Mattel Inc (MAT) 2005 Q4 法說會逐字稿

Good day and welcome to the Mattel, Incorporated fourth quarter 2005 earnings results conference call.

Today's call is being recorded.

With us today from the Company is the Treasurer and Senior Vice President of External Affairs, Mr. Mike Salop.

Please go ahead, sir.

Thanks and good morning everyone.

Also on the call today is Bob Eckert, our Chairman and Chief Executive Officer, and Kevin Farr, our Chief Financial Officer.

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

On the call today, Bob will provide brief remarks on the year and Kevin will review the financial results in more detail.

We will then open the call up to your questions.

Before we begin the formal remark,s let me note certain comments 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: performance of Barbie and other core brands and product lines, profits and margins, the impact of organizational changes, enhancing innovation, improving execution and realizing cost savings by capitalizing on scale, continuous improvement initiatives such as e-procurement, rationalization of intersourcing, and Lean manufacturing programs, management of inventories, price increases, effective tax rates, capital deployment and creation of 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 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 2004 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 Mattel's other statements.

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

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

Now I would like to turn the call over to Bob.

Thank you, Mike, and good morning.

Before Kevin provides an overview of the financial details, I would like to give you my thoughts on the past year as well as a look forward. 2005 was the year of mixed results.

As I've said consistently, we expected 2005 to be a challenging year for Mattel, as it was, as we continued to experience sales decline in the Barbie brand and extensive cost pressures.

That said there were many bright spots in our expansive portfolio.

American Girl had its best year yet, growing 15% to more $400 million, Fisher-Price, particularly Fisher Price Friends continued to grow worldwide with the Dora the Explorer property on fire.

The Batman property proved to be more than just a box office hit, and new introductions in the girls cat go like Disney Cinderella, Pixel Chicks and Winx proved to be quite popular with girls.

Growth in our international business was strong.

Despite the business challenges we encountered in 2005, we still generated $462 million in cash flow from operations, due to industry-leading net income and stable working capital.

And we kept capital expenditures tight.

We utilized this cash to reward long-term investors.

First by increasing the dividend, by 11%, and second, by taking advantage what have we believed was an undervalued stock price, by spending $500 million to repurchase our shares.

We still ended the year with a strong balance sheet that included just about $1 billion in cash.

To succeed in 2006 and beyond, as an organization we had to do three things, enhance innovation, improve execution and further capitalize on our scale advantage.

When I think about innovation, I think about what the child sees, the magic of the toys, the play experience.

The Barbie revitalization is a good example.

First, it's not about reinventing the brand.

Barbie is strong.

For example, Barbie.com is the number one Web site for girls, receiving more than 51 million monthly visits worldwide.

All six of the Barbie direct to home entertainment movies have been in the number one position in the Nielsen Entertainment Video Scan top kids' video chart.

Our most the recent movie, Barbie and the Magic of Pegasus which aired over the Thanksgiving weekend on Nickelodeon reached an all time ratings high across all Barbie movies with girls 2 to 11 as well as girls ages 6 to 11.

But we do need to do a better job of enhancing the play value of the dollar accessories by translating the essence and strength of the Barbie brands into the toys.

And we need to do a better job communicating that magic, that experience to girls.

Execution.

What our retail customers see.

This is the basic back room blocking and tackling.

In 2006 we are continuing to focus on improving the efficiency of our supply chain through Lean manufacturing initiatives and we will also help retailers keep inventories clean as they were in 2005.

And finally scale.

As the world largest and most profitable toy company, we can realize significant cost savings, for example , when we make purchasing decisions based on a One Mattel philosophy.

We are also focused on further tightening our supply chain through centralized e-procurement and the rationalization of our manufacturing and vendor sourcing.

As you are aware, late in 2005 we combined our Mattel brands and Fisher-Price business units with the goal of delivering improved results by creating a new structure that's centralized where it's more efficient to leverage our scale yet preserves the natural marketing and design groups which are empowered to create and market toys based on gender and age segments.

We are in the process of finalizing initial organization synergies which we expect to complete in the very near future.

As we enter the new year, we will continue to face some of the same challenges we did last year.

We don't expect much improvement in the retail environment as retailers rationalize stores and prioritize inventory management.

Key input costs have continued to climb, although we expect to offset some of these by price increases which will be effective after Easter.

We are keenly focused ton what it will take to declare success: Turning the tide on the Barbie brand and continuing to grow our other power brands in the global market.

And we will do this by enhancing innovation across all of our toys, improving execution in all areas of the business and further capitalizing on our scale advantage.

We will also, as always, be focused on generating and effectively deploying strong cash flow.

Thank you.

At this time I would like to introduce Mattel's Chief Financial Officer, Kevin Farr, who will take you through the financial review.

Kevin?

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 categories and brands, key drivers of the P&L, cash flow from operations, and the balance sheet at December 31, 2005.

To facilitate my review I recommend you refer to the exhibits in the press release.

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

I will start by reviewing sales for the fourth quarter.

Total worldwide gross sales for the fourth quarter were flat with the prior year with no impact from changes in currency exchange rates.

U.S. sales were down 3%, and international sales grew 3% including a negative impact of 2 percentage points from changes in currency exchange rates.

On at regional basis, sales in Europe were down 2%, including a 6 percentage point negative impact from changes in currency exchange rates.

Sales in Latin America were up 13%, including a 7 percentage point benefit from changes in the currency exchange rates.

Sales in Asia Pacific were up 13%, including a 2 percentage point negative impact from changes in that currency exchange rates.

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

Mattel Brands Girls and Boys: Worldwide sales for the Mattel Brands Girls and Boys segment were down 6% with no impact from changes in currency exchange rates.

The sales decline reflects a 16% decrease in U.S. sales, partially offset by a 2% increase in international sales which included a two percentage point negative impact from changes in currency exchange rates.

Worldwide Barbie sales were down 11% including a one percentage point negative impact from changes in currency exchange rates.

Barbie sales in the U.S. were down 18%, while international Barbie sales were down 7%, including a negative impact of two percentage points from changes in currency exchange rates.

Worldwide sales of other girls brands were up 23%, including a negative impact of one percentage point from changes in currency exchange rates.

The growth in other girl brands, primarily driven by Disney Princesses and Winx.

U.S. sales of other girls brands increased 15% and international sales grew by 30,% including a two percentage point negative impact from changes in currency exchange rates.

Sales in the wheels category declined 7%, with no impact from changes in currency exchange rates.

Domestic declines in Hot Wheels were partially offset by strong international growth from Tyco R.C.

Entertainment sales were down 13% with no impact from changes in currency exchange rates.

During the fourth quarter, sales of Batman products continued to be strong but were more than offset by sales declines in Yu-Gi-Oh worldwide and last year's Juicebox in the U.S.

Fisher-Price brands, worldwide sales for Fisher-Price brands was up 6% for the fourth quarter, with no impact from changes in currency exchange rates.

Worldwide, core Fisher-Price was up 1%, while Fisher-Price friends was up 16% driven by a strong sales of Dora the Explorer.

American Girl brands.

Sales of American Girl brands was up 12% driven by the continued success of both the American Girl Place retail stores and direct channels with strong sales of the Marisol Girl of Today doll and overall brand awareness generated by the second worldwide life action film that aired on the WB over the Thanksgiving holiday.

Now I will review sales for the full year.

For the full year worldwide gross sales was up 1% with no impact from changes in currency exchange rates.

International sales grew 5%, including the benefit of one percentage point from changes in currency exchange rates.

U.S. sales declined 2% when compared with the prior year.

On a regional basis ,sales in Europe were flat with the prior year, including a one percentage point negative impact from changes in currency exchange rates.

Sales in Latin America were up 23% including a benefit of eight percentage points from changes in currency exchange rates.

Sales in Asia Pacific were up 7%, including a 2 percentage point benefit from changes in currency exchange rates.

I will now review our core categories and brands for the full year.

Mattel Brands Girls and Boys.

Worldwide sales from Mattel Brands Boys and Girls decreased 3%, which included a benefit of 1 percentage point from changes in currency exchange rates.

The sales decline reflects a 10% decrease in U.S. sale,s partially offset by a 3% increase in international sales, which included a benefit from changes in currency exchange rates of 1 percentage point.

Worldwide Barbie sales were down 13%, including benefit from changes in currency exchange rates of 1 percentage point.

Barbie sales in the U.S. were down 21% and in international markets Barbie sales were down 7% including one percentage point benefit from changes in currency exchange rates.

Worldwide sales of other girls brands were up 25% which included a benefit from changes in currency exchange rates of 1 percentage point.

The sales increase is primarily the result of strong sales of Disney Princesses, Pound Puppies, and Pixel Chicks worldwide, and the continued success of Winx in international markets.

Worldwide sales for the Wheels business were down 1%, which included a benefit from changes in currency exchange rates of 2 percentage points.

Strong sales on Hot Wheels and Tyco R.C. internationally were more than offset by sales declines across the wheels brands in the U.S.

Sales in the entertainment category were flat with the prior year, a including benefit from changes in currency exchange rates of 2 percentage points.

The continued strength of the Batman entertainment property was offset by sales declines in some of our other entertainment brands, including Yu-Gi-Oh, Harry Potter and Juicebox.

Fisher-Price brands: Worldwide sales for Fisher-Price brands were up 5%, with no impact from changes in currency exchange rates.

U.S. sales were up 3%, while international sales were up 11%, including a benefit of 1 percentage point from changes in currency exchange rates.

Worldwide sales of core Fisher-Price were up 1%, with no impact from changes in currency exchange rates.

U.S. shipments were down 3% and international sales were up 10%, including a benefit of 2 percentage points from changes in currency exchange rates.

The increase in sales internationally was primarily driven by infant and baby gear products.

Worldwide sales of Fisher-Price Friends were up 18% with no impact from changes in currency exchange rates.

U.S. and international sales grew in the double digit,s driven primarily by the popularity of Dora the Explorer products.

American Girl brands: Sales of American Girl brands were up 15% versus the prior year.

The success of the American Girl retail stores, the new Marisol Doll and heightened interest in American Girl as a result of the live action made for TV movies that have aired on the WB over the past two Thanksgiving holidays have all contributed to the sales increase.

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

For the fourth quarter, gross margin was 47.8%, a 60 basis point decline versus the prior year.

Compared with the prior year, gross margin benefited from our price increases, and changes in currency exchange rates which were more than offset by higher external cost pressures and increased royalty costs.

For the year, gross margin was 45.8%, down 140 basis points from 47.2% in 2004.

Gross margins for the full year was negatively impacted by higher external cost pressures, sales of lower margin products and higher royalty costs, which were partly offset by price increases and favorable changes in currency exchange rates.

For the fourth quarter, advertising expense was $256.7 million, or 13.9% of net sales versus 15.1% for the fourth quarter, 2004, as we tightly managed our advertising spending.

For the year, advertising expense was $629.1 million, or 12.1% of net sales, down 50 basis points from last year, as we returned to a more historically normal level of spending.

For the fourth quarter, selling, general and administrative expenses were flat with the prior year at 16.4% of net sales, or 302.3 million.

SG&A expenses for the full year were $1.08 billion, or 20.8% of net sales, up 50 basis points when compared to the full year 2004.

The increase in SG&A expenses for the full year is attributable to continued upward cost pressures for employee-related expenses and ongoing investment and growth strategies including new product design, and expansion of our American Girl Place retail stores partially offset by lower incentive compensation.

For the quarter, operating income was $321.7 million, or 17.5% of net sales, up 50 basis points compared with last years fourth quarter.

For the year, operating income was 664.5 million, or 12.8% of net sales, down 150 basis points from the prior year, reflecting overall lower gross margins and higher SG&A costs slightly offset by lower advertising expenses.

For the fourth quarter, interest expense was 22.4 million, compared with 25.3 million in the fourth quarter of 2004.

For the full year, interest expense was 76.5 million compared with 77.8 million for full year 2004.

Interest income for the fourth quarter was 5.4 million in both 2005 and 2004.

For the year, interest income increased from 19.7 million to 34.2 million, primarily as a result of higher interest rates.

In the fourth quarter of 2005, other nonoperating income net was 1.1 million versus 6.1 million a year ago.

The other nonoperating income from the prior year fourth quarter primarily related to gains from an insurance settlement.

For the full year 2005, other nonoperating income net was 29.8 million versus 23.5 million in 2004, and is primarily the result in gains from the sale of marketable securities in 2005, up 25.8 million.

The Company recorded gains from the sale of marketable securities of 18.3 million for the full year 2004.

As of year end 2005, the Company did not have any unrealized gains on the balance sheet associated with marketable securities.

The income tax provision for the year increased from $123.5 million to 235 million.

As you recall, in the second quarter, we accrued a $112.9 million expense related to the repatriation of unremitted foreign earnings under the American Jobs Creation Act.

In the fourth quarter, we completed the repatriation and the tax expense to 107 million.

Also in the fourth quarter, the tax as a result of audit settlements reached with certain tax authorities and reassessment of tax exposures based on the result of tax audits in various jurisdictions around the world.

In the fourth quarter of 2004, the Company recorded tax benefits of 65 million related to an audit settlement with the IRS.

In future periods, Mattel's effective tax rate is expected to remain more consistent with the 2003 rate of 27.4%.

For the fourth quarter, reported net income of $279.2 million versus last year's $284.3 million.

Fourth quarter earnings per share of $0.69 cents included $0.11 per share of tax benefits, while fourth quarter 2004 earnings per share of $0.68 included $0.16 cents per share of tax benefits.

For the year we recorded net income of $417 million versus last year's 572.7 million.

Full year earnings per share was $1.01 and included a $0.26 per share expense related to AJCA repatriation and $0.09 per share tax benefit.

Prior year EPS of $1.35 included 15 cents of tax benefits.

So to summarize the P&L, the decline in full year net income resulted from the increased tax expense related to AJCA repatriation, lower gross margins and higher SG&A partially offset by slight revenue growth, lower advertising expense and higher interest income.

Now turning to cash flow and balance sheet on Exhibit 3 of the press release.

Cash flow from operations for the year was 462 million, driven primarily by net income of 417 million.

We have continued to return excess capital to our shareholders in the form of cash dividends and share repurchases.

In the fourth quarter we paid an annual cash dividend of $0.50 per share, up $0.05, or 11% from the prior year.

Also during the year we repurchased approximately 28.9 million shares of our stock at a cost of 500 million, representing almost 7% of outstanding shares.

In the fourth quarter of 2005 we completed to the 250 million share repurchase authorization that was announced in November of 2005.

Earlier today, we announced that Mattel's Board of Directors has approved an additional 250 million share repurchase authorization.

At year end, our cash on hand was approximately 1 billion, down from 1.16 billion at the end of 2004 due to the increased share repurchase, but consistent with our capital investment framework.

Our receivables were 760.6 million, or 37 days of sales outstanding, consistent with last year.

Excluding the year to year change in factoring, which was down 3 million versus the prior year, receivables were flat with no change in days of sales outstanding.

Inventories, at 376.9 million, were down 41.7 million or 10% versus 2004 and represented 77 days of supply, which is 12 days lower than last year.

Our data suggests retail inventory levels of our products with our major U.S. customers finished the year down high single digits.

Our total balance sheet debt increased by 125 million from the prior year, as we issued 325 million of international debt, partially offset by the retirement of that 150 million senior note and 35 -- 39 million mortgage.

Our year end cash exceeded debt by 255 million.

Our debt to total capital ratio ended the year at 26.1%, versus 20.6% last year consistent with our long-term goal of 25%.

Capital expenditures for the quarter were approximately $44 million.

This brought the full year total to 137 million, which is below our long-range target of 180 to 200 million but consistent with last year.

So to summarize, 2005 was a challenging year for costs and for Barbie, although we had many successes with Fisher-Price, American Girl, Disney Princesses, Batman, and other lines.

As we move into 2006, we plan to continue to align our organization to operate more efficiently, offset some cost pressures with post Easter price increases and focus on innovation to drive growth.

We also plan to deploy the excess cash generated in our business in a manner we believe will create value for our shareholders.

That concludes my review of the financial results.

Now we would like to open the call for questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS].

We'll go first to Sean McGowan, with Harris Nesbitt.

Couple of questions.

The advertising expenditure ratio for 2006, do you have any expectation of where that would be?

Yes, Sean.

As you know we don't give specific guidance.

However, we can tell you what we think strategically in the near term so you can make your own determination on the impact of EPS.

We're going to continue to invest in the business and drive sales growth, continue momentum in our core brands and support new product launches.

In 2005, we tightly managed our advertising spend at 12.1% of net sales versus 12.6 in 2004.

Our ratios have historically been in the 11 to 13% range.

Some years we spend more, some years we spend less.

And we manage media spend on a brand by brand, product by product basis, and won't hesitate to increase our advertising spend if we think it's better for the business, but I would say within that range for 2006.

Two other questions, one quick and then one might not be as quick but is there anything that you need to do over the next couple of years to comply with the requirements of the AJCA?

Is there anything you need to accomplish so that they don't revisit this two years from now and say, hey, wait a minute, you didn't do X or Y or Z?

Yes, we need to invest the cash and I think there are Safe Harbor rules where he have to meet three-year and five-year Safe Harbors, and as part of our repatriation and reinvestment plan, we've identified several investments expected to meet the AJCA Safe Harbors.

These investments include, among others, employment compensation, hiring and training, Research and Development, and advertising and marketing, and we expect to invest in those over the next three to five years and meet the Safe Harbor requirements.

Those investments will be consistent with what we've done historically.

You don't expect that to be a challenge.

No.

Then last question, then, with the management changes that happened back in October, actually a two-part question: First, are there any costs reflected in the fourth quarter as a result of management changes that were made?

And then, second, do you expect additional moves to be made in 2006 that might result in charges or displacement of people?

Yeah, for the fourth quarter there was approximately $7 million in SG&A related to severance for the changes.

John, this is Bob, in the second part of your question: When we announced the combination of Fisher-Price and Mattel brands, we said the primary opportunity is to improve our growth profile.

That's the primary motivation here, but there is an important secondary benefit and that is further One Company alignment.

Our overhead costs are growing faster than sales, and we need to correct that.

Historically we found cost reduction projects to be good investments.

That being said, we don't want to get ahead of ourselves.

Whatever we we do we will first communicate to the affected employees.

Okay.

Thank you.

Thanks, Sean.

We will go next to Dean Gianoukos with JP Morgan.

Can you talk about what you are seeing with Barbie internationally, whether you are seeing similar to the U.S. where your other girls brands are doing, are you seeing anything competitively?

It looks like the market might be a little weak.

I'm wondering if that's the case.

Could you quickly tell us what the impact of FX was on the bottom line?

And finally when you talked about your retail inventories being down, I think, high single digits, is that so low because Toys 'R Us is going to close doors and certain stores are very low in inventory or do you view that as sort of a same-store basis going forward?

Thanks.

Dean, this is Bob, let me start with the last one and then I think we will move up.

As it relates to Toys 'R Us, in terms of point of sales, retail sales, they were one of our stronger performing customers.

Clearly our shipments into them not surprisingly didn't grow as a result of some of the thing that they are do doing with their business including the anticipated store closures.

In my view at least, their inventories are low, they are clean, they are a good customer.

They are running a tighter ship, and they're doing some great thing on the merchandising side like the World's Greatest Barbie Store.

I am quite encouraged by what Toys 'R Us did this last holiday season.

I think as it relates to inventories related to store closures we've probably had some of that hit already but there could be more.

It's something that they would probably comment on before I would and we just don't know yet.

With respect to ForEx on sales for the fourth quarter, and full year there was no impact on the total Company.

With regard to EPS for the year it was about $0.10.

On Barbie, Dean, we have seen some sales decline overseas, primarily in the mature markets like Europe, not in Latin America or Asia.

And the decline has been less pronounced internationally than it has been in the U.S.

We made solid progress on Barbie in the fall of 2004, but we are disappointed with the performance in 2005.

As I tried to mention in my remarks, the brand is in better shape than the doll business.

Whether you look at the Web site, or the sale of videos, or the airing of videos, the audience for videos, even our licensing business which has held up better than the doll business.

The doll business clearly needs work.

The line is too fragmented.

We've been overly focused on age segmentation, not on basic play patterns and product features, and I think that's a global phenomenon, not just the U.S.

We also need to communicate those things about the brand better, whether it's in advertising, packaging or merchandising.

Again I would say that's a global opportunity, not just confined to the U.S.

But when we do it right, there's evidence that it works.

Fashion Fever is doing well.

Fairytopia, or right now, Mermadia, the Magic of Pegasus, the styling horse head was a big seller worldwide last fall.

So we are in the midst of tweaking the 2006 line, we will make more dramatic changes for 2007.

But the fact is the doll business can grow.

American Girl was up double digits again last year.

Disney Cinderella was very successful, worldwide.

Dora the Explorer has been a home run, not just in the United States but also international markets.

So the way I view it is we are entering the next chapter of the Barbie turnaround.

We have a lot of work ahead of us.

It's going to take time, but we are not going to waver until we see better performance, whether it's in the U.S. or around the world for what is still a marquis brand in the toy business.

I also want to clarify that the ForEx was a benefit for the year.

Okay.

Thank you.

We will go next to John Taylor with Arcadia.

Morning.

I have a couple questions.

I wonder if you could quantify a little bit what the cost changes were particularly on the input side, give us any sense what that was as a percent of the gross margin move.

And then maybe could you talk about the mix of LC business as a percent of the total and whether that changed very much?

And then Bob I was interested to hear what you were talking about with Barbie.

Maybe, does the refocusing of the Barbie brand away from [asegmentation] and on to features and play patterns and stuff, does that cause you to revisit the world test strategy?

Is there some other umbrella thing you are going to do or is it likely to come up underneath that?

Thanks.

Okay, JT, I will take the first question.

With regard to gross margins, coming into the year, we said we would expect the gross margin to be under pressure as we faced cost pressures for raw materials and transportation as we continue to invest in our brands to regain sales momentum.

For the year there was a lot moving parts in margin.

I don't want to get too detailed but more of the decline is related to cost pressures than product mix.

As I said, our price increase initiated in 2005, and the benefit of foreign exchange were not enough to offset external cost pressures, including higher raw and material costs and transportation costs.

So if you look at it it's more about cost than any other factor in the gross margin.

We did see a little bit more D. I. business versus trade business this year but not substantially more.

JT, let me try and address your Barbie question.

I think we are going to refocus the line.

We will continue with the Worlds but as you will see things unfold over the next couple of years, it will be less about Worlds of, even though they still be important and more about some of the basic elements of the brand.

I think a good example is just over the weekend I visited some stores.

I go into a nice store.

There's a nice display of Dora's Talking Kitchen, and I push a button and hear about Dora's Talking Kitchen and it was very good seller with very nice features.

When I look at the Barbie line we just don't have all of the good elements that make a good toy.

So it's a little bit more back to basics for me in the toy business.

Worlds will still be important but we are going to go to the next step beyond just focusing on Worlds.That's part of my comment on being overly age segmented.

And we need to do a better job across the entire brand.

Is that, is the addition of features and so on likely to have price implications?

It could.

You know, I was reading last week, I think it was in Toy Books, we are the top selling toys right now.

In our line, we had Dora's Talking Kitchen, the Tyco Shell Shocker, Pixel Chicks, the Fisher Price Star Station.

To me those four brands had two, those four toys had two things in common.

Number one is they were innovative.

Number two, they weren't cheap.

The fact is, we see year in and year out that good toys sell at decent prices.

So if it has implications for prices, so be it.

Great.

Let me go back to Kevin's gross margin answer for a second if I could.

As you guys are looking forward to '06, do you expect to see a similar kind of percentage move on the raw materials side, or give us any range of expectations versus what the increase was in '05?

We are not going to get into specifics but I think as we look at 2006, we expect key input costs to rise through 2005, and we expect these headwinds to continue through 2006.

And to partially absorb the increasing input costs we are instituting a modest increase in 2006 effective after Easter.

JT, it's not all products in all markets but order of magnitude, it's a 2 or 3% price increase and we tends to take pricing for what we see are sustainable cost increases.

So whether it's raw materials or labor, we are seeing sustained cost increases.

We took prices up a bit last year at the beginning of the year.

We've seen the cost continue to build.

We try and offset all of these costs with process improvements and organizational efficiencies and the like.

But over time we just have to reflect the higher costs and higher prices.

Okay.

Thank you.

Thanks,JT.

We will go next to Elizabeth Osur with Citigroup.

I want to delve into the price increases a little bit more.

I'm surprised that we are just talking about a 2 to 3% price increases and the timing also seems later than in 2005.

Can you just comment about the thought process of price increases this year versus last year?

Again, Liz, we try and estimate as best we can what are the sustained impacts in costs.

Raw materials, labor and employee costs.

And we try and offset those with our own cost improvement initiatives.

But when we can't we have to go to pricing.

We think pricing is important.

We try and be measured about it.

It's a long-term decision for us.

We don't move prices up and down quickly, and why we went this year after Easter is because several of our retail customers had made plans based on the former prices for their Easter merchandising and we wanted to make sure they were protected in that, so it's going to fall after Easter this year.

Could you comment on cooperative advertising spend and how your own marketing plans have evolved over 2005 and as you look into 2006 if there's any change in the allocation of marketing dollars?

Thanks.

No, there is not, I wouldn't say there's any significant change in the allocation between co-op spend and direct advertising spend.

If anything, we know one area that we are going to go after in 2006 is what we consider sort of non-media spend in advertising.

That is cost of production and those sorts of things that really don't -- they are not important from a consumer standpoint.

It's more internal costs.

So that's going to be our focus in 2006, is the non-media spend in the advertising line.

We think we need to work on that.

Okay.

Thanks.

Thanks, Liz.

We will go next to Tony Gikas with Piper Jaffray.

A little more follow up on the gross margin with double-digit increases, percentage increases and labor costs and resins and other raw materials.

How much of that was reflected in the gross margin in the quarter?

You know what I'm trying to get at and how much more could we see this year, and I think the second part of that question is are manufacturing partners as willing to contract with you nine or 12 months out as we've seen in previous years.

Tony this is Bob.

I certainly am not aware of any change in relationships that we've had with our vendor partners.

They are in it for the long haul.

We are in it for the long haul.

We have good relations with them and they tend to be long-term relations.

I don't think there's any news there.

We have gotten quotes for vendors here in the fall for next year.

We are always looking out 9 to 12 months and we've seen the same relationship ongoing.

So when we look at the fourth quarter margins down slightly as price increases and foreign exchange largely offset cost pressures and higher royalty expense.

Negative mix was less of a factor in fourth quarter than for the full year.

On the pricing increases you instituted for 2005, how did price points hold up on the Barbie product line overall, and Barbie sales were down I think you said 11% in the quarter, what were unit sales?

We don't have it off the top of my head, Tony, probably fairly consistent.

The price points across the entire line held up about as we expected.

I don't think that there was a fundamental change in relationship between dollars and units last year, was there, Kevin?

No, I don't think so.

Okay.

Thanks.

Thanks, Tony.

We will go next to Linda Bolton Weiser with Oppenheimer.

Thanks.

I just had a couple of questions about American Girl.

Can you tell us when the store in LA is scheduled to open this year?

And also, I know you've always talked about the potential of five to six stores over time, would that potential for the number of stores be greater if American Girl wasn't part of Mattel?

Hi, Linda, this is Bob.

The store opens in late April.

I don't recall the specific date off the top of my head, but it's sometime the third or fourth week of April.

I've been pretty consistent over the last several years about the number of stores.

We do one store at a time.

We think that's a prudent investment rate and we make sure each store proves itself out before we move to the next one.

So we did Chicago first.

We've now been in New York for several years.

Both have been very successful.

Both had fabulous years last year, and we we'll do the third store here in Los Angeles.

I guess somebody else could invest more stores more rapidly, but I think they would see the results that people like Disney had with stores or Warner Brothers or anybody else that opened too many stores.

We are not going to open too many stores.

They have to very special, they have to be stand-alone profitable investments for the shareholders.

Over time, as the stores become bigger in the mix versus the on line and catalog sales what does that do to the margin, the operating margin?

We don't break out the P&L for you, but the stores are very profitable standalone stores, we are not discouraged by having more stores.

So more stores in the mix enhances the margin over time?

That's not what I said.

Okay.

So that doesn't enhance the margin over time.

I didn't say that either.

Okay.

Okay.

And just one more question on the advertising and promo spend in the quarter.

You said you had tightly managed it.

What would be the reason that you would seek to tightly manage that in a period when some of your brands are losing market share?

Well, we try very hard to look at our spending and very quickly analyze what's working and what doesn't and the benefit of having in many cases, daily retail sales.

We can see which ads work and which don't.

You know, the old adage: half of your advertising budget doesn't work but you don't know which half.

We are zeroing in on which half doesn't work and we are not going to spend money unless it does work.

If you look at our historical averages, as Kevin mentioned, 11, 12, 13%, whether it's up a half or down a half in bay given year is any given year.

But we are really trying hard, advertising is another cost like any other cost and we want to be as efficient as we can.

If you look at the NPD data through November, our market share is actually up a bit.

So we will have to see how the year end ends but I wouldn't necessarily go, to we just need to spend more money to spend more money.

We try to spend money when it works.

Okay.

Thanks a lot, Bob.

Thanks, Linda.

We will go next to Margaret Whitfield with Ryan Beck.

Good morning.

A couple of questions.

Bob, you mentioned you wanted to enhance the play value of both dolls and accessories for Barbie.

Can you comment on what's been going on with accessories and if that he was weakened the whole category for you in Barbie?

That's the first one.

Certainly over the last several years, Margaret, I am going to go back at least in my history in 2000, the accessories business hasn't grown for us.

We think we can do a better job in accessories.

We think we need to add more features to accessories.

We have had some things work but you will see we are going to do more accessories in the -- I wouldn't say more, let me put it this way because I think it's true across both dolls and accessories.

One of the concerns that we have is we just try to do more.

We keep introducing more of this and more of that.

As if the sales are declining for the year, we try and compensate for that by bringing new products in faster and we are concerned about that.

What we would rather do is get the products right, put the magic back in the toys and spend more of our time and energy and design and development work getting the magic in the toys, not continuing this churn to see if we can find something that works.

Will we see any effect of these changes in '06 late or will it be more '07 and beyond?

I think you will see some in '06.

We are certainly working on the line in '06.

Chuck Scothon and his team are engaged fully in the '06 line.

At the same time you know the toy business.

Most of our '06 product line is done.

So when I talk in the comments about tweaking that's what we are doing, we are tweaking '06.

I think will you see more of a profound change in '07.

You mentioned you grew in Toys 'R Us last year.

Did you also grow with the other top two accounts?

I talked about retail sales at Toys 'R Us being encouraging.

In general if you look cross either our point-of-sale, our shipments or the NPD that we have through November, if you sort of triangulate all of that data, it would say our business was flat to down slightly, here in the U.S.

With the three majors as well?

I don't want to comment on individual customers.

I don't want to get into that level.

I always say, call them.

And your market share through November, you said it was up a bit.

Could you quantify where you were at that moment?

No, I don't know that we've ever done specific numbers on market shares but -- I would rather wait until the December data comes out because a big chunk of the business was in December but we were up fractionally.

The industry was down I think 4% or 4.4%, or some number like that through November and according to the NPD data our business was down less than that but it was still down a little bit so we picked up a little bit of share.

And finally the Toys 'R Us sale, how does that affect your first half, second half split in terms of the shipments into the trade this year?

We don't know.

Clearly as they close stores and I think the specific number was something like 85 stores, they are going to either close most of those or convert some of them to Babies that could have an impact on shipping.

But one could also say it would probably have had an impact on fourth quarter shipping.

The fact is if they are planning on closing stores they are not going to buy inventory for those stores late in the year as well.

I don't know what the split is going to be between last year and this year.

Then I am not sure I am going to have any insight into that until after the fact.

With the toys that are coming up can you give any thoughts on where you see retail and consumer excitement for the year in '06?

Clearly we are excited about some of the entertainment properties.

We start with Ice Age 2, it's a movie I think at the very end of March.

We then have Cars which opens at the beginning of June which looks like a really nice Pixar movie, and should be quite [toyetic] and we do cars well.

And then Superman returns opens at the very end of June.

So we are excited about the entertainment business.

I have to tell you we are excited about some of the innovation.

I think Pixel Chicks was a really nifty product last year and we saw our other girls lines, that is things beyond Barbie do well.

When I went to stores the last couple of days, in the Hot Wheels business, there is the Magnetix segment that I think is doing well.

In Matchbox, we have some pop up play sets that I think are really good consumer propositions.

It's a way to play with cars and not have a mess and you can take these things to Grandma's or wherever you are going.

And finally I think when we get to Fisher-Price we have done a nice job totally in innovation in Fisher-Price across the line.

We have a very special Elmo coming out this year that I think will be a good surprise and we will have very strong sales.

And we continue to work in the learning business as well.

We are going to introduce a new learning platform this year called Quizard which has a unique character and adds more play value to learning.

Thank you.

Thanks, Margaret.

Did I talk about Barbie and the 12 Dancing Princesses?

We have to write that one down, too.

I think that's going to be really cool.

We will go to Tim Conder with AG Edwards.

Bob or Kevin, could remind us what your actual blended overall price increase was in 2005 was?

And then, to maybe follow up on one of the first questions that was asked, your channel inventories, you mentioned your inventories in the channel were down high single digits year over year.

Could you just clarify what a normal level you view is going forward, are we at that level?

Are we below the level?

And maybe in context if you have any total related to the Toys 'R Us store closing.

And then finally, what type of return would you need for an acquisition within the toy industry?

You said before that obviously there's a less of a risk premium in making an acquisition within the toy industry because you know that very well.

Could you give us a tight range as to what type of a return you would be looking for?

Tim, this is Bob, I won't give you a tight range but it's the right thing at the right time at the right price, and above our long-term cost of capital.

As you've seen in the past if you look at what we've done, we spent $1 billion acquiring our own company.

I look at the EBITDA multiples of all the consumer companies and ours has been cheap.

So when Mr. Market has our price cheap we will buy ourselves before we buy somebody else.

As it relates to pricing in 2005, it's really hard to get to a specific number because about 80% of our SKUs are new every year so you don't have this apples-to-apples comparisons like you might in the soap or food business.

But in general, I feel good that if we thought about 2 or 3%, that would be about the right number for 2005.

What was the other question?

Related to your channel inventories you mentioned that it was down --

Thanks, Tim, I'm sorry.

Our inventory was down about 10% last year which I was encouraged by and we saw a fairly comparable level in the retail business.

The issue is, you never know where it's going to stop.

Inventory is one of those things, it's cash in the form of a depreciating asset and I think whether you're a retailer or a manufacturer or a supplier you are trying to run that as tightly as you can.

And so I don't know what the normal level is.

I can just tell you that everybody in the supply chain is working to go bring it down.

If had you to guess, Bob, would you feel subject to the Toys 'R Us getting their stores adjusted in the early part of the year.

Would you feel, if your gut tells you there's room to somewhat refill not to the tune of 10%, somewhat refill that will channel to get to the normalized level or not?

No.

My gut tells me that anybody that has reduced inventory doesn't want to build it back up.

But my gut also tells me the inventories at retail are lower than anything I've seen.

When I went to stores the first week of January, which is one of my favorite weeks to go to stores to see what didn't sell out there, not just in our business, I will tell you across the toy industry, including all of our competitors, I just didn't see a lot out there.

So I don't think anybody at retail ended the year with an inventory problem and they were as lean and clean as I've ever seen.

So my gut says I think some people lost some sales at the end of the year, because they were short on inventory.

So just from a pure gut standpoint I'm not sure those folks are going to take it down any further.

I don't run their business.

Obviously I try and sell them more.

That does conclude the question and answer session today.

At this time I will turn the conference back over for any additional or closing remarks.

Thanks.

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That concludes today's conference, ladies and gentlemen.

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