Mattel Inc (MAT) 2003 Q2 法說會逐字稿

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

Today's call is being recorded.

With us today from the company is the VP of IR Miss Dianne Douglas.

Please go ahead.

Thank you.

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

I'm Dianne Douglas, VP of IR and joining me today are Bob Eckert, Chairman and Chief Executive Officer and Kevin Farr, our Chief Financial Officer.

Earlier this morning we issued a press release which detailed our second quarter 2003 results.

On the call this morning you will hear brief remarks from Bob and Kevin will provide a review of the financial results.

As most of you know we typically have another member of the management team as a guest speaker on these calls.

Over the last year and a half you've had the opportunity to hear from essentially our entire senior management team regarding their specific organizations and business strategies.

We plan to continue the guest speaker format as appropriate in the future to help you better understand our company.

But because we just hosted an analyst meeting a few weeks ago we will not have a guest speaker on today's call.

We do plan to have Brian Stockton, President of International Operations on the third quarter earnings call to discuss what he's been focused on since taking on his new role a few months ago.

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.

Such forward-looking statements will include statements regarding 2003 revenues, the timing of product shipments, improved partnerships with major retailers, advertising expenses, improvement in SG&A as a percent of net sales, expectations of cash generation from working capital improvement, cost savings from the company's financial realignment plan, improvement in our improvement in our debt to capital ratio, capital expenditure plans and cash management strategy.

There may be additional forward-looking statements in response to questions or otherwise.

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 operation, performance, business strategy and results of Mattel and could cause actual results to differ materially from those projected in such forward-looking statements.

Some of these factors are described in our 2002 report on 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.

Information required by Regulation G regarding non-GAAP financial measures is available on the Investors and Media section of our corporate website, Mattel.com under the subheading "Financial Information and Earnings Releases".

Now I'd like to introduce Bob Eckert.

Thank you, Dianne and good morning, everyone.

As expected, sales for the second quarter were weak.

As I said during our first quarter conference call and at last month's analyst meeting here in Los Angeles, we're operating in a difficult economic environment with retailers tightly managing their inventories.

We're facing the additional challenge of strong competitive incursions in key categories which have resulted in the loss of market share.

Finally, as we've discussed for some time now, we're reducing first half shipments into retailers to better align our sales with consumer purchases.

But as you all know, the action for the toy industry is in the second half and we aim to have a strong holiday season by responding to the top line growth issue, by not only dialing up the marketing and promotional programs surrounding our core brands, but also introducing new brands in key categories.

With all that said, you know how I feel about managing the business for the next 90 days.

As a company we're focused on driving long-term performance and generating shareholder value.

As you know, we've benchmarked ourselves against the best consumer goods companies in the business.

To be a well-run consumer goods company you have to accomplish three things simultaneously.

You have to have revenue growth, margin expansion and a first rate cash management strategy.

Through our culture of continuous improvement, we strive to achieve each of these objectives over the long-term.

If you look at Mattel's performance over the past three years, you can see that we've met these benchmarks.

Our revenues have grown about 3%, operating margins have increased from 12.8% to 16% of sales.

Debt has been reduced by 37% and we finished last year with over $1 billion in the bank.

As we continue to execute our strategies to build brands, cut costs and develop people, we know there will certainly be short-term challenges including cost pressures and a challenging retail environment.

But over the long-term our goal is to out perform the competition, generate strong cash flow and deploy that cash effectively to create value for our shareholders.

Thank you and now I'd like to introduce our CFO, Kevin Farr.

Thank you, Bob and good morning, everyone.

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

I'll begin with the discussion of worldwide gross sales shown on the bottom of Exhibit 1.

Total worldwide gross sales for the second quarter were down 6% which included a benefit from changes in currency exchange rates of 4 percentage points.

As anticipated, gross sales in the U.S. declined 15% reflecting the challenging retail environment, competition in key categories and our continued focus on shipping closer to retail take away.

Our strategy of better aligning shipments with sell through continues to put pressure, downward pressure on our first half shipments in 2003, but should have no impact on full year sales.

This initiative should improve our partnerships with our major retailers.

Overall, the sales decline in the U.S. reflected continued inventory management by key retailers and market share losses.

And we continue to see competitor strength in dolls and various boys segments.

International sales increased 11% which included a benefit from changes in currency exchange rates of over 10 percentage points.

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

Last year, international sales were up 11% in the second half which included 3 percentage points of negative impact from changes in currency exchange rates.

On a regional basis in this year's second quarter, sales in Europe were up 22% which included a benefit from changes in currency exchange rates of 19 percentage points.

Sales in Latin America were down 14% which included 6 percentage points of negative impact from changes in the currency exchange rates.

The decline in this region was driven primarily by sales declines in Mexico and Latin America export markets where we have shortened customer payment terms and made progress in moving shipments closer to consumer purchases.

Asia Pacific was up 21% which included a benefit from changes in currency exchange rates of 11 percentage points and sales in Canada was up 3% which included a benefit from changes in currency exchange rates of 7 percentage points.

I will now review our core categories and brands.

For the quarter, worldwide sales in Mattel brands division were down 9% which included a benefit from changes in currency exchange rates of 5 percentage points.

Domestic sales were down 23% and international sales were up 9% which included a benefit from changes in currency exchange rates of 11 percentage points.

Worldwide Barbie sales were down 8% which included a benefit from changes in currency exchange rates of 6 percentage points reflecting 18% growth in international sales which included a benefit from changes in currency exchange rates of 13 percentage points, offset by a 29% decline of Barbie sales in the U.S. marketplace.

Barbie sales in the U.S. reflect declines in the core doll segment as well as continued declines in the collector and accessory segments.

Worldwide sales of other girl brands were down 12% which included a benefit from changes in currency exchange rates of 5 percentage points.

Driven by solid performances by Polly Pocket and Elmo, which were more than offset by declines in sales of Diva Starz and What's Her Face.

Worldwide sales for the wheels business was down 20% which included a benefit from changes in currency exchange rates of 3 percentage points with strong growth in international sales of Hot Wheels, more than offset by declines in sales of Hot Wheels in the U.S. and Match Box and Tyco RC worldwide.

Sales in the entertainment business were up 9% which included a benefit from changes in currency exchange rate of 5 percentage points versus the prior year.

Reflecting strong performances in games and puzzles, Yu-Gi-Oh and the new Warner Brothers properties offset by declines in sales of Harry Potter and Max Steel.

Fisher-Price brands.

For the quarter, worldwide sales for Fisher-Price brands were flat including a benefit for changes in currency exchange rates of 3 percentage points.

Strong growth in sales in core Fisher-Price in international markets and worldwide sales of Fisher-Price Friends were offset by declines in sales of core Fisher-Price in the U.S.

Domestic sales of Fisher-Price brands were down 6% and international sales were up 20% which included a benefit from changes in currency exchange rates of 11 percentage points.

Worldwide sales at core Fisher-Price were down 3% which included a benefit from changes in currency exchange rates of 4 percentage points with domestic sales down 12% and international sales of 25% which included a benefit from changes in currency exchange rates of 13 percentage points.

American Girl brands.

Sales of the American Girl brands declined 3% versus the prior year.

Sales in the Bitty Baby lines were strong reflecting new product launches of Bitty Twins.

However, this growth was more than offset by sales decline in the American Girl collection and American Girl Today lines.

New product line introductions for these lines are scheduled for the fall season.

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 charges related to the financial realignment plan.

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

Gross margin was 46.6% for the quarter which increased by 210 basis points versus the second quarter last year.

The improvement in gross margin was driven by the execution of our financial realignment plan, supply chain initiatives and a favorable mix shift.

The mix shift was driven by more sales of action figures and games and puzzles and less sales of dolls accessories.

The favorable impact of the shift in mix and the benefits from supply chain and financial realignment plan were partially offset by the anticipated increases in raw material costs and transportation prices.

Advertising expense was $80.8 million or 10.5% in net sales up 20 basis points versus the prior year.

As we said on the last conference call, we expect advertising expense as a percent of net sales derived during 2003 as media prices level off and as we invest in marketing and promotional programs.

These investments relate to supporting the launch of several new brands later in the year and rebuilding volume momentum in our core brands.

Selling, general, administrative expenses were $223.1 million or 29% of net sales for the quarter, up 210 basis points compared with last year's second quarter.

SG&A reflects savings from the execution of our financial realignment plan offset by increased employee benefit and insurance costs.

Our expectation for 2003 is for SG&A to improve 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 $54.8 million, down 6% versus last year.

As a percent of net sales, operating income declined 20 basis points versus the prior quarter to 7.1%.

The decline was driven by higher SG&A and advertising expense, partially offset by the strong gross margin improvement.

Interest expense was $18.2 million for the quarter compared with $29.1 million in the second 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 $30.9 million or 7 cents per share versus last year's second quarter of $29.6 million or 7 cents per share driven primarily bi lower sales volume and higher SG&A offset by stronger gross margins and lower interest expense.

Now turning to the balance sheet.

Our receivables at $604 million or 71 days of supply, days outstanding decreased by 11 days versus last year reflecting improved cash collections.

Excluding the year-to-year change in factoring which was down $7 million versus the prior year to $121 million, receivables were down $132 million.

Day sales outstanding improved by 11 days as we continue to focus on tightly managing working capital.

Inventories at $540 million were down $28 million or 5% versus last year's second quarter.

Days of supply was 54 days which is five days lower than last year.

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

Excluding the prebilled, days of supply would have been 54 days compared with 58 days last year.

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

In 2003, however, we do not expect to generate the same magnitude of cash from working capital improvements as we did in 2002.

Our total balance sheet debt decreased by $436 million and our debt net of cash decreased by $847 million from second quarter 2002.

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

Our debt to total capital ratio is 28% versus 44.3% last year.

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

We should achieve this debt to total capital ratio by the end of this year.

Capital expenditures for the quarter are approximately $55 million.

This is in line with our expectations of capital expenditures for the full year of 180 to $200 million as we invest in new American Girl place in New York City, execute our strategic plan for information technology and execute 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 second quarter we recorded a $14 million pretax charge related to financial realignment plan.

The charge consists of a $2.4 million charge to gross margins, primarily related to the consolidation of manufacturing facilities in Mexico, a $7.4 million charge to SG&A related to termination of a licensing arrangement and streamlining back office functions, a restructuring charge of $3.3 million which primarily relates to restructuring of Karol, our French doll business, and a $900,000 charge to other non-operating income net related to the termination of a vendor relationship.

Since we announced the realignment plan in September of 2000 we have taken approximately $249.3 million in pretax charges and we expect to record the remaining $700,000 by the end of this year.

Of the after tax charges taken thus far, $123 million were cash.

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

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

Over the last six months we've consistently said we expect 2003 to be challenging in light of the uncertain retail environment and certain cost pressures and that certainly has been the case thus far.

But as you know, this is the second half of the year business and we are working very hard as we move into that all important season.

That completes my review of the financial results.

Now Bob and I would be happy to answer your questions.

Operator?

Thank you.

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

To ask a question press the star key followed by the digit 1 on your touch tone phone.

Please make sure your mute function is turned off so your question will register in the queue.

Again, star 1 if you'd like to ask a question.

We'll take our first question, Jill Krutick, Smith Barney.

Thank you very much.

Good morning.

Hi, Jill.

Hi.

Could you, since the international was such a key driver for the first half, I realize the comps were a little tougher in the second half, is it fair to assume that a really strong momentum should continue in the international markets and what initiatives are being put in place to assure that?

Secondly, I'm curious if you've seen any push back from retailers to the Flavas dolls just given the way they look and so on in the market?

And finally, if you could just update us on some of the key market share data that you often share.

Thank you.

Let me start with your question on Flavas, we haven't seen any push back anyone.

In fact, Flavas now probably been in the market for all of two weeks and for whatever two weeks is worth with no advertising in a handful of stores it seems to be selling quite well.

And we worked very hard on Flavas to make it edgy, to make it hip hop, but also to keep it sort of in line with our Mattel values.

So the direct answer to your question Jill is, no, I haven't heard of any push back on that.

As it relates to international, we did have a good second quarter sales internationally in several of our key markets.

I think Kevin mentioned Europe was up 22% with some of that benefit obviously coming from currency.

That was in spite of a prior year comp of 15% growth.

Asia was also up.

We were down in Latin America because we tightened our trade terms with Mexico and Latin American export markets.

We continue to believe that if you look over the long-term planning horizon that we do, you know, 3 to 5 years sorts of range, international growth should marginally continue outpace domestic growth.

All that said as you know, we are up against the law of big numbers.

The second half sales at international last year were up 11%.

So we do have tough comps facing us.

But all of the things we've done over the several years to improve our international business we believe have worked and will continue working going forward.

Finally, your question on market share, the category, the industry according to MPD Trust is down 2.4% year to date.

You know that covers about 40% of the industry and some retailers are in that base and others are not.

Our share of market May year to date is 18.8%, down 1.4 share points.

So some of the issues we saw through the first part of the year continued into the spring.

You know we are not as pleased as we would like to be with our spring performance, but you also know we've done an awful lot to dial up the second half of the year.

As Kevin says, all the time, this is a second half of the year business.

We're introducing a lot of new items, we've beefed up our marketing programs and advertising and promotions.

And we aim to have a strong second half.

Best of luck, Bob, thank you.

Thank you.

Our next question, Brian McGough, Morgan Stanley.

Thanks very much.

I just have one question for you.

Aside from the product launches that we saw a few weeks back at the analyst meeting, I was hoping you could just walk us through how you are working on improving the shelf space productivity for your customers and how that might ultimately result in regained share and also what the working capital implications might be.

Thanks.

Brian, this is Bob.

We have worked very hard on improving our sophistication of category management and planning with retailers.

This is an area where I think we are clearly the leaders in the toy industry.

We worked very hard with their data, with our data to lay out a shelf plan-a-gram for them that will clearly increase their productivity of shelf space.

And then we worked very closely with retailers to refine that and take their input and those sorts of things.

But if you look at our efforts over the last two years, I think we've made a lot of progress in this area.

I think we're as good as the sophisticated well run consumer goods companies as it comes to working with our customers on a category management basis.

That is, working with the facts and working with them to improve their productivity in terms of sales and profit per linear foot.

I think on the working capital side, similar to what we're doing strategically with moving sales from the first half of the year to the second half of the year to align with retail take away, we continue to work with retailers.

Obviously we want to take inventory out of the total system.

So we're trying to get more efficient with retailers and that should benefit both us and the retailers.

So the point being that as you guys make them more efficient with their shelf space they should pay you guys faster?

Yes.

And I think we should also take inventories out of the system.

Great.

Okay, thanks.

Our next question, Sean McGowan, Harris, Nesbitt, Gerard.

Hi, guys.

A couple -- one quick question and one that might take a little bit longer.

The question on net, the difference between net sales and gross sales two percentage points, could you touch on that?

And second, I'm curious about the favorable sales shift.

You know, the mix shift points since Barbie's got to be one of the most profitable products and if that's down 29% in the U.S., how could that be made up by something else?

Thank you.

Really, on the 2%, that's really rounding, Sean.

It's close to 1%, but it rounds up to 2% this time, just happens that way.

And then with regard to mix shift, if you look at Barbie on a worldwide basis, if you take out the accessories category essentially, it's flat worldwide.

Okay.

And the accessories don't have anywhere near the margins of the dolls?

That is correct.

Thank you.

You're welcome.

And our next question Dean Gianoukos, J.P. Morgan.

Just a couple questions.

At your analyst meeting you talked about giving more value for the money.

Is that going to affect gross margin more on the back half of the year or have we seen any impact on that already?

Secondly, can you give as you a sense of what the SG&A run rate could be as a percentage of sales moving forward?

Third question, and I'm sorry for asking, is there anything in particular competition wise that would make What's Her Face and Diva Starz come back?

Or is this just a shipment, timing of shipment issues?

And then finally, when will you start to ship the American Girl stuff for the new store in New York to stock the store?

Thanks.

Hi, Dean, this is Bob.

The answer to your first two questions sort of would lead to something in the range of guidance which you know we don't do.

We have shown you and other analysts what we're doing to put more value in the package and those sorts of things, but we're also clearly working on efficiencies and driving gross margins through better procurement, better design of work, design tire to the engineering and those sorts of things.

So I think have you to come to your own judgment about that.

And the same is true of SG&A.

As Kevin mentioned, our objective is to have SG&A as a percent of sales lower this year than last year but exactly how do you that in your own models I think is up to you.

As it relates to American Girl, that store is expected to open later this fall, sometime in the October, late October, early November timeframe.

So product going into that store would probably be early October or there abouts.

And related to Diva Starz and What's Her Face, I think the magnitude of the decline will continue.

We are continuing those lines, we scaled them down.

They'll have a smaller presence than they've had in years past and they'll be replaced by things like Flavas and other new items.

But I don't count on those things coming back to be long-term players.

Okay.

Thanks a lot.

Our next question, Linda Bolton-Weiser, Fahnestock

Thank you.

Just in terms of the Flavas launch, you really moved up the launch date and you sped up the development process.

Can you comment on why you feel like the level of market research that you did was adequate?

And can you point to something in the market research that indicates that may be different performance either better or worse than the My Scene Barbie line?

Well, Linda, despite the fact that we did accelerate its launch, we clearly did the same sorts of homework on Flavas that we do on any other doll.

And it was in development for quite some time.

You know, it is clearly a complicated doll to manufacture.

So we didn't just turn on a switch overnight.

It's the first doll to have a variety of heights.

It's the first time we have a character, a doll with two totally different looks from the hairstyle to the fashions and those sorts of things.

They've got highly realistic face sculpts.

There, I think we showed you the 10-point possibility of them.

There's male dolls with the female dolls so it took a lot of work to get it done.

And we certainly did a lot of homework on that line before we launched it.

We also, one of the things we found in the homework is that it is different from our Barbie line and even those things in Barbie like My Scene that are going to older girls.

Core Barbie tends to focus on girls aged 3 to 7.

It's about fantasy play and role play and those sorts of things.

My Scene is designed for the 7 to 9-year-old, it tends to focus on girlfriends.

I think we call it glammed up, big city life and Flavas is the 8 to 10-year-old girl.

It's about self-expression, it's about aspiring to be a teenager.

We use the line, "Hanging with your crew", and we tightened those positionings as we worked with consumers in our marketing research so that we have several distinct lines of dolls that should appeal to different girls.

Okay.

Thanks.

Just one follow-up.

On the issue of share repurchase, can you share some of your thoughts about the potential timing of that?

Because, who knows, your stock may go higher from here in which case you might be want to buying some shares in this price range.

So can you talk about whether you want to achieve your targeted debt to total cap ratio first and then proceed with that?

Or can you shed some light on your thoughts?

Well, let me start with going back to I think last February when in our fourth quarter conference call we laid out the capital deployment framework for you.

I will tell you that the board is actively engaged in this.

We are rapidly approaching decisions.

Our dividend--.

Everyone please stand by.

Too hard of a question.

Everyone please stand by while we reestablish the speaker's line.

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Everyone we will be on hold with music until we do reestablish the speaker's line.

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Thank you for standing by.

You are on line for the Mattel conference call.

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Hi, Linda, it is Bob.

Are you still there?

Please stand by.

Hi, Linda.

Hello.

Hi, Linda.

Hello.

Hello.

Who's this?

This is Linda Bolton-Weiser.

Hi, Linda, it's Bob.

You asked the billion dollar question and the phone lines went dead.

I don't know where I was on the answer, but let me see if I can backtrack in my mind and answer your question about capital deployment.

I think you might have heard that, you know, we started this discussion with you in February when we laid out the capital deployment program, the framework we're going to be using for several years going forward.

The board is actively engaged in discussions on this and we are rapidly approaching some decisions.

We've historically considered the dividend in November and all I can say is that we will be disciplined and opportunistic as it relates to all sorts of investments including share repurchases.

By disciplined, we mean discounted cash flow, we mean rigorous analysis.

We'll incorporate tax implications, we'll use conservative assumptions, but as you know Kevin's pretty tight with the calculator on those sorts of things.

And by opportunistic, as it relates to acquisitions, we say the right thing at the right time at the right price, we're not going to force anything as it relates to acquisitions.

And the same is true in share repurchases.

We'll be looking at the market price of our stock, vis-à-vis, what we think is it's intrinsic value using conservative assumptions.

And that's the direction we've been given by the board.

They are actively engaged at this thing.

I can't make any predictions right now about who's going to do what when, but as Kevin reminds us, it's just as bad to overpay for your own stock as it is to overpay for someone else's and conversely it could be very beneficial for our shareholders if we bought stock at a low market price.

As I have said, if you look at this company, our stock price has ranged probably from 15 to 22 or $23 a share over the past year, and essentially, it's the same company.

So we are long-term players in this, and we'll be looking for those opportunities when the share price is we think significantly below the intrinsic value.

Thank you very much.

Our next question, Felicia Kantor, Lehman Brothers.

Hi, guys.

Just kind of looking at things from the big picture.

Clearly your saw the quarter coming in your comments since the first quarter release couldn't have been more clear in terms of preparing us for what you reported today.

Obviously it's clear now why you've implemented your aggressive product launch.

And I have questions regarding that.

First is, you have said several times on this call that it is the second half story and you are looking forward to a better second half.

But I'm wondering in reality, how long does it take for a product launch program and then a marketing initiative like you're implementing to really turn around?

And I'm wondering what you are seeing at retail in terms of the product take away and what you think between now and the holiday buy and do you think between now and the holiday buying time it is going to be enough to reverse the domestic declines that we've been seeing?

And then secondly, I'm just wondering which of your marquis products, the most you are excited about, what do they have yet to ship, and also have you seen that there's fixed shelf space out there for toys?

And whose expense do you think the introduction of your new products is coming from?

And then just finally, you did mention and you have mentioned several quarters how you are trying to realign your shipments versus your retail take away.

I am wondering where do you stand today as a percentage?

Of annual sales, you've given us those numbers a couple times.

And then also, when do you think you will be at the point where you want to be?

Okay, Felicia.

This is Bob, I'll try and get to several of them.

Let me start with, I think, the important discussion coming from your last point on retail inventories vis-à-vis take away and those sorts of things.

We don't make projections on that.

I think we finished last year with 31% of our full year sales coming in the first half.

The prior year I think it was 36% of our full year sales came in the first half.

We'll have to wait until we get through the December report to calculate what percent of our sales came from the first half this year.

But I think it does raise the very important point of how much our sales decline currently as related to retail inventories and how much of it's related to point of sale.

And I can't give you the answer with perfect precision.

Different data sources are involved here.

Some of them are internal, some of them are external.

We have different coverage factors.

As you know NPD covers 40% of shipments.

Our POS covers a higher proportion than that.

Obviously our sales, our shipments are our shipments and there are different levels of precision in the different data sources.

So as you can imagine, we've done a lot of analysis on this issue and they yield different conclusions.

One can build a case that all of our sales decline right now is related to retail inventory reductions.

One can also build a case that all our sales decline right now is related to what's happening at the point of sale and I think obviously truth is somewhere in between.

My judgment is that this is skewed a little bit more towards retail inventory change, but both inventories and point of sale are factors.

And so how this all plays out, we'll see.

This is a second half business.

We do have a lot going on in the second half in terms of new products, in terms of promotions and advertising support behind those new products.

Most of our new products if not all are shipping right now or certainly will be within the next 30 days.

I can't think of any of the major things that's really not shipping right now off the top of my head.

And you know, with the second half business, things can move fairly quickly.

At the same time, we have lost market share and we've got a hole to climb out of as it relates to market share and it's hard for me to predict exactly how the year-end is going to look.

But it is a holiday driven season and we aim to have a good holiday.

Now where exactly the shelf space comes from, it varies by retailer and we've been working very hard with them over the last 30 or 60 days to update their plan-a-grams and layout the shelf space.

As you start visiting stores probably in September sort of time period we ought to have a good handle on the shelf space

Okay, thanks a lot.

Okay.

Our next question, Margaret Whitfield, Brean Murray.

Good morning, Bob.

Hi, Margaret.

About a month ago at the analyst meeting you were somewhat cautious on the retail appetite for inventories.

I wonder if that view has changed any since that meeting.

And my own impression is that some of the doll products are doing well at this early stage, not just Flavas, but Swan Lake, My Scene improvements apparently are gelling and new products such as Stretch Sensation also.

Wondered if you can comment on the doll line and what you've seen recently because it does bring us optimism for the second half?

Well, we're optimistic about the second half too, Margaret and we do have a lot going on, but it is very early.

It is a very tough competitive environment, particularly in girls, you know, where we see Hello Kitty and Strawberry Shortcake and Care Bears and Bratz and all the things that have been coming at us in girls.

But we have responded aggressively in terms of the product in the marketing program.

And we'll have to see how it all plays out.

It is so early on some of the new items that I wouldn't want to lead you one way or the other on their performance.

It's just too early to tell.

But we think we have a pretty strong lineup for the second half.

And also Power Touch.

Is that out yet?

Is there any early read on that or any of your learning products from Fisher-Price?

No, Power Touch is just shipping now.

I haven't seen any retail data on Power Touch.

So it's way too early to get a judge on that one at retail.

We have done an awful lot of marketing research on Power Touch over some time period and we were pretty -- we are highly confident in the performance of the product.

It is a very good product as well as Kasey the Kinderbot last year's number one selling new electronic learning toy.

And I think some people have overlooked this Learn Through Music System which is really designed for the toddler.

So we have three strong initiatives going on in the learning category.

It is a growing category.

We haven't participated as strongly as we'd like to and we're changing that this year.

Finally, I think your question on inventories, as you know my view of inventories is, they're bad.

It doesn't make difference who holds them.

It's cash tied up, depreciating asset.

No one wants to build inventory especially in this environment.

When you look at retail over the past 8 or 9 months, probably the best performing retailers have had 2% comp growth.

Unemployment is at a 9-year high.

So it is a toughen environment.

The holiday season in general at retail last year wasn't as strong as retailers anticipated.

You know they went into this year with relatively high inventories and they've been working off those inventories.

So I am not surprised that they didn't have an appetite for inventories going this spring, given what happened last fall.

And just to clarify, did Kevin say earlier that Barbie would have been flat excluding inventories on a worldwide basis?

What I said is excluding the Barbie accessory category.

If you look at it worldwide on a U.S. dollar basis, it would have been essentially flat without the accessory business.

What went on in accessories to cause that?

Was it in fashion or like cars or?

No, we talked I think last quarter, Margaret I mentioned in accessories, which have been doing well for the past several years, there are two things going on.

One is, some of Barbie's accessories that worked well over the past couple years have tired.

Things like the Volkswagen Beetle which we and Barbie rode for the past couple years seems to have peaked and is coming down.

We're launching our own new accessories this fall and they're really not out yet.

And the second thing is, if you look at some of the competition in the doll aisle, some of the other folks have launched accessories.

We've done well with the My Scene dolls, but the My Scene accessories are just launching as we speak.

So we really don't have our full lineup of accessories out there this spring to be competitive.

But we do have a strong accessories program coming up this fall.

Thank you.

Our next question, Joe Yerman, Bear Stearns.

Hi, guys.

Hi, Joe.

Bob, a quick question for you and, you know, I'm sure you will want to think about this, but as the stock works lower or probably more apply said, given your, kind of the way you factor the intrinsic value of the business relative to the current stock price, if you were to engage in share repurchase, can you comment on how aggressive you would be in the form of would it be open market purchases or possibly a Dutch tender?

And then kind of a more of a big picture question, I'm sure you've seen the Wall Street Journal article this morning, there's some fairly scathing remarks from your competitor so you have to take that with a grain of salt.

I'm kind of curious how you're positioning the company, particularly, Bob with your comment about Mattel values, whereby you have aligned yourself with the Olson twins and now with Flavas, you know, some are aligning that, or at least this morning, with someone like Christina Aguilera.

I just wonder how you think about that relationship?

Thank you.

Well, as it relates to sort of competitive comments as I think those of you who know me well know I prefer to take the high ground on these things.

I won't react to what somebody says anywhere because I am not involved in the conversation.

I think it's better to have a conversation than to just make comments in the press.

As it relates to our product line, one of the advantages we have here at Mattel is the opportunity to have a portfolio of brands meaning different things to different people.

And I think the way we have positioned our doll business, whether it's the very young girl with things like our Princess line, with things like Swan Lake which is a very strong line this year, all the way to the very oldest girl who will play with dolls and the oldest girl who will play with dolls is familiar with Christina Aguilera and Britney Spears and all the other folks out there.

I think we've got a strong product line that covers the full gamut.

And that's important in this business particularly when we have been under competitive attack.

Joe, I'm sorry I missed -- the question in the middle about what kind of program we would do?

Yeah.

If we were to engage in some sort of repurchase program.

That's really a board level decision and, you know in general I don't speculate about those sorts of actions.

That's something that we're engaged with the board.

But I can tell you the board is actively engaged in discussions about this.

Just to tie back to the first question real quick and I'll jump off.

What gives you optimism about the Flavas line that was not captured by My Scene, I guess.

Where did My Scene miss the mark in getting this 'teen girl?

Well, Joe, as I think I said, I wouldn't describe it as My Scene misses the mark.

My Scene does within Barbie, takes Barbie to that older age girl.

At the same time, Barbie can only go so far, so Flavas comes in from the other side.

Not unlike Diva Starz did when it was launched probably three years ago with a different brand with a different appeal that is a little edgier that, you know, really is outside of the Barbie franchise.

So we're hoping to replicate the success we had when Diva Starz was the brand outside of Barbie.

As you know, brands come and go in this business, the side brands.

Barbie's been here for a long time, we'll be here for a long time.

And we like to surround Barbie with things that are hip and current which we think, and our marketing research suggests, Flavas certainly is.

Thanks, Bob.

Okay, Joe.

Our next question, Tony Gikas, U.S.

Bancorp Piper Jaffray.

Good morning, guys.

A couple questions.

Can you continue to achieve mid-single digit revenue growth over the next few years or the long-term with your existing franchises?

And if there is, maybe you could characterize on your appetite for doing acquisitions and if so would you characterize the availability of acquisitions in the market?

Second question, could you characterize any changes to cost of manufacturing?

Well, Tony, the very first question goes into guidance which you know we don't give so I won't comment on what our expectations are for future performance.

On your second question related to acquisitions, as I have said now for some time, the trick is to find the right thing at the right time at the right price.

All three of those things have to come together simultaneously.

My view on acquisitions, if you look at the history broadly of American business, the majority of companies overpay on acquisitions and we will be very disciplined and will work very hard to convince ourselves and our board that should the right thing come along at the right time it would have to be at the right price.

All that said Tony, as you know, it's a fragmented industry whether we are talking here or in international markets.

And so over the long-term it would seem to me that there should be opportunities to find things that are at the right time and at the right price.

But we have to see how it all plays out.

And then Tony, on the cost side, we are seeing pressure on our commodity prices.

You know, they're at 20 to 30 year lows so we're seeing pressure on that moving up in things like resins and transportation costs due to the fact that the cost of oil's up.

As you know we manage a basket of raw materials include paper and resins and electronic components.

The impact of some of the short-term fluctuations are mitigated by long-term purchase agreements with our major suppliers.

It's also difficult to quantify exactly how much has impacted the margin due to the fact that over 80% of our product's new every year and 50% of that product is bought from third party vendors as finished goods.

But when you're thinking about these price increases I think you've also got to balance that with the work we're doing on supply chain as well as global procurement.

Thanks, guys.

Our next question, Brett Jordan, Advest.

Hi, good morning.

Most of my questions have been asked.

Just a little bit of color.

You have made a comment as far as the charges in the second quarter and mentioned a tough million dollar charge related to the termination of a license.

Could you give us a little bit more information as to which license you terminated?

Bill, I'm sorry we don't get into that level of detail.

Okay.

Thank you.

Our next question, David Lebowitz, Burnham.

Good morning.

Hi, David.

Good morning, a few unrelated questions.

First, on Power Touch and Flavas.

How much merchandise dollar wise can you ship in this calendar year?

David, we don't talk about sort of going forward, sales projections in general or for any specific item.

Okay.

Also, the opening of the store in New York, how much is that going to be all and including inventory and how much of that has been expensed?

And finally, when do you expect that store to achieve breakeven or profit on an operating basis?

I'll start with the second half but that's the easy one, because that again talks about guidance and projections and those things we don't do whether in general or by product line.

Although I will say this, as I mentioned in capital deployment, we are very disciplined and we look very hard at numbers including our own internal investments and based on our history with American Girl Place near Michigan Avenue in Chicago we think it is a very attractive investment with a very short-term pay back.

And on the cost side, the cost of opening the store principally relates to capital expenditures.

Those capital expenditures are included in our forecast of 180 to $200 million of CAPEX spending in 2003.

What about advertising promotion and all the other hoopla that's involved?

That would obviously hit the P&L and when it comes it comes.

But I wouldn't want to get in on any comment how much, when, where, why.

Okay and lastly, you make quarterly estimates on markdown money.

As of this moment, have you been ahead or behind the curve on that for this year?

That's sort of a line item within the P&L that we don't comment on that level of specificity, David.

But I think the income statement sort of speaks for itself in what our sales line have been, what our gross margins have been and I think within the individual lines in there you can draw your own conclusions.

Okay.

And the very last question, what percentage of 2003 revenue will come from new categories and new products introduced this year?

Well, generally speaking roughly 80% of our sales comes from new products defined as a new SKU.

But that's obviously most of our revenues come from core brands like Barbie, Hot Wheels, core Fisher-Price where the brands tend to be around but the individual;

SKUs change.

And that's been our long-term experience.

Okay.

Thank you very much.

Thanks, David.

Operator, we'll take one more question.

And our final question, Natalie Warond with Pacific Growth Equities.

Hi.

I have a specific question about the ELA category and I apologize if this is something that you guys talked about at your analyst day, I didn't attend it.

But can you just give us a little more detail about what your approach is to the ELA category outside of Power Touch?

What else can we expect from you guys?

And in terms of new product launches, how does ELA stack up in terms of priority for new products coming in?

Natalie, this is Bob.

ELA is a focus category for us because it has demonstrated strong growth now for some period of time.

And it seems to be absolutely on trend with where parents are going on behalf of their children.

Last year we introduced Kasey the Kinderbot.

That was quite successful for us despite a relatively high price point.

I mean, that was probably a $60 or $70 item at retail, and did a very nice job.

We're launching two things this year, the Learn Through Music and the Power Touch.

We'll be continuing to introduce new products going forward in the category, but it's a little early to go into products in the years to come.

But it is a good category, it's a strong category, it's doing well and we think the category has legs for the long-term.

Okay.

Thanks a lot.

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

The replay of today's call will be available beginning at 11:30 a.m.

Eastern time today and the number for the replay is 719-457-0820, ID number 346895.

Thank you.

Operator?

This does conclude today's conference.

Thank you all for your participation.

You may now disconnect.