Mattel Inc (MAT) 2009 Q1 法說會逐字稿

Good day and welcome to the Mattel Incorporated first quarter 2009 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Dianne Douglas.

Please go ahead, ma'am.

Thanks, Laurie and good morning.

As you know, this morning we reported Mattel's first quarter 2009 financial results.

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

Certain statements Bob and Kevin make during the call may include forward-looking statements related to the future performance of our overall business, brands and product lines.

These statements are based on currently available operating, financial, economic and competitive information, and they are subject to a number of significant risks and uncertainties which could cause our actual results to differ materially from those projected in the forward-looking statements.

We describe some of these uncertainties in the risk factors section of our 2008 annual report on Form 10-K, as well as in our 2009 quarterly reports on Form 10-Q and in other filings we make with the SEC from time to time.

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, Mattel.com, under the subheadings financial information and earnings releases.

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

Thank you, Dianne and good morning everyone.

Our first quarter results were as expected, as we continue to weather the economic storm.

That said, there were some bright spots with domestic Barbie sales up double digits and our share of US toys continues to be above year ago.

We're experiencing solid POS performance, and both our inventories and retailers' inventories are declining.

We also reported a positive trend in the gross margin line, and we're making progress in controlling costs.

Still, we're operating in a sea of challenging economic news with March marking the sixth consecutive month of lower same store retail sales, though many retailers pointed to the late Easter as part of the decline.

While there are pockets of optimism with some reports of consumer confidence improving and new claims for unemployment benefits tempering, a lot needs to happen between now and the all-important holiday season.

Earlier this week, our annual report to shareholders was posted on our website for shareholders and other stakeholders.

Every year you've come to expect a theme or word to drive the year.

This year's call to action is deliver, which I shared with employees worldwide at the start of the year.

As I said in my letter to shareholders, companies that deliver improved execution during the tough times will be the ones best positioned to capitalize on the economic turnaround, which will most certainly occur.

To be successful in 2009, we need to deliver on improving execution across the supply chain and throughout the Company, by realigning our infrastructure, trimming the number of SKUs we're developing, and reducing capital spending by doing only business critical projects and doing them exceptionally well.

We also need to continue doing what we do best, bringing magic to the lives of children through innovative new play experiences, as well as through the revitalization of our classic and time-honored brands.

The success we experienced this quarter domestically with Barbie is a great example of this winning formula.

It would have been pretty hard not to have heard that the world's best selling doll of all time was celebrating a birthday.

And as David Letterman put it, how do we know this?

We know this because Barbie was everywhere, with more than 8.6 billion media impressions worldwide.

She was on TV, the web, at retail, on the newsstand, even the catwalk.

She has her own Facebook page with more than 90,000 friends.

She's tweeting on Twitter, she's blogging, she was the Belle of New York fashion week, she had a birthday bash in her very own Malibu dream house, and parties in Paris, Argentina, India, Italy, Japan, Brazil, Columbia and Toronto, to name a few.

She opened her first retail store in Shanghai, and boasted Barbie boutiques in Bloomingdale's New York, Fred Siegel in Santa Monica and Colette in Paris.

While it was an exciting month of celebration and some incredible groundwork was laid, now the hard work begins.

Translating the passion and energy from the 50th celebrations to sustainable worldwide performance for the brand.

I'm confident we have the right team in place and that we have the right dolls, promotions and partnerships to continue the celebration throughout the year.

While we experienced growth domestically in some of of our key brands like Barbie, Hot Wheels and Fisher-Price Friends, we have work to do in international markets and with other key properties.

The first quarter is just that, the first of four quarters, culminating in the key holiday selling season.

Moving forward, our challenge is clear as is our goal.

To deliver improved execution and great toys, and we aim to do just that.

Thank you.

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

Kevin?

Thank you, Bob, and good morning everyone.

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

Total worldwide gross sales for the quarter were down 15%, including a 7 percentage point negative impact from changes in exchange rates.

US sales were down 6%, and international sales were down 23%, including a 13 percentage point negative impact from foreign exchange.

On a regional basis, sales in Europe were down 26%, including a 12 percentage point negative impact from exchange rates.

Sales in Latin America were down 21%, including a 17 percentage point negative impact from foreign exchange.

And sales in Asia-Pacific were down 15%, including a 13 percentage point negative impact from changes in exchange rates.

I will now review our core business and brands for the first quarter.

Mattel girls and boys brands, worldwide sales for the Mattel girls and boys brand segment were down 15%, including a 9 percentage point negative impact from changes in exchange rates.

World wide Barbie sales were down 5% compared to last year, including a 10 percentage point negative impact from foreign exchange.

Barbie sales in international markets decreased 15%, but were essentially flat, excluding the impact from foreign exchange.

Barbie sales in the US were up 18%.

Barbie's growth in the US was driven primarily by both core lines and products supporting Barbie's 50th anniversary.

Worldwide sales of other girls brands were down 27%, including a 9 percentage point negative impact from exchange rates.

International sales of other girls brands were down 33%, including a 13 percentage point negative impact from foreign exchange, and sales in the US were down 14%.

The growth in Disney Princess and Little Mommy was not enough to offset declines in Polly Pocket and High School Musical.

Worldwide sales in Wheels decreased 14%, including a 7 percentage point negative impact from changes in currency exchange rates.

The worldwide decrease is driven primarily by sales declines in last year's Speed Racer property.

To remind you, our Speed Racer sales last year were reported in both Wheels and entertainment, depending upon the type of product.

Core Hot Wheels, which does not include Speed Racer, declined 3% worldwide, including a 10 percentage point negative impact from foreign exchange.

Core Hot Wheels sales increased double digits in the US, and were up low single digits internationally, excluding the impact of foreign exchange.

Worldwide sales in our entertainment business, which includes games and puzzles, were down 21% including a 9 percentage point negative impact from changes in foreign exchange.

The overall entertainment business decline was driven primarily by lower sales of our Cars entertainment property internationally, and last year's Speed Racer property.

Our games business performed relatively well in the US, but declined internationally.

Fisher-Price brands.

Worldwide sales for Fisher-Price brands were down 17%, including a 5 percentage point negative impact from changes in currency exchange rates.

On a regional basis, international sales at Fisher-Price brands decreased 25%, including a 12 percentage point negative impact from foreign exchange, while sales in the US declined 10%.

Worldwide core Fisher-Price was down 17%, including a 6 percentage point negative impact from changes in exchange rates.

International sales were down 26%, including a 12 percentage point negative impact from foreign exchange and US sales of Fisher-Price core were down 9%.

Fisher-Price Friends worldwide sales declined 7%, including a 5 percentage point negative impact from foreign exchange rates.

International sales were down 20%, including a 9 percentage point negative impact from foreign exchange, while sales of Fisher-Price Friends in the US grew 5% due to strength in Disney products.

American Girl brands.

Sales of American Girl brands were down 4%, primarily due to lower sales from the direct channel business, as Easter shifted from the first quarter last year to the second quarter this year.

Our retail channel sales increased due to the November openings of our two new stores in Boston and Minneapolis.

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

Gross margin was 44% compared to 43.2% last year.

The improvement was primarily due to price increases, which were effective January 1st, that helped mitigate cost pressures from commodities and foreign exchange.

Advertising expense was $84.1 million, or 10.7% of net sales compared to $103 million, or 11.2% of net sales in 2008.

Selling, general and administrative expenses decreased approximately $13.3 million to $317 million.

As a percentage of net sales, SG&A expenses were 40.4%, compared to 35.9% last year.

The year to year dollar improvement in includes approximately $15 million of net savings related to our global cost leadership program, $13 million of foreign exchange benefit, $11 million of lower MGA and recall litigation expenses, partially offset by a $21 million legal settlement reserve for product liability-related litigation.

Operating loss during the quarter was $55.2 million, compared to a loss of $36.5 million last year.

The increase in the loss was primarily due to lower sales in a legal settlement reserve, partially offset by gross margin improvement, lower advertising, and lower SG&A expenses.

Interest expense of $15.9 million was essentially flat versus 2008, as higher average borrowings were offset by lower average interest rates.

Interest income was $3.5 million versus $8.5 million last year.

The lower interest income was due to lower average investment rates, as well as lower average invested cash balances during the quarter.

Other non-operating income expense was income of $2.1 million, versus expense of $15.8 million in 2008.

The current year income relates primarily to foreign currency exchange gains versus foreign currency losses last year.

Income taxes provided a benefit of $14.5 million which translates to an effective rate of 22.1%, compared to prior year's benefit of $13.2 million.

Overall, we reported a net loss of $51 million or $0.14 per share versus last year's net loss of $46.6 million or $0.13 per share.

Now turning to the cash flow and balance sheet.

Cash used for operations for the quarter was $215 million, compared to $264 million of the first quarter of last year, driven primarily by the use of cash for seasonal working capital requirements.

Our cash on hand at the end of the quarter was $404.9 million, down $220 million from prior year first quarter, primarily due to lower beginning cash balances of $618 million this year, versus $901 million last year.

Receivables were $565.3 million, or 65 days of sales outstanding, six days lower than last year.

Factoring increased from $86 million to $101 million, prior to factoring, days of sales outstanding decreased four days.

Inventories at $487.9 million were down $46.3 million, or 9% versus 2008.

In light of the uncertain global economic environment, we are no longer providing days of supply information.

Our total balance sheet debt decreased by $10 million from the prior year.

Our debt to total capital ratio ended the quarter at 30.5% versus 28% in last year's first quarter.

Capital expenditures were $20 million, down from last year's $33 million.

So, to summarize, as Bob mentioned, this quarter results better expectations.

We expected top line challenges from softness at retail, foreign exchange headwinds, and an entertainment-light year.

Despite the top line pressure, we have made progress with aligning our prices and input costs, executing our global cost leadership program, and tightly managing our cash and capital expenditures.

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 Felicia Hendrix with Barclays Capital.

Please go ahead.

Hi, good morning, guys.

Hi, Felicia.

Hi, Felicia.

Hi.

So just a few questions.

Kevin, I was just wondering on the gross margin side, I was wondering if you could just talk us through the main drivers of the declines, is it just mainly cost, stuff that you've talked about before or is there other drivers such as mix?

Yeah, I'll take you through the increase in gross margin.

First quarter gross margin improved 80 basis points to 44% compared to last year's first quarter of 43.2%.

The pricing increase we took effective January 1st helped to mitigate cost pressures from commodity and foreign exchange, but as you mentioned, Felicia, gross margin was also positively impacted by mix and others.

So that summarizes the main drivers.

Okay.

And then on your inventories, was there any FX impact there?

Our inventories are dollar based, based upon dollar based input costs so there's not much of an impact from foreign exchange.

Could you just walk us through a little bit more, help us understand why you're not providing days of supply, even though I think we can calculate that ourselves.

It really relates to, we don't have good transparency into the environment, and as we look at inventories and as we were doing days of supplies it was very forward-looking, it was based upon what we thought would happen in the next quarter, and we don't have good visibility of that so we're not providing that information.

Okay.

And Bob, you're going to love this question.

I was wondering how Easter was, and I'm wondering if you're seeing any improvement at retail since the quarter and a lot of people are talking about bottoming.

I'm wondering if you're seeing actual improvement?

Well, Felicia, we have.

If we look at year-to-date point of sale through last week, so Easter is in both years, it's really not the quarter end, it's the quarter end plus a week or so because of Easter, our point of sale was up in the low to mid single digits.

All of our core brands, including Barbie and Hot Wheels and core Fisher-Price have been growing at retail.

And so the retail inventories as we calculate them are now below a year ago and you'll recall that we started the year with retail inventories up a bit over prior year.

So it's pretty clear that those stocks are being well worked off and in general, what we saw was good POS performance, up until the end of the quarter, when we started having the Easter year-ago comparisons.

And then once that cycled through and we looked at the beginning of the second quarter, we saw the POS rebound back to where it was growing again on a year-to-date basis.

Okay.

Great.

Thanks for that color.

I was -- I kind of started out thinking you weren't going to answer that so I appreciate that.

Felicia.

You surprised me.

Okay.

Thank you.

You're welcome.

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

Please go ahead.

Hi, good morning.

I was wondering in your discussions with retailers, what kind of feedback have they been giving you for basically the rest of the year, how are they planning holiday shipments at this point?

Well, I think all of us in the supply chain, whether it's retailers, or manufacturers like us, or probably even those who make a lot of the goods and run a lot of toy plants are planning conservatively as it relates to sales this year.

Clearly, the industry took a hit in the fourth quarter of last year.

For the Christmas season, the toy business here in the US was down about 5%, which at the time I thought was a big deal until I heard about a bunch of other categories after Christmas, and so I think it shows up, if you look at our POS growing and retailers' inventories down, our inventories down, we don't have visibility into some of the manufacturing plants, but I'm sure their inventories are down.

I think that's indicative of we would rather chase demand this year if it shows up than get ahead of ourselves and build extra inventory across the supply chain.

You mentioned inventories and I was wondering, last year at this time you were building some early inventory for movie related tie-ins.

So excluding those entertainment properties, what's your sort of like for like comparison there on inventory?

It's pretty good.

If we just look across the core brands, our inventories have come down in most of the core brands.

And we clearly have backed out stuff like Speed Racer out of Hot Wheels, and if you looked at Hot Wheels, inventories are down, those sorts of things.

So I think the general conclusion that retail inventories are coming down is accurate.

Clearly, we are not building as much movie related property inventory as we were in the prior year, but it's more than that.

Okay.

And finally, just one last thing on Barbie.

A lot of stuff going on there in terms of shipments.

Last year you ended the holiday '07 pretty heavy, and that was being worked down the first quarter of '08, and then this quarter you had some big shipments for some special promotions and feature shops, so I was wondering how was the POS data looking on Barbie?

It was a strong quarter for Barbie.

Sales were up.

Our shipments were up really in response to double-digit POS growth here in the US, and I think it's a combination of a couple of key factors.

First, is obviously the 50th birthday celebration.

There was a lot of buzz.

We had terrific retailer support.

We had things like the then and now promotion where we featured the new interpretation of the 1959 doll, but also important, the core doll performance improved.

An example there I think is the Ike and Bee segment which encourages girls to try on different personalities and explore the world and different possibilities.

That's selling well.

And I think the third thing is competitively, Barbie's regained the momentum.

Barbie is gaining share in dolls and she continues to gain share even when we measure Barbie against the total toy universe, and so my view of this is other properties come and go, and I'm sure there will be more properties that come and go, but Barbie is the best selling brand in the history of toys and I don't see that changing.

Okay.

Great.

I have a few more.

I'll circle back later on.

Thanks a lot.

You're welcome.

We'll go next to Sean McGowan with Needham & Company.

Please go ahead.

Thank you.

A number of questions as well, if I can.

Kevin, can you give us a sense of on the cash balances, how much of that is in the US versus offshore?

Yeah, I think with regard to cash balances offshore, a substantial portion of the cash balance is offshore and as you know, Sean, as a global Company, Mattel generates cash all around the world.

Our cash management strategy relating to cash balances, working capital funding and capital deployment considers a number of factors including interest rates, exchange rates, tax implications but we do have the ability to access the offshore cash and use it when and where we need it, potentially subject to taxation.

Our goal is to balance these factors in order to optimize the returns on the utilization of cash.

I think for Bob, can you give us a sense of to what extent you think Mattel might or might not be affected by some moves Wal-Mart is making to reduce its SKU count and inventory space for toys?

I wouldn't want to get specific to any retailer, but I think broadly speaking, this environment favors number one brands.

As people rationalize their inventories and their business, just as we rationalize our inventory and our business, you end up focusing on the cores, and like in so many other categories, the top 20 or 30% of your SKUs do 80% of your business, whether it's our business or a retailer's business.

So if somebody is going to focus on the top 20 or 30% of their SKUs, the odds are we're going to have our fair share or in fact more of those than most.

I think I got two other relatively quickies for Kevin.

Kevin, that $21 million product liability set aside there, could you talk about that a little bit more and specifically say whether or not that was kind of expected?

Is that something that you expected to have going into the quarter?

Finally, what should we be looking for full year tax rate?

Is that still 22, 22.5%?

Let me do the first one since I'm probably more familiar with the recall litigation and Kevin's obviously more familiar with the taxes.

As Kevin said, the charge was for a legal settlement reserve related to the product liability litigation.

There are several cases here with a variety of jurisdictions all over the world but we've had some discussions with some of the plaintiffs which have reached a point where the accounting rules have required us to establish a reserve.

These cases are not yet settled, and there is no guarantee that they will be, but we believe we're taking the right steps to resolve them, and we don't give guidance so I don't want to get into what the costs might be in the future, but the fact is, we've been working on trying to resolve these cases and we made enough progress that it's time to set up the financial reserve for it.

I know you wouldn't want to give guidance.

It would be especially difficult to predict something like this.

But would it be fair toy characterize that as payments you were probably going to have to make anyway and you're recognizing the expense now?

No, I don't think it goes that way.

Maybe Kevin, you're better at the accounting FASB 5 or whatever in here.

I think this is -- we're looking at the costs of settling versus the cost of litigating, and at this point we've had discussions with as Bob said, some of the plaintiff's attorneys and I think at this point settlement is probably the way we're going to go.

We don't know that for sure.

That's what I mean.

Like if you were going to settle, you would have had some expense down the road.

You're just taking some portion of that now?

Yeah, so we're accruing what we think that potential settlement is, and if we in fact do settle, then those costs will be expenses that we'll incur over the period that the settlement payouts are required.

Okay.

Great.

And --

Now the tax rate.

We expect the tax rate for 2009 to be somewhere between 22 to 23%, based on current tax laws and I think as I'll just remind everybody, in 2010, we expect our tax rate to be similar to our effective tax rate prior to a tax act that was in place, put in place in 2006 which is around the 27% range.

For 2010.

Okay, thank you.

And beyond.

Thanks, Sean.

We'll go next to Margaret Whitfield with Sterne Agee.

Please go ahead.

Good morning.

Bob, how do you keep the momentum going for Barbie?

How did Thumbelina perform?

Can you quantify the market share gain that Barbie made overall within the fashion doll segment?

Let me start with Thumbelina.

Thumbelina is doing fine, but Thumbelina isn't performing as well as Mariposa did in the prior year, which was quite impressive.

Broadly across the product line, as in all of our brands, some of the segments do better than others but most of the segments in Barbie are doing well.

We continue the momentum with what looks to be to me and to some of our customers a really strong product lineup for the fall.

We've got terrific promotion plans in place with our key customers.

I think they've recognized that we regained the momentum in the doll business and they're treating Barbie accordingly.

Obviously it's early and we don't like to get head of ourselves and those sorts of things.

A lot of you have been exposed to where we are in Barbie and what we're doing with our products and with the positioning of the brand and we've got some energy behind it and it's our job to capitalize on that momentum.

And the share?

Can you quantify the pickup?

I won't because that's a pretty small segment.

I'll just tell you that if you look at that small sort of NPD defined thing of either fashion dolls or dolls, it's a sizable share gain, among the best share gains we have across the Company.

We're gaining share across the Company and we're gaining share in most segments across the Company.

Clearly, we're gaining share in infant and preschool.

We're gaining share in dolls.

But as I started talking about at the end of last year, the thing that was most impressive to me about Barbie is forget the NPD defined segments, if you just look at Barbie as a toy brand, Barbie's been gaining share pretty regularly now since the Christmas season.

For Kevin, could you tell us the currency impact in total on the top line and the bottom line?

I sure can.

On the top line it was 7% negative impact, and about 1% favorable impact in EPS for the quarter.

Finally, legal, what was legal in Q1?

I'm sorry?

What was legal expense in Q1 versus LY?

Legal expense was $11 million lower than last year.

And the total was?

We haven't provided that information.

All right.

Thank you.

Next we'll go to Drew Crum with Stifel Nicolaus.

Please go ahead.

Great.

Good morning everyone.

Wonder if I could start with Barbie, just reconcile for us the variance between the performance domestically and overseas.

Absent the foreign currency impact.

Well, most of it was the foreign currency impact, so if you look at it on a constant currency basis, the overseas business was fine.

It didn't grow as well as we did in the US and probably the single biggest -- well, there's two issues there.

One is Barbie specific.

We don't have as well-developed a collector business outside the US as we do in the US and a lot of the 50th anniversary sorts of product lines are in the collector arena.

And secondly, I would say just broadly speaking, in international, we see more issues with some economies, with some customers, and I think Barbie to some degree was a victim of that.

I think if we looked across the businesses, internationally Barbie probably outperformed most of our other major categories.

Okay.

And somewhat related to that, can you give us an update as to what's happening with the Bratz legal situation?

Well, there haven't been a lot of changes.

Despite the public pronouncements, I haven't seen anything that leads me to conclude that MGA sincerely wants to resolve our differences at this time.

We're still awaiting the judge's final rulings from phase one of the case, which you'll recall resulted in an unanimous jury verdict in our favor last year.

We're also preparing for a phase two trial that is scheduled for -- I think, Kevin, it's March of 2010 and that will include our claims of trade secret theft against MGA.

So we'll continue pursuing this path until it's ultimately resolved.

But I don't think there's really been any significant change over the last couple of months.

Okay.

Fair enough.

And then lastly on the advertising, it was I guess as a percentage of revenue near the low end of the range.

Is that kind of the goal or target as you progress through 2009?

Yeah, I think if you go back to last year, our 2008 advertising rate was higher because sales were lower than expected.

In the future in 2009 we want to get advertising as a percent of sales back to the right level.

We're using realistic revenue expectations for 2009.

And advertising expense in Q1 of 2009 was 10.7% of net sales versus 11.2% in Q1 2008.

And our historical ratio has been in the 11 to 13% range, and we expect to be at the lower end of this range for 2009.

Okay.

Great.

Thanks, guys.

We'll go to Greg Badishkanian with Citigroup.

Please go ahead.

Great.

Thanks.

Hey, just to clarify, did you say that POS in the US was up around low to mid single digit year-to-date?

Yes, that's year-to-date through last weekend.

Right.

Incorporating the Easter factor.

Correct.

I mean, that's very strong.

What do you think is primarily driving that?

Historically, the toy business holds up pretty well in tough economic times.

Again, even though the industry here declined a bit in the fourth quarter last year, clearly the economy was jolted at the end of last year and consumer spending declined and again, relative to other categories I've seen, the toy industry did reasonably well and I think that's continuing.

I think consumers have sort of stabilized a little bit in terms of their mindset about where the world is going.

We see that a little bit in the consumer confidence numbers.

I just believe it anecdotally and I think the toy business, again, will hold up relatively well.

Good.

And then just internationally, if I -- if we take out FX, if I'm doing my math right it looks like it was pretty consistent I think around negative 10%, excluding currency and fourth quarter and the first quarter roughly.

Is that right?

And also, has that kind of stabilized throughout the quarter, or have you noticed any changes sort of coming out of the first quarter into the second quarter?

Well, I don't want to go into the second quarter but I'll start with -- I mean, your facts are absolutely correct.

I think Kevin had a constant currency basis, the fourth quarter was down 9% and the first quarter was down 10%.

Right.

But I do want to clarify that despite it being below year ago, the quarter's revenues for international business matched our expectations.

There really are three layers of issues here.

First as you pointed out is ForEx.

The dollar is 14% stronger than it was a year ago.

Secondly, I still see broad economic issues, especially in Western Europe.

I just don't think the European countries are performing as well, or I guess, to do this in a negative sense, they're not -- they're performing worse than the US economy is.

And third, and I think this is an important issue, is there are some very specific retail customer issues around the globe.

Some of this is related to a customer's overall open to buy.

As their local currencies have weakened, or if they had a tough fourth quarter, what a retailer can buy, whether it's toys or any other thing, since most of the world's purchases are related to the US dollar, becomes an issue.

And some of it also is just related to specific financial terms issues.

As we said last quarter, our goal is not to get ahead of our customer's ability to pay for the goods before we ship them.

So I think it's going to be a challenging year for international, but we've planned for solid profit performance and so far, again, it's very early, but we're absolutely on track with where we expect the business to be.

Great.

Thank you.

You're welcome.

We'll go next to Tim Conder with Wells Fargo.

Please go ahead.

Thank you.

Bob, somewhat along that same line, again, you said that both your US and international channel inventories are down year-over-year.

Is it fair to say, I mean, putting all those together, that the most work you still have to do on the channel inventory front, though, remains international or are you starting to feel pretty comfortable where those inventories are, both domestically and internationally in the channel?

Well, Tim, it's a little bit like the baseball season.

The Cubs are off to a pretty good start.

Was a tough day yesterday.

But the Cubs will be back.

Oh, we were talking about inventories.

Yeah.

No, I would say we finished the year cleaner or as clean, at least as clean in international retail inventories as we did in the United States.

That was clearly what our goal was last year was to collect the cash and make sure we finish cleanly an didn't get ahead of retailers, and I think that worked out pretty well.

That doesn't mean they're buying more today.

Inventory's still not a positive thing to have anywhere in the supply chain, so we're not seeing them rebuilding inventories, but I would say the level of inventory at retail in international on a year to year change basis is probably at least the same, if not better than the US.

Okay.

Okay.

So again, at the end of the day, you feel comfortable with your inventories internationally in the channel, and in the US, where they are currently and basically asking the question, you do not see any further destocking going forward at this point?

Well, no, A, I don't do a lot of going forward.

If I'm a retailer I'm going to try to cut inventory even more.

No different than Kevin Farr gets up every morning and looks at our inventory and tries to figure out ways to bring it down.

So I don't want to give what a retailer might do.

It's early in the baseball season and the Cubs lost one yesterday but they'll be back.

From a cost saving perspective, as you guys announce things and basically in the fourth quarter and started to implement those, how are those tracking at this point in time and do you see -- as you've gotten into it, do you see the opportunity for more or less versus your original expectations as you rolled those out?

Yeah, I think we're tracking to what we said we were going to do and I think we're looking for additional opportunities, but I think at this point in time what we're on track to do is deliver $90 million to $100 million net savings for 2009 and a cumulative $180 million to $200 million by the end of 2010 related to our global cost leadership program.

There's three drive lines that will result in significant savings, including reduction in force of 1,000 heads, that are implemented in October.

Excuse me, November of 2008.

Also the second drive line is a coordinated overhead efficiency strategic plan that includes structural changes to lower costs and improve efficiencies, working on things like SKU reduction, offshoring and outsourcing IT, clustering international regions, which is being implemented.

And additional global procurement focus to leverage Mattel's global scales, and then on the timing of savings, we expect approximately $60 million of savings related to last year's reduction of force to be evenly spread throughout the year, and the remaining savings weighted more towards the end of the second half of 2009, and if you look at the first quarter, we delivered $18 million in net savings with the majority of those savings, about $14 million, in SG&A.

The other thing I would add to that, Kevin and Tim, is while it's not a cost and expense and a P&L standpoint, certainly CapEx is on track.

We want to manage cash flow very importantly around here, control costs, as well as control spending on CapEx.

And that's another one that was down versus a year ago and right on our plan for the year.

Right.

It was at $20 million in the quarter versus 32 last year.

I think our goal is to get back to where we were several years ago, which is below the $150 million level in CapEx.

And we're tracking to that through the first quarter.

Okay.

And then Bob, again, you mentioned that you were gaining share in infant and preschool.

Kind of reconcile that I guess with the numbers, kind of been a little challenging the last couple months on Fisher-Price.

And is that just basically clearing out some inventories at retail because your wholesale shipments are down or maybe kind of help us there, reconcile.

There's a couple of things.

One, we are clearing out some inventories.

My recollection of the NPD data is that the infant and preschool segment, or category was down at about the same level that the overall toy industry was down, and yet again, according to NPD, our sales grew in infant and preschool at about the same rate that our sales grew overall across the toy business, so we gained share in infant and preschool at about the same rate that we gained share across the total toy business.

Our POS looks pretty good, but a couple of the areas that I think might shed some light on why it's difficult for you to reconcile the numbers, is we have been challenged in two subsegments of Fisher-Price, one is Power Wheels, our Power Wheels business is down it's a $200 or $300 item and it's not in the peak season and it's the kind of thing that I think both consumers and retailers are going to hold back on as long as they can in terms of the purchase.

So that's really not in the infant and preschool NPD data, but it is in our Fisher-Price shipments and the second thing is what we call BabyGear, sort of the juvenile products business.

That business has been a good growth driver over the last several years for Fisher-Price but we're transitioning right now into the Precious Planets line for BabyGear.

And our BabyGear business has been soft for the last couple of months.

The point of sale has improved in the last couple of weeks but it's still early in this transition.

But those two, if you'll call them subsegments within Fisher-Price, have been pretty soft from a shipment standpoint and might help reconcile why the shipments and the POS and the market shares don't triangulate as well as they do in some other categories.

Just a clarification, regarding the ForEx impact to EPS, you said roughly a $0.01?

It was a penny favorable on EPS for the quarter.

Great.

Thank you.

Thank you, gentlemen.

We'll go next to Rob Carroll with UBS.

Please go ahead.

Hi, guys.

How you doing.

Just commenting on the market share gains that you're seeing, have you seen any changes in the buying patterns of the stores in terms of as people get a little more clarity into the Consumer Protection Safety Act?

No, retail buying?

Not so much retail, but retailers.

As people are coming to you guys are you seeing kind of a reallocation of shelf space towards some of the larger operators, away from some of the smallers who may be more vulnerable to changes that are coming in?

I would almost defer that question to retailers.

Clearly, compliance with the new regulations is something that's very important to Mattel.

We've been on this for years, not just months.

So we're obviously in very good shape as it relates to compliance but I just think the answer to your question is probably best comes from retailers than from us.

Okay.

But I mean, is it possible that I mean some of the smaller guys who aren't as well prepared as you guys could end up in some of the shifting of the market share, might help to support what's going on or -- ?

Well, yeah, I think in general, go back to what I said about the economy.

In tough times, the people who execute really well are going to do better than the people who don't execute really well.

Great.

Thanks, guys.

Our next question is from Linda Bolton-Weiser with Caris.

Please go ahead.

Hi, thanks.

Can you -- on the topic of raw material costs, I assume that it was still a negative impact on the gross margin versus prior year because you didn't mention it as being one of the positive factors.

I know you hate to give projections, but is that a favorable effect on gross margin that we'll start to see maybe towards the end of second quarter, or is it more a third and fourth quarter phenomenon that we'll see in your results?

I think for the quarter you're right, I think our price increase helped mitigate cost pressures and commodity and foreign exchange but we didn't see lower input costs.

I think as you know, Linda, there's been a lot of volatility in input costs over the last couple years, particularly during our peak production season.

We're seeing some declines in our oil based input costs from a record high levels that we experienced last year.

However, while these costs are not as high as they were during peak production in mid- to late 2008, overall, our basket of input costs are still above year ago levels so we implemented a modest price increase for spring and fall 2009 products, and as you probably know, due to our manufacturing cycle there's also typically a lag of several months before input cost changes are reflected in our costs of goods sold.

Generally our costs of goods sold in the current quarter is heavily weighted to inventory that was made in the prior quarter.

In addition, we purchased about half of our products from third party vendors who generally quote prices to us about nine months in advance of our selling season.

We are, due to the rapid rise in input costs over the last couple years, in some cases we allowed our vendors to increase their prices after the original quote, so now we're renegotiating prices with vendors to recapture savings as some of the input costs began to decline from record high levels.

Products manufactured in our own plants, the impact of changing input costs is reflected in our cost of goods sold sooner.

With respect to seeing the showing up in our P&L, it's really going to depend upon those input costs are, when we buy them, which our peak production season starts in June, July and August.

Our goal is to improve gross margin over time and if costs continue to moderate, we should expect to see improvement sooner.

Okay.

That's helpful.

Thanks.

And just on Barbie, I mean, the point of sale growth in the US of -- well, you said it was double-digit and you said shipments were up 18%.

If point of sale was up only 10, I mean, you're still shipping in more than consumption growth.

Should I be worried about that or -- I mean, did you actually rebuild inventory of Barbie at retail or could you comment on that?

Well, yes.

Again, as I said, Barbie's regained momentum in the girls toy business and I think retailers are responding to that, both in terms of how they allocate their shelf space, how they allocate their promotions, how they allocate their business.

Barbie's growing in girls and as I said, Barbie's growing in the total toy business.

I think retailers are more encouraged about Barbie's performance and they're responding accordingly.

Okay.

And in terms of the 50th anniversary, it seems like there were a lot of events and things driving that whole phenomenon in the first quarter.

Can you name any specific events, or things that are quite special later in the year, that are going to continue to drive that later in the year?

We've got a lot of promotions.

Even like some of the dolls, I know this really stunning golden anniversary doll, the one with the gold dress, really is just out at point of sale right now.

So we haven't seen much of an impact of that sort of segment yet.

So we're going to continue to have things throughout the year.

But again, this is not just about the 50th anniversary.

That's important, and that was certainly a catalyst.

But I feel better about where we are across the Barbie brand than where we've been a couple of years ago.

Okay.

And then just on a couple of the other product lines, I think you mentioned that Cars internationally declined.

Does that imply that Cars was actually up in the US?

My recollection of the point of sale is that it was kind of -- it was probably down a little bit, but certainly not the magnitude it was internationally.

Cars really has turned into an evergreen property.

I think are we in year four, Kevin of cars.

Yes, this is year four, Bob.

And my recollection is maybe year two was bigger than year one.

Correct.

Year three we started to see some dropoff and year four there's some dropoff but it's fairly stable.

It's still a huge business for us.

Right.

And even last Christmas was one of the top six or seven brands in the toy industry.

So it's still a good business.

It isn't growing.

We're anxious about getting some more intellectual property on Cars which Disney is working on, because to me it's kind of another Toy Story which is it's going to sell -- or Batman or any of those other evergreen properties, it's going to sell fine, but not grow in the absence of new stuff, new entertainment.

But when the new entertainment comes out, it's going to get another sizable increase.

Okay.

And then just in your 10-K I noticed that the incentive compensation expense in 2008 was significantly lower than in 2007.

I'm ever I think it was $15 million versus $84 million in 2007.

I think it was $15 million, am I correct.

I thought you said 50.

I said 15, one, five.

So obviously it's kind of hard for an outsider to of project this, but what should we think about for '09, somewhere in between those two numbers?

That would be forward-looking and I don't want to get into that but the fact is we did not earn a robust bonus last year, and we're going to have to perform better if we want to earn a bonus this year.

So when the shareholders do well, we do well, and when the shareholders don't do well, we don't do well.

I said that in May of 2000.

I say it today.

And, that's what's happened.

Our goal this year is to deliver better results.

When we deliver better results, the shareholders will benefit.

And the employees will benefit.

We're in this together.

Okay.

And then just can you just say again, I didn't catch the quantification of the legal reserve in the SG&A.

Can you just give me the quantification of that again?

Approximately $21 million.

Okay.

Thank you very much.

Thanks, Linda.

We'll go to [Tim Gary with Xena Investment Management].

Please go ahead.

Most of my questions have been answered, but could you once again on the point of sale, just for the quarter, I know it's up through last weekend, but for the quarter, was it up or what?

My recollection is point of sale in the US for the quarter was just south of flat.

Again, the three week -- there's roughly a three week Easter build period and all three of those weeks were in the first quarter prior year, and two of the three weeks were in the second quarter this year.

So again, what I would think of as more an apples-to-apples basis, so you get the benefit of all three weeks, we were up a bit.

My recollection is, and I don't have the data right in front of me, but my recollection is, we were just a little bit south of flat at the end of March.

Thank you.

We'll go next to John Taylor with Arcadia.

Please go ahead.

Hi.

I got a couple as well.

Kevin, I don't know if you'll do this for us but in Q2 of last year, you guys were loading in the entertainment properties for the summer.

Wonder if you could give us a sense of roughly how big that might have been?

In aggregate.

JT, I don't have that information handy so I can't answer that question.

Okay.

And then as you -- I imagine you're making pretty substantial progress if you haven't completed some things already, but can you characterize kind of what you're seeing in terms of unit pricing in contract negotiations with the far east?

It sounds like there's been -- you know, there's some capacity to take it offline as people have gone out of business but there are a lot of people that want to make sure they stay busy with important people that are going to around for a few years like you guys.

Are you seeing anything?

Can you throw us any bones in terms of potential unit savings you're seeing in those negotiations?

JT, that's our argument every day.

We're going to be here for a long time and we're going to make more toys and sell more toys than anybody else in the toy business so we would like to work with you.

But in order to work with us, you've got to comply with all of our safety standards.

You've got to comply with how we want people treated in your plants.

And we've got to make high quality toys at low costs.

So we are seeing some -- I guess I would characterize it as we are seeing vendors come to the table with a recognition that their costs may not be as high as they were.

But it's an ongoing discussion.

Okay.

Overall, though, you think you're going to make some progress on that off of the hyper inflation of last year?

Yes.

Okay.

Maybe claim some back.

Okay.

Let's see.

Thailand's been a little bit volatile lately, got a lot of Barbie going on there.

Can you tell us how concerned you are, maybe contingency plans for that.

It's actually a Hot Wheels plant , or a die cast car plant in Bangkok.

The plant is running well.

My belief, Kevin, is we missed one day of production about a week ago.

We have very good relationships there with our employees.

We're not in the center of the action, if you will, in terms of physically where confrontations have taken place, so it is something about which we're concerned, but we do have other facilities that make die cast cars and we have not lost any productivity out of our Bangkok plant so

Okay.

Great.

And then let's see.

Post Toy Fair.

We haven't really talked much about sort of things that you were really happy with reception-wise from Toy Fair.

Wonder if you could talk about that a little bit and particularly maybe comments on reception for some of the new digital efforts.

Well, I'd start with one of the things that's selling well right now is that -- it's the $35 little dinosaur, Screecher I think is the name of it.

One of the problems I have is sometimes the product's name changes during its lifecycle before it's launched.

But that's a $35 toy in spring and generally speaking $20, $10 toys do better than those.

So I'm a little encouraged by that.

What we're seeing, though, is people are tightening up, and lower price items in general are doing better than higher price items.

I think higher price items have to be really special to do well.

Coming out of toy fair, I loved the little yellow Matchbox truck that does all sorts of stuff.

The Mind Flex game which is about $80 at retail, I think generated more buzz than anything I'm aware of out of toy fair.

The Elmo hands is sort of a lower priced way to play with Elmo.

So I got the sense from retailers and from folks who have been around the toy business for a long time that our line looks pretty good in the fall.

But we'll have to see.

Obviously, coming out of Toy Fair, feeling good is better than coming out of Toy Fair feeling lousy but it's not all that often we come out of Toy Fair feeling lousy.

It's the nature of human optimism.

Yeah.

Okay.

Okay.

And then in terms of the -- I don't know how you quantify this, if it's possible or not.

But this whole retail destocking question in the US, if it's 100-meter dash or if it's whatever, how much of that do you think is burned through?

Are you seeing -- how much pain does the retailer need to go through, how many days out of supply before they get around to writing a reorder?

Can you give us any sense of how much of the weight reduction has taken place versus how much still has to happen before people start loading in for holiday?

JT, this is purely my opinion and so take it for what it's worth.

It's an opinion.

I don't have insight into what a retailer is going to do.

But my sense is the heavy lifting is over.

As I look at the data, and I look at what the inventory level was going into this year, and I look at what the inventory level is coming out of the first quarter, again, we were up in inventory versus prior year at retail at the end of last year.

We're now down in inventory versus prior year at retail.

So the change during the quarter was fairly sizable.

And I just don't hear as I'm talking to customers, I don't hear people talking about inventory today like they were talking about inventory in January.

So it's anecdotal.

It's opinion.

I think a retailer is going to act like we are this year, which is how low can I get the inventory.

Our inventory was down 9% this quarter versus prior year, and our inventory was up at the end of last year versus prior year.

So just look at our own change.

We get up every morning and try and drive that as low as we can, and I think a retailer is no different, but my sense is the heavy lifting is probably behind us.

Okay.

Great.

Thank you.

Operator, we'll take one more question.

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

Please go ahead.

Hi.

I just want to follow up on something JT was talking about, the supply chain.

It appears Wal-Mart is pulling a few listing on Fisher-Price SKUs because of a supplier going out of business.

I was wondering if you could discuss your supply chain and your dedicated suppliers and their health and stability in China.

I'm not aware of the specific toys you're talking about.

In general, I'll tell you our supply chain is running well.

We're delivering good quantities to customers.

Our service levels are fine.

Across 8,000 SKUs, you're always going to have some issues.

You're always going to have too few of some toys and too many of other toys.

I wouldn't characterize it as anything out of the normal right now.

Certainly vendors come and go.

We had more vendor disruptions in 2007 and well into 2008 than we're having today.

Our vendor base is pretty stable right now, and I think we're in better shape right now in vendor support and performance than we've been at least in the last two years.

Okay.

So if you had to chase some demand later on in the year, that would not be a problem capacity-wise?

We don't know.

That's the sort of game of chicken we all play here.

Everybody wants to chase demand and the moment of truth are we going to be able to fill the order?

Retailers want to get their inventories down.

We want to get our inventories down but both of us want to be able to fill the orders for customers and consumers respectively.

I don't sense any issue right now.

Let me be clear.

Either at retail or at Mattel, I don't sense the inventory is too low that we've got a problem.

We are filling orders every single week around here and retailers are supplying toys to consumers every week.

Okay.

Great.

Thank you.

That does concludes our Q&A session.

Ms.

Douglas I'll turn the call back over to you for any additional or closing comments.

Thank you.

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