Mattel Inc (MAT) 2002 Q3 法說會逐字稿

Good day everyone and welcome to the Mattel incorporated third 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, Miss Dianne Douglas. Go ahead, ma'am.

Thank you. Good morning and welcome to Mattel's 3rd Quarter conference call. I'm Diane Douglas, Vice President of Investor Relations and joining me today are Robert Eckert, Chairman and Chief Executive Officer, Kevin Farr, Chief Financial Officer and as our special guest, we have Matt Bousket, President of Boys and Entertainment business.

Earlier this morning, we issued a press release which detailed our third quarter results.

On the call this morning, you will hear brief remarks from Bob, Kevin will provide a review of the financial results and Matt will give you some insight on our international business.

Before we begin the 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 discussions will include statements regarding growth and earnings per share, growth in sales, developments related to labor disputes at West Coast ports, the company's financial realignment plan, debt to capital ratio, capital expenditures, receipt of certain payments related to The Learning Company, inventory levels, receivables, international business strategy and growth, reduced shipments in sales of certain holiday and collector products, and a new retail store.

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 10K filed with the SEC and Mattel's other filings made with the SEC from time to time as well as in Mattel's other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so.

Now I'd like to introduce Robert Eckert.

Thank you, Diane and good morning, everyone.

I'm very pleased with our 3rd Quarter results. While Kevin will take you through the details, I'd like to touch on some of the highlights for the quarter as well as outline the challenges we face as we enter into the all-important holiday season.

I'm encouraged by the positive gains we've made across all areas of the business, worldwide sales are up 6%. Our core brands are growing, margins are expanding. The balance sheet continues to show improvement and our cash flow is strong.

As part of our continued success, we believe that reinvesting in the business is a key component. Just last week we announced the opening of the much-anticipated second American Girl place in New York City, slated for fall 2003. The flagship store, located on Chicago's magnificent mile, has been quite successful and we look forward to generating that same energy, excitement and profitability on 5th Avenue.

As you can see, we're making progress toward achieving our goals, but we're also experiencing some major challenges domestically. Last year we were faced with the devastating effect with the events of September 11th on the economy and consumer confidence. This year it's been an uncertain stock market, the threat of impending war and finally the unfolding drama of the West Coast port dispute.

As I've said many times, there will be bumps along the way and the port situation is clearly one of those bumps. We've been tracking this since the beginning and have contingency plans in place, some of which are now being executed. For example, early on, we arranged for containers with critical holiday product to be shipped on the carriers' top decks to ensure that they will be first to move as cargo is unloaded. Admittedly, a small step, but part of the process that we can control.

Of course, there are also factors that we cannot control, including the pace of work at the docks, availability of ships and containers in Asia and like in any holiday season, retailer appetite for the product when it is unloaded. But with all that said, we're confident that we are effectively managing the situation from our end. While we've had our share of challenges in the U.S., we're especially pleased about the success of our international business with double-digit growth in the third quarter.

And speaking of international, our guest speaker today is Matt Bousket, who is not only the President of the Boy's Entertainment division, but also heads up our International business. Matt's doing a magnificent job on both fronts and is here to share with us today to share where we've been, where we are now and where we're going.

Again, I'm please we did the overall health of the company, the performance of our core brands and the progress we've made this quarter. As I've said before, we're focused on the long-term, I'm confident that we're well-positioned to continue to execute our strategies and improve our performance. Helping us reach our vision of being the world's premiere toy brands today and tomorrow. Thank you for your attention.

Now let's move on to the financial overview section of the call with our CFO, Kevin Farr.

Thank you, Bob and good morning, everyone.

To facilitate my review of the financial performance for the third quarter, I recommend that you refer to the exhibits of the press release.

I will begin with a discussion of worldwide growth sales shown on the bottom of Exhibit 1. Total worldwide growth sales were up 6% for the third quarter, reflecting international sales growth of 17% or 15% in local currency and U.S. sales growth at 2%. Our strategic focus on globalization continues to generate good results for the company.

On a regional basis in the quarter, sales in Europe were up 24% or 14% in local currency. Sales in Latin America were up 16% or 27% in local currency. Sales in Canada the third quarter were down 8% or 7% local currency and Asia Pacific was up 16% or 12% local currency for the quarter.

Now I will review our core categories and brands. Girls, for the quarter, worldwide sales for the girls division were up 2% or 1% in local currency. International sales were up 18% or 15% in local currency and domestic sales were down 6%. Growth in Barbie internationally, Polly Pocket! and What's Her Face! offset declines in Diva Stars and large doll sales driven by the discontinuation of Cabbage Patch Kids this year. American Girl sales were up 10% in the quarter. Worldwide Barbie sales were up 6% for the third quarter, reflecting an increase of 17% in international sales and a decline of 1% in domestic sales.

The decline in domestic sales for Barbie was driven by the strategic initiative to reduce shipments of the collector and holiday lines. Excluding these adult-targeted lines, Barbie sales increased 3% in the third quarter in domestic markets. As we said previously, we plan to ship about half as many holiday dolls this year as we did last year. So...you should expect to continue to see this having an impact on Barbie's domestic sales.

Boys'. For the quarter, worldwide sales for the Boys and Entertainment division were up 9% in U.S. dollars and local currency. International sales were up 17% or 16% local currency while domestic sales were up 5%. Worldwide sales for the wheels business were up 8% with domestic sales up 1% and international sales up 26%. Worldwide sales for the entertainment business were up 21% in the quarter, reflecting strong sales from all licensed properties and games and puzzles, which more than offset the elimination of the Disney entertainment properties.

Infant and Preschool. Worldwide sales for the Infant and Preschool division were up 9% for the quarter and 8% in local currency. International sales for the division were up 15% or 12% local currency while domestic sales were up 7%. Worldwide sales at core Fisher-Price were up 23% with domestic sales up 22% and international sales up 26% or 21% in local currency.

Looking across all of the business units, our data suggests that retail inventories continue to come down. However, an obvious area of concern, near term, is the impact of the West Coast port dispute and a continuing difficult retail environment. That said, we have a strong product lineup for the fall season and good marketing programs with our major retail partners.

Now, let's review the P&L which is shown on exhibit 3. I will focus my comments on our performance, excluding the impact of non-reccuring charges. I will discuss the charges later in the context of an update on our financial realignment plan. Additionally, to facilitate the year-to-year comparison, prior year results have been adjusted to reflect the adoption of FAS 142, which took place in the first quarter this year, by removing goodwill amortization and its related tax effect from pro forma results.

Gross margin. Gross margin was 50.4% from the quarter, reflecting a 310 basis point improvement compared with last year's third quarter. Gross margin was positively impacted by the execution of our financial realignment plan and supply chain initiatives. Specifically, the margin benefited from lower royalties, logistics and product cost.

Advertising expense was $187 million or 11.2% of net sales, up 10 basis points from prior year and consistent with our expectations. Selling, general administrative expenses were $279.3 million or 16.7% of net sales for the quarter, up 210 basis points compared with last year's third quarter.

Improvements in SG&A this quarter, driven by continued execution of our financial realignment plan, were more than offset by a charge for bad debt and higher incentive compensation accruals. As most of you know, our incentive compensation plans are based on net operating profit less the capital charge and we've made substantial progress in improving this metric since this time last year.

As we do in every quarter, we re-evaluate our credit exposure with all of our customers and determined it was necessary an adjustment to our reserves for the K-Mart pre-bankruptcy petition receivables. As a result, we recorded an additional $18 million charge in the quarter. The remaining pre-bankruptcy petition receivable, net of reserves outstanding is $18 million. Excluding extensive accruals for this year, our expectation is improved SG&A as we continue to execute the financial realignment plan and tightly manage costs.

Operating income. Operating income for the quarter was $379.2 million, up 12% versus last year. As a percentage of net sales, operating income was 22.7%, up 130 basis points compared with the prior year quarter. Higher sales and improvements in gross margin was partially offset by higher SG&A.

Interest expense was $26.6 million for the quarter, compared with $39.5 million in the third quarter of 2001. Compared to last year, this year's interest expense reflects the benefit of lower short-term rates and lower averaging borrowing. This was driven by a hard cash balance at the beginning of the year, the payoff of maturing long-term debt and the progress we made in reducing our working capital and strengthening our balance sheet, which I will discuss in a few minutes.

So, to summarize the P&L for the quarter, we reported income, excluding the impact of charges, of $256.7 million or 58 cents per diluted share, versus last year's third quarter income of $216.7 million or 50 cents per diluted share. Increased sales, improved operating margin and lower interest expense more than offset the higher bad debt expense and incentive accruals and drove higher profits.

In addition to solid performance in our ongoing business, we also recorded a $27 million after-tax gain from the sales of Learning Company divisions by Gore's Technology Group. As you may recall in the beginning of the first quarter in 2000, Mattel's interactive business was classified as a discontinued operation. We subsequently disposed of the Learning Company business in a transaction with Gore's Technology Group and recorded a charge at that time.

Now, turning to the balance sheet. Our receivables at $1.356 billion were 67 days of sales outstanding, decreased by 17 days versus last year. This reflected improved cash collections and higher factor in accounts receivable that more than offset an increase due to the recording and receivable from Gore's Technology . This week, we received the $43 million pre-tax amount of cash due from Gore's related to Learning Company. Excluding the year-to-year change in factoring, which was up $99 million versus the prior year and the receivable from Gore's, receivables were down $180 million with days sales outstanding improving by 21 days.

Inventories at $574 million were down $166 million or 22% versus last year's third quarter and represented 64 days of supply, which is 13 days lower than last year. Compared with last year, inventory levels were positively impacted by the execution of supply chain initiatives and the elimination of pre-build inventory related to the closure of our Murray, Kentucky plant, which was essentially completed in the last quarter. Excluding the pre-build, days to supply would have been down 11 days compared with last year.

Improvements in the performance of our supply chain continue to be a key initiative going forward. As a result, we expect to show continued improvement in the receivables and inventory levels. That said, the West Coast port dispute could put pressure on inventories in the near-term.

Our total balance sheet debt decreased by $883 million and our debt net of cash decreased by over $1 billion from third quarter 2001. This reflects the strong cash flow generated by our operations and our improvement in working capital. Our debt to total capital ratio ended the quarter at 37.9% versus 55.4% last year. We continue to target a year-end debt ratio at about 1/3 of total capital. We expect to achieve this target by year-end.

Given the current environment, we will continue to evaluate the possibility of a more conservative capital structure going forward. Capital expenditures for the quarter are approximately $45 million, which is about equal to appreciation for the quarter and is in line with our expectations of capital expenditures for the full year of $180 to $200 million as we execute our long-term 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 2 of the press release, you can see that in the third quarter, we recorded $5.5 million pre-tax charge related to the financial realignment plan. hence charges consist of a $900,000 charge to gross margin primarily related to the closure of the Murray, Kentucky plant, a $2.3 million charge to SG&A related to streamlining back office functions, and a $2.3 million charge to other expense primarily related to the closure of the Murray, Kentucky plant.

Since we announced the realignment plan in September of 2000, we have taken $216.5 million in pre-tax charges and we expect to record the remaining $33.5 million during 2003. Of the after-tax charges taken thus far, $105 million were cash. We anticipate that approximately $120 million of the total $170 million after-tax charge will be cash.

We are taking the actions necessary to achieve our targeted cost savings and we are on track to deliver at least $65 billion of savings expected for 2002. We continue to 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 to the low end of the range to mid-teens at the high end of the range over the three to five-year planning horizon. Now I'd like to introduce Matt Bousket, who's going to discuss our international operations. Matt?

Thank you, Kevin.

Mattel first expanded overseas in 1963 and through the early '90s it grew to be an important part of the business. However, in the late 1990s, international sales declined and profit deteriorated.

When I took over the leadership of Mattel's International business in the spring of 2000 it was clear that we needed to make fundamental shifts in our global business approach to reverse this trend. A new long-term initiative, called One Mattel, designed to move us from a multi-national company to a global consumer products company was launched in the year 2000. These efforts are now paying off.

In the last 12 months, we've achieved all-time record sales in profits, growing in each division and in every region around the world, despite challenging economic and political situations in many countries. As Kevin mentioned, the third quarter results continue the success marketing -- marking the ninth consecutive quarter of growth in local currency with an increase of 15% versus year-ago and year to date results up 12%.

Performance was strong in all major regions across all three divisions, girls, boy's entertainment and infant preschool. Our performance at retail, as measured by market share gains, retail sales and customer feedback, is also very encouraging. We continually monitor these metrics to ensure our shipping and sell though is aligned.

There are four key strategies of the One Mattel initiative fueling our success.

One: Establishing consistently communicate a singular global position for each of our brands.

Two: Drive the main creation and distribution games in existing markets while continuing to build our brand equity.

Three: Develop one worldwide way of operating.

And four: Enter new geographic markets in a disciplined fashion.

Key to the successful implementation of the first strategy, a singular global positioning, we embarked on a worldwide research initiative which confirmed the fundamental positioning of our core brands is relative and unique in the world and has struck a chord with consumers, both kids and adults. So, for instance, Hot Wheels worldwide positioning of speed, power, performance and attitude is unique and relevant to kids around the globe. We achieved similar results with Barbie and Fisher-Price.

Knowing the core positioning of our brands were sound, it was important to have our product lines and our advertising reflect global sensitivities. These efforts have enhanced the ability to execute concurrent product launches and marketing campaigns on a worldwide basis. We will repeat last year's success by globally launching Barbie as Rapunzel, Fisher-Price Imagine-X, the second Harry Potter movie based product line and the Hot Wheels Aqua Blast set this year.

The second key strategy is building consumer demand for our brands while continuing to grow our retail shelf space. Around the globe, we have increased our efforts and our resources to drive kids and parents to retail by developing integrated marketing campaigns that include advertising, promotion, public relations and merchandising with a local spin to the brand's global positioning. At the same time, these marketing efforts are focused building brand equity, versus just selling individual toys. Consequently, these combined efforts resulted in higher sales and market share and expanded presence at retail with more space for our existing brands and existing doors and more new doors internationally.

The third key strategy, develop one worldwide way of operating, was a deliberate change to have the entire company think and act more globally both inside and outside the U.S. Looking for and aggressively adopting best practices from anywhere around the globe.

Key to the success of this strategy was holding the three business units accountable for global results. To achieve this, we aligned mine, Adreinne, Neil and our teams compensation structures such that we are now rewarded for global results. The international management team is now compensated U.S. results as well. This change has helped propel company initiatives in many areas of the business including packing and product development. So, for example, we have placed a greater emphasis on developing more global packaging, resulting in a move to more three-language and nine-language versions. This is greatly simplified our production, increased our inventory flexibility and improved our time to market.

This global focus now manifests itself in every aspect of the product development, as well, resulting in lines such as Polly Pocket! and Imagine-X, each developed with greater global influence.

The fourth strategy is geographic expansion into new markets in a disciplined and systematic fashion. We have continued to strengthen our foundation businesses. Those brands and countries that define Mattel and are critical to our financial and operational success. We are also entering new countries that we believe have the opportunity to grow profitably at a higher rate than average in the long-term.

Our new market entry strategy focuses on a vigorous market analysis followed by a best practice implementation plan. It includes evaluating category and brand strategy, distribution strategy and human resources review, manufacturing support, financial controls and processes, government relations, IT systems, media and licensing. A team of experienced managers addresses each of these areas prior to a full-scale market entry.

Our current focus is on expansion in Korea and Poland. In the case of our established businesses, Europe is the largest region outside of the U.S. and it continues to grow in all three divisions. Girls, boys and entertainment and infant preschool, despite lackluster economic conditions in some countries. Our market share is growing behind demand creation and distribution efforts that continue to be sub-par relative to the U.S., giving us upside potential.

The Latin America region continued to grow in local currency, despite economic and political hurdles. Mexico's third quarter results were particularly encouraging, where recent investments in process and people have resulted in significantly enhanced top line to bottom line flow-through.

Asia Pacific is our most underdeveloped region of the world, yet offers the greatest potential. All of the efforts I have outlined are anchored in a core [no pet] less capital charge measurement. It is a disciplined way of analyzing our business by region, by country, by division and allocating resources appropriately. It is a key driver of employee performance as it propels every part of our incentive programs across the entire Corporation, regardless of location or level.

World class consumer products companies benchmark success when 50% of the company sales are derived from international. Mattel's international full year sales for 2000 were approximately $1.7 billion or 33% of total corporate growth sales. Thus, despite record sales and profits for the third quarter this year, we still have opportunity for growth when benchmarking against world class consumer products companies.

The future for -- the future is definitely bright for Mattel's global efforts and there exists a world of opportunity. One of the most encouraging aspects of our progress is not that it's based upon the meteoric success of one product or one brand, nor is it reflective of particularly strong international economic conditions, but rather a fundamental shift in business operation that's should provide a foundation for growth in the future. This should allow us to grow our business outside of the U.S. at a rate above our U.S. expectations for the foreseeable future. Thank you.

Thanks, Matt. Operator, we're ready for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. If you are on a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, it is star one on your touch-tone telephone to ask a question. We will pause for just a moment to give everyone a chance to signal. Our first will come from Felicia Cantor at Lehman Brothers.

Hi, guys. Good morning!

Good morning!

Uhm - I have a couple of questions for you. First question is for Kevin, second one is for Bob.

Kevin, on the SG&A, seeing that -- I was wondering what it would have looked like as a percentage of sales without the bad debt effect and without the accrual for compensation effect? And then also with that, I think if I'm correct you mentioned on your last quarterly call that the effect from the accruals will take us through the end of this year and I'm wondering if we should start to see an improvement in the first quarter and then I'm also wondering in the quarter, was there was any kind of impact for your contingency plan with the ports in SG&A?

And then just a bigger picture question. You guys posted great results across-the-board. I do want to focus though, on the Boys Entertainment business for a second. Entertainment was up 21% this quarter. You guys have definitely announced some very strong licenses in particular. You have He-man, Yu-gi-oh, Harry Potter and, you know, while the plan for Mattel has clearly been focused on slow, steady revenue growth and a focus on core business, I wonder if you worry that these licenses could begin to attract the type of attention that's typically placed on companies that benefit from volatile growth spurts driven by hot properties?

Okay, well let me answer the first question. I think, as we said on the call, the savings from our continued execution of the financial alignment plan were offset by the K-Mart bad debt charge and additional incentive accruals. If you exclude both of those, SG&A as a percentage of sales improved. And with respect to contingency planning for the ports, there was no charge in the quarter related to contingency planning in SG&A. Bob?

On the entertainment business, as we've articulated previously, we have a very -- a very detailed series of hurdles that an individual property has to overcome to even become part of our portfolio and that -- we have a disciplined overall projection in terms of our sales for the future. Some licenses are going to be going up, some going down. And we're looking at a market basket approach overall, but we're not looking for meteoric growth that portion of my business overall.

Great. Thank you.

Our next question will come from Jo Kudis with Salomon Smith Barney.

Thank you very much. Good morning. I wanted to get a sense of -- in terms of the dock workers strike, first of all, if you could provide any level of detail in terms of how much product, you know, has been out on the ships and less accessible or how much inventory you've taken on to make the impact of this less severe on the business? Have you begun air freight shipping? Just trying to get a sense of, you know, what your expectation is in terms of the impact it might have on the fourth quarter. That's the first question.

Hi, Jill, this is Bob.

Hi, Bob.

Let me spend a couple of minutes, 'cause I'm sure this is important to a lot of you on the call. So let me spend a couple minutes giving you my perspective on the long shoreman situation.

First up, we're disappointed that management and the long shoreman haven't resolved their issues. I'm also disappointed the White House allowed two weeks to go by before intervening in this. The West Coast ports represent about 7% of the U.S. GDP and, I think, it represents about 10% of Asia's GDP, excluding Japan. And we've clearly had two weeks of shipping delayed at a critical time period.

Now, as I mentioned, there's things we control and things we don't control So let me amplify on that for a minute. We do control how our product moves once we get it. So, as I mentioned, in anticipation of the issue, we've moved our containers to the top decks of ships so that we can get unloaded first. We've identified containers with critical product and prioritized them. We've repositioned inventory from Canada and Mexico. Matt mentioned our increasing use of three-language packaging in globalizing our brand. That's clearly paying off in that standpoint. We have selectively begun to airship, but only where appropriate. And we've begun to work with our customers to get the product to them as soon as possible, including skipping RDCs once we get the product off the boats. You can imagine this is really our full-time job right now.

All that said, there are things we don't control. We don't control the pace of clearing up the backlog. We don't control the availability of ships or containers in Asia. We don't control the retailers appetite to take product once it is offloaded. And that's how this business works.

We're in the peak season, it's all about day-to-day execution and we're capitalizing on our strong retail partnerships. But I won't sugar coat it, this is a bump in the road. Two years ago we had the chip shortage. Last year we had the retail environment following the terrible tragedy of 9-11. This year we've got the West Coast ports and a sluggish economy. So, our job is to get over the bumps and keep pushing ahead.

Now, in specific answer to your question, you know, we -- we don't give short-term guidance and I don't want to start today, but just to give you an order of magnitude here, a two-week shipping delay, that is, you know, what inventory is on the water, it's about $75 to $100 million in wholesale value. Ships are loaded everyday, they're unloaded everyday. So, it is a dynamic number and it does move. That's the order of magnitude, it's not $5 million, it's not $500 million, and exactly how long it takes to clear up the port is anyone's guess. And the most important question is: Like in any year, you know, once we have the product and it is available, will retailers take it and how many of these delayed shipments will become [on-sales]? You know, we're working on that everyday with our customers, but right now that's anyone's guess. I can, you know, put in perspective how much is out there, but can't really tell you what the impact's gonna be.

Uhm - Okay. Thank you. And could you -- in the spirit of last year when you provided an outlook for the full year being in line with your full-year targets, do you think that despite these issues that we've discuss that Mattel should still reach their long-term targets for 2002? And the caveat, also, if you could discuss how much market share Mattel gained over the quarter? Thank you.

Well, we haven't given any guidance this year and you know my position on that, Jill. I think giving an answer, you know, guidance in the fourth quarter constitutes short-term guidance and I'm loathe to do that.

What I think everyone needs to do -- for those of you who are into making projections, is balance the progress we've made over the last two and a half years, the income statement, the balance sheet and the cash flows, the progress we've made in the first three quarters of this year, with the uncertainties of the fourth quarter.

You know, there are two big unknowns out there. The impact of the West Coast port situation and somewhat relatedly, what the retail environment's gonna be like. As Christmas approaches, we're in, you know, something we call in here, a term I heard which makes a lot of sense to me, EFJ's. Early fall jitters. At this time every year, it seems like a lot of people think there may not be a Christmas. I'm willing to bet that there is going to be a Christmas. It will probably be around December 25th and I think it will be an okay Christmas. Toys have traditionally held up well in tough economic times. Last year the industry was only down 7/10 of 1%. This year through August, year to date, the toy industry is up 1% and everyone knows that our industry data no longer includes the largest and one of the fastest-growing retailers. So, I think the toy industry will hold up well.

In specific answer to your question on market shares, we only have data through August, so, we really don't have the key seasonal products yet. But we were losing share through the summer consistent with what I told you last quarter in the Spring. Our market share was down through August 1.4 share points to 19.4%. Again, remember that [TRISS] now covers about 40% of the industry and is missing some important players. There are three key areas of decline for us in market share for the first part of the year. First is in fashion dolls. Brat is selling well.

We expect good things out of our own Rapunzel and My Scene dolls, both of which are just getting started, but seem to be doing quite well from what we can see and hear. But, I've also said, we do fully expect to record point of sales declines this year in Barbie due to our reduction in the holiday and collector business and having fewer closeout dolls available this year on the market than last year as we tightened up our supply chain and we just don't have as many closeouts out there that people can reprice aggressively.

And 89% of growth of the entire toy industry through August is in action figures. Spiderman and Star Wars have played out. Our most recent share is up as Yu-gi-oh and He-man are starting to show up. Both of those lines seem to be doing quite well. And finally, as you all know well, is the educational toy area, where Leapfrog continues to do well.

As we look at market share overseas, we continue to see markets growing and we're gaining share fairly consistently around the globe.

Thank you. Great job.

Thanks, Jill.

Our next question will come from Brian McGovern, Morgan Stanley.

Great. Thanks very much. I hate to ask near-term focus question like this, but -- but in the fourth quarter, I mean, one thing people are clearly concerned about is the overall likelihood for your U.S. customers to come back over the course of a month and to say that they don't want toys anymore or they're done.

I was wondering, what actions have you taken over the past, you know, few months in order to mitigate the impact in your P&L should we see order cancellations step up in the fourth quarter? And secondly, just how confident are you that you can gain enough market share with your brand extensions, that we've started to see it already and you've hit on it, as well, here to some degree, but what could we see in the fourth quarter or what are you expecting with these brand extensions in order just to offset just the overall malaise in U.S. retail?

Hi, Brian, it is Bob.

Probably the most important thing we have done in terms of dealing with the potential of inventory cancellations, and again, let me put this into perspective, every year I think people at this time of year get anxious about who's going to order what. What's going to be canceled. Then we run through a fire drill around here in November, which is a couple of things are going really well and can we find them? But, the two most important things is that one, we have really tightened our inventory.

I think you can see over the last couple of years, very good progress in the balance sheet specifically on inventories. Yep. We can end up more inventories than we'd like like, as we did in the fourth quarter last year. But we've made substantial progress since that time and we've refocused on it.

And the second thing is we have worked very, very closely with our retail customers. We are more aligned with them than ever before so that we have a pretty good handle on what their forecasts are and what we're going to ship them.

In response to your second question, sort of projecting share of market is difficult for me to do. I will tell you that we have seen very good early takeaway on several of our product lines.

In the Barbie area, the Rapunzel program, including the doll and accessories and the video, seems to be off to a very good start. The My Scene new line of dolls is just beginning to move, but the early reads are quite encouraging.

Matt's got some things in his area, even beyond the entertainment properties, like Yu-gi-oh and He-man, that are doing quite nicely, including Aqua Blast, which is this year's key Hot Wheels track set. And in Neil's business, infant and preschool, we've got Rescue Heroes, Casey the kinderbot, is off to a very good start. [Kickstart] continues to do well and as everybody knows, I'm still betting on Chicken dance Elmo.

One last question there, when does Elmo ship?

Elmo has not yet shipped, has it? We're not shipping Elmo significantly in the -- this year. We are going to get a - kind of an early read on it and probably ship some late because we - some retailers really wanted to get some sales on it and read of it this holiday season. But we will be shipping very limited quantities of Elmo.

Got it. Great, thanks very much guys.

Thanks, Brian.

Our next question will come from Shawn Magowen at Gerard Karr Maddis.

Hi guys. Uhm - couple of quickies. What's your stance on shipping to K-Mart at this point now that you've, you know, kind of taken another look at that debt? You've got the December 10th date looming. That's one.

Second, when you -- to the extent that you incur higher shipping costs for whatever reason, air freight or special measures to accelerate stuff, where does shipping cost go, they go to inventory or they go to some other the line on the P&L?

And then third, there was a report last week, I guess, that there had been some cancellations on Mattel's part with some major shippers. Could you address that, please? Thank you.

Shawn, this is Bob.

I will do numbers one and three and ask Kevin to do number two. Let me start with K-Mart.

[microphone interference] to them at a fairly consistent rate all year. We're hopeful that they emerge from bankruptcy. Like everybody, we're watching their performance this Christmas. In direct answer to your question, we are shipping to K-Mart.

In your third question, at any given point in time we have orders coming in and orders being canceled. At this point in time, we've experienced nothing that I'd consider extraordinary except for the in fact that our weekly fill rates, our service levels on our normal turn business have deteriorated in the last couple of weeks due to products stuck in the West Coast ports.

That said, who knows what the future looks like, but we have not experienced anything out of the ordinary to this point?

Bob, I wasn't talking so much about customer cancellations as the reports from some source that you guys had canceled shipping plans with major shippers. So, you know, I don't know it f that's out of the ordinary or that's something that happens all the time? That's what I was hoping you would address.

Well, some of that happens all the time. It's also a function of what ships are available and what product is where. So, for example, if we had planned on shipping some product and the boats here or the containers are here, we may have canceled some shipping things, but I don't -- I'm not thinking right now in direct answer to your question, Shawn. There is nothing that I'd consider really out of the ordinary in terms of how we're managing our supply chain overseas.

That's what I was looking for, whether it was out of the ordinary.

All of that said, Shawn, you know, it is a dynamic situation and how fast the boats are cleared and how fast they get back to Asia. I don't want to sugar coat all of this, but we have not had the sort of disruption date that I think you're referring to.

Thank you.

Okay. Now on the final question, Shawn, really shipping costs follow the inventory. So, the extent that we sell the inventory to customers, it hits the P&L. If the inventory is in our warehouses at the end of the year it would be capitalized as part of the cost of inventory.

Okay, that's what I would assume. So, therefore, would you say there were any extraordinary shipping costs that were already reflected in the cost of goods sold in third quarter?

No.

Okay. Thank you.

Our next question comes from Dean Janukas with JP Morgan.

Hi, just a couple of quick questions.

First, can you give what the impact of exchange rates was on the quarter, if any, net? And then also, you talked about shipping later in the year this year, you know, how much has that been impacted? And more of a, I guess, a short-term question, are you comfortable that your revenues can be up in the back half of the year, because you were - it did look you were cleaning out inventory and were in pretty good shape coming into the third quarter. Thanks.

Okay. Well, let me answer the first one. You know the impact on the foreign exchange and gross sales for the third quarter was not significant. As a total company, no impact. If you look at the International division, sales in U.S. dollar was 17% in local currency, it was 15% so it had a positive impact. With regard to EPS it was basically neutral. Bob?

Dean, I'm not going to give any projections of what we think shipments will be in the second half. That sort of violates my short-term guidance principle. I will tell you we did execute our plan as expected to have fewer shipments in the first half. Our U.S. shipments to retailers were down 4% in the first half, up 2% in the third quarter. I think they're down 1% year to date. That's consistent with sort of how the product has been flowing through, out of retail and those sorts of things. But I don't want to get into a projection of the second half sales.

Okay. Thanks a lot.

We'll go next to John Taylor with Arcadia.

Good morning. I got a couple of questions.

You -- you talked a lot about the fluidity and uncertainties related to, you know, the aftermath of the dock workers strike, et cetera. I'd like to hear you talk, I guess, a little bit about how you're approaching the risk management side of this whole thing?

I mean, it seems to me if retailers start to get cold feet and turn stuff back, you're going to be faced with decisions about, you know, pricing and advertising and this sort of thing. Can you give us a sense of how you're thinking about that and maybe a couple of milestone dates or a couple of key, you know, inflection points in the calendar where you really kind of have to make those decisions and then I got a couple of easy ones after that?

Well, JT, I will try to take the tough one, if this is the tough one. We're managing this full-time everyday as you can imagine and make decisions everyday. I don't want to kind of lay out the calendar for you.

Obviously we look at what consumer demand is at point of sale, what retailer demand is. This is not the first time we've been through a situation like this. In my three years here, we went through this two years ago with ship shortage, went through this last year, as you all remember well. I mean after 9-11, retail really slowed down. And we made a lot of decisions and finished last year, despite all of the issues in the fourth quarter, with inventory levels the same as the prior year.

We didn't reduce them the way we wanted to, but we took pretty aggressive actions and cleaned up a lot of issues during the fourth quarter. And this year we've got, you know, whatever the environment turns out to be. So, yes, this is an issue. But we're working on it it full-time and we make decisions everyday trying to adjust where we are in the short-term.

Let me follow-up on that, if I can. So, given the way last year turned out, last year was a fairly good it was a pretty good sell-through year end. The channel was largely cleaned out of a lot of stock. So, based on the way the pieces are moving around now and the decisions you guys are facing, is it your expectation that we're more likely or less likely to have a cleaner sell-through year this year based on whatever demand ends up being and whatever supply ends up being?

Boy,JT, that's really a tough one, 'cause that's really a function of what happens at retail.

I can't tell you, you know, what retail sales will be like in November and December. I can tell you that I think we are closely aligned with our retail customers and we're working with them based on their projections of what they think they're going to do. But at this point in time, it is anyone's guess whether Christmas is going to be great, poor or in between. We will find out.

My personal belief is, again, there is going to be a Christmas and toys will hold up pretty well. And we're planning with our retail customers, with that in mind.

Yeah, I guess what I'm getting at is, you know, you locked and loaded with "X". And there may be some flexibility to go at 95% of "X" in terms of the supply side. And I'm just wondering if you're pulling your foot off the gas at all so that you don't end up in a situation being overstocked in a less favorable retail environment kind of.

We certainly work very hard not to be overstocked. I mean, that's been a consistent theme, at least since I've been here. It is in nobody's best interest if we end up overstocked and I think our retailers know that, we know that and we certainly try to avoid that.

Okay. Okay, and then you cited some August sell-through data Do you happen to have what the Barbie number looked like in that? And I'm also interested in, Matt, for you, can you give us any sort of additional flavor on the building momentum on Yu-gi-oh or Masters or, you know, have you changed your expectation on what Harry Potter is likely to look like this year versus last year?

JT, before Matt talks about his stuff,Barbie we have never really talked about sell-through of specific lines or anything like that. For one thing, you know, as you know better than most, the MPD and trust data is representing sort of west of the population all the time and is less precise as a result, all the time. So, it is sort of directional. But we just haven't gone through specific line item stuff.

You don't have your top 10 accounts or -- sometimes you quote that data.

I don't recall quoting top 10 account data.

Maybe it wasn't top 10 maybe it was top 8 or something, but in the past you've talked about that a little bit I think.

Well, I generally try to give you a flavor for sell-through or market share, but don't recall talking about individual product market shares. If I'm wrong, I apologize. If I made that mistake, my Aunt Joyce said two wrongs don't make a right.

No problem.

JT, on the individual properties, Yu-gi-oh, the television show, the ratings continue to be extraordinarily strong. As you may or may not know, card sales from Upper Deck are extraordinarily strong right now and we continue to see on the toy side, building momentum as we move into the season and sales growing on a weekly basis.

Masters of the Universe has launched up to our expectations. The ratings of the show are also good and sales continue to build momentum across the entire Masters line as we are going into the season.

And Harry Potter, Harry Potter is coming up in the second movie, it looks great with a lot more action. I think it will be more tonetic than the first one. So, we're expecting good things from Harry.

No change in your expectation on Harry?

No.

Thank you.

JT, one more time, because I know you're frustrated by my answer. Let me try to put it to you this way.

As it relates to Barbie, we have expected a decline at point of sale this year related to holiday and collector and related to the fact we had fewer closeout dolls and at least the data that is available to date, the point of sale decline has been consistent with our expectations. Does that help at all?

Yeah, it does.

I mean correct me if I'm wrong, but I think the sell-in -- the decline in sell-in numbers is about as low in September as it's been in several quarters. Is that right? Minus 1%? You've been down close to double digits recently.

That's right. And like Kevin mentioned, if you exclude the things we are clearly focusing closely on, that is holidays, I hate to play that game if you look at it this way and that way, but we said in the past year we're going to reduce holiday Barbie, which is a substantial SKU, the Barbie sell-in was up 3%.

I'm looking for the demand side on that, looking for a similar trend sort of thing.

So are we! And we obviously in the third quarter sell ahead of consumption. So, we partnered with our retailers, you know, that this is what we'd like to sell, that's what they bought. Hopefully it sells through the way we like.

Okay, thank you.

Next question will come from Chris Cox with Goldman Sachs.

Good morning, guys. A lot of my questions have been answered, but just, you mentioned that inventories at retail were down. Can you give us, just a qualification of where we stand in terms of inventory at retail right now? I think at Q2 you had said you were down 10% to 15%.

That's probably done on an order of magnitude, Chris. I think what we've seen is consistent inventory reductions for the year and that really hasn't clanged. We do try as best we can and as best the available data is, we do our own modeling of inventory. It's not precise, it's not like we're counting cases of product at retail warehouses, but have seen pretty consistent declines for the past year.

Okay, and in terms of the discontinued gain that you'd gotten this quarter, should we expect to see more of those coming? And any -- any expense of cash versus non-cash impact on the cash flow statement?

Okay, I think with regard to your first question, Gore's has essentially sold off all the TLC businesses, is in the process of winding down the business. So, we don't expect to see anymore significant proceeds from Gore.

If we do receive additional proceeds, we will report it as a gain from discontinued operations. What recorded this quarter is cash, we did receive this we recorded $43 million of cash from Gore's related to the pre-tax amount of the gain on sale of discontinued operations.

Great, thanks a lot.

You're welcome.

Our next question is from Linda Bolton-Wiser with Fahnestock.

Thank you, can you give us some sense of whether you feel that retailers accepted shipments earlier or took in more shipments in the third quarter because of anticipation over problems in the fourth quarter, in terms of getting credit because of the dock situation?

Linda, this is Bob. You know, that's a question I would ask you to direct to retailers. I hate to speak for what they may or may not have done, what their plans are. It may have varied by retailers. As it relates to inventory at retail, as it relates to their plans for the holidays and how they feel about it, I'd ask you to talk to them directly.

Okay. And secondly, I found your presentation on the globalization of your business pretty interesting.

Just thinking about your capital expenditures, I guess last year you were sort of running at about 4% as a percentage of sales. Most global branded consumer product companies run significantly lower than that, you know, 3% or even lower. Given that you outsource even more than other global branded consumer product companies, do you think that percentage, CAP-X as a percentage of sales would decline even more over time?

I think in the near term, as we said, we're investing in the financial realignment plan, which includes the IT strategic plan as well as, you know, supply chain initiatives. So, I think in the near term we're going to be about around the $180 to $200 million level that we're forecasting for this year. I think -- but if we go back a couple of years, we actually achieved a level of about $160 million, so, I think after we get past this investment phase, you should see CAP-X decline.

Okay. Thanks.

Our next question will come from Margaret Whitfield of Breen Murray.

Good morning. Bob, you mentioned $75 to $100 million of goods on the water. Can you quantify if that includes some key toy drivers? And what is the status of the supply of key toy drivers? Is there anything left in Asia of any size yet to ship? Might the port situation affect what you normally do, which is to ship in Spring merchandise late in the year? And also, international has been holding up rather well. Is it, you know, what's the status of retail inventories? Or is this sell-throughs that we're seeing in the numbers? Thanks.

Hi, Margaret.

Hi.

As Matt reminds me regularly, the international holding up ever since he took is it over is probably a function of leadership! [ Laughter ]

But he and I and Kevin and others look at the sell-through and, you know, again, I -- I -- I'm anxious about the law of big numbers here, but after nine quarters, consecutively, it is not just being backed up, the fact is it is selling through, we're gaining market share, the business is growing very nicely. So, yeah, we always keep an eye those things, there is nothing out of the ordinary there.

And what's on the water represents most of our product line. Yes, there are key drivers on the water right now. And, sure, if things back up all the way to Asia and we can't get product out of Asia for whatever reason over the next couple of months that, would be an issue. Because we do, generally some of our retailers like to get an early start on Spring at the Christmas season and we build product in anticipation of that and that product hasn't shipped yet.

Okay. Thank you.

Our next question will come from Tony Gigags at U.S. Bancorp Piper Jaffray.

Good morning, guys, a couple of questions.

At what point do the retailers really significantly start reducing their orders as we move into the holidays? I mean is this the first week of December, second week of December?

And then is there a potential for any product that might be delayed coming into the U.S. that that gets sold through later in the year than you anticipated at additional discounts? And then, I do have a follow-up.

Yes, Tony, it is Bob. That can certainly happen. Again, we don't know exactly how this thing's gonna play out. I can't give you a date. Each retailer makes his or her own decision based on what he or she sees at any given point in time. Some people reduce orders, some people increase orders. That's the nature of the toy business.

There is no typical, I mean, like in the first or second week of December where they really start paring back on the holiday orders?

There is no -- there is no magic date here. This is how we run the business and how we work with them and my suspicion is this year will work out like it has in the previous 50 years we've been doing this.

Okay. And then, as a follow-up, there seems to be quite a bit of discounting at retail already, perhaps earlier than usual. This is just across-the-board. How would you characterize that this year? And what do you think we're going to see in terms of discounts as we move through the holiday selling season?

And then, the last question, just on Barbie, you know, sales in the quarter were a little better than we expected. How would you, just, you know, characterize domestic Barbie sales? What's your level of satisfaction?

Well, I'm -- I have to tell you Tony, there isn't much that happened in the third quarter that is dissatisfying to me. If you look at the progress we made across-the-board, across all of our major brands, all around the world, all around the margins, all in the balance sheet, all in the cash flow statement, I think you probably got to go back 8 or 10 years to look at the kind of results that we were fortunate achieve this quarter.

So, all of that said, you know, we still -- Christmas hasn't come yet and we have a lot of work between here and there and we have a big bump in the road we're working on full-time, but we're working on it full-time.

And discounts at retail?

Discounts at retails, I wouldn't characterize as -- I don't know, Matt, what's your perspective? I wouldn't characertize it as anything out of the ordinary.

No, no, we don't think we've seen anything from a discounting perspective that is significantly different than any previous year thus far this season.

Okay. Great, thanks.

We have seen some really good merchandising early in the year and I think that levers well for the holiday season. I think some of our major retailers are really stepping up and promoting product well and the merchandising looks very good. Some of the -- some of the recent ads, I think have, been outstanding.

Thanks.

Operator, we have time for one more question.

Our final question for today will come from David Liebowitz with Burnham.

Thank you very much. How's the indications been on pre-Toy Fair for next year's merchandise?

Well, David, this is Bob.

I think at the time we said, when we -- when we talked at the time, we had a very favorable response to next year's line. You know, it's still early and my experience is we always feel good and our customers feel good when they see some of the exciting things we're doing and some of the new ideas we have. The rubber meets the road when we start selling it and they do or don't buy it. I would characterize the retail reaction based at pre-Toy Fair is quite favorable.

And in terms of the international operation, are there certain key markets that were underperformers that now are up to snuff? Or is it more that we have very fine product that's driving things across-the-board, irrespective of which market we look at?

We're generally doing well all around the globe, although I have talked about David in the past. I was quite concerned about our performance in Mexico. Mexico had the problem of, what I characterized as, empty revenue growth. That is selling a lot of product, but not converting it into cash. And we've made quite a few improvements down there, not only our business practices and processes, but in the people who are running their business down there and I was quite pleased with our performance in third quarter, which is a very important quarter. We really did a very nice job in Mexico. That's a country that I've been keeping a very close eye.

And lastly, with media rates coming down for advertising and staying down, are there any changes in your own promotional and marketing and advertising plans as a consequence?

No, in fact, David, we're starting to see media rates go up. That's consistent with what our expectation has been all year is the media market would bottom out and we're just starting to see the beginning of that right now and I expect that we will probably get to some more normal media levels next year. But we have not done anything short-term related to that.

Also, I heard nothing on the call about the Olson Twins and yet when you read various business publications, they're supposed to be the hottest thing in marketing. What has been your experience with it?

We've been in that business for a couple of years and it is a very nice product line. We're glad we have that business.

Okay. Thank you very much and congratulations on a great quarter.

Thank you.

I'd like to thank everyone for their participation in the call today. The relay of today's call will be available for 48 hours beginning at 11:30 a.m. Eastern time today. The number for the replay is 719-457-0820. The I.D. number is 763971. Thank you.

This does conclude today's Mattel third quarter earnings release conference call. We thank you for your participation and you may disconnect at this time.