Mattel Inc (MAT) 2006 Q4 法說會逐字稿

Good day and welcome everyone to the Mattel Incorporated fourth quarter and year end earnings results conference call conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thanks, Amanda.

Earlier this morning we issued a press release which detailed Mattel's fourth quarter and full year 2006 results.

On the call today, Bob Eckert, Mattel's Chief Executive Officer will give a few brief remarks and then Kevin Farr, our Chief Financial Officer, will provide more detail on the financial results of the quarter and the year.

After Kevin comments, we will 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 Barbie, Fisher-Price, and our other core brands and product lines, brand strategies, maintaining growth, international expansion of Radica, American Girl retail expansion, profits and margins, supply chain improvements, our capital investment framework, capital deployment and global manufacturing principles.

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 subheadings Financial Information and Earnings Releases.

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

Thank you Mike, and good morning.

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

Overall, I am pleased with our 2006 results.

As I said on previous occasions, the Company's strong portfolio of brands has consistently performed well despite the challenges we've experienced within the Barbie brand.

I have often said turning the tide on Barbie would serve to bring incremental gains to an already successful company.

We realize some of those benefits in 2006.

Barbie's domestic sales were up 3% for the year, with four consecutive quarters of U.S. growth for the brand.

Worldwide, Barbie revenues were flat for the year, clearly an improvement in the decline of the past two years.

Though the new team has been working on Barbie for just over a year and there is still work to be done, we're encouraged by the progress to date.

In addition to the challenges with Barbie, our gross margins declined in both 2004 and 2005, primarily due to rising external costs particularly for raw materials such as resins and the negative impact of product mix.

In 2006 gross margins grew 40 basis points to 46.2%, the first increase since 2003 as price increases and supply chain savings more than offset cost pressures and mix.

The U.S.

Barbie stabilization and gross margin improvement were just two of the many highlights of our 2006 results.

There were a variety of other factors at play that drove 9% revenue and 10% operating profit growth for the year and operating cash flow generation of more than $875 million, almost double the 2005 level.

At approximately 45% of the business, international is well on its way to our 50% goal.

Globally, Fisher-Price, both core and friends, had a phenomenal year with the unparalleled launch of TMX Elmo, as well as strong contributions from the preschool, baby gear and Nickelodeon businesses, and we drove strong and sustained performance from the Pixar CARS entertainment property.

We also strengthened the balance sheet and effectively deployed excess cash for our shareholders through an acquisition, share repurchases and a 30% increase in our dividend.

One of the biggest highlights in 2006 was the acquisition of Radica, makers of such popular youth electronics as 20-Q, DigiMakeover and Cube World.

Radica experienced a record fourth quarter, and we look forward to future opportunities given its strong product lineup and creativity.

Radica's products differ from most of Mattel's portfolio as they appeal to older kids and adults, compete in some of the industry's fastest growing areas, and do not as of yet have sufficient international presence.

While many of our key product initiatives are under wraps until the New York Toy fair during the first part of February, we've begun the new year with exciting news from the American Girl business.

As you know, American Girl is recognized an an industry leader in experiential retail since opening American Girl Place Chicago in 1998.

Our three phenomenally successful retail and entertainment sites have welcomed more than 15 million visitors to date.

This year American Girl plans to open American Girl Boutique and Bistro, a new experiential retail concept in two premier shopping centers, Galleria Dallas and North Point Mall in Atlanta.

The new stores are slated to open in mid-to-late 2007.

The American Girl boutique and bistro will carry a rotating section of the Company's popular dolls, outfits, and accessories, as well as a variety of its best-selling American Girl books.

There will also be a doll hair salon and a casual bistro.

Designed as the ultimate place to celebrate girl's birthdays and other special occasions, each American Girl boutique and bistro will feature separate party rooms where girls and their friends can enjoy American Girl themed parties, complete are organized games and activities, special food and cake and party favors.

Various girl and mom friendly programs and classes will also be offered at the store throughout the year.

Earlier this month American Girl also introduced the 2007 girl of the year, Nicki, a contemporary girl who is compassionate, generous and a natural with animals.

Like previous girl of the year characters, Nicki is only available until the end of 2007.

One of the efforts we're most proud of at Mattel celebrates its ten-year anniversary in 2007, our global manufacturing principles, the cornerstone of the Company's ongoing commitment to responsible manufacturing practices around the world.

In commemoration of this historical milestone for the Mattel and the toy industry at large, Mattel will release its 2007 global citizenship report tomorrow.

The Company's second such report, Mattel remains the only company in the toy industry to produce its report as well as the only toy company and one of the few consumer goods companies to publicly disclose third party audit results of its factories.

I am immensely proud that during the past ten years, Mattel's efforts have had an enormous and positive impact on how the toy industry views ethical manufacturing practices, and we continue to bring transparency to the process.

I encourage you to visit Mattel.com where a copy of the report can be viewed and downloaded.

All in all 2006 was a good year for Mattel.

We made solid progress on the Barbie brand though we recognize that there is still work to be done .

In 2007, we're excited about the opportunities that come with expanding the scope of Radica to the global marketplace.

We look forward to capitalizing on the strong momentum with Fisher-Price.

We're encouraged by our revised Hot Wheels strategies, including the new basic die cast collection strategy featuring dozens of new styles and collectible segments which was successfully launched late last year.

In our games business, we're excited about new launches in the scene it brand, including the new platform and entirely new versions of our three strongest titles, movies, Disney and Harry Potter.

In 2007 we'll continue to be focused on generating cash and effectively deploying it for our shareholders, and we'll do all of this as a productive and positive global citizen.

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

Thank you, Bob.

Good morning, everyone.

I will start by reviewing sales for the fourth quarter.

Total worldwide gross sales for the fourth quarter were up 15%, including a 2 percentage point benefit from changes in currency exchange rates.

The Radica acquisition was responsible for 3 percentage points of growth in the quarter.

U.S. sales and international sales each grew 15% in the fourth quarter and changes in exchange rates had a 5 percentage point positive impact on international sales.

On a regional basis, sales in Europe were up 17%, including a 7 percentage point benefit from exchange rates.

Sales in Latin America were up 16%, with no impact from foreign exchange.

Sales in Asia Pacific were up 13%, including a 2 percentage point benefit from changes in exchange rates.

I will now review our core categories and brands for the fourth quarter.

Mattel's girls and boys brands: worldwide sales for Mattel girls and boys brand segment were up 17%, including a 3 percentage point benefit from changes in currency exchange rates.

The sales increase reflects strong growth in the U.S. and international markets with 25% sales growth in the U.S. and 12% sales growth internationally, including a 4 percentage point benefit from foreign exchange.

Worldwide, Barbie sales were up 3% including a 3 percentage point benefit from changes in currency exchange rates.

Barbie sales in the U.S. and international were both up 3%, international sales growth included a 4 percentage point benefit from changes in currency exchange rates.

We are encouraged by the positive trend in our U.S.

Barbie business.

Our results demonstrate the changes we made have had a meaningful impact with our customers and consumers.

But we know there is more work to do and more opportunity to improve the brand's overall performance in the U.S. and abroad.

Worldwide sales of other girls brands were up 8% including a 3 percentage point benefit from changes in exchange rates.

Worldwide sales growth in other brands for girls was primarily driven by Polly Pocket, Pixel Chix and Winx in international markets.

International sales of other girls brands grew 19%, including a 5 percentage point benefit from changes in currency exchange rates, while sales in the U.S. were down 7%.

Sales in the wheels category increased 5%, including a 2 percentage point benefit from changes in currency exchange rates.

Sales declines in Hot Wheels in the U.S. were more than offset by strong international growth.

Matchbox posted worldwide growth in the quarter.

Sales in our entertainment category, which includes our games and puzzles business, and the newly acquired Radica, were up 62% including a 2 percentage point benefit from changes in currency exchange rates.

Even without Radica, our remaining entertainment games and puzzles business experienced strong growth.

During the fourth quarter, sales of CARS product continued to be strong worldwide and more than offset declines in Batman and Yu-Gi-Oh while UNO and Scene It led growth if our games business.

Radica gross sales were $62.5 million, representing the best fourth quarter performance in Radica's history, which was driven by the continued success of the 20-Q franchise, introduction of Cube World, expansion of the GirlTech line with innovative product introductions like DigiMakeover and steady growth in the play TV product lines.

We're excited to have Radica in our portfolio brands and look forward to establishing a stronger presence in electronic games.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were up 16% for the fourth quarter, including a 2 percentage point benefit from changes in currency exchange rates.

On a regional basis, U.S. sales of Fisher-Price brands increased 12% while international sales grew 24%, including a 5 percentage point benefit from foreign exchange.

Worldwide, core Fisher-Price was up 15%, driven by growth in the preschool, infant and BabyGear lines.

Fisher-Price friends was up 31%, driven by strong sales of Sesame Street, including TMX Elmo and Nickelodeon license properties Go Diego, Go!, and Backyardigans.

American Girl brands, sales of American Girl brands were up 2%, driven primarily by the continued success of the American Girl Place retail stores, including our new Los Angeles store, which opened in April.

Growth generated from our stores offset softness in the catalog business.

Now I will review sales for the full year.

Worldwide gross sales were up 10% for the full year, including a 1 percentage point benefit from changes in currency exchange rates, and a 1 percentage point benefit from the inclusion of Radica.

The sales increase reflects the strength of our core portfolio with healthy incremental contributions from strong entertainment properties.

U.S. sales grew 8%, while international sales grew 11%, including the benefit of 2 percentage points from changes in currency exchange rates.

On a regional basis, sales in Europe were up 9% compared to the prior year, including a 2 percentage point benefit from foreign exchange rates.

Sales in Latin America were up 15%, including a benefit of 1 percentage point from changes in exchange rates.

Sales in Asia Pacific were up 10% with no impact from changes in currency exchange rates.

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

Mattel girls and boys brands: Worldwide sales from Mattel girls and boys brands increased 9%, which included a benefit of 1 percentage point from changes in currency exchange rates.

The sales increase reflects an 11% increase in U.S. sales and an 8% increase in international sales, which included a benefit from changes in currency exchange rates of 2 percentage points.

Worldwide Barbie sales were flat, including a benefit from changes in currency exchange rates of 1 percentage point.

Barbie sales in the U.S. were up 3%, Barbie sales were down 2% international markets, including a 2 percentage point benefit from changes in currency exchange rates.

Worldwide sales of other girl brands were up 11%, which included a 1 percentage point benefit from changes in currency exchange rate.

The sales increase is primarily the result of strong sales of Polly Pocket and Pixel Chix worldwide and the continued success of Winx in international markets.

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

Strong sales of Hot Wheels and Matchbox internationally were more than offset by Hot Wheels sales declines in the U.S. and Tyco RC sales declines worldwide.

Sales in the entertainment category, which include games and puzzles and the newly acquired Radica, were up 34% with no impact from changes in currency exchange rates.

Even without Radica, our entertainment, games and puzzles business still experienced strong growth, driven by the summer blockbusters, CARS and Superman, which more than offset declines in Batman and Yu-Gi-Oh, and UNO, which celebrated its 35th anniversary this year, and delivered the growth in our sales and puzzles business.

Because the Radica acquisition closed October 3rd, Radica results for the full year are the same as the fourth quarter which were reviewed during my earlier remarks on the fourth quarter sales.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were up 12%, with a 1 percentage point benefit from changes in foreign exchange rates.

U.S. sales were up 8%, while international sales were up 20%, including a benefit of 2 percentage points from changes in currency exchange rates.

Worldwide sales of core Fisher-Price were up 11%, including a 1 percentage point benefit from currency exchange rates.

U.S. sales were up 9% and international sales were up 15%, including a benefit of 2 percentage points from changes in currency exchange rates.

BabyGear, infant, and newborn products continued to drive the growth in both U.S. and international markets.

Worldwide sales at Fisher-Price Friends were up 19%, including a 1 percentage point benefit from currency exchange rates.

U.S. sales grew 12%, while international sales grew 32%, including a 2 percentage point benefit from foreign exchange.

The double-digit increase was driven primary by the popularity of several Nickelodeon properties, including Go, Diego, Go!, Dora the Explorer and Backyardigans, and of course, the holiday must have item, TMX Elmo.

American Girl brands, sales of American Girl brands were up 1% versus the prior year driven by the American Girl retail stores including our third store, which opened in Los Angeles in April.

Growth in our stores offset softness in the catalog business.

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

For the fourth quarter, gross margin was 48%, a 20 basis point improvement versus a year ago.

Compared with the prior year fourth quarter, gross margin benefited from price increases and savings from supply chain initiatives, which were partially offset by external cost pressures.

The addition of Radica had a 30 basis point negative impact on the quarter's gross margin.

For the year, gross margin was 46.2%, up 40 basis points from 45.8% in 2005.

Compared with the prior year, the gross margin benefited from price increases and supply chain savings which were partially offset by a favorable mix, external cost pressures and higher royalty costs.

For the fourth quarter advertising expense was 255.6 million or 12.1% of net sales versus 13.9% for the fourth quarter of 2005.

While advertising spending was virtually flat with the prior year fourth quarter, it declined as a percentage of net sales due to increased sales volume.

For the year, advertising expense was $651 million, up $21.9 million or 3%.

However, as a percentage of net sales advertising spend was down 60 basis points to 11.5%, due primarily to overall higher sales volume and greater leverage in ad spending.

For the fourth quarter selling, general and administrative expenses were 110 basis points, up at 17.5% of net sales or $368 million.

SG&A expenses for the full year were $1.23 billion or 21.8% of net sales, up 100 basis points when compared to full year 2005.

The increase in SG&A expenses for the quarter and the full year is primarily attributable to increased incentive compensation accruals, stock-based compensation, costs associated with the new American Girl place retail store in Los Angeles, and the acquisition of Radica.

These upward cost pressures were partially offset by savings generated from actions taken to streamline our Mattel brands division and certain other international operations.

SG&A for the full year included incentive compensation accruals of $109 million versus $22 million in 2005.

SG&A also included stock-based compensation expense of $2.7 million in the fourth quarter and $27.6 million for the full year, of which $19 million relates to cumulative adjustment for prior year stock option grants recorded in the third quarter.

In the fourth quarter, operating income was $388.7 million, or 18.4% of net sales, up 90 basis points compared with last year's fourth quarter.

For the year, operating income was $728.8 million or 12.9% of net sales, up 10 basis points from the prior year, reflecting slightly higher gross margins and lower advertising expenses offset by higher SG&A costs.

For the fourth quarter, interest expense was $26 million, compared with $22.4 million in the prior fourth quarter.

The increase was driven by higher average debt outstanding and a greater proportion of long-term debt.

For the full year, interest expense was $79.9 million compared with 76.5 million for full year 2005, due to higher long-term borrowings and higher short-term interest rates partially offset by lower short-term borrowings.

Interest income for the quarter was $8.5 million, versus 5.4 million in 2005.

For the year, interest income decreased from $34.2 million to $30.5 million due to overall lower average invested cash balances.

In the fourth quarter, other non-operating income net was $2.1 million versus $1.1 million in 2005.

For the full year 2006, other non-operating income net was $4.4 million versus $29.8 million in 2005.

As a reminder, other non-operating income in 2005 included gains from the sale of marketable securities of $25.8 million.

There were no gains or losses from the sale of marketable securities in 2006, and as of year end, the Company did not have any unrealized gains or losses on the balance sheet associated with marketable securities.

The income tax provision for the year decreased from $235 million to $90.9 million.

As mentioned in our prior quarterly conference calls, the 2006 tax rate has been positively impacted by the Tax Increase Prevention and Reconciliation Act Passed in May of 2006 and tax benefits of approximately $63 million related to tax settlements which were recorded in the first two quarters of 2006.

The prior year tax provision included a $39 million positive impact from audit settlements and reassessments of tax exposures as well as a $107 million expense related to the repatriation of unremitted foreign earnings under the Americans Jobs Creation Act.

For the fourth quarter, reported net income of $286.4 million or $0.75 per share versus last year's $279.2 million, or $0.69 per share, the 2005 earnings included tax benefits of $0.11 per share.

For the year, reported net income of $592.9 million versus last year's $417 million.

Full year earnings per share of $1.53 included tax benefits of $0.16 per share and earnings per share for 2005 of $1.01 included $0.26 per share expense related to the AJCA repatriation and $0.09 per share tax benefit.

So to summarize the P&L, the increase in full year net income resulted from increased sales volume improved gross margin, lower advertising expense as a percentage of net sales, and positive tax benefits, which were partially offset by higher SG&A costs and lower non-operating income.

Now, turning to the cash flow and balance sheet, cash flow from operations for the year were $876 million, nearly double last year's amount, driven primarily by net income of $593 million and working capital improvements.

Consistent with our capital investment framework, $235 million in cash was deployed to complete the strategic acquisition of Radica Games Limited.

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

In the fourth quarter, we paid an annual cash dividend of $0.65 per share, up $0.15, or 30% from the prior year.

Also during the year, we repurchased approximately 11.8 million shares of stock at a cost of 193 million, representing almost 3% of outstanding shares.

At year end, our cash on hand was $1.2 billion, up from approximately $1 billion at the end of 2005 primarily due to increased profitability and working capital improvements.

Our receivables were $943.8 million or 40 days of sales outstanding, three days higher than last year.

Excluding the year to year change in factoring which was down $31 million versus the prior year, receivables were up $152 million and day sales outstanding was one day lower.

Inventories at 383.1 million were up 6.2 million or 2% versus 2005, and represented 73 days of supply, which is four days lower than last year.

Our data suggests retail inventories of products with our major U.S. customers finished the year down slightly.

Our total balance sheet debt decreased by $43 million from the prior year.

During 2006, the Company paid down $293 million of international debt and lines of credit and $50 million of medium-term notes.

These payments were partially offset by the issuance of $300 million of senior notes.

Our debt to total capital ratio ended the year at 22.3% versus 26.1% last year, consistent with our long-term goal.

Capital expenditures for the full year were $133 million, which is below our long range guidance of 180 to $200 million, but consistent with last year's capital expenditures of 1$37 million.

So to summarize, we made progress in 2006 on many fronts.

Our top line results were robust with double-digit international growth, continued strength in our Fisher-Price core and Fisher-Price Friend businesses and significant contributions from our entertainment products and other girls business.

The Barbie business has shown marked improvement, with sustained growth in the U.S. and Radica posted its best ever quarter.

After two years of declines, the gross margins are moving in the right direction, as a result of supply chain savings and our efforts to align our prices with increased input costs.

Our profitability is improving and our balance sheet is strong.

We generated $876 million in cash from operations, increased our dividend and opportunistically repurchased shares of our stock.

We've been disciplined in operating our business, and our results confirm it.

We look forward to the challenges and opportunities 2007 brings.

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

Operator?

[OPERATOR INSTRUCTIONS].

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

Hi guys, good morning and congratulations on the year.

I have a few questions for you.

You mention this in your last quarter and again we've seen it this quarter.

In the American Girl business, just wondering why the catalog business is slowing and if you anticipate that, or if you're working on anything to drive an improvement in '07 and then I have several other questions.

But let's start there.

Hi, Felicia it is Bob.

Congratulations to you, too.

You had a good year last year.

I did.

I am tired.

You did.

Welcome back.

Thanks.

American Girl had a record year last year, but it didn't meet our expectations.

The L.A. store did well, in fact,all three of the stores did well.

Last year's Girl of the Year Doll, Jess, wasn't quite as strong as the prior year's Girl of the Year doll, Marisol.

This year, we think we have several things going for us.

First, Girl of the Year Nicki has promising potential.

Secondly, we're planning to introduce a new historical character, this will be the first one we've introduced I believe since Kaya in 2002, and I think it is our eighth historical character in the last 21 years.

As I mentioned in my remarks we have the two boutique and bistro stores opening, one in Dallas and one in Atlanta.

Across the portfolio, even though American Girl grew and hit record sales and profits, it didn't meet our expectations and we think with have programs going on in 2007 to drive further growth.

Then I am wondering and trying to think about obviously going forward, and in the boys business in light of the upcoming competition from Spiderman and Transformers, wondering how we should think about your business there and then also with the huge success of CARS and TMX this past holiday season, wondering if you're concerned at all by " the tough comps" created by those hot properties?

We are going to have tough comps, with revenues up 9% for the year, that's clearly the best I have seen since I've been here, which is 6.5 years now, and in an industry that at least through November I think in the U.S. was down about 2%, we clearly did well, so we're going to have tough comps.

CARS was nothing short of a home run.

Superman would have been a double.

And we had a terrific year in Nickelodeon with Dora and with Go, Diego, Go!, and with Sesame Street in TMX, so clearly 2007 is going to be a lighter year for us in entertainment properties.

We have Pixar's Ratatouille, and other people have the other big movies coming out, but even if you exclude the entertainment properties, we had a good year at Mattel last year, the base is in good shape, and I am encouraged where we are in the base business.

The entertainment properties go up and down with who has what movies.

Great.

Finally, how are inventories heading into the year?

Our inventories or retail inventories?

Retail inventories.

Retailers are reminding us our inventories are a little bit light.

We finished the year with strong sales.

Even even though I think the inventories were up a little bit, Kevin, I think if you were to exclude Radica, whose inventory we inherited, our inventories in fact were down for the year.

Retailers finished quite cleanly.

If you look at our sell-in to retailers and their sell-through or point-of-sale sales to consumers, they were similar, and so retailers finished cleanly.

Great.

Thanks a lot.

Thanks, Felicia.

Now we have a question from Liz Osur of Citigroup.

Couple of quick questions.

I guess, first on the balance sheet, you're sitting on a cash balance of larger than you typically want to end the year and we had anticipated some fourth quarter buybacks.

Can you talk about whether or not you thought about changing your targets, whether or not the leverage goals and the ending cash goal is still the same?

I think with respect to our capital investment framework, we're consistently have been executing against that, and I think we're happy with our framework of having approximately $1 billion of cash at year end and debt to total capital of about 25%.

I think, Liz, since 2000, we've generated almost $5 billion in cash, about $200 million of that went to acquisitions in Radica.

We reduced debt $800 million.

We have almost $900 million worth of dividend payments.

We spent over $900 million in CapEx investing in the business.

We have had almost an increase of $1 billion over the last six years in cash, and we've spent $1.2 billion in share repurchases which represents about 15% of our shares.

So, we don't comment on specific quarters and what we do with the cash flow, but one of our goals, five or six years ago, was to strengthen the balance sheet, my position on this business has been consistent.

That is the toy business is operationally tricky.

Some years are very strong.

Some years aren't so very strong, and you want to make sure you have really strong financial resources and don't layer on financial risk on top of the operating risk.

We'll continue to be disciplined.

We'll continue to be conservative, and we'll be opportunistic.

Okay.

Maybe two more questions.

One regarding that operating risk.

Given the success of the entertainment properties in 2006, have you given any thought to changing your strategy there and maybe increasing your exposure to movie properties in particular, and then secondly, if someone could just address the different Barbie trends in the U.S. and international if you're seeing different products hit in different markets or whether the product availability was just different in the U.S. versus in Europe.

Thanks.

With entertainment properties our point of view is consistent with how we view acquisitions.

That is, it's got to be the right thing at the right time at the right price.

We will not go after entertainment properties to go after entertainment properties.

We'll go after entertainment properties if it looks like it's got strong global appeal, if it looks like it is a good deal for our shareholders, and if you look at our track record over the last six years, our entertainment properties have been very good deals for both the licensor of those properties and for our shareholders.

We'll continue to be just as disciplined about signing up for entertainment properties as we ever have been.

There will be no change in how we approach those things.

As it relates to Barbie, a year ago I talked about the brand being in better shape than the doll business.

We talked about the websites which I think now generate over 58 million visitors a month.

We've sold over 30 million units of Barbie movies over the last five or six years, every one of them I believe has been number one on the Nielsen top kid video chart, and we've got a solid licensing business, but we also said the doll business needed to be improved.

The new team has added value, the Totally Real Barbie House was probably our best doll house in four or five years.

The hot tub party bus did well.

In general, all around the world, our accessories business and the basic Barbie business did quite well and we have more innovations coming in '07.

The U.S. out performed international.

As I said at the end of the first quarter conference call, we got off to a slow start in the first quarter in internationally in 2006.

We reduced the rate of decline or improved the rate of decline every quarter and finished the year cleanly, so I don't think there is a big difference between U.S. and international.

Thank you.

At this time we have a question from Michael Savner of Banc of America Securities.

Good morning.

Thanks.

If I could follow up a little on the first question on American Girl, a little more specific, can you give us what the organic growth was or negative growth was for the quarter, and for the year with and without FX, that would be helpful and maybe a little bit on the spending CapEx wise for Dallas and Atlanta, how you think about CapEx for those stores on a square foot basis so we can think about how that flows into the model, thanks.

There is no FX in American Girl because it is sold only in the United States.

Kevin, do you want to talk about the CapEx?

Basically the CapEx that we spent on American Girl would be within our long-term guidance of 180 to $200 million.

We've been basically below that in 2006 we spent about $133 million, and about $137 million in 2005, but it is part of that, and we don't disclose how much it is per store nor do we disclose by channel sales growth.

I think it is fair to say, Kevin, that each of the three American Girl stores to date have been good investments in the shareholders point of view.

The Dallas store is going to be about 22,000 square feet, and Atlanta I think is about 12,000 square feet.

They're going to be smaller investments, smaller stores, but we're planning on that old 80/20 rule, that is, we don't have quite as many products, but we should be able to get good leverage off of them, and we used the same disciplined approach in making those investments as we did the three larger stores.

That's very helpful.

Thanks.

For the organic growth at American Girl I misspoke.

I meant excluding the L.A. opening, what organic growth would have been.

It would have been lower.

Negative, I assume?

That's your assumption.

We don't go into line item stuff like that, but I think it is fair to conclude that we had a modest level of growth and obviously we had very good performance in the L.A. store.

The L.A. store drove it.

That said, I think I mentioned all three of the stores did well last year, and the catalog business was a little soft.

The primary driver, the catalog business being soft was the Girl of the Year Doll in 2006 compared to 2005.

Terrific.

I appreciate the color.

Thanks.

Thank you, Michael.

Now we have a question from Sean McGowan of Wedbush Morgan.

A couple of questions if I may, some quickies here.

Kevin, what would be your expectation for tax rate in 2007?

I think the tax rate for 2007 would be approximately somewhere between 23 and 24% as we continue to benefit from the tax increase and prevention reconciliation act.

In addition, next year we will be required to adopt the new accounting standard FASB interpretation number 48, accounting for uncertainty income taxes.

We're evaluating the effects of that adoption of Fin 48, but we currently don't expect the new accounting standard to have a significant impact on our 2007 worldwide effective tax rate.

Okay.

Thanks.

Bob, your comment about retail selling versus sell-through was I think year two overall.

Can you just confirm that's the same for Barbie in the U.S.?

Yes, generally speaking it is.

Retailers went into 2006 with very low levels of inventory for the Barbie brand, and my recollection is we probably finished the year just a little bit up in inventories compared to what we started with in 2006, but all in all, it was an okay year, and we don't know of any problems out there.

Okay.

And final question, maybe for Kevin, in the other income line, you gave us what the net figure was.

Are there any big numbers one way or the other offsetting other that would stand out as exceptional?

No.

Thank you very much.

Thanks, Sean.

At this time we have a question from Tony Gikas of Piper Jaffray.

Good morning, guys, a couple of questions, I know it is a little early but can you comment on the raw material costs and looking to 2007, are you planning then flat or could they be down a little bit?

Second question.

Looking to the American Girls product line, what sort of improvements do you anticipate this year and will they come from new product introductions or new marketing initiatives and maybe you can give us a little more color on how you're going to grow that business this year.

Tony, I will talk about the prices for commodities and costs next year.

I think the more recent change in oil prices aren't reflected in our fourth quarter results, and some analysts have correctly noted the declines in oil have not translated into lower resin prices, and if resin prices do begin to drop, there is typically a lag of when raw material prices change as reflected in our cost of sales.

As you know, Tony, we purchased about half of our products from vendors who generally quote prices to us nine to twelve months in advance and maintain those prices for the selling season.

For products manufactured in our own plants the impact change in raw materials is of course sooner.

That said, it is important to note there is not a perfect correlation between resin prices and oil prices, so our raw materials in transportation costs may lag the current market trends.

So therefore as we look out to the next year, I think we are seeing declines in oil and oil prices, but so far we haven't seen that in resins, and we look at probably a continued pressure on external costs for cost of goods sold in 2007.

Tony, this is Bob.

For American Girl, we talked about this year's Girl of the Year Doll, Nicki, which has a strong marketing program around volunteerism, which I think will strike a chord with both girls, and importantly, their mothers.

The new historical character which is our first one with a whole world of things that go with her, first one I think in five years, and of course we'll have both the boutique and bistros up and running before the important holiday season in '07.

Just a couple quick follow-up questions.

Could you just comment a little bit about competition in the dolls category?

Has that been as intense in the last year or so as it has been over the last five years or so, and then final question, just your thoughts on acquisitions looking forward, do you have a little bit bigger appetite?

Are you more encouraged by what you're seeing in the market today, or you haven't really done much in terms of acquisitions over the last six years.

Well, our acquisition strategy can be summarized by right thing, right time, right price, and when those three things come together, as we believe they did in the Radica deal, we'll make an acquisition regardless of the size.

When they don't come together regardless of how long it takes, we won't make an acquisition.

As it relates to the competition in the dolls business, I always let the competition speak for themselves.

We're encouraged by our trends in Barbie and we'll have to see how the other people feel about their business.

Thanks.

At this time we have a question from Linda Bolton Weiser of Oppenheimer.

Thanks.

I just wanted to get a little more information on the raw material cost situation.

Can you give us some idea as to what you purchase, what the mix is like, polypropylene versus polyethylene, and also is it all under contract or do you purchase any on the spot market?

Linda, I can give you some details.

With regard to the mix between the two resins, we really don't get in that level of detail.

Generally there is a lag with respect to our purchase of raw materials, and when we see price reductions, but most of our purchases are done through long-term contracts based upon feed stocks.

We haven't seen the price of feed stocks go down yet.

As you know, as I indicated earlier, we purchased half of our products from third party vendors which, quote 9 to 12 months in advance of when the product is going to be delivered and maintain those prices.

We haven't yet seen the impact to our costs related to the recent decline in oil?

Okay.

Because spot markets for the plastics are showing down year-over-year for the spot prices.

Am I mistaken on that?

I think you are as it relates to plastics or resins we're procuring in Asia today: I believe it is not down.

If it is down it is a pretty small amount.

Okay.

Just again on Barbie, and I am sure you keep very close watch on competitive products and anything else that might be taking a girl's attention or the girl's disposable income.

Is there anything out there that you see that could be a potential to threat to girl's interest in fashion dolls?

We've heard the Wii gaming system is perhaps a little more appropriate for girls.

Are you worried about that out there?

We're always worried about things encroach willing the toy business in general whether it is for boys or girls.

I think one of the things we all saw and you all saw and several of you wrote up last year was that the industry, not just Mattel, but including some of our competitors, proved that higher-priced toys can sell.

People did shell out $250 or more for their Wii game systems and 18-year-old Brian Eckert has one, and I'll tell you that 15-year-old Allison Eckert has one and it is probably the first videogame system she's played with and it is a lot of fun, but whether you look at our portfolio or whether you look at some of our competitor's portfolios, a lot of people focus so much on price points in the toy business, and what the industry clearly proved in 2006 is that if you have really good play value, if you have good innovation, consumers will step up and pay for higher-priced toys.

I am encouraged by that experience coming off of 2006.

Okay.

Finally, just another follow-up on American Girl.

I know as you started opening the flagship stores you did a lot of study of cannibalization of the catalog business in the areas where the stores were opened.

Are you still finding there is not significant cannibalization based on the store openings?

Yes.

It is just really predominantly this issue of the Girl of the Year doll this year versus last, that's kind of the key issue?

That's the biggest issue.

The catalog business was a little soft for us last year, and the catalog is -- incorporates a bunch of products in the catalog.

Okay.

Thanks very much.

Thanks, Linda.

Our next question comes from Dean Gianoukos of JPMorgan.

I am just wondering if you can talk about Radica a little bit.

It looks like that acquisition cut out a lot of what you're losing in entertainment, but as you guys discussed previously, with the electronics business, it can be a little more volatile and hence at times lower margin.

Is there anything you're doing since you bought that business to try to make it so it can be an even business like your core brands and anything you're working on the cost side to increase profitability?

Thanks.

Clearly we'll work on the cost side to increase profitability.

That was one of the tenets of the acquisition.

Really what we like so much about Radica is that they've got a proven history of being quite innovative.

They don't just get lucky once every couple of years.

They do well consistently in that business, and that's why it was very appealing to us, and while it the cost side is important, we do see significant opportunities for growth.

As an example, Mattel overall has about 45% of its business outside the U.S. and that has been growing probably 15 percentage points in the last five or six years, and Radica still has quite a small international business, so we're looking forward to expanding Radica's geographic distribution to the rest of the world.

Okay.

Thanks.

Thanks, Dean.

Now we have a question from [Jed Elebrook] of AG Edwards.

Hi.

Thanks.

Can you please talk about the outlook for the Hot Wheels and Matchbox business given that one of your competitors exited that business?

We saw some cannibalization primarily from our CARS product last year.

If you look across the toy industry as reported by NPD, vehicles was one of the fastest-growing areas, and we gained share.

Our Hot Wheels business was soft last year, but we think it was largely driven by the success we had in CARS.

CARS is still selling very nicely.

I happened to be in stores over the weekend, and it is still about as hard to find as TMX Elmo is, so I think both of those will continue shipping this year.

We see competition in all parts of the toy business, and we tend to focus our own innovations and what we need to do to drive business, and I am encouraged by some of the programs we have in place in Hot Wheels that you will see play out the rest of the year.

Okay.

Thanks a lot.

Thanks.

We now have a question from Gerrick Johnson of BMO Capital Markets.

Good morning.

With respect to the CARS property, what did you do differently when executing that strategy compared to other movie-related properties like Superman or Harry Potter?

Gerrick, the products just performed well.

We saw it before the movie launched when we introduced CARS, I recall one major retailer had an end cap display a couple of weeks before the movie was released, and I was anxious about that because I didn't want to have that valuable real estate position in a store and have the product not move, but the product sold out before the movie even hit.

We've been chasing consumer demand and retail demand for CARS ever since.

The products are just cool, and clearly sold better than we had planned, and probably sold better than others had planned, and retailers and Mattel chased it all year long.

We wish we could have made more and sold more.

We're not into creating demand and not filling the orders because we're cash flow people, but the fact is it was just one of those things that everything hit.

It was a home run, it was the best entertainment property we've had since I've been here.

Okay.

Great.

And onto Elmo, I was wondering if you can give us a growth in just Elmo quarter over quarter and also if we exclude what I call core Elmo, TMX from this year and Shout from last year, what was Elmo's performance outside those core properties, everything else related to Elmo, how did that do?

Now, Gerrick, you're in a way level of detail we're not going to get into.

All I will tell you about Elmo is I believe we said ten years ago that Tickle Me Elmo we sold over a million units and we said that TMX would likely be the strongest thing since, and it was.

It was a very strong property, did very well, all of our Sesame Street business did well, and I think as some of you reported, I believe there was a halo effect between all of the publicity and excitement around TMX Elmo and the rest of the Sesame Street business, whether it be in toys or outside of toys.

Thank you.

Thanks, Garrett.

[Operator Instructions] We'll take a follow-up question at this time from Sean McGowan of Wedbush Morgan.

Thanks.

Wanted to know what your thoughts were, Bob, about the likelihood of getting price increases in 2007?

Well, commodity costs as you've noted have not come down for us.

When we look at whether it is foreign exchange in China, labor costs in China or continuing high commodity costs, I think we're going to be looking at some price increases.

Again, very modest.

We're not going to get ahead of ourselves at all.

There probably will be some within the industry.

As I think I mentioned in the past, one of the few benefits from retailers going into private label toys is they see these costs coming out of factories directly with whom they work.

I think the environment will be okay, and I think the industry has proven over the last couple of years that we have raised prices modestly.

I believe industry-wide, at best to try and cover the costs, and if you look at our gross margins over the prior couple of years, we weren't even doing that, and we've also committed to we'll have to do what we have to do if the costs continue to stay high.

Okay.

Kevin, could you repeat what the compensation components were to SG&A in the fourth quarter of '06, please?

Thanks.

Yes.

I think the compensation components to the fourth quarter, incentive compensation this year was $108 million versus $22 million.

That was for the full year.

For the full year.

I am sorry.

For the fourth quarter?

The full year is good enough.

Thanks.

Okay.

It was stock compensation was $27 million this year.

Thank you.

You're welcome.

At this time that is all the time we have for questions.

I would like to turn the conference back over to Mr. Mike Salop for final or closing remarks.

Thanks, Amanda.

There will be a replay of this call available beginning at 11:30 eastern time today.

The number for the replay is 719-457-0820, and the pass code is 1095540.

I would like to thank everybody for participating in the call and wish you a good day.

That does conclude today's conference.

We thank you for your participation.

Please have a good day.