Mattel Inc (MAT) 2006 Q3 法說會逐字稿

Good day and welcome, everyone, to the Mattel Inc. third 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 Mr. Mike Salop.

On the call today we have Bob Eckert, our Chairman and CEO, and Kevin Farr, our Chief Financial Officer.

Earlier this morning we issued a press release that detailed our results for the third quarter.

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

We'll then open the call up for your questions.

Let me note that certain statements made today may include forward-looking statements about Management's expectations, strategic objectives, anticipated financial performance and other similar matters.

Such forward-looking statements may include comments regarding stabilization of the Barbie brand, performance of our other core brands and product line, the toy industry outlook, retail outlook, maintaining growth and international expansion, profits and margins, the impact of streamlining of the organization, improving innovation and execution, capitalizing on scale, our capital investment framework, and capital deployment.

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, affects 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.

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, under the subheadings financial information and earnings releases.

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

Thank you, Mike.

Last year at this very same time I described the year as challenging and our results as disappointing.

I explained that while our portfolio of brands are performing, none could escape the shadow of the Barbie brand.

We announced reorganization of the Mattel group to streamline our core toy business with a focus on innovation, execution and scale, all in all, not a very upbeat call.

I closed the call remarking that the organization was moving into the next phase, Chapter II.

Chapter I was the turnaround initiated in 2000.

And while we made solid progress through 2003, the results for the last couple of years have not been as strong as we would have liked, so October 2005 was the first chapter of II.

As I said last year, our portfolio of brands is strong and that continues to be true today.

Core Fisher-Price up 7%, American Girl brands up 3% and strong performances by the CARS, Dora the Explorer, Polly Pocket and Pixel Chix toy line, not the mention TMX Elmo, the must have toy of the season.

And Barbie sales are up and on a worldwide basis, Barbie sales are up for the first time in almost three years.

Our customers are experiencing good signs for the holidays as well with some retailers commenting that many of the higher-priced toy items like Power Wheels are moving nicely and early.

In a statement, quote, the latest indices give us reason to believe the softness we have seen in recent years may level off or improve in the next few years.

MPD published a recent study that looks at the leisure time of children and concluded within kids favorite free time activities, playing with toys still ranks higher than playing video games or on the computer.

And two weeks ago, Toy Wishes Magazine unveiled its hot dozen holiday toy list with Mattel claiming four of the twelve top spots with Barbie and the twelve dancing princesses, Fisher-Price's Kid Tough Digital Camera, TMX Elmo, and Radica's Digi makeover.

Let me take this opportunity to welcome our Radica colleagues to Mattel.

As you know, on October 3, the Radica transaction officially closed and Radica and its family of brands joined the Mattel family.

It could not have been a more timely announcement, as according to MPD, one of the fastest growing area in toys is youth electronics with sales up 23% over the last year.

Radica's expertise in this burgeoning arena combined with Mattel's global footprint should be a win-win for both organizations and all of our collective brands.

Across Mattel, our international team under Brian Stockton's leadership continues to post strong double digit growth rates, growing in all regions across the globe.

We also saw the first increase in gross margins in a few years, although we're still not where we want to be from a historical perspective.

When I spoke to you a year ago, I said that I was as excited about Chapter II as I was in my early days at Mattel.

I feel the very same way today.

I'm encouraged by our progress with the Barbie brand and we have continued the positive momentum in our other core brands, like Hot Wheels, Fisher-Price and American Girl.

Both execution are improving and we're better capitalizing on the advantages of scale all over the world.

And I'm excited about the future with our new colleagues at Radica.

True, the holiday season has just begun, but so far it's a good beginning.

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

Thank you, Bob, and good morning, everyone.

Before I begin, I'd like to remind you that the Company's acquisition of Radica Games, Ltd. was completed on October 3rd.

Therefore, Radica's operations have not been included in Mattel's third quarter results.

Radica's results will be included in Mattel's financials beginning in the fourth quarter.

My remarks regarding Mattel's third 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 September 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 third quarter were up 8% over the prior year, with a one percentage point positive impact from changes in currency exchange rates.

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

On a regional basis, sales in Europe were up 13%, including a 4 percentage point benefit from changes in currency exchange rates.

Sales in Latin America were up 10% with no impact from foreign exchange.

Sales in Asia Pacific were up 6%, including a 1 percentage point negative impact from foreign exchange.

I will now review our core categories and brands.

Mattel girls and boys brands.

Worldwide sales for Mattel girls and boys brands were up 8% with a two percentage point benefit from changes in currency exchange rates.

The sales increase reflects a 6% increase in U.S. sales, and a 9% increase in international sales, including a three percentage point benefit from foreign exchange.

Worldwide Barbie sales were up 1%, including a one percentage point benefit from changes in foreign exchange.

Barbie sales in the U.S. increased 4% while international Barbie sales were flat with the prior year, including a three percentage point benefit from changes in currency exchange rates.

Barbie brands experienced a restabilizing trend with domestic share gains in MPD fashion doll category and three consecutive quarters of sales growth in the U.S.

Worldwide sales of other girls brands were up 16%, including a three percentage point benefit from foreign exchange.

The sales increase was primarily driven by strong sales of Pixel Chix and Polly Pocket, especially in international markets.

Sales in the wheels category declined 3%, including a one percentage point benefit from currency exchange rates.

Growth in Hot Wheels internationally was more than offset by sales decline in Hot Wheels and Tyco R/C in the U.S.

Our entertainment sales remain strong and were up 27% including a one percentage point benefit from changes in currency exchange rates.

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

We also had solid growth in our games business led by UNO, and we look forward to expanding our offering within this area through our acquisition of Radica, which I mentioned was completed early in the fourth quarter.

Fisher-Price brands: worldwide sales for Fisher-Price brands were up 9% for the quarter, including a 1 percentage point benefit from changes in currency exchange rates..

Worldwide, core Fisher-Price was up 7%, with a one percentage point benefit from foreign exchange and Fisher-Price brands was up 13% worldwide, also with a 1% benefit from foreign exchange.

Our newborn and baby gear lines continued to lead the growth in Fisher-Price core, while Nickelodeon properties including Dora the Explorer, Go Diego Go! and Backyardigans continued to drive the growth in Fisher-Price Friends.

And let's not forget our favorite friend, TMX Elmo, which is off to a great start, and is already Fisher-Price's top-selling item for the year.

On a regional basis, U.S. sales of Fisher-Price brands increased 4% while international sales grew 20%, including a 3 percentage point benefit from foreign exchange.

American Girl brands: sales of American Girl brands increased 3% in the third quarter driven by the new American Girl retail store in Los Angeles.

Let's review the P&L, which is shown on exhibit one.

For the quarter, gross margin was 47.6%, 190 basis point increase versus the prior year reflecting the positive impact of aligning our prices with increases in input costs, favorable mix, and supply chain savings.

Advertising expense in the quarter was $205.9 million, or 11.5% of net sales, consistent with last year.

Selling, General, and Administrative expenses were $323.3 million, up $62.4 million from last year's $260.9 million.

As a percentage of sales, SG&A increased 240 basis points to 18.1% in the third quarter from 15.7% of net sales last year.

As mentioned in our press release, $19 million of the increase, or 110 basis points related to a cumulative adjustment for non-cash compensation expense.

This expense related to unintentional accounting errors identified during our historical stock option review, which I'll talk about in more detail in a few minutes.

Beyond this adjustment, the largest component of the increase in SG&A related to incentive compensation accruals.

SG&A was also negatively impacted by $4 million of current period stock-based compensation expense in according with SFAS 123-R.

Increases in SG&A were partially offset by savings resulting from the streamlining of the Mattel brands organization.

Excluding the stock option adjustment and the increased incentive, SG&A as a percentage of net sales was relatively flat with the prior year quarter.

For the quarter, operating income was $322.2 million, compared with $308.8 million in last year's third quarter, with the increase driven primarily by higher sales volume and improved gross margin.

Interest expense was $22.6 million in the quarter, compared with $16.8 million in 2005.

The increase in interest expense versus last year is due to a greater proportional long-term debt and overall higher average interest rates.

Interest income for the quarter was $6.7 million compared to $4.3 million in 2005.

The higher interest income is also due to higher average interest rates.

Other nonoperating items in the quarter was an expense of $1.million versus income of $15 million a year ago.

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

Income tax expense for the quarter was $65.6 million, or 21.5% of pretax income, compared to $86 million, or 27.6% in the third quarter of 2005.

As we mentioned in the second quarter, this year's tax rate is being positively impacted by the tax increase prevention of reconciliation act passed in May of this year.

So to summarize the P&L for the quarter, we reported net income of $239 million or earnings per share of $0.62 versus last year's third quarter net income of $225.3 million or $0.55 per share.

Net income and earnings per share was negatively impacted by the $19 million pretax non-cash compensation expense related to unintentional accounting errors, which reduced earnings per share by $0.03 per share.

The overall increase in net income is primarily the result of higher sales volume, improved gross margins, and lower tax rate.

Now turning to the cash flow statement, the balance sheet is shown on exhibit three.

Cash used for operations in the first nine months of 2006 was $368 million, driven primarily by the use of cash for working capital requirements, partially offset by net income of $307 million, and depreciation and amortization of $128 million.

Cash used for investing activities was $101 million, primarily for capital expenditures.

Cash from financing and other activities was $24 million, and reflects the proceeds from the issuance of $300 million of senior notes, offset by the utilization of cash for share repurchases and debt repayments.

During the quarter, the Company repurchased approximately 2.4 million shares of stock at a cost of $39.4 million.

Our cash on hand at the end of the quarter was $552.4 million, up from $173.8 million at the end of last year's third quarter.

The increase in cash was due primarily to increases in long-term debt, including the issuance of $300 million of senior notes in June.

Receivables at $1.4 billion were up $125.5 million from last year's third quarter and represented 70 days of sales outstanding, which is two days higher than last year.

Factoring was down $76 million from 2005 levels and day sales outstanding prior to factoring was three days lower than last year.

Inventories at $672.2 million were down $53.7 million, or 70% versus the third quarter of 2005, and represented 62 days of supply, which was five days lower than last year.

Our total balance sheet debt increased by $404.7 million from the third quarter of last year, primarily as a result of the $225 million international term loan entered into in December 2005, and the issuance of $300 million in senior notes in June 2006, partially offset by the retirement of a $39 million mortgage in November 2005 and $50 million of medium term notes.

As of quarter end, our debt to total capital ratio was 29%, versus 19% last year.

We continue to operate under established capital and 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 $31.6 million versus $32 8 million in the third quarter of 2005.

Now I'd like to discuss the results of our stock option review in more detail.

During the third quarter of 2006, the Company commenced and completed a comprehensive review of its historical stock option practices for grants made during the period beginning fourth quarter 1993 through third quarter 2006.

Outside legal council actively participated in the review.

The review found that there have been no back dating of stock option grants, no misconduct or manipulation associated with stock option grant dates, no intentional deviation from generally accepted accounting principles and no material inaccuracies with respect to the current or financial historical statements of Mattel.

The review did identify some administrative procedural deficiencies that resulted in unintentional accounting errors principally related to situations which at the date of grant approved by the compensation committee, an aggregate number of options to be granted to the general population of employees was approved and the exercise price for the options was established, but the allocation of those options to certain individual employee recipients were not yet finalized.

In these situations, the company has utilized the grant dates approved by the compensation committee as the accounting measurement date.

For accounting purposes, however, the measurement date for a grant cannot occur until the allocation of grants to individual employee recipients is finalized.

The therefore, the use of grant date approved by the compensation committee as an accounting measurement date resulted in unintentional accounting errors.

The review found no such errors associated with any executive officer or board member branch and no errors associated with any grants made after 2002.

The unintentional accounting errors associated with the use of incorrect measuring dates for certain grants caused non-cash compensation expense to be understated by a cumulative amount of $19.3 million or $13.3 net of pretaxed income -- or net of income tax expense, over the years 1995 to 2005, the period in which the options in question vested.

The impact on income from continuing operations was not material to any previously reported period, and was less than 1% of income from continuing operations in any individual year.

Because the errors are not material, a correcting entry was recorded in the third quarter of 2006 to recognize the cumulative impact of this non-cash expense on the Company's financial statements.

This adjustment increased selling and administrative expenses and reduced operating income by $19 million or 110 basis points of net sales.

This resulted in an aftertax reduction of net income of $13 million or 70 basis points of net sales.

The impact net to the third quarter earnings was a $0.03 reduction in earnings per share.

So to recap the third quarter, our top line benefited from continued international strength, a major contribution from our entertainment properties, solid growth in Fisher-Price and other girls' brands, and a stable Barbie performance.

Our profitability reflects the positive impact of some of the actions we took earlier in the year, including streamlining our Mattel brands business,aligning our prices with increases in input costs, and initiating supply chain improvements, partially offset by the stock-based compensation adjustment and incentive compensation accruals.

Our top line and gross margins are moving in the right direction, and we're encouraged by the improving trends in our business.

Clearly we are making progress, but we know we have a lot more work to do.

As we enter the all-important fourth quarter remained focused on executing our business.

That completes my review of the financial results, now we'd like to open the call to questions.

Operator?

Thank you. [OPERATOR INSTRUCTIONS] Elizabeth Osur, Citigroup.

Thank you.

I have two quick questions.

One on gross margin, if you could talk about a little more in detail about the improvement, and which pieces you think would be sustainable throughout the rest of the year, and second on American Girl, the results were actually disappointing to us, although they were up year-over-year.

So if you could touch on just whether or not the L.A. store is performing as expected, whether you think the stores are starting to cannibalize from catalog business, and if that's the case, how you think about further store expansion for next year?

Thanks,

Hi Liz, this is Bob.

Let me start with American Girl, and then Kevin can talk about the gross margins..

The stores in general are doing well.

The catalog business is a bit soft.

This year's 100-page wish book catalog goes out to our best customers starting today.

The girl of the year, Jess, is starting to do a bit better, and the third movie, "Molly" airs Sunday after Thanksgiving on the Disney channel this year.

So, so far the business in total hasn't done as well as we've liked, but nonetheless, it is growing on top of last year's double digit growth, I suspect we'll make a decision on further stores sometime in the future.

As I've mentioned previously, we are looking and will be testing the concept that we've internally called American Girl boutiques, which are smaller stores.

And we'll probably open a couple of those next year to get a feel for those.

Thanks.

With respect to gross margin, Liz, if you look at gross margin's higher input costs for raw materials, labor, transportation and higher royalty costs continue to put pressures on margins but selective price increases taken earlier this year, favorable mix and cost savings generated from our supply chain initiatives more than offset these costs during the quarter.

As for sustainability of improvements, we'll continue to pursue cost savings at our supply chain to at least partially offset upward cost pressures but there's no guarantee we'll be successful in fully offsetting the pressures.

This quarter was the first increase gross margin in a couple of years, but we're not where we want to be from a historical perspective, however, over the long-term, we believe that our brands can generate margins consistent with well-run consumer product companies, and as you know, well-run consumer product companies generate gross margins around 50%.

Several years ago, we were approaching this benchmark, but most recently our margins have been under pressure due to declines in Barbie and rapidly rising input costs.

Over the long-term our goals improved gross margin by stabilizing and growing Barbie and continue to grow our other core brands through innovation as well as generate supply chain savings to partially offset upward cost pressures.

Joe if I could just ask one follow-up, could you touch on the supply chain and maybe just let us know how far along you are in the improvement process and if there's some way to kind of summarize, are we 50% the way through the improvement plan or give us a sense of where we are?

This is Bob.

My view on supply chain is, you kind of always go after the low-hanging fruit.

Certainly we're doing that.

Then the trick is to see the new fruit ripen every year and pick that fruit.

Today, there are two big initiatives going on.

One is in eProcurement and I would say we are partially but not totally done with implementing eProcurement which will centralize and digitize everything we buy.

The second one is lean manufacturing, which we borrowed heavily from the large industrial companies like 3M or GE or Toyota.

We've got experiments now going in all of our plants.

We're starting to move from our plants to our vendor's plants to improve their manufacturing.

This is another one where we're well along the way, but we haven't yet achieved all the benefits we anticipate.

And then once we are finished with those two, the challenge will be to find the next generation of cost savings, which we've been pretty successful in doing over the last few years.

That's great, thanks so much.

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

Good morning, guys.

A couple of quick questions, the video game industry which is about half the size of the traditional toy industry is expected to start growing at 30 to 40% herein the December quarter and in 2007.

Does this concern you?

Do you think there'll be any cannibalization from that sector on the traditional toy business?

And second question, with the price of oil coming down, have you seen any changes in resins costs?

Could there be any impact to this year, or do you think there's potentially some benefit to 2007?

Hi, Tony, I'll start and turn it over to Kevin.

Historically, the traditional toy industry has not experienced a lot of direct cannibalization from increased and video game sales.

Certainly there is an issue when you look at the price of some of these new platforms, particularly when something -- when a new video game console costs 4 or $500, just from a share of wallet standpoint, I I find that concerning.

But going back to historic data, particularly as it relates to Mattel, our market tends to be more girls than boys and tends to be younger than older and we don't see much of a cannibalization affect on our traditional sales.

And with regard to your question on oil, there's typically a lag of when raw material prices change and those being reflected in our cost of sales.

We purchased about half our of our product vendors who generally quote prices nine to 12 months in advance and maintain those products through the selling season.

For products manufactured in our own plant, the impact of changes in raw material prices is of course, sooner.

However, we don't expect benefits from these recent declines this year, as almost all of our products have been made for the 2006 holiday season.

Hopefully, if prices continue to decline, we would see that next year in 2007.

Okay, great job, thanks, guys.

Thanks, Tony.

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

Thanks.

First, I was wondering if you could talk a little more about the Radica acquisition and what your thoughts and plans are for that?

Just looking at the consensus sales projections, it looks their sales were up 32% last year but the consensus projection is only for 2% growth this year.

I'm trying to figure out how to think about projections for for the fourth quarter and can you also comment if there's any unusual pattern on the seasonality of profitability there that's different from traditional toys?

And secondly, can you talk a little bit more about Barbie and just some of the industry data in terms of how the fashion doll category overall did in the quarter?

And just about your performance relative to that and also about inventory levels in the channel and what your view is on that?

All right, Linda.

Let me start with Radica.

We do not provide forward-looking guidance on any of our business or on our business in total.

I can tell you that a few years ago, we identified games as an area of strategic growth.

We've been building our portfolio ever since.

Electronic games are becoming increasingly important and we naturally want to participate in that growth and we see Radica as a facilitator of that growth, and it's a group of people that have done a fabulous job in that area of toys and we're looking forward to partnering with them.

But as it relates to commenting on somebody's consensus forecast, we don't do that.

As it relates to Barbie, my views on Barbie really have been consistent all year.

We do have a long way to go, but I continue to feel pretty good about our progress.

The POS that we get from top customers shows that this year's product is up, but total sales are down due to lower sales of prior year or closeout goods.

Retail inventories, according to our calculations, are down and the way we do that is to look at our shipments and the consumption going out.

The total category as defined by MPD, MPD of Dows is down this year as is the entire toy business so far this year.

But that same source MPD shows Barbie and Polly and our Disney princesses business all gaining share.

Okay, great.

Thanks very much.

Thanks, Linda.

We'll go next to Sean McGowan with Wedbush Morgan.

Thank you.

Was wondering if you could talk in a little more detail about the components of Fisher-Price and what we're seeing, where there's areas of relative strength and what you're seeing on the competitive front in preschool in general?

Hi Sean, this is Bob.

We've certainly have good experience with TMX Elmo, I think as Kevin mentioned.

Elmo has performed very well.

It's Fisher-Price's best-performing SKU right now and as most of you know is pretty well sold out, although we are scrambling to get more goods in as fast as we can to fill to demand.

The digital camera is also performing very well.

That's been cited on several of the hot lists as being an important toy for this holiday season.

It is very early, but it's selling well.

Kevin, do you have any other?

Dora is doing well, all of Nickelodeon is doing well.

Go, Diego, Go!

Or Backyardigan is doing well.

So the sales or character license Brand side of Fisher-Price is doing well, as is the core business, which has done well for several years now.

Particularly baby gear.

If I can ask something about TMX.

This is a product you wouldn't even show anybody back in February.

So it obviously has been a successful campaign to increase buzz around the thing, but how do you develop a campaign designed to increase buzz and get everybody hyped about it and then not have anywhere near the level of supply to meet demand.

Didn't you think your program was going to be successful?

How do you find out now?

we certainly thought it was going to be successful, Sean, and we have a lot of experience of making Elmos every year, but nobody anticipated the first day response we had on this toy.

I don't have all the history I would need to support this statement, so I'll just say it's an opinion, but I -- certainly since I've been here, there's never been a one-day sellthrough of a toy like this, let alone this happening in September, not the day after Thanksgiving.

We're getting more Elmos in, we will sell a lot of Elmos and trust me, we want to sell Elmos, not create demand and not create the order, we like cash flow around here, and we don't get cash unless we sell the toy.

Does the fact you got that indication in September give you an extra turn in the factory that you might not have had if you found out in late October that it was going to be that high?

Yes, so we have increased production, we are working hard to fill demand.

And the good news that it was early enough so it will be a scramble to get it here, but we're working pretty hard and will get as much here as we can.

Okay, thank you very much.

We'll go next to Margaret Whitfield with Ryan Beck.

Good morning, everyone.

I guess we covered Fisher-Price pretty well.

But I wondered, Bob, there are some new Fisher-Price products that are just arriving now at retail.

Are there any other key holiday toy drivers that we haven't addressed on this call that you could comment about in terms of the early sales in September?

Well, we've had good early experience with several of the Barbie items.

Twelve dancing princesses is off to a good start, Tanner the Dog, Barbie loves TMX Elmo.

That was something we came up with quite late and a lot -- not a lot, some retailers did not even want to support the item, and that's been a sellout.

That's another one that today you can only find on eBay.

Fashion fever has done well, accessories have done well in Barbie, although it's very early, but the styling head and the party bus and those sorts of things.

CARS, as you know, from Pixar, has been on fire all year.

Superman did fine.

If we really look at it versus history, right now CARS is about equal to what we did historically on Batman and there seems to be no end in sight for CARS demand.

Superman was probably about two-thirds the size of Batman and is probably done about now.

What else did I miss, Kevin?

I think you got it, Bob.

Any other learning products, like, I Can Play Piano, any early read on that, or the Smart Start Creativity Center by Fisher-Price?

We like both, it's very early on both, the advertising anno on the smart start just started and I'm not even sure if I've seen the advertising yet on I Can Play Piano.

It's a little early.

I don't think there's anything -- it's not yet exciting on either one of those items, but it's still pretty early.

And you said your inventories at retail were down.

What is the retail appetite given the fact that September in general was a pretty good month for retail sales?

Well, I mentioned our inventories are down as we calculate them on Barbie.

It also happens to be true that we see retail inventories as being down versus prior year across Mattel's lines.

I would say at this time of year, retailers only buy what they really believe they have to have and my discussions with retailers would indicate that if you look at gasoline prices, look at their trends in other businesses, again, it's very, very early but I would say in general they're encouraged about the prospects for the holidays.

And refresh my mind, is Radica expected to contribute to Q4 since that must be their peak quarter, and what can you say about next year in terms of any contribution?

We won't say anything about next year, Margaret.

As it relates to Q4, we believe it's immaterial one way or the other.

It could be a little bit up or a little bit down.

In fact is, I think I would have probably said it's dilutive in the early days, but it's a small number either way this year.

Okay, thanks and good luck.

Thanks, Margaret.

[OPERATOR INSTRUCTIONS] We'll go next to Tim Conder, with A.G. Edwards.

Thank you.

Just a couple.

Back to American Girl, can you give us the catalog -- you said it was down in the third quarter, if I heard you right.

And how the catalog's looking year-to-date there.

And then with the fall toy fair coming up here starting towards the end of the week, what type of pricing power are you still looking to get, or will that be a little more challenging given the recent follow off in some of the input costs?

Well, we've never, Tim, disclosed sort of the fine line item of sales at American Girl other than to say, I think it has consistently been all year.

Catalog down just a bit, offset by store sales.

So the trend has been fairly consistent all year and there's no real news there yet one way or the other.

Again, remembering it's early and this year's catalog literally mails today.

So we'll see how it goes.

As it relates to next year's pricing, certainly commodities have moved up and down and we look at these things on a line by line and brand by brand basis and I know everybody follows oil prices.

I can tell you I'm at $2.75 a gallon today.

So we all memorize the price of gasoline, but resins, I think, probably represent -- haven't we said about 10 or 12% of our product cost.

And resins are not directly related to oil prices, certainly in the short-term.

We've seen labor costs increase, we've seen other commodities like zinc costs at record levels.

So it's early to get into specific pricing discussions, which of course, we prefer to have with our customers before we have with others, but just because the price of gasoline is down a little bit doesn't mean that we're looking at good news across the portfolio of commodities.

Okay.

And on zinc and then transitioning into the wheels category, if there's any area that's a little dampening here to a very good quarter, that may be it.

What are the thoughts about timing of potential turnaround there and will that be more of an '07 event as you see it at this point?

Yeah, I think it will.

We're certainly seeing cannibalization from Pixar's CARS toys as it retails to Hot Wheels.

If you look at MPD's vehicle category, it is growing and we are gaining share with CARS more than offsetting modest Hot Wheels declines.

I think that could cycle through in the future.

And back to the pricing question, where do you stand at this point?

Obviously it appears that the mix has helped and the strong topline, but where do you stand year-to-date?

Is pricing pretty much fully offset?

The input costs, you alluded to that on an earlier question in gross margin.

Can you just isolate pricing?

We don't do, that Tim.

We try to talk about some of the components, but we don't like to get into that level of detail.

Okay, great.

Thank you, gentleman.

Thanks, Tim.

We'll go next to Gerrick Johnson with BMO Capital Markets.

Good morning.

Question on Elmo, can you discuss sales of Legacy Elmo dolls.

You've seen sales from TMX, people not finding TMX so they go off and buy a different Elmo?

Yes, we have seen that.

We've seen our Elmo business growing across the portfolio.

I've read reports that Elmo in general is growing, even outside of the toy business in areas that other licensees have and I've also seen reports that something like this even though we're disappointed we couldn't fill demand in the short-term, there's some benefit to the toy business when there is some excitement and some news and innovation out there.

Okay.

And back to the wheels segment, is there -- do you have any plans to offset perhaps the private label encroachment that we're seeing at certain retailers, anything you can do about that?

Yeah, we see that across all of toys and the real trick here is innovation.

When we have good innovative product regardless of for what segment we're talking, when we have good innovation, we're going to perform well and store brands aren't going to do as well because it tends to take them a longer time to catch up.

Innovation is key to this business, that's not going to change and if we do our job, we'll with b fine.

Any specific innovations in the vehicles area?

Yeah, there are, but I wouldn't want to get into those.

We are doing our toy shows with customers upcoming pretty soon.

I think it's probably February or thereabouts when we'll unveil next year's lines publicly.

We'll go next to John Taylor, with Arcadia.

Good morning.

Hi, J.T.

I've got a couple of questions.

I got on a little bit late, so if you went over this, I apologize.

Could you talk a little bit about the inventory number going down.

Were there any concentrations of anything, major new programs in Q3 last year that might relate to that or was there -- just talk about by region, give us a little color on that, that's the first one.

The second one, Bob, could you talk about any observations you might have about collectors and whether rising gas prices might have had an impact on that business outside of cars and maybe there's hope for that return when prices come down.

Last thing is, kind of related to inventory, but a pretty nice low number.

I wonder if anything cash catches on fire rather than TMX or in addition to TMX, whether you'll have any air freight issues that might be above what you had last year.

Thank you.

Let me start backwards and go earlier, J.T.

You know this business well.

There will undoubtedly be some SKUs we don't have enough of and there will be some SKUs we've got too many of.

That really hasn't changed.

I don't anticipate anything particularly unusual this year compared to prior years.

I don't recall anything specific in last year's inventory that's causing any changes this year.

We're focused on running our inventories tight, retailers are.

My view of inventories has been consistent for many years now, which is inventory is just cash in the form of a depreciating asset and we want to run our business tightly just as retailers do.

The inventory reduction that we've seen generally is pretty broad.

We haven't seen it -- it's not concentrated in one particular toy line or another.

We've been focused on it across the entire company and the results have been pretty broad across the company.

As it relates to collectors, that's an area of the business we've been working on and need to work on .

I've seen competitors of ours like Lego do a nice job of tapping into their heavy users and collectors and we've been working hard, particularly on Barbie and now Hot Wheels of trying to get that business stabilized or improving.

It would be nice if lower gas prices helped that business.

It certainly can't hurt anything.

Are we likely to hear more about the new programs for collectors at maybe toy fair in February, is that a logical time for that?

Sure.

Okay, thank you much.

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

Thanks.

Just another question on TMX Elmo.

I guess I was thinking that you could get more product here within four to five weeks and knowing that it was a big hit in September, I'm expecting to see some in the stores.

And yet the Wal-Mart we checked did not receive a shipment in the last weekend.

So I'm just kind of wondering if you could give a little more color on the production elements and time to transport products from China to here and a little more color on that.

Well, Linda, I can't comment on your specific store you shop in.

Stores are getting inventory, but it sells quite quickly.

The same has been true of CARS all year.

When a product has been doing well -- I can't talk about specific stores, but we're trying to fill demand and we are shipping products to retailers and will continue shipping through the holiday season.

I don't know what kind of color to give you on the timing of it, other than we're all working as hard as we can and products are coming in, when we get the product, we move it through quickly, and when retailers get the product, they move it through quickly, but consumer demand is pronounced.

Can I assume you shipped all your own inventory out to retailers already?

No, we have inventory -- there's work in process inventory, there's inventory probably sitting that was finished goods at the end of a production line.

You can assume we're moving as fast as we can and so are retailers.

This isn't -- the issue is not that somebody's got a pile of inventory and hasn't moved the pile of inventory.

The issue is demand is outstripping the supply.

Okay.

Can I ask a longer term question about production in China?

Some other toy makers have been talking about moving more inland with their plants because of rising labor costs in China.

Is that something you're working on in terms of your supply chain improvements that you're making?

We are looking at all sorts of alternatives.

One would be to go further inland, another would be to go into new countries.

Some toy producers are talking about going into places like Vietnam to produce toys.

Over the long-term, we are looking at those things, but we certainly don't have any immediate plants plans to move our plants.

That does conclude our question-and-answer session today.

I would like to turn the call back over to our speakers for any additional or closing remarks.

Thanks, Matt.

I would like to thank everyone for participating in the call.

We will have have a replay available beginning at 11:30 Eastern time.

The number for the replay is 719-457-0820, and the passcode is 8926049.

Thanks, everyone and have a good day.

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