Mattel Inc (MAT) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Mattel's first quarter 2010 earnings conference call.

At this time, all participants are in a listen only mode.

Later we will conduct a question and answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Ms.

Dianne Douglas, Senior Vice President of Investor Relations.

Please go ahead.

Thank you, Allison.

As you know this morning we reported Mattel's first quarter 2010 financial results and 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 relating 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 2009 annual report on Form 10-K as well as in other 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 headings Financial Information and Earnings Releases.

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

Thank you, Dianne and good morning everyone.

I'm pleased with the Company's overall performance for the quarter, with worldwide net sales up 12%, reflecting good performance in the US as well as international with continued improvement in our gross margins.

That said, the first quarter is just that, the first 90 days of the year and we still have a lot of work to do to deliver another strong year for our investors.

It's nice to be off to a good start with our core brands, as we've successfully transitioned into the New Year with the momentum and energy from the fourth quarter.

Our core brands like Barbie, Hot Wheels, Fisher-Price and American Girl continue to grow, and the newest members of our rich portfolio are performing quite well.

As you know, we launched our WWE line of toys on January 1 and it's been very well received by both collectors and kids, domestically and internationally.

The toys are not only available at retail but are also sold at WWE Live events throughout the year.

In anticipation for Toy Story 3, Disney relaunched a Toy Story franchise last fall, building to the release of Toy Story 3 which will hit theatres on June 18th.

While a majority of our Toy Story sales in the first quarter were tied to the overall franchise, we're very excited about the release of the Toy Story 3 specific products which hits shelves in about two weeks.

For those of you who have seen our Toy Story 3 product line, you know that the toy range covers every way to play off the movie.

It includes many categories across several of our divisions, action figures, dolls, plush, vehicles, preschool, toys and games.

In the preschool aisle, the Thomas and Friends property posted very solid performance, particularly with the Track Master and the Die Cast Take and Play segments.

Not surprisingly, Thomas and Friends is tracking to become the number one brand in the Fisher-Price Friends portfolio.

From our perspective, what's most exciting about our newest license properties is that we expect them to perform more akin to evergreen toy brands than one hit wonders which should augur well for our business not only in 2010 but beyond.

As some of you may know, the year 2010 is a personal milestone for me.

May 17 marks my 10 year anniversary with Mattel.

I joined the Company during some tough times and in the midst of change.

On my first day, I told employees gathered in the Company's cafeteria that we are going to do three things, build brands, cut costs, and develop people, and we've made good progress on all three fronts.

So after 10 years what I'm asked most often, whether by investors and analysts or employees in the cafeteria is what's next for Mattel.

Let me start with where we've been.

In 2000, the Senior Management Team created a vision for the Company to be the world's premier toy brands today and tomorrow.

This vision has served our Company well during the past decade, and every single word has helped guide us to become a more focused and cohesive Company, shepherding absolutely stellar brands.

Last week, our latest Annual Report to shareholders was posted on our website for shareholders and other stakeholders.

Every year, you may have come to expect a theme or a word to drive the year.

This year's call to action is Next and in the context of what's next, we challenged our thinking around the vision itself.

This year we're launching a new guiding vision for the Company, Creating the Future of Play.

At Mattel we are the imaginations behind some of the most recognized and best loved products around the world, but I'll let you in on a secret, we don't just make toys.

We create emotional connections that last a lifetime by encouraging children to stretch their imaginations, creating joy and allowing children to become lost in play.

That's the real value of our toys, that's the value of play, and in keeping with our new vision, we've added new innovation and playfulness to our Annual Report, through the launch of an interactive video on our corporate website that takes viewers through a dynamic tour of the Company and our products.

Creating the future of play is evolution.

Our goal is to build on the progress we've made and to push ourselves to achieve more.

That's consistent with our business goals for 2010 which include capitalizing on opportunities to increase revenues, by continuing core brand momentum while maximizing the opportunities surrounding our new entertainment properties, maintaining cost and expense controls, and delivering another strong year of profits and cash flow.

We believe in the value of play, the possibilities it creates, and the joy that it brings.

At Mattel, we have the unique opportunity to work at the intersection of what is enduring and what is innovative.

When we do this, there are no limits to what we can invent and the joy we can create.

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 up 12%, including a 3 percentage point positive impact from changes in exchange rates.

US sales were up 12% and international sales were up 12%, including a 7 percentage point positive impact from foreign exchange.

On a regional basis, sales in Europe were up 9%, including a 5 percentage point positive impact from exchange rates.

Sales in Latin America were up 10%, including a 2 percentage point positive impact from foreign exchange, and sales in Asia Pacific were up 32%, including a 16 percentage point positive impact from changes in exchange rates.

I'll now review our core businesses and brands for the first quarter.

Mattel girls and boys brands, worldwide sales from Mattel girls and boys brand segment were up 14%, including a 4 percentage point positive impact from changes in exchange rates.

On a regional basis, domestic sales were up 18%, and international sales were up 11% including a 7 percentage point positive impact from changes in exchange rates.

Worldwide Barbie sales were up 5% compared to last year, including a 4 percentage point positive impact from foreign exchange.

Barbie sales in international markets were flat including a 5 percentage point positive impact from foreign exchange while Barbie sales in the US was up 13%.

Worldwide sales of other girls brands were up 21%, including a 6 percentage point positive impact from exchange rates.

Sales of other girls brands in the US were up 44% and international sales were up 6% including a 9 percentage point positive impact from foreign exchange.

Good growth in Disney Princesses was partially offset by declines in High School Musical.

Worldwide Sales in wheels increased 3% including a 3 percentage point positive impact from changes in currency exchange rates.

The Worldwide Sales performance reflects good growth in sales of Hot Wheels, offset by declines in sales of other wheels products not continuing into 2010.

Core Hot Wheels increased 9% worldwide including a 4 percentage point positive impact from foreign exchange.

Core Hot Wheels sales increased mid single 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 up 35% including a 4 percentage point positive impact from changes in foreign exchange.

Sales were equally strong in the US and internationally, driven by the addition of new entertainment properties, Worldwide Wrestling and Toy Story as well as good growth in our core Games business.

Fisher-Price brands.

Worldwide Sales for Fisher-Price brands were up 11%, including a 2 percentage point positive impact from changes in currency rates.

On a regional basis, domestic sales of Fisher-Price brands increased 8% and international sales increased 17%, including a 6 percentage point positive impact from foreign exchange.

Worldwide core Fisher-Price was up 5%, including a 3 percentage point positive impact from changes in exchange rates.

International sales were up 10%, including a 7 percentage point positive impact from foreign exchange, and US sales of Fisher-Price core were up 2%.

Fisher-Price Friends worldwide sales increased 44%, including a 1 percentage point positive impact from foreign exchange rates.

International sales were up 58%, including a 3 percentage point positive impact from foreign exchange, while sales of Fisher-Price Friends in the US grew 35%.

The growth of Fisher-Price Friends was driven primarily by the addition of products supporting the new Thomas and Friends property, as well as good growth in Disney products.

American Girl brands.

Sales of American Girl brands were up 6%, reflecting growth across all key channels primarily due to strong sales of the Laney, the girl of the year, as well as a slight benefit from an earlier Easter.

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

Gross margin was 49.1% compared to 44% last year.

The improvement was primarily due to lower product costs, savings from global cost leadership initiatives and price increases.

Given the current commodity and labor cost environment relative to year ago levels, we expect input cost pressure in our gross margin beginning in the second half of this year.

Advertising expense was $94.2 million or 10.7% of net sales compared to $84.1 million or 10.7% of net sales in 2009.

Selling, general and administrative expenses decreased approximately $24.5 million to $292.5 million.

As a percentage of net sales, SG&A expenses were 33.2% compared to 40.4% last year.

The year to year improvement primarily reflects $22 million of lower litigation and legal settlement related costs and savings related to our global cost leadership program.

For the quarter, our global cost leadership program delivered overall gross savings before severance of about $17 million.

The gross savings includes about $5 million in SG&A, $11 million in gross margin, and $1 million in advertising.

For the quarter, we recorded a severance charge of $2 million bringing the net savings related to the global cost leadership program to about $15 million.

We remain on track to deliver cumulative net savings of approximately $180 million to $200 million from this program by the end of 2010.

Operating income during the quarter was $45.2 million compared to a loss of $55.2 million last year.

The year to year improvement was due primarily to higher sales, gross margin improvement, and lower SG&A expenses partially offset by higher advertising expense.

Interest expense of $13.6 million was down from $15.9 million last year reflected lower average borrowings as well as lower average interest rates.

Interest income was $2.5 million versus $3.5 million last year.

The lower interest income was due to lower average investment rates partially offset by higher average invested cash balances during the quarter.

Other non-operating income expense was an expense of $800,000 versus income of $2.1 million in 2009.

The current year expense reflects and relates primarily to foreign currency exchange losses versus foreign currency exchange gains last year.

The income tax provision for the quarter was $8.5 million, which translates to an effective rate of 25.4% compared to prior year's benefit of $14.5 million.

For the full year 2010, we currently expect the tax rate to be about 24% to 25% based on current tax laws.

Overall, we reported net income of $24.8 million or $0.07 per share versus last year's net loss of $51 million or $0.14 per share.

Now, turning to cash flow and balance sheet.

Cash flow used for operations for the quarter was $245 million compared to $215 million in 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 $871.9 million, up $467 million from prior year's first quarter, primarily due to higher beginning cash balance of $1.1 billion this year versus $618 million last year.

Receivables were $661.9 million or 68 days of sales outstanding, three days higher than last year.

Factoring decreased from $101 million to zero.

Prior to factoring, Day Sales Outstanding decreased eight days.

During the first quarter of 2010, we made the decision not to factor receivables due to our current cash position and the availability of lower cost funding alternatives.

Inventories at $429.6 million were down $58.3 million or 12% versus 2009.

Our total balance sheet debt was $750 million, a decrease of $150 million from the prior year reflecting the pay down of maturing long term notes.

Our debt to total capital ratio ended the quarter at 22.4% versus 30.5% for last year's first quarter.

Capital Expenditures were $24.2 million, up slightly from last year's $20.1 million.

So to summarize, as Bob mentioned, we're pleased with this quarter's results, but there's a lot of work to be done between now and the end of the year to deliver on our priorities of continued core brand momentum, maximize the opportunities surrounding our new entertainment properties, maintaining costs and expense controls, and deliver another strong year of profits into cash flow.

That concludes my review of the financial results.

Now we would like to open the call to questions.

Operator?

(Operator Instructions).

Our first question comes from Tony Gikas of Piper Jaffrey.

Please go ahead.

Thanks, good morning guys.

A couple questions.

Looking at the cost of sales for 2009, I think input costs were a relative push, but as we move into the back half you guys do expect some cost pressure there.

Is that the biggest risk to the back half of the year, and any way to quantify what you're seeing so far with some of your manufacturing partners?

Yes, I think with respect to challenges in 2010, I do think that the rise in input costs will be a challenge to the second half of the year.

I think Tony, we've made good progress in rebuilding our gross margins in 2009 with full year gross margins of 50%, and our goal is to sustain gross margins consistent with our long term goal, and when we look at gross margins for the second half of the year, there's many factors that impact those margins besides input costs, like freight and distribution costs, minimum wage, royalties, foreign exchange, mix and tooling to name a few, so predicting our gross margin is very difficult due to the complexity of all of the moving pieces and lack of transparency and predictability, but we know looking forward we have higher royalty costs in 2010 due to our new entertainment partnerships, and while it's impossible to predict what will happen with commodity and labor costs, we're already seeing year to year cost increases, which would impact our gross margins in the second half of 2010.

For example, there's been steady recovery in crude oil prices at the current level of $85 a barrel compared with about $40 a barrel this time a year ago.

We're also seeing minimum wage and foreign exchange pressures in China.

That said, we're going to continue to execute our global cost leadership program and other costs and manufacturing efficiency programs in 2010 and we priced our products consistent with making progress against our long term annual goal of 15% to 20% of operating margins.

Okay, thanks.

Could you also just comment on point-of-sale during Q1 and maybe the first part of the second quarter here and then sales in Europe seemed to pick up nicely.

What were your thoughts there, and what might be the better performing international markets later this year?

Hi, Tony, this is Bob.

Point-of-sale has held up pretty nicely with the change of Easter, it makes it a little bit more difficult to look at the quarter end point-of-sale but if you kind of try and normalize for that as best one can by looking at kind of point-of-sale through the most recent weeks, I'd say our point-of-sale is up sort of low to mid single digits across the Company and I think there's no question that an important factor in the first quarter's results is the absence of the prior years inventory depletions.

In essence, retailers bought what they sold this year.

Last year, they really could support their business without having to buy much from us, so I wouldn't say they're rebuilding inventories.

In fact we're still seeing inventories a bit below the prior year and I've seen some studies that suggest broadly and that is not just toys and not just in the US.

Retailers are continuing to focus on reducing inventories and from everything I read in here, they see this as a sustainable strategy for the foreseeable future.

As it relates to international, POS is tracking ahead of our shipments in international.

Retailers are continuing to very tightly manage inventories, particularly in markets where economies are struggling more so.

We've seen pretty good growth in the first quarter around the globe.

We had good performance in Latin America.

We had good performance in virtually all the markets of Asia Pacific although that's off of a very small base, and we had pretty solid performance in some of the more mature markets of Western Europe, so this is one of those quarters where we love all our children whether it's brands or markets and fortunately they seem to have all done pretty well.

Okay, thanks guys.

Great job.

Thanks, Tony.

Our next question comes from Tim Conder of Wells Fargo.

Please go ahead.

Thank you.

Great job on the quarter.

A couple of things to follow-on on the input cost.

Kevin you went through several items there.

One thing that you did not talk about and you've outlined before even back when you rolled out the GCI back in November of 2011 or SKU reductions and I think you've also mentioned Bob and Kevin that SKU reductions really did not benefit gross margins in 2009 and that's going to be more of a 2010 item.

Can you kind of add that into the whole mix as far as your strategy in maintaining gross margins?

Yes, I think the global cost leadership program is an important aspect of improving and maintaining our gross margins as well as we continue to work on manufacturing, productivity and efficiency programs and I think as we said [the size of the price] with regard to SKU reductions is that 30% of our SKUs generate about 1% to 2% of our revenues and managing the number of SKUs and improving our SKU productivity is a strategic way to cut non-value-added work in the organization.

SKU rationalization cuts across the entire value chain.

It touches all functions like D&D, sales, marketing, engineering, manufacturing, testing, and other supply chain areas, and that rationalization should result in less headcount, lower tooling spend, less testing, less inventory and lower markdowns, and it's a sustainable advantage to us by managing SKUs because it aligns us well with SKU efficiency focus of our major retailers.

We have made progress in 2009 with respect to reduction of SKUs in 2010, we continue to work on SKU reduction in 2011.

I think you're going to see more of the benefits from SKU rationalization really in 2011, as we get momentum on this strategic initiative.

Okay, and then Kevin, I think in prior calls, or at the toy fair, you mentioned that a 27% tax rate at that time was sort of more reasonable and now you've updated that for 24% to 25%.

Can you maybe just walk us through what's changed here on that tax rate outlook for the year?

Yes, I think as we said in the call today, we expect the 2010 tax rate to be 24% to 25%.

The calculation of our worldwide expected tax rate is a very complex calculation and basically the computation of the tax rate is kind of where income is earned geographically and how that income is taxed in those geographic locations and based upon our most recent calculation our current estimate is for the 2010 worldwide effective tax rate to be between 24% and 25% for 2010 and likely beyond.

Okay, but I guess what in the overall calculation are you expecting higher revenues and income from areas that would reduce that rate, that's changed in the last two to three months?

Yes, I think we've just refined that calculation and it does relate back to the geographical mix.

Okay, and then Bob, you've already commented a little bit about in response to the prior question, the inventories in the channel, and do you think there could be some as we move closer to the Christmas holiday season, some potential modest increase in inventory versus last year, or what I heard you say earlier that may not be the case as you see things right now, just maybe to clarify that?

Well, Tim, my perspective on inventories is that we're unlikely to see sort of the rebuilding of inventories.

I think retailers are very sharp with what they're buying.

They are buying what they think is going to sell.

They finished the year with very clean inventories.

Their inventories today continue to be very clean, and we're just not anticipating that they are going to want to kind of slide backwards on inventory reduction, so who knows.

We won't know until the season comes along, and I think certainly retailers are more bullish about this holiday season than they were last holiday season but I don't know if that's going to translate into inventory build.

Okay.

Thank you gentlemen.

Appreciate it.

Thanks, Tim.

Our next question comes from Sean McGowan of Needham & Company.

Please go ahead.

Hi.

A couple of questions as well.

Kevin?

Can you give us what the depreciation and amortization was in the quarter?

Yes, I can.

Just give me a second on that, Sean.

Okay, and then another question and related to previous questions is on the gross margin improvement, as you've done in the past, could you sort of give us an idea of, the factors that drove it higher, kind of which was more important, so if you're looking at price, cost cuts, and input costs, how do they rank out in terms of what influence they [have been]?

Okay, I'll answer the first question, it's about $41 million for the quarter versus about $44 million last year.

Okay.

And then looking at the first quarter gross margin, the first quarter gross margin improved by 510 basis points to 49.1% compared to last year's first quarter gross margin of 44% and gross margin benefited primarily from favorable product costs, savings from the global cost leadership program, price increases, and favorable mix.

This quarter, we continue to benefit from lower commodity cost markets that occurred last year when we were buying input costs and manufacturing for a 2010 product line.

Our 2010 gross margin is also improved due to continuous improvement programs related to the global cost leadership program and other manufacturing efficiency programs across the supply chain.

We made good progress in rebuilding gross margins and our goal is to sustain gross margins consistent with our long term goal.

Okay, in the past though I think you've said things along the lines of a third of the increase or decrease in certain quarters come from X and part of it came from Y.

Are they kind of equally contributing to the increase in the first quarter?

No, I think the biggest impact was the favorable product costs followed by savings from the global cost leadership program which was about $11 million in the quarter related to gross margins and then price increases and then favorable mix so that would be the order of magnitude.

Thank you, and Bob if you can give us a little color on within the Barbie line what seems to be driving that?

I mean you're up against a pretty tough number in the first quarter in the US.

Anything particular that stood out as working well within Barbie and do you think it's sustainable?

Yes, there is, Sean.

We continue to experience good momentum on Barbie.

POS is increasing even when we compare it to last year's 50th Birthday Celebration of Barbie.

The "I Can Be" segment is performing particularly well.

You'll recall we launched Barbie's 125th and 126th careers during the quarter.

The Spring Entertainment, which is Barbie in a mermaid tail is doing well, Fashionistas are doing well, Barbie Basics are doing well, that's the Little Black Dress Line right now, so I think there's no question that Barbie is gaining share and continues to have good momentum and beyond Barbie, Disney Princesses is doing very well both in the US and abroad.

We've had good success with the princess and the Frog line, the DVD was released just a couple of weeks ago, and I think Disney Princesses is going to do well all year, particularly as we approach the fall movie, Tangled, which is the Rapunzel story, and that probably the offset there to some degree is High School Musical, but the momentum we have on Disney Princesses looks pretty solid.

Great.

Thank you very much.

Thanks, Sean.

Our next question comes from Drew Crum of Stifel Nicolaus.

Please go ahead.

Great.

Thanks, good morning everyone.

Just want to go back to the cost of goods sold.

I think you mentioned Chinese currency being an item.

I know it's been in the news quite a bit recently and I think we've talked about the impact but can you talk about strategies you guys have in place in the event the Chinese government will let the yuan float or are you doing anything in anticipation of that?

Yes, as you know, Drew, the vast majority of the world's toys are produced in China, the majority of our toys are produced in China, but we are one of the few folks that also manufactures our own toys and manufactures toys in markets other than China, including Malaysia, Thailand, Indonesia, and Mexico, so we're relatively less dependent on China than the rest of the toy world but it's still very important to us.

Yes, and I guess, Drew, I look at it as just another cost pressure, same as I look at input costs, labor costs, so it's just another cost pressure that we've got to when we consider pricing our products, to price to the new reality in costs.

Okay, and Bob, could you comment on what you saw in terms of performance for the new entertainment properties, domestic versus international and specifically WWE?

We're off to really a solid start on all of the new properties.

Toy Story, in the Fisher-Price segment, the Thomas property is off to a really nice start and WWE.

WWE has done well globally.

It's not a big factor in every market around the world but clearly I think we're going to build an international presence for WWE.

If anything we've been struggling in the past several months to keep up with demand for WWE, so it's off to a really nice start and broadly speaking, I'd say, all of the new properties are performing well globally, with pretty good performance everywhere in the world where those properties have been supported.

Okay, and last question, it doesn't look like you guys did any share repo during the quarter.

Could you just update us on your thoughts of uses of cash?

You're sitting on close to $900 million of cash on the balance sheet.

We expect you to generate some cash flow during the year.

What are your updated thoughts on uses of cash?

I guess I'd start by reminding everyone that last year, given the macro environment, we were really in hunker down mode around here.

We said a year ago that our priorities for 2009 were to strengthen the balance sheet.

We wanted to increase cash, reduce debt, and protect the dividend.

We were successful in achieving our goals last year, so as we look at 2010, we're transitioning back to our capital and investment framework which we developed in 2002 or 2003 and have been using ever since.

In the end, capital deployment is a Board level decision but I can tell you that we have recently reaffirmed the key tenets of our framework with the Board and aren't really going to be any changes in the near future.

Okay, thanks guys.

Our next question comes from John Taylor of Arcadia Investment.

Please go ahead.

Hi.

Good morning.

I have two questions I guess.

One, you know, Thailand seems to be in the news again here so I wonder if you might talk about that a little bit from a supply/security side of things and the other thing I guess would be sort of container capacity out there, things stacking up in remote places and what not, so that would be the first operational question, and then Bob, I wonder if you could expand a little bit on your opening comments about sort of the new Mattel and the new decade we're looking at.

What are we seeing executed this year, and if there's anything you can sort of foreshadow for us for next year, what the implications of the out of the box thinking might be for play.

Thanks.

A couple of things.

First as it relates to Thailand, we have a good presence in Thailand.

Our operations and supply chain really haven't been materially affected by what's going on over there and, in history at least in the 10 years since I've been here.

There's usually one or two places that are of concern from a supply chain standpoint and we're not solely dependent on one area of the world, so even if we run into hiccups, we generally have an ability to overcome those and I would say the situation in Thailand is consistent with that right now.

As you think about the Company going forward, I really think over the last decade, we've been very focused and very disciplined and it has served us well.

We have built shareholder value.

We look at the benchmarks and what's happened over the past 10 years and I'm generally pleased with the progress we've made.

As we think about the Company going forward, one of the points I wanted to make in the opening comments is it is evolution, not revolution, but we think there is a lot of potential and value in thinking more about play.

Toys are certainly an important component of play, and I think 10 years from now, if all goes well we're going to continue being the leading toy company in the world, but we see avenues for growth in the years ahead, beyond just traditional toy play.

As an example, we're doing a lot of work right now in the digital space, and we know kids are playing digitally and they're playing with our brands digitally and they are staying in the marketplace longer than they used to.

I remember in 2000, I remember talking about kids getting older and younger and a lot of us seemed focused on that phenomenon.

In fact today, kids seem to be playing with our brands in the ages that are inconsistent with kids getting older or younger.

They are just playing in a different way, and we have to figure that all out, we have to figure out how to generate revenues out of that and how to make money in that.

but I think that's one example of a new avenue of growth for the Company and hopefully profitable growth when you think about the years to come.

Okay, thank you.

Can I slip one more in here?

I wonder if you could call out anything that's going on in China as it relates to the retail store and the footprint you're trying to build there and consumer reaction.

Thanks.

Yes, the store is okay, not great.

If you look at that store as how many toys it sells relative to all of the toys sold by all of the retailers in Shanghai or even in China, it's actually performing quite well, but you still have to think about the future potential of China and the future potential of Barbie in China, and as much as anything else, that store is designed to sort of introduce China to Barbie.

Generally speaking whether we're talking about Barbie or talking about all of our brands in China, we're seeing good growth.

We didn't grow last year in China as the global economy didn't do as well as it had previously but we kind of picked up again this year in virtually all of the emerging economies like China and India.

That being said, while the growth rates look really good and it's really impressive when you put the percentage signs next to them, it's off of a very small base.

We're making progress but it's really a long term strategy still not material for the Company.

And finally JT, with respect to your question on containers, every year we've got challenges in our Supply Chain and we manage through those.

We haven't heard anything yet about having a container capacity issue here for the Fall.

Okay, great.

Thank you.

Thanks, JT.

Our next question comes from Robert Carroll of UBS.

Please go ahead.

Hi, everyone.

Just actually one quick housekeeping.

Are you able to give the percentage of comps that are denominated in RMB, just to bring that full circle?

I'm sorry, I didn't catch the question.

Percentage of cost of goods sold in RMB?

Yes.

Yeah, I think with regard to if you look at RMB, it's a small percentage because it's really most of it relates to labor and local value add, and if you look at a 1% movement in the RMB, it has about a $5 million impact positive and negative based upon that.

Perfect.

And then actually just going to some of the entertainment properties, it seems like Toy Story got off the ground earlier than we were expecting; there's some pretty strong retail support.

Just big picture, do you guys see that as being incremental so it adds to the pie over 2010 or slightly pulling things forward from some earlier -- for some later quarters?

No, I'd say generally speaking, Rob, Toy Story is consistent with our expectations right now.

We had good success with Toy Story last year and as I've been out in retail stores so far this year, we see continued good performance of the sort of core franchise Toy Story products and as I mentioned over the next couple of weeks here we ought to start to see strong support for Toy Story 3, so my view of Toy Story is that it is an evergreen property, like Cars, which is now in its fifth year for us has been an evergreen property, and like we think WWE and Thomas will be so that's one of the things that is most exciting to me right now is that we've got our hands-on these brands and they are really brands, not just movie properties.

Great, and then two other quick ones.

Just is the whole Thomas line out on market yet?

I know I guess back at Toy Fair I don't think it had been fully launched yet.

No, I really don't think it is.

I was in stores last weekend and I still see some of the segments in which we're now selling products represented by older products, so I think there is still going to be some transition to Thomas.

That being said, Thomas again is consistent with our expectations and doing very well, but just my observation for what it's worth is that we're still not fully through the pipeline and seeing our products on shelf every day.

And then actually just on Monsters.

Any sort of update on that or tying into your expanding the play area comments and broader thoughts on reaching into (inaudible) reaching entertainment properties?

No, but that's an interesting part of the strategy going forward.

I think we're going to do an Analyst day here coming up in the Spring and Dianne promises me that sooner or later we're going to have to talk more specifically about Monsters and I've told her I think it might be a good idea to do that then.

Looking forward to it.

Congrats.

Thanks.

Our next question comes from Margaret Whitfield of Sterne, Agee.

Please go ahead.

Yes, good morning, everyone.

Congratulations.

Thanks, Margaret.

I wondered, Bob you mentioned the Easter shift as it related to American Girl if you could give us some commentary as to how the earlier Easter benefited your top line in Q1 and what might occur as a result in Q2.

Yes, I think it had some effect, Margaret.

It's hard to tell, but I think from my vantage point, the easiest way to think about it is in the first quarter of 2009, my recollection is American Girl was down 4% in sales and in the first quarter of 2010 it was up 6% in sales.

Easter is one relatively small component of that.

There are a lot of other things going on in American Girl like the stores doing well, like as Kevin mentioned, Laney doing particularly well compared to the prior year's girl of the year, but generally speaking, I think that clearly the earlier Easter had some impact, I think personally it's a fairly minor impact, but a positive impact in this quarter at the expense of next quarter.

I was referring to the entire Company, so you think it's a minor impact in Q1?

I do.

We don't know what the second quarter is going to look like yet so we'll see, but in my experience of doing this for a while now, it tends to be a little bit of a shift from the first quarter to the second quarter or vice versa, but not a big deal.

Okay, and then on Barbie, the US did extremely well against tough numbers.

International was flat with currency positive.

Could you comment on why international lagged although the comparisons, as I recall are easier.

Yes, Margaret, I think as we've rationalized the line particularly internationally, we focused more on fashions and this year in the career aspirations segments, so we've seen declines on My Scene which is a relatively larger line outside the US than in the US where it's been discontinued and especially in the younger Princess segment overseas so as we transition to Disney Princess in Europe, for example, we're clearly looking to build that business.

Okay, and could you give us an update on the MGA situation, Phase II and the appellate court?

Well, there really isn't much.

In December the Ninth Circuit heard MGA's arguments for its appeal of the trial courts orders that granted an injunction against MGA and the other equitable relief to Mattel.

The orders were originally issued by the trial court, after the 2008 unanimous jury verdict against MGA and Mr.

Larian, the court hasn't yet issued any opinion addressing the merits of the case but in December, it ordered a stay on the equitable relief including the transfer of Bratz and the registrations and the trademarks and those things to Mattel so we're still awaiting the Ninth Circuit's opinion and at the same time, we are very busy preparing for the next phase of the case which focuses on trade secret theft among other things.

Is that in Q2, the beginning of Phase II?

Well, we really don't know.

I think it will happen fairly quickly after the Ninth Circuit opines on the first phase of the case.

We're certainly gearing up for that, so we're ready to go whenever the time comes, but I'd have no clue of whether that will be second quarter, third quarter, fourth quarter or whenever.

Okay, finally, you mentioned Tangled as probably a strong property in the second half and I know Toy Story and WWE and Thomas will likely be.

Anything else to call out post-Toy Fair in terms of where the retailers are placing their bets in terms of your new line?

No, I think we've got it covered.

I think when we get to the Monsters property, that's going to start, exactly how that plays out is yet to be seen, but I don't think it's going to be a big deal for this year's numbers.

I think we've got all of the drivers already in place for this year.

Okay, thanks, Bob.

Thanks, Margaret.

Our next question comes from Felicia Hendrix of Barclays.

Please go ahead.

Hi, good morning guys.

Hi, Felicia.

Hi.

Just Kevin, circling back to the gross margins, one of the items although it was the least important was the favorable mix and I'm just wondering trying to understand that other than Barbie increasing which is obviously more profitable, what else in your line contributed to the favorable mix?

It was really all the performance of the core brands, where we don't play (inaudible) so we saw good growth in core brands.

And then Bob, on the strength of Disney Princesses, besides Princess and the Frog, was there anything else or is it just that?

I wouldn't say it's just that.

I think the line broadly speaking is doing well.

If you look at the product line, if you look at just physically the products that we're introducing in Europe as we speak and it's been a pretty slow transition in Europe because there's a fair amount of old products still in the marketplace but if you look at the princess dolls that we have created and compare those to the princess dolls that have been in the marketplace in Europe, in my judgment, it's night and day better and I think we've got some great products, we've had very strong retail support, and so I think the franchise is doing particularly well, not just one individual item.

That having been said, we've had very good success with Princess and the Frog and it's clearly one of the key drivers and I think it's going to continue to do well.

Great, and then in terms of the shipments for Thomas and WWE going forward, should it be, adjusting for seasonality, should the shipments basically be even throughout the year or do we see more in the first half or is it like everything else that's just core evergreen, it just kind of comes throughout the year and just obviously adjusting for the seasonality?

I think it's like everything else.

I don't think those are unique.

Certainly Toy Story will be a little different because of the entertainment coming up in June of this year but if you think about something like Thomas, I don't think there's an unusual seasonality to Thomas.

No, and I think in general 30% of our sales are done in the first half of the year and 70% is done in the back half.

I don't see any difference in Thomas and WWE from that.

Okay, great.

And then just probably Kevin, in prior quarters, you would break out the components of the cost leadership program, so you said it was $11 million in the quarter.

How does that split among SG&A, advertising and cost of goods sold?

Yes, I think with respect to the global cost leadership program, in the first quarter we delivered gross savings before severance of approximately $17 million as I said in addition to the $5 million of gross savings reflecting SG&A.

As I said there's roughly $11 million of savings in gross margin and $1 million in advertising expense.

With $17 million in gross savings and $2 million in severance charges, we achieved net savings of $15 million from our global cost leadership program and we remain on track to deliver cumulative net savings of approximately $180 million to $200 million from the program by the end of 2010.

Okay, all right thanks guys.

Thanks, Felicia.

Our next question comes from Greg Badishkanian from Citigroup.

Please go ahead.

Great, thanks.

Just on the cost cutting program, the $180 million to $200 million target, you said you're on track.

Just wondering, so if sales continue, momentum continues to be strong like it was this quarter, do you think it's still achievable or do some of those costs rise making it not as achievable?

No.

I think as I said we're on track to deliver the $180 million to 200 million and I don't see volume changing and I think we're really reflected and focused in on specific programs to cut costs in things like SKU rationalization, clustering of our European operations, we're working on consolidating our southern California distribution centers, we're working on outsourcing our IT infrastructure, so there's programs that are independent of our top line revenue growth.

Good, good to hear, and just obviously nice performance at Barbie.

Any sort of color on the competitive environment there that maybe helped you and in terms of MGA in terms of what shelf space they've been getting and what they are expected to get sort of in the Fall ahead of Christmas?

I'm always fascinated to hear how they comment on their business so I don't think I'd do that.

Any other sort of color in terms of what you've been seeing over the last few months, any changes in the competitive environment?

Well I think Barbie has good momentum, as I mentioned Disney Princesses has good momentum.

Other brands come and go, but we've been at this for a long time and things seem to be going pretty well.

Absolutely.

Good.

And then just in the third quarter call, you talked about Toy Story I think being over $100 million business during the movie year and just kind of as you kind of look out, how well do you think that could be relative to that year?

Obviously stronger but how much stronger do you think?

Well I don't know if I said that, Greg.

If Kevin said that I'll strangle him.

Oh, okay, maybe you didn't.

I'm sorry, I may have said something from which you can infer, like a good movie property is $100 million or more and there's every reason to believe Toy Story is a good movie property, so if I've gone beyond that I apologize and I'll reprimand myself and we won't do it again, but obviously, Toy Story should be a really important property.

It's been a great property for the last 10 years without entertainment support and everything I've heard about the movie is it's going to be a terrific movie, so it's obviously going to be bigger than a bread basket.

Great.

Thanks and great quarter guys.

Thanks, Greg.

Our next question comes from Gerrick Johnson of BMO Capital Markets.

Please go ahead.

Hi, good morning.

I was wondering if you could talk about Fisher-Price and provide some sort of organic growth number for Fisher-Price exclusive of the Thomas shipments.

Well, I think Fisher-Price is one of the areas that's a really good example of retailers this year needing to buy what they sold as compared to last year.

Last year in the first quarter, retailers didn't need to buy that much from us in order to support the POS that they had.

This year they had to do that and I think Fisher-Price is probably the most signing example of that.

There's certainly areas in core toys that are doing well but the momentum on Fisher-Price is right now more consistent with the Fourth Quarter or the holiday season in the POS end of Fisher-Price than we expect it to be later this year.

We've made some changes to the key drivers of the line in terms of the innovations that we have and the price points that we'll be offering so I think right now, the Fisher-Price success in the first quarter is really more related to what retailers needed to do than the POS trends.

We don't break it out with respect each of the businesses excluding the entertainment but if you look at Fisher-Price core globally it was up 5% which would exclude Thomas as well as if you look at it domestically, it was up 2% and in international, it was up, core was up 10%.

Yes, but core hasn't been the problem, it's been Friends so I'm kind of wondering how that number looked exclusive of Thomas.

No, I wouldn't, yeah, I wouldn't say that just friends has been an issue.

I think we've had some issues on core as well but within Friends, Dora did very nicely this quarter.

We've seen some increases in Dora, we've seen increases in Disney in the Fisher-Price line, in the Friends line and we've seen some decreases in Sesame Street which is consistent with the trend, so some of the things like Dora that has been a drag on our sales potential certainly from a point-of-sales standpoint, actually we've seen better success on Dora of late than we have for some time.

Okay, great.

And Bob, sounds like you've been in the stores a lot lately.

I was wondering if you could perhaps comment on any sort of industry trends you're seeing, category trends, you know, it is a fashion business.

Where are kids gravitating these days and particularly interested the girls segment, fashion dolls, or (inaudible) dolls, et cetera.

Well, I think toys in general have held up pretty well in the holiday season last year, just as they did for the past five or six recessions and I think there's pretty good momentum relative to other categories in the toy business right now and I don't know that that's going to change.

We're certainly seeing good momentum in our girls business.

We tend to be the leaders in things girls, so I think that bodes well for what's happening in the marketplace.

Okay, and lastly, discount retailers, are there any changes in the way they do business that may be benefiting the industry in Mattel this year?

We often talked about what they are doing that's detrimental to the industry but what might they be doing this year that might benefit you guys?

I don't know there's any significant change in the retail landscape that I see.

Okay.

All right, thanks a lot.

Thanks.

Our next question comes from Linda Bolton-Weiser of Caris.

Please go ahead.

Hi.

Can you just talk a little bit more about the retail inventory situation and I'm trying to gauge how many more quarters you could actually have shipments exceed the POS growth.

Was it second quarter or more like third quarter last year where the retailers started to behave a little more normally on the inventory front?

My recollection from last year, Linda, is that inventories as we calculate them, that is retail inventories based on what we ship in and what POS has sold declined every quarter last year compared to the prior year and this year in the first quarter we are seeing retail inventories down versus the prior year, so I don't think there's been a change in trend and again, as I tried to mention earlier, I'm not really betting on a big change in trend.

I think retailers are going to continue to focus on inventory management.

Right, but certainly, your shipments can't exceed POS for many more quarters.

So is it one more quarter, two more quarters before the math works out that the retail inventories year-over-year are more normalized?

Do you understand what I'm asking?

I guess I understand what you're asking I'm not sure that I can answer the question.

The changes on a percentage basis are kind of consistent with having different bases.

What we really saw in the first quarter, and I've tried to communicate is retailers bought what they sold, so the percentage change on shipments is a function of what they bought last year, but today, they are currently buying what they are selling.

Okay, I get what you're saying, and then on the pricing, can you just remind us, is the pricing that you mentioned that favorably contributed gross margin, is that a carryover from actions taken in 2009 or was that like new pricing initiatives in early 2010?

It's primarily a carryover, Linda.

Okay, and can you remind us again, was there two rounds of pricing in 2009 and what's the thought in 2010?

No, there was one round of pricing generally speaking in 2009 and there will be one round of pricing in 2010.

We did not price significantly in 2010 but we did price, and it's consistent with what we had planned on the input costs being at the time.

Okay, and then just on your global cost leadership, I mean you've been really successful with that so far, and you'll be realizing the final savings this year.

Are you thinking about initiating a new program or focusing in other areas or continuing it, and might we hear more details about that at the Analyst meeting?

Well I think from the perspective of the global cost leadership program, I think we are executing it.

I think we're on track to deliver the $180 million to $200 million.

I think as part of this program we're really trying to infuse our culture with this continuous improvement philosophy and I think like we have in the past, we'll continue to look for opportunities to be more efficient and effective and drive cost savings programs.

Whether that will be a formal program or informal program, you know, we'll continue to look at what makes sense.

Okay, thanks a lot.

Operator, we have time for one more question.

Our last question comes from Hayley Wolff of Rochdale Securities.

Please go ahead.

Good morning guys.

Hi, Hayley.

A few questions.

First, just following up on Linda's question.

The cost savings potential in 2011, Kevin earlier talked about SKU reduction starting to benefit you in 2011 and now that you're running your business a lot smarter, a lot more efficiently, we should be able to expect some cost savings.

Yes, we should expect cost savings from SKU rationalization.

We did see some of that in 2009.

We expect to see more of it in 2010 and we expect to deliver even more in 2011.

Order of magnitude, relative to GCO, can you comment on that?

I'm not going to get into specific detail, but the 2010 savings are included in the $180 million to $200 million cumulative goal that we have for 2010.

Right.

But you won't give us a sense of relative to what 2011 could have relative to 2010 from some of these initiatives in place now?

Yes, I'm not trying to be difficult, but it is a pretty difficult thing to estimate because it touches the entire value chain.

Okay, and then American Girl, the Denver store, did that benefit you in the first quarter or is that a second quarter?

More second quarter, Hayley.

It did open in the First Quarter and we're continuing to look at expansion opportunities for American Girl.

It's our smallest store.

It's under 10,000 square feet.

It's kind of a test of the new smaller store that doesn't have any food service involved, but it did not have a big impact on the First Quarter.

Remember, what we sell at retail is what gets counted in numbers on American Girl and it's really only been open a couple of weeks.

Okay.

And then there's been some talk about a re-release of Avatar in September I think or some time during the fall?

Do you have any comment on that?

Avatar is a focused product line, is a terrific movie, the DVD I think comes out in a couple weeks here or maybe even next week, it is not a big driver of our performance, it's not a big toy property.

That's what we thought when we went into the development of the line and that's exactly how it's played out, so Avatar is not going to be a big contributor this year.

Again, when I visit stores, there's plenty of Avatar product out there.

It's good product.

It tells the story well, but it's just not going to be a big entertainment property for the toy business.

Okay.

And then can you comment on any legal expenses for the Bratz litigation and how we should think about them throughout the course of this year?

Yes, I think, as you know we've been incurring significant legal costs over the last couple years related to MGA and recall related litigation.

For full year 2008 we incurred incremental legal costs of about $37 million related primarily to Phase I of the MGA trial which occurred in May through July of 2008.

For 2009, litigation related legal costs decreased by $33 million.

Additionally in the first quarter of 2009 we recorded $21 million in charges related to a legal settlement, for product liability related litigation.

The good news is going forward we expect legal fees related to recall related litigation to be relatively minor given the recent legal settlement for product liability related litigation, and as Bob said, and as you know, we're still in litigation with MGA and current legal costs associated with the case is being reviewed by the Court of Appeals.

In addition, we're also incurring legal fees for the next MGA trial, which could occur in 2010.

While we reduced expenses in 2009, we'll continue to make the appropriate level of investments in legal fees until legal matters are resolved, and if you look at Q1, legal costs are up $6 million in Q1 versus the prior year.

Thank you and great quarter.

Thanks.

Thanks, Hayley.

I'd like to thank everyone for participating on the call today.

There will be a replay of the call available beginning at eleven-thirty AM Eastern Time today.

The number for the replay is 706-645-9291 and the passcode is 61632801.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

You may now disconnect and have a wonderful day.