Mattel Inc (MAT) 2008 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Mattel Incorporated third quarter 2008 earnings conference call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms.

Dianne Douglas.

Ms.

Douglas, please go ahead, ma'am.

Thanks, Rufus.

As you know, this morning we reported Mattel's third 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 the call will be open for your questions.

Certain statements made during the call may include forward-looking statements about management's expectations, strategic objectives, anticipated financial performance and other similar matters.

Such forward-looking statements may include statements regarding performance of our brands, productions, entertainment properties, DVD releases, toy sales, retail inventory levels, input cost pressures, effects of price increases, margins, foreign exchange gains and losses, retail expansion, impact of the global economic environment, investments, liquidity and mitigation of risk.

A variety of factors, many of which are beyond our control, affect the operations, performance, business strategy and results from 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 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 and media section of our corporate website at Mattel.com under subheadings Financial Information and Earnings Releases.

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

Thank you, Dianne and welcome back.

Good morning, everyone.

Every year at this time, some event arises that gives folks in the toy industry what I'd like to call the early fall jitters, and while that may sound a bit trite, the events haven't been.

We've seen port strikes, terrorist attacks, potentially deadly epidemics, global product recalls and this year we're experiencing what is likely the worst economic crisis of my generation.

As I've said during past times of high anxiety, my bet is there will be a Christmas.

Kids will get toys, and we'll sell more toys than anyone else.

That's not to make light of the concerns because they're real.

As you've likely heard, retailers are reluctant to make inventory bets and it will be difficult for some of our customers and vendors to obtain the funds they need to buy inventory or raw materials.

It will also be hard for parents whose job status and financial well being are uncertain.

And as we've done in the past, we'll need to adjust accordingly.

But on the whole, the toy industry has held up well in tough economic times, and Mattel has had solid performance in both good times and bad.

For the quarter, we experienced good top line growth as we saw improvement in our domestic Barbie business and also nice growth in several of our key core brands, including core Fisher Price and American Girl.

Outside of Barbie, our other girls' businesses performed quite well with this being the fourth consecutive quarter of double digit growth, lead by High School Musical doubts.

Growth in our international markets is being fueled by developing markets including Eastern Europe, Latin America, Asia, and our U.S.

business delivered improved revenue in the quarter.

As we move into the all-important holiday season, Mattel and Fisher Price toys are already topping must have holiday toy lists including Barbie's Diamond Castle, Hot Wheels Trick Tracks, American Girls Bitty Twins, Fisher Price's Laugh and Learn toys and of course, Elmo Live, and while I don't always have the best track record in predicting the hot toy for the season, while I stick with Elmo, I do pretty well.

Elmo Live went on sale last week and early results are encouraging and consistent with our high expectations.

Although most online outlets and some stores quickly sold out of initial inventories.

most stores where toys are sold have Elmo Live available today, which is a good thing for consumers during holiday shopping.

For Barbie this holiday, Barbie is starring in her first Christmas Movie, Barbie in a Christmas Carol, which launches on November 4.

I'm excited about the DVD release for two reasons.

One, about 50% of DVD sales during the holiday season are holiday themed, and two, for the first time, we featured the holiday doll as part of a bigger program, by cross-promoting the 2008 holiday doll with the release of a DVD.

For Wheels, the Trick Tracks is getting rave reviews because the innovative track set has great play value for mom and great play action for kids, with three ready made stunts that kids can use to build an array of endless configurations for multiple play experiences.

We're also excited about the opening of two new American Girl Boutique and Bistros in Boston and Minneapolis's Mall of America on November 1 and 15th respectively.

This format has worked quite well for us as the Dallas and Atlanta locations are performing nicely.

And lastly, Disney's High School Musical 3: Senior Year opens in theatres this Friday.

We've been very pleased with the performance of this Disney franchise, and suspect it will be on top of girl's wish lists for the holiday.

As I have said every holiday season since I arrived at Mattel there will be a Christmas and Mattel toys will be under the tree.

That said, I appreciate that some families may have to make choices this year when it comes to buying toys for their children.

I'm convinced that Mattel, Fisher Price, American Girl and Radica provides superior play value time and time again.

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

Thank you, Bob, and good morning everyone.

I'll begin my review for the third quarter with a discussion of worldwide gross sales shown on exhibit two of today's press release.

Total worldwide gross sales for the quarter increased 5% including a 2 percentage point benefit from changes in foreign exchange rates.

US Sales grew 4% and international sales increased 7%, including a six percentage point benefit from foreign exchange.

On a regional basis, sales in Europe were up 2%, including a five percentage point positive impact from exchange rates.

Sales in Latin America were up 18%, including a nine percentage point positive impact from foreign exchange.

And sales in Asia Pacific were down 2%, including a one percentage point positive impact from changes in exchange rates.

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

Mattel girls and boys brands.

Worldwide sales for the Mattel girls and boys brand segment increased 6%, including a four percentage point positive impact from changes in exchange rates.

Worldwide Barbie sales were down 1%, including a three percentage point positive impact from foreign exchange.

Barbie sales in the U.S.

grew 3% while Barbie sales in international markets decreased 2% including a six percentage point benefit from foreign exchange.

On a worldwide basis, declines in My Scene and Collector were partially offset by growth in our fantasy business.

Worldwide sales of other girls brands increased 26%, including a three percentage point positive impact from exchange rates.

Sales in the U.S.

Were up 19% while international sales of other girls brands were up 31% including a six percentage point positive impact from foreign exchange.

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

The Disney Princesses business also continued to perform well.

Worldwide sales in the Wheels category, which includes Hot Wheels, Speed Racer, Matchbox and Tyco RC increased 7%, including a three percentage point positive impact from changes in currency exchange rates, due to solid performances across all brands in the U.S.

The worldwide Wheels business, excluding Speed Racer, grew 2% including a three percentage point positive impact from foreign exchange.

Worldwide sales in our entertainment business, which includes games and puzzles, increased 3%, including a four percentage point positive impact from changes in foreign exchange.

The growth in entertainment was primarily attributable to Batman, the Dark Knight, which more than offset the decline in CARS, a property that continues to demonstrate evergreen status at retail.

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

On a regional basis, international sales at Fisher Price brands grew 6%, including a three percentage point positive impact from foreign exchange.

Sales in the U.S.

increased 3%.

Worldwide core Fisher Price increased 7% including a one percentage point benefit from changes in exchange rates.

U.S.

Sales of Fisher Price core grew 3% while international sales were up 15%, including a four percentage point benefit from foreign exchange.

Core Fisher Price achieved all-time record sales in the third quarter behind very strong demand for new toys like Bounce & Learn Smart Pony and Spike the Ultra Dinosaur.

Fisher Price brand sales declined 3%, with zero impact from foreign exchange rates.

Sales of Fisher Price Friends in the U.S.

were up 4% while international sales were down 13%, including a one percentage point benefit from foreign exchange.

On a worldwide basis, Sesame Street was slightly ahead of last year.

As you know, Elmo Live launched last week and the early signs at retail are very encouraging.

Additionally, in the quarter, Disney performed very well in the U.S.

American Girl brands for the third consecutive quarter, American Girl brands delivered sales growth, up 11% this quarter driven by growth at our retail stores as well as catalog and internet.

Growth in historical characters was driven by strong sales of Kit Kittredge, movie related product.

Before I provide my usual remarks on the P & L, I'd like to discuss the impact of the global economic environment that everyone is currently facing.

In this quarter, bad debt expense increased $10 million versus last year as a result of certain customers facing financial difficulties.

Additionally, we took a $4 million writedown of the money-market investment and reclassified the remaining $81 million to long term investments.

We expect to receive the proceeds of this investment by the end of 2009 when the underlying securities will have matured.

While no one is immune from the effects of the credit market crisis, Mattel's direct exposure is fairly limited, and we have ample liquidity to fund our business needs including the beginning of the year cash, cash flow from operations, and access to our $1.3 billion credit facility.

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

As a reminder, in the 2007 third quarter, we had $39.8 million of pre-tax recall expenses which primarily impacted net sales and cost of sales.

Our gross margin in this year's third quarter was 46.2% which compared to last years margin of 47%.

The benefit of this year's mid to high single digit price increase and lower recall related costs were not enough to offset cost pressures from commodities, Chinese labor rates, the appreciating Chinese currency and incremental product testing costs.

Given the continuing cost pressures, it's likely we'll raise prices for 2009.

Advertising expense was $223.8 million or 11.5% of net sales consistent with last year.

Selling, general and administrative expenses increased about $18 million to approximately $361 million as a percentage of net sales, SG&A expense were 18.5% compared to 18.6% last year.

The increase in SG&A expense is primarily due to higher bad debt expense of $10 million and the impact of foreign exchange.

MGA and recall related litigation expenses are essentially flat with last year.

Equity compensation expense increased from $7 million in last year's third quarter to $11.7 million this year but was offset by a reduction in other employee related expenses.

Operating income during the quarter was $315.3 million compared to operating income of $310.5 million last year, as higher sales were partially offset by cost pressures and higher SG&A.

Interest expense was $20.4 million versus $16.4 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 $6 million versus $6.2 million last year, primarily due to lower average interest rates, partially offset by a higher average cash balances during the quarter.

Other non-operating income net was $6.2 million versus income of $7.4 million in 2007.

The current year income relates primarily to foreign currency exchange gains but was partially offset by an investment impairment of $4 million.

The income tax provision of $69 million compared to prior year's expense of $70.9 million.

The year-to-date effective tax rate is 22.5%.

Overall, we reported net income of $238.1 million, or $0.66 per share versus last years net income of $236.8 million or $0.61 per share.

So, to summarize the P & L, strong performances from Batman, core Fisher Price, High School Musical, and American Girl, as well as the benefit of foreign exchange contributed to our top line growth.

Margins were negatively impacted by cost pressures and higher SG&a expenses but partly aided by price increases, lower recall related cost and foreign exchange.

Now turning to the cash flow and balance sheet.

Cash flow used for operations for the quarter was $667 million, driven primarily by the use of cash for seasonal working capital requirements.

Cash on hand at the end of the quarter was $447 million, up from $277 million in the prior year, primarily due to lower share repurchases compared to 2007.

We completed $40 million of share repurchases in the quarter, retiring 2.2 million shares at an average price of $18.45.

As of September 30, our basic share count was 359 million, and we had 420 million remaining on our share repurchase authorizations.

Receivables were $1.713 billion or 79 days of sales outstanding, down one day versus last year.

Factoring decreased from $132 million a year ago to $83 million.

Prior to factoring, days of sales outstanding decreased four days.

Inventories at 751 million were up $19 million or 3% versus 2007 and represented 55 days of supply, which is seven days lower than last year.

Our total balance sheet debt increased by $474 million from the prior year, primarily due to 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 37%, which is compared to 29% in last year's third quarter.

Capital Expenditures were approximately $58 million, up from last year's $40 million.

So to summarize, we experienced revenue growth in the quarter due to the continued strong performances in Batman, core Fisher Price, High School Musical, and American Girl as well as the benefit of foreign exchange.

Input cost pressures and higher SG&A expenses continued to hamper margins, partially offset by price increases and lower recall related costs.

So as we enter the all-important fourth quarter, we remain focused on executing our business, and partnering with our customers and vendors to mitigate risk and position Mattel for a successful holiday season.

That concludes my review of the financial results.

Now we would like to open the call to questions.

Operator?

Thank you, sir.

(OPERATOR INSTRUCTIONS).

For our first question, we go to Sean McGowan with Needham.

Hi, can you hear me?

Yes, Sean.

Okay, thank you.

A couple of questions if I can.

Bob, does the relatively low level of inventory increase indicate anything about your expectations for the balance of the year?

No, Sean, I think in this environment, everybody is tightly managing inventories.

Certainly our retail customers are, and we are as well, and as always, we're just trying to match supply with demand.

Okay, maybe the second question here might be you or Kevin.

Expected currency impact in the fourth quarter and the outlook for the early part of next year as we've seen a spike up in the dollar, assuming the dollar stays where it is today what kind of impact can we expect in the near term?

Yeah, I think, Sean, we can't predict currency for 2008 or 2009 but the year averaged about $1.52 for the first nine months of 2008, compared to about $1.34 for 2007 and in the fourth quarter 2007, the Euro averaged $1.45 and averaged $1.37 for full year 2007, and looking at last Friday, the Euro's spot rate was at $1.34.

So I think if you compare it to the average of last year $1.44, it's going to depend with regard to ForEx in the fourth quarter 2008 whether the actual average exchange rates are higher or lower than the fourth quarter of 2007 average exchange rates.

Okay.

Any comment on taking advantage of this stock price and stepping up the stock buyback in the fourth quarter?

Well, Sean, all capital deployment decisions ultimately reside with the Board and I think I'd defer to them.

Certainly, Kevin, you might have some more in that.

Yeah, I think, Sean in the quarter repurchased about $40.1 million or 2.2 million shares at average price of $18.45.

At the end of the quarter, we had approximately $420.4 million remaining on our authorization, and as you know we generally don't comment on the timing of respective share repurchases.

Bob indicated that is a forward level decision but over time we'll continue to execute in our capital investment framework and be disciplined opportunistic as we deploy capital and last year we spent over 800 million on repurchases all in the second half and since we implemented the capital investment framework in 2003, we've we've repurchased over $2 billion of stock so I think as you look out over the future you can expect us again to be executing within the capital investment framework.

Okay, last quick one, thanks, Kevin.

If you are looking out, we seen oil practically crash, it's got to help transportation costs.

What point do you think you'll begin to see the benefits of lower costs?

I think, Sean, as we use oil prices as a proxy our key input costs have actually its own supply and demand, so resin prices do not always move immediately with oil.

We set our prices earlier this year and while oil prices have recently declined, these moves were subsequent to buying commodities for our Fall product line but I think we should see a benefit next year of resin prices recede due to lower oil costs.

Okay, thank you.

Our next question we go to Linda Bolton-Weiser with Caris.

Hi.

Thank you.

I was just wondering if you could repeat the item about the write-off or whatever it was, I believe it was $4 million.

Could you explain that one more time, and also in the other income expense line, it looked like that was more favorable than we had expected.

Was there something unusual in that line?

Okay, well first let me give you, I'll respond to the write-off of the $4 million impairment charge.

Mattel has an $85 million investment in the reserve international liquidity fund.

We're not fairly able to liquidate this investment because the reserve fund halted redemption requests in approximately mid September.

We reviewed the September 30, 2008 investment portfolio with the reserve fund and determined the only counterparty at issue was Lehman as a result of $4 million impairment charges recognize in the third quarter.

The remaining counterpart its have an A-plus or better rating and mostly A1 and P1 short-term ratings and securities are mainly CD, CP, and floating rate demand notes have matured by early 2009, so as the maturity date for a portion of the investments reserve fund exceed one year, under Generally Accepted Accounting Principles we are required to classify this asset as a non-current asset.

And then with regard to your other question on non-operating income, for the third quarter of 2008, non-operating income related primarily to foreign currency exchange gains in a Latin American subsidiary which was partially offset by an investment impairment charge of $4 million that I discussed in my script.

In 2007, non-operating income related to foreign exchange gains in the same Latin American subsidiary.

Okay, great.

And then can I just ask you about gross margin performance?

I mean, you did have recall related items affecting the gross margin performance in the third quarter of '07, and I think if you excluded that, I think your gross margin was down about 150 basis points year-over-year, and that was really almost as bad as the decline in the second quarter, even though you had a lot more benefit from price increases.

So I would just like to understand that better.

I mean, did you achieve the pricing that you expected to achieve and also, maybe you could give some insight into how your cost comparison will be in the fourth quarter.

How are costs in fourth quarter of '07 compared with the cost situation in third quarter '07?

Well, Linda, this is Bob.

Regarding the last part as you know, we don't go into forward-looking discussions but in general I'll tell you our costs have risen quite a bit this year as well, so we did affect the price increase that we had planned.

Costs have gone up higher than planned as it relates to both key commodities, transportation, the Chinese currency and labor rates throughout Asia, so in general, while we had effective pricing, clearly with the benefit of hindsight now, our costs went up even faster, so as we're looking out into the future, it's likely we'll continue to chase costs with further price increases.

Okay, and just one final thing.

Are you seeing that you that your smaller companies out there, smaller competitors in the industry are having problems either with funding working capital needs or in terms of a higher testing and more stringent requirements by the retailers?

Are you finding that you're benefiting versus the smaller companies in the industry?

Well, certainly, the credit crisis is having an impact on the Supply chain whether you look at some of our vendors, some of our retail customers, or I suspect some of our competitors.

Fortunately, we have sufficient resources to get us through any storm like this and we're doing well on that front but I'd rather be in the position right now of being a large Company with ample resources than being someone that doesn't have access to the markets that we do.

Okay, thank you.

We go next to Tim Conder with Wachovia.

Yes, hi, this is actually Joe Lackey subbing in for Tim this morning.

Just kind of wanted to get an update on U.S.

global channel inventories as of the end of the third quarter and specifically if you could comment on European inventories?

Hi, Joe, this is Bob.

In general, our sell-in and sell-through are well aligned right now.

Both are up in the low single digits, if you look at the U.S.

basis, you'll recall that we started the year with higher retail inventories compared to the prior year.

I think they were up about 10 or 15%, but that's all been worked off, and related to your specific question, in Europe, the data isn't quite as good as it is here in the U.S.

But my sense is inventories are tight in Europe, particularly in Western Europe, retailers have been very cautious about the economic situation there and also we've had one or two customers that are struggling with their results of the financial crisis that we've slowed shipments to them, but I'd say in general, retail inventories are pretty tight right now whether it's here in the U.S.

Or overseas.

Right, right.

Wondering if you guys could comment as well on your retail sell-through.

At the end of September-October, early October here, given concerns in the credit environment and consumer pullback overall, do you have any comments as far as how you've seen trends just specifically end of September, early October?

No.

We don't want to comment on trends within the fourth quarter as we're now into the fourth quarter.

Right.

I'll again just reiterate that if you look at the first three quarters of the year, we're very well balanced between what we're selling into retailers and what they're selling to consumers.

Got you.

Did you guys have any negative impact on your borrowing costs here, given the tightening in the commercial paper market and how is your access at this point to that market?

Yeah, so far, through the end of the third quarter we didn't have any impact from higher borrowing costs and we were able to access our revolver and I think our average borrowing cost was a little over 3%.

Okay, thanks.

And then finally last question here, if you could give some update on the third quarter legal spending and any outlook on the MGA and recall class actions.

Well I'll give you an update on legal expenses for the quarter.

I think as we said in January this year, we expect to incur sizeable legal costs this year.

We've got a lat of litigation around the world and things related to product recalls as well as the MGA case, and as I said, our legal costs in the third quarter were comparable with last year's third quarter.

About two-thirds of this cost is related to MGA trial.

The balance relates to recall related litigation.

For the MGA case which represents the largest piece of our litigation spending so far this year, costs have receded as the trial wrapped up in the Summer.

The judge has scheduled a hearing on November 10 to hear arguments regarding MGA litigation matters, and as you know, we don't give guidance so we will not elaborate further on cost for 2008 and we'll continue to make these investments until legal matters are resolved.

Great.

Thanks, guys.

Thanks, Joe.

We go next to Shoshanna Pollack with Barclays Capital.

Hi, guys, just a couple quick questions.

You talked about retailers being more cautious in international markets.

Are there any other trends that you're seeing in international markets that are different from previous quarters and years?

No, in general we're seeing more mature markets like Western Europe in a situation similar to North America, and all of the growth we're seeing right now internationally is in the more emerging markets of Latin America and Eastern Europe and Asia.

In terms of promotions are you participating at all in additional programs with retailers to try and generate, help them generate store traffic or any additional things you would normally not do given the current economic environment?

I wouldn't say anything out of the usual but this is the toy time of year, so we've got active programs with retailers around the globe and as you go into stores right now, they look pretty good for the toy season.

Okay.

In terms of shelf space, are you seeing anything dramatically different more or less overall?

No.

Okay.

Great.

Thanks guys.

Our next question comes from Drew Crum with Stifel Nicolaus.

Great.

Good morning everyone.

I wonder if you could comment on your outlook for product testing just given the passage of the federal legislation, there's some other item percolating at the State level and several retailers have discussed doing their own testing standards.

I was wondering if you could comment on that.

Secondly, just some thoughts on the Barbie Diamond Castle property, how that's gone at retail.

The DVD has not done as well as some of the others in the past and finally if you could just comment on the performance of the Asian market in the quarter, thanks.

Drew, we don't see anything particularly unusual coming at us from the testing protocol standpoint.

As you know we've been doing a lot of these tests and the industry has, and the regulations are now clear and tighter and they will be changing over time but I wouldn't say there's anything particularly new as it relates to testing costs.

As it relates to your question on Barbie, in general, the doll, the fashion doll categories have been pretty sluggish for the first three quarters despite the fact that we've seen pretty good incremental volume from Disney Princesses and Hannah Montana and now High School Musical, and I think Webkin is impacting the doll business.

I also think Nintendo's Wii.

It's really the first game system with girl appeal, and I think that's had an impact on the category.

That said, we did growth in U.S.

for Barbie in the quarter and it was driven by the younger fantasy segment lead by Diamond Castle, which partially offset declines in reality products such as last year's MP3 player that sold for $55 or $60.

We are cautious, however, about the early success of Diamond Castle because it was launched a week earlier than last year's Island Princess but everything I've seen says the DVD is selling quite well and the dolls are selling well so while we're encouraged by the domestic Barbie sales growth we obviously still have work to do.

We'll be sharing more about our future plans with everyone early next year, but in the meantime we're adding magic to the Barbie Holiday Doll by pairing it with a classic holiday entertainment property, Barbie and a Christmas Carol, the DVD on that one launches November 4, I believe it is, and we cross-promote the doll who appears in the movie and on shelf that doll looks terrific.

Yeah, then finally Drew with regard to Asia Pacific, our Asia Pacific region was down 2% actual dollars down 3%, local currency but if you look at continental Asia, that growth was offset by more sales in Australia.

Okay, thanks guys.

We go next to Robert Carroll with UBS.

Hi, guys.

I was wondering if you might be able to touch on the progression during the quarter if you saw any increasing cancellation levels or order sizes being adjusted?

No, Robert, we didn't really see anything unusual.

It's that time of year where retailers mix and match and some are doing better or feeling better than others, but I wouldn't say overall there was anything particularly unusual.

Okay, and you guys don't give guidance, but looking at the entertainment offerings around 2009, is there anything that may be a contender for anniversarying Batman and some of the other more popular items?

Well I think in general, we'll have a lighter entertainment category in 2009.

Batman is an evergreen property.

We'll continue to do well.

Cars has been nothing short of phenomenal and if you just look at the overall sales, Cars has done even better than Batman.

Now, Cars isn't as big as Cars was a year or two ago when we had the entertainment, but that's an evergreen property for us but I think in general you'll see 2009 be a little bit light for us, 2010 will be stronger as we introduce things like the WWE line.

Last thing.

On cash balances exiting the year, are you guys expecting that level obviously to depend on how things go in the fourth quarter but are you looking to maintain higher levels than you have in the past given the current financing environment?

No.

Well, we continue to execute against the capital investment framework that I believe the Board approved in 2002 or perhaps it was 2003, and in general we like the end of the year with a cash balance of about $800 million to $1 billion.

I believe last year Kevin, in it was right around $900 million?

Correct.

Okay.

All right, thanks guys.

We go next to Greg Badishkanian with Citigroup.

Great.

Thank you.

Just two quick questions here.

First is how do you feel that the low single digit retail sales growth U.S.

and international I think is what you mentioned compares to the industry?

Are you taking a little bit of share with that?

Well, it's always hard to tell at this time of year.

The NPD data suggests I think we have that through August that in fact we aren't gaining share and they would show our sales declining at retail but we get the data obviously from our large customers which shows that our sales are increasing.

I don't have any reason to believe really either way that anything is particularly unusual for us either good or bad, Kevin.

Do you?

No.

Okay, good.

And you had mentioned in the press release that you had some of the hottest toys in the marketplace and Elmo Live was something you talked about.

Are there any other standout products and how do you think retailers are responding to to your products this year versus last year?

Are they much more innovative or just kind of similar level this year as last year?

Well, I always encourage people to talk directly to retailers, but I happen to be in stores this weekend and I think the toy departments look very good.

I did see some Elmo Live's out there.

Not every store had Elmo Live, but it displays really well.

The other toy that I think is incredibly innovative in merchandising is Spike the Ultra Dinosaur from Fisher Price.

That has got the best merchandising piece that I've ever seen in the toy business.

It's really quite impressive, and our competitors have good toys as well so at this time of year we all get anxious about the toy business and will there be a holiday and will kids get toys?

But I'm sure this year will work out like all of the other years and retailers will do fine.

Good.

Thank you very much.

We go next to John Taylor with Arcadia.

Hi.

I was wondering if you could talk at all about sort of the macro outlook in China.

Somebody just, I forget the name of it, one of the big toy factories just filed for bankruptcy and I'm kind of wondering what you're hearing as it relates to capacity related to toy production for next year and talk about the broader implications of commodity prices coming down.

Sean kind of got at this a little bit but I wonder if you could expand on what all this might mean for margin next year.

Well, it's tight, JT.

The supply chain is tighter than any other time I've seen it.

Certainly, we have some vendors who are under pressure either because their costs are rising so quickly with the currency that they use or the labor costs that they have or labor availability so in general, it's been tight.

A number of smaller vendors have left the business.

There were news reports of half the toy vendors leaving the toy business but they tend to be particularly small ones, but I think the name of the outfit you're thinking about is Smart Union.

Yeah.

It did fold last week I believe it was.

They are a vendor of ours.

They do about 1% of our overall business, and I think that's just indicative of the fact that it's tight in the supply chain and i don't see it getting looser next year.

I think it will continue to be tight.

There's a lot of testing.

There's a lot of competition for labor in Southern China.

Commodity cost, it's interesting to see the barrel oil headlines but we haven't seen our costs come down.

Yeah, I guess just adding to that, Bob, I think there's a variety of moving parts in our costs including resins, labor, currency, the changing vendor landscape that you just talked about and testing costs related to complying with new regulatory requirements.

Last year, JT, We experienced a lot of volatility in virtually all our input costs and we aren't going to get to the detail of our cost assumption but we are pricing for the new reality in our cost and over the long term our goal is to improve margins and given the continuing overall cost pressures, it's likely we're going to raise prices in 2009.

Okay.

All right, and then to follow-up on questions about inventory, so everybody is managing things a little bit tight.

If Christmas does come this year, what's the likelihood that they are going to be substantial spot outs on store shelves and so on and who is going to have something in their back pocket to restock at the last minute?

Well, I think it's going to vary by retailer.

I think some retailers are running quite lean and other retailers have demonstrated over the past year or two that they will have the inventory at the end of the year.

They're buying today as if they will have the inventory at the end of the year and they won't have to give toys away at the end of the year.

They're the only ones left standing so my sense is theres going to be a number of hot properties out there.

Not just our properties but our competitors have good ones as well, and some retailers are going to make the bet and my sense is they will probably do pretty well.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

With a follow-up we return to Linda Bolton-Weiser with Caris.

Thank you.

I know you guys threw your research on children and their behavior and development you guys are real experts on children's behavior but what can you tell us about your research on parents buying behavior in different economic-type conditions?

Have you done research on, I mean will parents tend to buy the same number of items for under the tree but maybe reduce the average price point of items they're buying?

Is there something you can tell us about the buying behavior in a recession airy type economy?

Well two things, Linda.

First I would start with the historical facts are behavior has held up pretty well.

The toy industry in general has done pretty well, relative to other industries in tough economic times.

We do talk to a lot of parents as well as kids.

Generally speaking, they've always got room for one or two really important things they are planning to buy, some of which will be for the entire family.

They will also buy a lot of toys in sometimes and some families clearly they will buy more lower priced toys than at other times, but so far this year, we haven't seen a dramatic shift as we look at sales by price point, and again it's early in the year and we haven't really seen the holiday season yet but we haven't seen a fundamental shift in toy consumption by price point.

Thank you.

That's helpful.

With that, ladies and gentlemen, we have no further questions on our roster.

Therefore, Ms.

Douglas, I'll turn the conference back over to you for any closing remarks.

Thank you, Rufus.

There will be a replay of this call available beginning at 11:30 a.m.

Eastern Time today.

The number for the replay is 719-457-0820, and the passcode is 3333641.

Thank you for participating.

And again, ladies and gentlemen, this does conclude the Mattel Incorporated third quarter 2008 earnings conference call.

We do appreciate your participation and you may disconnect at this time.