Mattel Inc (MAT) 2009 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Mattel second quarter 2009 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

Thanks Melissa.

As you know this morning we reported Mattel's second 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 statement.

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 to Bob.

Thank you, Dianne, and good morning.

Much like the first quarter of this year, throughout the second quarter, we saw the continuation of economic malaise on a global basis.

That said, we're encouraged with the positive momentum we're seeing at point-of-sale for our brands like Barbie, Disney Princesses, Hot Wheels, Matchbox, Apples-to-Apples and Fisher-Price Friends.

As it relates to the sales declines for the quarter, that is our shipments into retailers it's fairly evenly split between three main drivers, the continuation of retailers tightly managing inventory, the lack of toys geared to summer entertainment properties as compared to last year, as well as the negative effect of foreign exchange.

If you'll recall during last year's second quarter, we experienced double digit revenue increases boosted by contributions from toys tied to 2008's key summer entertainment properties, Batman, Speed Racer and Kung Fu Panda.

The second quarter's typically a key shipping period for summer related products and represented the largest shipping quarter for those products in 2008.

Although the second quarter like the first is relatively small for us, overall we're pleased with our ability to deliver on what we can control, including appropriately pricing our brands, tightly managing costs, and aligning our infrastructure with realistic revenue assumptions, which have resulted in improved gross margins, profits and cash flow for the quarter.

For the second half of the year, it should come as no surprise that we anticipate the continuation of pressures on the top line from several key areas, including the negative effects of foreign exchange, general softness at retail as our customers continue to cautiously align their inventory bets with consumer demand, and as I said earlier, 2009 is an entertainment light year.

Our priorities for the second half of the year are consistent with our goals for the first half: to improve profitability, generate strong cash flow and strengthen the balance sheet.

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 second quarter with a discussion of worldwide gross sales shown on exhibit two of today's press release.

Total worldwide gross sales for the quarter decreased 20%, including a six percentage point negative impact from changes in foreign exchange rates.

The remainder of the decline was about equally driven by the lack of toys geared to summer entertainment properties as compared to last year and the continuation of retailers tightly managing inventory.

US sales were down 12%, and international sales were down 26%, including a 10 percentage point negative impact from foreign exchange.

On a regional basis, sales in Europe were down 29%, including a nine percentage point negative impact from exchange rates.

Sales in Latin America were down 23%, including a 13 percentage point negative impact from foreign exchange.

And sales in Asia Pacific were down 20%, including a nine percentage point negative impact from changes in exchange rates.

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

Mattel girl's and boy's brands.

Worldwide sales for the Mattel girl's and boy's brand segment were down 25%, including a seven percentage point negative impact from changes in exchange rates.

Worldwide Barbie sales were down 15%, including a seven percentage point negative impact from foreign exchange.

Barbie sales in the US declined 5%, and Barbie sales in the international Markets declined 20% including an 11 percentage point negative impact from foreign exchange.

Our US retail inventory levels for Barbie appear to be very tight as retailers continue to be cautious even in light of the continued strength in consumer sell-through.

Worldwide sales of other girl's brands were down 23%, including a 7 percentage point negative impact from exchange rates.

Sales in the US were down 4%, while international sales of other girl's brands were down 32%, including a nine percentage point negative impact from foreign exchange.

The sales decline worldwide was driven primarily by High School Musical and Polly Pocket.

Worldwide sales in the Wheels category were down 28% including a six percentage point negative impact from changes in currency exchange rates.

The worldwide decrease is driven primarily by sales decline in Speed Racer's product.

To remind you, our Speed Racer sales last year were split between the Wheels and entertainment categories depending upon the type of the product.

For core Hot Wheels, which did not include Speed Racer last year, worldwide sales were down 10%, including a nine percentage point negative impact from foreign exchange.

Domestic sales increased 10%, and international sales declined by 19% including a 13 percentage point negative impact from foreign exchange.

Worldwide sales in our entertainment business, which includes games and puzzles and Radica, decreased 32%, including a six percentage point negative impact from changes in foreign exchange.

The overall decline in entertainment was primarily attributable to lower sales of toys geared to last year's three key summer movie properties, Batman, Speed Racer, and Kung Fu Panda, as well as the Cars entertainment property primarily outside the US.

Fisher-Price brands.

Worldwide Sales for Fisher-Price brands decreased 14% including a five percentage point negative impact from changes in currency rates.

International sales at Fisher-Price brands decreased 19%, including a 10 percentage point negative impact from foreign exchange.

And Fisher-Price sales in the US declined 9%.

Worldwide core Fisher-Price decreased 13%, including a five percentage point negative impact from changes in exchange rates.

US sales of Fisher-Price core declined 8% while international sales were down 19%, including a 10 percentage point negative impact from foreign exchange.

Fisher-Price Friends sales declined 15% including a four percentage point negative impact from foreign exchange rates.

Sales of Fisher-Price Friends in the US were down 10%, while international sales were down 19%, including an eight percentage point negative impact from foreign exchange.

American Girl brands.

Sales of American Girl brands were flat.

Higher sales due to the shift of Easter from the first quarter last year to the second quarter this year and the benefit of the November 2008 openings of our two new boutique stores in Boston and Minneapolis were offset by lower sales of products tied to last year's Kit Kittredge movie.

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

Our gross margin in this year's second quarter was 45.2%, which compares to last year's margin of 44.5%.

The improvement was primarily due to price increases which were effective January 1, as well as lower royalties and savings from the global cost leadership program, partly offset by cost pressures from commodities and foreign exchange.

Advertising expense was $89.8 million or 10% of net sales compared to 10.5% in 2008.

Selling, general and administrative expenses decreased by $64.1 million to $283.8 million.

As a percentage of net sales, SG&A expenses were 31.6%, compared to 31.3% last year.

The year to year dollar improvement includes approximately $22 million of lower litigation related expenses, $20 million of net savings related to our global cost leadership program and $14 million of foreign exchange benefit.

As previously reported, in the first quarter we recorded a $21 million charge for a legal settlement reserve for product liability related litigation.

In the second quarter, we adjusted this charge down by $5 million primarily due to insurance recovery.

In the quarter, our global cost leadership program delivered net savings of approximately $32 million.

In addition to the $20 million reflected in SG&A, there were savings of roughly $9 million in cost of goods sold and $3 million in advertising.

We are on track to deliver net savings of $90 million to $100 million for 2009 and cumulative net savings of $180 million to $200 million from this program by the end of 2010.

Operating income during the quarter was $32.5 million compared to operating income of $30.6 million last year.

The improvement was driven by gross margin improvement and lower advertising and SG&A expenses, partially offset by the lower sales.

Interest expense was $17.5 million versus $16.6 million in 2008.

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

Interest income was $2.5 million versus $7.3 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 $6.3 million versus expense of $6.4 million in 2008.

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

This quarter's income tax expense of $2.3 million includes discrete tax benefits of $2.5 million, compared to prior year's expense of $3.1 million.

The estimated 2009 full year effective tax rate continues to be 22 to 23%.

Overall, we reported net income of $21.5 million or $0.06 per share versus last year's net income of $11.8 million or $0.03 per share.

Now, turning to the cash flow and balance sheet.

Year-to-date cash flow used for operations was $350 million, an improvement of about $180 million compared with the first half of 2008, driven primarily by lower seasonal working capital requirements.

Our cash on hand at the end of the quarter was $423 million, up from $384 million in the prior year, primarily due to lower year-to-date cash usage for operations and capital expenditures and increased short-term borrowings partially offset by a lower beginning cash balance of $618 million this year versus $901 million last year.

Receivables were $747.2 million or 75 days of sales outstanding, four days lower than last year.

Factoring increase from $73 million a year ago to $81 million.

Prior to factoring, day sales outstanding decreased two days.

Inventories at $589.6 million were down $86.5 million or 13% versus the prior year.

Our total balance sheet debt increased by $37 million from the prior year.

Year-to-date payments of $140 million of maturing long term debt have been more than offset by short-term borrowings.

Our debt to total capital ratio ended the quarter at 32.7%, which compared to 30.4% in last year's second quarter.

Capital expenditures during the quarter were $41.7 million, down from last year's second quarter of $47.4 million.

So to summarize, despite the top line pressure, we made progress with aligning 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 would like to open the call to questions.

Operator?

Thank you.

(Operator Instructions).

We'll take our first question from Greg Badishkanian with Citigroup.

Yes, hi.

Obviously you did a great job in cutting costs and in terms of earnings in a tough environment.

Can you talk a little bit in terms of sort of the cost of goods going forward in terms of China and other input costs and how you see that playing out over the next few quarters?

Okay, I'd be happy to do that.

I think as we indicated in our analyst meeting, we're seeing some declines in our oil based input costs from the record high levels that we experienced last year.

And in that analyst day presentation we gave you simplified guidelines to provide a basic understanding of how the seasonality of our business impacts our financial results.

And there's many factors that impacted gross margin not only input cost but also freight and distribution, royalties, FX, mix and tooling just to name a few.

So predicting our gross margin is very complex since there are a lot of moving pieces and not always good transparency, but it's our goal to improve gross margins over time, and if our overall basket of costs are consistent with our assumptions used for setting 2009 prices, we should see more improvement in the second half of 2009, and over time we should approach our long term goals of gross margin at 50% of net sales.

Okay, good.

And kind of just looking at the retail level, in the US and internationally, can you talk a little bit about sort of inventory levels at the retail level and how they progressed and are you seeing kind of a replenishment of one-to-one now or are they still reducing inventories?

No, Greg.

This is Bob.

We have our best visibility into that in the US, so let me focus first on the US numbers.

On a year-to-date basis, our retail sales, our POS is now down in the low single digits, and that's driven by last year's Speed Racer product.

The retail inventories, and remember we calculate those using our shipments in and what we get from the POS data, are now down in the US mid to high single digits.

You may recall I think we started the year at plus 8% in retail inventories through the first quarter retailers burned off all of that increase and we finished the first quarter down a little bit.

We're now accelerating that decline through the second quarter, so I'd say retailers are still very cautious on their inventory positions, as are we.

Our inventories as Kevin just mentioned are down 13% through the second quarter.

Internationally, I think it continues.

Everything we see in the US is happening overseas and probably at more pronounced levels, so not only do we have the foreign exchange which I think is I think the US dollar is 12% stronger than it was a year ago and things like the lack of entertainment property, but the contraction of economies outside of the US is more pronounced than we see in the US and retailers' reluctance to either make the inventory bet or frankly our reluctance to ship too much into retailers given credit conditions and issues with credit insurance and the like probably make the burn off of inventories even more pronounced overseas than they are in the US.

Great.

And can you give us a little bit more color maybe internationally just maybe Europe versus kind of some of the emerging markets?

Well, I think in general, Europe is the most challenging area of the world for us.

I'm not aware, I can't think of any economy or any unemployment level that isn't 10% or more.

I know of a country or two where the reported unemployment is 20% and my sense is unemployment levels tend to be underreported in Europe.

Retail conditions are tougher in Europe than they are in the US.

I remember going through a country review just the other day where we talked about the fact there's no credit insurance available in this particular country, and we used to rely on credit insurance before we shipped to some small retailers, so we're pretty tight with our shipments as a result of that so in general I would say Europe is the toughest place to do business today.

The more emerging markets continue to do relatively well for us.

Great.

Thank you very much.

All right, Greg.

We'll take our next question from Sean McGowan with Needham & Company.

Hi, thanks, guys.

I have a couple as well.

Bob or Kevin, can you comment on what we can expect regarding full year SG&A, year-over-year comparison, pretty hefty reduction there.

You have outlined that you're on track to save that money, but $64 million year-over-year, is that the kind of improvement we can expect there each quarter?

Well, as you know, we don't give guidance but I think we're working on a couple things seem to be working for us.

Obviously, ForEx has been working for us here and that will continue in the third quarter and then ForEx I think last year averaged about $1.34 in the fourth quarter is currently $1.40 so that may turn on us but with the global cost leadership program I think we're on track.

In fact it's true, we're running a little ahead in our savings expectations through the first half; however we're making more investments in the second half related to initiatives and intend to drive further savings in 2010, so for the balance of the year we expect to deliver about $90 million to $100 million for the full year with the $40 million to $50 million of net savings should be evenly spread through the third and Fourth Quarter.

We also benefited from lower legal costs in the second quarter as well as in the first quarter and as you know we've been encouraged significant legal costs over the last couple years related to MGA and recall related litigation.

For the full year 2008 we incurred incremental legal fees of about $37 million primarily for MGA and about $15 million of legal settlements related primarily to recall-related multi-state settlements, and that second piece happened in the Fourth Quarter of last year.

For the first half of 2009, litigation related legal costs decreased by $33 million primarily for MGA litigation related, partially offset by $16 million net charge related to legal settlements for product liability litigation, which most of that charge was taken, or all of that charge was taken in the first quarter this year, so we're hopeful that our legal costs related to litigation will be lower in 2009 as we continue to work on resolving recall related litigation progress with the MGA litigation, however, we'll continue to make the appropriate level of investments in legal fees until these legal matters are resolved.

Okay, great.

Thank you.

A couple of other quick ones then.

On the taxes, could you go back over what it was that made this particular quarter so low?

Did you say it was $2.5 million of a credit?

Yeah.

I think there's a couple things.

I think there was a discrete period item of $2.5 million that we had to recognize in the quarter under GAAP.

I think when you look at the second quarter, you have to look at the first half tax rate, we benefited in the first quarter from losses so we had to take the rate for the year and apply that to the first half results.

Our expected rate for the year continues to be 22 to 23%, which would include those discrete period items so I think as you look forward you should be using a 22 to 23% rate for the full year and for the third quarter and fourth quarters and we would expect our 2010 tax rate as we indicated before to be similar to our effective tax rate prior to the Tax Act of 2006 which was approximately 27%.

Okay.

And last question either for you or for Bob.

Given the discrepancy between ship in and sell-through and it's been that way now for some time, at what point are we to the point where you just can't go any lower?

It has to be some kind of parity between ship in and sell-through.

Are we there, past there or about to be there?

Well, Sean, one never knows.

As I visit stores and not just looking in the toy aisles but looking broadly at retail, there is just a lot less inventory available, period, and we don't make those decisions.

We do encourage retailers to focus on the point-of-sale and replenishment and get ready for the holidays and that's the message we have for them, but unfortunately, we don't get to tell them how much to carry.

Okay.

Thank you very much.

We'll take our next question from Hayley Wolff, Rochdale Securities.

Hi there.

Hi, Haley.

See, most of my questions were just asked, but can you, when you talk about the inventory destocking, is much of it attributed to Wal-Mart moving to a new store format?

Can you parse out that piece?

Well we don't really discuss results by individual retailer.

I will tell you that the large sophisticated retailers are really tightly managing inventory.

We tend to have a pretty point of good sale of growth with the large sophisticated retailers with lower inventory levels so their report card or our report card with them looks quite good, and I think that it's fair to say that's a reasonable conclusion across really big retailers.

Okay.

Can you give a little more detail on Barbie in the US sell-in versus POS, given they had relatively easy comps against last year?

I'm just trying to get a sense of why it was down this quarter versus having a nice sell-in last quarter?

Yeah.

We're still feeling good about Barbie.

The POS here in the US is still up in the double digits and what we can read out of market share results from NPD suggest Barbie's share continues to grow whether we measure against the doll business or against the total toy business and within Barbie, a number of segments seem to be doing well particularly at retail.

The Princess segment, the Beach segment, I Can Be, Collectors, probably the one area we're seeing declines in Barbie is in entertainment.

This year's Thumbelina versus last year's Mariposa, which is consistent with the strategy to reduce our reliance on those large entertainment properties that Richard Dixon is leading, so the POS is holding up well.

We're just now starting to see some POS increases outside of the US.

Australia, Canada, Brazil, Italy, Chile are now up in POS, and even some of the other large markets, that were still declining in POS, the rate of decline is less so we're starting to see some improvement there.

The brand is reenergized.

The retail sales are responding.

If the trends continue the shipments will ultimately take care of themselves.

I would say in the US in general, as Kevin mentioned, inventories are pretty tight.

We have seen some growth in inventory in the US, but not nearly the rate of growth that we see in point-of-sale in the US, so kind of in a day supply measure however one might look at it, things are down.

Okay.

And then on the legal expenses it looks like in the second half you should get a real benefit assuming there's no additional litigation or no acceleration of litigation, but there's probably about $50 million worth of litigation expenses in the back half of last year so that should come down dramatically?

I don't know what the quarterly number is last year.

I think Kevin said the trends on litigation expense have been favorable for a couple of quarters but remember as you model all this stuff, litigation is inherently risky.

You never know the outcome.

You never know [which skirmish] is going to dial-up when, so I'd hate to get too forward-looking on it other than as Kevin mentioned, we expect full year costs to be down.

They've been down in the first half consistent with our expectations and we don't have anything new that would indicate that the second half should be different than we expect of that.

I'll just remind you last year, we were preparing for trial and had the trial in the second quarter and the early third quarter and then once the trial was over, the legal expenses in total went down because we didn't have the batteries of attorneys working day and night in trial and preparing for trial.

All right okay, great.

Thanks guys.

Thanks Hayley.

We'll take our next question from Rob Carroll with UBS.

Hi, guys.

Just going to the global cost leadership program for a second, I know that you'd mentioned you're running ahead of schedule.

Is that pulling forward, like the progress we've seen in Q1 is that pulling forward what would have been in Q2 or are you getting more ambitious in terms of what you think the 2010 goals are in terms of the additional spend?

No, I think it's just timing as I mentioned.

I think we are running a little ahead on savings through the first half.

As I said before we expect to make more investments in the second half related to initiatives to drive further savings in 2010 to achieve that cumulative of $180 million to $200 million for 2010 so our view is that we're on track to deliver $90 million to $100 million net savings from the program in 2009, as well as the cumulative net savings of $180 million to $200 million by the end of 2010.

We're going to aggressively pursue opportunities to hit those numbers.

Okay, but I mean in terms of you guys have done a really good job laying out in terms of breaking out where that 90 and 100 was coming from (inaudible).

So those initiatives are still in place?

There's not necessarily anything new which is the timing issue?

That's correct.

And then secondly, just in terms of market share overall, with the somewhat tighter CPSIA regulations coming in for August in terms of the product label are you guys seeing sort of consolidation at retail around some of the larger manufacturers?

I mean obviously just at the margin but any color would be great.

Yes and no, and again, to what can we ascribe certain improvements in share for some of the larger players?

Is it because consumers favor larger brands when times tough?

I think history is consistent with that.

Some of the larger companies have really good properties right now and really good toys and good toys sell and those sorts of things, so in general, I think the environment is conducive for market share gains by the large company.

That said there's some relatively small toy companies that are doing quite well even in this environment with some really creative innovative products so again, it's hard to tease out what's due to what.

I think some of the large companies are doing quite well.

A couple of the small companies are doing quite well and a bunch of people are probably struggling right now.

That's great.

Thanks guys.

We'll take our next question from Tim Conder with Wells Fargo.

Thank you.

Gentlemen, just a follow-on on one of the earlier comments.

Bob, you were talking about again year-to-date point-of-sale in the US is down low single digits I think is what you said and then inventories are down mid to high and then international POS and then inventories I don't think you finished that thought or if you did I missed it and I apologize.

We really, Tim, don't try and present that data because it's just a lot looser out there.

We don't have as much good point-of-sale data as we do in the US.

I would say overall the trends that we see in the US are consistent around the world.

That is point-of-sale is outperforming retail inventories, but I don't think it would be productive to kind of try and get into the numbers.

Okay, okay.

No, that's fine, Bob.

And then regarding your market share, a couple of last questions, it sounds like you're alluding that you continue, you and a couple of the other larger players are gaining market share in general domestically.

Is that the same international also that you're seeing those trends?

Again, the data is not as strong.

I would say where we do have data in Europe, we've given back some share.

We're not gaining share, and as I may have mentioned last quarter or the quarter before, in tough times, economically, I think the well known and established brands are favored, and as we get into some markets in Europe, we've got some really well entrenched local brands that have done really well.

So our market share performance in the US is ahead of where we are in Europe.

I would say in other parts of the world, more times than not, the trends are probably closer to the US than Europe but again the data is a little sketchy out there.

Okay, and then Kevin, in the other income, you mentioned ForEx, was that predominantly anything related to Venezuela?

Yeah, I think with regard to the quarter, other non-operating income was $6.3 million compared to an expense of $6.4 million in the second quarter last year and as you've indicated the higher income versus the prior year is due to foreign currency exchange gains, primarily related to US dollar cash balances held by our Venezuela subsidiary compared with losses by that same subsidiary last year, so going forward, the US dollar cash balances held by our Venezuela subsidiary may create paper gains or losses that will be reported in non-operating income or expense as they are retranslated (inaudible) using the parallel exchange rates at the end of each quarter.

Okay, and then the lonely FX line there, can you just maybe quantify on down the P & L the impact on EBIT and EPS?

I'll give you the EPS impact.

It was a negative $0.05 for the quarter and year-to-date it's a negative $0.04.

Okay.

And lastly, any comments on how your price increases for the Fall set, getting any pushback from retailers or are those fairly well holding, just a little additional color there?

Tim, they're holding.

We've been consistent with discussions we've had with retailers about our need to recognize the reality of today's environment and a whole basket of costs as Kevin mentioned, commodities, labor, transportation, all sorts of things.

We have been more modest with our price increases this year as compared to last year but we're still running at gross margin levels below our targets and we need to keep working on that but I would say we're pretty well locked and loaded with our prices for the Fall and our real priority now is working with retailers to make sure we've got the right promotional plans in place to drive traffic into their stores and drive our toys out of their stores.

Okay.

Great.

Thank you, gentlemen.

We'll take our next question from Jake Hindelong with Monness, Crespi, Hardt.

Hi, good morning.

Hi, Jake.

How are you?

Great.

First couple questions are on revenue.

Just from Kevin's comments it sounds like the entertainment impact on the Second Quarter was probably about 7% of the revenue decline, and then just looking forward, based on the product lines that you've got coming out of the mix and going into the mix, is it fair to think that in that 4Q that Avatar could offset the entertainment declines from other properties?

Well I'll do the forward parts because that's always my favorite thing to talk about which is we don't do that.

Right.

You've got to make your own estimates of what launches when and where and those sorts of things.

I think, Kevin, seven points is about right?

Yes, I think that's in the ballpark, Bob.

I think with regard to the Fall last year, we obviously had Batman so I don't think Avatar is the size of Batman.

No, and it's a later property.

Got it, right.

And then on advertising expense, as a percentage came in lower on the decline in revenue.

Do you think that you may even exceed your previous commentary on being at the low end of the expected range for advertising spend?

Well again we don't get into sort of forward-looking numbers.

I think consistently, we've said historically we've been in sort of the 11 to 13% range of advertising as a percent of sales and our objective is to get to the lower end of that this year.

We're a little bit higher than we wanted to be last year because the revenues didn't materialize in the fourth quarter so the good news is this year we've got time to adjust.

Exactly where it falls out is going to be more a function of revenue than it is anything else right now.

And just another way to look at it, in the second quarter, was advertising just much less expensive or did you do less advertising?

Yes.

Both.

Okay, got it.

Thanks.

We'll take our next question from Linda Bolton-Weiser with Caris.

Hi.

Just a question about the other girls' category.

High School Musical being down, I thought there was a new movie or something that would be expected to drive that this year, was the POS for High School Musical down as well?

Let me look it up.

I believe the answer to that is yes, Linda, but I'll double check.

High School Musical is one of those properties, it clearly is down in sales, and it is one of those properties where I do specifically recall we ended last year with more inventory than we wanted, so sales are going to be down just to burn off the inventory.

I'm pretty sure High School Musical POS is down a bit, but give me one second to look it up.

Okay.

Linda, I don't want to do the specific data by specific brand but it's pretty flat at POS.

It's not a big number either way.

Okay.

And then Polly Pocket, I mean, do you hope to rejuvenate Polly, or do you think the brand is damaged because of the magnet recall issue?

No.

We do hope to rejuvenate Polly.

It's an important brand to us.

We are seeing for what we hope for early signs of improvement in the US, behind a couple segments, one was Designables and the other was Shimmer and Splash.

It is a big brand.

It's had a lot of competitors come into its space.

We haven't turned the corner yet on Polly, but it really is an important brand to us and one of our core brands and we want to see it do better.

It's too early to get excited about what we saw in the US this quarter but we're certainly hopeful about Polly, and it is clearly our intention to rejuvenate Polly.

Okay, and then just on the cost reduction program, I'm just wondering if some of those costs are going to come back into the flow of things when your top line growth improves in 2010 and 2011.

Are you pretty committed to keeping those costs out now that you've taken them out?

Well as you talk specifically about 2010, Kevin mentioned what our objective is for the program and again it's very early.

We're only a couple quarters into the program but we're on track with what we expect to do and our objective with this program is to make sustainable structural changes in our infrastructure.

Again it's early but so far so good.

Okay.

And then Kevin, could you remind me what the special other income that was pretty large in the fourth quarter of 2008 so I can think about that for the comparison?

There was something like $19 million of other income in fourth quarter 2008?

Yeah, that again relates to foreign exchange gains related to our Venezuelan subsidiary and it was really marking those cash balances to market based upon the parallel rate movement in that quarter.

Okay.

And then can you just remind me, I didn't catch what you said on the gross margin change, what was the mix and commodity cost effect on the gross margin.

Was mix favorable?

Mix was basically didn't have much of an impact on the quarter results.

And commodity costs were up or down?

Well there was pressure from commodity costs so as we did in the analyst day, we indicated that there's a lag between the time we're buying input costs and the time that they show up in the P & L and for our plants it can be six months and it can be a little bit longer for vendors, so I think what you're seeing is those high costs from last year and early this year coming through our P & L in the second quarter.

Right, and just I didn't catch the cost savings program favorable effect on how much of that was in SG&A in the quarter.

SG&A was $20 million.

Okay, that's it.

Thanks a lot.

Thanks, Linda.

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

Good morning everyone.

Bob, as you look into the holiday period, I love your views on what Mattel product lines you think will work well and whether or not you think there will be later shipping this year because of the tight retail management.

That's my first question.

Well, I suspect there will be later shipping.

We're certainly seeing particularly international Markets a real trend towards kind of just in time receipts.

They don't want to take much of an inventory bet and some of these customers are unable to take much of an inventory bet given the financial conditions outside of the US.

I think we have some very innovative product for the quarter, for the year.

I'm very high on the Mind Flex game which is a really cruel nifty unique thing, very high on the yellow Matchbox truck, Rocky, the robot truck, which I think is the coolest toy I've seen in a long time.

We're doing well with Hot Wheels overall.

Hot Wheels core, Cars is doing well, Trick Tracks is doing well, we've got the Battleforce 5 television show coming online this Fall, so I think our core brands are in good shape with pretty good innovative product.

A chart I believe I showed at analyst day was that if you try and measure our share not just of overall toy sales but of those top hundred toys in any given year, we tend to do really well with the top hundred toys because of the innovation we put behind the brand, and I don't have any reason to believe this year is going to be much different.

Does this suggest that fourth quarter will be more significant to Mattel this year than third, these later shippings?

Well, neither of us will know that until we get through the fourth quarter.

The toy business is pretty hard to predict and we'll know that when we look backwards.

It's hard for me to figure that out looking forward and even if I did have a handle on it we just don't talk about those kinds of projections.

In terms of your commentary on strong holiday properties, you did mention Barbie and what's going on at Fisher-Price with the declines in both core and Fisher-Price Friends?

Well, I think I think Barbie continues to have really good momentum.

We've seen consistent sort of week after week after week point-of-sale growth this year in the US and I am hopeful that what we're seeing in early signs of POS improvements overseas materialize and strengthen so our core Barbie business was something that we counted on heavily this year with the absence of entertainment related properties and so far it seems to be working out so I don't want, we love all of our children and in this Company we particularly love Barbie when she's doing well and what was the second part of your question?

Fisher-Price, declines, any hope for improving trends in the back half at Fisher-Price?

It's hard to tell with Fisher-Price.

The core business kind of core toys and the core Friends properties seem to be holding their own at point-of-sale.

We are seeing double digit declines in the teens for some of the more expensive things in the Fisher-Price line like Power Wheels or Baby Gear, the high chairs and bouncers and monitors and those sorts of things, so I'm not overly optimistic about those areas doing particularly well this year.

I think the core and basic Friends business will be fine.

And finally, American Girl.

The new dolls that you've introduced this year, how are they performing?

They're doing fine.

We're holding our own in American Girl.

At retail, the stores are up.

Now remember we've got still through this quarter the advantage of the boutiques in Boston and Minneapolis that we didn't have a year ago and that's probably driving the improvement in the store side of the business.

The portfolio is doing well but we are up against the Kit Kittredge movie last year which was a really strong Marketing program driven by the folks who made the movie, so we're holding our own but the good news there is we just don't have any issue with retail inventories in those sorts of things.

What we sell is what consumers buy.

Final final question.

Have you decided on any price increases for the Spring line for next year?

We have not.

It's still early in those discussions.

We need to see how the costs are coming in.

We need to see what opportunities we have in our own cost reduction programs because that's important.

We have to get a handle on the environment.

We haven't made those decisions but we will be over the next few months.

Okay, thank you.

All right, Margaret.

We'll take our next question from Tony Gikas with Piper Jaffrey.

Good morning guys.

I have a few questions as well.

During the quarter you talked a little bit about where the cost savings came in including on the cost of goods.

Could you update us on the long term goals, so the $180 million to $210 million over this year and next, where those cost savings are coming in relative to cost of goods, SG&A, et cetera, and second question, how is the private label business doing at retail right now?

Are we seeing consumers trading down in this category much, and then I have a follow-up.

Okay I'll take the first one on the global cost leadership program, so we expect this year's savings of $90 million to $100 million and if you look at the first half of 2009, we generate approximately $50 million through the first half.

There's about $35 million reflected in SG&A.

There was about roughly $12 million of savings in cost to goods sold and $3 million in advertising and we're on track to deliver that $90 million to $100 million as well as for the $180 million to $200 million next year.

When you look at full year savings of the $90 million to $100 million from a P & L perspective about $50 million of this year's savings will be reflected in SG&A, approximately $35 million in cost of goods sold and roughly $10 million in advertising and with regard to next year, it's a little too early to give you the areas that the incremental savings would be for 2010 but I'd expect it again to be in those categories of gross margin advertising and SG&A.

Would it be more weighted towards gross margin next year perhaps?

It's really too early to tell.

We're working on things like SKU efficiencies when that hits the entire Supply Chain so those things are evolving and we're making good progress but it's too early to give you guidance for 2010 P & L classification of those savings.

Okay.

And I don't, Tony, have specific numbers on private label.

It will be really more pronounced in the holiday season whatever happens but I can go back to the last holiday season and I think there are probably three groups of products that did well the last holiday season and are likely to continue to do well now.

That is established brands from the large companies that spend a lot of time, energy, money, innovation on those established brands.

Certainly there's some very innovative products coming out of some smaller companies that are allowing them to gain share and I suspect just broadly in this kind of economic environment, private label will at least hold its own and the fallout comes from the people who are the kind of the smaller companies that don't have new innovations.

They don't have established brands, they don't have a lot of innovations and as the sophisticated retailers are looking to optimize their productivity of their toy department, fewer SKUs, that will probably help the established brands that do well and it will probably help private label that generates good margins for retailers, so I don't know of anything today that is inconsistent with what I think are the broad economic trends.

Okay.

And just two little follow-ups.

Bob, you tend to be fairly conservative.

How are you looking at the holidays?

Are you planning very conservatively for the holidays in your opinion, and then the last question would be just to follow-up on Tim's question on the market share.

The data points we're getting on toy sales here in the first half is that sales were maybe down 1 or 2%.

Is it fair to say that you've maintained your share in the first half?

Yes, we've probably picked up a little bit but I think all of the data as I try and triangulate this stuff because the data isn't always great but if I look at point-of-sale, if I look at the NPD data, it's all telling the same sort of story to me.

That is at POS, we're just a little bit south of flat, again right now driven by Speed Racer.

We have pretty good POS increases in the first quarter and as we now anniversary the movie entertainment properties, we're giving some of that back.

But I don't see anything that's really inconsistent with our POS is a little bit on the south side of flat and retailer inventories are more on the south side of flat than that.

Whether I look at NPD, whether I look at POS or whether I talk to retailers I think it's a pretty consistent message.

Am I overly conservative?

I don't know.

I think the environment in which we're in looking at retail inventories, they're certainly very conservative and as I say, they are planning cautiously about the holiday season.

If you look at our inventories, you know one of the big issues in this business is making too many toys and what it does to your margin structure when you do that and as I've said all year, this is going to be a tough year from a top line standpoint, to use Kevin's term that he uses every day around here, realistic revenue assumptions, so far we're exactly on track with having realistic revenue assumptions and being able to build profits despite that.

So whether I'm too conservative or not I don't know, but we're on track with what we expected to do this year.

Do you feel like you're taking many chances going into the holidays, Bob?

Yes, well that's the toy business.

Every holiday we're taking a chance.

We're still going to end up with hundreds of millions of dollars worth of toys and those are being produced, what's our inventory Kevin right now?

Right now I think it is--

$500 million?

Yes, I think it's around $500 million.

So you got $0.5 billion worth of toys that haven't yet cleared so that's what we own let alone what retailers own so you know this business as well as I do.

This is a high bet business that you look at the history of Mattel, we've been able to make those bets, 8,000 SKUs at a time all over the globe every year and come up with a pretty good cash flow business and I don't think this year is going to be any exception other than the environment is tougher out there.

The good news is unlike last year we had more time to plan the environment and as you see, we're managing the infrastructure, we're managing advertising expense, we're managing the costs to recognize that revenues are going to be a challenge, but we don't want that to hold us back.

Okay, thank you, guys and good luck.

Thanks, Tony.

We'll take our next question from Drew Crum with Stifel Nicolaus.

Great.

Good morning everyone.

Wonder if you could talk about what entertainment properties you're going to be shipping in the third quarter and related to that, what type of commitment you're seeing from retailers for Toy Story?

We're starting to ship, there's just a little bit of Toy Story Kevin the second quarter, so we're starting to ship Toy Story as we speak.

We have good commitments from retailers around the world on Toy Story.

Clearly that's an evergreen property in the toy business like Cars has become an evergreen property for us, and we all have high expectations for that.

Beyond Toy Story, we've already begun shipping, I don't know we want to get into quarter by quarter expectations of properties.

Right.

Okay.

But we should see most of the entertainment properties that you have for the second half we should see that flow in the third quarter, is that fair?

Like there's a question on--

Avatar is a pretty late movie.

Disney has what really sounds like a really good new Princess movie, probably the first one they've done in eight or 10 years but I think that's very late in the year, so I don't know that the flow is it going to be September 30 or October 1, that's too sophisticated for me to figure out, too heavy for me to figure out.

Fair enough.

Bob, could you spend a minute just discussing the disparity and performance for Barbie, domestic versus international?

I think we saw a similar spread in the first quarter.

Just some additional color there.

I think there's two things going on.

One is the discrepancy between Barbie, US and international is very typical of the discrepancy overall between US and international and again, I think the economic environment we're in is tougher overseas than it is right now.

Retailers, there are many retailers struggling outside of the US, and we are very mindful every day of how much we're going to ship into retailers because --

We want to get paid.

So Kevin is pretty disciplined on that, and I think that affects Barbie, it affects every one of our toys.

The second thing is the 50th Anniversary, which really accelerated the momentum of Barbie, Barbie finished strongly in the fourth quarter last year but we did even better in the first quarter this year.

I think the 50th Anniversary is a bigger deal in the US than it is in some markets.

It is a big deal in other markets but it's a bigger deal here.

Okay.

And one last question.

Kevin, can you just give us the status of that money-market fund that you were carrying as the long term asset?

Has that been converted to cash yet?

Yes, most of it has been converted to cash.

I think we have collected about $67 million of the cash and we've got $14 million more to collect and we think we'll collect that early in the fourth quarter.

Okay.

Thanks guys.

We'll go next to John Taylor with Arcadia & Buckman.

Good morning.

Hi, JT.

Hi.

I've got a couple questions as well.

Let me follow-up on Drew's question on Barbie, the difference between US and International.

So all of the changes you made in repositioning and all that stuff, have those been, are those being sort of simultaneously introduced around the world or are they kind of leading in the US and following later internationally?

No.

I would say they are.

It is a global change and I guess I probably failed to mention one other thing that I think will play out internationally.

The portion of the business done by the big entertainment properties, those direct to DVD movies we make, it's a higher percentage of the business outside of the US than it is inside of the US so as we are strategically reducing reliance on the entertainment segment in favor of a more balanced portfolio in Barbie, we probably see more of an impact of that overseas than in the U.S..

Is that reasonable Kevin?

That's correct, Bob.

Okay, good.

And then sort of the product line innovations, the new products, are you pretty much on a global ship, all about the same year rather than starting here and next year doing it internationally?

Yes.

I think almost everything is launched globally.

There are some of the really higher priced really innovative things that are going to be starting the larger more sophisticated Markets as they always have done but over time, certainly over the last 10 years, both we and other toy companies have done a lot more global launches than we used to and almost everything is global.

Right.

Okay, good and then in terms of your promotional spending, I wonder if you could talk about the mix between sort of classic media TV versus point-of-sale versus other kind of things.

Any changes in that mix that's significant?

Not significant in the short-term basis but clearly over time we are reducing our reliance on broadband media.

We are doing more internet.

That's where eyeballs are shifting.

We are recognizing that.

We're spending more money there.

We continue to invest in point-of-sale, so I think that the long term secular trend isn't changing but I don't know if there's any short-term change worth mentioning, Kevin.

Yes, I don't think there's much of a change this year.

We are doing things with regard to Barbie on Facebook and Twitter and other things which aren't things that cost us money, it's just time but I think this year, the mix is pretty relative to what it's been in the past.

Okay good.

And then last question, so last year, everything was sort of melting down during the most intense shipping months and so retailers were freaking out at the end of the year and I'm assuming there probably wasn't a lot of first quarter shipments that were done in the fourth quarter.

You think things changed very much this year?

I mean obviously a lot depends on how things sell-through but you think could you talk about that a little bit?

You could get some, clearly, we've got some big new important licenses as you know that we take over next year, so retailers may want to get a head start on some of those things.

They did in general finish with higher inventories than anybody wanted last year so there are one could make the argument that they ought be more eager to buy Spring product at the end of this year.

That said, my history always suggests when somebody has lower inventories they really like it, they get focused on cash flow too, and they're now comping those numbers as they do their measures and they said inventory was blank last year, why should it be blank plus this year, let's keep it tight.

So you never know but I absolutely agree with the premise of your question that it was really tough at the end of last year to sell anybody anything whether you were in our side of the business or on the retailer side of the business and one thing I am encouraged by, is as I talk to retailers, they understand that.

They certainly understand that it was a real scramble last year and we've all had a, we've all, both sides both retailers and manufacturers have had time to plan and respond this year and we should be relatively better off for that.

Okay, very good.

Thank you.

Thanks, JT.

Operator, we have time for one more question.

We'll take our final question from Tim Gary with Xena Investment Management.

I have a question for Bob and one for Kevin.

Bob, you've cut back a lot on advertising to make sure that's not out of whack with sales but are you learning any lessons from that cut back that would suggest that as you go forward, maybe you would have a different relationship relative to sales when you're back to more normal sales levels?

Well the old adage of half of advertising doesn't work, I just don't know which half.

We've clearly spent an awful lot of time and effort in this Company answering that question.

We do know which half isn't working and that's the half that is not being spent right now, so the pay off of the work we've done, pretty sophisticated work in the consumer goods industry in terms of advertising effectiveness, have allowed us to develop internally some key principles and these principles tend to play out around the globe.

What time is the right time to advertise, how much does one advertise, on what kinds of products, and I do think there are some structural benefits, some lasting benefits to that discipline.

That being said, we spend around 11 or 13% of sales in advertising, that's high relative to the consumer goods industry.

We do invest in these brands.

They are responsive to advertising and we're going to continue to be big advertisers.

Okay.

And then Kevin, you talked about gross margins for the coming quarters as improving assuming that your assumptions that you've made about cost when you did your price increase were to hold.

Could you just tell us how things have been tracking versus those assumptions?

Yes, I'm not going to get into that level of detail but I think overall, with regard to our assumptions I think they're pretty good versus what we've been buying.

I think it's fair to say we're on track on virtually every line of the P & L right now with what we expected.

Again, everybody remember it's early and it's spring training and that whole bit, but we're on track almost to the tee of where we expected to be right now.

Right and I think the point that I also made was that there's a lot of moving parts and gross margins so it's hard to predict with things like ForEx and royalties and tool links so when you look at it overall it's difficult to project but I think our assumptions with regard to where we thought input costs would be we're on track.

Okay.

Very good.

Thank you.

All right, thank you for participating in the call today.

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

eastern time today.

The number for the replay is 719-457-0820 and the passcode is 486-4704.

Thank you.

Once again that does conclude today's call.

We do appreciate your participation.