Mattel Inc (MAT) 2006 Q1 法說會逐字稿

Good day.

Welcome to the Mattel Incorporated first quarter 2006 earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Treasurer and Senior Vice President of External Affairs Mr. Mike Salop.

Please go ahead, sir.

Thanks, Peter 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 first quarter.

On the call today Bob will provide a few brief remarks and Kevin will review the financial results in more detail.

We will then open the call up for your questions.

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

Such forward-looking statements will include comments regarding performance of Barbie and our other core brands and product lines, profits and margins, cost pressures, price increases, enhancing innovation, improving execution and realizing cost savings by capitalizing on scale, initiatives to improve supply chain efficiency such as lean manufacturing programs and e-procurement, the impact of organizational changes including savings from reduction in workforce, capital deployment, retail store openings 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 2005 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 Investors and Media section of our corporate Web site, Mattel.com under the subheadings "Financial Information and Earnings Releases."

Now I'd like the turn the call over to Bob.

Thank you, Mike, and good morning.

There were no big surprises during the first quarter of the year, though not of particularly compelling time of the year for a toy company, we did moderately grow the business in the U.S., and our international business was flat with organic growth offset by currency exchange rates.

For the first time in more than a year our Barbie business in the U.S. grew slightly and I'm encouraged by our progress and our plans going forward.

Fisher-Price, both core and friends was on fire in the quarter growing at double-digit rates worldwide.

Our Other Girls lines continued to grow driven by Pixel Chix, Polly Pocket and Winx, particularly in international markets.

Performance of the American Girl division declined as expected due to the timing of Easter and very strong performance in 2005 due to the premier of the Marisol Girl of the Year doll.

The mix shift of business to Fisher-Price puts pressure on the Company's gross margins.

Additionally, Fisher-Price is our heaviest user of petroleum-based raw materials.

We expect our price increases, which go into effect domestically this month, will help to alleviate some of the pressures on margin.

Across Mattel we expect 2006 to be challenging, but look forward to the opening of American Girl Place Los Angeles this week and the rollout of the toy lines based on the CARS and Superman movies slated for release this summer.

Before Kevin provides a more detailed review of the quarter, I'd like to take a moment to talk to you about our strategic areas of focus for 2006.

Last week we began mailing our 2005 Annual Report to shareholders which you can also see on our corporate Web site Mattel.com.

As you know, I like to use the release of Mattel's Annual Report as an opportunity to inaugurate the coming year with a word or direction.

With the release of the report and as we move into the next chapter of Mattel's progress I'm excited to unveil this year's direction, play to win.

We'll do that by enhancing innovation, improving execution and leveraging our scale.

Mattel boasts some of the most innovative toys in the marketplace and 2006 is no exception with Let's Dance Barbie where little girls can literally dance with a Barbie doll, Pixel Chix, which is making the transition from one toy to an entire brand, and TMX Elmo which is so magical that we're keeping it a secret until the Fall.

But there's no sense creating an innovative toy if you can't get it in the hands of the child.

I think about execution as the basic back room blocking and tackling.

For example, Mattel is the only toy company to deploy more than 350 dedicated retail merchandisers to regularly call on 4,000 key retail stores across the U.S.

During seasonal periods that force is more than 1200 strong.

In 2006 we're also continue to go focus on improving the efficiency of our supply chain by implementing lean supply chain tools and methodologies.

We've streamlined our sales leadership in the U.S., fully staffed cross- functional business teams, and developed customer account plans on a global basis to build retailers toy sales and profits.

As the world's largest toy company we can realize significant cost savings when we leverage our scale and make purchasing decisions based on a one Mattel philosophy and by further implementing e-procurement initiatives.

These are just a few examples of innovation, execution and scale advantage already in progress at Mattel.

Our mandate now is to bring all of the elements across the organization together in order to win in today's marketplace.

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

Kevin?

Thank you, Bob, and good morning, everyone.

My remarks regarding the first quarter 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 March 31, 2006.

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

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

Total worldwide gross sales for the first quarter were up 2% over the prior year with a negative 2 percentage point impact from changes in currency exchange rates.

U.S. sales were up 3% and international sales were flat including a negative impact of 4 percentage points from foreign exchange.

On a regional basis, sales in Europe were down 6% including a 7 percentage point negative impact from changes in currency exchange rates.

Sales in Latin America were up 10% including a 7 percentage point benefit from foreign exchange.

Sales in Asia Pacific were down 3% including a 3 percentage point negative impact from foreign exchange rates.

I will now review our core categories and brands.

Mattel Girls and Boys brands.

Worldwide sales for the Mattel Girls and Boys brand segment were down 4% including a negative 2 percentage point impact from changes in currency exchange rates.

The sales decline reflects a 3% decrease in U.S. sales and a 5% decrease in international sales, which included a 4 percentage point negative impact related to foreign exchange.

Our worldwide Mattel Girls brand portfolio, which includes Barbie and Other Girls, was flat in the quarter despite a negative impact from foreign exchange of 3 percentage points.

Worldwide Barbie sales were down 8% including a 3 percentage point negative impact from currency exchange rates.

Barbie sales in the U.S. increased 1% while international Barbie sales were down 14% including a negative impact of 4 percentage points from changes in currency exchange rates.

International Barbie sales were negatively affected by the later introduction of the Mermadia segment in many of the key markets.

Worldwide sales of Other Girls brands were up 23% including the negative impact of 3 percentage points from foreign exchange.

The growth in Other Girls brands was primarily driven by Pixel Chix, Winx and Polly Pocket.

U.S. sales of Other Girls brands increased 5% and international scales grew by 40% including a 7 percentage point negative impact from changes in currency exchange rates.

Sales in the Wheels category declined 4% including a negative 1 percentage point impact from currency exchange rates as declines in Hot Wheels adults and Tyco R/C were partially offset by gains in Hot Wheels kids.

Entertainment sales were down 14% including a negative 2 percentage point impact from changes in currency exchange rates.

Declines in Robots, Yu-Gi-Oh! and Batman were partially offset by Ice Age 2 and initial shipments of CARS and Superman.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were up 16% for the quarter with a negative 2 percentage point impact from changes in currency exchange rates.

Worldwide core Fisher-Price was up 12% with a negative 1 percentage point impact from currency, while Fisher-Price Friends was up 21% with a negative 2 percentage point impact from foreign exchange.

The Fisher-Price Friends performance was once given driven by strong sales of Dora the Explorer.

Power Wheels also exhibited strong worldwide growth in the quarter.

On a regional basis U.S. sales of Fisher-Price brands increased 18%, while international grew 13% including a negative 4 percentage point impact from foreign exchange.

American Girl brands.

Sales of American Girl brands declined 9% in the first quarter.

The decrease was primarily attributable to later Easter and Spring breaks this year, as well as benefits in 2005 first quarter from the very strong Marisol, the Girl of the Year doll.

As Bob mentioned, the new American Girl Place retail store in Los Angeles will open this weekend.

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

For the quarter gross margin was 41.8%, a 210 basis point decline versus the prior year.

The 2006 gross margin was negatively impacted by mix, external cost pressures and changes in currency exchange rates, partially offset by supply chain savings.

Domestic pricing increases were not implemented until April so they were not reflected in first quarter results.

The negative impact was mix was driven by the growth in Fisher-Price relative to some of our other higher margin brands.

Advertising expense in the quarter was 88.9 million, or 11.2% in net sales consistent with last year.

Selling, general and administrative expenses of 275.1 million, or 34.7% of net sales increased from last year's 250.8 million, or 32% of net sales.

The 2006 quarter includes a $13 million severance charge primarily related to the streamlining of the Mattel brands organization which resulted in the reduction of approximately 200 positions.

We also recorded stock-based compensation expense of approximately 700,000 in the quarter due to the adoption of FAS restatement No. 123R in 2006.

For the quarter our operating loss was 32 million compared with income of 5.5 million in last year's first quarter.

The decline is primarily attributable to lower gross margins and the severance charge.

Interest expense was 15.2 million in the quarter compared with 17.6 million in 2005.

The decline in interest expense versus last year is due to lower average domestic borrowings partially offset by higher interest rates.

Interest income for the quarter was 8.8 million compared to 12.1 million in 2005.

The lower interest income is due to the utilization of cash to reduce borrowings and lower beginning cash balances partially offset by higher interest rates.

As a reminder, our cash balances entering 2006 were lower than prior year due to the 500 million share repurchases executed in 2005.

Other non-operating income net in the quarter was 1.9 million versus 8.9 million a year ago.

In 2005 other non-operating income included 10.7 million of gains on the sale of marketable securities.

The Company does not currently have any unrealized gains on the balance sheet associated with marketable securities.

Income tax for the quarter was a benefit of 66.7 million compared to an expense of 2.4 million in the first quarter of 2005.

The 2006 benefit included a 56.8 million positive impact from audit settlements reached with foreign tax authorities.

For the quarter reported net income of 30.2 million versus last year's 6.5 million.

First quarter earnings per share of $0.08 included $0.15 per share of tax settlement benefits when compared to 2005 earnings per share of $0.02.

So to summarize the P&L, the increase in net income resulted from the positive tax settlements partially offset by reduced gross margins, severance expense, and the gain on sale of marketable securities in 2005.

Now turning to the balance sheet and cash flow statement.

Cash flow use for operations for the quarter was 290 million driven primarily by the use of cash for working capital requirements, partially offset by net income of 30 million and depreciation and amortization of 42 million.

We did not execute any share repurchases in the first quarter of 2006 and still have 250 million remaining under our current authorization as of the end of the quarter.

Our cash on hand at the end of the quarter was 603.3 million down from 778.7 million at the end of last year's first quarter.

The reduction in cash was due primarily to the increased share repurchase in 2005.

Our receivables were 585 million, or 66 days of sales outstanding consistent with last year.

Factoring was down 20 million from 2005 levels.

Inventories at 410.8 million were down 61.8 million, or 13% versus the first quarter of 2005 and represented 72 days of supply, which was 17 days lower than last year.

Our total balance sheet debt increased by 59.7 million from the first quarter of 2005.

Our debt to total capital ratio ended the quarter at 23.7% slightly above the 20.2% ratio in the first quarter of last year.

Capital expenditures for the quarter were approximately 29 million as compared to 25 million in the first quarter of 2005.

So to summarize the first quarter was challenging as expected.

We did have some positive sales developments with worldwide Fisher-Price, Other Girls, and U.S. Barbie.

Gross margin, however, continued to be pressured with the implemented U.S. price increases effective in the second quarter.

We expect the actions taken that produce the severance charge in the first quarter to generate overhead savings in the remainder of the year.

That concludes my review of the financial results.

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

Operator?

[OPERATOR INSTRUCTIONS].

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

Hi, guys and good morning.

Bob, you touched on a number of things that I was hoping you could elaborate on.

One, it was encouraging to see Barbie up slightly domestically in the quarter.

I was wondering if you could address what was the driver behind that and then also you commented that you were encouraged by the progress and plans going forward for Barbie so maybe a little bit more color there.

And then regarding the gross margins, you did attribute some of it to mix shift and some other items, just general costs.

I was wondering if you could kind of give us a feel for how much of the gross margin decline was due to mix shift versus general cost pressures which we've been seeing for a while and then maybe how much your cost -- your price increases might offset that?

And finally, if you could just elaborate a little bit on the supply chain efforts that you addressed.

Hi, Felicia.

It's Bob.

I'll start then turn it over to Kevin and then I'll come back.

On Barbie, we're not out of the woods yet.

But I do feel better about where we are than I have for the past nine months.

First, as I've said before, the brand is in better shape than the doll business.

We've got a fabulous Web site, the number one PC game for girls, we're continuing to build the brand with Barbie Alive with Clear Channel, and I think last week we announced a multi-year partnership with Universal Studios for content.

Secondly, we're making progress with the dolls.

I've said before that we need to walk and talk and chew gum at the same time, and we clearly have with Mermadia.

Mermadia's a home run in the U.S. and it's just now expanding to most overseas markets.

We're also seeing good takeaway on Fashion Fever, our Princess line and My Scene Bling.

We're in the midst of developing new advertising for this Fall and for 2007 we'll have a simpler more strategic, more toyetic, if you will, product line.

And don't forget, we're more than Barbie.

Dora the Explorer is booming.

Polly Pocket's doing well, Pixel Chix and Disney Princesses are growing and Winx Club is hot in a couple of international markets.

That said, we know we have a lot of work to do on Barbie but the new team is clearly up to the challenge.

Bob, I know you don't give forecasts, but--

Right.

Is there any way that you could give us a feel for how Barbie might round out the year domestically?

That would be hard to do without giving a forecast, Felicia.

Do you think that the trend that we're seeing now is something we might see for the rest of the year?

That would constitute a forecast.

You know I'm not going to do that.

But I do want you to know we've been working hard on Barbie and I feel better about Barbie.

But we're not out of the woods.

One quarter of a little domestic growth is not all we need, but it's clearly better than another quarter of decline.

Okay.

Felicia, with regard to gross margin, as you know, key input costs continue to rise through 2005 and consequently, we need to take additional price increases in 2006.

Domestically we didn't implement these price increases until April so they're not reflected in the first quarter, and as you know, the majority of our products are new each year so quantifying that price increase is always difficult.

In general though, we've implemented low single-digit increases which vary by product line and that's on a global basis.

And if you look at the first quarter, we were particularly hard hit by product mix, not only between brands, that is Fisher-Price growing substantially and then with Barbie and American Girl down, but also within segments.

The growth to Fisher-Price relative to some of our higher margin brands negatively impacted gross margin and foreign exchange was also a negative factor in this quarter, and I think if you look at mix versus external cost pressures, we we're impacted by external cost pressures but mix drove most of the decline, and we did have some supply chain savings.

We expect the price increase effective Q2 will help alleviate the cost pressures but mix could obviously go in either direction as we move through the year, and then as always to the extent possible we continue to work on savings and procurement initiatives to offset at least some of the pressure on gross margin, but there's no assurances that we'll be successful in offsetting these costs as we don't control the external cost environment.

Can you tell us the EPS impact of foreign exchange?

Of foreign exchange was on sales it was a negative 2 point impact and on EPS it was a penny.

Around a penny.

Felicia, last question I think was on supply chain.

Where we are I think is a logical extension of what we've been doing for the past several years so let me take you back, and we started with what toys we make and what toys we outsource then moved into where we make which toys, whether inside or outside.

We're now at the, in the plants we run, how do we make the toys more efficiently and that's really our focus on lean supply chain initiatives.

We've seen dramatic improvements in work in process, in productivity, in space utilization, and that's going to be our focus probably for the next, I would think, two years or so.

And finally, across all of that, we have centralized procurement, we have digitized our needs and we ought to see savings by leveraging our scale and procurement.

Okay.

Thanks a lot, guys.

Thanks, Felicia.

We'll take our next question from Dean Gianoukos, JPMorgan.

Hi.

Just two questions.

Can you comment on what you're saying of the sell through of Barbie, whether the sell through both U.S. and internationally is sort of consistent with your shipment?

And then secondly, you talked about shipping I think some of the CARS and Superman product.

Is that a very small portion of what you're eventually going to ship in which I would assume it is but I don't know, or was that a major sort of ship in quantity?

That's it.

Thanks.

Hi, Dean.

No, it was a very small quantity of CARS and Superman.

Really, most of the time sales will take place this summer.

In regard to your first question, let me tackle it broadly because it's true for both Barbie and across all of Mattel.

Our shipments in the quarter were a little bit ahead of POS so far for three reasons, I think.

First, clearly there's a later Easter this year than last year, and so when we look at point-of-sale through March, we don't have as much Easter as we did a year ago.

Certainly the last couple of weeks, that is the first two weeks of April, have been very strong for us and presumably for all toy folks at point-of-sale.

Secondly, retailers opened with very low levels of inventory this year and needed product just to support the point-of-sale.

And third, it's at least possible that some retailers took some product ahead of the price increases that Kevin mentioned were effective April 1st.

As we go through the Easter period and as we've seen POS over the last couple of weeks, we probably have a pretty good match whether we're speaking about Barbie or broadly across the Company with POS and what we've been shipping.

Let me also comment because I think part of your question went to Barbie international.

Let me make a comment on that because that did decline this quarter.

First, our feature segment, Mermadia, shipped early in the U.S. as retailers set their shelves early and is really now shipping in international markets.

Secondly, we have a difficult comp on our low-priced beach doll internationally.

Last year we shipped a lot of it early in the year, but it took a long time to sell through.

This year we've taken a more measured approach to shipments of the beach doll.

And finally, in several European markets Winx has become very popular.

We make Winx I think in everywhere but Italy, and it's done well in several markets and that's probably had a little bit of impact on our Barbie business.

That was very helpful.

Thanks.

Thanks, Dean.

We'll go next to Sean McGowan, Harris Nesbitt.

Thank you.

Just wondering if the settlement of a lot of these tax issues would have any impact on your expected tax rate going forward and what should we be expecting there?

Thanks.

I think, Sean, with regard to the tax settlement we're routinely complete prior year audits with tax authorities around the world.

Recently some of these result in settlements that were previous accruals.

Due to the HACA repatriation expense in '05 and various benefits in '05 and '04, the 2000 tax rate of around 27% is a more consistent indicator of an ongoing effective tax rate.

Thank you.

We'll go next to Elizabeth Osur, Citigroup.

Thanks.

Just a couple questions.

First on channel inventories I know, Bob, you said that we started off the year at particularly low levels but can you just comment on where we are versus the same time last year?

I realize Easter timing is different but can you just give us any sense on that?

Yeah, Liz, our calculation, which again is, we know what we ship in, we have a pretty good read on point-of-sale going out.

Our calculation says that through the end of March retail inventories were down in the low to mid single digits.

Even though Easter hadn't even happened yet?

Correct.

Thanks.

Okay.

And then just second question.

Remember, Liz, they were coming off very low levels, you know, when we did that same calculation as we reported last year against prior year.

Right.

So if you kind of did the change of the change I guess maybe it wouldn't be as dramatic.

But our calculation is versus year ago they were down a bit.

Okay.

And then on your comment earlier on the call, I'm not sure if it was you or Kevin, about the severance charges and that they might result in future savings, can you just quantity what those savings might be to SG&A going forward?

Sure.

Generally, as we look at the severance expense of about $13 million related to workforce reduction taken in January, we expect to generate savings over the balance of the year.

I think generally speaking annualized savings of two times the charge is reasonable although in 2005 we'll not have a full-year savings as we took that charge in February.

I think if you look at two times that savings on an annual basis, and then annual, and take the fact that we got 10 out of the 12 months, that will give you a good estimate for 2005.

Great.

Thanks a lot.

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

Hi.

Good morning, guys.

A few questions this morning.

With oil now at $70 and highly volatile, could you quantify the impact to the gross margin a little bit more specifically?

It sounded like Kevin was implying that the price increase would offset pricing increases to product would offset that cost this year, and how much are you hedged and how are you hedged for the back half of the year?

You know, Tony, we don't hedge oil because we actually, when you look at our input costs, they're oil related like resins and transportation costs, but basically we don't hedge that because we can't find a hedge that is a perfect hedge with respect to our commodities.

Let me ask that from, can I ask that from a different angle, then?

How are you securing forward contracts for product manufacturing with your manufacturing partners?

We basically, we don't have forward contracts other than we do it on a product by product basis, so some of it we hedge because we've gotten quotes earlier but it depends upon those quotes of what they have assumed for oil.

And as we've noted, the price of oil is merely a proxy for oil-based raw materials such as resins that we utilize, so it's difficult to tie our costs to an exact price of oil.

In addition, the price of our oil is based on costs in any given day doesn't really represent the cost to us for the year.

As I said, vendors commit to prices to us at various times of the year depending on the product, so they've made assumptions about raw material costs before giving us a quote.

For products we do produce in our own plant, we are more quickly impacted by changes in raw material price so ongoing changes either positive or negative and obviously today oil is around $70 a barrel, either could impact us further in the current year.

Tony, we really don't get into specifics of each input cost variable for 2006.

We really raised our prices modestly for rise of input costs we've experienced over the past several years.

We won't know whether the price increase will be enough until we look the back at 2006.

What we can say is we didn't price enough in 2005 to cover the cost increases we eventually were hit with, and costs in general have continued to rise.

So we take what we think is going to be a sustained level of input costs, and we price for those input costs as we look out to the year.

Unfortunately, there isn't the perfect hedge in this area for us to really be able to hedge oil-related input costs.

Nor do we as an industry, Tony, move that quickly in price.

My Mobile station is up to 3.19 a gallon.

And it didn't take them long to get there over the last couple of weeks.

We unfortunately, don't react that quickly the way we price our products.

Okay.

A couple of follow-ups.

Since you brought up the price of gas, do you expect that $3 gas looking forward here could have some meaningful risk to discretionary spending, or more specifically, spending in the toy sector and maybe the second part of that is competition from new video game systems.

Do you expect meaningful competition in that regard later this year or is it a different customer?

Well, first, Tony, as it relates to gasoline prices, there's always the risk that the consumer is going to go away from the economy because they finally have been hit with too high of mortgages or too much gasoline price.

But historically, that certainly has not played out across the toy industry.

In fact, in tough times people tend to buy toys for their kids, and if the price of gas and/or airplane tickets, which at least my experience are going up right now, if that has some chilling effect on travel, arguably that could be good for the toy industry as people stay home and buy more gifts for their kids and spend money at home as opposed to flying somewhere or driving somewhere on an extended vacation.

So it's too early to see how it plays out.

Fortunately, it's early in the year, and the consumer will have time to adjust before we get into the big holiday season.

But historically, the economy hasn't had a huge impact on the toy business.

What was the second question, Tony?

The second question was, do you expect that these new video game systems that are currently launching, will they pressure traditional toy sales or do you think that's a different consumer?

Well, they could pressure it from sort of a share of wallet.

A $500 system, which I think is what I read the next PlayStation is going to cost, is a pretty good chunk out of somebody's wallet, so for those who spend that much money on one kid or one system, that could have an impact.

But historically, at least as it relates to our business, that tends to focus on older boys.

Our product line tends to be focused on younger and a little bit more girls, so we haven't historically seen a big impact.

Okay.

And then last question, just on long-term guidance.

I haven't heard you guys talk about that long-term guidance for a while.

Do you feel that's still in place?

No.

We haven't talked about long-term guidance for a long time, and we don't talk about any guidance short term, long-term or in between term.

Well, you'd given us long-term goals of EPS growth, low double digits, et cetera.

Yeah, I had back in 2000, and that was over a period of time, and we've now moved beyond that, and we don't give any guidance of any type.

Okay.

Thanks, guys.

Okay, Tony.

We'll take our next question from Linda Bolton Weiser with Oppenheimer.

Thank you.

Hi, how are you doing?

Great, Linda.

Good, thank you.

Just a couple questions.

First of all, on the advertising expense ratio, I guess it was flat year-over-year whereas it was down last quarter.

Can you just talk about, are you actually purchasing more media or are you still making the cost reductions you had talked about last quarter?

Can you just talk about that ratio?

Yeah, you know, I think last year, Linda, it went from something like 12.6% of sales to 12.1% of sales.

So if you really look at it for the year, it's been between 11 and 13% at least since I've been here, and we do intend as we get into the Fall to produce fewer commercials and to have less non-media expense in our advertising budget.

So that should play out as the year unfolds.

So the idea that your ratio was not down year-over-year implies that you actually purchased more media time?

I wouldn't look at ratios in the quarter where the whole ad budget is so small to predict off of that.

I would say in general we've been between 11 and 13% without giving any kind of guidance or forecast, that's been our practice for some period of time, and we have committed to try and shave off some money in the non-working media this year.

So we should be within that historical range and in some years we spend more, some years we spend less.

But you know, we really evaluate media spend on a brand by brand, product by product basis and we'll not hesitate to increase our advertising spending if we think it's best for the business.

I think you'll see us within that range.

Okay.

And just in terms of the sales growth in the quarter in the U.S. and we've all been talking about and looking at the Wal-Mart initiatives to reduce their inventory.

Did you see any effects of that on your business in the first quarter and do you expect anything related to that later in the year?

Well, I think we've seen all customers focus on inventory significantly including Wal-Mart.

We've all read the stories about Wal-Mart, but that's really not at least new as it relates to the toy business.

They've been pretty tight on inventory for a long time, and we've seen other customers be tight on inventory.

So in fact, I would argue that the inventory was so low leaving last year at least as it relates to our business, that they had to buy some, and I'm not talking about specific customers, but clearly our shipments I think did reasonably well.

Again, it's a quarter that doesn't mean that much to our business.

But our shipments held up reasonably well given the environment.

Okay.

And I noticed in your 10-K that your total number of employees increased 4% in '05.

Can you talk about what areas you increased employees and the areas that you decreased?

I'll have to read the K, Linda, because that surprises me if our employees went up.

The only possible change I can think of off the top of my head is maybe some products from contract plants went into our plants and that would have been a shift but it certainly isn't at headquarters level, it's certainly not in the overhead kind of line.

So let us get back to you on that one.

Okay.

And also when you talk about supply chain and cost savings there, do you actually quantify productivity in your company?

We do but we don't disclose it.

But we clearly track output per direct labor hour and output per raw material input, so we have a relatively sophisticated handle on manufacturing costs.

But you're not willing to disclose productivity in a period historically?

Correct.

Because the problem with that is, you really can't go back and find it, so you end up saying, well, our productivity was up 7%, but then other costs were up, our productivity improved 7%, other costs were up 9%, blah, blah, blah.

You kind of get into a discussion, one can get into a discussion of what counts as productivity and what's real cost.

I think the best way to look at cost is just look at the absolute cost.

Did it go up or down?

There's productivity in there, but there's offsets.

Bottom line at the end of the day how much cash did you pay out to make a product.

Right.

Okay.

And then does the operating cash flow for the quarter include, I'm assuming that includes the positive effect of the tax benefit, the 57 million.

That is correct.

We did get the -- we got the benefit of the tax settlement in cash in the quarter.

Okay.

And then just finally, do you have any measurement of the effect on the Easter shift on the American Girl sales growth in the quarter or sales decline in the quarter?

We do.

It was clearly a factor in both the catalog business and the retail stores, but we don't disclose that level of detail.

Okay.

Thank you very much.

Thanks, Linda.

Thank you.

We'll take our next question from Tim Conder, A.G. Edwards.

Thank you.

Good morning, gentlemen.

Two -- a couple quick questions here.

Number one, could you give us a little bit of color as to what level of oil prices and/or resin prices you have factored into your cost estimates at this point?

And then we would anticipate shipping costs continue to go up, we're seeing things from different shipping companies as it relates to fuel, but are you starting to see any discussion as far as pricing that could moderate the fuel price being offset as additional capacity comes on in the industry?

And then thirdly, Bob, in your opening comments you mentioned that leverage or scale is one of your pieces of your word for the year.

Could you give us an update on acquisitions and would you term acquisitions being more or less in focus on the year-over-year basis?

I'm sorry, Tim, what was the more or less what?

Basically are acquisitions more or less on the front or back burner on a year-over-year basis with acquisitions?

It really doesn't change.

I think I've been very consistent over the last several years.

It's the right thing at the right time at the right price.

If that comes along this year and not last year or next year and not this year, or seven years from now and not this year, it comes along when it comes along.

Any feelings there is the right time thing and price or is anything a little bit warmer or cooler than last year?

I wouldn't want to get into that discussion, Jim.

Let me use the opportunity though, Tim, to talk about the fact that this is clearly a cash flow friendly business.

Since 2000 we have generated $4 billion in cash.

We've deployed it first with three quarter of a billion dollar increase in the cash balance, a three quarter of a billion dollars reduction in debt so we clearly have a stronger balance sheet today than we had several years ago.

We've spent over $800 million in Cap Ex, things like the American Girl stores, the supply chain, the IT initiatives, tooling is still our heaviest user of Cap Ex.

We've returned $1.6 billion to shareholders, a billion dollars in buybacks and $600 million in dividends.

We're continue to follow the capital investment framework that we announced I think it was February 2003, Kevin.

And we'll continue to look at acquisitions but not until it's the right thing at the right time at the right price.

Okay.

And then with regard to your question on oil, we don't get into specifics of what we assume for each input cost variable for 2006.

As we said, we raised our prices modestly for rise of input costs we've been experiencing over the last several years.

We try to set those price increases at a level that we think things like oil would be sustainable at.

We won't know whether the price increase will be enough until we look back at 2006.

Okay.

With regard to your question on transportation and whether we're seeing any capacity being added, right now I'm not aware of any capacity being added and we are seeing, we have been seeing pressure on transportation costs.

We have been working on supply chain initiatives to better utilize our existing distribution system in the U.S. to optimize our transportation costs, but we continue to see cost pressure on the actual transportation in and of itself.

Thank you, gentlemen.

Thanks, Tim.

We'll take our final question from John Taylor with Arcadia.

Hi, J. T.

Hi.

Good morning.

I got a couple of things here.

On the P&L to start with, if you were to look at revenues as first quarter revenues as two baskets, the first basket kind of being shipments of product from last year, restocking, that sort of thing versus new, I wonder if you could talk about what that mix looked like?

Was there any big difference between Q1 of this year versus last year?

That's the first question.

And then on the G&A line, looks like you were up about $25 million year-on-year, and 13 or 14 of that was related to severance and the stock option accounting.

I wonder if you could talk about what the rest of that was?

So those are two questions on the P&L.

And then on the balance sheet I was curious what was going on with the prepaid line, if there's anything in particular that's causing that to go up?

And then inventory was down year-on-year in the face of what's going to probably be a pretty good ramp for CARS, I'm guessing, so I wonder if you can just kind of talk about what was going on, and what accounted for the inventory drop?

Thanks.

Okay, J.T.

I'll start.

Kevin can go into the prepaid line I'm sure.

Shipment mix, I don't have specific numbers, but it probably has not changed dramatically.

If anything what we internally call good lines versus older products and we're certainly seeing it point-of-sale.

Our good line business is the one that's growing, not more shipments of older products, but I wouldn't say if there's any change I'm sure it's immaterial.

J.T., with regard to prepaids, the biggest item in prepaids, which is the primary driver of it, was prepaid advertising expense, and it related to a Mexico when we prepaid media advertising this year versus not doing that in the prior years.

With respect to SG&A, we not we see cost pressures with regard to employee-related costs, but we also made investments in growth for the new American Girl Place in Los Angeles, as well as in emerging markets like Brazil, Japan and Eastern Europe.

With respect to the balance sheet, we did tightly manage inventories in the first quarter as well as we really entered the year in much better shape with respect to inventories beginning the year.

Bob, I remember I think at Toy Fair there was some talk about how clean things were at the end of the year and that there were even some fulfillment issues.

Was that a meaningful number in the first quarter?

Was what a meaningful number, J.T.?

Reorders that you didn't have stuff in the warehouse to basically ship.

No.

Our fill rates as we went into the year were a little bit lower than we expected just because of the changeover from one year's line to the next, and retailers, as I said, had very low inventories and ordered a little faster than we expected.

But it's not important right now.

We're filling the orders pretty well.

Good.

Kevin, when you're talking about investments in Brazil, Japan, Eastern Europe, that sort of thing, are those basically sales offices?

Are you moving from distributors to direct or can you explain that a little bit more?

Yeah, I think you've got it right.

We're moving from distributors to sales offices, and then in the areas that we have been in we're adding additional sales people.

Okay.

Great.

Thank you.

The [way] it follows J.T., model in most of these emerging markets, we start with an outside distributor, then as the market matures we go into a model that is part distributor and part our investment, and then if the business continues to grow and have good potential, we take over the business at some point in time and we're through that transition now in a couple of these important markets for the future.

Great.

Thank you.

Thanks, J.T.

At this time I would like the turn the call back over to management for any additional or closing remarks.

Thanks, Peter.

I'd like to thank everybody for participating in today's call.

There will be a replay available beginning at 11:30 a.m.

Eastern time today.

If you'd like to listen to the replay the number is 719-457-0820.

The pass code is 7651954.

Thank you and have a good afternoon.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.