Mattel Inc (MAT) 2004 Q3 法說會逐字稿

Good day and welcome to the Mattel Incorporated third quarter 2004 earnings conference call.

Today's call is being recorded.

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

Please go ahead, ma'am.

Thank you.

Good morning and welcome to Mattel's third 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 third 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 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 similar matters.

Such forward-looking statements will include statements regarding consumer and retailer confidence levels, toy industry challenges, our Barbie brand strategy, sales growth goals across brands and markets, maximizing performance at retail, value enhancement initiatives and the costs thereof, advertising spending, sales of securities and long-term value creation.

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

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

A variety of factors, many of which are beyond our control, affect the operation, performance, business strategy and results of Mattel and could cause actual results to differ materially from those projected in such forward-looking statements.

Some of these factors are described in our 2003 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.

Information required by Regulation G regarding nonGAAP financial measures is available on the Investor and Media section of our corporate website under the sub-heading "Financial Information and Earnings Releases."

Now I would like to introduce Bob Eckert.

Thank you, Diane, and good morning everyone.

EPS for the quarter was flat with prior year, reflecting that the underlying performance of our business remains quite challenging.

Overall sales in the third quarter were below our expectations and that's not solely about Barbie, it's across the board.

We are facing issues on a number of fronts, internally and externally.

And while I can't quantify the specific impact of each, I will try to put them into some sort of context.

Like many other consumer goods companies, we are currently dealing with broad consumer uncertainty related to higher gasoline prices and lackluster employment picture, which translates into uninspiring consumer confidence levels.

We are also contending with challenges unique to the toy industry.

It can't be good for the industry when major retailers are saying they expect sales of discretionary items like toys to lag until fuel prices come back down and we see more positive consumer attitudes.

Generally speaking, retailers continue to be less than sanguine about taking toy inventory.

These broad consumer goods and toy industry issues are affecting the entire Mattel portfolio.

In addition, there are Mattel-specific issues primarily related to the Barbie transition, which I've said on previous occasions is going to take time, and it is.

Even though a complete overhaul of the brand is not something one does quickly, we've made significant progress in executing the strategy, improving the product line and enhancing the marketing.

But there is more work to do, and importantly, we need to make progress in regaining the confidence of retailers, and that takes time.

Let me talk a little bit more about where we are with the repositioning of the Barbie brand.

Most of the Barbie product has been realigned with the "Worlds Of" strategy.

Our latest sub line, Fashion Fever, is designed to rebuild Barbie's fashion-forward image with girls.

Additionally, in an effort to capitalize on the number one TV show for girls, our American Idol Barbie begins shipping late this year, hitting the shelves at retail right in time for the January launch of the show.

And Barbie's new marketing campaign is just getting started.

I hope that some of you have seen the new television commercials featuring Hilary Duff on air.

Remember, three quarters of the advertising impressions for the fall season are still in front of us.

At retail we clearly have more work to do as retailers make decisions regarding shelf space and ad support based on past performance, which, as you know, has not been good for Barbie.

So our challenge now is to drive stronger sell-through of Barbie product so that retailers will be more favorably inclined as they look back at this year's performance.

All that said, Barbie remains the clear category leader and our U.S. category share has, at the very least, stabilized.

In Europe, the NPD data suggests that we've gained share in most measured markets.

I continue to have confidence in our Barbie strategy.

We are working on all the right things.

That being said, it's difficult when you are in the midst of a turnaround to tell exactly where you are.

We will only know that with the benefit of hindsight.

As it relates to the overall business, there are clearly broader economic trends that are influencing consumer sentiment and consequently retailer behavior as we head into the holiday season.

Given this environment, our focus continues to be on executing strategies to maximize our performance at retail.

Every year has its executional challenges and it's still much too early for anyone to write off the holiday season, and we certainly haven't.

And with that, I would 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 third quarter financial performance will be organized in the following manner -- Revenues by geography, business units and brands, key drivers of the P&L, cash flow and the balance sheet at September 30, 2004.

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

I'll begin with a discussion of worldwide gross sales shown on Exhibit 2.

Total worldwide gross sales for the third quarter were down 3%, which included a benefit from changes in the currency exchange rates 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 of 2003.

This change resulted in an additional benefit of 70 basis points to sales growth and a negative impact to gross margin of 40 basis points during the third 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. decreased 9% while international gross sales increased 6%, including a benefit of 4 percentage points from changes in currency exchange rates.

On a regional basis, sales for the third quarter in Europe were up 7%, including an 8 percentage-point benefit from changes in currency exchange rates.

Sales in Latin America were up 6%, including a negative impact from changes in currency exchange rates of 3 percentage points.

Asia Pacific was up 8%, including a 4 percentage-point benefit from changes in currency exchange rates.

And sales in Canada were up 5%, including a 4 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 down 9%, including a 2 percentage-point benefit from changes in currency exchange rates.

Domestic sales were down 18% and international sales were up 2%, including a 5 percentage-point benefit from changes in currency exchange rates.

Worldwide Barbie sales were down 13%, including a 3 percentage-point benefit from changes in currency exchange rates in the third quarter.

Barbie sales internationally were flat including a 5 percentage-point benefit from changes in currency exchange rates.

And Barbie sales in the U.S. declined 26% when compared to the third quarter of 2003.

As you heard from Bob, we continue to have confidence in our new Barbie strategy and believe we are moving in the right direction.

We are focused on regaining the confidence of our retailers through improving performance at retail, but we cannot reasonably predict when this will result in improvement in shipments to retailers.

Worldwide sales of Other Girls Brands were down 25%, including a 3 percentage-point benefit from changes in currency exchange rates.

The double-digit decline was driven primarily by lower fall shipments of Polly Pocket in the U.S. this quarter compared to the same period last year.

However, consumer take-away is relatively consistent with last year.

Worldwide sales for the Wheels business were down 3%, including a 2 percentage-point benefit from changes in currency exchange rates.

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

Worldwide sales in the Entertainment business were up 13% versus the prior year, including a 2 percentage-point benefit from changes in currency exchange rates.

The increase in sales primarily reflects growth in the U.S. market driven by increased sales of Yu-Gi-Oh! and Mega Man entertainment properties, as well as strong growth in games and puzzles, which include initial shipments of Juice Box, our new personal media player that debuted at retail yesterday.

Fisher-Price Brands -- For the quarter, worldwide sales for Fisher-Price Brands were up 7%, including a 2 percentage-point benefit from changes in currency exchange rates, reflecting strength in worldwide sales of core Fisher-Price and Fisher-Price brands, partially offset by declines in sales of Power Wheels in the U.S.

Domestic sales of Fisher-Price brands were up 1% and international sales were up 23%, including a 6 percentage-point benefit from changes in currency exchange rates.

Worldwide sales of core Fisher-Price were up 7%, including a 2 percentage-point benefit from changes in currency exchange rates, reflecting low double-digit sales growth in the U.S. and double-digit sales growth internationally, driven by continued success with the infant and baby gear lines.

American Girl Brands -- Sales of American Girl brands were up 9%, reflecting continued strength in the American Girl collection, Bitty Baby and the recently launched Hopscotch Hill School brands.

The growth was primarily generated by the new American Girl Place store in New York which was opened in November, 2003.

Sales growth generated from the New York store was partially offset by declining sales from the catalog and Internet channel.

Before I begin the review of the P&L, let me remind you that the third quarter of 2003 included other nonoperating income of $7.9 million associated with an adjustment of a reserve accrued in 1999, related to the closure of our Beaverton manufacturing facility.

This adjustment was partially offset by charges related to the financial realignment plan which was completed in the fourth quarter of 2003.

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

Gross margin was 47.8% for the third quarter of 2004 which decreased 150 basis points versus the third quarter of last year.

The margin decline versus the prior quarter was driven primarily by sales of lower margin product including the impact of mix, value enhancement initiatives, the change in classification of closeout sales that I previously mentioned, as well as higher external cost pressures.

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

Advertising expense was $192.1 million, or 11.5% of net sales, flat versus the prior year.

Consistent with our plans to invest in the business to drive long-term performance, we currently expect advertising spending levels for 2004 to be fairly consistent with the prior year.

SG&A expenses were $243.7 million, or 14.7% of net sales for the quarter, down $19.6 million, or 80 basis points compared with last year's third quarter.

SG&A in 2004 was impacted by lower incentive accruals and decreased spending and continuous improvement initiatives, partially offset by overhead costs associated with the American Girl Place in New York and the impact of change in the currency exchange rates on overhead costs in international markets.

For the quarter, operating income was $360.9 million, down 7% versus last year.

As a percentage of net sales, operating income was 21.6%, down 110 basis points compared with last year's third quarter.

Interest expense was $20.8 million for the quarter, compared to $21.2 million in the third quarter of 2003.

Compared to last year, this year's interest expense reflects higher average borrowing more than offset by the benefit of lower average rates.

Other nonoperating income net was $5.9 million, which includes an $8.8 million gain from the sale of marketable securities.

Other nonoperating income net in the prior year was $3.8 million, which reflects 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 litigation, and a gain from the sale of marketable securities of $6.9 million.

The Company expects to sell additional securities from time to time.

As of September 30, the unrealized gain of publicly traded securities held by the Company was approximately $29 million.

So, to summarize the P&L for the quarter, we reported net income of $255.9 million, or $0.61 per share, versus last year's third quarter of $270 million, or $0.61 per share, driven primarily by lower sales and operating margin offset by the benefit of lower share count.

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

Cash use for operations in the first 9 months of 2004 was approximately $549 million.

It was relatively consistent with levels used in the first 9 months of 2003.

Cash used for investing activities improved by $55 million versus the prior year to approximately $85 million, including capital expenditures of $109 million.

Cash used for financing activities and other was approximately $188 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 third quarter was $331 million, down $70 million from a year ago.

Our receivables grew $1.22 billion and days of sales outstanding were flat with prior years at 66 days.

Before factoring, which was $368 million, down $14 billion versus the prior year, receivables were down $52 million with DSO improving by 1 day.

Inventories at 666 -- $667 million were up $47 million, or 8% versus last year's third quarter and represented 64 days of supply, which is 1 day higher than last year.

Our total balance sheet debt increased by $43 million, and our debt net of cash increased by $114 million from the third quarter of 2003.

Our debt to total capital ratio was 24.2% at the end of the third quarter compared with 22.4% at the same time last year.

Since the first conference call this year, we've consistently said we expected 2004 to be a challenging year, and it has been.

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

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.

But these efforts will take time and will require continued investment in the near term to insure success over the long term.

That concludes my review of the financial results.

Now we would like to open the call to questions.

Operator?

Thank you. (operator instructions) And we'll take our first question from Jill Krutick, Smith Barney.

Thanks very much.

Good morning.

Bob, I was hoping you could give us a sense, a little bit more depth on the Barbie side.

If you can, tell us what kind of sell-through data you're seeing for some of the newer products?

How much of the new versus the old is currently in the channel?

And then, perhaps maybe touch on some of the other categories like boys, in particular, why you think you are seeing some weakness there?

Are there some competitive dynamics that might be contributing to that?

Thank you.

Okay, Jill, good morning.

Let me start with Barbie.

We've made progress in defining the strategy "The Worlds Of," and now the majority of our product is shipping within that concept.

We've made progress in executing the strategy in the form of the products, and we've just begun marketing the new strategy to consumers.

I've also told you that retailers tend to lag the trends in this business.

They look at history, and if you look at Barbie's performance over the past couple of years, it's not surprising that our retail support has declined.

It does vary customer by customer and store by store.

You can certainly go to some stores and see that the shelf space is up, but if you look across the universe of stores and across all of the elements of retail support, that is shelf space and ads and displays, I believe that we have lost some retail support this fall compared to the prior year.

So our goal is to get the point of sale up so that when retailers make future bets, the facts are friendly and the trends are friendly for us.

Our early fall results on point-of-sale have been mixed.

Some of our customers, we have seen that the retail support has been solid and in fact our point-of-sale is growing.

In others, both the retail support and the point-of-sale are well below a year ago.

I'm also encouraged by the fact that if you look at the NPD data for the past 5 months, our doll share has stabilized.

In fact we just launched the Princess and Pauper video a couple of weeks ago and we have data from the first week.

Of all of the videos sold in Princess and Pauper's first week, we rated number one.

We were the number six DVD, behind only adult theatrical releases.

We sold more videos in 1 week at retail than our competitor has cumulatively and I think they have been at retail for about 2 months.

So, it's premature to declare success or failure in the turnaround.

We've got a lot of work to do refining the components of the plan, improving the retail execution.

But as I've said before, we are focused on 3 things.

One, rebuilding relevance with girls.

I think we are well on our way there.

Two, regaining market share.

We haven't yet turned the corner, but the momentum may be beginning to shift.

And, three, restoring retailer confidence.

We are working on that but there is a lot of work to do in that area.

Now, your second question, as it relates to boys, we are coming off in Hot Wheels certainly a strong second quarter.

We've had good response to Rev-Ups and Crash Dummies and Formula Fuelers for the year.

Last fall's Key Driver got off to a terrific start.

It was the T-Rex track set.

It was a beautiful thing.

It's a beautiful toy.

I think we are going to have a hard time comping that this year.

If you look at our Entertainment business, which tends to be a little bit more weighted to boys than girls, Yu-Gi-Oh! continues to perform very well.

We've seen double-digit growth in point-of-sale and shipments, and you'll recall, I think it was back in the first quarter conference call, I thought maybe we had seen the best of Yu-Gi-Oh! but it continues to grow very nicely for us.

The Dual Disk Launcher has been one of the industry's best sellers all year.

Harry Potter did okay.

We did about $25 million in sales this year, so it wasn't the $150 million range that we saw in the first couple of movies, but it was a reasonable business for us.

Mega Man, as Kevin mentioned, is off to a pretty good start.

Shaman King is slow out of the gate, but it's probably too early to call either one of those.

And Batman and Justice League continue to hold up pretty well.

So we've seen mixed results across boys.

We've got some work to do on Hot Wheels.

I think some of that is what happened in the second quarter and what happened last year, and our entertainment properties look pretty good.

Did I cover them all, Jill?

Yeah, that's great, Bob.

Thank you very much.

We'll take our next question from Felicia Kantor Hendrix, Lehman Brothers.

Hi, guys.

I have a question regarding your cash.

And actually, given the American Jobs Creation Act, it looks like it could increase the amount of funds for you guys, given your undistributed foreign earnings.

I'm wondering if you all anticipate that you might repatriate these funds, and the way that we've calculated here, it's about $2.7 billion.

If so, what are your plans for that?

And that kind of segues into if we should expect any kind of buyback programs reinitiated again?

And then, that's-- and then, just a question on the industry, Bob.

It's been kind of several years now where we've been seeing difficulties in the retail environment overall and now there's some specific difficulties you're talking about in the toy industry.

And if we think about the long-term growth rate of the industry, which, given its maturity, has always been kind of in the low single digits.

What are your projections for that?

I mean, do we -- are we seeing a see-change here where we should look at maybe a 1% secular growth rate for the industry versus maybe the 2-3% that it's shown in the past?

Okay, Felicia.

On the first question, you know, at this point it's not appropriate to speculate how much, when or how we may repatriate foreign earnings.

What we need to understand is the specifics of the legislation are still being drafted.

We need time to study it in the context of our overall cash and tax management strategies, and we'll have to put an investment -- a reinvestment plan has to be approved by the Board of Directors.

So it's too early to the comment on possible actions without knowing the details of the legislation.

Hi, Felicia.

This is Bob.

Let me talk about the share repurchase for a moment.

The amount authorized for any repurchase, as you know, is a board level decision.

And whether additional authorizations will occur is totally up to the Board.

But I do like to caution folks from trying to draw conclusions purely from the timing or the magnitude of our share repurchase authorizations.

We believe it's most important for shareholders to understand that we try and be disciplined and opportunistic with our cash, and it's less important to know exactly when or why we announce the next share repurchase program.

That said, we haven't announced another share repurchase authorization simply because we don't want to get ahead of ourselves.

And to your final question on the industry growth rates, when you look at a go-forward basis, the difference between 1% or plus-2-or-3% is too close for me to call.

In general, this industry has held up pretty well in difficult times.

We are currently seeing some slowness or softness in the industry, as you've seen from a couple of the major retailers who, within the last few weeks, have called out toys as something that isn't performing very well.

But it's very early in the season.

We all saw the retail data that came out Friday, and maybe there was a little bounce at the end of the month, and if there was that would be great and we would get some re-orders.

But I don't know long-term that I would come off this being an industry that grows in the low single digits.

That's my perspective on it, at least.

Okay.

Thanks.

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

I had a question regarding spending in the second half.

Can you clarify, Kevin, when you were talking about ad spending being consistent with levels last year, did you mean in dollars or as a percentage of sales?

Sean, it was as a percentage of sales.

Thank you.

Our next question comes from Linda Bolton-Weiser, Oppenheimer.

Thank you.

First, can you just comment on, you had mentioned that inventory days were just slightly deteriorated.

Can you just comment if there's anything going on special there?

No, it's only up 1 day, Linda, so I don't think there's anything special going on there.

Okay.

And secondly, can you just clarify again -- you know, can you sort of go through the incentive compensation accruals in the year ago and maybe how that flowed quarter by quarter?

And what comparisons we should see on the SG&A line in the fourth quarter?

Yes.

I think as you look at incentive compensation, we don't really disclose it by quarter by quarter, but basically I can tell you how we accrue.

It's accrued based on achieving certain financial goals and generally accepted accounting principals require that we accrue the expense based upon how our performance is tracking towards these goals.

And, as I said, year on year SG&A is down 80 basis points this quarter and that reflected decreased incentive accruals.

And as we said, our results have not been where we wanted them to be.

So our incentive accrual reflects that.

Linda, this is Bob.

Let me build on your question on inventories and spend a moment talking about our inventory as well as retailers.

Retailers have talked about sluggish toy demand within the last few weeks.

And either they have seen a slowdown in demand or they are anticipating sluggish demand for the holidays.

That's supported by our own experience at retail.

You know, the American Girl business is one in which we sell directly to consumers and we had a relatively slow September.

American Girl was up 9% for the quarter, but it's only because the New York store was there this year and wasn't in the base.

So it looks to us like retailers would rather chase demand than take goods early and that's affected our inventories.

Now, we've all gone through the early fall jitters before, and our goal is to get the fair share of this business and again it's held up pretty well, even in tough times.

But our calculation of retail inventories, which last quarter-- well, let me back up.

Remember, we can do this by knowing what we sell in and then matching that to the point-of-sale data that we get directly from retailers.

Last quarter I said that our calculation of retailer inventories suggested that they declined in, I believe I said, the high single digits.

If you look at our data through September year-to-date now, or at the September inventories at retail, they are down well into the double digits.

So we've seen a pretty noticeable decline in retailer inventories, and that's pushed back to some degree on our inventories.

Okay.

Thanks.

Once again, ladies and gentlemen. (operator instructions) We'll go next to Tony Gikas, Piper Jaffray.

Good morning, guys.

A couple of questions.

You talked about retailers being a little reluctant to take inventory risk as we move into the holiday season.

Do you have any visibility on the floor plans in terms of Wal-Mart, Target, rolling out expanded floor plans for the holidays?

Is it coming a little later this year than it did last year?

And if I recall correctly, about a year ago we were talking about Wal-Mart being pretty aggressive with their promotional activity in the month of October, which was typically a little earlier than previous years?

Second question, as it relates to Barbie, do you know -- could you comment a little bit on Barbie pricing on like a product line over product line basis?

I mean, this year the world's pricing versus previous pricing?

Are they comparable?

Was there an opportunity to take the pricing a little higher on Barbie?

And then the last question, has there been any issues with getting product into the U.S. with port delays?

Tony, let me start and Kevin, chime in any time you'd like.

With retailers setting up their shelves, remember, for those of you who go to stores a lot -- and I do, too.

Like you, I was out this weekend shopping -- it's very important to remember that you can see certain things in certain stores.

And a major retailer in these days probably has 100 different shelf sets.

So I always caution folks what you see in 1 store or even a handful of stores may not be representative.

I would say, in general, the retail sets are close this year to last year.

One of the retailers got off very early and did a very nice job in their stores.

Another major retailer is quite late this year.

But I think that as you go to stores right now, they are pretty well set for the holidays.

Secondly, your question as it relates to pricing.

We haven't seen significant price changes virtually anywhere across our line, including Barbie.

Some things might be a little bit higher than the comparable sorts of items last year.

Other things are probably a little lower than they were last year.

But I will use your question to talk broadly about cost and pricing, because it is clear that our major component costs, whether it's raw materials or labor or transportation, are starting to run substantially above prior-year levels.

You all know, I think oil is $55 per barrel this morning, resin prices are up double digits.

Wages have risen in China.

Energy costs more in virtually every plant we run.

So, we've used so far productivity improvements to partially offset the higher costs, and we've held prices, generally speaking, when you compare this year's fall line to last year's.

But, as I've said before, it's really only a matter of time before prices go up in response to higher costs, and I don't think that's just for toys.

But it's for a lot of other consumer goods industries.

As it relates to the -- your question on the ports, Tony, the shipments flowing through the southern California ports are under pressure, reflecting labor shortages and strained -- both railcar and trucking capacity.

Our logistics team has been on top of the situation.

They've been working with carriers to optimize the flow of our inventory and to our distribution centers.

Generally speaking, we don't believe that the delays experienced to date have impacted our ability to fill orders, and we have contingency plans in place should something go wrong.

So the bottom line is there's been a little bit of a slowdown for us at the ports but it really hasn't been an issue for us.

And, at this point we don't anticipate it being a big issue for us.

Thanks, guys.

(operator instructions) We will take a follow-up question from Linda Bolton-Weiser, Oppenheimer.

Thanks.

Can you comment on how the mix of Barbie dolls versus accessories might have affected the gross margin in the quarter?

Linda, in looking at it, I don't think it had much of an impact in the quarter.

Okay.

Thank you.

Thanks, Linda.

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

The replay of today's call will be available beginning at noon Eastern Time.

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

The I.D. number is 944361.

Thank you.

Thank you.

That does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.