Mattel Inc (MAT) 2002 Q4 法說會逐字稿

Good day and welcome everyone to the Mattel Incorporated fourth quarter and year end 2002 earnings 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 fourth quarter conference call.

I'm Dianne Douglas, Vice President of Investor Relations and joining me today are Bob Eckert, Chairman and Chief Executive Officer and Kevin Farr, Chief Financial Officer.

Earlier this morning, we issued a press release which detailed our fourth quarter and full year 2002 results.

On the call this morning, you will hear a brief overview from Bob and Kevin will provide a review of the financial results and outlook for 2003.

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 revenue, strategic initiatives, core brand performance, supply chain initiatives, manufacturing plant consolidations, commodity prices and other costs, long-term guidance, the company's financial realignment plan, product shipping patterns, growth margins, advertising expenses, working capital improvements and plans to deploy capital and make investments, including statements related to expected cash flow, internal funding of seasonal working capital, debt to equity ratios, long-term debt ratings, capital expenditures, acquisitions, cash dividends, share repurchases and the decision making process related to such plans.

This morning's discussion may include other forward-looking statements.

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 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 Bob Eckert.

Thank you, Dianne and good morning, everyone.

I'm very pleased with our 2002 results.

While Kevin will take you through the details, I would like to touch on the highlights for the year and tell you where our focus will be for 2003.

Mattel performed well across all financial measures during 2002.

I'm particularly proud of the progress we have made in generating cash flow and strengthening our balance sheet in a year that clearly had it's challenges.

The first quarter saw industry sales start out strong, driven by clean retail inventory levels and an early Easter, but as the year progressed, U.S. consumers stopped propping up the economy.

The most significant challenges of 2002 included an uncertain retail environment, weakening consumer confidence, disconcerting employment figures and unrest at the west coast ports.

By the fourth quarter, which contributes about 55% of the industries annual retail sales, we experienced the worst overall retail environment in many years.

But the pattern of toys doing relatively well during tough times held up yet again in 2002.

That, combined with our strategic initiatives to optimize our business drove our success in 2002.

To continue this progress, in 2003, we'll focus on what I call the four C's, core brands, channels, costs and cash flow.

First is core brands. 2003 will be an entertainment light year.

While we'll have a cache of exciting entertainment products, there is no Blockbuster movie, but we do have a couple of brand products launching, including LO and My Scene, and we expect to generate strong core brand programs like Hot Wheels' 35th anniversary celebration.

Next is channels.

The challenging retail environment took it's toll on our customers in 2002.

Most retailers reported sales below expectations and certain retailers announced store closures and reorganizations plans.

The resulting reorganization and consolidation activity put pressure on Mattel sales during 2002 and this pressure isn't likely to subside as the reorganization activities continue into 2003.

Amid these challenges in 2003, we'll strengthen our relationships with retailers and continue to provide quality service to our customers.

For example, we made progress in 2002 with our efforts to better align our shipments with retail take-away, thereby tightening the supply chain and we plan to continue this initiative.

Third is costs.

While the execution of our financial realignment plan is continuing into its final year, including the recent announcement of plans to consolidate two plants in Mexico by the end of this year, we clearly face challenges in controlling costs in 2003.

We expect pressure as commodity prices come off 20 to 30 year lows and transportation, health care, and insurance costs are all rising.

Our strategic initiatives including centralization of global procurement will clearly be important as we work to overcome price pressures.

And the final C is cash.

As I like to say, cash is king and we generate a lot of it.

Much like our approach in 2002, we'll be disciplined about how we generate cash in 2003 and just as disciplined about deploying it.

With the goal of maximizing shareholder value, Mattel's Board of Directors has established a capital and investment framework to guide this decision-making process as we move forward.

We are looking carefully at all of our options, including reinvesting in our business like American Girl Place in New York and other value-enhancing activities such as strategic acquisitions, share repurchases and cash dividends.

But most importantly, as we evaluate these alternatives, we'll be disciplined and opportunistic with a keen focus on creating value for our shareholders.

As I've said many times before, we are focused on the long term and 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 planning horizon.

You should also know that, while we had reiterated our long term guidance today and have every expectation of continuing to deliver on it just as we have done so far, this is the last time we plan to provide this kind of guidance.

As you know, I do not believe in giving short term guidance and we haven't.

My feelings about guidance have strengthened as I have witnessed the events of the past year so it's now time to take the final step.

Please be assured, however, that we'll continue to provide you with important information regarding our strategic initiatives and insights into what we believe to be important trends that may impact our business and drive future performance, just as we have for the past three years.

While we clearly had a strong year in 2002, we see more opportunities to improve our performances as we look ahead.

That's balanced with what we see as a continuation of the challenging business environment.

I'm confident that we are well positioned to continue to execute our strategies and improve our performance, helping us achieve our vision of being the world's premiere toy brands today and tomorrow.

Thank you for your attention and now let's move on to the financial overview with our CFO, Kevin Farr.

Thank you, Bob and good morning, everyone.

As you heard from Bob, we are very pleased with our fourth quarter and full year results, especially in light of the challenging environment.

My remarks regarding the fourth quarter and full year financial performance will be organized in the following manner: Revenues by geography, division and brand; key drivers of the P&L, excluding restructuring and non reoccurring charges; an update of the status of the financial realignment plan; the balance sheet at December 31, 2002 and a discussion of our new capital investment framework; and finally, our financial outlook.

To facilitate my review, I recommend that you refer to Exhibits in the press release.

I will begin with the discussion of worldwide gross sales shown in the bottom of Exhibit 1.

For the first quarter, total worldwide gross sale were up 8% or 7% in local currency.

International sales grew by 11% and U.S. sales grew by 6%.

For the year, worldwide gross sales were up 5% or 4% in local currency, reflecting international sales growth at 12% and U.S. sales growth of 1%.

Our strategic focus on globalization continues to generate positive results for the company.

For the year, on a regional basis, sales in Europe were up 20% or 13% local currency.

Sales in Latin America were down 3%, but up 7% local currency.

Sales in Canada were up 5%, or 6% local currency.

And Asia Pacific was up 15% or 12% in local currency for the year.

I will now review our four categories and brands.

Girls; for the full year, the girls division grew its worldwide is sales by 6%, or 5% local currency.

Growth in sales of Barbie International markets as well as Polly Pocket! and American Girl offset declines in U.S.

Barbie sales and the large doll category.

For the year, worldwide Barbie sales were up 6% reflecting strong growth in international offsetting a 2% decline in domestic sales.

The decline in domestic sales from Barbie was driven by the strategic initiative to reduce shipments of the collector and holiday lines.

Excluding these adult target lines, domestic Barbie sales increased 2% for the year.

In the fourth quarter, sales for the Girls division increased by 10%, or 8% in local currency reflecting strong sales of Barbie worldwide and Polly Pocket! offsetting declines in other segments.

For the fourth quarter, Barbie worldwide sales were up 17% with domestic sales up 9% and international sales up 25%.

Boys.

For the year worldwide sales for the Boys and Entertainment division were up 2%.

Strong sales of He-Man, Masters of the Universe, Yu-gi-oh, Sponge Bob Square Pants and International Wheel offset declines for Harry Potter and Disney entertainment.

For the year, worldwide sales for the Wheels business was up 3% with domestic sales down 2% and international sales up 13%.

Domestic sales reflected declines in Hot Wheels and Tyco RC which more than offset strong sales of Matchbox.

Domestic Hot Wheels sales declined due to higher retail prices at certain retailers as well as the likely lost sales due to Spiderman and Star Wars boy toys in our own Matchbox brand.

For the year, worldwide sales for the Entertainment business was up 2% reflecting strong sales from most licensed properties and games and puzzles which more than offset the elimination of Disney entertainment properties and declines in Harry Potter sales.

For the fourth quarter, worldwide sales for Boys and Entertainment division were down 3% as declines in the sales of Tyco RC and Harry Potter more than offset gains in Hot Wheels, Matchbox, and other Entertainment categories.

Infant and preschool.

For the year, worldwide sales for the Infant and preschool division were up 5% or 4% in local currency.

Domestic sales were up 3% and international sales were up 10% or 7% in local currency.

For the year, growth in sales of core Fisher-Price and Power Wheels offset a decline in licensed character brand businesses in both domestic and international markets.

While a number of character brand properties did well, this was not enough to offset the declines across other parts of the line.

For the full year, worldwide sales at core Fisher-Price were up 9% or 8% in local currency.

For the full year, domestic sales at core Fisher-Price were up 6% and international sales were up 15% or 11% in local currency.

For the fourth quarter, worldwide sales for the Infant and Preschool division were up 14% or 13% in local currency.

Core Fisher-Price brands were up 8% on a worldwide basis.

Looking across all of our business units, despite weaker than expected overall retail sales in the U.S. during the holiday season, our data suggests retail inventory levels of our products finished the year about flat versus the prior year.

We also made progress in 2002 with our initiative to better align our shipping with consumer demand.

We plan to continue this initiative in 2003.

As retailers continue to focus on just-in- time inventory management, our objective is to better match our shipping with consumer take-away and strengthening our partnerships with our major retailers.

This caused us to ship a greater proportion of our volume in the second half of 2002.

Like last year, it is extremely likely that this initiative will again put downward pressure on our first half shipments in 2003 which should have no impact on full year sales.

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 reoccurring charges.

I will discuss these charges in the context of an update of our financial realignment plan.

Additionally, to facilitate the year-to-year comparison, prior year results has been adjusted to reflect the adoption of FAS 142, which took place in the first quarter of 2002, by removing goodwill amortization and its related tax effect from 2001 pro forma results.

We continued to make progress in the key categories of the P&L, sales, gross margins, SG&A and operating profit.

For the fourth quarter, gross margin was 50.1% reflecting a 220 basis point improvement versus the fourth quarter of 2001.

For the year, gross margin was 48.5%, up 210 basis points.

Gross margin was positively impacted by the execution of our financial realignment plan and supply chain initiatives.

Specifically, the margin benefit from lower commodity costs and logistic costs, lower manufacturing overhead, lower material costs due to improved design and engineering processes and lower product costs due to shipping production to Mexico and Asia.

We expect to make continued progress in improving our gross margins as we execute our supply chain and procurement initiatives.

But, as we look towards the foreseeable future, we also expect to see increases in commodity and logistics costs which would put pressure on our margins.

For the fourth quarter, advertising expense was $199.9 million or 12% of net sales.

For the year, advertising expense was $552.5 million or 11.3% versus 11.6% of net sales last year.

Media prices were soft in 2002 and this was the primary reason for the decrease.

Our expectation for 2003 is that, advertising expense as a percentage of net sales will rise, reflecting the combination of media prices leveling off and the company's plans for spending to support the launch of several new brands.

For the quarter, selling, general, and administrative expenses were $315.6 million or 18.9% of net sales, up 70 basis points compared with last year's fourth quarter.

For the year, SG&A expenses were $1.018 billion or 20.8% of sales up 90 basis points from last year.

Improvements in SG&A this year, driven by the continued execution of our financial realignment plan, and tight cost controls were more than offset by higher incentive accruals.

As you know, our incentive compensation plans are based on net operating profit after tax, plus the capital charge.

We have made substantial progress in improving this metric since this time last year.

For the year, excluding the year-to-year increase in incentive accruals of about $64 million, SG&A improved by 40 basis points.

Additionally, as we do in every quarter, we re-evaluated our credit exposure with all of our customers.

As a result, we determined that it was necessary to make an adjustment to our reserves for the K-Mart pre-petition bankruptcy receivables.

As a result, we recorded a $15.3 million charge in the fourth quarter.

The remaining net book value of K-Mart pre-petition receivable at December 31, 2002 was $2.7 million.

Total bad debt expense for the year was $53.4 million which was down slightly from $57.7 million in 2001.

Additionally, in the fourth quarter, the company recorded a pre-tax charge of $25.4 million in the miscellaneous expense line of the income statement for the settlement of shareholder litigation related to the 1999 acquisition of Learning Company.

For the quarter, operating income was $291.1 million, up 14% versus the prior year.

For the year, operating income was $783.7 million or 16% of net sales.

For the year, the 140 basis point increase in operating profit as a percentage of net sales versus 2001 was driven by sales gross, strong gross margins and cost containment offset by the shareholder litigation settlement and additional incentive compensation accruals.

For the fourth quarter, interest expense was $28.6 million.

For the year, interest expense was $113.9 million compared with $155.1 million for full year 2001.

Compare to the prior year, interest expense for 2002 reflects the benefit of lower short-term rates and lower average borrowings.

This was driven by a higher cash balance at the beginning of the year, the repayment of approximately $400 million in long-term debt and the progress we made in reducing our working capital and strengthening our balance sheet which I'll discuss in a few minutes.

So, to summarize the P&L for the year, we reported income, excluding the impact of charges of $486.9 million or fully diluted earnings per share of $1.10 versus last years income of $368.3 million or fully diluted EPS of 89 cents.

Driving the higher profits were increased sales, improved operating margins and lower interest expense, more than offsetting the impact of the settlement shareholder litigation and higher incentive accruals.

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 fourth quarter, we reported a $7.2 million pre-tax charge related to financial realignment plan.

These charges consisted of a $1.7 million charge to gross margin, primarily related to the closure of the Murray, Kentucky plant.

A $2.8 million charge to SG&A.

And a $2.9 million dollars of restructuring and other charges, all related to streamlining back office functions.

And a $.2 million in income and other expenses, relating to the closure of the Murray, Kentucky facility.

Since we announced the realignment plan in September of 2000, we have taken $223.7 million in pre-tax charges and we expect to record the remaining $26.3 million during 2003.

Of the after-tax charges taken thus far, $108 million were cash.

We anticipate that proximately $120 million of the total $170 million, after tax charge, will be cash.

We have exceeded our targeted cost savings for the plan to date and we are on track to achieve at least the $200 million of savings expected for the first three years of the plan ending with 2003.

Now, turning to the balance sheet.

As a result of strong cash flow from operations of $1.156 billion, we ended the year with cash on hand of $1.267 billion, an increase of $650 million compared with year-end 2001.

Significant improvements in income from continuing operations and working capital drove the strong cash flow from operations.

Our receivables at $490.8 million or 26 days of sales outstanding, decreased by 12 days versus last year, reflecting improved cash collections, partially offset by lower factoring in accounts receivable.

Excluding the year-to-year change in factoring, which was down $62 million versus the prior year, receivables were down $237 million with days sales outstanding improving by 17 days.

Inventories at $338.6 million were down $149 million or 31% versus last year and represented 74 days of supply which is 33 days lower than year-end 2001.

Compared with last year, inventory levels were positively impacted by the execution of supply chain initiatives and the elimination of pre-built inventory related to closure of our Murray, Kentucky plant which was completed in 2002.

Excluding the pre-built, days of supply would have been down 32 days compared with last year.

Going forward, improvement in the performance of our supply chain, and management of working capital continue to be key initiatives.

Respectively, however, we do not expect to generate the same magnitude of improvement in working capital that we achieved in 2002, considering our current levels of account receivables in inventory.

Our balance sheet debt decreased by $421.5 million and our debt net of cash decreased by over a billion from a year ago.

This reflects the strong cash flow generated by our operations and improvements in working capital.

Our debt to total capital ratio ended the year at 30% versus 42 .2% last year.

Capital expenditures for the quarter were approximately $59 million which brought the full year total to $167 million.

This was lower than we had early expected reflecting tight cost management and process improvement initiatives that lowered our investment and tooling.

To guide our capital employment decisions going forwards with a goal of maximizing shareholder value, our Board of Directors established a capital investment framework.

Assuming the company continues to generate strong operating cash flow, it plans to invest within the following framework: to maintain $800 million to a billion in year-end cash available to fund a substantial portion of seasonal capital; to maintain a year-end debt to capital ratio of about 25% with a goal of achieving a long term debt rating of single A and to invest $180 million to $200 million in capital expenditures annually to maintain and grow the business.

Given this framework, and our long-range outlook, we may generate more than $1.5 billion of excess free cash flow over the next three years.

The company's current plan provide us to utilize free cash flow opportunistically for, strategic acquisitions that fit within the company's vision of providing the world's premiere toy brands for today and tomorrow and, to return funds to shareholders through cash dividends and share repurchases.

In the near term, the company will use about $130 million of free cash flow to fund incentive compensation and the shareholder litigation settlement and $180 million to pay off maturing long-term debt.

Of course, we'll communicate any other investments when it is appropriate.

As I said before, the company plans to continue utilizing a disciplined decision-making process regarding its capital deployment.

This process is based upon a discounted cash flow evaluation of investment alternatives and requires a yield in excess of cost of capital.

While we are pleased with the progress we have made over the last three years, as we plan for 2003, it is clear there will be challenges from the uncertain retail environment and the expectation of rising costs.

With that said, over the long term, we believe we are well positioned to deliver our long-range goals of revenue growth in the mid single digit range and EPS range in the low double digits at the lower end of the range to mid-teens at the high end of the range over the planning horizon.

We are committed to bringing financial discipline to every aspect of our business with a goal of optimizing our performance and maximizing value for shareholders.

Now, we'd be happy to take your questions.

Operator?

Thank you, Mr. Farr.

Today's question and answer sessions will be conducted electronically.

If you would like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch tone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow the signal to reach our equipment.

We will proceed in the order that you signal and we'll take as many questions as time permits.

Once again, that is star 1 to ask a question.

We'll pause just a moment to assemble our roster.

We'll take the first question from Jill Krutick, Salomon Smith Barney.

Thanks a lot.

Good morning.

Could you perhaps update us on your just-in-time program?

How far you've been able to - how much you were able to achieve in 2002 and your expectations for 2003 and beyond?

Secondly, I would be interested in if you could share some of your new products initiatives over the course of this year, if you can't share with us too many highlights, perhaps instead, you can talk about your approach to the licensing business, which looks like it's increasingly a difficult business and one that seems difficult to get some growth adds on a long term business.

Thank you.

Okay, Jill.

I'm going to answer the first question on the just-in-time initiative.

We made good progress in 2002.

In 2001, we shipped about 36% of our shipping in the first half of the year and 64% in the second half of the year.

And as you may be aware, from a retail take-away perspective, usually [INAUDIBLE], about 30% happens in the first part of the year and about 70% in the second half of the year.

And in 2002, we shipped 31% in the first half of the year and 69% in the second half of the year so there was about 5% shift to the second half of the year.

And POS was about the same.

It was 28% during the first half of the year and retail take-away was about 72% in the second half.

Jill, this is Bob.

Good morning.

In response to your question on new products, I don't want to take the thunder away from the brand Presidents who will be talking to you at Toy Fair but just to give you some insight into what they will be talking about, we clearly have a strong follow-up to Nutcracker and Rapunzel this year.

The My Scene line within Barbie did quite well in the holidays and we have high expectations for that.

In the Boys area, it is Hot Wheels's 35th anniversary and Matt Bouskets' group has put together a really sharp fully integrated program, the kind of program that drove Matchbox sales in this past year and we've got, without question, some of the neatest track sets that anybody has ever seen in the Hot Wheels business.

And then, in Neil Friedmans' area, at Fisher-Price, the core business continues to do well.

You will see more basis toys and some really nifty new simple ideas for infants.

You will also see new toys within the Learning area category.

And, of course, you will see Elmo again.

Chicken Dance Elmo did very well and Elmo is going to do some nifty things this year.

With regard to the license business, you know how we felt about that for the last three years, which is, we are managing that business to make sure we make good investments for the shareholders.

We, what I think, have made some pretty good licensing arrangements that are working out for us, when we look at a no cap less capital charge sort of basis, which is how we measure it.

And we are comfortable with the decisions we've made.

Thanks very much.

Our next question comes from Brian McGough, Morgan Stanley.

Hey guys, thanks very much.

I was hoping, Bob, you can just hit a little bit on what was seen in U.S. distribution.

In that, we have had yet another retail bankruptcy this quarter and you are increasingly relying on a few large customers which, I know you know.

But in light of that, I was just hoping you could update us on where you stand with broadening U.S. distribution and actually starting to sell toys more where people shop day-to-day?

Brian, that's a good plan and clearly that's one of the strategic initiatives for us.

We are expanding distribution.

If you look at some of the growing outlets like Kohl's stores in this past year, you saw good presence of toys in there and very good presence of our toys.

And in general, one of the things we have been working on is to make sure that our retailers don't have excess inventory at the end of the year, based on the data that we see, as Kevin mentioned, we are in pretty good shape.

Frankly, we would have liked to have done better in the year 2001.

Our inventories at retail were down in what we think are double digit rates and they were about flat in 2002.

One of the things we keep working out in our supply chain is to get tighter and tighter retail inventories.

And I think the lack of progress this year was a function of the fact that the holiday season really did not do all that well in overall retail.

We'll go next to Shawn Magowen, Gerard Klaur Mattison.

Good morning everybody.

My questions are mainly balance sheet related.

And there are several things I would like to look at on the receivables.

Just generally, where would you characterize the shipments in the quarter as having happened earlier or how do you explain the ability to have such a big sales increase and to bring accounts receivable down?

And related to that.

What do you think we should expect for that in 2003?

Is it going to be so difficult to cycle that that we expect accounts receivables to end the year up?

K-Mart, again, a receivable question.

You talked about a K-Mart writedown.

Were you talking about the initial hit or another one in the fourth quarter of '02?

And then just generally, Bob, why the need to maintain $800 million to a billion dollars to fund seasonal needs?

I mean why not just rely on seasonal borrowing and use all - think all of that cash as being available for, you know, other things to return it to the shareholders?

Thank you.

Okay.

Let me answer your questions on the receivables.

I think the first one was, why was it down?

Again, I think it relates to the time that we ship sales in the fourth quarter.

I think that flew naturally.

But essentially it related to the fact that we focused in on customer payment terms and collecting the cash and we did a good job there on a worldwide basis ensuring those terms.

So, Uncle Louie is doing a good job collecting, huh?

That's correct.

And K-Mart, we did write the pre-petition receivable in the fourth quarter to what we think is it's net realizable value of about $2.7 million.

Finally, with regard to a billion dollars of cash at year-end, I think we have taken a more conservative view of our cash position and our financial position at the end of the year.

And given the operational risk in this business and due to its seasonal nature, in the current economic environment, we believe it's more appropriate to be more financially conservative and our proposed capital structure now provides the company with a strong balance sheet and financial flexibility, Shawn.

And, Shawn, we were clearly stretched as it relates to debt a couple of years ago.

We are committed to lowering debt.

We have been doing that.

We want to make sure we've got the flexibility to fund our working capital, whenever we need to.

And all that said, what we articulated today is a capital and investment framework, not specific decisions.

We just want to frame it for you as the kinds of decisions we're going to be looking at.

And as Kevin mentioned, we're going to be opportunistic and disciplined.

That is, if something comes along that seems like a very good investment at the time, then we'll look at the balances within these particular places but we want to outline it for you is what our intentions are going forward.

Finally, Shawn, you asked about next year.

As you know, we made significant progress in 2002 on the reducing working capital and our goal is to continue our supply chain initiatives but that does not mean that working capital will be a source of cash necessarily.

For example, we know at the end of 2002, we had higher accrued liabilities for things like incentive compensation and the shareholder settlement that will be paid in the first quarter.

Okay, thank you.

We'll go next to Linda Bolton-Weiser, Fahnestock.

It looks like you've had a second consecutive quarter of some sales decline in the other part of the Girls business.

Maybe you could comment on what the sources of the weakness were there?

And secondly, when you think about your dividend policy, could you tell us what peer group of companies you look at when thinking about that policy?

Linda, as background, the other doll segment is about a quarter of the size of our Barbie business.

A number of things have driven the decline in sales in the past year.

First, is a doll called Scooter Shannon, which is in it's third year.

That has matured and prices were down.

Second is the Diva Starz line, which is also in its third year.

Our Fashion Divas launched last year.

They did okay but were at a lower price point than the original Divas and we had the discontinuation of Cabbage Patch Kids.

An area which we have discontinued.

All that was partially offset by Polly Pocket! which continues to perform well and, In fact, once again, had strong double digit growth.

And Linda, as you know, we do a lot of benchmarking and when we benchmark ourselves, we benchmark ourselves against well-run consumer product companies and we have benchmarked our capital investment policies against them.

Thank you.

Our next question comes from Dean Gianoukos, JP Morgan.

Hi.

This is actually Ron Abdel-Misih for Dean.

First, just had a question about Harry Potter.

I wanted to know if you could you tell us what it was down for the year or for the quarter on a percent?

And then, secondly, I guess I wanted to know, I don't think there is a share repurchase plan in place right now.

I want to know if that's correct?

And if you guys plan to do one, I guess, soon, given your comments.

And then, third, I guess, with gross margins, I guess, it looks like we'll see soon - maybe a couple of hundred basis point improvement in the first half.

I wondered if it looks like you will get pressure in the back half of the year due just to tough comparisons?

Thanks.

Ron, this is Bob.

Let me start with Harry Potter.

Frankly, we thought what Harry Potter would do better than it did.

Sales in 2002 declined in the low double digit range.

We tried not to do too much line item, talk about sales in quarters or anything like that, but I think, two years ago, in 2001, we had sales of about $160 million dollars in Harry Potter, and, order of magnitude it was $20 to $25 million dollars decline.

If we would have planned based on the history of second movies, we would have been better off.

You know, we have gone through this analysis.

We understand that movie 2 is tougher than movie 1, but we had such good momentum coming out of movie 1 and there was such retailer appetite for product in 2002 that the line didn't perform just as as we thought or as retailers had thought.

All that said, Harry Potter continues to be a very good franchise for us.

Now, as it relates to things like share repurchases, there is not an approved plan in place to repurchase shares.

We have made strong progress in the past three years in all of our financial statements, the income statement, the balance sheet and cash flow.

And as a result, we are now moving into an investment mode.

And one of the most important points I want to communicate to you today, is that we'll be no less disciplined on how we generate cash in the future and we'll apply equal rigor to how we deploy it, always with shareholders best interests in mind.

We'll use our cash opportunistically to enhance both our growth and shareholder value.

Okay.

And I think your last question related to the gross margins.

We improved 210 basis points this year and one of the key strategic priorities is tightening up our supply chain and we believe there is significant opportunity for improvement.

We are working on all elements of the process from design to procurement to manufacturing, to forecasting and through delivery to the customer.

These areas address such things as accelerating product cycles, shortening production ramp up time, better utilization of warehouse facilities, lower cost storage in the Far East and improved logistic planning to improve purchasing and lower distribution costs.

So these initiatives have resulted in lower manufacturing overhead, lower material cost to improve design and engineering process, and lower labor rates due to shifting production to Mexico and Asia.

That said, we have also benefited from things that we don't control, like 20-plus year lows of some commodity prices and we expect those costs to rise in 2003.

We'll go next to Margaret Whitfield, Breen Murray.

Good morning and congratulations.

When do you think you will be able to make some decisions on the use of this free cash flow?

Will it have to await the 25% debt ratio, for example?

Also, I wondered if you could comment on international which continues to surprise on the upside?

What's the status of your retail inventories is over there and what do you see from international?

And also, regarding the outlook for the first half with your shift in shipments to coincide with consumer take-away compounded with the later Easter, wonder if there is any new product planned for the first half that could offset what's going on at retail in terms of types of purchases?

Thanks.

Okay.

Let me talk about the cash flow.

Again, due to the seasonal nature of the business, we are a net user of cash in the first three quarters of of the year as we come off, you know, peak accrued liabilities in the first quarter, we'll also be making payments for things like shareholder litigation settlement, incentive accruals.

That's about $130 million.

Additionally, there is about $180 million of maturing long-term debt to be paid in 2002.

That said, we are in a position to invest excess free cash flow and strategic acquisitions to strengthen our portfolio brand or to return funds to shareholders through cash dividends and shareholder repurchases but we'll be disciplined and opportunistic as far as the timing of that goes.

Margaret, this is Bob.

As it relates to international, our sell -through has been good.

You know, the data isn't quite as robust internationally as it is in the U.S., not that the U.S. data is that good anymore.

But it looks like our sell-through is quite good and in general, we've been gaining market share in growing markets internationally.

All that said, we've now had 10 consecutive quarters of growth.

This is our second year of doubling digit growth in international.

International is up to about 35% or 36% our sales now.

That's about 5 percentage points from a couple of years ago.

So, we're making good progress.

I kep talking about law of being numbers and those sorts of things, but the fact is, we continue to make good progress on international and we expect to continue to keep doing so going forward.

As it relates to seasonality of sales this year, I think, Kevin mentioned to you that we were quite pleased with the fact that we shipped more off our product in the second half of 2002.

One of the things we talked about a year ago on this call, that we wanted to ship closer to retail take-away and we did that, when you look at our sales split first half to second half.

We'll continue with that initiative this year.

At the same time, we have things like LO, we have My Scene, we have good momentum on Fisher-Price which should help to offset some otherwise slow times.

Do you have any market share data, Bob, in terms of the overall number or by brand?

Yes, I do.

You know, we don't get into it by brand.

And as I mentioned a moment ago, accurately measuring market share has become increasingly difficult for us.

Wal-Mart whose business is growing no longer provides the data, as you know.

K-Mart, whose business is clearly on the decline is still in the data.

The I think, the NPD data now represents probably less than 40% of total consumption.

That said, the data is the data.

And we do have the data for the year.

The industry declined 1.7%, that is traditional toys.

We lost 1.9 market share points to 22.1% here in the US.

And while we had four of the top ten promoted toys, I think, in December, that wasn't enough to overcome three things: First, full year growth in games and puzzles.

That growth was driven by Yu-gi-oh trading cards.

We have the toys but not the trading cards.

Second is growth in male action, which is driven all year long by Spider-Man and Star Wars.

And third, there was growth achieved by relative newcomers in both Learning toys and Fashion dolls.

All that said, our internal POS data suggests that sell-through was fine for us, particularly in light of the overall retail environment.

And we don't have the full year data in yet from the over seas markets.

But clearly through November, as I mentioned, the trend has been consistent all year that we are gaining share and growing markets.

You had a limited participation in learning.

Did that sector grow substantially more than other categories last year?

Yes.

I assume that your addition in the Learning space will help you this year.

Yes.

The learning area continued to grow nicely last year.

We participated in some of that growth.

When you look at Fisher-Price's product line, things like Kasey, the Kinderbot did very well. [Pixter]continues to do well.

We'll be talking about new ideas in Toy Fair coming up.

But that's a category at that looks like it's got a good sustainable growth rate right now.

Thank you.

Thanks, Margaret.

Our next question comes from Felicia Kantor, Lehman Brothers.

Good morning.

Great quarter in a tough environment.

I just have a couple of questions for you.

Margaret touched a little bit on the international business.

I was wondering what were some of the main -the key drives there and I'm wondering what your internal goals are for international as a percentage of overall sales?

Also, I'll have to be the one to ask a Barbie question?

Because, if I heard correctly Barbie sales were up 9% in the quarter domestically, is that correct?

Yes.

And just wondering what the driver was behind those strong sales.

That was particularly impressive given some some of the competition that was out there.

I wonder if it was driven mainly by Rapunzel or by your holiday Barbie.

And then, just finally, I'm wondering if you are able to quantify at all the I am pack of the west coast dispute on earnings?

Okay.

Felicia, let me try and get started here.

If I miss anything, I'm sure Kevin will pick it up.

As it relates to international, we continue to do well with global brand positioning for our core brands, developing,one sort, of worldwide way of doing things, including global customer plans, aligning our marketing and sales plans better all around the world.

Our brand presidents, Neil, Matt and Adrienne, have worldwide responsibility, they are compensated for that.

And obviously, our worldwide business continues to do well.

We do believe that, over our planning horizon, international should grow faster than domestic.

Again, I always offset that, the caveat is the law of big numbers.

But as we benchmarked really well, run good class consumer goods companies, some of them have upwards of 50% of their sales internationally.

And so, even though we continue growing at double digits, I remind our folks around the world that we have gone up to about 31% to 36% of sales and we've got more progress to improve.

And then, were there any particular products that were exceptionally strong there?

The same products generally that were strong in the U.S. and that's one of the things that we have clearly seen over the last couple of years as we globalized the business.

So things like Rapunzel, when I talk about Barbie, have done well globally.

Fisher-Price like Imagine-X did well over the world and Little People has done well all over the world.

Hot Wheels has had good momentum all over the world.

There is not one or two things driving the business internationally.

Let me spend a minute on Barbie.

The fourth quarter benefited from a couple of things: First, you recall we had a pretty soft year ago comps.

I think Barbie U.S. was down 11% in the fourth quarter of 2001.

We also had the benefit of our company wide strategy of better aligning our shipments to retain sales.

That clearly shifted some sales from the first half into the second half and we had very strong performance of several items including Rapunzel.

The Rapunzel line was about 35% stronger when we look at sales compared to the Nutcracker business.

The My Scene line did well even though it really just got started in the month of December.

We managed the holiday and collector business reasonably well.

The sell-through on those things was much improved over the prior year.

So, I wouldn't say those things drove our growth.

In fact, I think, as Kevin mentioned, on an overall basis for the full year, the business was down 2% in the U.S.

It would have been down 2% when you exclude holiday and collector.

And, in fact, if you did that analysis for the fourth quarter, even though Barbie grew U.S. in the fourth quarter, it would have grown faster without holiday and collector.

And it continues, the business continues to do well internationally.

What did I miss on your last question?

Just, if you can at all, quantify the impact of the -- on EPS of the west coast dispute.

Unfortunately, we really can't.

I talked about this in the third quarter.

I talked about the things we were doing to try and overcome the obstacles like unloading the ships as fast as we could, and putting our products on the top shelf, working with our customers skip our distribution centers and the product there faster.

We moved product from Mexico and Canada into the U.S. and having multi-lingual packages has helped us in that.

I did try and frame the thing for you in the third quarter.

We said that there was about $75 to $100 million of product stuck on the water at the time.

And I also said that even in hindsight, it would be difficult to measure.

I really think that is the case.

As in any other holiday season, the most important factor in our success is retailers' appetite for product which is a reflection of their expectations for sales.

Given their outlook during the holiday season, I'm not sure that retailers would have ordered more product regardless of availability.

We did see our customer service levels decline for a period during the stoppage but we also know, at the end of the day, our inventories finished the year about $149 million dollars below prior year, down 31%.

So the fact is there wasn't product stuck somewhere that we didn't sell.

Great, thank you.

We'll go next to Gary Cooper, Bank of America.

I just wanted to ask a question about the doll category.

You mentioned that you lost a little bit of share there and I know you mentioned the My Scene doll.

Can you comment, Bratz is doing very well.

I think, on a Disney call, last week, they talked about foreseeing the Disney Princess line doubling.

Can you talk a little bit about the competitive landscape in dolls?

Maybe which of your lines are not doing as well as you hoped and what you plan to do about it?

Thanks.

Well, I guess I would refer you to talk to competitors if you want to talk about their business.

I don't know who said what, when or where, but I can tell you that, you know, we had an okay year on Barbie, not a great year.

And it's clear that there has been a lot more competition in that area.

All that said, we had a 2% growth in the U.S., excluding holiday and collectors which we've managed out.

We didn't grow as fast as the industry grew.

We did lose share in dolls and that concerns us.

We are not here to lose market share.

We have a very strong line-up this year to make sure we hold our own in light of the competitive attacks.

I never want to get into, you know, sort of, SKU by SKU, what particular item did do well or didn't do well or anything like that.

We manage it as a whole line and that's how we look at the performance.

We'll go next to Tony Gikas, U.S.

Bancorp Piper Jaffray.

Good morning, guys.

Congratulations on a great year.

Couple questions just to follow up on the international.

Could you comment on the pricing domestic versus international?

Was there a price deflation on an international basis?

What are your goals for getting international business to a total percent of sales?

And then on the Barbie line, did you indicate what the percent of the Barbie sales came from the Rapunzel line of product?

No, Tony, again, we don't go through line item by line item sales.

Rapunzel did do well, as everyone knows.

It ran out of stock quite early in the holiday season but we don't get into line item details.

As it relates to pricing, we have not seen as much deflation in the toy business as I think some folks have talked about.

I will give you one example.

I think Kevin mentioned it in his comment.

In fact, in Hot Wheels in the U.S., we saw retail prices increase.

I think they were up about 9% if you look at average retail price in the U.S. of Hot Wheels in 2002 compared to 2001.

That's really a function of retailers not discounting the brand as strongly as they did in 2001.

And yeah, we had a little bit of a sales decline associated with that but we think, when you look at the elasticities, that it came out pretty well.

And retailers are better off.

As it relates to international goals, we continue to expect to do better internationally than we have domestically.

I mentioned earlier, that we've benchmarked some world class consumer goods companies that have half or more of their sales overseas.

And again, we don't get into specific targets, but we clearly expect we ought to be able to do better.

And pricing international versus the U.S. is not all that significant.

At least change in price overtime.

We have not seen big upticks or declines one way or the other vis-a-vis the U.S. benchmark.

Just one follow-up.

Anything on the competitive landscape on an international basis that you see in the near term?

No, other than -- you know, the toy business was a very, very competitive category, as you know.

We experienced competition here in the U.S. and overseas and we are fighting for our fair share all the time.

All that said, we are the largest toy company in the world.

We are the most profitable toy company in the world.

We generate the most cash compared to any other toy company and we expect all those things to get nothing but better.

Thank you.

We'll take our next question from Bret Jordan, Advest.

Good morning.

Most of my questions have been asked but on a macro basis and given, and I guess, NPD being flawed but a decline in the toy business in '02, do your sales force or the vendors you talk to have any perspective on '03?

Is there any expectation of improvement as you've had a shakeout on the retail channel?

And I guess, on the same theme, a little bit more focused, what's the feedback on the LO line?

The feedback on the LO line has been good but it is very new.

So, we just wanted to seed a little bit, to see what sort of response we would get.

We have had good response.

But this is the year where we'll find whether LO is a good idea or not.

As it relates to retailers, I always ask you to talk to them directly instead of going through us.

But I will say, that in general the holiday season last year was tough.

We talk about things like consumer confidence and the environment.

At at this time of year, I think we are all optimistic that things might get a little bit better.

All that said, when we talked to you in October or whenever, we talked to you at the end of the third quarter, we'll probably have a better feel for it then.

Thanks.

Operator, we have time for one more question.

We'll take that final question from David Liebowitz, Burnham.

Thank you very much and let me add my congratulations for an excellent year.

A few quick questions.

First, what is the company's effective tax rate, not from financial but from actual tax reporting?

You know, our effective tax rate on a worldwide basis for financial reporting is 27.3% for the full year.

Our rate for tax payments is substantially less since we have net operating losses in the U.S. and foreign tax credit carry-overs.

Having said that, would that impact your decision on a cash dividend if the Bush program in some sort were to pass?

Are you weighing a cash dividend versus a stock repurchase?

We will weigh things like cash dividends versus stock repurchase versus other ways we could deploy the cash.

And, certainly, if tax laws change between here and there, the Board, I'm sure, will take that into consideration.

Second of all, what dollar volume of merchandise will not be brought forward into this year's discontinued merchandise, et cetera?

We've never, David, kind of gone through what's in or what's out.

I don't think there is any significant change compared to what we have been doing in recent years.

You know, probably 75% or 80% of our SKU's are new in any given year.

All that said, they tent to be focused on core Fisher-Price, Barbie, Hot Wheels and our other core brands.

And last question.

Oh boy, let me get it properly phrased.

When I look at this year, quarter by quarter, where are you going to have your toughest comparison?

Boy, David, it is just a matter of policy, never to get into quarter by quarter comparisons.

We don't manage the business that way.

I don't look at the business that way.

And frankly, I think that's a mistake.

But I'll save that for another day.

Okay?

Amen.

I have no problem with the response but I was wondering if you were going to say, you know, that we had such a marvelous and inordinate success in XYZ quarter last year, that quarter would be tough to match or beat only because it was so inordinantly successful a year ago. and it's gonna be our toughest comparison.

And tough comparison does not mean it's gonna be down, it simply means where we're just going to show the narrowest improvement or whatever.

David, you got it right.

I don't like anything that smacks of guidance and even though that might or might not fall in there,it falls under my definition.

I think, and what I've seen is that analysts and investors are more than capable of building good models based on reasonable assumptions and that whole area around guidance has become a matter of principle for me and we're just not going to do anything like that.

Very fine.

Thank you so much.

Okay.

Thanks, David.

Thanks everyone.

Thanks, operator.

I with like to thank everyone for their participation in the call today.

The replay 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.

And the Id number is 433974.

Thank you.

That does conclude today's Mattel, Incorporated fourth quarter and year end 2002 earnings conference call.

We thank you for your participation.

You may disconnect at this time.