Mattel Inc (MAT) 2003 Q3 法說會逐字稿

Good day everyone and welcome to Mattel, Inc.'s third 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.

Please go ahead, ma'am.

Thank you.

Good morning and welcome to Mattel's third 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 Brian Stockton Executive Vice President of International.

Earlier this morning we issued a press release which detailed our third 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 Brian will discuss our international businesses.

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

Such forward-looking statements will include statements regarding 2003 revenues and costs, increased promotional spending aimed at core brand sales, advertising expenses, improvement in SG&A as a percentage of net sale sales, cash generated from working capital improvements, charges and cost savings associated with the company's financial realignment plan, debt to total capital ratio, sales of securities owned by the company and the use of proceeds, capital expenditure plans, international sales growth and various international strategies and initiatives.

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

Some of these factors are described in our 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 in Mattel's other public statements.

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

Information required by reg.

Information required by REG-G regarding non-GAAP financial measures is available on the Investor and Media section of our corporate website, www.mattel.com, under the subheading 'Financial Information and Earnings Releases'.

Now I'd like to introduce Bob Eckert.

Thank you, Diane and good morning, everyone.

Overall, our third quarter performance was consistent with our expectations.

As I've said on previous occasions, the U.S. retail environment is challenging.

And while there was positive retail sales momentum during the back-to-school shopping window, key customers have continued their focus on reducing inventories.

On the other hand, our international business enjoyed robust growth and we've continued to benefit from our progress on the balance sheet and cost initiatives.

We've also made solid progress on the supply chain front.

As I mentioned in June, executing the successful distribution of 250 additional product introductions for the holiday season is demanding for even the most first-rate supply chain.

Whether you're a manufacturer or retailer.

While it's still early and our promotional programs and advertising schedules are just beginning to ramp up, I'm pleased to tell you that the products have reached store shelves and many of them as well as our other fall items are off to a good start.

While realizing improvements and making progress is an important part of any upgrading initiative, it's equally important to capture those enhancements and institutionalize them.

And one way we're doing that is by shifting the timing of our internal customer toy fairs.

The recent improvements we've made to the supply chain specifically in product development and manufacturing cycle times has enabled us to schedule our internal customer toy fairs after the holidays.

This new timing allows us to incorporate key learnings from the holiday season into our new product lines resulting in more on-trend product offerings.

It's a win-win for everyone.

In the meantime we're focused on execution for this Christmas, which is still 70 days away.

As we've done successfully in the past we'll work hard to overcome any challenges, big or small, without losing sight off our over-arching objective of enhancing long-term performance and generating value for 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 third quarter, I recommend that you refer to the exhibits or the press release.

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

Total worldwide gross sales for the third quarter were up 2% which included a benefit from changes in currency exchange rates of two percentage points.

Gross sales in the U.S. declined 4% reflecting the challenging retail environment as we've said all year, key retailers have focused on reducing their inventory levels levels.

International sales increased 16%, which included benefit from changes in currency exchange rates of seven percentage points.

We continue to focus on improving our international business, and you will hear more about that from Brian in a few minutes.

On a regional basis in this year's third quarter, sales in Europe were up 25% which included a benefit from changes of currency exchange rates of 12 percentage points.

Sales in Latin America were down 5% which include 5 percentage points of negative impact from changes in currency exchange rates.

Asia-Pacific was up 26% which included a benefit from changes in currency exchange rates, up 12 percentage points.

And sales in Canada were up 16%, which included benefit from changes in currency exchange rates, of 11 percentage points.

I will now review our four categories in brands.

Mattel brands, for the quarter, worldwide sales for the Mattel brands division up 3% which included benefit from changes in currency exchange rate up three percentage points.

Domestic sales were down 6%.

International sales were up 15%, which included a benefit from changes in currency exchange rates of seven percentage points.

Worldwide Barbie sales were up 8% which included a benefit from changes in currency exchange rates of 4 percentage points, reflecting 19% growth in international sales, which included a benefit from changes in currency exchange rates of 9 percentage points, and flat sales in the U.S. marketplace.

Barbie sales in the U.S. reflect growth in the doll segment offset by continued declines in the accessory segment.

Worldwide sales of Other Girl brands was up 15% which included a benefit from changes in currency exchange rates of 3 percentage points.

Driven by solid performances in Polly Pocket, Flavas, and Ello which were partially offset by which were partially offset by Diva Starz and What's Her Face!.

Worldwide sales for the wheels business down 6% which included a benefit from changes in currency exchange rates of 2 percentage points.

Strong growth in international sales of Hot Wheels and Tyco R/C more than offset by declines in sales of Hot Wheels and Tyco R/C in the U.S. and Matchbox worldwide.

Sales in entertainment business down 6%, which included benefit from changes in currency exchange rates of 3 percentage points versus the prior year.

Strong sales performances in the new Warner Brothers property Batman and Justice League as well as Yu-Gi-Oh! and games and puzzles was offset by declines in sales of Harry Potter, He-Man and Max Steel.

Fisher-Price brands, for the quarter, worldwide sales for Fisher-Price brands were up 2% including a benefit from changes in currency exchange rates of 2 percentage points.

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

Domestic sales of Fisher-Price brands were down 3%, and international sales were up 18% which included a benefit from changes in currency exchange rates of 7 percentage points.

Worldwide sales of core Fisher-Price were down 1%, which included a benefit from changes in currency exchange rates of 3 percentage points.

Domestic sales at core Fisher-Price were down 8%, and international sales was up 19%, which included a benefit from changes in currency exchange rates of 9 percentage points points.

American Girl brands.

Sales of American Girl brands declined 2% versus the prior year.

Sales declined from Bitty Baby and the American Girl collection lines were partially offset by strong sales from new product launches in the American Girl Today and Hopscotch Hill lines.

Now, let's review the P&L which is shown on Exhibit 3.

I'll focus my comments on our performance excluding the impact of charges related to the financial realignment plan and the reversal of a 1999 reserve.

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

Gross margin was 49.3% for the quarter which decreased by 110 basis points versus the third quarter of last year.

The decline in gross margin was primarily driven by investments in initiatives designed to enhance the value proposition for consumers, and higher commodity and distribution costs, partially offset with savings there supply chain initiatives and foreign exchange.

As we previously communicated we are increasing spending on promotional programs as we work to rebuild volume momentum in our core brands.

Advertising expense was $196.6 million, or 11.5% of net sales, up 30 basis points versus the prior year.

As we said all year we expect advertising expense as a percentage of net sales derived during 2003 as media prices level off and as we invest in marketing programs.

Selling, general and administration expenses were $263.3 million, or 15.5% of net sales for the quarter, down 140 basis points compared with last year's third quarter.

SG&A reflects savings from the execution of our financial realignment plan, lower incentive compensation accruals, and lower bad-debt expense, partially offset by increased employee benefit insurance cost and $7.6 million of spending related to continuous improvement initiatives.

Our expectation for 2003 is for SG&A to improve as a percentage of net sales, as we complete the execution of our financial realignment plan and focus on new initiatives to drive continuous improvement.

For the quarter, operating income was $380.2 million, up 2% versus last year.

As a percentage of net sales, operating income was 22.3%, flat versus the prior year quarter, reflecting lower SG&A offset by lower gross margin and higher advertising costs.

Interest expense was $21.2 million for the quarter compared with $26.6 million in the third quarter of 2000.

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

Other nonoperating income net was $3.8 million, which reflected a number of puts and takes, including a foreign currency loss of $10.7 million, a $7.8 million gain from an insurance recovery related to the shareholder lawsuit settled last year, and a gain from the sale of marketable securities of $6.9 million.

The company expects to sell additional securities from time to time and invest the proceeds in new continuous improvement initiatives as we did this quarter.

As of September 30, the unrealized gain on publicly traded securities held by the company was approximately $64 million.

So, to summarize the P&L for the quarter, reported income excluding the impact of charges and the reversal of a 1999 reserve of $265.2 million or 60 cents a share versus last year's third quarter of $256.7 million, or 58 cents per share driven primarily by higher sales volume and lower interest expense.

Now, turning to the balance sheet, our receivables at $1.258 billion or 66 days of sales outstanding decreased by 8 days versus last year, reflecting improved cash collections.

Excluding the year-to-year change in factoring which was up $15 million versus the prior year to $382 million, receivables were down by $100 million.

Excluding factoring, day sales outstanding improved by 11 days as we continue to focus on tightly managing working capital.

Inventories at $620 million were up $46 million or 8% versus last year's third quarter, reflecting the negative impact of shifts in shipment patterns.

Days of supply was 63 days, which is one day lower than last year.

As we've said on each of our previous calls this year, improvement 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 cash from working capital improvements as we did in 2002.

Our total balance sheet debt decreased by $443 million, and our debt net of cash decreased by $648 million from the third quarter of 2002.

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

Our debt-to-total capital ratio was 22.4% versus 37.9% last year.

As previously announced, our long-term goal is to maintain a year-end debt to total capital ratio of about 25%.

Capital expenditures for the quarter were approximately $60 million.

This is in line with our expectation of capital expenditures for the full year of approximately $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.

During the quarter, Mattel purchased 3.5 million shares of the company's common stock at a total cost of $66.8 million.

The shares were purchased as part of the $250 million share repurchase program which was authorized by Mattel's Board of Directors on July 21 of this year.

Now, let me update you on the status of the financial realignment plan.

If you look at Exhibit 2 of the press release, you can see that in the third quarter we recorded a net credit of $7.6 million on a pre-tax basis consisting of a $7.9 million reversal of a reserve accrued in 1999 related to closure of the Beaverton facility.

This reserve was not part of the three-year financial realignment plan announced in 2000, and a restructuring charge of $300,000 related to the consolidation of manufacturing facilities in Mexico/

Since we announced the realignment plan in September of 2000 we have taken $249.6 million in pre-tax charges and we expect to record the remaining $400,000 by the end of this year.

Of the after tax charges taken thus far $124 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.

Since the beginning of this year, we have consistently said we expect 2003 to be challenging from both the top-line perspective and certain cost pressures.

And that has certainly been the case thus far.

We're working very hard to maximize the results for this year as we execute in this all-important holiday season.

But with that said, creating value for our shareholders over the long-term continues to be our top priority, and we're making good progress.

That concludes my review of the financial results, now I'd like to introduce Brian Stockton to talk about our international businesses.

Brian?

Thank you, Kevin.

And good morning everyone.

The last eight months have been an incredibly exciting time for me.

When Bob asked me to lead international, I knew that it would be a challenging assignment.

Challenging because as I like to say, nothing was broken and performance was solid.

I joined an organization that's growing and has some of the best people in the business.

So our challenge is to take a healthy business with positive momentum and grow it even faster.

Before I talk about our strategies for growing the business, I'd like to take a moment to step back and provide you with the framework of how we think about the role of International within our global brand system.

Our first responsibility is to build brands and build demand, region by region, country by country, and customer by customer.

It's our job to develop localized communication and promotions for our brands to build incremental demand and brand equity.

We are also responsible for developing a strong retail presence.

Our sales and trade marketing teams work with retail and wholesale customers to ensure they have the optimum product mix, shelf space, instore merchandising and promotional ad space to support all of our Mattel and Fisher-Price brands.

This support is critical for our advertising and promotions to be fully effective.

We've been reemphasizing execution of these important customer in-store fundamentals.

And as a result, our retail presence including listings, shelf space and customer support, is growing.

The second responsibility for international is to globalize our brands.

Our focus is to strengthen our brands in developed markets, and to establish our brands in developing markets.

You've heard Bob talk about how well-run consumer products companies generate about 50% of their sales internationally.

In the year 2000, we were at 31%, last year 36%, and this year we are on track to improve our performance.

Now I'd like to provide you with an overview of our business structure.

As you might know, the global toy industry is highly concentrated in eight countries representing about 80% of the market.

For Mattel, we also have eight geographies that represent about 75% of our business.

The U.K., France, Germany, Italy, Spain, Canada, Mexico, and northern Europe.

Our first focus is on these eight subsidiaries.

Maintaining a high level of business performance here gives us more degrees of freedom to be opportunistic in markets where our business is smaller and less developed.

These less developed markets are our second area of focus.

An example of a less-developed market would be Japan.

Japan is a very significant toy market which is virtually untapped by Mattel.

We see a good opportunity to leverage our strengths and expand our presence in Japan.

As you may have heard, we recently agreed to end our distribution agreement for Japan with Bandye (phonetic).

As a result, we started the process of opening a fully operating subsidiary in Japan.

I also want to be sure to mention that we will continue to work with Bandye (phonetic) in Latin America.

Our relationship with Bandye (phonetic) in Japan was a success.

It enabled us to stabilize our business, improve execution on the fundamentals of our business, and learn more about how to become a long-term success.

Based on this experience, our goal in Japan is to build a stronger foundation, brick by brick, to become a long-term success.

To support achievement of this goal, our own local subsidiary will develop marketing and sales programs appropriate for our brands in the Japanese market.

Recently we restructured our international management team to better support these two areas of focus.

As a result, we reduced one layer of the organization.

The objectives of this change are to speed decision-making, and improve the flow and execution of brand-building ideas across regions, countries and customers.

So, for example, today our European general managers report directly to me, and can easily communicate with other regions of the world to share ideas.

Relative to our U.S. businesses, the international customer base is more fragmented.

This is not only due to the breadth of countries we sell in but also to the development of the retail trade.

For example, in Europe, the hyper-market channel is large and growing.

However, toy and specialty stores still represent from 30 to 50% of the market, depending on the country.

And in some countries, this segment is growing.

Our sales structure and programs must reflect different trade and customer structures country by country.

Our concentration of customers is also lower than in the U.S.

As you may recall, globally our top three customers represent about half of our sales.

For international, our top three customers represent about a quarter of our sales.

And the top three customer list is very different country but country.

Strengthening our performance and relationship with our customers is a key growth strategy for all of our markets markets.

As we've stated before, we want to lead our growth with growing customers.

Especially in markets that are still underdeveloped in toy consumption.

So now you have a better understanding of the international environment in which we're operating.

The next question is: How do we plan to reach our 50% goal?

In this period of fast adapting ideas and international, I'd like to adapt our corporate priorities over the last three years of refocus, optimize, and innovate.

With our history of success in international we're sharpening our focus rather than refocusing.

Examples would include how we've segmented our countries into groups such as the Big 8, and our recent reorganization, which increases management focus on these countries.

We have and will continue to optimize demand and brand building across all brands, and especially in our core brands, Barbie, Hot Wheels and Fisher-Price.

For example, in the U.K. we optimized demand for the Barbie brand.

The team in the U.K. combined the brand and product strengths of our Barbie toy business and consumer products business to improve impact of the brand with both consumers and customers.

As a result, we have both Barbie fashions for girls and toys being advertised to consumers.

Additionally, we have combined toy and consumer product promotions with some of our retail customers.

For the Hot Wheels brand, we added several localized promotions to the Highway 35 initiative.

These promotions demonstrate Hot Wheels speed, power and performance to our target group at various events and sites.

For the Fisher-Price brand, we jump-started sales of the Little People product line in Europe.

Through product line expansion and instore merchandising we created a world of Little People.

This enabled us to strengthen our presence at retail, and enhance the collectability of the product line with consumers.

To support this approach, we developed a world of Little People promotion with the Pampers Baby Dry brand of diapers in Europe, and in Germany we executed a world of Little People on-pack promotion with the infant formula brand Melupa.

In addition we're optimizing how we do business.

For example, we're strengthen centralizing transaction activities to realize savings through many initiatives such as the European shared service center, centralized logistics as well as global financial and demand-planning tools.

These initiatives allow us to eliminate duplicate functions and reduce our overall back-office costs.

And where appropriate, we plan to reinvest these savings into revenue-producing initiatives in sales and marketing.

We are also innovating in international.

The introduction of Mycine was an innovative fully integrated launch.

Not only do we have a strong product line and powerful advertising but we developed several brand-building promotions combining licensing as well as toys and in some countries, local celebrities.

In fact, in Germany we worked with MTV to develop a My Scene Dress Design contest that created a great buzz around the brand.

The winner's design was made into a life-size dress by German designers Sadda Eilbo and Andrea Hartvig (phonetic) and the dress was featured on the German MTV show Design-A-Rama On Stage, an event featuring cutting edge fashion.

In Italy we published the very successful Barbie magazine for number of years.

This year, our Italian subsidiary expanded this concept to support the launch of Little People.

We have expanded this notice innovative brand-building idea to more countries.

We are also being innovative with our customers.

We developed unique and tactful instore merchandising ideas and led innovation through category leadership assignments from our customers.

And finally, we remain committed to developing people.

People are our key assets worldwide.

As I mentioned earlier, the recent organization changes not only optimized our cost structure, but more importantly, eliminated a layer allowing senior management to be one step closer to key markets.

Additionally, we expanded management responsibilities for several people on the international leadership team.

For example, we asked our general manager of the Canada, Australia, New Zealand region to assume responsibility for continental Asia as well.

These changes provide development opportunities for our international leadership team but for members of their local teams as well.

The key to building upon Mattel's international success is to focus on building brands, and building demand.

We will accomplish this by utilizing local market expertise, building stronger performance-based relationships with our customers, and properly focusing our resources.

Thank you.

Operator, we're ready for questions.

Thank you.

If you would like to ask a question to know today's call you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

Once again ladies and gentlemen to ask a question press star 1 on your touch-tone telephone.

And we'll take our first question from Jill Krutick with Salomon Smith Barney.

Please go ahead.

Thank you very much.

Good morning.

Could you, Bob, give us a flavor for how the market share situation is working out here domestically?

I know there have been changes with MPD, how well can market share be measured here domestically?

I'm curious how it's measured internationally and how you would say Mattel is performing there, too.

Secondly if you could give us a sense of the key promotions, what's started and the relative success of them and other key highlights that will be coming in the back half of the year?

Thanks.

Hi, Jill, it's Bob.

As you all know, the MPD tryst data has become less reliable over time.

I'm probably the last person still talking about the data.

Other than some little people who abuse the data.

That said, we do have MPD, we have the tryst at least through August, and remember that in the month of August, toys Toys-R-Us only participated in tryst I think for couple of weeks.

That said, what we do know through August is sales at retail for the toy industry were down 3.2%, and our market share declined by 1.3 share points to 18%.

And that's been fairly consistent throughout our spring line.

Competitors seem to be doing well in the doll and trading card categories and while we've gained share in both the wheels and action figure categories, those categories overall declined as spending on boys has shifted to trading cards.

But you also know we receive proprietary POS data from our key retail customers and that data paints a more positive picture showing growth in sell-through and double-digit decline in retail inventory levels.

Now, your point on where we're going forward here, Jill, I think that is an important one because MPD will no longer be providing the tryst data.

They will have a consumer panel.

The validity of the panel remains to be seen.

And even MPD will tell you that it's probably directional at best.

So we're going to evaluate our options.

Unfortunately, it will be just about impossible to accurately calculate market share.

That said, we do receive point of sale information from the major retailers.

We do have confidentiality agreements with them so we can't go into any specifics, but as I just did a moment ago, we'll try and give you a general sense of what we see.

And over the long-term, I think you just have to judge our performance by looking at our sales growth.

Your second question on promotions, things have really just begun at retail.

It is very early.

You know, it's still October.

There's still leaves on the trees.

And up until last night, the Cubs were still playing baseball.

So while it's early, our promotions are starting to take hold, we are starting to see the impact at point of sale.

As a general rule, I would say we're pleased about the performance across all the major brands.

And I think your final question was on market share internationally.

Yes, thanks.

We do use MPD internationally.

We do get it through point of sale data, I believe Brian that's going to continue so we'll probably continue capturing that data.

As a general rule over the last several years, the international markets in total had been growing and we've been at least holding our own if not gaining market share overseas.

Great, thanks very much.

Next to Sean McGowan, Harris Nesbitt Gerard.

Two questions, one for Kevin, one for Bob.

Kevin, can you quantify the earnings impact of currency changes during the quarter and second, Bob, on many of, many if not virtually all of Wal-Mart's weekly sales calls they have called out toys as one of the best performing categories.

Can you comment how that's been affecting your ability to do business with them or is that a comment on the strength of their own brands?

Okay.

Sean let me summarize the impact of foreign exchange in the third quarter and year-to-date results.

Foreign exchanges on sales growth through the quarter was a benefit due primarily to the strength of the Euro, worldwide sales up 2% including a benefit from currency exchange rates of 2 percentage points.

On a year-to-date basis the FX slightly favorable to operating income and slightly unfavorable to nonoperating income resulting in EPS impact of less than one penny positive.

The strength of the Euro has positively impacted results this year and that's been somewhat offset by the Mexican peso devaluation and the Hong Kong dollar.

I'm sorry, you said year-to-date it's been negligible but what was it in the quarter?

The quarter was about a penny.

Sean on your second question regarding Wal-Mart, we don't like to discuss sales by customer, with you you're right, publicly they've said at least on several of the last weekly calls that their toy business has been one of their stronger categories, I think in general Wal-Mart has been performing well for the past couple months.

We tell our retailer partners that supporting our brands is good for their entire category.

And I think suffice it to say we've seen that play out.

So those who are supporting our brands at retail right now and who have gotten a good jump on the season seem to be doing better than those who don't.

Thank you.

We'll go next to Dean Gianoukos of JP Morgan.

A few questions.

First, is My Scene in with the Barbie dolls, and secondly on the gross margin side, is there any way to calculate how much is due to raw material cost and how much is due to the more for the money phase you're going through?

And then when you look forward and you look at cost-cuts, are you going to be able to offset the more value for the money proposition going forward?

Thirdly, wheels.

Is the category weak because action figures are strong, is that what you're saying?

Finally and most importantly can you comment on what you've seen for reorders on the new products you've shipped?

Thanks.

Dean, this is Bob.

I'll start the answer is yes, My Scene is included in Barbie, and it's doing nicely.

It's very early but I think last year when we first launched My Scene a lot of pundits thought that maybe it wasn't effective and it's played out quite nicely, one of the segment doing well in Barbie right now.

Swan Lake off to a very nice start in Barbie.

Of course there are offsets there's segments every year that don't do well but My Scene and Swan Lake are two doing nicely.

Dean on the gross margin, 110 basis-point decline in gross margin, about half of the decline was attributable to product cost and the other half attributable to logistic cost.

Product costs were equally impacted by our investment initiatives designed to enhance the value proposition for consumers and the other half was by higher commodity prices.

And with regard to, you know, are we going to be able to in the future with regard to cost reduction initiatives, we'll continue to work on supply chain initiatives, and our strategic initiatives on continuous improvement, and you know try to offset cost pressures.

As we look at our gross margins at 49%, we look at well-run consumer product companies, they're general at 50%.

Over the long-term our goal is to continue to improve gross margins.

Dean, let me try your last two questions.

First on Hot Wheels, as you know, it has underperformed all year.

At least in the U.S. that is.

The third quarter was no exception from a shipment perspective.

Sales were down in the high single-digit rates below year ago.

Yu-Gi-Oh! has done very well in trading cards, and in the action figures.

Things like Bey Blades has continued to do well.

We have seen a pretty healthy uptick in the POS data very recently.

The Hot 100 new cars seem to be off to a good start.

This fall, track set TREX seems to be off to a good start.

It's very, very early but I'm encouraged by the momentum we've seen recently on Hot Wheels.

Finally as it relates to your reorder question, it is way too early to have reorders.

The shelf sets have only been up for a while, the initial quantities have been shipped.

We're really focused right now on the point of sales data.

I'm not sure where sales are going to fall out, that is shipments because as I've told you really starting from the first quarter this year, retailers in general, not even specifically talking about toys went into this year with heavy levels of inventories, you've heard them publicly say they're going to pare back.

I don't know your shipments are going to fall out.

I do want to focus on point of sale because over the long term, those are going to turn into shipments.

Maybe I can sneak one more in.

The Mexican plant that you're closing, when will that start to hit numbers?

We'll complete the consolidation of Mexico by the end of this year so you should start to see the benefits of that next year.

Thanks a lot.

We'll go next to Margaret Whitfield with Brean Murray & Company.

Good morning.

On certain products I wonder if you could comment on how they're going initially, the Power Touch and other learning toys, how Flavas is performing, and if you could have any comment on the erosion that likely you have had in the fashion doll segment through the month of August and what the recent indications are?

High Margaret, this is Bob.

Let me try and hit them all.

Let me start with Flavas, the brand is only a couple months old, too early to see how it will play out but it hasn't set the world on fire off to an early start.

My hope is it kind of plays out like My Scene did, which was last year it didn't get off to a really robust start but it turned out to be a great segment for us this year.

It's way too early on Flavas, I think the headline is it certainly hasn't set the world on fire at this early stage.

Conversely, the Power Touch system is selling briskly.

Again, it's very early.

As you know, that's an expensive proposition for consumers.

So it's hard to get too early a read on that kind of thing.

But we are pleased in general with our performance across the learning category.

And that includes also the new Learn Through Music system which which we think is pretty important.

As it relates to Barbie business, we don't go into market share stuff by segment but we have lost share early in the year.

We've seen some improved performance at point of sale, we don't know how the competition is doing at point of sale because we don't have data beyond August.

I think it's going to be up to the fall set, we'll see how it plays out.

Could I ask what was the reason for the decline in core Fisher-Price in the U.S. and has it picked up recently?

That's really, you know shipments are down as they've been down and as we said all year long, you know, shipments are going to lag retail assumption this year.

We have shipments, we have seen shipments go down.

But we generally speaking, see very good levels at point of sale on core Fisher-Price products.

I'm particularly encouraged this year by the character brands of the Friends business.

We've had several properties do well.

Sesame Street's off to a very good start.

And Dora the Explorer has done value, our Nick properties have done well all year.

Thank you.

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

Thanks.

Could you repeat maybe the data point you gave regarding Barbie?

I think you said that doll sales were up in the U.S. but accessories were down?

I guess that goes against the idea that your -- well, can you just kind of repeat again the relationship between your gross margin and the mix of the business?

And also can you provide what those two numbers were on a global basis?

Yeah, Linda, we don't -- you got the trend right.

We don't go into specific numbers by individual segments within a business but overall in the U.S. as well as internationally and worldwide.

Our Barbie doll business was up in shipments in this past quarter and our accessories business continued to decline.

And that's something we've talked about in probably the last couple of quarters.

That our accessories business needs some more work, we're just launching some of the new things.

But from a shipment standpoint it was down.

I think you've got it right, Lind that the doll segment is from a gross margin perspective, more profitable than accessories but when you look at gross margin overall, there was a lot of moving parts in gross margin.

And mix overall was negative.

Okay.

And just secondly, just on commodity costs, on plastic resin, can you just comment if your year-over-year cost increase was larger in this quarter or in the second quarter?

I think it was basically the same between the second and third quarter.

So the price of oil has been, you know, averaged around $31, I think that's been the impact this year versus last year it was lower.

Okay.

And just one more thing.

You had commented, it sounds like your sale of securities is going to fund ongoing costs related to ongoing, you know, process improvement changes going forward.

Is that another way of saying that beyond '03 we will see no more restructuring charges from you?

Let me interrupt before Kevin answers your question, Linda.

I never say never but I've also told you from day one or at least from August or thereabouts of 2000 we view restructuring sorts of things as very significant and not normal courses of business.

And so we will continue to view those things as very significant when there's some very meaningful thing coming along that just doesn't flow through our normal P&L.

But Kevin?

Thanks, Bob.

Talking about the securities, the company receives publicly traded securities from time to time as part of distribution agreements.

And we don't want to get specific about the publicly traded securities the company holds, but we're simply trying to do is match gain from selling the securities with costs associated with improvement initiatives as those opportunities present themselves, just like we did this quarter.

That said, we certainly sell the publicly traded securities whenever it's in the best interests of our shareholders regardless of the cost offsets, and as Bob said, we'll always invest in continuous improvement initiatives if it's the right thing for our shareholders over the long term regardless of whether we have securities to sell.

Okay.

Well, I guess that's it right now.

Thank you very much.

Thanks, Linda.

Next to Karen Becker with Arian Capital (phonetic).

Hi.

Hi Karen.

How are you?

Great.

You've seen a lot of retailers get into the toy distribution business as a way to drive traffic which obviously should bode well for your business over time.

Can you talk a little bit about what you're seeing on the distribution front?

Yeah, I think there are opportunities.

And you know, years ago, there were more retailers of toys than there are today.

It's become quite concentrated.

But I think retailers in general are seeing the toys offer an opportunity for them to build traffic, whether that's in supermarkets, whether that's in places like Sears which at one time was probably the largest toy retailer in the country.

Some of them are doing distribution arrangements with people like Toys R Us or with KB Toys, and I think that's a smart idea.

Other folks we're working with directly particularly in the supermarket business.

I think long term having more points of distribution is good for the industry and should be good for us as having the leading brands in the industry.

We offer the kind of products that should do well in new outlets.

And have you told any of these people that you would commit capital, either on the storefront side or whatever it is, to help make their stores look good?

Well, we work with retailers to make their stores look good but I don't know if I'd describe that as capital commitments.

It tends to be point of sale sorts of things which are not capitalized.

Okay.

Great.

Thank you.

We'll go next to John Taylor, Arcadia Investment Corporation.

Good morning.

I've got a couple of quick questions, I think.

Could you give us a sense of the breakdown between the LC business and you know, what you shipped in through your own facilities and so on?

Did that change much?

And if it did, maybe which division it might have been concentrated in.

That's the first one.

And then second an the ad to sales number do you expect the number to increase about the same in both the U.S. and international or is it going to be more heavily weighted in one or the other?

Thanks.

JT this is Bob, we've never disclosed the relationship between kind of our internal distribution and that which is bought on letter of credit.

It hasn't changed dramatically.

One way or the other over the recent term.

And it does vary quite a bit by customers.

Some customers prefer to take goods LC and others prefer to go through our distribution system.

And even sometimes within a customer it varies by item.

But it hasn't really changed dramatically.

I guess what I'm getting at is any impact on gross margin from a shift there but it doesn't sound like it?

No I don't think.

And with regard to contingencies we're stepping it up globally but I would say proportionately that would be more in the U.S. than international.

Great.

Thank you much.

Next to Joe Yurman with Bear Stearns.

Hey, guys, good morning.

I guess this is for Brian, but Bob I'm sure you're going to want to jump in here, too.

Regarding Japan and kind of for lack of a better term, going it alone now, as you look back on that joint venture with Bandye (phonetic) was it more about getting the distribution in place or more about having the brand in place with customers?

And I guess just a piggyback to that, we've had discussions before some of the growth opportunities mentioned were Korea and some of the eastern European economies like Poland.

Have you put those more on the back burner to focus on the initiative in Japan?

Thank you Joe, it's Brian.

Let me address both of those questions.

As it relates to Japan, as I mentioned in my comments our main objective was to stabilize the business in Japan and try and get a foothold with our brands in that important toy market.

In our evolving strategy there, it's important for us to build good, strong relationships with customers directly.

We've proven that we can do that in every country in the globe.

And that's really what we're trying to do is get closer to our customers and build our brands with localized promotions.

As it relates to what we used to call mason markets and still call mason markets like Korea and some of the eastern European markets, we aren't deemphasizing them, what we are doing is we're ensuring that the Big 8 countries, which as I mentioned are about 75% of our business, are performing very well.

If those eight are performing well, it does give us the freedom to be more opportunistic and invest more aggressively for growth in these new developing markets.

Thank you.

Thank you.

Operator, we have time for one more question.

We'll take our final question from Stephanie [inaudible] with US Bancorp Piper Jaffrey.

Hi, good morning.

This is Tony Gikas on the call.

A couple of questions about the retail environment.

You keep talking about how challenging it is here in the U.S.

As Sean mentioned, Wal-Mart it's been coming up as a category that's strong.

It's also been until Monday's call this week a category target that's been outperforming.

Could you maybe just characterize a little bit more for us how tough the market is here?

Is it shelf space, pricing, sell through or promotions?

And then also if you could characterize for us what percentage of Wal-Mart and Target sales are their own branded product?

And then maybe a little bit on the international markets we have seen very strong retail sales industrywide here in the U.S. where you guys are underperforming and you seem to be outperforming in the U.K. and the Euro zone where retail sales have been very challenging on a broader basis.

Can you characterize the climate on an international basis U.K.

Europe specific?

This is Bob, I'll turn it over to Brian for comments on international.

We don't comment on individual customer's performance.

You read what they disclose publicly and you know what we know at least as it relates to talking about their total toy business.

As it relates to private label you'd have to ask them what their share is within their own brands versus other brands.

I have said for some time that retailers will continue across consumer goods categories in my judgement, to continue to promote private label because it's in their best economic interest.

At the same time, I think we've also proven in many categories, including toys, that if you don't focus on the major brands, you're going to lose customers to your competitors at retail who do focus on the major brands.

And I think that's continuing to play out.

Tony, it's Brian.

As it relates to our performance in Europe, the toy market growth varies by country by country.

But what I would say overall for our position in Europe is we've really been focusing on two things.

One is strengthening on and it will call it instore fundamentals, optimizing the listing by customer, focusing on getting the right ad space, right displays and merchandising, and sharpening the focus has paid off for us in terms of strengthening a performance based relationship with those customers.

Another thing we can attribute our success to so far has been building brands and building demand through some of the promotional ideas I mention in my comments earlier.

So it's really focusing on customers and store conditions, and building brands.

Okay.

Can I just ask a quick follow-up question?

What's the status of the Flavas product at Target right now?

Is there any way to quantify in the Q3 sales what percentage of that was, you know, roughly sell-through at the retail level?

Let me start with Flavas at Target, Tony.

Target took Flavas on in a finite number of stores and built an end aisle display fairly recently, I think it's been up for a couple of weeks at least at the two I shop at here in the south land.

It's fair to say that those displays were not as productive as Target likes its display space to be, it was not productive and they're starting to take those displays down.

So you are seeing that.

How that plays out for the future of the brand at Target is too early to tell.

But the end aisle display did not perform up to Target's expectations.

As it relates to selling and sell-through, you know, it's hard to quantify.

I think it is clear that our sell-through has done better than our sell-in.

And that's not surprising given my comments on retail inventories broadly.

Okay.

Thanks, guys.

You bet, thank you Tony.

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