margins and sales, the company's financial realignment plan, debt to capital ratios, supply chain management and shipments, capital expenditures, information technology initiatives, inventory levels, receivables, media expense, tax rates, interest expense and SG&A expense.

A variety of factors, many of which are beyond our control affect the operations 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 2001 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 published statements. Mattel does not update forward-looking statements, and expressly disclaims any obligation to do so. Now I'd like to introduce Bob Eckert.

Thank you Dianne and good morning everyone.

I'm generally pleased with the company's first quarter performance. Worldwide net sales were up four percent, with earnings per share at two cents. While the progress report for the quarter is good, as I've said before, we're managing our business for the longer term, not quarter-by-quarter or brand-by-brand. As it relates to our performance in the first quarter, we benefited from a variety of factors, including low levels of year-end retail inventories into early Easter.

And our strategic focus on globalization continues to generate robust international results for the company. Our first quarter international results with double-digit growth in almost all regions represent the seventh consecutive quarter of growth in international markets in local currencies. This strong performance is a reflection of improved product availability and better alignment of worldwide marketing and sales plans. With that said, and as I mentioned during January's conference call, we still expect lower shipments in the first half of the year, with no impact on the full year as we continue to better align our shipments with consumer demand.

As I reflect on 2001, it was a year of transition. Moving from refocusing the company on our core competency toys, to the beginning stages of optimizing our systems, processes and work force. In 2002, optimization continues as the Mattel mantra, as we concentrate on our four key priorities, which include strengthening core brand momentum in the U.S. and abroad, executing the financial realignment plan, and delivering the cost savings announced in September 2000, improving our supply chain performance and customer service levels, and finally, developing our people and improving our employee development processes.

During past quarterly conference calls, our division president's have spoken in detail about our plans for accomplishing our first priority, strengthening core brand momentum. Beginning with this quarter's call, we'll update you on two other priorities, delivery cost savings and improving the performance of our supply chain.

As Dianne mentioned, I've invited Joe Eckroth, Mattel's CIO, to join the call today, and Tom Debrowski, our Executive Vice President of Worldwide Operations, to be a guest on next quarter's call. For this morning's call I've asked Joe to give you some insight into our long-term IT strategy and how it directly relates to both our cost saving and supply chain priorities, with the ultimate goal being tighter management of the business.

And therein lies the key to our core priorities for the year. They each work and feed off the other. While each initiative has focus and direction, their ultimate success depends on the success of the other. It's a symbiotic relationship to achieve core brand momentum

supply chain, which requires a world-class IT infrastructure. And they all

the best people in the business. They work together, as in one Mattel.

And with that, I'd like to move into the financial overview section of the call. Thank you for your attention, and I'd like to introduce our CFO, Kevin Farr.

Thank you, Bob, and good morning, everyone.

As you heard from Bob, we are generally pleased with our first quarter results. To facilitate by review of the financial performance for the first quarter, I recommend that you refer to the exhibits of the press release. I'll begin with a discussion of worldwide gross sales shown on the bottom of exhibit one.

Total worldwide gross sales were stronger than expected, up four percent, or five percent local currency for the first quarter. This reflects strong international sales up 16 percent, or up 20 percent in local currency, partially offset by U.S. sales that were down one percent this quarter. The lower U.S. sales reflect our focus on narrowing the gap between our shipments into retailers and consumer take-away.

As we said in the last conference call, this will put downward pressure on our first-half shipments in 2002, but should have no impact on full-year sales. This initiative should improve our partnerships with our major retailers.

As Bob mentioned, our strategic focus on globalization continues to generate strong results for the company. While we continue to focus on improving our international business, we are facing tough sales comp through this year. Last year, international sales in the first half were up 18 percent, and second-half sales were up 10 percent in comps and dollars.

On a regional basis for this year's first quarter, sales in Europe were up 20 percent, or 24 percent local currency. Sales in Latin America were up 10 percent, or 11 percent local currency. Asia-Pacific was up 12 percent, or 16 percent local currency for the quarter, reflecting growth across the region with the exception of lower sales in India. And sales in Canada were up three percent, or six percent in local currency.

I will now review our four categories and brands. Girls. For the quarter the girls division grew its worldwide sales by 10 percent, or 11 percent in local currency, with domestic sales up one percent and international sales up double-digits. With international Barbie sales, as well as Polly Pocket, What's Her Face and American Girl offset declines in U.S. Barbie sales, and drove growth in the Girl's division. Worldwide Barbie sales were up five percent for the first quarter.

Seventeen percent growth in international sales of Barbie was partially offset by a three percent decline in the U.S. sales. The decline in the U.S. sales of Barbie was offset by growth in other Mattel brands. American Girl sales grew two percent over the prior year.

Boys. Sales for the Boys and Entertainment division were up seven percent, or eight percent in local currency. International sales were strong, up 21 percent, while domestic sales were up one percent. Worldwide sales for the Wheels business was up seven percent, or eight percent in local currency, with growth across all key brands. Sales for the Entertainment business grew eight percent behind strong worldwide performance of the Harry Potter franchise, which more than offset the Disney Entertainment business.

Infant and Preschool. Worldwide sales for the Infant and Preschool division were down seven percent for the quarter, reflecting declines in core Fisher-Price and licensed character brands, partially offset by growth in the sale of Power Wheels. Domestic sales were down seven percent, and international sales were down six percent, or three percent in local currency. Worldwide sales in core Fisher-Price were down six percent, or five percent in local currency, with domestic sales down eight percent, and international sales up one percent, or four percent in local currency.

Despite the decline in U.S. shipments, consumer demand for the brand remains strong. In fact, across all of our businesses, while our shipments in the U.S. were down this quarter, based upon our internal PUS data, we believe that retail takeaway was up. This is consistent with our objective to better align our shipments with retail demand, which will put pressure on first half sales.

Now let's review the P&L which is shown in exhibit three. I will focus my comments on our performance excluding impact of non-reoccurring charges, and a one-time non-cash transition charge related to the implementation of FAS-142. I'll discuss these charges later in the context of an update of our financial realignment plan, and new accounting requirements. Additionally, to facilitate the year-to-year comparison, prior year results have been adjusted to remove the goodwill amortization and its related tax effect from pro forma results.

We continue to make progress in the key categories of the P&L: sales, gross margin and SG&A.

Gross margin was 45.3 percent for the quarter, which increased by 100 basis points versus the first quarter last year. Gross margin was positively impacted by the execution of our financial realignment plan and lower product costs driven by our supply chain initiatives.

Advertising expenses, $82.7 million, or 11.1 percent of net sales, flat with the prior year. As we said in our last conference call, we expect media costs to remain soft in the first half of the year and strengthen as we move to our peak advertising season in the back half of the year.

Selling and general administrative expenses were $209 million, or 28.2 percent of net sales for the quarter, down 50 basis points compared with last year's first quarter. We continue to make progress in executing our financial realignment plan, which is driving savings in SG&A. Our expectation for 2002 is to improve our SG&A as a percent of net sales, as we continue to execute the financial realignment plan.

For the quarter, operating income was $43.7 million, up 47 percent versus last year. As a percentage of net sales, operating income improved 170 basis points versus the prior year quarter to 5.9 percent of net sales. The improvement was driven by solid sales growth, strong gross margin improvement and better leverage of SG&A.

Interest expense was $29.6 million for the quarter, compared with $34.9 million in the first quarter 2001. Compared to last year, this year's interest expense reflects the benefit of lower average borrowing and lower short-term rates. We expect the interest expense for 2002 to be down modestly compared with 2001, reflecting a combination of our expectation of slightly lower average borrowing and increasing short-term interest rates beginning midyear, as we move into our peak borrowing period for seasonal working capital financing.

So, to summarize the P&L for the quarter, we reported income, excluding the impact of charges, of $10.3 million, or two cents per share versus last year's first quarter loss of $3.8 million, or one cent per share, driven by improvement across all key categories of the P&L. Solid sales growth, strong improvement in gross margin and better leverage of SG&A.

Now, turning to the balance sheet, our receivables at 656 million were 73 days of sales outstanding, decreased by 23 days versus last year, reflecting improved cash collections and higher factoring of accounts receivable. Excluding the year-to-year change in factoring, which was up 51 million versus the prior year, receivables were down 183 million with days sales outstanding improved by 15 days.

Inventories at 488 million were down 86 million, or 15 percent versus last year's first quarter, and represented 95 days of supply, which is three days lower than last year. Compared with last year, inventory levels were positively impacted by the execution of supply chain initiatives, and lower levels of prebuilt inventory related to the planned closure of our Murray Kentucky plant later this year.

Excluding the prebuilt, days of supply would have been 94 days, compared with 96 days last year. We recently announced to our employees that the last manufacturing date for the Murray plant would be May 24th, therefore inventory levels should normalize over the next couple of quarters.

Improvements in performance of our supply chain continue to be a key initiative going forward. As a result, we expect to show continued improvement in receivables and inventory levels.

Our total balance sheet debt decreased by over 500 million, and our debt net of cash decreased by almost 700 million from first quarter 2001. This reflects the strong cash flow generated by our operations in 2001, and our efforts to reduce short-term debt. Our debt to total capital ratio is 45 percent versus 56 percent last year. We continue to target a long-term goal of reducing the year-end debt ratio to about one-third of capital. We believe we'll make significant progress towards our targeted debt to capital ratio by the end of 2002.

Capital expenditures for the quarter were approximately 27 million, in line with our expectation of capital expenditures for the full year of 180 to 200 million as we execute our strategic plan for information technology, and the next phase of the financial realignment plan.

Now, let me update you on the status of the financial realignment plan. If you look at exhibit two of the press release, you can see that in the first quarter we recorded a 20.6 million pre-tax charge related to the financial realignment plan. The charge consists of a $4 million charge to gross margin, primarily related to the planned closure of the Murray Kentucky plant. A $900,000 charge to SG&A related to streamlining

dysfunctions.

A restructured charge of $14.8 million, which primarily relates to severance and other compensation related to the elimination of 240 positions, or seven percent of our domestic headquarters staff that was announced in January 2002, as we continue to streamline our headquarters operations. And a $900,000 charge to other expense, primarily related to the planned closure of

.

Since we announced a realignment plan in September of 2000, we have taken approximately $196 million in pre-tax charges, and we expect to record the remaining $54 million over approximately the next year-and-a-half. Of the after-tax charges taken thus far, $92 million were cash. We anticipate that approximately $110 million of a total of $170 million after-tax charge will be cash.

We continue to take actions necessary to achieve our target cost savings. Just this week, we announced the elimination of 50 positions in Hong Kong, as part of the financial realignment plan. We are on track to achieve the $65 million of savings expected for 2002.

Now let's discuss the accounting changes that we adopted in the first quarter.

As a result of adopting FAS 142, which relates the amortization of goodwill and other intangibles, we recorded a one-time, non-cash transition charge of $252.2 million net of tax to write down goodwill associated with the 1998 acquisition of

company.

of adopting FAS 142, the company's effected tax rate is reduced to 27.2 percent for the first quarter. Our expectation is for the effected tax rate to remain at that level for the foreseeable future. In addition, as disclosed in our 10-K filing, prior year results include reclassifications of certain customer benefits and allowances to conform to the income statement classification requirements of a recent emerging

pronouncement.

On last quarter's conference call, we said one of the clear challenges for 2002 is delivering good top-line growth in light of the uncertain retail environment in the short term. Our outlook for the year has not changed based upon the results of the first quarter. With that said, we believe we are well positioned to deliver our long-range goals of revenue growth in the mid single-digit range, and EPS growth in the low double-digits at the low end of the range to mid teens at the high end of the range over the

.

We are committed to bringing financial discipline to every aspect of our business, thereby optimizing our performance. And that is a perfect lead-in for a discussion of our long-term IT strategy from our Chief Information Officer, Joe Eckroth. Joe?

Thanks Kevin. Good morning. As most of you are already aware, this year we commenced a long-term information technology strategy aimed at achieving operating efficiencies and cost savings across the corporation. Our investment in information systems and technology will help us better manage the business, which in turn should drive better economic performance through a combination of better sales, higher operating margin, and improved asset turns.

Every year we are incurring millions of dollars in lost opportunities, whether it's the manage better -- to manage inventories better, reduce our cycle times, improve our customer service, or eliminate non-value added work, all because our systems infrastructure is not up to date. Today our systems are very fragmented. We have more than 200 enterprise systems, requiring heavy manual intervention. Because over 80 percent of these systems are homegrown, availability of support resources is limited. This is not only costly, but it is also a limiting factor on our employee's productivity and operating efficiency.

Our IT strategy is focused on four key areas, the global infrastructure, upgrading our enterprise systems, implementing an integrated data warehouse, and e-business. While each of these areas are important, our approach to execution also is important. You may assume that our IT plan is focused first on upgrading systems, but that would be starting at the wrong end. Instead, to achieve our over

objective of putting in place a global infrastructure that allows Mattel to optimize productivity and better enable integration, we are using a tiered approach to implementation.

The approach consists of simplifying and globalizing our processes based on best practices, streamlining the organization by eliminating redundancies, and finally upgrading our systems to allow greater visibility of information on a global basis. Our first focus area will be of global infrastructure. It is critical because it is the foundation on which everything else is built. To improve our infrastructure this year, we will upgrade our global networks, replace more than 2000 old obsolete desktop computers, implement new storage technology, and invest in a host of new employee productivity tools.

Secondly, we will improve our enterprise systems by replacing or integrating those 200 fragmented systems I mentioned earlier. We are starting with what we call the global transformation, which targets finance, HR and supply chain forecasting. Again, using our tiered approach, we evaluate the process, look at the organization, and then begin to upgrade and integrate the systems.

At this point, we are in the design and development stage of these initiatives. Each of these core building blocks will be designed for global use, piloted on a regional basis and then quickly rolled out to the rest of the world. Over the next few years, we will transition to a handful of tightly integrated systems that will take us from

inefficient processes to globally consistent and optimized processes.

The next focus area of the strategy is our data warehouse. Today, we have a multitude of separate data repositories that has information gathered from many different legacy and spreadsheets. Our goal is to develop an integrated data warehouse sourced from a single set of integrated systems that provides full-sale service capability to our employees. The single most important thing that our strategy will enable is the ability to get better information into the hands of the people who run the business, so they can make better decisions faster.

And the last piece of strategy is e-business. And put simply, this means digitizing Mattel. We will save money by putting more information on the Web and eliminating the need for paper, and by reducing unnecessary handouts between our suppliers, employees and customers, via these self-service applications.

In this area, our focus for 2002 will be to leverage e-procurement by integrating

; to expand our business-to-business site both geographically and functionally; to better serve our retail customers and our internal sales force; and finally to expand self-service capabilities for our workforce, enabling our employees to do more, faster and easier. For example, we are investing in new technology to allow better digital design collaboration, which will not only improve the efficiency of our design process, but also eliminate the requirement to travel as frequently, lowering our overall travel costs.

At Mattel, our IT strategy is all about improving the speed and visibility of information, simplifying process, empowering employees and reducing costs. Today, by the time an event has occurred -- let's say a change in demand for a specific product -- and the information is made available to the people who need to react to it, it is often too late to take action to effectively minimize a risk or maximize an opportunity. Tomorrow, as we execute our strategy, we'll have both the tools and the information so that we can react quickly.

We know the companies that react the quickest in today's marketplace win, and our IT strategy is aimed at transforming Mattel into a faster, more competitive company.

Thank you.

Thanks, Joe.

Operator, we're ready for questions.

Thank you.

Today's question-and-answer session will be conducted electronically. If you have a question, you may pose it by pressing the star key, followed by the digit one on your touch-tone telephone. Once again, that is star, one to ask a question.

We will pause just a moment to assemble our roster. Today's first question comes from

with Morgan Stanley.

Great, thanks very much. I have a couple of questions for you guys, and all of them are really about market share. I guess the first is, with a more efficient overall supply chain, you move the order closer to the ship, and the ship closer to the sell-through, it seems like it should give the retailer more flex room in not having to make a bet on a certain product as far out, so I guess aside from reducing inventories, I'm wondering how much of a marketing vehicle and market share gain tool this is?

And the second question is really about international, in that we're at a point here where we should be saying that international is off because of tough comps, but we're not. And the market's not growing at 16 percent, it implies that if ship is matching sell-through that you guys are gaining share, so I'm wondering how much of that is due to the sales force for you organization, and how much, and how just an overall more fragmented retail based outside of the U.S. is impacting your market share?

Hi

this is Bob. Let me start at least. I think as it relates to the supply chain improvement, helping market share, I think you're absolutely correct in that. By shortening our product development cycle time, by contracting our manufacturing ramp up schedules, we can get products to retailers closer to when they sell them to consumers. That's very good for retailers, and I think it's good for us, and I think one of the reasons that we have been consistently gaining market share is essentially every market in the world for the past year-and-a-half, is not only that we have great products and great marketing programs and those sorts of things, but as Kevin mentioned in his remarks, we have very strong partnerships with retailers, because we've improved our supply chain.

Now let me address international. Obviously the law of bigger basis will come into play sometime. I've said for the last five or six quarters that our growth has been quite robust, and at some point that's going to cycle through, but having said all that our growth has not been accidental internationally. I think it's related to several things.

First is global business units. We have much better communication, coordination, from product development through launch of products, whether it's Harry Potter, which continues to do very well on a worldwide basis, or things like Barbie in the Nutcracker that was launched last year in 42 languages I believe, or our core brands with core customers.

Secondly, related to what I just talked about in market share, our customer or account planning has improved significantly, not only in the U.S., but overseas. We have proactive partnerships with key retailers throughout the world, and we are growing with large and growing retailers throughout the world. And supply chain improvements have clearly played a role here. We've shortened the product development cycle, we've improved the performance of our distribution centers all over the world. And being able to get the right

for the right customer at the right time at the right price has obviously worked to our advantage.

All of that said, we are going to

the law of big numbers sooner or later at the international, and I don't think we're going to continue growing shipments as fast as they are. But we are, in fact, gaining market share.

Great, thanks.

Our next question comes from

with Salomon Smith Barney.

Hi, thanks. It's actually

.

Just following up on Barbie a little bit, could you just give us an update on your efforts to revitalize Barbie domestically? And, secondly, maybe you could just talk a bit more about the key drivers behind -- it looks just like Barbie internationally was up, you know, 20-25 percent. And maybe you could talk about the key products there. If it was Barbie and the Nutcracker or something else -- thanks.

Hi,

, it's Bob.

I think there are three or four points to make on Barbie this morning. First, we are successfully developing a portfolio of doll brands. Our total gross business was up 10 percent worldwide, with Barbie up five percent. In the U.S. our total gross business was up one percent, with Barbie down three percent.

The second point is Barbie is holding her own at retail. You'll recall in the full-year numbers last year -- according to

in the U.S. -- Mattel Inc. point of sale growth was five percent. Our girls' business grew at

percent. And Barbie was just slightly north of flat. I think it was up three-tenths of one percent.

Where Barbie has not performed well tends to be in the more adult products, like collector and Holiday Barbie. I addressed those things in previous calls.

Our internal point of sale through March supports the same general conclusion this year that we saw last year, but indeed it is very early. And, you know, we are going to constrain production of this year's holiday doll. We've talked about that before, and we don't anticipate a real turnaround in the collector business.

Third, while the doll business is holding her own -- remember it's the foundation of a larger Barbie brand that encompasses

, footwear, electronics, jewelry -- based on our licensing revenues, we see the Barbie brand continuing to grow. And, finally, the Barbie brand is expanding globally, driven by a solid foundation.

Internationally, Barbie grew in 2000 seven or eight percent. Barbie grew 15 percent last year globally. And about 17 percent, as Kevin mentioned in the call this morning.

So again, the law of bigger basis will get to us sooner or later, but our total doll business is performing well, Barbie is sort of holding her own while the other doll brands perform better, and that's not a surprise to us. A couple of years ago the company was criticized for being too Barbie dependent, now Adrienne Fontanella and her team have done a wonderful job introducing new products around Barbie, and people are anxious about how come Barbie's not doing as well. So, you know, we're all trying to have our cake and eat it too, but it's not always going to work out like that.

Thanks.

Next we'll go to

with Gerard Klauer Mattison.

Hi, first just to kind of follow-up on a similar course with Fisher-Price. The declines there, can you talk about what you're seeing in terms of market share, and sell-through, and also what you expect with character brands, when we might see that business turn up?

Hi

. Let me address broadly before I get into Fisher-Price what we're seeing at point of sale. And I start by saying that our shipments in the U.S. were down one percent. Our internal read of point of sale data through March, which includes Easter this year, does show increases. So, it's consistent with our objective of managing sales to a level that better balances sales and take-away. You haven't seen that yet in the NPD data, nor have we, but it's hard for me to imagine that by the time that the March data comes out it won't be a very good month according to NPD. And remember Easter was in March this year, two weeks earlier than it was last year.

I think one of the real key questions is, will NPD report an increase on year to date basis through March. I haven't a clue. You know, there's a couple of things going on at NPD this year, I think they made a rather arbitrary adjustment to eliminate last year's extra week in January, and obviously they no longer capture data from the largest toy retailer, and one who's clearly been gaining share, so I don't know how all this is going to play out, but I suspect you'll see March NPD data up quite nicely, but then I'll remind you as soon as you see that, don't forget in April we had the benefit of Easter last year, and not this year.

As it relates specifically to Fisher-Price, that is an area where we are seeing strong consumer take-away, based again on our internal look, but at least through February I think you also saw that in the NPD data. The decline in shipments at Fisher-Price is consistent with our objective to better align shipments with demand. I don't spend too much energy trying to figure out exactly how that's going to play out brand-by-brand or quarter-by-quarter, and I wouldn't suggest that you all spend too much energy on that, but I do think because Fisher-Price tends to be a larger

and maybe more expensive items, that if you're a retailer looking to manage your inventory, those are good places to start.

OK, and one...

Finally -- I'm sorry, character brands. We have experienced softness in the licensed character brands, as you know. Specifically in plush and feature plush. We believe we have a strong lineup in 2002. We have Barney, we have

the Explorer,

. One of my favorites, Chicken Dance Elmo. They're all planning to ship in the second half.

All that said, we haven't yet seen a turnaround in character brands at retail or in our shipments. So it is a challenge for us, and all I can tell you is we're continuing to work on it.

OK.

Bob, if I could ask you to clarify too as you talk about lower shipments in the first half, are you referring to kind of a gross trend? The gross, being lower in the first half versus the second half? Or, you know, lower shipments in the first half versus last year's first half?

Well,

, you know I don't give guidance by quarter, by brand or any period of time. But I do think it is very important for you to know how we're thinking. We did have a good first quarter.

We had low beginning-of-the-year retail inventories. We had the early Easter. We had continued extraordinary growth outside of the U.S. But our U.S. sales, in fact, declined, as we worked with the retailers to better align shipments at take-away.

We are clearly going to continue working on that. You'll recall last year, I think 35 percent of our annual sales were sold in the first half, and that compares with only 28 percent of what consumers bought. And that gap between what we sold in and what sold through has increased over time. And we want to make it decrease over time.

In the second quarter, we're also going to face more issues with Kmart, as they close doors. And, clearly, the early Easter timing that worked for us in the first quarter is going to work against us in the second quarter. But, again, we manage for the long term, not market by market, not quarter by quarter. And our long-term guidance remains as it has been.

There's no doubt in my mind that we're going to have some good quarters and we're going to have some not so good quarters. And that's the nature of our business.

Thanks very much.

Next we'll go to

with Arcadia Investment Corporation.

Godo morning.

I got a couple of questions. The first one, focusing on the clean sell-through at the end of last year, were there any particular categories that benefited from kind of a recharge of empty shelves that impacted the first quarter?

Yeah

, there were a couple. One was clearly Power Wheels. You know, I go back to the statement I just made on Fisher-Price being large, huge and expensive items and if you're running a warehouse, that's the sort of thing that you might be looking to manage down as opposed to up. But we had strong internal shipments of Power Wheels, and in my judgment that's because inventories were so low at retail at the end of the year that retailers are actually missing normal turn business, and they had to replenish.

We've also seen strong performance in Rescue Heroes, in the Barbie accessory business, and I think one of the reasons our shipments were stronger than we might have expected in the first quarter, was just because several large retailers sort of had to reload just to stay in business and keep up with consumer demand.

OK. Did, you think the basic Wheels business benefited from that too, the Hot Wheels and whatnot?

Well we've seen growth across all three of the Wheels business, in that case I don't know how much of it's due to retailer reloading versus just the momentum that that business has had at retail for a long time.

Yeah, OK. And then, is there any specific impact that K-Mart had on the first quarter?

Well, as you know we didn't ship to K-Mart for most of the first half of the first quarter. And so that obviously, you know, had a negative impact on our shipments, and as they've had some business disruptions and making some decisions, I think it's clear that K-Mart doesn't enjoy the momentum in the marketplace that they may have had in earlier times, and that's impacted our shipments to them.

OK. Coming out of Toy Fair, did your expectations about the makeup of the portfolio change very much, in a large category or in a brand sense?

No, you know, I felt very good coming out of Toy Fair. I guess if I had to cite one product area that has now seen renewed momentum, at least compared to the last year or two it's Matchbox. We've got a very nice thing started here on Matchbox with the 50th anniversary, and I thought it was a pretty nifty program when I saw it. And I think retailers are encouraged by it, and now based on the take-away it appears that consumers are encouraged by it. So, I was pretty enthused about Matchbox, and while I hate to admit it, I was pretty enthused about character brands. The problem with character brands is I've been enthused before, and consumers haven't voted with me, so we'll see how things work out this year.

OK, and last question. Can you give us an update on what's going on with

, shipments, take-away, whatever?

It's very early on

. We've enjoyed what I think is pretty solid support with retail, but it's very early and I really don't have anything for you in terms of it being a big success story or anything like that. It's just too early to tell,

.

Are you getting reorders faster than you would have thought or anything like that?

That kind of goes to the brand by brand. I would just say it's so early that I wouldn't want to steer you one way or the other yet. We'll have to see how it plays out.

OK, thank you.

Next we'll go to

with Lehman Brothers.

Hi there. Good quarter.

I have a couple of questions for you. Actually, I have three.

First, getting back to the IT discussion at the end of your part of the call, just wondering how much of your -- what percentage of your cap ex budget for the year is coming from IT spent?

The second question I have is really regarding this early Easter. And I was wondering if you were able to do this. If you normalized Easter, how you think the quarter might have looked.

And then, finally, just getting to the alignment -- or the changing of your shipping patterns, you know with the growing strength of the retailers -- like Wal-Mart and Toys "R" Us and Target -- I'm wondering how you can ensure that you can stick to your plan to better align your shipments to the retailers with consumer demand. I'm assuming that the retailers have similar goals to keep their inventories low, but how do you handle the cases when your research might indicate that you should ship a product later than the retailers are requesting?

OK,

. I'll ask Kevin to start with the cap ex thing, and then I'll try and talk about shipping patterns.

OK,

. I just want to sort of back up and indicate there'll be some incremental capital spending

IT strategy. These expenditures will be within our capital expenditure targets of 180 to $200 million. However, the majority of the funding will come from our existing IT spend, as we direct our spending in more strategic IT projects rather than tactical spending.

With that said, I think about 25 percent of our budget for cap ex this year will be related to IT spending.

As it relates to normalizing our shipment pattern for Easter, I think we're going to be all better off doing that in hindsight after we see how April and May play out, than probably, you know, trying to do it today. That said, without going through the numbers, we clearly saw an impact from a strong Easter consumption. Again, our March POS was quite strong, and I think you'll see that when the

data comes out.

Now how much of that is just a shift from March into April, we'll have to see how our internal shipments look and how POS looks, you know, six or eight weeks from now.

the shipping patterns, you're absolutely right. I think what we're trying to do is absolutely in sync with where major retailers are going.

I've also said though, very clearly, we're not here turning down orders, so if a retailer thinks that he or she needs more product than we might think, we might, you know, very gently let them know that we might get it to them a little bit later, but we're not in the business of turning down orders.

OK, thanks.

We'll go next to

with Bank of America.

Thank you. Couple questions. Bob, first I'll ask you on the international sales side, talking specifically about Barbie, could you maybe give us some insight as to whether Europe is still driving this business, and whether Asia, whether you're having really any impact in Barbie sales in Asia? And then, since Joe's there, I'll ask a couple questions of him, if he'll answer.

Number one, can you give us some idea of how much of your international business is direct, and if there's a system similar to EDI that helps you with inventory, and they maybe more importantly, do you have a sense of your international inventory at your retailers, and I guess the real question is, what is the risk that these retailers maybe aren't very sophisticated and are carrying too much inventory? Thanks.

I'll try a little bit on both

and then turn it over to the guys. We have seen Barbie have good momentum throughout the world. As I mentioned I think, you know, we saw eight percent growth internationally in Barbie in 2002, followed by 15 percent last year, followed by a good quarter this year on top of a good quarter last year. We clearly have improved momentum in Europe on Barbie, but it's not confined to Europe. Things are playing out well for us in Barbie, and remember, one of the differences is, unlike the United States, we don't have a lot of things like collector Barbie, and the Holiday Barbie, and the things that have constrained our growth in Barbie here in the U.S. Those things are not factors overseas.

As it relates to retailers, we don't find generally that many less sophisticated retailers overseas. We are growing our business with the large and growing retailers, you know, there are some very large retailers overseas, they are sophisticated, they know their inventories, if they don't want to buy more than they can sell, and I'm not here to tell you that double-digit growth is going to hold up infinitely, or indefinitely, for, in international. I really don't think it will. But the fact is, we have good momentum, we're working very well with key retailers, and we have seen market share gains internationally.

I think

with regard to EDI, we do get EDI from our major customers like Piper Markets abroad, so we do get a significant portion of our sales through EDI interchange.

Thanks.

Next we'll go to

with

and Murray.

Good morning.

END