Mattel Inc (MAT) 2007 Q1 法說會逐字稿

Good day and welcome, everyone, to the Mattel's first quarter 2007 earnings conference call.

Today's conference is being recorded.

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

Mike Salop.

Please go ahead, sir.

Thanks, Matt.

Earlier this morning, we issued a press release which detailed Mattel's first quarter 2007 results.

On the call today, Bob Eckert, Mattel's Chairman and 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.

After Kevin's comments, we will open the call to your questions.

Before we begin the formal remarks, 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 performance of Barbie, Fisher-Price, and our other brands and product lines, brand strategies, international growth opportunities, international expansion of Radica, American Girl retail expansion, profits and margins, supply chain efficiencies, capital spending, and our capital investment framework.

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 2006 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 investor's and media section of our corporate Web site, Mattel.com, under the subheadings Financial Information and Earnings Releases.

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

Thank you, Mike, and good morning.

As I always remind everyone at this time of the year, the first quarter is not a large portion of our business.

That said, 2007 is off to a good start.

Our U.S.

business grew 10% with international sales growing 29% and our gross margins continued to improve.

Our portfolio of brands maintained the momentum from the holiday season, with strong performances from both Fisher-Price core and Fisher-Price Friends.

We continue to chase demand for Disney/Pixar's CARS, and Hot Wheels was up an impressive 14% on a worldwide basis.

And in Barbie, while disappointed with shipments in the U.S., we're encouraged by our international growth.

Kevin will take you through more detail in a few minutes, but first I would like to spend a few moments on the bigger picture.

Last week , we began mailing the 2006 annual report to shareholders.

I use that form to not only review the successes and challenges of the previous year with shareholders, but also to set the stage for the coming months by inculcating a word or phrase into the worldwide organization.

Last year, the rallying cry was "Play To Win", and we did.

In 2006, we outperformed the competition, global net sales were up 9%, and we made solid progress in addressing the two key issues for the Company by making strides towards stabilizing the Barbie business and growing gross margins for the first time since 2003.

2006 was also the year for two toy industry phenomena, Disney/Pixar's CARS and TMX Elmo.

As we move into 2007, the catch phrase is "Opportunity" and there is clear opportunity for growth both domestically and abroad to engage children around the world with our brands, to partner with our retail customers, and to build and strengthen our communities locally and around the world.

In the worldwide marketplace, there is indeed great opportunity for growth from Mattel's portfolio of brands.

For example, even though western Europe and Canada are considered more mature business environments, we continue to see robust share opportunities for Fisher-Price.

Across Latin America and eastern Europe, we have identified opportunities for growth for all of our brands as we see rise in economies, in emerging middle class, and modernization of the retail environment.

With international contributing 44% of Mattel's global gross sales, the opportunity to generate more than half of our business outside the U.S.

is clearly in sight.

We're excited about the opportunities for American Girl, with the opening of American Girl Boutique and Bistro in both Dallas and Atlanta this year.

In the first quarter, Nicki, the 2007 Girl of the Year, has gotten off to a strong start, and we look forward to the launch of American Girl's newest member of the historical doll collection later this fall.

There are also opportunities to build and grow the recently-acquired Radica business globally.

We are pleased with Radica's first-quarter performance, and look forward to taking the business to the global marketplace in 2007.

As I state in my letter to shareholders, we define opportunity as a promise, a promise not only to take advantage of the opportunities we're given, but also to create positive opportunities for our brands, our employees, our customers, and consumers as we continue to embody our vision of being the world's premier toy brands today and tomorrow.

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

Thank you, Bob, and good morning, everyone.

I'll begin my review for the first quarter with a discussion of worldwide growth sales shown on exhibit 2 of today's press release.

Total worldwide gross sales for the first quarter were up 18% over the prior year, with a 3 percentage point positive impact with changes in currency exchange rates.

U.S.

sales were up 10%, and international sales were up 29%, including a 7 percentage point positive impact from foreign exchange rates.

On a regional basis, sales in Europe were up 35%, including a 10 percentage point positive impact from changes in currency exchange rates.

Sales in Latin America were up 33%, including a 2 percentage point negative impact from foreign exchange.

Asia-Pacific sales were up 12%, including a 4 percentage point benefit from foreign exchange rates.

I will now review our core categories and brands.

Girls and boys brands.

Worldwide sales for girls and boys brands segment were up 15%, including a 4 percentage point positive impact from changes in currency exchange rates.

Compared to the first quarter of 2006, U.S.

sales were flat, and international sales were up 28%, including a 7 percentage point positive impact related to foreign exchange.

Worldwide Barbie sales were up 2%, including a 4 percentage point positive impact from currency exchange rates.

In the U.S., Barbie sales declined by 21%, but were more than offset by a 20% increase in international markets, including a positive impact of foreign exchange of 7 percentage points.

The U.S.

business was negatively impacted by the strong performance of last year's Mermaidia line, compared to this year's Magic of the Rainbow line and declines in My Scene.

International Barbie sales, however, rebounded from a difficult first quarter in 2006, which was partially caused by the late introduction of Mermaidia lines in several international markets.

The growth was led by Barbie basics, Princesses, and Fairytopia's Magic of the Rainbow line.

Worldwide sales of other girls brands were down 8%, including a 4 percentage point positive impact from foreign exchange.

The sales decrease is primarily due to a 25% decline in the U.S., partially offset by a 3% increase in international markets, including a 6 percentage point positive impact from changes in currency exchange rates.

In the international markets, Polly Pocket grew double digits, but was more than offset by sales declines in Polly Pocket in the U.S., Pixel Chix and Winx worldwide,and other smaller lines.

Sales in the wheels category increased 15%, including a 3 percentage point positive impact from currency exchange rates, with strong sales growth in Hot Wheels internationally, and Matchbox worldwide.

Entertainment sales were up 59%, including a 4 percentage point positive impact from changes in currency exchange rates.

The double digit sales growth was driven by continued momentum for the CARS property, and solid growth in our games business, plus contributions of $19 million from the recently-acquired Radica product lines.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were up 27% for the quarter, with a positive 2 percentage point impact from changes in currency exchange rates.

Worldwide core Fisher-Price was up 27%, with a positive 2 percentage point impact from currency exchange rates.

Fisher-Price Friends was up 45%, including a 2 percentage point benefit from foreign exchange.

Infant, Babygear, and newborn products were behind the strong performances in Fisher-Price core and licensed properties TMX Elmo, Go Diego Go, and Backyardigans drove the strong performances in Fisher Price Friends.

On a regional basis, U.S.

sales of Fisher Price Brands increased 25%, and international sales grew 31%, including a 6 percentage point positive impact from foreign exchange.

American Girl brands.

Sales of American Girl brands were up 2% in the first quarter of 2007, as compared to the first quarter a year ago, driven by the growth from American Girl retail stores.

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

For the quarter, gross margin was 44.5%, a 270 basis point improvement versus the prior year.

Although we continue to face commodity cost pressures, these were more than offset by pricing, supply chain savings, and favorable product mix.

Also, you should recall that last year's first quarter results did not reflect price increases in the U.S., as they were not implemented until April 2006.

Advertising expense in the quarter was $105.3 million or 11.2% of net sales, consistent with last year's, as a percentage of sales.

Selling, general and administrative expenses of $292.8 million increased from last year's $275.1 million.

As a reminder, last year's first quarter included a $13 million severance charge related to the streamlining of the Mattel brands organization.

The increase in selling, general and administrative expenses this quarter can be primarily attributed to the inclusion of Radica, increases in employee-related costs, and the impact of foreign exchange.

Non-cash equity compensation expense was $3.6 million, compared to $700,000 in the year-ago quarter.

As a percentage of sales, selling, general and administrative expenses decreased 360 basis points to 31.1% of net sales in the first quarter of 2007, versus 34.7% of net sales in the first quarter of 2006.

For the quarter, operating income was $20.6 million, compared with a loss of $32 million in last year's first quarter.

The increase is primarily attributable to strong topline growth, improved gross margin, and last year's severance charge.

Interest expense was $14.5 million in the quarter, compared with $15.2 million in 2006.

The decline in interest expense versus last year is primarily due to lower average debt outstanding.

Interest income for the quarter was $12 million compared to $8.8 million in 2006.

The higher interest income is a result of overall higher invested cash balances and higher interest rates.

Other nonoperating expense net in the quarter was $2.4 million, compared to the other nonoperating income net of $1.9 million in the year-ago first quarter.

Income tax expense for the quarter was $3.7 million, or 23.5%, compared to a benefit of $66.7 million in the first quarter of 2006.

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

As of January 2007, the company adopted FASB interpretation number 48, accounting for uncertainty in income taxes, which clarifies accounting and disclosure for certain audit -- certain tax positions.

The adoption of this interpretation did not have any impact in our income statement or result in a cumulative affect adjustment.

It did, however, result in the reclassification between current liabilities and other noncurrent liabilities.

For the quarter, reported net income of $12 million or $0.03 per share compared to $30.2 million or $0.08 per share in 2006.

As a reminder, the 2006 first quarter earnings per share of $0.08 included $0.15 per share of tax settlement benefits.

So to summarize the P&L, our top line benefited from continued momentum in our entertainment, Fisher-Price, and international businesses, and gross margin improved as a result of our efforts to align our prices with increased input cost and supply chain savings.

Now turning to the cash flow statement and balance sheet, cash flow use for operations for the quarter were $327 million, driven primarily by the use of cash for seasonal working capital requirements, partially offset by net income of $12 million and depreciation and amortization of $44 million.

We did not execute any share repurchases in the first quarter of 2007, and still have $57 million remaining under our current authorization as the end of the quarter.

Our cash on hand at the end of the quarter was $984.2 million, up from $603.3 million at the end of last year's first quarter.

A portion of the increase in cash is due to the receipt of $175 million from the exercise of employee stock options.

Our receivables were $730.6 million, or 70 days of sales outstanding, 4 days higher than last year.

The increase in day sales outstanding is primarily related to a $55 million decrease in factoring levels compared to 2006.

Before factoring, days of sales outstanding was lower by three days compared to the prior year.

Inventories at $448.6 million were up $37.8 million, or 9% versus the first quarter of 2006, and represented 76 days of supply, which was four days higher than last year.

The main driver of the inventory increase was the addition of Radica.

Our balance sheet debt decreased by $18.5 million from the first quarter of 2006.

The company prepaid $50 million of international term loans during the first quarter of 2007.

Our debt to total capital ratio of 19.8% at the quarter end was in-line with our capital and investment framework.

Capital expenditures for the quarter were approximately $24 million, as compared to $29 million in the first quarter of 2006.

Over the past few years, our annual capital spending levels have been below the long-term targets of $180 to $200 million, set forth in our capital investment framework.

This year spending could be above last year's levels, but likely still below our long-term targets.

I would like to reiterate that we remain committed to our capital investment framework initiated in 2003.

Since that time, we've returned more than $2 billion to shareholders in the form of share repurchases and dividends, and we acquired Radica.

Over time, we plan to continue to effectively deploy excess cash for the benefit of our shareholders.

So to summarize, our first quarter performance was solid with double digit growth from many of our core brands, strong international results, and another major contribution from entertainment properties, offsetting the declines of Barbie sales, and our supply chain initiative and pricing are translating into improved margins and profitability.

That completes my review of the financial results.

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

Operator?

Thank you.

[OPERATOR INSTRUCTIONS] We'll go first to Michael Savner with Banc of America Securities.

Hi, good morning.

Thanks very much.

Two questions, if I could.

First, could you maybe go a little bit deeper into the Barbie performance.

You seem to be making some good inroads in the latter part of 2006, but certainly pretty steep declines on a tough comp in the first quarter, and then you'll be facing the Bratz feature film movie, which will come out in August, and obviously, no one knows if that will be a driver for them or not, but could you just talk about your comfort with your strategy level in the first half of the year for Barbie?

Second question, even if it's just qualitatively, could you give us a little bit more break down on the 60% growth in the entertainment group, if the vast majority of that was from Radica, or if it was just an incremental contributor?

Hi, Mike, this is Bob.

I'll take the first question and then ask Kevin to do the second one.

As it relates to Barbie, on the fantasy side of the business, this year's Fairytopia segment, which is rainbow and butterflies clearly wasn't as strong as last year's Mermaidia line.

That's the big driver of our decline.

On the reality side, which are the beach dolls and fashion fever and basic Barbie and accessories, we're doing okay, and that's good, because overall, shelf space is working against us this spring compared to a year ago.

Obviously, that's an area of focus for us this fall particularly in light of our performance vis-a-vis the competition last fall.

So we see an opportunity there.

While the numbers are what they are, I'm not discouraged about where we are.

We've made good progress on the strategy and the product lineup.

As you know, this is the second half of the year business, and both we and what I've heard from our retail customers, believe we have a strong fall lineup.

Competitively, we see Hasbro's Littlest Pet Shop and the Webkinz line doing well, but when we look at the MPD data, our shares are up in dolls.

Of course, it's very early in the year, and MPD doesn't even like us to disclose much data until we get three months, but certainly in the first couple of years -- the first couple of months, I'm sorry, will look pretty good.

And we have good momentum internationally.

We do want all of our children to grow every 90 days in every market and I want Barbie to grow every quarter, but we didn't do that in the U.S.

this quarter.

But we have a broad portfolio of brands.

Some will overachieve and some won't.

In the case of the first part of this year, Barbie's been an underachiever.

Kevin?

And on the entertainment category, the growth was driven by the CARS entertainment property.

As I said, Radica added $19 million to sales, and then we did see double digit growth in our games business.

Thank you.

Thanks.

Thanks, Mike.

Thanks, guys.

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

Thanks.

I was wondering if you could give a little more color on wheels.

That business was very strong overall.

If you could just talk about that a little bit.

And also, just a question on American Girl.

It does seem that the sales are just a little bit soft for a couple quarters here and the profitability, the operating margin was down in '06, even though I think there was a store opening in '05 and yet the margin increased in '05 and yet we saw a margin decline in '06.

Can you talk about what's going on there, please?

Linda, this is Bob.

Let me start with Hot Wheels.

We continue to derive our Hot Wheels growth from international right now.

That said, we are seeing sequential improvement in the U.S.

trends.

We've just about cycled through a full year now of the Pixar's CARS business, which has clearly impacted Hot Wheels.

The vehicles category is growing in the MPD reports and our share of market is up, so we're starting to see things improve in Hot Wheels, and I think it's as much as anything else, the fact that we've now cycled through CARS, although CARS continues to sell quite briskly.

Related to American Girl, Nicki, this year's Girl of the Year is doing well.

It's early, but she's not only outperforming Jess, who was the Girl of the Year doll last year, she's also above Marisol, which was a record breaker in 2005.

The stores generally are up, where we've had some softness over the last several months was in the catalog business, especially in the historical dolls segment of the catalog.

As you know, we'll have some new news coming out with an American Girl historical character launch later this fall.

Kevin, do you have anything about the margins?

No.

I think we were impacted last year by the opening of the new American Girl in L.A.

It wasn't a full year and there were some preopening expenses associated with that.

Okay.

Wasn't there a store that was opened in '05 as well?

No.

Oh, okay.

Thanks a lot.

Thanks, Linda.

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

Hey, good morning.

Can you quickly quantify the impact of the Easter shift in terms of sales and EPS, if that had any impact at all?

Secondly, back to the fashion doll segment, rather than just talking about Barbie in particular, what about the business as a whole?

Is that market growing, shrinking, what are the opportunities you see and what are the challenges you're seeing in the doll market, particularly the fashion doll market?

Thank you.

Hi, Gerrick.

Our POS was up for the quarter, but clearly the shipments outpaced or POS growth.

To me there were two things, first, refilling the retail pipeline, probably more important to Easter to me.

The 2006 year-end retail inventories were quite low, and retailers needed to buy ahead of consumption just to refill the pipeline.

That was especially pronounced in Fisher-Price, where we just saw very strong sales all quarter long.

The second thing is, as there was an earlier Easter this year by, I think, seven or eight days, that probably increased sales a bit, but we saw pretty consistent growth throughout the quarter.

So between those two things, I would say the pipeline fill was more important than the earlier Easter.

Okay.

Second question on dolls in general, historically, at least looking back for the last couple of years, the doll business has been tracking reasonably close with the total toy industry.

It hasn't been one of the big growth opportunities, like youth electronics, for example have been, nor has it been a decliner, broadly speaking.

More of our issues in dolls has been in share than it has been in category demand or primary demand.

I think as a business, there are things we can do to rebuild and help grow the doll business.

We're going to be announcing some new things within the next couple of weeks that I think will add some excitement to the doll business.

I think we'll wait a couple weeks for that.

Okay.

Any particular trends that you're seeing that might be affecting doll performance?

No.

As I mentioned competitively, Littlest Pet Shop is doing quite well and I believe there's something in this Webkinz line that's not yet really strong at mass, but I think there's enough demand for it out there, that it's probably having some impact.

As we look at other competitors, I don't see a lot out there right now.

There have been a lot of closeouts in the market, not ours, but driven by some other people who probably didn't have a particularly good Christmas.

Okay, great.

Thank you.

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

Thanks.

I have a couple of questions.

Kevin, you mentioned as a component of the -- or as a driver of the gross margin improvement favorable product mix.

Can you be more specific about what shift would have been favorable product mix?

I think it was the Fisher-Price increase as well as the CARS entertainment property and our games business.

Okay.

Second, any -- was there anything in that other expense line that's worthy of note?

No, there was just some minor foreign exchange loss in there.

Okay.

Another question.

On Radica, looks like it was about flat in the first quarter versus a year ago, but was there any change on how you handle that business?

You're doing a lot more direct sales now.

Can you comment on unit sales or local -- is there anything there that would have increased or decreased versus how it was being handled?

Sean, this is Bob.

We did see a nice increase in the first quarter compared to prior year, even though it's not in our numbers in prior year.

There was a nice increase in the U.S.

business and there was a nice increase in the fourth quarter, and our retail service reps, that is, the folks we have calling on stores now have their hands on the Radica business, and I think that's driving some growth.

Where we saw the decline, partially offsetting the growth in the U.S., was in international, and I think that's a function of relationships with distributors and things starting to wind down and no longer shipping to distributors, as we're starting to take over the line directly.

Right.

That makes sense, and that's what I was getting at.

Last, question Bob, any comment on appetite for buybacks at this point?

No.

I always tell people to focus on long-term deployment of cash.

We don't comment on quarter to quarter repurchases.

We generated about $5 billion in cash since 2000.

We've acquired Radica, we've reduced our debt, we've increased the dividend.

I think we've spent almost $900 million now on dividends in the last few years.

Was up 30% last year alone.

We have bought back shares, I think $1.2 billion over the last three or four years, about 15% of the company.

So we'll continue with a long-term deployment strategy.

The two words that Kevin always mentions to everybody are, we'll be opportunistic and we'll be disciplined, and we focus on how we deploy the cash long-term, not quarter to quarter.

Thank you.

Thanks, Sean.

We'll go next to Tony Gikas of Piper Jaffrey.

Hi, good morning guys.

Hi, Tony.

Good start to the year.

A couple questions.

Could you remind us of the blended average price increase for 2007 and then will that be more than -- will that more than offset the increases to raw material cost for 2007?

Second question, could you just remind us a little bit of the timing of new Barbie product introductions?

I think it's weighted towards Q3, but maybe a little update there.

And then, third question, international markets continue to do very well for you guys.

Could you just talk a little bit about the trends there and the markets that you're focusing on looking forward?

Let me cover the price increase for 2007.

As you know, Tony, commodity costs have not come down and the overall cost of doing business in China is increasing due to foreign exchange and rising labor costs.

So inherent in the pricing of our 2007 line was a modest price entrees to reflect the new reality and the cost of making the products.

As you know, our visibility price increase is difficult because over 80% of our product is new this year, and 50% is sourced from vendors.

And unlike the last prior couple of years, our price increases occurred as we initially showed our new products to retailers, whereas in prior years, we implemented a supplemental pricing action after we showed the product to retailers.

Compared to price increases in the prior years, the 2007 price adjustment was not nearly as comprehensive as those taken in 2005 and 2006, which were in the range of 2 to 4%.

It was lower than that in 2007.

Whether they're going to cover the commodity cost increases and the rising cost in China this year, we'll known when the year is over, but we did take a modest price increase.

Tony, this is Bob.

As it relates to Barbie, you're correct, the second half is more important to us in terms of product introductions than the first half.

Our big first half introduction was Magic of the Rainbow, which has clearly not performed well as we look at the year-ago comps in the Mermaidia line.

Your second or third question was on international.

Our strategy is focused on strengthening our business in developed markets and establishing our brands in new and developing markets.

We're doing well in both.

We've had nice increases, consistently now in the core markets of Europe and Mexico and Australia and in developing markets, which to us would be Brazil, eastern Europe, Asia.

We've grown nicely and in fact across both sets of markets, we're growing well brand by brand.

Barbie's up, Hot Wheels is up, CARS has worked well for us for the last year, core Fisher-Price is up, the Nickelodeon business with Dora is up, Sesame Street was up behind Elmo.

In general, we've had pretty good and consistent performance all around the world, but our strategy is to gain share in the mature markets and expand the brands in the new markets.

Okay, thank you.

Thanks, Tony.

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

Edwards.

Thank you.

Let me also say a congratulations on a great start to the year, gentleman.

A couple of items here.

If you had to look, Bob, at strategically and forward on the long term, what areas of the business would you like to potentially accelerate the growth in?

I know you said you like to take care of all the children, but what areas do you think represent the most opportunity, looking forward, either domestically or internationally, and that you would like to accelerate that growth?

Secondly, just remind us of the store opening costs for the two boutique stores coming this year, both American Girl?

Tim, this is Bob.

I'll start and turn it over to Kevin for store opening costs, which I don't think are particularly material.

Yeah, they are significant.

We wouldn't get that level of detail, Tim.

Okay.

I guess we'll skip the second one and go not first one, which is our second one.

I do like all of our children to grow, every market, every 90 days, so I hate to pick favorites here.

That said, clearly the whole electronics area, youth electronics, and the sorts of things that Radica is doing, that's a growth segment of the overall toy business, and it's one in which we've historically not been well represented, and Radica gives us a big opportunity there, not only in the U.S., but internationally.

In general, I think things with a more electronic bent to them, whether they're in the core business, for example the Fisher-Price camera, the Kid Tough Digital Camera, I still don't think I've seen one on shelves.

I was out as recently as this weekend.

Products with electronic components in general are doing better across the industry.

It's in an area that we think we can do much better.

Okay.

With the strength of your balance sheet, the strength of your stock, and again within the context of remaining disciplined, would we -- could we expect to potentially see you be more acquisitive here as the year progresses?

We always say right thing, right time, right price.

We clearly have a strong balance sheet, and we have the opportunity, should something come along, that's right thing, right time, right price.

So the key word then for us is disciplined, which we will be.

We think we were disciplined when we bought Radica and I'll be astonished if that doesn't turn out to be a great deal for our shareholders and as many of you know, my overall view on acquisitions is more times than not, they're not good for the acquiring company's shareholders, so we're going to make sure that when opportunities do come along, they are good for our shareholders.

I wouldn't want to get in any specifics as the year progresses.

Okay, great.

Thank you, gentleman.

Thanks, Tim.

We'll go next to Felicia Hendrix with Lehman Brothers.

Hi, guys.

How are you?

Hi, Felicia.

A couple of follow-up questions.

First, Kevin, you had an -- you said you didn't do any factoring in the quarter, I was just wondering why not?

We did $55 million less of factoring, and I think consistent with what we disclosed in our 10-K, we did not -- we basically terminated our European receivables facility for factoring since we have adequate liquidity offshore.

Okay, great.

And Bob, I was wishing -- I was hoping you could follow up or elaborate a little bit more on the shelf space comments you made earlier, that overall it's working against you this spring versus last year.

Yes, it is in Barbie.

I wouldn't say in general that's the case --

No, right, in Barbie.

In Barbie, as we look at shelf space, which is always a difficult thing to do, because there's so many different shelf sets by customer in different parts of the country and even within stores in a market, as example.

But we do our best, like many of you do, just to measure our shelf space.

This spring in Barbie, our shelf space was down a bit.

I don't think that was, in my opinion, the big driver of our decline, but it clearly worked against us.

It's an area of focus for us since we outperform the competition last fall, certainly when we go into this fall, when it really counts, we're working hard to make sure that's not the case.

Okay.

So my next question is, do you see it growing in the fall, and your answer is you hope so?

Yes.

We don't have the specifics yet, but clearly we're working with retailers as you might imagine, to show them our trends compared to the competition last year.

We finished last year with good momentum in the company and in the girls' segment and we would like to repeat that this year.

Okay.

And is there any way you guys will give us color in terms of how Radica contributed to either the bottom line and some of the margin improvement, the gross margin improvement we saw in the quarter?

It was not -- Radica was not a big component in either case, either on the bottom line or in terms of a mix shift.

It's not that big a business.

Kevin, didn't you say sales were $19 million?

$19 million.

So on a $1 billion business, it wasn't the key driver for us.

That being said, it is doing well, it is doing everything we wanted it to do.

The integration is going well, the business is growing, and again, I have every reason to believe this will be a good acquisition for the company.

Great.

My final question is, you showed very nice improvement in your SG&A in the quarter.

I was wondering if you could give us some more color behind the drivers for that?

Sure.

I can do that.

Probably the biggest driver was severance a year ago.

Yes, there was $13 million less severance.

If you look at SG&A in total, it was up compared to last year in absolute dollars due to the inclusion of Radica, higher employee-related costs, including stock-based compensation, and the impact of foreign exchange, but as you noted, Felicia, it was down as a percentage of sales.

The decrease as a percentage of sales is primarily the result of, last year we took a $13 million severance charge included in the first quarter of 2006 related to the streamlining of our Mattel brands organization, and we just got greater leverage as a result of higher sales volume.

Okay.

Thank you.

That's it.

Thanks, Felicia.

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

Good morning.

I've got a couple of questions too.

I wonder if you could talk a little bit about -- a little bit more about expanding borders, in the sense that Europe is growing due to the inclusion of eastern Europe and so on.

Could you maybe help us understand what impact that might have had on the European number.

That's the first question.

Second question is I wonder if you could talk a little bit about Polly Pocket.

That brand heading south for a little bit, and kind of what you're thinking about, or how you're thinking about it for the full year.

And then I guess, the third question is, every first quarter is a reflection of a bunch of big factors.

One of them can be early shipments taken in fourth quarter for the first quarter.

Did that meaningfully move sales into the first quarter to help support that big growth number?

Thanks.

No, J.T.

In fact, we do like to early ship products, particularly as retailers come out of Christmas with bare shelves, but our shipments were strong starting at the very beginning of the year.

I mentioned earlier reloading of the pipeline.

That occurred more this year than it did late last year and it was clearly one of the positive -- had a positive impact on our business in the quarter.

As it relates to your question on Europe, we've done well in both western Europe and eastern Europe.

In western Europe, we've done particularly well over the last six to eight months in the U.K.

We've had a good start of the year in Germany and Spain and northern Europe, so if you just look at the mature side of Europe, we've done well.

The toy business has done reasonably well.

Again, it's very early in the MPV data, but it looks like the industry is off to a good start and we've gained share in the western European markets.

And then in eastern Europe, what would it be, about a quarter, maybe a quarter of the growth in Europe has come from the east?

Yes, I think about a quarter of it came from the east, Bob.

Okay.

Could you talk a little bit about Polly Pocket as well?

Yes.

I think Polly is going to be fine.

It did not have a particularly strong first quarter in the U.S.

International growth more than offset the U.S.

decline, so it grew -- Polly grew in '06 in both the U.S.

and internationally.

The brand, I think, is in good shape.

As I've seen stores recently, the Polly wheels, the new product, seems to be selling quite nicely in stores, but I'm not -- I'm not too anxious about Polly right now, J.T.

Okay, great.

Kevin, let me sneak one in if I can, the new FASB rule you just picked up, you said it had no impact for the quarter, what do you expect it to do for the year?

No impact to the total year, either, on the income statement.

On the balance sheet, you did have a reclass.

There was a reclass between current and noncurrent liabilities, but no impact expected for the year on the income statement.

Thank you.

We'll go next to Dean Gianoukos with JPMorgan.

I'm all set.

Thank you.

Nice talking to you.

We'll take our next question from Margaret Whitfield with Sterne Agee.

You mentioned retailers were excited about the second half lineup.

Could you give us some highlights as to what we should be looking for in terms of hot sellers?

If I were that good, Margaret -- I don't know.

My toy of the year, which was kind of a no-brainer last year when I went with TMX Elmo, but I will take credit for at least picking the toy of the year, I'm big this year on the Fisher-Price Smart Cycle.

Fisher-Price in general has done well, they've got some great products, and I think that smart cycle is going to be a home run, because it really does two things important to moms, one, it's a learning toy, and you know that's been on trend for the last many years, but the more kids cycle, the more exposure they have to things they can learn.

The second thing is it gets kids off the couch and exercising, which I think is good.

It's a pretty good price point, I think it's right around $100 or $99, thereabouts, and it's my pick for toy of the year.

We'll see in hindsight how we did this year.

Anything else, Bob, in Barbie or Wheels?

In Barbie, you're going to see we have the island princess line, which has certainly been exposed to little girls and has tested very well with little girls, so I think that's going to be a strong lineup for Barbie.

We have some new things we'll the talking about the next couple of weeks for Barbie, that I think will be important.

In American Girl, the first new historical character since maybe 2002 will be launched, and I think that's going to be important and I think will be relevant.

You know this business, we'll introduce probably 6,000 SKUs over the course of this year, and I certainly want every one of them to do well, and we have high expectations for them all.

Some will do well, some won't do well.

The good news is when we add up the portfolio, we gained share last year.

My sense is we're gaining share this year and our goal is to continue outperforming the competition.

If retail inventories are stocked and if all these shipments are weighted to second half, or a lot of them, we would assume more normalized sales growth in Q2?

Well, that would be probably a forward-looking sort of statement, that as nicely worded as that was, I probably won't answer.

Okay.

Fair enough.

We'll look forward to seeing the new additions of Barbie line.

Thanks, Margaret.

We'll take a follow-up question from Linda Bolton Weiser with Oppenheimer.

Thanks.

Can you give a little bit of information about how the $109 million of incentive compensation expense in '06 flowed by quarter?

Linda, we haven't broken that out by quarter in the past, we just give it at the end of the year.

The majority of it was accrued in the third and fourth quarter of last year.

Okay, thanks very much.

You're welcome.

Thanks, Linda.

I guess we're done with questions.

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