Mattel Inc (MAT) 2008 Q2 法說會逐字稿

Good day everyone and welcome to the Mattel second quarter conference call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr.

Mike Salop, Treasurer and Senior VP of Investor Relations.

Please go ahead, sir.

Thanks.

As you know, this morning we reported Mattel's second quarter 2008 financial results.

In a few minutes Bob Eckert, Mattel's Chairman and CEO; and Kevin Farr, Mattel's CFO will provide comments on the quarter and then we will open the call up for your questions.

Certain statements made during the call may include forward-looking statements about managements 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, entertainment properties, retail inventory levels, input cost pressures, litigation expenses effects of price increases, margins, income tax provisions, foreign exchange gains and losses, capital deployment, retail expansion, and legal matters.

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 2007 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 website Mattel.com under the headings Financial Information and Earnings Releases.

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

Thank you, Mike and good morning everyone.

Before I begin my remarks as it relates to the quarter I wanted to take a moment to address yesterday's jury verdict in favor of Mattel in the Bratz case.

The jury's verdict was a victory not only for Mattel but for all those who believe in fair play.

Mattel has pursued this case as a matter of principle and we are very satisfied that the justice system has helped uncover the wrong doing that occurred.

While the case has been very complicated the underlying principle has been a simple one.

You shouldn't take what isn't yours.

As many of you are aware, this verdict is just part one of a two-part trial.

So although it is an important step in the right direction, the trial hasn't yet been concluded.

The next phase of the trial will determine if the Bratz products infringe on the drawings and sculpts determined to be owned by Mattel and if so what damages should be be awarded.

We look forward to continuing to present our case in the next phase of the trial which is scheduled to begin next week.

Moving on to the quarter we experienced good top line growth with a double digit revenue increase boosted by contributions from toys tied to key summer entertainment properties.

We also saw nice improvement in several of our key core brands including Fisher-Price core and American Girl.

While international markets around the world continue to lead our growth partially aided by foreign exchange rates in Europe our U.S.

business also delivered improved revenue in the quarter.

Kevin will discuss the financial results in more detail.

Kevin will discuss the financial results in more detail in a few minutes, but in general improvements in profitability from revenue growth, foreign exchange our June price increase and reduced recall-related costs were countered by continued input cost pressures and litigation costs.

While input costs will be a challenge all year, we should benefit in the second half of the year from having the price increases in place the entire period.

As I mentioned, toys tied to the key entertainment properties, Batman, the Dark Knight, Speed Racer and Kung Fu Panda aided second quarter results.

While Speed Racer didn't meet box office expectations consumer reaction to the toys in the U.S.

has actually been very solid.

Kung Fu Panda on the other hand had nice box office performance which will hopefully extend the legs on the toy sales.

Our innovative Batman toy already on shelves have jumped off to a good start prior to the movie release which debuts in the U.S.

today.

Barbie performance in the quarter was a disappointment although consumer take away performed better than shipments.

Our new Barbie Girl's VIP subscription site just kicked off a few weeks ago.

So at this point it is too early to judge success as we continue to build the subscription base.

Outside of Barbie, our other girl segment performed quite well, led by High School Musical dolls.

Fisher-Price core delivered good growth in the quarter as retail inventory levels returned to positions consistent with prior year.

Continued sales of Smart Cycle and the introduction of a new Imaginext Batman line also contributed to the growth.

Finally, American Girl had a terrific quarter.

Although the Kit Kittredge movie wasn't released in theaters until July, the premovie marketing generated great demand for products tied to the movie characters.

Both the retail and catalog businesses grew.

With our new boutique stores in Atlanta and Dallas continuing to perform well.

As a result, we recently announced plans for new boutique stores scheduled to open later this year in Boston and at the Mall of America in Minneapolis.

Overall, although the second quarter like the first is relatively small for us, we are pleased to generate some positive top line momentum and see clean retail inventory levels as we enter the second half.

I will now turn the call over to Kevin Farr, Mattel's CFO who will provide more detail on the results.

Thank you, Bob and good morning everyone.

I will begin my review for the second quarter were a discussion of worldwide gross sales shown on exhibit 2 of today's press release.

Total worldwide growth sales for the quarter increased 10% including a 6 percentage point benefit from changes incurred, see exchange rates.

U.S.

sales grew 3% and international sales grew 15% including a 10 percentage point benefit from foreign exchange.

On a regional basis, sales in Europe were up 7% including a 11% positive impact from exchange rates.

Sales in Latin America, 22% including 11 percentage point positive impact from foreign exchange.

And sales in Asia Pacific were up 16% including a 6 percentage point positive from changes in currency exchange rates.

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

Worldwide sales for Mattel girls and boys brands segment increased 13% including a 6 percentage point positive impact of changes in currency exchange rates.

Worldwide Barbie sales were down 6% including a 6 percentage point positive impact from foreign exchange.

Barbie sales in the U.S.

declined 21% while Barbie sales in international markets increased 3% including a 9 percentage point benefit from foreign exchange.

On a worldwide basis, growth in our fantasy business was more than offset by declines in collector in My Scene.

Our U.S.

retail inventory levels for Barbie, however, ended the quarter down significantly from a year ago as consumer sell through declines much less than shipments.

Worldwide sales of other girls brands increased 27% including 8 percentage point positive impact from exchange rates.

Sales in the U.S.

were up 23% while international sales of other girls brands were up 30% including a 14 percentage point positive impact from foreign exchange.

The sales growth worldwide was once again driven primarily by High School Musical.

Worldwide sales in the Wheels category increased 32% including a 7 percentage point positive impact from changes in currency exchange rates.

Strong performances in both the U.S.

and international markets was driven primarily by the addition of Speed Racer and good growth from Tyco RC.

As a reminder our Speed Racer sales are split between the wheels and entertainment categories depending on the type of product.

Core Hot Wheels which does not include Speed Racer grew 5% worldwide including a 7 percentage point positive impact from foreign exchange.

Worldwide sales in our entertainment business which include games and puzzles increased 14% including a 6 percentage point positive impact in changes from foreign exchange.

The growth in entertainment was primarily attributable to shipments of product tied to our three key summer movie properties Batman, Speed Racer and Kung Fu Panda.

Worldwide sales for Fisher-Price brands increased 4% including a 4 percentage point positive impact from changes in currency exchange rates.

On a regional basis, international sales of Fisher-Price brands moved 13% including a 9 percentage point positive impact from foreign exchange while sales in the U.S.

declined 2%.

Worldwide core Fisher-Price increased 10% including a 5 percentage point benefit from changes in foreign exchange rates.

U.S.

sales of Fisher-Price core grew 4% while international sales were up 17% including a 10 percentage point benefit from foreign exchange.

Fisher-Price Friends sales declined 19% including a 3 percentage point benefit from foreign exchange rates.

Sales of Fisher-Price Friends in the U.S.

were down 28% while international sales were down 5% including a 7 percentage point benefit from foreign exchange.

Although we continue to see declines in Sesame Street and Dora against strong year ago levels, the rate of decline improved significantly compared to the second quarter.

We did see good movement in key Dora categories such as dolls and preschool and this year's lead Sesame Stree item Elmo Live will be introduced in October.

Sales of American Girl brands were up 10% for the second consecutive quarter.

Strong sales of products tied to the Kit Kittredge movie which opened in July but generated preopening buzz and additional contributions from our new boutiques in Atlanta and Dallas drove our growth in the quarter.

As Bob mentioned, we have new boutiques planned for Boston and Minneapolis later this year and we will also be moving our Chicago flagship store to a larger space directly on Michigan avenue.

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

As a reminder in the 2007 second quarter, we had $28.8 million of pretax recall expenses which were primarily impacted net sales in cost of sales.

Our gross margin this year's second quarter was 44.5% which compared to last year's margin of 44.2%.

The increase was primarily attributable to the absence of last year's recall cost, the benefit of price increases and favorable foreign exchange.

Partially offsetting these benefits were continued cost pressures from commodities, Chinese labor rates, the appreciating Chinese currency and incremental product testing costs.

We implemented our mid to high single digit increase on June 1, across most of our product lines so we benefited from this only in the last month of the quarter.

Advertising expense was $117 million or 10.5% of net sales compared to 10.7% in 2007.

Selling, general and administrative expenses increased about $49 million to approximately $348 million.

As a percentage of net sales, SG&A expenses were 31.3% compared to 29.8% last year.

Approximately $25 million of the increase in SG&A expenses was due to higher MGA and recall related litigation fees.

Also contributing to higher SG&A was the impact of foreign exchange and the increase in equity compensation expense from $3.2 million in last year's second quarter to $6.4 million this year.

Operating income during the quarter was $30.6 million compared to operating income of $36.8 million last year as higher sales and lower retail costs were offset by higher SG&A.

Interest expense was $16.6 million versus $14.1 million in 2007.

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

Interest income was $7.3 million versus $10.5 million last year.

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

Other nonoperating expense net was $6.4 million versus income of $3.3 million in 2007.

The current year expense relates primarily to foreign exchange losses although these were more than offset by gains recorded in cost of sales.

The income tax provision of $3.1 million compared to prior year's expense of $13.7 million.

The year-to-date effective tax rate is now 22.3%.

Overall, we reported net income of $11.8 million or $0.03 per share versus last year's net income of 22.8 million or $0.06 per share.

So to summarize the P&L, strong performances from our entertainment properties, core Fisher-Price and American Girl as well as the benefit of foreign exchange drove double digit top line growth.

Margins were aided by the reduction of recall costs, the June price increase, and FX but negatively impacted by input cost pressures and litigation expenses.

Now, turning to cash flow and balance sheet, cash flow used for operations for the quarter was $530 million driven primarily by the use of cash for seasonal working capital requirements.

Our cash on hand at the end of the quarter was $384.4 million down from $742.6 million in the prior year primarily due to deployment of excess capital during the second half of 2007.

We completed $40 million of share repurchases in the quarter retiring 2.1 million shares at an average price of $19.07.

As of June 30, our basic share count was 360.5 million, and we had 460 million remaining on our share repurchase authorization.

Receivables were 977.4 million or 79 days of sales outstanding, two days higher than last year.

Factoring the increase from $48 million a year ago to $73 million.

Prior to factoring days of sales outstanding increased three days.

Inventories at $676.1 million were up 64.

-- $69.4 million or 11% versus 2007 and represented 59 days of supply which is two days higher than last year.

Our total balance sheet debt increased by $382 million from the prior year primarily due to the net higher net debt position entering the year after the large deployment of excess capital in the second half of 2007.

Our debt to total capital ratio ended the quarter at 30.4% which compared to 18.9% in last year's second quarter.

Capital expenditures were $47 million up from last year's $34 million.

So to summarize, we experienced double digit revenue growth in the quarter thanks to the continued strong performances in international markets, partially aided by foreign exchange rates, Batman, Speed Racer and Kung Fu Panda delivered incremental revenues and we also benefited from good growth of Fisher-Price core, American Girl, Tyco RC and our other girls lines.

Input cost pressures and litigation expenses continued to hamper margins.

The second half of the year should benefit from the full impact of our price increases, anticipated lower in creases in litigation expenses compared to the first half, and lower recall costs.

But we also expect to continue to face pressures from rising input costs.

The July releases of Batman and Kit Kittredge movies should continue to benefit our toy lines with Batman, The Dark Knight opening today.

And always throughout the year we will continue to opportunistically deploy excess capital generated by our portfolio.

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

Operator.

(OPERATOR INSTRUCTIONS) We will go first to Sean McGowan with Needham and Company.

Thanks.

Good morning, guys.

I have a couple of quickies here.

Can you comment on what the increase in prepaid expenses is related to?

Okay.

I think it's mainly prepaid advertising and some prepaid royalties, Sean.

What would make that go up kind of more than normal?

Well, I think biggest piece is, just the increase in deferred tax assets as we ended the year, as well as some prepaid value-added taxes.

Okay.

On the other nonoperating expense line, is that a line that we should expect to be consistently an expense through the balance of the year?

It really depends on what happens with regard to the Venezuelan currency.

It has been appreciating against the dollar.

But going forward, we will continue to have excess foreign exchange gains or losses raid the Venezuela in nonoperating line if the currency moves significantly.

However, as we saw in this quarter we would continue to counter in gains or losses elsewhere in the P&L due to Venezuela U.S.

dollar liabilities.

Right.

Okay.

What would be your expectation for a tax rate for the balance of the year?

Our estimate is consistent with the first half which is about 22.3%, somewhere between 22 and 23.

Okay.

And then the last question for now is the American Girls line, are you, what are you seeing in the sales of dolls other than Kit Kittredge, particularly the new doll, Julie, launched last year?

It continues to do well Sean.

In general the business is up almost across the board and by distribution channel.

When you say across the board do you mean across product lines?

It is not like Kit is offsetting declines in other things.

Well, naturally in a product line that large there are some decliners but the growth has come from more than just Kit.

Okay.

That's good.

Thank you very much.

Thanks, Sean.

Thank you, Sean.

We will take your next question from Felicia Hendrix from Lehman Brothers.

Hi, good morning guys, just to stay on American Girl for a second.

Bob, I think you just said that it was -- business is up across the board and across distribution channels, does that mean that your catalog business is performing better now, too?

Yes, it does.

Okay.

Great.

And then, just switching gears, in terms of your entertainment property, just a couple of questions.

I was wondering if you could provide some granularity regarding Speed Racer and Dark Knight and how they each performed domestic and internationally.

Kevin, in your preamble you didn't really give us any color on the international performance of entertainment.

Felicia, this is Bob.

Let me do that.

Speed Racer has done quite well in the U.S.

particularly in light of the box performance office.

It has not performed well outside of the U.S..

And in fact the movie didn't even air in some relatively important markets to us.

But overall, if you look at Speed Racer, we have been pleased with the performance of the toy line.

Batman is doing well around the world.

It is very early, but the products are moving well.

The movie is getting rave reviews.

It is a fabulous movie.

So we will have to see how that one goes.

But in general I would say if you look at both Kung Fu Panda and Batman our sales, our shipments so far have been right about as we expected.

Okay.

And then as you enter or we have entered it, as we are in the third quarter, I am just wondering what the take away has been for reorders and how the inventory levels look for those properties?

I don't know specifically, and I probably wouldn't want to get into third quarter orders by product line.

But in general, I will just tell you that as we look at the entertainment portfolio it has performed about exactly as we expected so far this year and I don't know that it is going to change that much in the near term.

Okay.

Just a little picky question, Speed Racer it is split between entertainment and wheels.

In the last quarter it was about 50/50, was that about the same in this quarter?

It is about 70 wheel, 30% entertainment.

Okay.

And final question, just wondering, with the declines in M y Scene, when do you foresee those stop being a drag on Barbie?

Well, in the U.S.

the decline happened in the fall of last year.

So we will see it probably by the fourth quarter.

Internationally, My Scene while it has declined so far in the first half it continues to be a pretty good size business, so we will have to see how that plays out.

We have not discontinued the product line internationally.

Great.

Really appreciate it.

Thanks, guy.

Thanks, Felicia.

Our next question from Tony Gikas with Piper Jaffray.

Thank you.

Good morning, guys.

Nice job on the quarter.

A couple of questions.

What were the incremental legal fees in the quarter and any update for the year?

Second question, could you just comment on retail shelf space thus far in the year and what are you hearing from your retail partners on shelf space allocation for the toy category in total over the holidays?

Is shelf space going to be flat or down this year at all?

Third question would be just on commodity inflation, what is the impact in the back half of the year?

Maybe just an update and comment there.

Are your costs set at this point?

Do you feel like you have pretty good visibility?

And then I have a follow-up.

Okay.

Let me take the first one.

About half of the increase in SG&A expense or $25 million is due to higher litigation fees.

As we said in January, we expect to incur sizable legal costs this year.

We have got a lot of litigation related to product recalls as well as the MGA case.

With respect to that $25 million, about two-thirds of the increase is related to the MGA trial and the balance relates to recall-related litigation.

We will continue to make these investments until legal matters are resolved.

For the MGA case which has represented largest piece of our litigation spending so far this year, costs should recede as the trial wraps up in the next few weeks.

Further litigation matters with MGA have not yet been determined.

So that's about all of the guidance I can give you, Tony, on that.

Tony, this is Bob.

On shelf space, I don't have -- or I don't have measurements right now but I can tell you the anecdotes from what I've heard from retailers.

I have no reason to believe that shelf space would decline for the toy category.

Historically the toy category has held up pretty well in tough economic times.

That certainly was true both in the second half of last year and so far in the first half this year.

So I don't see any big change coming.

Then with regard to commodity costs, we set our prices earlier this year.

Oil prices have subsequently continued to rise but in addition to differences in timing in resin prices.

There's a variety of other moving parts, Tony, including currency that will ultimately impact our margins.

In Q2 we only had price increases in place for one month and we've benefited from lower recall costs combined with positive foreign exchange we're able to offset higher input costs and additional testing costs.

We expect to continue to have cost head winds with regard to commodities for the balance of the year.

So for the second half, we won't know if our pricing is enough until we have had the benefit of hindsight to see exactly what costs were -- for our input costs when we use them but over the long term, our goal is to improve margins and if inputs, if resins in key input costs continue to rise we will have to adjust our 2009 pricing accordingly.

Then just two other quick follow-ups here, as it relate to Barbie during the quarter, were there any stand out products last year that might have created the miss, or at least the appearance of a miss this quarter in the down sales?

And then last question, is there any reason you didn't buyback more stock during the quarter?

Business is firming up in a pretty stable category and the stock went fairly low during the quarter.

Tony, on Barbie on sight, two things.

Although, again, in a product line that large there's always some things declining and some things growing.

From the good news side, the spring entertainment property, Mariposa did quite well.

That was very important to us because we didn't do so well with that last year for the first time in many years.

The two product lines I would cite that really dragged things down beyond My Scene overall were one in our Collector business.

Last year we had Wizard of Oz that did quite well and this year we don't have a good comparison against that.

The second thing in the Barbie reality segment which didn't do as good as younger girl reality segment, last year we were shipping the MP3 player which played out in the second half, but shipments were pretty strong throughout the middle of the year.

And with respect to share buy back in the quarter as I said we repurchased 40.5 million or 2.1 million shares at an average price of $19.07.

At the end of the quarter we approximately 460 million remaining on an authorization.

As you know, we generally don't comment on the timing of perspective share repurchases and it is difficult for you to determine a purchase pattern because there are many times we are unable to be in the market of legal reasons or maybe temporarily holding cash for other potential purposes.

Over time thought, we will continue to execute under our capital investment framework and be disciplined and opportunistic as we deploy capital to create shareholder value.

As you know, Tony, last year we spent over $800 million on share repurchases, all in the second half and since we implemented the capital investment framework in 2003 we've repurchased over 2 billion of stock.

Perfect.

Thank you, guys.

Good luck.

Thanks, Tony.

We will take your next question from Linda Bolton-Weiser with Caris.

Thank you.

I was wondering if you could tell us like, just in a rough sense what percentage of your shipments fall in the month of June in the quarter?

Boy, I don't think we would do that.

We have never Linda, gotten kind of that granular with results.

Okay.

And just on the CapEx, it was like up a little bit year-over-year.

Is that because of the boutique openings or -- and then can we expect modest increases in CapEx for the rest of the year?

Yes, I think as I mentioned capital expenditures for the second quarter increased $14 million to $47 million which is primarily due to manufacturing operations initiatives at our facilities in Asia as we try to optimize those things.

Renovations at our El Segundo design center and the move of American Girl Chicago to Michigan avenue at Water Tower Place.

If you look at full year our 2008 CapEx spending is likely to exceed 2000 levels as we invest in House of -- Barbie, Shanghai.

Move the current American Girl Place Chicago store to a new prominent location at Water Tower Place, renovate our design center at California.

But we should still be below our long term range of 180 million to $200 million.

With regard to the boutiques last year, we opened two boutiques, this year we are opening two boutiques.

Those should sort of net out.

Okay.

And is there any way you can give, I mean I would assume like Car sales were down in the quarter but can you give us some rough idea as to the rate of decline.

Is it like a double digit decline or is it more like slightly down?

No, Linda, I think it was down double digits but also recognize it is still an evergreen property for us.

It is still one of our top selling brands.

And to the point that we even extended license with Disney and Pixar through 2011 during the quarter.

We like the Cars business.

We have some new products coming up with Cars this fall and I think it is going to be around for a long time.

Great.

Just one last thing.

On the Batman products, I mean from what you have seen from consumer take away in the short time it has been out there, have you been able to decide yet whether you are trying to increase production even more in anticipation of the holiday season for those products or is it too early to decide on that type of thing?

Well, just from a shipment standpoint, Linda, I would tell you we are just, we are right on track with the entertainment properties.

It is too early to comment on what take away mig be although again, take away has been quite good even before the movie hit.

So it is an evergreen brand.

We will continue across the portfolio?

Some toys will do well and we will want to increase production, but at the same time some other toy and maybe even some other brand won't do as well and we want to cut back production.

Okay.

Thanks, good quarter.

Thank you.

We will take your next question from Greg Badishkanian with Citi.

Great.

Thanks.

Just a few questions here.

With respect to inventory levels you mentioned that you had clean inventory levels exiting the quarter which is good.

How does that compare with the last year?

Is it down and can you maybe quantify that a little bit?

Yes, Greg, this is Bob.

Our point of sale or retail sales that we get from our top U.S.

retailers is pretty consistent with the fourth quarter.

That is we are just a bit north of flat.

And retail inventories which started the year maybe 10 or 15% over the very low levels of the prior year.

By the end of the first quarter they were down slightly versus year ago and as we progressed through the second quarter, they have declined more versus year ago.

So, they're at lower levels than they were a year ago.

I think that's consistent with how retailers see their business today.

But again we focus on POS on what sells to consumers because ultimately that is what retailers buy.

And I find it pretty encouraging.

Good.

And as you look out to product costs, I think in your, at the investor day you mentioned it's going to be about 1.5points as a percentage of sales.

Is that this quarter, and can you give us a little bit of color on even what those costs are?

Yes, I think Greg you are talking about incremental testing costs.

Exactly.

And I think what we have said in addition to incremental testing costs, which we previously announced would be 1% of cost of goods sold.

We are currently enhanced our testing and quality control procedures for a variety of heavy elements and other chemicals in combination with lead costs, we now estimate total incremental testing and other quality control costs at approximately 1.5% of costs of good sold.

I think our experience in the quarter was consistent with that.

Okay.

Perfect.

Thank you.

We will go next to Drew Crum with Stifel Nicolaus.

Good morning, everyone.

Kevin, can you quantify any impact from the voluntary recall from the Speed Racer line?

Yes, it was about $5 million.

And it was, Drew, this the Bob, we recalled products beyond just Speed Racer we had some other entertainment properties as well.

Those products didn't meet our internal specifications and certain country standards outside the U.S..

But the product was determined to be absolutely safe.

So there was no reason for a recall.

Bob, is that included in that $5 million number?

Yes.

Okay.

Then, I wonder if you guys could comment.

I'm sorry.

Go ahead.

I just needed to yell at Kevin for a minute.

Okay.

I wondered if you guys could comment on the weighted average pricing increases during the period and what you are hearing from retailers in terms of their willingness to accept pricing and just your overall thoughts on pricing for the spring product given the cost environment we are in?

Well, again, I don't think we will comment at sort of pricing by month.

But I will say--.

For the quarter.

Well, for the quarter, the portion of the quarter was up and a portion of it wasn't.

Okay.

But I don't want to get into pricing by month.

As we look at our pricing, when we took our price increase going into this year, there was some anxiety among retailers that we might have been pretty agressive but we were projecting costs and in a rising market you need to step up.

Now with the benefit of hindsight, with oil even if it is down to $130 or so a barrel, that's a lot more than it was when we took our price increase.

With the benefit of hindsight I'm certainly glad we went up as much as we did.

And we may need to go up more.

So as we are talking to retailers now about next spring's line, we are anticipating more cost increases and to the extent we cannot offset those with good productivity improvements we will have to raise prices again.

No retailer likes to raise prices, we don't like to raise prices, but the fact is the costs are increasing and we need to reflect those costs and retailers know that.

Most of the major retailers are making their own toys or sourcing their own toys for private label.

So they see the cost coming out.

It is totally cost justified.

Moving to the entertainment properties, given the success of Kung Fu Panda, is there any plans to extend the number of SKUs in conjunction with the DVD release in the fall?

And do you have this for just one film because it seems like it is going to be a franchise for Dreamworks?

I don't know.

I believe we only have it for one film but I will have to confirm that.

We will get back to you on that.

The product line isn't going to change between now and the fall.

It has been performing right on our expectations.

Certainly with the box office success of the film as I mentioned in my comments we are hopeful that it extends the legs of the franchise.

Certainly I don't think any of us three years ago would have expected Cars to still be one of the top performing properties in the toy business.

It has had no entertainment for three years.

Kung Fu was a great movie.

The animation is just astonishing to me and it was a great story.

The toys have done well.

We hope they continue to do well.

In pursuing licensing opportunities, are you seeing any change in terms of minimum guarantees, royalty fees, et cetera?

No.

That's always an issue.

We have been clear since the very early days of the year 2000 that we are going to approach these sorts of arrangements with win-win propositions.

Our presentation to intellectual property holders, the movie studios is, we will sell more toys and make you more money if you work with Mattel, but we like to do things on a variable basis so that everybody wins when something does well.

Okay.

Thanks, guys.

We will go next to Tim Conder with Wachovia.

Thank you, and congrats, gentlemen.

A couple of items related to just a clarification on American Girl.

I know there were a few questions before on it, but what were your comp store sales and then what were the sales of the stores that effectively would not have been in the comps?

We don't disclose that, Tim.

But the fact is the stores did well whether they were older stores or newer stores.

Okay.

Okay.

And Kevin you had given the, talked about the '08 tax rate.

What type of rate are you assuming for '09?

I know there's some concerns about tax credits that may or may not be renewed.

Yes.

I think as we look at '09 tax rate, in the last couple of years we benefited from the 2000 Tax Act which provided favorable treatment to U.S.

taxation of earnings of foreign earnings of foreign subsidiaries.

This treatment was applicable for 2006, 2007, and 2008, had the impact of lowering our effective rate by 3 to 4 percentage points.

As you look at '09 and beyond assuming that this provision expires in '08 which it is scheduled to do that the rate would be up by 300 to 400 basis points in '09 and beyond.

Okay.

And relating to your receivables, yes, they were up just a little bit more than sales but given the price increases that you implemented June 1, assuming 30 day terms at the end of the month roughly, was there any pull forward of ordering that could have driven that increase in receivables?

No.

We don't see a lot of that.

Retailers try and buy with what they anticipate selling.

We don't see a lot of, if you will trade inventory pushes as related to price increases in this business.

Okay.

I just needed to check on that.

And then Barbie is probably the disappointment here in the quarter.

But how much of a substitution effect do you think was High School Musical?

And then is it correct to assume that margins on High School Musical products are less than Barbie?

No.

We don't disclose margins by segment but I don't know if I would make that assumption.

We still have work to do on Barbie, but we believe the strategy of first improving our entertainment offerings, second introducing innovative and strong play value products like in the reality segment and third engaging older girls with new types of play like Barbie I Design or Barbie Girls VIP will move us in the right direction.

So we still have work to do on Barbie.

But I think the strategy is right.

Okay.

And given that a competitor of yours is tied up with several different entertainment properties, how are you going about pursuing maybe some other properties from Disney Pixar and then you mentioned, Bob, that you renewed Cars out through 2011.

I think the sequel to Cars has been announced for 2012.

How are things going related to that?

Well, I think the studios prefer to make announcements when, at their time and when they're ready.

You are correct, I've heard 2012 for the next Cars movie.

Three years ago I started launching a campaign to try to get them to make it faster because it has been a fabulous toy property and I know it's more than just a toy property it's been a great property for Disney in general but they've got a lot of movies they're pursuing.

But in general I know that we told you when you were here at investor day that we're pursuing entertainment properties for several of our own core brands like Masters of the Universe or Hot Wheels and those sorts of things.

Entertainment will continue to be an important part of the portfolio, but the mix of entertainment and non-entertainment properties really hasn't changed all that much since I've been in the toy business.

And last question, gentlemen, obviously you've talked about your price increases, you've talked about the input cost increases, but would it be out of the realm of reason tha given that, given efficiencies, and given the easier comps that you have with the absence of recall cost could your gross margins reasonably come in flattish, or would that be asking too much.

That's why you all are so good at what you do.

Okay.

So the door is not closed I guess?

It's your door, Tim, you can open it or close it.

Kind of like the Cubs and the Cards right now.

It's not over until it's over.

Okay.

Thanks.

You get that one, Mike?

Cubs and the Cards?

Mike's a Cards fan too.

This is the year.

We'll take our next question from Gerrick Johnson from BMO Capital Markets.

Good morning.

Three questions, if I may.

I was wondering about your performance in the UK for the quarter?

Second, have you been seeing or hearing open to buy dollars are being reduced at some of your key U.S.

retailers?

And third, what movie property are you making toys for next year?

Thank you.

Any signs of evidence of the rebates might have aided your Q2 business, I guess specifically if you could look at retailers and if certain did better than the rest that might be an indication.

Good.

No.

And we don't have a lot of movie properties next year, other than Batman will be evergreen, Cars will continue to do well.

I think WWE, which we're expecting to be a very important franchise for us starts in 2010.

Great.

Thanks, Bob.

All right, Gerrick, thank you.

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

Good morning.

Was wondering if you had seen any signs of anecdotal evidence that the rebates might have aided your Q2 business, specifically if you could look at your key retailers and if certain ones did better than the rest, that might be an indication.

Also Bob, inventories are in good shape at retail, what is retailer appetite for toys given the macro environment?

And also, Europe, I don't have all of the numbers in front of me, but it looks like it was all currency for the gains this quarter as well as for Barbie itself.

Any signs of slowdown there or anything going on to make currency the reason why business was up in Europe?

No, Margaret we have generally done well in Europe over the years.

Certainly the first half of this year has been a little slower in Europe.

It is confined to a handful of markets.

It is not across the board.

As an example, Germany is one of the markets where we haven't shipped as well.

And most of this relates to the retail inventories coming out of Christmas last year.

I think broadly speaking retailers didn't have as good of a Christmas as they expected last year so they had some inventory to burn off.

But I don't see anything systemic in Europe that would lead me to believe that we shouldn't continue to grow there.

But you are right.

You are correct, currency was the source of growth in Europe this past quarter.

So are the inventories flushed through now Bob, so then in Q3 there might be shipments into the countries that you mentioned?

Well, I never want to get into the projection business but inventories have certainly come down and retailers works very hard particularly in this kind of environment running lean inventories as we have all over the world.

To your other question I haven't seen any real change in appetite for the toy business.

Retailers understand that it has historically performed well in tough economic times.

There's no reason to believe, based on what we have seen so far this year or last Christmas, that the toy business won't continue to perform well for them.

So, we will have to see how it goes but retailers are pretty sophisticated, they want to buy what sells and as long as we keep focused on point of sale, and have good consumer demand, they will buy toys.

The rebate question.

Rebate's hard to tell.

I don't know the impact of rebates and I am not sure our retailers can calculate the importance of rebates.

Certainly I think historically there's some evidence that people spend that money, but whether they're spinning it on gasoline or food or toys, I really don't know.

Finally, in terms of a holiday preview we all expect Elmo Live to do well.

Any other key products that retailers are particularly enthused about?

Boy that's a tough one.

I love all of my children and I love all of my customers and I wouldn't want to get into which customer likes which child better than to say you are correct, October 14, which I believe is the launch date for Elmo Live should be a great day for the toy business.

It is just a fabulous toy.

Anything to drive Barbie's business in the back half?

I sure hope so.

So we all -- anything you can point to though, Bob.

As much as I do, Margaret.

We will take your last question from John Taylor with Arcadia Investment.

Good morning.

Good response.

So let see.

Could you give us any characterization of what's going on with Barbiegirl.com in terms of versus expectation whatever those might be?

No, it is still really early, JT.

We are at 13 million registered users since we launched Barbiegirls, in I think it was April of '07.

We just launched the 5.99 subscription model, the VIP launch in early June.

It really is too early to pass judgment on it.

It's one of those things where we don have an experience curve like we do in the core toy business where we have some idea of how demand ramps up.

We still have a lot of girls who bought that MP3 device, they get a year's free, I believe, Mike.

They get a year's free access to VIP.

So that sort of clouds a trend or the now that is already pretty murky.

Have you done much advertising of that other than on the site itself?

No, I don't think we have started really any advertising at all, it is very early in its life cycle.

Again, we want to see how it goes on its own first.

Then if you took a basket of like for like goods, things that really didn't change much from this year versus last year could you tell us what the -- give us a ball park of what the actual bill of goods, bill of materials increase was out of China?

Roughly?

Double digit.

You don't want to go any further then?

It is just order of magnitude, Kevin, 10, 15%?

Yes, I think things like resins have gone up over the last 12 months about 15 to 20%.

So I think it is in double digit increases.

Okay.

Great.

Then Bob you seem to be one of the experts on this.

Apparently the dock workers are slowing things down a little bit.

Are you hearing anything through your back channels about how things are going there?

Well, I certainly wouldn't describe myself as an expert on this.

I am--.

You're the expert in my life.

--anybody here, but the fact is the six year, I think it was, labor agreement expired on June 30, so the West Coast ports today are working without a contract.

We expect it would take several weeks to reach an agreement but everything I have heard is that the negotiations have been respectful and positive and well organized.

So, there could be some short-term disruptions during the negotiations but at this time I certainly anticipate and am hopeful that an agreement will be reached without anybody doing anything extreme.

It is still early days.

We're not really hitting the heavy arrival time yet.

Correct.

Last question, Shanghai store, can you talk a little bit about the merchandising mix there, what lines you are drawing on, whether you are doing anything special for the store, et cetera?

We are doing some special things for the store.

It is going to be quite interesting.

We are going to do some core Barbie because Barbie is a new brand in China but we are also going to do some unique things and importantly some experiential things modeled after the experience we've had here with American Girl.

It is going be a blend of core product.

There will be some unique product and there will be unique experiences.

And then how does your distribution channel look like throughout the rest of China in case all of the sudden word starts to spread?

We do well in China in distributions.

There are some accounts we distribute directly to and there are other accounts that are serviced by a local distributor who has done a good job for us.

So boy, I would love to have that problem anywhere in the world.

We will figure out how to fill demand if it is there.

Thank you.

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

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

Okay.

Thanks.

We will have a replay of this call available today beginning at 11:30 a.m.

Eastern time.

The number for the replay is 719-457-0820.

The pass code is 342-6585.

Thanks for participating in today's call, and have a good weekend.

Once again, that does conclude today's call, we do appreciate your participation.

You may disconnect at this time.