Mattel Inc (MAT) 2003 Q4 法說會逐字稿

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

Today's call is being recorded.

With us today from the company is the Senior Vice President of External Affairs, Ms. Diane Douglas.

Please go ahead, ma'am.

Thank you.

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

I'm Diane Douglas, Senior Vice President of External Affairs, and joining me today are Bob Eckert, Chairman and Chief Executive Officer and Kevin Farr, Chief Financial Officer.

Earlier this morning we issued a press release which detailed our results for the fourth quarter and full year 2003.

On the call this morning, you will hear brief remarks from Bob, Kevin will provide a review of the financial results, and then we will be happy to take your questions.

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

Such forward-looking statements will include statements regarding a shift in consumer buying patterns, the challenging 2004 business and retail environment, ongoing retail consolidation, profitability and cash flow, sales growth goals and strategies aimed at total sales, core brands, the domestic segment, Barbie and electronic learning, the impact of later toy fair timing, developing new retail channels, gross margin and cost pressures, capital deployment, our long-term debt-to-capital goal, strategic initiatives, including costs thereof and maximizing long-term shareholder value.

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 10K filed with the SEC and Mattel's other filings made with the SEC from time to time, as well as in Mattel's other public statements.

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

The information required by regulation G regarding nonGAAP financial measures is available on the investor 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, Diane and good morning everyone.

Our results for 2003 were mixed.

While Kevin will take you through the details, I would like to discuss some of the challenges we faced during the past year and tell you where our focus will be for 2004.

We struggled with top line growth all year in the U.S. and continued to operate in a challenging retail environment, which included aggressive pricing by retailers and rationalization of stores.

And while the aggressive price cuts started in early fall, what wasn't clear until later in the holiday season was that consumers shopped very late.

This clearly impacts our reorder flow.

When a consumer buys a toy in October or November, the retailer is inclined to reorder more of that toy to stock the shelf for the holiday season.

But when a consumer buys a toy on December 21st or uses a gift card after Christmas, the retailer has no incentive to refill the shelf with holiday product.

We believe what we saw this holiday season represents a secular shift.

Consumers have now been trained to shop late, or better yet, to give gift cards so the recipient can take advantage of after-Christmas sales.

With all that said, I want to reiterate that 2003 results were mixed, so there were some positives as well.

We continue to grow internationally.

We made progress in improving profit margins and generating strong cash flow and we began executing our capital deployment framework by increasing the annual cash dividend and instituting a share repurchase program.

Generally speaking, we don't expect 2004 to be unlike 2003 or said another way, we we expect the business environment will continue to be a challenge with ongoing retail consolidation and cost pressures.

How long it takes to get through this patch is anybody's guess, but I want to assure you that it's not business as usual at Mattel.

We continue to believe that over the long-term this company will generate exceptional profitability and cash flow.

So our goal for the upcoming year is to regain positive momentum in the business and reestablish domestic growth in our core brands.

Before I delve into 2004, I wanted to take a moment to touch on the importance of studying the 2003 performance and taking key learnings into 2004.

As many of you may know, we're in the midst of hosting our customer-only toy fair at the Mattel campus in southern California .

As I mentioned when we first talked about moving back our customer toy fair into the January/February time frame, we expected to take away some key learnings from the holiday season that we could incorporate into the 2004 line and that's worked out well for us.

The holidays allowed us to better gauge what was hot and just as important, what was not.

Something we wouldn't have known if we held toy fair in November.

For example, we learned that in the Barbie line, what did well was the content-driven product lines, like Swan Lake and My Scene, and you will see much more of that reflected in the 2004 lineup.

We also learned that the Flavas line didn't work as well as we wanted and our discussions with retailers reflect what we learned.

Another key take away was that our electronic learning strategy is on trend and on target.

For 2004, we're focused more than ever on top line growth and keenly focused on improving the girl's business.

To regain positive momentum and reestablish growth in our core brands, we have devised a strategy to continue growing and strengthening the Barbie brand.

To regain our momentum in the doll category, this year we're going to do things differently.

First, we have new leadership in the girl's area that's brought new energy and new thinking to the team.

Tim Kilpin, formerly of Disney consumer products, has rejoined Mattel as Senior Vice President of Marketing and Design for girls.

Second, we're going to do fewer things better by using a different approach to marketing.

The new mantra for Barbie is not about a multitude of SKUs, but a strategy based on storytelling with technology and age-appropriate aspiration.

The content-driven strategy is being expanded to encompass virtually every segment of Barbie.

Barbie has always been hip and relevant for today's girl, whether today was 1964 or 2004.

We mean to make that even more the case this year.

I don't want to give away too much before New York toy fair, but if you pay attention to the latest gossip, Barbie and Ken may way have gone to way of J Lo and Ben.

She's using instant messaging to stay connected to her game.

Her ears can be pierced.

Her car has a working CD player, and according to one of our key retailers, the 2004 lineup is not a hundred times better, but a thousand times more relevant.

She's even wearing the newest twist.

It's not business as usual at Mattel or for Barbie.

In short, the 2004 Barbie line is not your grandma's Barbie.

We also want to continue the positive momentum we've made in the electronic learning category with Kasey the Kinderbot, PowerTouch and Learn Through Music.

We believe it's important for children to be exposed to a wide variety of play experiences, but what's critical is that these play and learning experiences be age-appropriate.

In 2004, we're introducing an exciting new lineup of interactive learning toys that were designed specifically to meet the needs of children at different developmental stages: infant, toddler, preschool and grade school.

Although we've received a tremendous amount of positive feedback from our key retailers on the 2004 line, we're not operating in the vacuum.

We have to address the continuing challenging retail environment and the increased consolidation of our customers.

K-Mart's ongoing store rationalization program, KB toy store closures and the bankruptcy of FAO.

We remain committed to being a good partner to our retail customers but to regain our momentum and grow the top line , we will need to develop new retail channels as well.

We also need to take a hard look at costs.

Our value enhancement strategy will continue to put pressure on gross margins and we expect continued upward pressure on costs of key business inputs.

Again, it's not business as usual at Mattel.

We're intently focused on addressing the top line by invigorating the Barbie brand and capitalizing on the positive momentum of our electronic learning strategy.

We're also managing and controlling our costs while we continue to improve our productivity and processes.

We're working on ways to strengthen our relationships with customers and we're committed to maximizing value for our shareholders by generating strong cash flow and deploying it effectively.

Thank you, and now I would like to turn the call over to Kevin for a financial review of the quarter and year.

Thank you, Bob and good morning everyone.

My remarks regarding the fourth quarter and full year financial performance will be organized in the following manner.

Revenues by geography, core category and brand, key drivers in the P&L,, excluding restructuring and nonrecurrent charges, a final update of the financial realignment plan, cash flow from operations and the balance sheet at December 31st, 2003.

To facilitate my review, I recommend that you refer to the exhibits of the press release.

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

Before I begin my remarks, I would like to point out the fact that the company has changed the way it classifies closeout sales within a statement of operations.

Closeout sales are sales of certain products that are no longer included in current product lines.

Effective October 1st, 2003, closeout sales previously classified as a reduction of -- in cost of sales are now classified as net sales in the company's statement of operations.

This change in classification has no impact on gross profits, net income, earnings per share, balance sheets or cash flows.

For the fourth quarter, closeout sales, which are included in reported net sales, were $19.2 million, representing 1 percentage point of sales growth for the quarter and 40 basis points of sales growth for the year.

For analytical purposes, Exhibit 4 provides the detail of worldwide closeout sales by business unit on a quarterly basis for the last two years and annually for the last five years.

That information is intended to allow those of you with detailed financial models to make adjustments for purposes of historical comparisons.

I'll start by reviewing sales for the fourth quarter.

Total worldwide gross sales for the fourth quarter were up 4%, including a benefit from currency exchange rates of 4 percentage points.

International sales grew by 17%, including a benefit of 10 percentage points from currency exchange rates.

And U.S. sales declined by 5%.

On a regional basis, sales in Europe were up 14%, including a 15 percentage point benefit for changes in currency exchange rates.

Sales in Latin America was up 17%, including a negative impact of 5 percentage points for changes in currency exchange rates.

Sales in Canada were up 18%, including a 17 percentage benefit for change in currency exchange rates.

Asia-Pacific was up 41%, including an 18 percentage point benefit for changes in currency exchange rates.

I will now review our four categories and brands for the fourth quarter.

Mattel brands.

Sales from Mattel brands increased by 2%, including a 5 percentage point benefit from changes in currency exchange rates.

Worldwide Barbie sales were down 5%, including a 6 percentage point benefit from currency exchange rates.

Domestic Barbie sales were down 25% while international Barbie sales were up 15%, including a benefit of 11 percentage points from changes in currency exchange rates.

Increased sales in the doll segment in international were more than offset by declines in sales of Barbie accessories worldwide and declines in the doll segment domestically.

Fourth quarter sales for other girls division was up 2%, reflecting a benefit of 7 percentage points for changes in currency exchange rates.

Sales for the wheels category grew 17%, and entertainment sales grew 4%, each reflecting a 5 percentage point benefit from changes in currency exchange rates.

Sales of Hot Wheels performed well during the quarter in both domestic and international markets while Tyco R/C sales were strong domestically.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were up 10% for the fourth quarter, including a benefit of 4 percentage points from changes in currency exchange rates.

With core Fisher-Price up 16%, and Fisher-Price brands up 6%.

Sales for core Fisher-Price in the U.S. were up 10%, reflecting strong sales of new key driver products as well as continued strength in the Baby Gear line.

American Girl brands.

Sales of American Girl brand were flat for the quarter.

Now I will review sales for the full year.

Worldwide growth sales were up 1%, reflecting a benefit from currency exchange rates of 3 percentage points.

International sales grew 15%, including the benefit of 10 percentage points for changes in currency exchange rates and U.S. sales declined 6%.

On a regional basis, sales in Europe were up 20%, including a 15 percentage point benefit for changes in currency exchange rates.

Sales in Latin America were down 1%, including a negative impact of 6 percentage points for changes in currency exchange rates.

Sales in Canada were up 15%, including 11 percentage point benefit for changes in currency exchange rates.

Asia-Pacific was up 25%, including a 13 percentage point benefit for changes in currency exchange rates.

Now I will review our four category and brands for the the full year.

Mattel brands.

Worldwide sales for Mattel brands increased 1%, which included a benefit of 5 percentage points for currency exchange rates.

Reflecting a decline of 10% in domestic sales and an increase in international sales of 14%, which included a benefit from changes in currency exchange rate of 10 percentage points.

Worldwide Barbie sales were flat, including the benefit of currency exchange rates of 6 percentage points.

This reflects the 15% decline in domestic sales, offset by 17% growth in international sales, which included a benefit of 11 percentage points for currency exchange rates.

The decline in domestic Barbie sales were primarily driven by lower sales in the accessory category, as well as declining sales in the doll category.

Worldwide sales of other girl brands was up 5%, which included a benefit from changes in currency exchange rates of 5 percentage points.

Sales in Polly Pocket and Ello were strong, but sales in Flavas was not enough to offset declines in Diva Starz and What's Her Face.

Worldwide sales for the wheels business was down 2%, which included a benefit for changes in currency exchange rates of 3 percentage points.

Sales in the entertainment category were up 3%, including a benefit in currency exchange rates of 4 percentage points.

Fisher-Price brands.

Worldwide sales for Fisher-Price bands were up 4%, including a benefit of 2 percentage points for changes in currency exchange rates.

Domestic sales were down 1%, while international sales were up 20%, reflecting a benefit of 10 percentage points for changes in currency exchange rates.

Growth in international sales of core Fisher-Price and worldwide sales of Fisher-Price brands were partly offset by declines in sales of core Fisher-Price domestically and Power Wheels sales worldwide.

Worldwide sales of core Fisher-Price were up 5%, including a 4 percentage point benefit for changes in currency exhange rates.

Domestic sales were down 3% and international sales were up 25%, including a benefit of 12 percentage points from changes in currency exchange rates.

American Girl brands.

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

Declines in Angelina Ballerina, Bitty Baby and last year's highly successful launch of the historical Kaya doll was partially offset by strong performances by the newly launched Kaylee doll as well as the introduction of the Hopscotch Hill School brand.

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

However, the weaker than expected retail sales and a shift in consumer shopping habits to later in the holiday season negatively reimpacted reorders from retailers.

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 nonrecurrent charges.

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

For the fourth quarter, gross margin was 49.7%, a 40 basis point decline versus the prior year, reflecting a cost of value enhancement initiatives discussed last quarter.

For the year, gross margin was 49.1%, up 60 basis points.

For the year, gross margin was positively impacted by the continued execution of our financial realignment plan and supply chain initiatives.

Specifically, the margin benefit from procurement initiatives and lower royalty costs offset by higher raw materials and tooling costs due to the value enhancing initiatives.

For the fourth quarter, advertising expense was $274.9 million, or 15.8% of net sales versus 12% for last year's fourth quarter.

For the year, advertising expense was $636.1 million or 12.8% versus 11.3% last year.

The increase in advertising reflects a previously discussed MEDA and promotional programs undertaken to rebuild volume in our core brands and to launch new brands.

We are fine-tuning our advertising spending for 2004 based upon our experience in 2003.

It remains to be seen how much of the higher spending will be institutionalized in 2004.

For the quarter, selling general administrative expenses were $286.2 million or 16.4% of net sales, down 320 basis points compared with last year's fourth quarter.

For the year, SG&A expenses were $994.3 million or 20.1% of sales, down 110 basis points from last year.

Improvements in the SG&A this year were primarily attributable to a reduction incentive compensation accruals of $80 million and lower bad debt expense partially offset by investments and continuous improvement initiatives, higher employee costs and the impact of currency exchange rates.

As is customary in every quarter, we reevaluate our credit exposure with all of our customers and determined it was necessary to increase our reserve.

As a result, we recorded a $7.6 million charge in the fourth quarter compared to $25.3 million in the prior year, which included a charge of $15.4 million for K-Mart.

Total bad debt expense for the year was $10.7 million, down significantly from $53.4 million in 2002.

For the quarter, operating income was $304 million or 17.5% of net sales, down 100 basis points compared with last year's fourth quarter.

For the year, operating income was $803.2 million or 16.2% of net sales, up 20 basis points from prior year, reflecting improvements in gross margin and SG&A, partially offset by increased advertised spending.

For the fourth quarter, interest expense was $23.8 million, compared with $28.6 million in the fourth quarter of 2002.

For the year, interest expense was $80.6 million, compared with $113.9 million for full year 2002.

Compared to the prior year, lower interest expense for 2003 primarily reflects the benefit of lower interest rates for our seasonal borrowing as well as substantially reduced levels of long-term debt.

Other nonoperating income items in the fourth quarter include gains from the sale of marketing securities of $8.6 million and for the full year, $15.5 million.

As of year end 2003, the company had $52 million in nonrealized gains associated with marketable securities it owns.

As a reminder, in the fourth quarter of 2002, the company recorded a pretax charge of $25.4 million, resulting from the settlement of shareholder litigation related to the 1999 acquisition of Learning Company.

No such charge was incurred in 2003.

So, to summarize the P&L for the year, reported income, excluding the impact of charges of $552.6 million or $1.25 per diluted share versus last year's income of $486.9 million or $1.10 per diluted share.

Driving up higher profits were increased sales, improved operating margin and improvement in nonoperating items.

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 we reported a $400,000 pretax charge during the fourth quarter, which completes spending against the $250 million financial realignment plan.

The fourth quarter charges relate to consolidation of two manufacturing facilities in Mexico.

For the year, pretax charges related to financial realignment plan totaled $26.3 million and included charges related to consolidation of the girls and boys entertainment divisions, termination of a licensing arrangement, the consolidation of two manufacturing facilities in Mexico and streamlining back office functions.

Of the $171 million after-tax charges related to financial realignment plan, $122 million were cash.

And we exceeded our targeted cumulative cost savings of $200 million over the first three years of the plan ending with 2003.

Now turning to the cash flow and balance sheet.

Cash flow from operations for the year was $604 million, driven primarily by net income of $538 million and depreciation and amortization of $184 million, partially offset by use of cash for working capital.

As we've said all year, in 2003, we did not expect to generate cash from working capital improvements as we did in 2002.

In terms of capital deployment in the fourth quarter, we announced a second share repurchase authorization of $250 million and a significant increase in our annual cash dividend to 40 cents per share from 5 cents per share.

At year end, the cash on hand was $1.153 billion, a decrease of $114 million compared with year-end 2002.

Our receivables at $543.9 million, or 28 days of sales outstanding, increased by two days versus last year, reflecting a minor shift in the timing of fourth quarter shipments year-to-year.

The payments associated with these shipments were collected in January.

Excluding the year-to-year change in factoring, which was up $19 million versus the prior year, receivables were up $72 million, with days sales outstanding increasing by two days.

Inventories at 388.7 million were up $50.1 million or 15% versus 2002 and represented 90 days of supply, which is 16 days higher than last year.

While inventory levels were negatively impacted by lower than expected sales sales during the holiday season, we are still able to many obtain the majority of the progress we made in reducing inventory since 2001.

In fact, excluding 2002, our inventories at the end of 2003 were the lowest they have been in almost a decade.

Our total balance sheet debt decreased by $187 million and our debt net of cash improved by over $70 million from a year ago.

This reflects a strong cash flow generated by our operations.

Our debt to total capital ratio ended the year at 23%, versus 30% last year, essentially in line with our long-term goal of 25%.

Capital expenders for the quarter were approximately $53 million, which brought the full-year total to $200 million, in line with our expectations for the year.

As Bob said earlier, our outlook for 2004 is not unlike 2003.

We expect to the retail environment to be challenging as retailers continue to focus on inventory management and more retailers close stores.

And we expect continuing cost pressures in areas we don't control, like pricing of raw materials, insurance and employee benefits, as well as pressure for the things we do control, like investing and strategic initiatives.

But you should know that we are intently focused on driving top line growth, especially in the U.S. girls business.

Over the long-term we continue to believe our businesses should generate strong profitability and significant cash flow.

Our primary goal is to deploy that cash flow to maximize long-term value for our shareholders.

Now we would be happy to take your questions.

Thank you.

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

To ask a question, press the star key followed by the digit one on your touch-tone telephone.

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

Once again ladies and gentlemen, it's star one to ask a question and we'll go first to Jill Krutick with Smith Barney.

Thank you very much.

Hi, Bob.

Hey, Jill.

Could you give us a sense -- you mentioned that inventories were in good shape domestically.

Could you perhaps comment more specifically on inventories of Barbie products?

That's question number one.

Second question, in terms of your efforts to diversify the retailer mix, can you maybe talk about more specifics about how far you can take that and if that can really offset from what we're seeing from some of the mass merchants.

And finally, in in terms of the operating margin, I know you touched on the possibility that gross margins might be worse comparatively in 2004 versus 2003, but in terms of your realignment plan and all your other initiatives, should we anticipate that operating margins should continue to improve from here?

Thank you.

Jill, I'll start and then I'll turn it over to Kevin for the question on margin.

Let me start with your second question, was on diversifying our customer base.

You know this is a highly concentrated business with a handful of retailers and we do well with those retailers.

Yet at the same time as we're looking forward, we're trying to expand our customer base and get more people interested in selling toys.

So, it's a little early.

We're just doing toy fair now and over the next couple of weeks.

It's a little early to give you any specifics.

I just wanted to let you know that that's one of our strategies for this year and continuing into the future.

We've had some good success, particularly with supermarkets, as an example.

I think one of the large supermarket chains is now certainly in the top five sellers of important products like Hot Wheels cars.

Let me go on to the first question, which was about Barbie retail inventories.

In general, we have seen a double digit decline in retail inventories as we calculate them and the way we do that is what shipped in and what's sold through based on the POS that we receive.

And across the company, our POS was down for the full year in the mid single digits, fairly consistent with the NPD trends for the whole year.

So when we look at what we shipped in, what sold through, we calculate those inventories and that's true that decline is true across all important segments, including our girls business and specifically including Barbie.

We've seen what I would consider to be at -- you know, let me do it this way.

It's a double digit decline, almost across the board and certainly within our girls business.

Thank you.

Okay.

Thanks, Jill.

And Jill, as you know, we don't give guidance by line item but I'll give you some things that we're looking at strategically so you can get some views on how we see gross margin.

I think when we look at the negatives, we continue to see higher costs associated with our value enhancement strategy and, you know, costs pressures driven by higher fuel prices, distribution costs but I think on the other hand, we see positives with savings from the global procurement initiative, continued reduction of manufacturing capacity.

As you know, we just completed the consolidation of the two Mexican plants.

We should see those benefits 2004 and we think there's still opportunities to optimize manufacturing in sourcing, as well as continuing to move forward on global procurement.

Great.

Thank you very much.

Thanks, Jill.

We'll go next to Sean Mcgowan with Harris Nesbitt.

Good morning.

A couple of questions.

Should be on the quick side.

One, can you quantify the EPS impact of the foreign currency changes in the quarter and in the year?

Second, the American Girls being flat in the quarter with last year, can you comment on what impact the opening of the store in New York had and what else is going on in that line?

And then finally, Kevin, because I must be just an idio, can you talk about the closeout accounting in the past, you know, what you specifically how it showed up on the P&L as a reduction in cost of sales and how it's looking at now because I'm not quite following that.

Thanks.

Okay.

Let me talk about the impact of foreign currency on the P&L.

For the fourth quarter, there was a benefit due primarily through the strengthening of the Euro with worldwide sales up 4%, including a benefit from changes in currency exchange rates of 400 basis points.

That was the fourth quarter full year, we're up 2%.

There was a 400 basis point improvement for the full year.

Foreign exchange impact was slightly favorable to operating income, slightly unfavorable on nonoperating income for the year, resulting impact of EPS of about 3 pennies, Sean.

This is Bob.

Let me talk about American Girl.

The New York American Girl place performed very well.

It surpassed the Chicago store's performance during its opening year, but it's important to keep in mind that that's a relatively small part of our sales channel, which also includes catalog and internet, which are more significant.

We did experience declines at American Girl in Angelina Ballerina, Bitty Baby and really important thing is the year ago Kaya doll.

Kaya is in the historical collection and we generally introduce an historical doll every other year.

So this paster we introduced an American Girl of today, the Kaylee doll, which did very well within that segment.

That segment is smaller than the historical dolls.

Then on closeout sales, Sean, just to make sure we're clear, closeout sales are sales of certain product that are no longer in the current product line.

Part of the fourth quarter 2003 certain of these sales were debated against cost of sales.

These sales are now classified as net sales.

So they weren't showing up in sales at all before, if you sold something for $10 that you had $10 cost in, how would it have been done in the past?

It would have been netted within the cost of sales line.

Okay.

So never show the sales line.

It was not in the revenue line.

We'll go next to Linda Bolten Weiser with Oppenheimer.

Thanks.

Can you just -- Mattel has always talked about how you look at brand segmentation and different play patterns of children at different age, points of age development.

Can you just talk a little bit about the Brats competitive competition and if you think that Barbie's issues have been partly due to Brats or just due to Barbie's own issues in the product line and if the segmentation theory works, then why would the Brats, which is for older girls, be affecting Barbie?

Hi, Linda.

It's Bob.

Let me spend a moment on Barbie.

We certainly do believe in age segmentation.

It has historically worked out very well for us and probably one of our best examples is within electronic learning recently.

We have Learn Through Music, which is for very young children.

We have things like Kasey the Kinderbot and PowerTouch and we'll be introducing two more platforms this year and it's very consistent with our successful strategy historically on age segmentation.

Within Barbie, there are things that did well and things that didn't do well and certainly we did notice the impact of competition because one of the areas that didn't do well all year for us was in Barbie accessories.

Order of magnitude, accessories are probably 15 to 20% of the Barbie line and they did not do well this year.

We did see new competition in accessories although like many of you, I make store checks in January and I noticed some of that product still available after the season.

But really more importantly, I think our own items in accessories like the cruise ship, didn't meet our expectations.

The second thing that didn't do well in Barbie is what I will call one-off dolls.

You know, Cheerleader Barbie or Barbie's got a new plaid outfit or Barbie likes Jell-O.

Those things just didn't work well all year.

Conversely, two segments did do very well.

One is at the younger end of the age spectrum, Swan Lake, which outperformed Rapunzel, which outperformed The Nutcracker the first time we did one of these things.

Swan Lake had a lot of contented, related dolls and accessories.

The second thing that did well was in the older girl age segment, which is My Scene.

It's a whole world of Barbie and friends and accessories.

So we worked very hard over the past six months under Matt Buskett, Tim Kilpin and Russell Arrons.

She's our Vice President of marketing on Barbie.

It's a new team and we've built a 2004 lineup that reflects what worked well in 2003.

Specifically, I think we have eight different worlds of Barbie, each with content, like DVDs or CDs or magazines, related accessories instead of one-off things like the cruise ship, licensed products and the like.

We really started with a story, you know, what story did we want to tell girls, some younger, some older and then how do we develop the product line around that story.

That's what's worked well for us in My Scene and Swan Lake and we're hopeful that will work well for us in the future.

Okay.

Thank you.

Thanks, Linda.

Can I ask one financial question?

Sure.

Did you say how much you spent on share repurchase in the quarter?

No, we did not.

We completed our program and we issued a press release I think in October about that.

Okay.

Thanks.

We'll go next to Dean Gianoukous with J.P. Morgan.

Just a couple of questions.

I don't know if if you quantified FX for the quarter and secondly, on the SG&A line, I know you had the $15 million K-Mart charge and last year's quarter and what is the other benefit, how much of that is bonus, how much of it is something else and can you give us an idea if you should see continued improvements in that line going forward and then I don't know if there's any way you could quantify or give us a sense of how much the Mexico consolidation could help next year.

And then just one final question, your inventory that you're carrying not a retailer, are you happy with the quality of that?

Thanks.

Hi, Dean.

This is Bob.

Let me back up and just respond to Linda's question before I turn it over to Kevin because we don't generally talk about the details of our day-to-day execution on share repurchase.

We have told you in the past, though, that we are disciplined and opportunistic.

We use the discounted cash flow model to determine what we think is the intrinsic value of the company an while that value doesn't change much month to month or even quarter to quarter, certainly the execution of our repurchase program does include evaluating other factors as well.

So given the seasonality of our business, the cash flow as you know comes in very late in the year.

As we begin to see indications of the holiday season with price wars and consumer shopping late and certain retailers facing challenges, we decided it's best not to get ahead of ourselves on share repurchase.

And I think it's also very important for you all to know, it's not our objective in the share repurchase program to influence the stock price.

Mr. market does that.

Our goal is to build long-term shareholder value.

Kevin, back to Dean's question.

On four X, for the quarter, it was 2 cents for full year it was about 3 cents.

With regard to our inventory that we hold at the end of the year, we feel very comfortable about the quality of that inventory.

We think the quality of inventory is as good or better than the quality of inventory we had at the end of 2002.

And then with regard to the impact of the consolidation of the two plants in Mexico, that will have a positive impact next year but we haven't quantified that amount.

And then finally, you had asked a question on SG&A and I didn't quite pick up --

I thought that there was a $15 million hit last year from K-Mart right off?

That is correct.

Also I know you had talked about bonus accruals potentially being lower this year.

How much of that is -- is there anyway you can tell us how much of it is bonus?

Yeah.

And what else is just improvement that we could potentially see going forward.

I think the bonus, I indicated in the conference call, it was about a $80 million benefit and then this quarter we took about $7.6 million related to bad debts for last year.

It was about $15 million related to K-Mart and I think it was about $25 million in total for the quarter.

So those impacted us positively.

We had negative impact, obviously, from higher employee benefit costs and insurance as well as four X, but we do continue to work on improving our -- you know, your SG&A line by working on financial realignment plans, really continuous improvement programs but we are facing higher employee costs looking at 2004, but will continue to work very diligently on continuous improvement initiatives in 2004.

So could we expect to see some improvement in SG&A?

We don't give guidance by line item and we are seeing cost pressures in the SG&A line.

Okay.

Thanks.

Thanks, Dean.

Next is Joe Yurman with Bear Stearns.

Good morning.

Bob one of the positives about the Mattel story was kind of getting on board with the idea, you know, let's talk about the toy business as what is it, kind of low secular growth but the idea being that a focus on the core business will have less earnings and cash flow volatility.

With that being said, is there anything that has happened during this season and particularly the actions of the retailers and, you know, what appears to be a little bit of a vacuum on the sales side of the business to suggest that some of the operating goals that you set for Mattel in benchmarking the company against global consumer products companies are no longer attainable?

Well, Joe, I don't like to comment on sorts of views of the world going forward, but let me try and respond to your question.

Probably the thing that I took away from this year, certainly in a more pronounced fashion than in prior years, was this shift towards purchasing later in the holiday season.

You know, clearly there are things that make the toy business very much like a consumer goods business and I would talk about cash flow in one of those regards and the importance of brands.

But two of the things that make the toy business unique are the new product nature of this business are roughly 80% turn over of SKUs and the seasonality.

And I think at least in my mind's eye for the first time we have seen what I've described as a secular shift in retail buying by consumers.

When we look at the point of sale, month by month or week by week in the holiday season, we have seen more and more of it coming later and later and if you would have asked me how the holiday season went, I would have said, you know, it was probably okay at best.

If you asked me that question up through mid December based on what I could see in POS and discussions I had with retailers all the time.

I said this isn't going to be a very good holiday and we certainly read reports of it being robust and high value items doing really well but we really didn't see the toy business pick up until very late in the year.

And so I think that is one of the things that has influenced me and will influence our thinking on how we work with retailers and that's to better plan on the fact that sales are coming in later.

The data shows that's happening every year, at least in recent history.

Maybe as a follow up, I know that a couple of quarters ago you suspended talking about long-term goals for the company both for the top line and what you could leverage on an EPS and cash flow basis, but are those still levels that are consistent with the opportunities and the challenges that you see as being a toy manufacturer?

Well, Joe, I think that question goes to guidance and I need to step back and remind those of you who are new about my feelings on that.

I don't think it's productive for companies and specifically our company, to give guidance in any way, shape or form.

I let investors come to their own conclusions.

We did get asked several years when we are at the early stages of the turn around, well can you frame this thing out for us, so we gave view of what the world could look like three to five years.

We're now three to four years into it, and the world's pretty much look like that.

So I think probably a year or so ago I said, great, we did what you asked us to do then, but we're not going to get into giving guidance.

That's fair.

Kevin, one quick question, to attack the report from just a slightly different angle, is it fair to say that there's a hundred percent drive powder on the second authorization?

Yeah, clearly we have got the ability to purchase shares.

We want to be opportunistic, deploy our cash.

So we do have that ability.

Thank you.

Let me spend a minute on cash flow because I think it is important to your point of well-run consumer goods companies.

Over the last three years, we've generated about $2 and 3/4 billion of cash.

We've invested in capital to run the business, including things like the American Girl place in New York.

We've reduced debt by over $800 million.

We've paid dividends now of over $200 million and we spent almost $250 million on the share repurchase and still increased our cash position by about $900 million over three years ago.

So we have clearly been focused on using strong cash flow to strengthen the balance sheet and we have begun giving money back to our shareholders.

Thanks, Bob.

We will go next to Felicia Kantor with Lehman Brothers.

Good morning.

You guys have been making Barbies for a long time.

It's an obvious comment, but you know over the past year or so, you guys have tweaked things, you changed things.

You've been adjusting to the competitive environment.

Some of the things that you're doing to Barbie for this holiday season sound pretty interesting but I'm wondering, how can we be confident that these changes are going to work for 2004?

And I'm also wondering, do you think that you're finally at the place where Barbie is going to be get back to being the market leader versus reacting to what is going on in the market today?

Well, let me start, Felicia, by your question on the market leader.

Barbie is the market leader.

I know there's people out there with different reports but if you go to the NPD data, and we all know that that's --

I guess -- I didn't mean market leader in terms of share.

I meant market leader in terms of trends.

But let me set the record straight on market leadership first in terms of numbers.

Barbie outsold her nearest competitor by two-to-one consistently all year long.

She is more than a doll.

Barbie is a brand.

It's a character that I think we're over $3.5 billion of worldwide retail sales, including dolls and all the other things that are Barbie.

It's the number one girl's brand, the number one girl's website and I think second only to Winnie the Pooh and Mickey Mouse in terms of kid's products.

So yeah, we clearly have work to do on Barbie.

Barbie particularly in the U.S., the trends have not been good for several years now and that's caused us to rethink our strategy and to retool the whole brand but, you know, I don't want to get into projections on when is Barbie going to do this or do that.

I think what I can tell you is we understand that we haven't performed well in Barbie.

We have lost market share in dolls over the last couple of years and we want to work very hard to regain that momentum.

Whether it's this month, next month, 12 months, 18 months or how many months it takes, I just want you to know, we are working very hard on it and we think we have some good ideas.

Time will tell when and if they're successful.

And then you mentioned at the beginning of the call, some changes, some personnel changes you've made in the girls department.

Have there been other changes?

I mean, what are you doing internally to ensure that you will be, you know, back to where you need to be there?

We are making changes.

I talked about Matt who assumed leadership for girls in addition to our historical boy's business about a year ago this time, thereabouts.

Tim Kilpin is relatively new to the company.

Russell Arrons, who did a fabulous job when she run our entertainment properties, like Yugi-O and the like, has come over to Barbie and given us some leadership in the marking area.

We are strengthening the organization.

We are making some changes.

They are ongoing and the organization, you know my view on that is you never say never on how things play out.

But I think we understand it's a new day on Barbie.

We understand we have challenges and we need some new thinking to address those challenges and we're attempting to do that.

And just finally, I know you don't like projections but can you -- I'm assuming that some of the changes that you're making to Barbie for this holiday season will help the doll SKU a little bit older.

Yes, we have clearly been working on the older girl strategy and there I would tell you to look even beyond Barbie.

We have some new lines coming out within dolls this year, which will attempt to help us shore up the older age segment, but if you look at the eight or nine worlds of barbie that we will be introducing this year, some of them are clearly geared towards younger girls.

Our princess strategy, if you will, and some of them are clearly geared older girls, or M Scene strategy.

But it is true, over the last couple of years we have been working hard to fight age compression within Barbie.

Thank you.

Well go next to John Taylor with Arcadia.

Good morning.

I got a couple of questions too.

The -- could you talk about the momentum sort of year-to-year that you're seeing on a couple of the licensed properties like Yugi-O and Justice League, talk to us about how confident you are that those are going to continue to grow this year.

That's the first question.

Second is, this may be jumping into toy fair already, but give us any sense you can about the Harry Potter rollout, because I think that movie is coming in May and then on the financial side I'm trying to reconcile the higher DSOs with the fact that you -- that reorders were probably lighter because of the lateness of Christmas, maybe touch on that, help me figure out what's going on behind that.

And last question, Bob, for you a little more general, with Toys 'R' Us in the U.S. and KB in the U.S., sort of, you know, the guys under the greatest siege, what does that do to seasonality and Mattel's ability to introduce new products earlier in the year and how doesn't this -- you know, do we become even -- I mean, we're all talking about the change in seasonality.

How does that end up in the way you guys plan your business?

Thanks.

Let me start, JT, with the last one and then we'll turn it over to Kevin.

Well, I'll do the entertainment one too.

On seasonality, we have been working hard over the last couple of years, as I mentioned, to try and better match the timing of our shipments with retail takeaway and we did reach the point now that we can calculate exactly what happened in 2003.

We reached the point where if you look at the percentage of the full year contribution done in the first half of the business, we matched shipments to takeaway.

So we feel good about not selling that far in advance.

I think the numbers, Diane were 30/70 this year, or 20/71.

30% of our shipments went in the first half and 70% in the second half and I believe the number was 29 or 30% of our POS happened in the first half and 69 or 70% hin the second half.

So we got to the point where we wanted to be.

Secondly, as it relates to entertainment property, we have three I think it would be reasonable movie properties this year.

Sponge Bob, which is now been around for a while is going on to big screen.

Yugi-O, which has continued to do pretty well based on the TV series, I think it's still the number one TV show, certainly for boys, that goes to a movie.

And we do have Harry Potter coming out I think either May or June.

So last year in 2003, we really had virtually no Harry Potter product or sales.

If you go back to two or three years ago, it was a pretty good business and we expect it to be a pretty good business this spring.

From a TV standpoint, we have three properties that could pan out to be something for us, we'll see.

One is Shaman King that was brought to us by For Kids, the folks who brought us Yugi-O, the second is Megaman and the third one is Winks.

Winks is a girls property and we'll be doing a line of dolls for Winks and that's probably one of the areas I would talk about when we look at age segmentation across girls and something that's outside of Barbie.

Then on the DSO issue, we had slightly later timing in shipments in October, early November where we got those payments in the first couple of weeks of January.

Okay.

So it was really just a shift within October that kind of overshadowed --

Year end.

Yeah, the year end.

Yes.

Okay.

Thank you.

Next is Margaret Whitfield with Brean Murray.

Good morning, Bob and Kevin.

Regarding the price wars, which seemed in a way to particularly focus on some of your leading toys for the holiday season, I wondered what strategies a manufacturer can use to make the impact less in coming years and also, did you increase your business with your top three toy retailers last year?

What was your ending market share and how does the confluence of the later Christmas, the failure to reorder, the gift card business and the later toy fair affect the quarterly pattern this year?

Let me start, Margaret.

This is Bob.

Let me start with your question on retail prices.

As you know, we don't control prices but we certainly don't do anything to encourage our retail customers to sell products below cost.

Three things happen when they sell below cost.

The first one is, that retailer isn't looking to sell more product.

The more they sell, the more they lose.

The second thing is the retailer's competitors have to respond.

They can either hold price and be embarrassed or not competitive or they can lower their price, lose margin and also attempt to limit quantities sold and we in fact saw a reduction in support of some of our key products, including the cancellation of retail ads this fall when retail prices dropped as dramatically as they did early in the holiday season.

So what are we doing about it?

First, we're trying to build more value into our products to sell more on content and less on price.

And secondly, we're working with retailers to develop alternative products and programs to help them sell more toys and make more toys -- make more money on those toys at the same time.

Let me now go to market share.

As you know, the NPD is more directional than precise as they've moved from store scanners to the on-line consumer panel, but for the full year, through December, the toy category was down about 3% and we lost a share point.

We don't disclose shares by segment and again, as you get more and more granular, the NPD data is less and less precise, but we did lose some share in dolls.

We picked up a little bit of share in action figure and in flush.

Then with regard to the top three, it really is consistent with our overall company performance on a local currency basis.

So just down slightly.

Okay.

You were down with each of the big three?

Yes.

Each was consistent with one another?

Well, we don't want --

We're not going into that level of detail.

And then the confluence of the later toy fair, presumably, later shipping of new products, the gift cards.

I mean, people have cards but there's nothing on the shelves.

How does that affect the quarterly performance?

I hate to get into quarterly projections, but the good news is there's nothing on the shelf, so there's opportunity for retailers once they get through their year-end inventory thing, which for most was last weekend, there's an opportunity for them to rebuild stocks.

The bad news is, you're right.

Somebody got a gift card.

I went to stores in January across all major retailers.

I was surprised that how empty the store shelves were.

So, you know, in some places they might use that gift card on something other than a toy.

That's not good for any of us.

Can you quantify the increase in gift cards?

No, I think that's probably a question better asked of retailers.

Okay.

We'll go next to Scott Barry with Credit Swiss First Boston.

Just one question.

I'll ask the same question a little bit different way.

Bob, is there really any precedent, any historical precedent, for the relevancy challenge you seem to be facing with Barbie, and if so, maybe you could walk us through what the historical response was and what the resolution was of that challenge?

Absolutely.

One of the real tricks of managing this $3.5 billion brand and making it successful is to continue keeping Barbie relevant.

When you look at her history, there are clearly times when things have plateaued or even declined and then a new strategy, a new series of dolls comes along and rebuilds the business.

So we are not in unprecedented territory as it relates to Barbie.

That said, we probably have an unprecedented amount of competition in dolls and for girls dollars than we've had probably in Barbie's history.

So we have to work that much harder.

Great.

Thanks.

Next is Tony Gikas, Piper Jaffray.

Good morning, guys.

You've talked about focusing on the top line more in 2004 and probably needs to start with create activity and innovation.

Can you characterize the increase in spending on research and development and you've talked about a couple new key hires, but have there been other changes, are you beefing up that particular department?

Where are you finding these people?

Well, this is Bob.

In addition to continuing to work internally and a couple of our new product ideas, one that I'm very high on that we'll probably show at toy fair in New York when we meet you all, is a product line that was totally internally developed in the girls arena, a new brand and a new idea and I think might work out quite well.

At the same time I will tell you, just Saturday night here, we hosted the inventor community at Mattel.

They came through and looked at our lines and we talked to them and I think there's a big opportunity for us to go outside more and come up with more and better new ideas by tapping into that resource.

We probably in some of our products lines, I would would think in Fisher-Price, about 30% of our new products come from outside of Fisher-Price.

They come from the inventor community.

When I met with the community Saturday, I encouraged them to work on our behalf and let them know we're open for business.

Some of the new ideas that we have, whether it's a Fisher-Price or a Mattel brand have clearly come from the inventor community and I think we can do a better job there.

Do you have plans to increase spending in R& D?

Can you characterize that?

We don't get into projections on any line item, including R&D spending.

Okay.

Thanks.

Thanks.

Operator, we'll take one more question.

Today's final question comes from Brett Jordan with Advest.

A couple of quick questions and I got on a little late.

Sorry if you've already hit this.

Could you discuss Flavas and how that performs relative to your expectations and then within the domestic Hot Wheels business, given the strong performance, were there any particular drivers there, licensed or unlicensed product?

Yeah, Brett.

Every year we have products that work with well and products that don't and simply said, Flavas was one of those that didn't work well.

I said in the third quarter that it was too soon to see how the brand would play out and we were hoping to fine tune it and generate more positive results and in fact, it didn't.

So the fact is, there is no Flavas going forward and it's been replaced by some other ideas.

Okay.

The Hot Wheels

The Hot Wheels, Hot Wheels is one of those areas if you look at both the Fisher-Price an the Hot Wheels trends, we clearly invested more in advertising this year across the line and in Hot Wheels in core Fisher-Price, you saw the benefit of that in the fourth quarter sales compared to the other periods and so, in addition to effective advertising, I would say there are two things that worked really well in Hot Wheels.

One was the new 100 cars where we started launching some new innovations and new ideas during the holiday season, so the basic car business responded to that innovation.

The second thing was the T-Rex track set.

That thing was probably the most successful track ever done and worked very, very well and was out of stock in October in some stores.

Okay.

And last question, on KB, any exposure there?

I'm not sure if you addressed that earlier.

I missed it.

No, we took a $7.6 million charge in bad debts in the fourth quarter, a substantial portion of that related to KB.

Great.

Thank you.

Thanks, Bret.

Thanks, everyone.

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

The replay of call will be available beginning at 11:30 a.m. eastern time.

The number for the replay is 719-457-0820.

The ID number is 769315.

Thank you.

This concludes today's Mattel conference call.

We thank you for your participation.

You may disconnect at this time.