Mattel Inc (MAT) 2006 Q2 法說會逐字稿

Good day and welcome, everyone, to the Mattel Inc. second-quarter 2006 earnings results conference call.

Today's call is being recorded.

With us today at this time for opening remarks and introductions I would like to turn the call over to Mr. Mike Salop.

Please go ahead, sir.

Thanks, Laurie, 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 second quarter.

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

We'll then open the call for your questions.

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

Such forward-looking statements may include comments regarding performance of Barbie; our other core brands and productlines and new entertainment properties; maintaining growth in international expansion; profits and margins; cost pressures and controlling costs; supply chain initiatives and savings; the impact of tax law changes; capital and investment framework; capital deployment; and maximizing 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 website, Mattel.com, under the subheadings "financial information" and "earnings releases".

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

Thank you, Mike, for that browsing and inspiring reading of the Safe Harbor.

Good morning, everyone.

Although the second quarter is still relatively small for us, the quarter played out very well and we're pleased with the results of the business.

Our positive topline sales trends this quarter in both the U.S. and abroad benefited from our new entertainment properties such as CARS and Superman as well as solid growth from core brands such as Fisher-Price and American Girl.

Our Barbie business experienced its second consecutive quarter of growth in the U.S. led by Mermaidia and Barbie princesses.

It's obviously much too early to declare victory, but I'm encouraged by this positive trend in Barbie and look forward to the continued implementation of our plans going forward.

In our other girls business, despite a slight decline overall, our Pixel Chix, Polly Pocket and Winx toy lines continued to grow with strong performance internationally for all three brands.

Kids have responded extremely well to our summer entertainment toy lines based on the CARS and Superman movies and American Girl Place remains the hot ticket in Los Angeles.

Since opening our doors at the L.A. store in April we've served 23,000 meals, hosted more than 1,000 birthday parties and welcomed more than 200,000 guests.

As you know, both of our studio partners for CARS and Superman have aggressively promoted their properties and have seen very good results at the box office.

Our key retail customers supported both properties with feature locations, end-caps and promotions.

For CARS activity has been strong across all price points and categories including die cast cars, radio control and games and puzzles.

Interestingly we're seeing demand for the products from both boys and girls.

We also have anecdotal reports from stores that customers are already putting CARS product on layaway for the holidays.

Sales for Superman have also been strong, led primarily by action figures and role play items like the TV promoted InflatoSuit which is the must have item.

The success we're seeing in the U.S. on both of these properties is now being replicated around the world.

In many cases the films are just releasing as they were held back in some international markets until after the World Cup.

Turning to infant and preschool, Fisher-Price grew for the quarter with solid growth in both Fisher-Price core and Fisher-Price Friends.

For the first half of the year Fisher-Price posted double-digit growth on a worldwide basis led by positive trends in the baby gear, Power Wheels and Dora the Explorer lines.

As I've said before, we still face our share of challenges in 2006.

Commodity prices, including record high petroleum prices and other costs, continue to climb; but we were able to achieve increased operating margins in the quarter compared to year ago due to price increases, supply chain savings and the streamlining of our Mattel brands organization.

As I've said before, over the last couple of years our portfolio of brands other than Barbie has been performing very well.

Stabilizing Barbie goes a long way toward improving our operating performance and the second-quarter results help demonstrate this.

We also continue to focus on strategically returning cash to shareholders with 9.4 million shares repurchased in the second quarter of this year.

Over the last three years we've repurchased over 65 million shares representing about 15% of our shares outstanding.

We continue to focus on generating and effectively deploying the strong cash flow capabilities of this business.

We remain committed to maximizing long-term value for our shareholders; to achieve this we must continue to re-energize our Barbie business, maintain growth in our other core brands and continue international expansion.

And as you know, we're focus on controlling costs and effectively deploying capital.

Together these efforts will allow us to win in the marketplace and for our shareholders.

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

Kevin?

Thank you, Bob, and good morning, everyone.

My remarks regarding the second-quarter financial performance will be organized in the following manner -- revenues by geography; core categories and brands; key drivers of the P&L; cash flow from operations; and the balance sheet at June 30, 2006.

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

I'll begin with a discussion of worldwide growth sales shown on exhibit 2.

Total worldwide growth sales for the second quarter were up 8% over the prior year with no impact from changes in currency exchange rates.

U.S. sales were up 5% and international sales were up 12% including a 1 percentage point benefit from foreign exchange.

On a regional basis, sales in Europe were up 4% including a 1 percentage point benefit from changes in currency exchange rates.

Sales in Latin America were up 24% including a 2 percentage point benefit from foreign exchange.

Sales in Asia-Pacific were up 17% including a 2 percentage point negative impact from foreign exchange rates.

I will now review our core categories and brands.

Mattel girl's and boy's brands -- worldwide sales for Mattel girl's and boy's brands were up 8% with no impact from changes in currency exchange rates.

The sales increase reflects a 7% increase in U.S. sales and a 9% increase in international sales with no impact from foreign exchange.

Worldwide Barbie sales were down 1% also with no impact from changes in foreign exchange.

Barbie sales in the U.S. increased 2% while international Barbie sales were down 3% including a 1 percentage point benefit from changes in currency exchange rates.

As Bob mentioned, this was the second consecutive quarter of U.S. growth for Barbie with increases led by Mermaidia and Barbie princesses.

Worldwide sales of other girl's brands were down 1% including a 1 percentage point benefit from foreign exchange.

While Pixel Chix and Polly Pocket continue to demonstrate strong growth worldwide, other girl's brands were negatively impacted by declining sales of productlines introduced in the prior year including Furryville and Doggie Daycare correct.

Sales in the Wheels category declined 6% including a 1 percentage point benefit of currency exchange rates.

The sales decline was primarily driven by declines in Hot Wheels and Tyco RC in the U.S. partially offset by growth internationally.

Our entertainment sales were up 38% with no impact from changes in currency exchange rates.

Strong sales of CARS and Superman worldwide more than offset declines in Batman.

We also had good growth in games led by Scene It internationally and Uno worldwide.

Fisher-Price brands -- worldwide sales for Fisher-Price brands were up 8% for the quarter with no impact from changes in currency exchange rates.

Worldwide core Fisher-Price was up 10% with a 1 percentage point benefit from foreign exchange.

And Fisher-Price Friends was up 5% worldwide with no impact from foreign exchange.

The growth in Fisher-Price core is attributable to continued strength in our newborn and baby gear products worldwide while the growth in Fisher-Price Friends was once again driven by strong sales of Dora the Explorer and other Nickelodeon properties.

On a regional basis U.S. sales of Fisher-Price brands increased 4% while international sales grew 18% including a 1 percentage point benefit from foreign exchange.

American Girl brands -- sales of American Girl brands increased 5% in the second quarter driven by the opening of the new American Girl retail store in Los Angeles.

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

For the quarter gross margin was 43.5%, a 10 basis point decline versus the prior year. 2006 gross margin was negatively impacted by external cost pressures, mix and higher royalty costs, but these were largely offset by price increases and supply chain savings.

Advertising expense in the quarter was $100.6 million or 10.5% of net sales consistent with last year.

Selling, general and administrative expenses of $265.5 million increased slightly from last year's $265.2 million.

However, as a percentage of sales, SG&A decreased 220 basis points to 27.7% in the second quarter from 29.9% of net sales last year.

Savings related to streamlining of the Mattel brands' organization partly offset higher SG&A costs associated with the new American Girl Place retail store and higher employee-related costs.

Additionally, stock-based compensation expense of approximately $700,000 is included in SG&A and primarily relates to the requirement to expense stock options effective the beginning of this year.

For the quarter operating income was $49.9 million compared with $28.5 million in last year's second quarter with the increase being primarily attributable to higher sales volume.

Interest expense was $16.1 million in the quarter compared with $19.6 million in 2005.

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

Interest income for the quarter was $6.4 million compared to $12.4 million in 2005.

The lower interest income is due to lower average cash balances during the quarter partially offset by higher interest rates.

Other nonoperating income net in the quarter was $2.2 million versus $4.7 million a year ago.

In 2005 other nonoperating income included gains on the sale of marketable securities.

Income tax for the quarter was $5 million compared to $120 million in the second quarter of 2005.

The 2006 tax expense reflects a positive impact of a $6.2 million tax benefit primarily related to a settlement reached with the state tax authority.

The 2005 tax expense includes $112.9 million in incremental tax expense related to the repatriation of foreign earnings under the American Jobs Creation Act.

Mattel's 2006 tax provision is also being positively impacted by the Tax Increase Prevention and Reconciliation Act which was signed into law in May of this year.

The Tax Act provides changes to tax rules that will reduce Mattel's provision for income taxes in 2006 and for the two years thereafter.

The positive impact of the Tax Act has been reflected in the Company's tax provision for the first half of 2006.

Excluding tax settlements we expect the Tax Act to lower our tax provision by approximately 3 to 4 percentage points resulting in an effective tax rate of approximately 23 to 24% in 2006.

We do not expect the effective tax rates for the following two years to be quite as low.

For the quarter we reported net income of $37.4 million or earnings per share of $0.10 versus last year's loss of $94 million or $0.23 per share.

The second-quarter earnings per share of $0.10 included $0.02 per share of tax settlement benefits while 2005 earnings per share included the American Jobs Creation Tax Act incremental tax expense of $0.28 per share.

So to summarize the P&L, the increase in net income resulted primarily from higher sales volume and the positive impact from the tax settlement.

Now turning to the cash-flow statement and balance sheet.

Cash used for operations in the first half of 2006 was $358 million driven primarily by the use of cash for working capital requirements partially offset by net income of $68 million and depreciation and amortization of $86 million.

Cash used for investing activities was $66 million primarily for capital expenditures.

Cash from financing activities was $51 million and reflects the proceeds from the issuance of $300 million of senior notes as well as the utilization of cash for share repurchases.

During the second quarter the Company repurchased approximately 9.4 million shares of our stock at a cost of $153.3 million.

Our cash on hand at the end of the quarter was $625.1 million, up from $361.9 million at the end of last year's second quarter.

The increase in cash was due primarily to the issuance of 300 million of senior notes in June.

Receivables at $743.7 million were up $51.3 million from last year's second quarter and represented 70 days of sales outstanding, consistent with last year.

Factoring was up $9 million from 2005 levels, but days sales outstanding prior to factoring was also unchanged from last year.

Inventories at $538.5 million were down $41.4 million or 7% versus the second quarter of 2005 and represented 53 days of supply which was three days lower than last year.

Our total balance sheet debt increased by $308.5 million from the second quarter of last year primarily due to the issuance of 300 million in senior notes in June 2006.

The debt issued is comprised of 200 million five-year fixed-rate 6 1/8% senior notes and 100 million three-year floating rates which have since been swapped to a fixed rate of 5.87%.

The proceeds from the debt issuance will be used for general corporate purposes including the replacement of debt maturing over the next few years.

Our debt to total capital ratio ended the quarter at 31.1% versus 23% last year.

We continue to operate under our established capital investment framework targeting year-end debt to total capital ratio of around 25% and year-end cash balances of around $800 million to $1 billion.

Capital expenditures for the quarter were approximately $44.4 million versus $33.8 million in the second quarter of 2005, reflecting increased investments in information technology and the opening of the new American Girl retail store.

So to summarize, a strong contribution from our entertainment properties, solid growth at Fisher-Price and American Girl, and a stable Barbie performance drove our top line.

Our margins were positively impacted by some of the actions we took earlier this year including streamlining our Mattel brands business, raising prices and initiating supply chain improvements.

The all-important second half is still ahead of us, but we're clearly pleased with the improvements we achieved in the second quarter.

That concludes my review of the financial results.

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

Operator?

(OPERATOR INSTRUCTIONS).

Sean McGowan, BMO Capital Markets.

If I can have two questions, please.

One, can you comment on any difference between last year and this year and retailer willingness to take in inventory?

And second, can you talk about American Girls ex the L.A. store?

What are you seeing there vis-a-vis the first quarter, vis-a-vis last year?

Is there anything there to comment on?

Thank you.

This is Bob.

Let me start with your first question.

We still see very good alignment between what we ship into retailers and our POS going out that we get from our top retailers.

Inventory among retailers continues to be tight, I don't think that's going to change.

It's been a pattern I've seen for six years in the toy business and I don't think that's going to go away.

We have pretty good alignment between POS and shipments.

As it relates to American Girl, we did make progress this quarter.

If you look at the relationship of this quarter versus the first quarter, some of the decline in the first quarter, as I mentioned I think last quarter, was due to Easter timing.

The L.A. store is doing well.

This year's spring doll, Jess, hasn't done as well as the last year's what turned out to the a blockbuster, Marisol, but it's tracking fine and we have pretty strong plans this fall featuring a movie about Molly who is the World War II character and that's coming along nicely and should be quite special.

So we saw a little bit of an uptick compared the first quarter; but really, if you exclude the L.A. store, the business isn't doing as well as we'd like.

Okay, thank you.

Elizabeth Osur, Citigroup.

I was hoping you could talk a little bit more about the gross margin.

With Barbie pretty stable and gross margin stable we would have expected, given the strength in the entertainment business, that maybe the overall gross margin would have been a little bit weaker.

I was hoping maybe you could talk about some of the areas of strength or some of the businesses where you're seeing some improvement in gross margin.

And in particular on pricing, if you feel like there's room for a second round of price increases later this year or if there's been a big difference in the price increases across different segments?

Thanks.

Okay, Liz, with respect to gross margin I think we said coming into 2006 we expected the gross margins to be still under pressure as we face cost pressures for raw materials and transportation, as we continue to invest our brands to regain sales momentum.

Key input costs have continued to rise and consequently we took an additional price increase coming into 2006.

In general we've implemented low single digits 2 to 4% increases which vary by productline.

But as to know, the majority of our products are new each year so quantifying that price increase is difficult.

Looking closer at second-quarter margin, we continue to be negatively affected by the external cost pressures and higher royalty costs, but these pressures were largely offset by price increases and supply chain savings.

Liz, this is Bob.

One point of color on your question is as it relates to the entertainment properties, both CARS and Superman are very good deals for both the studios and for our shareholders.

We have the strongest global footprint in the toy business, that's part of our appeal to studios, and we work very hard to create win-win financial propositions for both the intellectual property holders and for Mattel.

And finally, as it relates to pricing, we are working on our '07 plans as we speak, and it's too early to talk about '07 pricing.

But clearly, if commodities stay up where they are, our prices are going to have to reflect that.

Is there any way you guys would be willing to quantify either the impact on gross margin from transportation or from any of the specific commodities that you're seeing or just kind of a range?

No, we don't get into that sort of level of detail on the margin structure.

We have worked very hard on transportation and distribution, as you know, over the last couple of the years and we're clearly seeing benefit of tying all that together globally and working on important contracts that leverage our scale.

And you all follow commodities as well as we do -- whether it's zinc or resins or anything petroleum-based, they're pretty high.

If you look at the biggest impact negatively on our margin this quarter, it really is cost pressures on commodities followed by the fact that we've got higher royalties because of the popularity of CARS and Superman.

Okay.

And if I could just ask one unrelated questions.

You talked about some of the brands that were strong in the other girl's part of the business; can you just talk about what was weaker?

I think we talked about Furryville and Doggie Daycare which are a couple of things that we introduced a year ago at about this time and aren't going forward significantly.

Okay, thanks.

Dean Gianoukos, JPMorgan Shays.

Just one quick question.

The SG&A improvement, it sounds like that was from the realignment.

So is that going to be sort of stable moving forward, that kind of improvement?

Again, we don't give guidance on forecasts, but we did streamline Mattel Brand's operations in the first quarter and these cost savings initiatives have relatively short payback periods and we should see that trend to be favorable as we look out the year.

We continue to work on the fact that the organization has changed;

I think there are other opportunities for cost savings initiatives there.

But we also expect pressure from the American Girl retail store that we just opened in Los Angeles; that will have a negative impact on SG&A for the balance of the year as well as we're still experiencing employees-related costs. (multiple speakers) We continue to focus on tightly managing SG&A.

Okay, but the American Girl affect was in this quarter as well, too, right?

So whatever savings you got from the realignment was already offset by American Girl's, is that right?

That is correct.

Okay, good.

Thanks a lot.

Linda Bolton Weiser, Oppenheimer.

Can you just comment a little bit on Barbie internationally and what's going on there?

And also a second question pertains, again, to the gross margin in the quarter.

Can you just comment on the supply chain initiatives?

It seems like that's the delta thing that might have been a little bit better than in previous quarters?

Are there any new activities or things that are going on there that affected the gross margin positively in the quarter?

Linda, it's Bob.

I'll start with Barbie and then Kevin can talk about the margins.

There was nothing specific about international.

Our feature segment, which was Fairytopia this spring, was launched a little later internationally than in the U.S.

It's done fine, but it didn't benefit from the natural seasonal bump associated with Easter everywhere in the world.

We also have a little bigger impact from Winx club dolls which have been quite popular in several European markets -- more of an impact on Barbie than we've seen in the states.

With regard to the supply chain savings, the supply chain savings are driven by some initiatives we've undertaken to make our transportation and distribution networks more efficient.

Most recently we implemented a variety of sophisticated tools to assist us with logistics.

These tools help us to optimize volume in shipping containers as well as help us select the best routes to our customers.

These tools along with some changes we've made to further consolidating our shipping vendors and reorganize our U.S. distribution centers to full mix warehouses have generated savings for us in the second quarter and we expect those to be ongoing.

And then as you know, Linda, we're also working on lean methodologies in our manufacturing and supply chain to help us be more efficient and effective there.

Great.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Marguerite Whitfield, Ryan Beck.

A few questions.

Could you discuss the timing of the movie openings outside the U.S. for CARS and Superman and what countries are opening later?

Also could you discuss if the U.S.

Wheels' business was affected by CARS -- I didn't hear that number when you gave the rundown, Kevin?

And what was the ending share count at the end of the period since you bought back a lot of stock?

Margaret, this is Bob.

I don't have the calendar of the CARS and Superman movie launches.

I will tell you I do know they were later in some markets than in others and generally were a bit behind the U.S.

Now I wouldn't necessarily translate that into shipment trends.

We've been shipping CARS and Superman since early this spring.

And then Hot Wheels worldwide was down 7% in the quarter.

We saw less cannibalization, Margaret, from CARS' movie-related products than we expected.

And within Hot Wheels, based on the retailer feedback we've had so far to the '07 line, we're pretty optimist about the future.

And as you look into the second half, Bob, bearing in mind that retailers seem to be somewhat cautious as usual, what do you see as the big winners for Mattel coming up for holiday?

Well, the Barbie line has done surprisingly -- not surprisingly, it has done reasonably well so far this year in the U.S.

We've had Mermaid, Elina has done well, Birthday Barbie has done well, My Scene Bling, the Electronic Diary, the Fashion Fever room line, Totally Real Barbie House -- in general the accessories on Barbie are doing better.

And remember, as I've said in previous calls about Barbie, the brand is doing better than the doll business whether it's the website or the entertainment properties with going forward universal or the PC games for girls -- we're making good progress with the dolls.

The most recent rolling three-month report from NPD, which covers I think March through May, shows us outperforming the competition and gaining share.

So I felt better about where we are on Barbie today than I have in some time.

Clearly our entertainment properties are doing well.

Superman order of magnitude looks a lot like Batman for us last year as it relates to toy sales and CARS is an absolute homerun.

There were many stores that were out of stock on CARS toys before the movie even hit.

And both those movies will be launched in CVD this fall I believe, so we should continue seeing good momentum from those lines.

And as I think I said in my opening remarks, Fisher-Price has grown at double-digit rates.

So almost every year since I've been here Fisher-Price has done quite well and I don't have any reason to believe that string is going to come to an end.

And American Girl -- while it didn't exactly hit what I would have thought in the first part of the year, I'm still quite optimistic.

If you look at that brand's performance over the last couple of years -- part of the reason we didn't have a great first half is because a year ago first half I think we were up probably over 20%.

So we're coming off a pretty high base and as those plants lay out going forward I think we'll have a fine year.

So short of giving projections which we don't like to do, there really isn't anything in the brand portfolio that's concerning to me today.

And as we look geographically, our international business continues to grow.

I think we finished last year with international about 44% of the Company's revenues.

We're clearly well on our way towards getting to half of the Company coming room overseas which is the goal I laid out in 2000.

Margaret, with respect to your question on the shares outstanding at the end of the quarter, the basic shares outstanding are about 380 million.

Okay.

And diluted would be?

I'd say a couple million more.

Okay, thank you.

And we have no other questions at this time.

I'll turn the conference back over to our presenters for any additional or closing comments.

Thank you, Laurie.

I'd like to thank everyone for joining the call today.

The replay of today's call will be available beginning at 11:30 AM Eastern Time.

The number for the replay is 719-457-0820 and the pass code is 624-4535.

Thanks, everyone, and have a good day.

That does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.