Mattel Inc (MAT) 2007 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Mattel second quarter 2007 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn the call over to Mr.

Mike Salop.

Please go ahead, sir.

Thanks, Melissa, and good morning everyone.

Earlier this morning we issued a press release with details Mattel's second quarter 2007 results.

On the call today, Bob Eckert, Mattel's Chairman and Chief Executive Officer, will give a few brief remarks and 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 for your questions.

Before we begin, let me note certain statements made during the call and in the question-and-answer session that follows 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 our brands and product lines, new product introductions including toys and DVD movies, brand strategies, international growth opportunities, American Girl retail expansion, profits and margins, supply chain efficiencies, capital spending, income tax provisions and our capital and investment framework.

A variety of factors, many of which are beyond our control, effect 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 Investors and Media section of our corporate Web site, mattel.com, under the subheading "Financial Information and Earnings Releases."

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

Thank you, Mike, and good morning, everyone.

Although the first half is relative small for us, I'm generally pleased with the performance of our portfolio as we head into the all-important fall season.

In the second quarter continued strength in Fisher-Price and our international business, helped drive top line growth which is especially encouraging given the entertainment property comparisons with last year.

While CARS continues to perform well for us, last year we benefited from strong shipments in both CARS and Superman toys in the quarter.

Barbie also was a contributor ton our growth in the quarter with strong international performance more than offsetting a modest domestic decline.

The U.S.

Barbie business did improve relative to the first quarter partially driven by gains in our collector (inaudible).

Our overall revenue growth was complimented by strong gross margin improvement resulting in a solid increase in profitability to the quarter.

While the first half results were good we all know that the bulk of the toy business happens in the back half of the year so I want to take a few minutes to remind you of some of Mattel's key opportunities we see coming in the fall.

Earlier this year we launched Barbie Girls.com, the first global virtual online world designed exclusively for girls.

To date almost 3 million girls have registered at the site.

Additional, exclusive content on the site can be unlocked with the Barbie Girls device when connected to a girl's computer.

The sleek hand-held device, which serves as a music player and fashion statement, launches at retail this month.

We're excited about this on trend opportunity to engage girls with the next generation of fashion play.

Our Barbie Entertainment franchise has produced nine extremely popular direct to DVD movies each reaching number one on the Nielsen Top Hit Video charts.

And this fall we're introducing our tenth Barbie of the Island princess.

American Girl will be the center of much activity in the second half beginning with the launch of a new historical doll, the first in five years.

We also are anticipating the opening of the two boutiques.

Atlanta will open in mid august and they're already taking reservations for parties and the Bistro [at] Dallas is on track to open in mid November, just in time for the holiday shopping season.

We're excited about many introductions from Fisher-Price including the Smart Cycle, a product that combines fitness and learning in a fun, engaging way for children which parents can also feel really good about.

The Hot Wheels and Matchbox brands are also on track for the second half with some very exciting toy lines including the Hot Wheels Dragon Fire Track Set and Matchbox Mega Rig vehicles.

Internationally we continue to focus on our market portfolio strategy of growing core country's revenues and profits, investing in growing markets and selectively investing in developing markets.

This strategy has helped us achieve robust international growth over the last several years which we continued to experience in the first half of 2007.

We still faced our share of challenges this year but we're on a good track and continue to capitalize on opportunities.

As we look toward the months ahead going into the holiday season, we'll be focused on maximizing these opportunities for our brands, our customers, our consumers, and of course, in our shareholders.

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

Thank you, Bob, and good morning, everyone.

My remarks regarding the second quarter financial performance will begin with a discussion of worldwide gross sales shown on Exhibit 2 of today's press release.

Total worldwide gross sales for the second quarter were up 6% over the prior year including a 3 percentage point benefit from changes in currency exchange rates.

U.S.

sales were down 3% while international sales were up 18% including a 7 percentage point benefit from foreign exchange.

On a regional basis sales in Europe were up 14% including a 6 percentage point benefit from changes in currency exchange rates.

Sales in Latin America were up 34% including a 7 percentage point benefit from foreign exchange.

Sales in Asia Pacific were up 11% including a 6 percentage point benefit from foreign exchange rates.

I will now review our four categories and brands.

Mattel Girls and Boys brands.

Worldwide sales from Mattel Girls and Boys brands were up 5% including a 4 percentage point benefit from changes in currency exchange rates.

U.S.

sales declines of 8% were more than offset by strong sales in international markets which increased 15% over the prior year and included a 7 percentage point benefit from foreign exchange.

Worldwide Barbie sales were up 6% including a 4 percentage point positive impact from changes in foreign exchange.

Barbie sales in the U.S.

were down 5% while international Barbie sales were up 13% including a 6 percentage point benefit from changes in currency exchange rates.

Our Barbie Reality and Barbie Collector businesses continued to do well on a worldwide basis but these performances have been partially offset by some challenges in our Barbie Fantasy product lines particularly in the U.S.

Worldwide sales of other Girl brands were down 1% including a 4 percentage point benefit from foreign exchange driven primarily by sales declines in Pixel Chix.

Sales in the Wheels category increased 20% including a 5 percentage point benefit from currency exchange rates.

The sales increase was primarily driven by robust sales growth from Hot Wheels internationally and Matchbox worldwide.

Our Entertainment sales were down 2% including a 4 percentage point benefit from changes in currency exchange rates.

Sales of the car product line remained strong and even surpassed last year's second quarter levels.

However, this growth plus contributions from Radica of $17 million were not enough to offset last year's combined shipments of product related to CARS and Superman entertainment properties.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands was up 12% for the quarter including a 2 percentage point benefit from currency exchange rates.

Worldwide core Fisher-Price was up 22% with a 3 percentage point benefit from foreign exchange.

Fisher-Price Friends was down 3% worldwide with a 1 percentage point positive impact from foreign exchange.

The growth in Fisher-Price core is attributable to continued worldwide strength in our infant, newborn and BabyGear products as well as preschool electronics.

The decline in Fisher-Price Friends was driven primarily by sales declines in Dora the Explorer which were partially offset by gains in Sesame Street and Go Diego Go.

On a regional basis U.S.

sales of Fisher-Price brands increased 4% while international sales grew 26% including a 6 percentage point benefit from foreign exchange.

American Girls brands.

Sales of American Girl brands decreased 10% in the second quarter driven by declines in the historical characters.

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

For the quarter gross margin was 46.1%, a 260 basis point improvement versus the prior year.

The 2007 gross margin was positively impacted by favorable foreign exchange rates, modest price increases, overall lower royalty expenses, and supply chain savings which were partially offset by upward cost pressures.

Advertising expense in the quarter was $107.1 million, or 10.5% of net sales consistent with last year as a percentage of net sales.

Selling, general and administrative expenses of $300.1 million increased from last year's $265.6 million.

As a percentage of net sales, SG&A increased 170 basis points to 29.4% in the second quarter from 27.7% of net sales last year.

The increases in selling, general and administrative expenses is primarily attributable to increased investments in the business, the impact of foreign exchange, higher employee related costs and the inclusion of Radica.

Additionally, non-cash equity compensation expense was $3.2 million compared to $700,000 in the year ago quarter.

For the quarter operating income was $63.5 million compared to $49.9 million in last year's second quarter with the increase being primarily attributable to higher sales volume and improved gross margin.

Interest expense was $14.1 million in the quarter compared with $16.1 million in 2006.

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

Interest income for the quarter was $10.5 million compared to $6.4 million in 2006.

The higher interest income is primarily due to higher average cash balances during the quarter.

Other non-operating income net in the quarter was $3.2 million versus $2.2 million a year ago.

Income tax expense for the quarter was $20 million compared to $5 million in the second quarter of 2006.

The 2007 tax provision includes an expense of $5.3 million related to a change in the New York state tax law.

This change will not significantly alter our ongoing effective tax rates but did require us to make an adjustment to our deferred tax assets impacting our 2007 provision.

As a reminder, the 2006 tax expense included a $6.2 million tax benefit from primarily related to a settlement reached with the state tax authority.

For the quarter we reported net income of $43.1 million, or earnings per share of $0.11 versus last year's net income of $37.4 million, or $0.10 a share which included a $0.02 per share benefit related to the state tax settlement.

So to summarize the P&L, solid contributions from the CARS entertainment property and strong performances from our Fisher-Price and international businesses continued to drive our top line.

While favorable foreign exchange rates, supply chain initiatives and our efforts to align prices with increased input costs are driving improvements in our gross margin.

Now turning to the cash flow statement and balance sheet.

Cash used for operations in the first half of 2007 was $492 million driven primarily by the use of cash from working capital requirements, partially offset by net income of $55 million and depreciation and amortization of $84 million.

Cash used for investing activities in the first half of 2007 was $137 million.

This includes $58 million for capital expenditures and $79 million for the acquisition of the Polly Pocket brand which was a previously licensed brand.

Cash from financing activities was $166 million and reflects the proceeds from the exercise of stock options partially offset by the repayment of $80 million of medium [turn] notes and international term loans.

During the first half of the year the Company did not repurchase shares of its stock.

Our cash on hand at the end of the quarter was $742.6 million, up from $625.1 million at the end of last year's second quarter.

Receivables at $881.6 million were up $137.9 million from last year's second quarter and represented 78 days of sales outstanding, eight days higher than last year.

During the quarter factoring was down $81 million from 2006 levels.

Before factoring day sales outstanding was 82 days, unchanged from last year.

Inventories at $605.1 million were up $66.6 million, or 12.4% versus the second quarter of 2006 and represented 57 days of supply which was four days higher than last year.

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

Our balance sheet debt decreased by $293.3 million from the second quarter of last year primarily due to the repayment of international term loans and the maturity of medium-turn notes.

Our debt to total capital ratio ended the quarter at approximately 19% versus 31% last year.

Capital expenditures for the quarter were approximately $34 million versus $37 million in the second quarter of 2006.

So to summarize, our portfolio global brands generated positive top line growth with particular strength in the CARS entertainment property and our Fisher-Price and international businesses.

Our gross margins and overall profitability are improving, we are pleased with our year-to-date results, and we remain focused on executing and capturing the opportunities in the all-important second half.

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 Sean McGowan with Wedbush Morgan.

Thank you.

Good morning, guys.

A couple questions, two quickies and then one that might need a little bit more explaining.

Was CARS actually up in the quarter, Kevin?

Yes, it was up on the quarter.

But it started shipping in the second quarter of last year?

That is correct.

That's pretty good.

Okay.

Second thing, any visibility at this point as to what the other income line, net of all that's in that will look like for the balance of the year or should we expect that to be pretty much a wash in (inaudible) or will that be a contributor?

We don't give guidance, Sean, as you know, so I can't make predictions for the balance of the year, but it was not significantly up this quarter versus last year.

The last thing then, if you could just explain a little bit more about the tax, what's going on in this quarter and what the implications are for the balance of the year on -- what you think the tax rate will be for the full-year and the quarters?

Yes.

In the second quarter the tax rate was negatively impacted by a change in New York state tax law that prompted up to make some adjustments to a deferred tax assets which impacted our tax provision.

That was a $5.3 million charge in the quarter.

However, the full-year 2007 results will continue to benefit from the positive impact of the tax increase, a reconciliation act which was signed into law in May of last year, and this act will benefit us in -- it did benefit us in 2006, it benefits us again in 2007 and 2008.

With respect to the full-year tax rate, as you know, we don't give guidance, but with respect to the tax rate we expect that to be in the 24 to 25% range.

However, as you know, we are continually under audit around the world and our 2007 tax rate will be positively or negatively impacted by the results of routine audits by the governments around the world.

Right.

That's helpful.

If I look at that $5.3 million in the quarter and take that out, it looks like the rate was in that 24% range, right, so does that mean that for subsequent quarters you'll show that 24 to 25% rate or will the rate be really reduced so that the full-year rate is 24, 25%?

We're not going to get into that level of detail.

I think for the full-year you can use that methodology.

Okay.

Thank you.

We'll go next to Michael Savner with Banc of America Securities.

Hi.

Good morning.

Thanks.

A few questions.

First a two-parter on Barbie.

Can you just, Bob, maybe go over your conviction level that the Barbie kind of recovery and restructuring is progressing as you'd hoped?

Obviously we're still comfortably negative in the U.S.

in the first half, but obviously you've got a couple important rollouts for Barbie in the second part, so to what extent does that recovery you think really accelerate in the second half or is it probably a slower more graduate process?

And then the second part of the Barbie question, internationally, in some of the strength you're seeing, is that coming from new market opportunities or is it coming from certain geographies internationally that are doing better than expected and if so, can you give us which ones are doing better?

I guess, Michael, I'd start by saying you use the term "comfortably negative" which doesn't particularly work for me.

It's one or the other.

But overall, the trends are pretty similar to what we saw in first quarter, that is international growth offsetting the domestic decline.

From the international standpoints, the trends are solid across the board by market and by segment.

And domestically, while we're still down versus year ago, we did improve a bit sequentially.

The year-on-year decline continue to be concentrated in the Fantasy segment which is Fairytopia and Princesses.

This year's spring key doll just didn't work as well as last year's mermaid line.

The reality segment which is Beach Dolls and Fashion Fever and basic Barbie still is doing fine, and I think that's important particularly in light of the, what I would say was a modest shelf space decline this spring overall versus year ago.

The collector doll business is up behind High School Musical and Wizard of Oz and the birthstone dolls, and that's offsetting a decline domestically in My Scene, and as you mentioned, it is I second half of the year business.

Both we and retailers feel good about the line.

Island Princess is out there just beginning now.

The basic Barbie business looks good, and as I mentioned in my comments, Barbie Girls is off to a good start online.

We're now linking Barbie Girls with Barbie.com, our capacity is building nicely, and we just started shipping the MP3 fashion device which allows deeper play into Barbie Girls Web site.

So I don't know how the trends will end up in Barbie.

I continue to feel good about where we are strategically, but we've got some work to do still in the U.S.

Thanks, Bob, that's helpful.

And then a quick balance sheet question.

It looked like day sales outstanding appear to be at the highest levels since the middle of 2002.

How should we think about that?

What might be driving that increase, anything -- just any more color would be helpful.

Yes.

I think as I mentioned in the comments, the increase in receivables really attributable to increased sales growth in the quarter and lower levels of factoring.

During the quarter factoring decreased by $81 million, and excluding factoring our day sales outstanding was unchanged compared to last year.

And we don't believe there's any issues with the collectability of receivables.

Fair enough.

Thank you.

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

Hi.

Good morning, guys.

A few questions.

Bob, you sound pretty optimistic on the business.

What gets you most excited about the back half of the year?

Is it new products, low consumer trends, retail programs, shelf space, maybe you could comment on a few of those?

Second question appears that input costs have been relatively stable.

Any expectations there for the back half of the year?

You probably have pretty good visibility on that at this point.

And then I have a couple of follow-ups.

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

As it relates to the environment, you're right, I've probably been more optimistic since the second half of the last year than I've been in several years.

The toy business did well in the back half of last year.

As you know, better than many of us, it is a strongly seasonal business, and we ended up with good momentum coming out of last year, and I haven't seen anything to change that going into this holiday season.

I think we are particularly well aligned with retailers right now and we have good strong programs coming up for the fall.

Obviously that has to turn into consumer sales.

But at this time of year, you know, we're always at our highest level of anxiety, as somebody once told me was the pre-fall jitters.

We're making all of this inventory and starting to move the inventory from our warehouses into retailers warehouses, and it's a big pile of goods that has to be sold for Christmas, so the anxiety meter seasonally is about as high as it gets right now, and I haven't felt or heard anything that makes me have more anxiety than normal and that's a good sign.

So generally speaking I feel good about the business.

Good.

And Tony, let me back up on gross margin and talk about again the improvement gross margins this quarter and then answer your question on what the outlook is on costs or input costs for the balance of the year.

Our margins have improved year-over-year for the fourth consecutive quarter demonstrating our commitment to improving margins despite continued cost pressures.

There's a few things behind the gross margin improvement.

We took a modest price increase with the 2007 line, and in the second half of 2006 we shifted our distribution centers to regional full mix warehouses and implemented software to optimize our transportation network resulting in administrative and logistics savings, and the benefit of those actions are reflected in our second quarter 2007 results.

And foreign exchange and royalty expense were more favorable during the quarter.

As we look to the balance of the year, the sustainability of these improvements will anniversary some of the above actions as the year progresses, so year-over-year impact in pricing and supply chain savings may be less pronounced.

And then with regard to looking at input costs in the back half of the year, we continue to have input costs pressures, particularly on resins and zinc, and as you know, oil prices seem to be having an upward trend again, but resin prices haven't really fluctuated much and still remain high relative to prior year levels, and then I think we still face input cost pressures on China labor as well as the Chinese currency.

So looking at the back half of the year, we expect about the same of what we see in the first half of the year.

Okay.

A couple quick follow-ups.

Maybe just a comment on the share repurchase, why there was no repurchase during the quarter.

The stock's been off about 10% in the last few months.

And then last question.

Just any competition trends that you could talk about particularly in the Girls category both U.S.

and international?

Tony, this is Bob.

You know we don't comment on the timing of specific share repurchases, particularly on a prospective basis, but consistent with the last several years we'll continue to execute under our capital investment framework.

We'll be disciplined and opportunistic as we deploy capital to create shareholder value.

You know since 2000 we've generated about $5 billion in cash.

We've strengthened the balance sheet by reducing debt and increasing our cash balance.

We've spent over $900 million of Cap Ex investing in our business with tooling and American Girl stores and the like.

We've executed a strategic acquisition of about $200 million for Radica, and that was in the October, the fourth quarter of last year, and as Kevin mentioned, in this past quarter we invested $79 million for the acquisition of Polly Pocket.

We've returned since 2000 about $2 billion to shareholders, $900 million of that's been in dividends and $1.2 billion in share repurchases.

So if you look at it from that standpoint, represents about 15% of shares outstanding.

So while we don't comment about the specific quarters and I tell folks every time I cannot to put too much weight into what we do or don't do every 90 days, I think if you look at our long-term period here we've been consistent with the investment framework we announced in February, Kevin, of 2002?

2003.

2003.

Competition trend and maybe--

Competition trends in Girls, I would say Littlest Pet Shop is doing well at retail.

I would say the Webkinz concept is still doing very well.

It's not a global concept.

It's confined to some markets including the U.S.

and Canada, but I think that phenomenon is real and will continue to do well.

So from a Girls standpoint those are probably the two things I'd cite.

Okay.

Thanks, guys.

We'll go next to Dean Gianoukos with JPMorgan.

Hi.

Just two questions.

First, when you said strength sort of across the board in Europe and internationally, is there anything you're doing differently or is that just market strength?

And then secondly, what is driving such strong performance in Wheels, and I guess are you a little bit surprised given all the action figure competition and all the movie properties, et cetera?

Well, in general, Dean, we're seeing markets growing outside of the U.S., and we're gaining share in growing markets, and it's been a pretty consistent story now for several years.

We're up to about, I think, at year-end last year about 45% of our business was done outside the U.S., and that's up from about 29% of the business in 2000.

So we've made good progress.

We've had a consistent strategy and it's not any particular product line or any market that is driving our improvements overseas.

As it relates to Hot Wheels, I do feel good about the improvements and the innovations we've made in Wheels.

I think I talked about that the last couple of quarters now.

We've been working very hard on our Hot Wheels business.

It is building some momentum.

And Matchbox, although off of a much smaller base, is one of our fastest growing brands right now in the portfolio.

So all in all I feel good about our Wheels business.

You know, that was a growing segment for the past year or more since we introduced CARS, and I do believe that our Hot Wheels business, while it did well, it was impacted by CARS, it wasn't as significant as I expected, and it's starting to come back, so I feel good about your Wheels business.

What about when you look at Transformers, Spiderman, and Fantastic Four and things like that?

I mean, how are you doing so well, I guess, with all this new stuff out there on the shelves?

There is some very exciting stuff, you know.

I happen to think this Transformers product looks terrific on the shelf.

So we'll have to see how that plays out.

At some point in time there is competition on a share of wallet basis if no other thing, so I don't put that much stock in any 90-day period one way or the other, but I feel good about where we are in our Wheels business and the innovations we have in it.

Okay.

Thanks a lot.

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

Thank you.

I guess in terms of the Radica sales they just declined a little bit sequentially from about $19 million to $17 million I think in the second quarter.

Is there any significant to that and can you just update us on terms of the integration of Radica?

I don't think there is any significance from that from the fact they went from 19 to $17 million.

I think from an integration point of view it's going very well.

We've substantially integrated the business globally, and I think in the second half we're very excited about the fact that we're now going to begin to distribute around the world Radica's product line.

Okay.

And then in the Entertainment segment is there anything else besides Superman, you know, being in the prior year period and then declining?

Is there anything else in there that declined given that CARS was up?

Well, there's, gosh, in that segment, Linda, there's probably 15 or 20 different things around the world and on the toy aisle.

CARS does continue to do well.

Ratatouille I definitely would recommend as a movie.

I thought it was a terrific film, but as we've said all along, we don't expect a lot of toy sales resulting from Ratatouille.

The movie business for us is probably more about next year where we have Speed Racer, we have a Batman movie and we've announced a partnership with Dreamworks on Kung Fu Panda.

So this is a relatively light year for us in Entertainment, and next year should be a little bit stronger.

Okay.

Thank you.

Thanks, Linda.

(OPERATOR INSTRUCTIONS) And we'll go next to Margaret Whitfield with Sterne Agee.

Good morning, everyone.

You mentioned Barbie shelf space is down somewhat in Q1, or Q2, rather.

Wondered if you have any comments on how the fall planograms will look and whether or not Barbie will hold her space for the fall season?

I don't have the specifics yet, Margaret, but I feel pretty good about Barbie for the fall shelf space and promotionally.

We did have some good momentum in the key season second half of last year, and I am expecting to be rewarded a little bit for that or at least not punished, not a reduction.

So I think without getting too specific, and I don't want to get ahead of myself because you never really know until you go out and look at the shelf, and I happened to be out this past weekend and retailers are not fully set up for the fall so they're just getting there now.

But in general I would say I feel pretty good and encouraged by the support we have from retailers for Barbie this fall.

I've seen the Smart Cycle for one at retail.

I wonder if you have any early read on some of your holiday toy lines?

We do.

It is very early, but again, encouragingly I haven't heard anything that gets us too anxious for this time of year.

It is very early.

Some of these products normally in a handful of stores, but I think the early reads are in pretty good shape.

Apart from Smart Cycle, any products you think will perform well?

Yes.

I got a whole list, but I think of the however many thousand SKUs will launch this fall, I'll probably be right on a few and wrong on many.

Okay.

And any specific plans on terms of how you're going to launch Barbie Girls?

Any marketing that you can share?

Not a lot.

We've been struggling with keeping up with demand for the site, so one of the things that we have not done much of, for example, is promoting Barbie Girls on Barbie.com which is, I think, last month, and I might be wrong, but I think it was the second most popular Web site in the world for girls.

So we haven't even taken advantage of the easy opportunity that is to pipe people from Barbie.com into Barbie Girls.

You can't do that today.

We do not have the capacity to link them, and I think you'll see more things like that this fall.

Any reason why CARS rose over last year which was so strong?

Did you have better placement, new product or what were some of the reasons for that?

Margaret, we're in stock now.

We were out of stock early and often, and we chased that product line, unfortunately, all year last year, and as I visit stores and I know many of you go to stores, I think we're in stock this year.

We're not in stock on every SKU in every store, but demand continues to do well for that product line, and I think we're filling the demand for that.

Okay.

Finally, I didn't hear this.

You said U.S.

Barbie rose over the first quarter.

I heard collectibles.

Did I hear games mentioned as a factor?

No.

Probably collector and maybe the reality segment, you know, kind of the basic Barbie.

Right.

Okay.

Thanks and good luck.

Thanks, Margaret.

We'll go next to John Taylor with Mattel.

Thanks.

Actually Arcadia.

Let's see, two questions.

First is I wonder if you can talk a little about Latin America.

Amazing growth down there.

Are there certain countries that are driving that?

Certain product lines?

Maybe give us a little color on that.

And then, Kevin, I wonder if you could talk about the SG&A creeping up a little bit as a percentage of sales and whether you're feeling confident you've got your arms around everything there?

Maybe whether that reverses as we go into the back half?

Thanks.

J.T., I'll talk about Latin America, and then Kevin could talk about SG&A.

Our trends in Latin America have been consistent, really for each quarter in the first half.

It is essentially every market down there is growing at double-digit rates.

The one market I would highlight that has been a real star for us the last, I'm going to say, 18, 24 months, Kevin, is Brazil.

We've built a very nice business in Brazil.

We've always done well in Chile and Argentina and Venezuela.

Mexico has been one of our star performers for the last four or five years, and it is obviously the larger market for us.

But if I had to pick out something to give credit to right now, it's what we've done in Brazil.

We've got a very nice business down there.

And, J.T., on SG&A, SG&A expenses were up compared to last year due to a variety of factors with the most significant drivers being new investments in the business, foreign exchange, higher employee related costs including stock-based compensation and the inclusion of Radica.

And over the past few years we've undertaken measures to improve our overall performance including centralizing back office functions, upgrading our systems, improving processes to make us more efficient.

These initiatives are generating savings for the Company but they're being offset by cost pressures and investments in growth.

If you look at an annual basis, we've been running a bit over 20% in net sales.

It's been fairly consistent over time but for different reasons.

So I don't think when we look at this quarter that SG&A is out of control.

I think we've been strategic with regard to investments.

We've had the negative impact of foreign exchange, and then obviously, we've also had the acquisition of Radica.

I was wondering if you could maybe focus a little bit on those offsets to the gains kind of thing, whether there was anything specific to, I mean you could talk about related to the investments in the business you're making, or maybe quantify what the FX impact might have been, something like that?

Yes.

We really don't get in that level of detail, J.T., but I think as I've mentioned, when you look at order magnitude, I think the biggest thing is with regard to investments in our business both with product development investments and expansion in international markets and then foreign exchange were probably the two factors that impacted us the most.

Okay.

Bob, back to your comments about Brazil and Latin America in general.

Are there any brands that -- is the mix of product, I guess, very much different in those markets than it is globally?

I mean is it heavily weighted towards anything?

No.

We've got a terrific Hot Wheels business in Brazil right now, a nice Polly Pocket business.

The one product line that is unique to Latin America is Max Steele, an entertainment property that played out here, Kevin, three or four years ago, sort of came and went in the U.S.

and Europe.

For whatever reason, Max Steele not only caught on in Latin America, but it has stayed strong.

We've done a lot of direct to DVD entertainment which is has done well.

It's one of the stop-selling male action brands if not the top-selling male action brand in Mexico and all of Latin America.

So that's the only product line that's really fundamentally different between Latin America and the rest of the world.

Thank you.

I'd forgotten about Max.

Thank you much.

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

Hi.

Good morning.

You recently announced a new DC Comics licensing deal with Warner.

Can you share with us some details like duration and costs on that?

No.

We certainly don't share costs, although our principle on all entertainment properties is we look at conservative revenue assumptions and a discounted cash flow analysis and make sure as best we possibly can that this is going to be a good deal for our shareholders, and we certainly feel that way about DC.

Kevin, it's a multi-year deal, probably three or four?

Yes.

I think it's probably three or four, and it's an extension of our great partnership with Warner Brothers.

Okay.

And I'm not sure if I heard a domestic Wheels number, but can you give us that number?

You didn't [hear] a domestic Wheels number, did you, Kevin?

Was it down?

I think it was down 1%.

No, that might have just been -- I might be wrong.

Hang on.

We'll look it up for a second.

Okay.

Wheels was minus 1.

That's correct, Bob, total Wheels in the U.S.

Okay.

Thank you.

And we'll go next to Tim Conder with A.G.

Edwards.

Thank you.

A couple of questions.

Number one, could you remind us when in the second quarter last year you started shipping your CARS products?

And then, Bob, I think when we were up in East Aurora you mentioned that what was important about CARS in the strength of the tale here or not would be how it performed here in the second quarter.

It sounds like you're more optimistic now given that it performed well in the second quarter against Spiderman, against the initial shipments of Transformers.

Is that a fair statement?

Well, I start by taking we shipped CARS, my recollection, Kevin, is the entire quarter of the second quarter last year, and at least in the handful of stores that I regularly visit that's the unique one where we were starting to have stock out problems even before the movie hit, and the movie did very well at least from a toy standpoint.

So we felt good about it for a long period of time, and you're right, I think the real acid test on CARS and whether it's an evergreen property is sort of between now, I guess, and the end of the year.

There's certainly some great competition out there for boys toys right now, but CARS is probably a little bit younger than some of the other lines that are being featured today, and we'll have to see how it plays out, but so far so good.

Okay.

And given that it appears that we'll definitely be more evergreen, similar to what your competitor's done with your marquise products, are you going to start giving us on a quarterly basis what CARS was as far as a percentage of revenue?

I can't imagine doing that.

We won't know until future quarters come along.

Check back in 90 days, Tim.

Okay.

Well I mean on a historical basis I mean you mentioned again that CARS was up in the quarter on a year-over-year basis.

Can you give us the actual dollar amounts?

No.

We don't break out brand item levels although I think I said certainly at the year-end call last year that CARS was a really nice property for us, a home run, the best entertainment property certainly since I've been here for seven years, and again, we did talk about during the quarter we did well this quarter as well.

Okay.

And relating to the input costs, Kevin, you were commenting earlier and with the price increase now you're seeing part of the benefits of that also.

In the back half of the year here, given what's in place with the customers scheduled to be shipped and planned and everything and contracted in, do you anticipate at this point the price increase and everything else fully offsetting those input cost increases for the back half of the year?

We don't give guidance, as you know, and it's difficult to determine what's going to happen in the back half of the year, so we see that we took a modest price increase this year.

It was lower than the price increases that we took in 2006 and 2005, and we still are going to face cost pressures.

We'll see as the quarters play out whether that price increase was enough to offset the cost pressures.

But I mean aren't the majority of those input costs already locked in, though, for the back half of the year?

We're still producing, you know, we're at our peak production here the next couple of months, and we're still buying raw materials to meet that production requirements.

It is with regard to third party vendors more or less built in, but we will continue to face cost pressures as we look at the balance of the year.

Okay.

So you still have about a 90-day window on what you purchased for your factories, correct?

It depends upon what materials you're talking about.

So we make thousands and thousands of SKUs, so we do buy every day to be able to fund production.

Okay.

Thank you.

We have a follow-up from Linda Bolton Weiser with Oppenheimer.

Thanks.

We saw the Barbie Girls.com MP3 players in Toys 'R Us and didn't see it in the store, the Wal-Mart store we checked.

Is it in Wal-Mart or how much of the distribution has taken place in Wal-Mart?

Linda, I have not seen it anywhere at retail including Toys 'R Us yesterday in the particular store I was at, so I don't think it's -- it certainly isn't widely available at retail in any of the major customers yet.

We just started shipping it, so maybe that's insight into the improved supply chain at Toys 'R Us that they received it and got it on the shelf so quickly.

I will tell you, the Toys 'R Us stores look terrific to me right now, and going back to one of the comments I made on the retail environment, Toys 'R Us I think is doing a terrific job, and I think we're well aligned with them, but just going -- just shopping their stores and seeing how they're presenting toys to me is a big improvement.

Yes, we did see it on Friday in Toys 'R Us, but it looked like it just got there.

Did you buy it?

No.

We don't shop when we check.

Is that against -- do you have to disclose or something if you buy it?

Is that part of the analyst certification that you buy our toys, that somebody seeks our business and they buy our products?

Plus I don't have any girls.

All right.

Thanks, Linda.

Okay.

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

Yes, a follow-up on Dora.

Can you tell us if you're seeing anything broad in that license or do you think this is a one quarter aberration in the decline in Dora?

No, I think Dora has started to wane, clearly more in the U.S.

than we've seen in some of the international markets where it's a newer property.

It's been generally offset by Go Diego Go, and Backyardigans as those are starting to build momentum, but I don't think it's just a one quarter phenomena that Dora is not as prominent as she once was.

Okay.

Thank you.

Thanks, Sean.

It appears we have no further questions at this time.

All right.

Thanks, Melissa.

Thanks, everyone.

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