Mattel Inc (MAT) 2003 Q1 法說會逐字稿

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Good day everyone and welcome to the Mattel Incorporated first quarter 2003 earnings results conference call.

Today's call is being recorded.

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

Go ahead, ma'am.

Thank you, Operator.

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

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

Earlier this morning we issued a press release which detailed our first quarter 2003 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 discuss our new Mattel brands business unit.

Before we begin the formal remarks, let me note certain statements made today may include forward looking statements about management expectations, strategic plans and objectives, anticipated financial performance and other similar matters.

Forward looking statements in this mornings discussion will include statements regarding the timing of product shipments, which is subject to risk associated with our supply chain initiative, improved partnerships when our major retailers arriving for example strategic initiative, rising raw material costs, advertising expenses, and transportation cost, improvement in SGA as a percentage of net sales, which is dependant upon our cost cutting initiative.

Expectations of cash generations from working capital improvement, cost savings from the companies financial realignment plan, improvement in our debt to capital ratio, capital expenditure plans, and strategic initiatives regarding the Mattel brands business units, which are subject to risks associated with new initiatives.

Furthermore, we anticipate the questions asked during this call may elicit answers that contain additional forward looking statements.

The exact nature of which we cannot predict beforehand.

We intend for these additional forward looking statements to be covered by this cautionary statement, 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.

In addition to the risks already described, some of these are factors are described in our 2002 report on form 10-K filed with the SEC and Mattel's other filings made with the SEC from time to time as well as Mattel's other public statements.

Mattel does not update forward looking statements and expressly disclaims any obligation to do so.

Information required by regulation G regarding certain statements in this call is available in the investor/media section of our corporate website at Mattel.com.

Now, I would like to introduce Bob Eckert.

Thank you, Dianne, and good morning everyone.

Our first quarter top line results were disappointing.

As I said on previous occasions, the challenges we face at the close of 2002 have continued into 2003.

From our last conference call in February, we have seen the economy weaken and the conflict in the Mideast escalate, consumer confidence rattled as unemployment figures rose and retailers increasing their focus on inventories as they position themselves to withstand the tough retail environment.

Since we don't operate in a vacuum, we've had to face the additional challenge of increased competition in the doll and male action categories, which have affected Barbie and Hot Wheel sales for the quarter.

Despite the current sales environment, I was pleased with our progress on P&L and balance sheet.

While Kevin will take you through the specifics, earnings were strong, reflecting the focus on executing long-term strategies as well as benefits from nonoperating items including interest expense.

Our focus on controlling cost and optimizing our businesses allowed us to weather these challenges and drive operating margin improvement.

This morning we have a guest speaker on the call.

Please welcome Matt Bousquette, our newly appointed president of Mattel brands.

Matt's going to take a few minutes to update you on his progress as he integrates the girls and boys entertainment divisions into one cohesive business unit.

Since day one, I have always said in order to achieve long-term success, we must stay focused on strategies and overcome obstacles.

Whether it's the retail environment or competitive incursions to help achieve our vision of being the world's premiere toy brands for today and tomorrow and maximize value for our shareholders.

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 first quarter, I recommend that you refer to the exhibits of the press release.

I will begin with a discussion of worldwide growth sales, though not shown on the bottom of exhibit 1.

Total worldwide gross sales for the first quarter was up 1% or down 3% local currency.

As anticipated gross sales in the U.S. declined 5% reflecting a later timing of Easter, the challenging resale environment and our continued focus on shipping closer to retail take away.

As we said in the last conference call, this strategy will put downward pressure on the first half shipments in 2003 which should have no impact on full year sales.

This initiative shouldn't prove our partnerships with our major retailers.

We have seen competitor strength in the fashion doll and male action categories.

International sales increased 13% or a flat in local currency on top of sales growth at 20% in the first quarter of 2002.

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

While we continue to focus on improving our international business, we are facing tough sales comps throughout this year.

Last year international sales on a local currency basis were up 10% if the first half and up 11% in the second half.

On a regional basis in this year's first quarter, sales in Europe were up 23% or 3% in local currency.

Sales in Latin America were down 32% or 21% in local currency.

The decrease in this region was driven primarily by sales declines in Venezuela to the economic and political climate and Latin America exports, where we have shortened customer payment terms, which will shift sales closer to consumer purchases.

Asia Pacific was up 4% or down 3% local currency for the quarter and sales in Canada were up 20% or 15% in local currency.

I will now review the four category and brands.

Mattel brands: for the quarter, the Mattel brands divisions worldwide sales were up 1% or down 4% in local currency.

Domestic sales were down 5% and international sales were up 10% or down 2% in local currency.

Worldwide Barbie sales down 1% or 7% local currency for the first quarter reflecting 15% growth in international sales or 1% local currency, offset by a 14% decline of Barbie sales in the U.S. market place.

While sales in the core doll segment were essentially flat, the collector and accessory segments drove the over all decline.

Worldwide sales of other girls brands were up 7% or flat in local currency driven by solid performances by Polly Pocket and ello, partially offset by decline in sales of Diva Starz and What's Her Face.

Worldwide sales for the Wheels business were down 6% or 9% in local currency where strong growth in international sales of Hot Wheels were more than offset by declines in sales of Hot Wheels in the U.S. and Matchbox and Tyco R/C worldwide.

Sale in entertainment division were up 20% or 15% in local currency versus prior year reflecting strong performances in games in puzzles, Yu-Gi-Oh and the new Warner Brothers properties, partially offset by declines in sales of Harry Potter and Max Steel.

Fisher-Price brands; for the quarter, worldwide sales for Fisher-Price brands were up 3% or flat in local currency reflecting strong growth in core Fisher-Price and licensed character brands, partially offset by the decline in sales of Power Wheels due to unfavorable weather and our continuing efforts to better align shipments with consumer purchases.

Domestic sales with Fisher-Price brands were down 4% in international sales were and up 28% or 14% in local currency.

Worldwide sales of core Fisher-Price were up 8% or 3% in local currency with domestic sales down 2% and international sales up 35% or 18% in local currency.

American Girl brand; sales of the American Girl brand declined 8% versus the prior year.

Sales in the American Girl collection in Bitty Baby lines were strong, reflecting new product launches of Kaya and Bitty Twins.

However, this growth was more than offset by sales declines in the American Girl of Today line as new production introductions are scheduled for the fall season.

No, let's review the P&L, which is shown on exhibit 3.

I will focus my comments and financial performance excluding the impact of nonrecurring charges.

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

Gross margin is 49.6% for the quarter which increased by 430 basis points versus the first quarter last year.

About half the improvements were driven by execution of financial realignment plan and supply chain initiatives.

The remainder was driven by the temporary timing benefit on raw material costs, transportation prices and improved product mix.

As anticipated we are experiencing higher costs of these areas today which will be reflected in future results.

Advertising expenses 83.8 million or 11.3% of net sales, up 20 basis points versus the prior year.

As we said on the last conference call, we expect advertising expenses as a percentage of net sales to rise in 2003 as media prices level off and we invest and support the launch of several brands later in the year and seek to rebuild volume momentum in our core brands.

Increase promotional expense were recorded in the sales adjustment line while media investments appear in the advertising line.

Selling general administrative expenses were 221.7 million or 29.7% of net sales for the quarter, up 110 basis points compared with last year's first quarter.

The higher SG&A reflects increased employee benefit cost and the impact of changes in foreign exchange rates that more than offset the savings from the execution of our financial realignment plan.

Our expectation for 2003 is to improve our SG&A as a percentage of net sales as we continue to execute the financial realignment plan and control our spending.

For the quarter, operating income was 64.2 million, up 56% versus last year.

As a percentage of net sales operating income improved 300 basis points versus the prior quarter to 8.6%.

The improvement was driven by strong gross margins, partially offset by higher SG&A.

Interest expense was 17.4 million for the quarter compared to 29.6 million in the first quarter of 2002.

Compared to last year this year's interest expense reflects the benefit of lower average borrowing.

So, to summarize the P&L for the quarter, reported income excluding the impact of charges of 40.8 million or nine cents per share versus last year's first quarter of 10.3 million or two cents per share driven primarily by improving operating margins and lower interest expense.

Now turning to the balance sheet, our receivables at 531 million or 64 days of sales outstanding decreased by 16 days versus last year reflecting improved cash collections.

Excluding the year to year change and factoring, which was up one million versus the prior year to 105 million, receivables down 127 million with day sales outstanding improved by 14 days as we continued to focus on tightly managing working capital.

Inventory at 395 billion were down 93 million or 19% versus last year's first quarter and represented 82 days of supply, which is 13 days lower than last year.

Compared with last year, inventory levels were positively impacted by execution of supply chain initiative and lower levels of prebilled inventory related to the closure of our Murray, Kentucky plant in May 2002.

Excluding the prebill, days of supply would have been 82 days compared with 94 days last year.

As we said in our previous call, improvements in the performance of supply chain and management of working capital continue to be key initiatives going forward.

However, we do not expect to generate the same magnitude of cash from working capital improvements in 2003, considering the current levels of accounts receivable in inventory.

Our total balance sheet debt decreased by 416 million and our debt net of cash decreased by 937 million from the first quarter of 2002.

This reflects the strong cash flow generated by operations during 2002 and our efforts to reduce long-term debt.

Our debt to total capital ratio is 29% versus 45% last year.

We continue to target the long-term goal of reducing the year end debt to total capital ratio to about 25%.

We believe we will make significant progress towards our targeted debt to total capital ratio by the end of 2003.

Capital expenditures for the quarter were approximately 32 million in line with our expectations of capital expenditures for the full year of 180 to 200 million as we invest in the new American Girl place in New York City, execute our plan on information technology in the final 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 first quarter we recorded it at 11.6 million pretax charge related to financial realignment plan.

The charge consists of a $1.7 million charge to gross margin primarily related to the consolidation of manufacturing facilities in Mexico.

A 1.2 million charge to SG&A related to stream lining back office functions and a restructuring charge of 8.7 million that primarily relates to severance and other compensations due to consolidation of girl and boys entertainment division.

Since we announced the realignment plan in September of 2000, we have taken approximately 235.3 million in pretax charges and we expect to record the remaining 14.7 million by the end of this year.

Of the after tax charges taken thus far, 115 million were cash.

We anticipate approximately 120 million of the total 170 million after tax charge would be cash.

We continue to take the action necessary to achieve our targeted cost savings.

We are on track to achieve the $80 million in savings expected for 2003.

On last quarter's conference call we said we expect 2003 to be challenging in light of the uncertain retail environment and certain cost pressures.

Our outlook for the year has not changed based upon the results of the first quarter.

We are committed to bringing financial discipline to every aspect of the business, thereby optimizing our performance and maximizing value for our shareholders.

That concludes my review of the financial result and I would like to introduce Matt Bousquette to discuss our recent reorganization.

Matt?

Thank you, Kevin.

Good morning.

The toy industry is in a state of continuous evolution from consumers to customers to competition.

Adapting to that change over the years has been a key ingredient to the company's success.

The creation of Mattel brands division is the most recent example of such a strategy.

While it eliminated redundancies in the organization, it furthered an environment of best practice sharing in a one Mattel approach to the business.

The shift was intended to improve the effectiveness of the organization in the changing environment.

Critical to Mattel's long-term success is leveraging a deep understanding of kids to build our brands through cool toys, great license products and memorable advertising.

Ultimately, we believe the creation of the Mattel brands business unit sharpens our focus on one of the most valuable assets, our brands.

In outlining our vision for the Mattel brands division, our goal remains the same.

We want to create and develop premiere toy based brands to own the number one share of kid spending worldwide.

To accomplish this, we will focus our efforts in three areas.

Building brands, cutting cost and developing people.

The first area of focus is building our brands.

Our road to long-term brand vitality is what we refer to as the pyramid of success.

The pyramid is constructed of five primary building blocks.

At the foundation of our pyramid is a deep understanding of end consumers.

We intend to continue to invest heavily in research to understand how kids play, what consumers are really thinking and how they shop.

A great example of this is a recent ethnic graphic study of older girls which has been critical in driving new lines such as the My Scene segment to Barbie.

Which seems to -- with that target audience.

Armed with these consumer insights, we move to the next level of the pyramid in which we segment our brands and categories to differentiate them in consumers eyes.

This allows us to target specific market needs based on demographics, psychographics and play patterns.

In the past we shared how we segment fashion doll, Wheels and entertainment to limit cannibalization and extend our relationship with consumers overtime.

Moving up the pyramid, innovation can take many forms across the business.

First, it can be bringing in a trend such as Japanese animation to life, which we've done with Yu-Gi-Oh across the action figure games and vehicles business.

It can be a never seen before product to penetrate new categories such as, girls construction with ello or it can be new undifferentiated product backed by breakthrough marketing programs such as Barbie of Swan Lake.

A further benefit to the new Mattel brands structure is a broader view of kids over all.

Rather than our traditional view of just boys or just girls, this is important since many of the successful properties have appeals to both genders.

Great examples of those hits include Harry Potter, Loony Toons and SpongeBob SquarePants.

In the fourth level of the pyramid, we take the strongest brands and extend them outside the classic toy categories.

As we've discussed, toys represent less than one quarter of discretionary spending on kids 3 to 10.

Combining our boys and girls consumer products groups into one licensing organization should yield significant benefits.

Now armed with the best portfolio brands in the toy industry, we have the opportunity to more deeply penetrate our existing licensing community as well as add licenses to our roster on a domestic and international basis.

We will tame to create stronger multibrand promotions and establish an expanded in store presence with our retail partners resulting in both better sell-in and sell through.

At the top of our pyramid is globalizing our people, our processes and our brands.

The recent organizational changes have not altared the belief that many of the greatest growth opportunities for the company remain outside the U.S.

The Mattel brands organization retains its global focus and responsibilities and will continue to create and drive global strategies.

We have an outstanding international team in place which has driven 11 consecutive quarters of growth.

I am pleased to be turning over responsibility for the group to Brian Stockton, who is an excellent partner in his previous roles supporting our efforts to improve international performance.

I am confident that Brian will continue to be a great partner in the ongoing execution for global strategies .

As you can see building Mattel's brands has been the primary objective.

Turning to our second key area of focus, cutting cost.

We continue to streamline the process from ideation to end retail sale, removing nonvalue functions and activities to the system while adding back value into the product.

Our final area of focus is developing people.

Our employees are one of the greatest strengths and frankly, one the companies key point of difference.

To effectively execute our strategies, we strive for functional excellence and focus on motivating and training our people to build a world class organization.

While we remain confident that our long-term strategies are solid, we're fully aware that we face several challenges in the short-term.

While the bottom line remains sound as Kevin mentioned, our first quarter sales from Mattel brands were soft due to external issues such as the economic downturn, slipping consumer confidence and an increasingly competitive toy market.

Responding to these challenges, we are focusing on demand creation activities and strengthening our retail partnerships.

First and foremost, we are focused on creating really cool on trend products with strong value propositions.

We plan to increase advertising promotional spending to drive consumers to retail and regain market share.

Finally, we are [INAUDIBLE] our brands by partnering with other brands that appeal to our target consumers such as the Barbies brands relationship with the Limited Too.

Next, we are working more closely than ever with our retail partners to maximize sale and profit.

Through various supply chain initiatives, category management and collaborative forecasting, we will help our retail partners run their toy departments in a more productive manner and maximize space efficiency.

These partnerships will allow us to chase the upside of hit item and protect the downside on disappointments.

These efforts are ongoing with our key customers around the globe.

You heard me talk about a world of opportunity.

With the creation of the Mattel brands division, the opportunity is bigger than ever before.

The market for toys among the target consumers exceeds $30 billion, however it's not just about pursuing new opportunities, but it's about regaining market share.

This organization is well poised to tackle these challenge having operated successfully in both the boys and international businesses through growth sale and significantly increased profit over the last three years into extraordinary competitive environments.

We will leverage this experience and discipline to drive the new Mattel brands division in the future.

Thank you.

Thanks, Matt.

Operator, we are 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 press the star key followed by the digit 1 on your touch tone telephone keypad.

Again, to ask a question, please press star 1.

We'll take our first question will be from Jill Krutick from Smith Barney.

Ms. Krutick, your line is open.

Hello?

Can you hear me?

Yes.

Sorry about that.

I was curious if you could give us a flavor for where you think interest expense might come in on a four-year basis, first of all.

And secondly, in terms of new product initiatives, could you give us more color on how ello is doing and perhaps some of the other recent new product launches that you've recently launched.

And finally, if you could give us a flavor for where you see retail inventories domestically today.

Thanks very much.

Jill, I'll answer the first question on interest expense.

As you know interest expense for 2002 is down from the prior year due to lower average debt outstanding and lower short-term interest rates.

We have not given guidance for interest expense in 2003, but as you might expect to be lower than 2002 with the magnitude will vary depending on expectations for revenue growth, operating earnings, short-term interest rate trends and capital deployment assumptions.

In terms of the new product introductions, both He Man and ello are meeting expectations and we're very pleased with the results on the launch of Yu-GI-OH and My Scene segment of Barbie.

Jill, this is Bob.

Let me spend a moment on your third question of retail inventories.

We encourage you to talk to retailers specifically, but our own analysis based on our internal data and the point of sale information we get, suggests our retail inventories continue to be fine and in fact continue their downward trend which we think is good.

All that said, let me spend a moment on Easter timing because I'm sure that's an issue for you.

Last year we saw two thing that is benefited the first quarter shipments.

First, there was an early Easter in March of '02 instead of April in 2001.

The second thing is we saw a retail customers replenish their inventories.

As you'll recall, following 9/11 of '01, retailers were very cautious about Christmas in '01.

Which in the end was better than I think most people expected and therefore retailers needed to rebuild inventories early last year.

This year we are seeing the opposite.

The last three or four months at least including Christmas were by and large weaker than many expected.

They have already got plenty of inventory over all and they don't really need to buy more to get through Easter.

I don't think we will see any second quarter benefit in terms of our shipments related to Easter.

Okay, great.

Have you seen a shift in terms of your over all market share, Bob?

Yes, we have.

As everybody knows, the NPD [INAUDIBLE] data is less than ideal.

I think we are covering now about 40% of retail sales and it excludes the largest and one of the market share gainers in the business.

In February, according to NPD, the category is up 5.3% and our share is 19.1, which is down 1.3 share points on a year to date basis.

The facts are the facts, but I'll tell you I don't believe that retailers think their toy business is booming right now.

I think our 5% domestic sales decline is consistent with the over all state of the toy business and with the fact that competitors are doing well in girls and in the male action categories.

Right.

Okay.

Thanks very much.

We will go next to Brian McGough of Morgan Stanley.

Great, thanks.

There is a lot of noise on the sales in the quarter, but I was wondering, one is it safe to assume that the down 5% U.S. sales number adequately reflects the actual retail take away and two, this whole loss of share and dolls and male action, what categories have you actually gained share and what do you do to offset the loss of share for the fall for those categories for the fall?

Thanks.

Brian, this is Bob.

There is a couple of things going on as we think about top line and market share.

First as I mentioned, the retail environment including Christmas of last year in the first quarter of this year has been challenging across-the-board whether it's consumer confidence or unemployment or the war or whatever.

I think that the industry performance over all in my judgment and again this is just judgment, the facts are facts, but in my judgment I'm not yet convinced that the toy industry is growing in consumption at 5%.

The second thing is the competitive environment.

We lost share in the girls segment and we gained in things like Wheels.

The Wheels category is down due to all the action in male action right now, including our own He Man and Yu-Gi-Oh, but a lot of competitors products in there.

We clearly got a strong product lineup for this year.

You have seen it like Barbie of Swan Lake and My Scene and the Hot Wheels 35th and Batman and Yu-gi-oh and Masters.

I think Hokeypokey Elmo or Limbo Elmo one or the other will be the biggest hit.

We are also strengthening our marketing plans in light of the tough retail and competitive climate.

In short we will be dialing up marketing investment near term to best ensure we have good holiday sales.

Which is when it really counts in this business.

Because as we said for sometime, top line growth is the biggest challenge this year.

Operator?

We will take our next question from Felicia Kantor with Lehman Brothers.

Good morning guys.

A couple of questions.

Kevin, you mentioned in your remarks that you expected a decline revenue growth for the first half of the year, you mentioned a shift in the shipping patterns and I thought you cycled through last year.

So I was wondering if you could walk me through that and also mention that the collectibles in the girls business were once again a drain on the business and I'm wondering what kind of changes that you're ultimately taking here.

Because it seems to be something that is difficult in a challenging environment and wondering strategically how you are looking at that.

Finally, Kevin, all of these are for you.

Finally, I was hoping that you could just -- on the SG&A walk us through the mechanics of how foreign exchange rates have impaired SG&A.

This is Bob.

Let me start with the shipping patterns, because I think I've talked about this in the past but I just want to clarify it.

I don't think we have ever said that we expect a decline in shipments for any period of time.

We never give short-term guidance on sales.

It's important to clarify that.

We have talked about the shipping pattern first half versus second half.

If you go back to 2001, our shipments in the first half represented about 36% of our annual shipments and our POS or consumer take away was about 28%.

We saw the gap and as I explained to you last year, that gap had been growing.

The defense in shipments and consumption in the first half.

In 2002, we said we wanted to work on that and we made progress.

When we look at the full year business, our shipments were 31% of the full year and retail take away stayed at 28%.

We made about a five percentage point improvement and we also said going into this year that there is still that gap and we're going to continue working on it.

This was not just a one period effort.

We want to continue moving towards our shipments, better aligning with what consumers buy.

That's good for the supply chain and good for inventory management whether it's ours or retailers.

Then Bob, in the past when you have talked about the difference between ship in and sell through, you also every once in a while you mentioned how your products were selling from a POS perspective.

Can you touch upon that in the quarter?

Probably the best data is the NPD data.

We don't like to talk about internal POS that we get from customers, largely for some of the confidentiality arrangements with customers.

It's really their data.

Let me follow-up on the SG&A question.

I think what we said in the fourth quarter conference calls, we expect cost pressure this year on things like insurance and employee benefit costs.

In the first quarter we did see higher employee benefit costs and we did see the impact of foreign exchange.

They more than offset the savings for financial realignment.

The exchange piece, Felicia, really relates to the SG&A cost primarily in Europe being converted at a higher rate this year, exchange rate than last year.

Our expectations for 2003 for SG&A as a percentage of net sales, we expect to continue to control cost and execute the financial realignment plan and expect for the full year that SG&A is a percentage of net sales should decrease.

Okay.

Then a question on collectibles?

It's Matt, on the collectibles business, a couple of things.

First, the adult collectibles category is challenged over all.

As you look at the economy it's an area under pressure for a year or year and a half.

With that being said, if you look at the demographics and the equity of the Barbie brand and the attachment between adult females and the Barbie brand, clearly there is long-term opportunity.

Quite frankly what you are doing right now is strategically refocusing the business and sort of setting ourselves up to start back the growth curve.

That will take a couple of quarters to do, but we are confident they represent long-term potential.

Thank you.

We will go next to Sean McGowan, Gerard Mattison

Hi guys.

Two questions, first for Matt and second for Kevin.

Matt, can you talk more specifically about My Scene and that is to the extent that you can get this from consumer feedback, how incremental are the sales to the over all Barbie category?

Are they substitutive and are kids buying My Scene instead of other Barbies or are they buying My Scene where they would have graduated already from the Barbie line?

And Kevin, question for you.

Can you give us more on gross margin expectations?

This surprise in the first quarter is fairly substantial, at least on my model.

Give us an idea of how much improvement we can expect for the rest of the year versus last year or is this a one quarter aberration.

Sean, it's Matt.

On the My Scene segment, first we are kind of early in terms of out of the gate given that the dolls have reached retail and are turning well.

That being said, we have not seen the accessories in the balance of the product line hit the retail counter yet.

I would say our efforts are targeted at older girls.

It seems to be -- with the older girls segment, but we have to wait longer to play it all out to understand how much is totally incremental versus how much is cannibalistic.

If I could follow up on that, Matt.

Any indication from consumer or feedback from retailers as to whether -- was taking share from Barbie or whether the -- sales to girls who would not really have been in fashion dolls anymore.

Sean, this is Bob.

We have clearly seen as I tried to indicate earlier tremendous competition in the girls categories whether Hello Kitty or Strawberry Shortcake or Care Bears or --.

There is more action in girls right now than we have seen in sometime.

Let me build on what Matt just talked about.

We have seen very good early read on the My Scene dolls.

At the same time we haven't yet sold any of the My Scene accessories which will be coming out in the second half.

Here again, the competitors are out there with some of their accessories and selling well.

That's been an issue for us as we look across Barbie accessories.

The other thing going on in Barbie accessories is the fact that some of our items, I think it was the VW Bug, probably the best selling accessory over the last couple of years, we are going into the third year of those things.

They are starting to cycle through.

We have the Barbie Cruise Ship this year and Barbie of Swan Lake Castle.

Those should be big items, but they are second half items.

The accessories business is not doing as well as doll business right now.

Okay.

Sean, on the gross margin, as I look at gross margins, I think about half of the margin improvement in the first quarter was driven by execution of supply chain and financial realignments plans and strategic initiatives.

The remainder was driven by temporary timing benefit on raw material cost, transportation prices and a shift in mix.

If you look at their operations now, we are experiencing higher cost in these areas today, particularly commodities and transportation which will be reflected in future results.

What we believe there is more opportunities to improve gross margins as we execute the supply chain initiatives, but you need to balance that with the pressures of these higher commodity costs and transportation costs.

You mentioned mix.

How would that have helped you?

I would have thought with Barbie not being up it would be hard to get gross margins to be up this much.

Things like Wheels being down and Power Wheels being down and entertainment properties like Yu-gi-oh being up.

That helped substantially.

I'll tell you, Sean, as you've seen over the last couple years in the segment recording, particularly under Matt's leadership, international and the entire boy's product area has really improved profitability.

We are now benefiting from all that work and the fact that our portfolio is in fact broader then it was a few years ago.

Looking at plastic as the most important commodity price.

We had in March a spike in oil prices.

Does that lock in higher plastic prices for the rest of the year or if there was a drop in resin prices over then next couple, would you be able to take advantage of that?

I think we do have long-term contracts with suppliers.

It's somewhat tied to the price of oil.

And I think right now we are seeing these higher prices, if it does decrease later in the year we may see the benefit of lower resin prices.

Thank you.

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

Thank you.

Bob, maybe you can elaborate on your decision to break out the American Girl business separately and what it could mean strategically and you mention the second store is part of the capital share for the year and maybe you could share the economics in the store in Chicago.

Well, Linda, let me start with really the key point in breaking out Pleasant Company.

It was to allow Matt to focus on the Mattel brands units here in El Segundo.

We will facing tough competitive challenges whether in male action or girls or game and puzzles in every element of the toy business.

I think you have all seen how Matt has built businesses and increased market share and improved profitability and done a world class job.

He will bring that same sort of energy into the girls categories.

At the same time, Pleasant Company, as some of you have pointed out, is really a strategic opportunity for us.

The direct to consumer distribution system, the fact that they have done so well with brands with older girls gives us an area on which we want to focus on the future and enjoy better growth.

Okay.

What about are you willing to talk about the economics of the store?

Generally no, not specifically.

It's clear now we have been in the store for four years just off Michigan Avenue in Chicago.

I think it's a great -- the New York store is a great example as reinvesting our capital in our business to drive top line growth.

We are very excited about the new store.

I was in New York last weekend, it's 609 Fifth Avenue.

It will open this fall.

We had the benefit now of years of very strong economics in the Chicago store.

So, based on all analysis on spending opportunity and the traffic and all of the things that obviously you do in the analytics, we think the New York American Girl Place will be a very strong return on our investment.

Okay.

Thank you.

We will go to Dean Gianoukos with J.P. Morgan.

Two quick questions.

Can you tell us the net effect on foreign exchange?

And also how much did the consolidation of the Mexico plants help you on the gross margin?

Thanks.

On to the second one first, we are still in the process of the consolidation of Mexico plant and that won't happen completely until the end of the 2003.

We will see those benefits in 2004.

The impact of foreign exchange on gross sales for the first quarter that benefits do to the strengthening Euro.

For the quarter worldwide growth sales were down 3% local currency and up 1% in U.S. dollars.

So that was a 4% difference there.

The impact of foreign exchange of EPS was about one cent, Dean, again due primarily to the strengthening of the Euro.

Thanks.

Our next question is from John Taylor with Arcadia Investments.

Good morning, I got a couple of questions as well.

A lot of press coverage about SARS and so on.

Can you talk about any impact that might have on corporate process and particularly as it relates to product development for, you know, the future.

The second question is I wonder if Matt can go into detail in the boy's action category.

Specifically we are seeing strong competition from one or two things or is it a lot of things?

Give us as part of that a Batman update.

Then I guess this is for Matt or maybe Bob.

With the consolidated divisions, I wonder if you can give us a sketch of how the girls division will look differently in a year or two after the consolidation is happening.

That will be different down the road?

Well, JT, let me start with SARS.

Obviously our main concern lies in providing the safest possible work environment for employees across the organization.

The good news is we haven't experienced a single incident of SARS infection at any one of our manufacturing facilities to date.

At the same time we have also got a pretty strong protocol to do everything we can to prevent any problems.

If an employee were to become infected, our first priority is to ensure they are provided with immediate and appropriate medical treatment.

We made arrangements around our manufacturing facilities that make sure that can happen well.

Within our plants, we are doing everything we can on a precautionary basis.

We've increased plant hygiene and sanitation.

We are making face masks available to employees.

Our doctors are on call in local health communities.

At this point we don't anticipate any issues that would disrupt our normal flow of operations.

We do have at the same time already kind of a whole series of contingency plans in the event that something happens.

There is really nothing I can point to today, JT, that causes us any concern.

We are working very hard on this.

We are working on it with a lot of people.

We think that if we were to be impacted by it, it should be short-term.

I hope that gives you a flavor for it.

I'm curious, I'm assuming a lot of travel between the U.S. and far East has been cut back and whether in terms of the product development process, that sometimes a really important aspect of it.

No.

Since the beginning of the war with Iraq, JT, our air travel has been restricted to business and critical situations.

That applies to travel in and out of Asia.

Which you're correct, we scaled back almost completely.

We are utilizing our existing communications infrastructure.

We have video and teleconference abilities and we do a lot of design work over the internet right now.

So that we can move things back and forth electronically which obviously helps us with productivity.

I don't see an issue at all from a development standpoint.

Great.

JT, on the action figure business over all, I would say it's a lot of people doing well rather than sort of one absolute run away hit.

I'm speaking specifically to our brands, we continue to see growth in Yu-gi-oh and are very pleased with our results and it is exceeding expectations.

In the launch of He Man it's going well in the U.S. right now and we are looking forward to both Yu-gi-oh and Masters of the Universe roll out around the globe, and we should see that in the second half of 2003.

In terms of competitive stuff, across-the-board a lot of guys doing well.

Nobody running away with the show, but a variety of brands are doing well.

In terms of the division and the girls and boys business together, I would say quite frankly it's early to make long-term predictions on the same or different, but I would say on a couple observations, we have enormous talent in the organization and just in the 30 days or so we have been at it, the opportunity of putting everybody in the room and taking the best ideas from everywhere on both businesses and cross fertilizing and sharing back and forth has yielded exciting results for us.

I just make one other comment.

Expect to see us be more aggressive and competitive and really go to building our brands for the long-term.

I think that would be the general trend you are looking for.

JT, I don't make a lot of projections on things like that, but I can tell you that the attitude is changing in our girls business already under Matt's leadership.

This is a fellow who will not accept market share losses from anybody, any place, any time.

I have seen that firsthand for the last three years in the boy's and the entertainment segments all over the world.

I think you will see us be that much more aggressive under his leadership.

Okay.

Any comments on Batman?

We are just getting out with the Batman stuff.

As you read, it's very well received by all of the trade and as well as a lot of the special publications.

We have put Justice League into the market place and it's doing extraordinarily well, but the Batman stuff is starting to trip up with retail and you see that in the second half of the year.

Everything looks on track and very good at this point.

Have they picked a date for a movie?

You will have to ask Warner Brothers that.

Thank you.

Our next question is from Margaret Whitfield with Brean Murray.

Good morning.

I was wondering if your comments about the absence of an Easter benefit also included the international markets?

Wondered if you could comment on the retail reaction of power touch.

And for Matt, I wondered if you could be more specific as to what marketing programs you might have to help offset the share losses in the fashion doll and Wheel category due to strong action figures.

Margaret, his is Bob.

I think if there is any benefit to the late Easter, this is my speculation, I think we would see some benefit internationally vis a vi the U.S.

Now I start with Easter in general is not a strong a toy holiday outside the U.S. as it is in the U.S., but thinking about the economic environment and retail inventories in general, I think that issue is more pronounced in the U.S. than it is over seas.

Thank you.

And Margaret in terms of specific program, I don't want to get into the tactical details perse, but know that if they went under the headings of demand creation and in terms of marketing and promotional spending advertising and promotions as well as compelling value at retail, I think those would be the areas of focus.

And Margaret, this is Bob on your question on power touch, obviously we haven't shipped any yet.

Retailer response has been very encouraging.

Neal Friedman and the Fisher-Price team have built very good momentum in that whole learning category starting last year big time with Kasey the Kinderbot, which continues this year.

So we have good solid expectations, but we expect it to be a real long-term fight.

Within the market share data you provided the over all loss of share, could you comment on the loss of share presumably with the dolls and the Wheels category?

Could you quantify it and any increases?

We don't go through segment by segment.

The data is still 40% and I think the more granular you get, the less reliable it is.

We gained share in Wheels and the problem with Wheels is from a mixed standpoint, the Wheels business is done less well than male action or games and puzzles.

Thank you.

We have time for more question.

Our final question from Tony Gikas from U.S. Bancorp.

Hi guys.

My question is more about revenue growth this year.

And if I heard you correctly, it sounded like shipments from the first half will be down compared to the prior year which implies Q2 being a down quarter.

The comps get tougher later this year, could you characterize how tough the comps are and address international versus domestic or any specific product categories or product lines like how tough could the comps on the Harry Potter be with no movie properties to support the license this year?

Tony, this is Bob.

Just to clarify one thing, and I want to make sure this is clear for everyone.

We don't make projections by quarter for anything.

We never said whether any given quarter will be up or down.

What we have said is that we expect our shipments to be more second half weighted as we continue to work on the gap between our shipments in the retailers and their sales going out.

What was the second part of the question?

It gets on to the how tough are the comps later this year?

Sales last year in the second half were up 6.5%.

Where do you see the biggest challenges?

Domestic or international or product lines specifically?

I think the comps are difficult and we have been talking about that on international for sometime now.

Particularly as it relates to international.

We have done well with double-digit growth, 11 or 12% on a full year basis for each of the last two years.

Frankly Tony, I was encouraged by the fact that our international business did as well as it did this past quarter.

We continue to grow the business in Europe despite very challenging comps.

We did that in both an actual basis and on a constant currency basis.

As Kevin mentioned in his remarks, we didn't do as well in Latin America, but we expected that.

Our Latin America decline tended to be focused in places like Venezuela where the political and economic climate is a big issue.

We tightened trade terms significantly in Latin America over the last 12 months and that has the impact of moving shipments closer to consumption which is what we like.

Thanks.

That concludes the question and answer session.

Ms. Douglas, I will turn the conference back over to you for any additional or closing comments.

Thank you, Operator.

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

The replay of this call will be available beginning at 11:30am Eastern time today.

The number for the replay is 719-457-0820 and the Id number is 578411.

Thank you.

And this does conclude today's conference we do appreciate your participation, you may now disconnect.