Mattel Inc (MAT) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the Mattel incorporated second quarter 2004 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. Dianne Douglas.

Please go ahead, ma'am.

Thank you.

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

I'm Dianne 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 second quarter.

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

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

Such forward-looking statements will include statements regarding sales growth goals across brands and markets including initiatives in the fashion doll and electronic learning category, our fashion doll strategy and the timing of product introductions and mix, cost controls, capital deployments, strategic investments including initiatives regarding productivity, margin improvement and value enhancement as well as near-term cost of such initiatives, advertising spending and maximizing long-term value for shareholders.

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 language.

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 2003 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 Regulation G regarding non-GAAP financial measures is available on the investor and media section of our corporate website, Mattel.com, under the sub headings financial information and earnings releases.

Now I'd like to introduce Bob Eckert.

Thank you Dianne and good morning everyone.

As I've said before 2004 will be a challenging year for Mattel and the second quarter was consistent with that outlook.

To declare success in 2004 we need to stay focused on improving our long-term performance by addressing the top line, controlling our costs, improving productivity and processes, and effectively deploying our capital.

Our biggest challenge ahead is reinvigorating the fashion doll business.

We're directing tremendous time, energy, and resources to regain our momentum in the fashion doll category which is commenced with the world's of strategy.

As you know we're in the beginning stages of executing the world's up strategy at retail with about 30% of the Barbie line reflecting our new vision.

For the holiday season we expect to see a higher concentration of this strategy at retail along with the launch of Barbie's fourth film, Princess and the Pauper, as well as My Scene Masquerade Madness with a DVD in the package.

With that said, we don't expect the worlds of strategy to be fully executed at retail until 2005.

To help ensure our success in the worlds of approach we'll continue to make strategic investments in the business to drive growth, such as adding value in the box and developing and launching a new Barbie marketing and communications platform targeting the older girl segment.

We also need to capitalize on the sizable opportunity to gain share in the electronic learning category by developing innovative platforms beyond book-based systems such as Laugh and Learn for Infants, Learn Through Music for Toddlers and Interact TV for Preschoolers.

These multiple platforms combined with the strength of our PowerTouch learning system truly provide parents with the best alternatives in learning for the first years.

In terms of our initiatives to cut costs and improve productivity just this month we began the integration of our Matchbox and Tyco R/C business which was formerly centered in New Jersey, into our existing Hot Wheels business here at our southern California campus.

This move enables us to concentrate our Wheels marketing and design groups into one cohesive team which allows us to take advantage of synergies and reduce redundancies.

Over the last year we've execute within our stated capital and investment framework, increasing our dividend to 40 cents per share and using about $500 million to repurchase over 6% of the shares outstanding.

As I've said on previous occasions we don't run the business for 90-day intervals, we run the business for the long term.

And for the toy business, which is an annual cycle business with an emphasis in the second half, that means focusing on optimizing the year and not losing sight of our goal to be a well run consumer products company.

We're committed to maximizing long-term value for our shareholders.

To achieve this we must rebuild our fashion doll business and expand our strong presence in the electronic learning category.

These efforts combined with our cost control, productivity enhancement initiatives and effective capital deployment are leading us in the right direction.

Thank you and now I'd like to turn the call over to Kevin for a financial review of the quarter.

Thank you, Bob, and good morning, everyone.

My remarks regarding the second quarter financial performance will be organized in the following manner: Revenues by geography, business unit and brands, key drivers on the P&L, cash flow, and balance sheet at June 30th, 2004.

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

I'll begin with a discussion of worldwide growth sales shown in Exhibit 2.

Total worldwide growth sales for the second quarter were up 6% which included a benefit from changes in currency exchange rate of 2 percentage points.

As a reminder the company changed the way it classified certain close-out sales within its statement of operations beginning in October 2003.

This change resulted in additional benefit of 160 basis points to sales growth and a negative impact to gross margin of 70 basis points during the second quarter of 2004 when compared to the prior year.

For analytical purposes close-out sales by business unit on a quarterly and annual basis is available on the investor and media section of our website.

Gross sales in the U.S. increased 1% while international gross sales increased 12% including a benefit of 4 percentage points for changes in currency exchange rates.

On a regional basis sales for the second quarter in Europe were up 4% including a 6 percentage point benefit from changes in currency exchange rates.

Sales in Latin America was up 18% including a negative impact from changes in currency exchange rates of 4 percentage points.

Asia Pacific was up 53% including an eight percentage point benefit from changes in currency exchange rates.

And sales in Canada were down 3% including a two percentage point benefit from changes in currency exchange rates.

I will now review our core categories and brands.

Mattel Brands.

For the quarter worldwide sales from Mattel brands were up 4% including a 2 percentage point benefit from changes in currency exchange rates.

Domestic sales were down 1% and international sales were up 8%, including a 3 percentage benefit from changes in currency exchange rates.

Worldwide Barbie sales were down 13% including a 1 percentage point benefit from changes in currency exchange rate for the second quarter.

Barbie sales internationally were down 11% including a 3 percentage point benefit from changes in currency exchange rates.

And Barbie sales in the U.S. declined 15% when compared to the second quarter of 2003.

Based on the data we see we believe the Barbie worlds of strategy is working but as previously described for you we are in the early stages of executing this strategy.

A relatively small percentage of the total Barbie product at retail reflects this new strategy.

As we continue to pursue our worlds of strategy a higher concentration of product developed around stories and content will be available at retail in the 2004 holiday season.

The new strategy will be fully executed in the 2005 product line.

Worldwide sales of the Other Girl Brands were flat including a 2 percentage point benefit from changes in currency exchange rates.

Worldwide sales for the wheels business was up 22% including a 2 percentage point benefit from changes in currency exchange rates.

Double-digit increases in Hot Wheels in both the U.S. and international markets was driven by new product introductions which included Formula Fuelers, Crash Test Dummies, and Rev-ups.

Worldwide sales in the entertainment business were up 31% versus the prior year including a 3 percentage point benefit from changes in currency exchange rates.

The increase in sales primarily reflects growth in Harry Potter and other Warner Brothers products as well as games and puzzles.

Fisher-Price brands.

For the quarter worldwide sales for Fisher-Price brands were up 6% including a 1 percentage benefit from changes in currency exchange rates.

Domestic sales of Fisher-Price brands were up 1% and international sales were up 22% including a 4 percentage point benefit from changes currency exchange rates.

Worldwide sales of core Fisher-Price were up 12% including a 2 percentage point benefit from changes in currency exchange rates reflecting double-digit growth internationally as well as solid growth in the U.S. driven by continued success with the infant and baby gear lines and games in the learning category.

American Girl brands.

Sales of American Girl brands were up 18% reflecting continued strength in American Girls Today, American Girl Collection and the recently launched Hopscotch Hill School brands.

The growth was primarily generated by the new American Girl retail store in New York City.

Before I begin reviewing the P&L let me remained you that the second quarter of 2003 included charges of 14 million associated with the Company's financial realignment plan which was completed in the fourth quarter of 2003.

From time to time the Company expects to invest in initiatives intended to enhance the productivity and improve margins while the company will continue to provide information regarding the cost of these initiatives we will no longer provide the pro forma impact on results.

Now let's review the P&L which is shown on Exhibit 1.

Gross margin was 45.6% for the second quarter of 2004 which decreased 70 basis points versus the second quarter of last year.

The margin decline versus the prior year quarter was driven primarily by sales of lower margin product including the impact of mix, the change in classification of close-out sales I previously mentioned, and value enhancing initiatives as well as higher royalty expense and external cost pressures.

Partial offsets included benefit in 2004 from foreign exchange, a charge in 2003 for plant consolidation, and other savings and procurement initiatives in the current year.

We plan to continue invest in the value enhancing initiatives and we are actively pursuing actions to offset or minimize the cost of these initiatives.

Advertising expense was 84.4 million or 10.5% of net sales, flat versus the prior year.

We will continue to fine-tune our advertising spending throughout the year.

However, consistent with our plan to invest in the business to drive long-term performance we currently expect advertising spending levels to be fairly consistent with the prior year.

Selling, general, and administrative expenses were 238.7 million or 29.7% of net sales for the quarter, up 8.2 million or down 30 basis points compared with last year's second quarter.

In comparing 2004 second quarter SG&A to the second quarter of 2003 the following items should be noted.

In 2003 there were 7.4 million in charges related to termination of a licensing arrangement and streamlining back office functions.

In 2004, there was a 4.4 million charge for severance primarily related to moving our Matchbox and Tyco R/C brands from New Jersey to California to take advantage of synergies in our wheels business.

Additionally, included in this year's second quarter was a net benefit of 10.1 million related to favorable legal settlements.

Exclusive of these items SG&A in 2004 was impacted by overhead costs associated with the new American Girl store in New York City, like rent and store personnel, the impact of changes in currency exchanges rates and overhead costs in internationally markets, primarily the euro, and higher insurance and employee related costs.

For the quarter operating income was up 43.2%, up 4% versus the prior year.

As a percentage of net sales operating income was 5.4%, flat compared with the prior year.

Interest expense was 16.4 million for the quarter compared with 18.2 million in the second quarter of 2003.

Compared to last year, this year's interest expense reflects the benefit of lower long-term debt outstanding partially offset by higher average short-term borrowings.

So, to summarize the P&L for the quarter we reported net income of 23.5 million or 6 cents per share versus last year's second quarter of 20.9 million or 5 cents per share driven primarily by revenue growth as well as the benefit of lower share count.

Now turning to cash flow on the balance sheet shown on Exhibit 3.

Cash used for operations in the first half was approximately 518 million, an 82 million dollar improvement versus the first half of 2003.

Cash used for investing activities improved by 28 million versus the prior year to approximately 63 million including capital expenditures of 71 million.

Cash used for financing activities and other was approximately 208 million, including 255.1 million used to repurchase 14.7 million shares at an average cost of $17.38 per share.

Cash on hand at the end of the second quarter was 364 million, down 219 million from a year ago.

Our receivables were 623 million or 70 days of sales outstanding improving by 1 day versus last year.

Before factoring, which was 128 million up 7 million versus the prior year, receivables were up 26 million with days sales outstanding improving by 1 day.

Inventories at 558 million were up 17 million or 3% versus last year second quarter and represented 57 days of supply, which is three days higher than last year.

Our total balance sheet debt decreased by 110 million and our debt net of cash increased by 109 million from the second quarter of 2003.

Our debt to total capital ratio was 26.3% at the end of the quarter compared with 28% at the same time last year.

At the beginning of the year we said we expected 2004 to be challenging and is has proven to be thus far.

We are focused on rebuilding growth across all of our brands and all of our markets because we believe that will drive long-term value creation.

Now, this will take time and we require continued investments in near-term to ensure success over the long-term.

That concludes my review of financial results.

Now we'd like to open the call to questions.

Operator.

Yes, thank you.

The question-and-answer session will be conducted electronically.

If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touchtone telephone.

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

Once again, press star, 1 to ask a question.

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

Yes, please.

First of all on point of sale if could you perhaps give us a sense of what the trends are that you're seeing among some of your key brands in overall here in the U.S.

Secondly, if could you give us a sense in the gross margins which factors are going to be continuing to have pressure in the second half and where you might see some opportunity there and if net net we might see some improvement overall which I know might be close to a forecast, but the factors would be real helpful.

And then finally on the electronic learning area perhaps you could talk about some of the successes you're seeing there and how you see that market developing.

Thank you.

Hi, Jill this is Bob.

I'll start then turn it over to Kevin.

Regarding point of sale let me start by again reminding everyone that NPD is now an on-line panel and not scanner-based POS, so it's less precise, especially when looking at the off-peak season time periods.

But through May, May year-to-date, NPD says the category is down in the mid single digit range and Mattel take-away or consumption is down in the high single digits and that trend in the US is consistent with the internal POS data that we have.

So, when you triangulate the NPD data, our POS data, and our shipments you get a reasonably consistent view.

Related specifically to brands we've seen nice POS increases in Fisher-Price and in our Wheels business, but so far we have not seen that in the Barbie business.

The situation in Barbie is similar to the comments I made last quarter.

That is our shipment decline is consistent with what we see in NPD and POS.

The new worlds of products, Cali Girl and Fairy Toad and Princesses are doing fine but the non-worlds of product is struggling.

This fall we'll transition from about one-third worlds of and two-thirds non worlds of products to two-thirds worlds of and one-third non-world.

Our strategy in dolls is threefold, to rebuild relevance with girls.

There two new worlds this fall worth highlighting.

One is based on the hottest TV show for girls and that is "American Idol", and another is based on fashions called "Fashion Fever."

The second is to regain market share.

That is the product as well as the communications platform that we'll be launching this fall, particularly for the older girl.

And finally it's regaining retailer confidence.

That's space productivity and placing smart bets for retailers.

We know there's going to be a lag effect between when the business starts turning around and when retailers really support it, so we want to remind retailers of what we think is coming and also remind them that even in this time period we're outselling the competition by more than 2 to 1.

And, Jill, in gross margin, as we've said all year, the gross margin is under pressure as we invest to regain sales momentum in our brands in view of the rising cost environment.

Consistent with the first quarter the second quarter gross margin was negatively impacted by sale of lower margin product, including mix, value enhancing initiatives and the change in classification of close-out sales.

Additionally we experienced higher royalty expense and continued external cost pressures for raw materials and transportation costs.

However, these declines were partially offset by a benefit for foreign exchange and other cost savings and procurement initiatives.

In our view the year hasn't changed and that gross margins will continue to be under pressure.

At this point we haven't seen anything to indicate that cost pressures will subside and the margin benefit in the first half from the strengthening of the euro and no w the magnitude of that yea- to-year benefit is waning.

But we plan to continue to invest in our brands to regain sales momentum and we'll continue to work on savings and procurement initiatives to help offset at least some of the pressure in gross margins.

But, generally speaking, our view of the year has not change.

Finally, Jill this is Bob, on your question on learning.

This is a consumer need-driven category so we think it offers long-term opportunity for growth and we obviously can pick up market share.

We have platforms across age segments, Laugh and Learn, Learn through Music, Casey the Kinder-Bot, Interact TV and PowerTouch.

It's a little early this year to handicap which one will do better than the rest, but we like our strategy of having a variety of platforms across multiple age groups.

Thanks very much.

We'll take our next question from Sean McGowan, Harris Nesbitt.

Hi, guys.

I also have a couple of questions.

One, could you provide a little more detail on what the favorable legal settlements were?

Number two, comment on likelihood of future buyback activity or anything else having to do with excess cash?

And third, can you give us an update on the status of holdings of Van Dye stock?

Thank you.

Well, Sean, this is Bob.

We don't get into specific legal settlement discussions because frequently we have confidentiality arrangements with the other party, so I can't give you any insight there.

I can talk to you a little bit about capital deployment.

You all know that we do have a framework in place that was approved by the board in February of '03.

We talked about having $800 million to $1 billion in cash at the beginning of the year.

Last year I think we entered, or we entered this year, I think, with 1.135 billion.

We targeted debt-to-capital ratio of about 25%.

That peaked at 52% in 2000 and I think it was 23% last year.

We'll continue to invest in growth with roughly 180 to 200 million in CapEx.

We'll make strategic and financially prudent acquisition.

And you know I've consistently said we're looking for the right thing at the right time at that time right price and we'll return excess funds to shareholders.

We restored and increased the dividend last year to 40 cents.

That represents about a third of an earnings payout or 2% dividend yield.

Our share repurchases over the last year, we've purchased 27 million shares at an average price of $18.23.

The board will continue considering the state of the balance sheet, cash flow projections, alternative uses for capital.

I don't want to get ahead of them and predict timing but I'm confident that we'll continue to strive to operate within the publicly announced guidelines, with a goal of having discipline and being opportunistic and building long-term shareholder value.

And, Sean, with regard to Van Dye(p), as you know , we want to be opportunistic about liquidating that from time to time and at the balance sheet at the end June we have a 42 -- $48 million on the balance sheet with regard to our net investment.

Thank you.

We'll go next to Tony Gikas, Piper Jaffray.

Good morning, guys.

Couple of questions.

You know, there's been some questions recently about the support of the fashion doll business overall.

Could you just talk a little bit about, including and excluding Mattel, do you have research that supports the girls, you know, girls' interest in fashion dolls and at what ages have you identified any changes?

If you could talk to Barbie, too, that would be great, within that context.

And then do you see competition increasing or decreasing later this year or would you characterize it as being similar to the prior year?

Then the second question, just maybe update us on the cost savings to date, where you're at there.

Thanks.

Yeh, Tony this is Bob.

As it relates to the fashion doll category it is a category that has been growing based on the NPD data and it has been growing for sometime.

We look at three specific age segments within the fashion doll category.

There are the younger girls, call it roughly three to five years of age, where we have a large share of market and the market has been doing reasonably well.

There are the older girls, call it eight to ten year olds, that market has been growing nicely over the last two years driven primarily by a competitive entry in that category, as you know, and then there are the girls that we talk about as being in transition from younger to older, the five to eight-year-old girls, and that's where a lot of the market share battle is being conducted today.

So whether you include or exclude Barbie, the category is growing and that has been growing most pronounced at the older age segment.

Competition, I never like to talk much about competition.

I would leave it up to them to talk about competition.

But even during Barbie's struggling period here I want to -- I always like to remind retailers that we're outselling the competition anywhere you look 2 to 1 or more.

And then with regard to cost savings programs, Tony, as you know, we complete our financial realignment plan last year and those cost savings are ongoing.

And then as we have in the first half of the year we'll continue to pursue initiatives, enhanced productivity, improve margins or reduce overhead costs over the long-term and these costs will be absorbed in normal operating costs.

However, these initiatives generally have a short payback period.

Okay.

Thanks, guys.

Thank you and the next question comes from Dean Gianoukos, JP Morgan..

Hi, just have like, I guess, 4 questions.

The first one on Harry Potter, I know you don't like to give numbers, can you just give us a sense of how big it is relative to the last movie, is it half, a quarter, two-thirds?

Secondly, international Barbie was down a lot.

Have you seen pressure from Brats(ph) and those markets as well?

Also, on Barbie, can you give us a sense of how much of the revenues are from the worlds of product?

You've given us idea how much is on the shelves.

Can you give us a sense of shipments and if you have any idea of take-away how much of it is the worlds of product?

And finally, when you think about putting a lot of extra stuff in the boxes to increase market share, if your strategy works are you going to be able to reverse that at some point to try to get margins back up or are we looking now at sort of run rate margins that are going to be lower?

Thanks.

Dean, this is Bob.

Let me try the first couple of questions.

As it relates to Harry Potter, the movie three toys have shipped and are selling.

Order of magnitude, this is a 15 to $20 million toy property, not surprising to us but nowhere near the $150 million or thereabouts in years one or two.

Related to that in the entertainment property we have seen a nice build in Yu-Gi-Oh lately.

Our POS continues to grow behind the dual disk launcher.

You might recall in the first quarter I talked about shipments softening in the retailers but that has rebounded nicely of late and POS is still up and we're anticipating an August movie.

Related to your second question on international and Barbie, let me say broadly speaking we have grown fairly consistently across our product lines for the past three or four years but 2004 has started off slowly for us in Europe.

According to NPD we are gaining share in growing markets but our first half shipments are down 4% in Europe across our line on a constant currency basis.

I talked in the first quarter about retail overhang.

That is, broadly speaking, there were inventories left over from Christmas that retailers have been working off.

Our doll business is gaining share in most countries in Europe but is lagging in terms of a shipment standpoint or even POS.

With regard to gross margins of Barbie I think it's a cost in the near-term but expect over the long-term through pricing and volume to improve the margins.

Okay.

And then just maybe the world of stuff, how much at retail the take-away is.

If you have any idea.

It's still, Dean, roughly one-third/two-thirds, one-third worlds of, whether you look at by the number of SKUs shipped or their dollar volume or anything like that.

Again, that's an order of magnitude and not that precise.

But, one-third/two-thirds is a pretty good number.

Okay, thanks a lot.

Once again, if you would like to ask a question please press star, 1 on your telephone.

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

Thank you.

I just have two questions.

First, your growth in Asia Pacific was it especial strong.

Can you just comment if your strategy to kind of go after that market in Japan is taking hold.

And then secondly, Bob, I think on the last call you had made kind of a quick comment about maybe what you felt brats inventory was looking like at retail relative to Mattel product inventory.

Can you kind of revisit that topic and what you think now on that subject?

Thanks.

Well, Linda, I probably inadvertently talked about the competition last time so I'll defer that one.

Again, I don't like to talk about somebody else's business but I think you're all familiar with the situation going on out there in the fashion doll business.

As it relates to Asia Pacific probably the biggest driver has been Australia which has consistently been a large and growing market for us now, probably for the past three years.

Our strategy in Asia Pacific is to do better in growing markets, South Korea and China, but we want to crawl before we walk and walk before we run, so we don't want to get ahead of ourselves over there.

We're in the process of transitioning the Japanese business away from BanDyne into our own structure.

It's in the very early stages and that has not been a key driver of growth in the last quarter.

Okay, thank you very much.

You're welcome.

Thank you.

And we'll take our final question today from Felicia Kantor, Lehman Brothers.

Hi, guys.

Just a quick question you haven't touched upon, yet.

Inventories, if I'm remembering correctly, this is about the third quarter we've seen inventories increase, if you can just address that increase and maybe help us think through what inventories might look like for the rest of the year.

Thank you.

Well, I'll start, Felicia, with retail inventories and then maybe Kevin can have a comment on our inventories.

Our calculation of retail inventories, which, remember, is based on shipping in, which we know -- and our read on POS out that we get from the top customers, shows continued declines year-on-year in the high single digit range.

And then our inventories are up slightly by 3 days but again it's initiative with regard to working capital and tightly managed AR and inventories and we'll continue to do that throughout 2004.

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

The replay of the call will be available beginning about noon eastern time.

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

The ID number is 174789.

Operator?

Thank you.

And this does conclude today's conference.

We appreciate your participation.

You may now disconnect.