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Mattel, Inc. (NASDAQ:MAT)

Q3 2008 Earnings Call

October 20, 2008 8:00 am ET

Executives

Dianne Douglas – Senior Vice President Investor Relations

Bob Eckert - Chairman and Chief Executive Officer

Kevin Farr – Chief Financial Officer

Analysts

Sean McGowan – Needham

Linda Bolton Weiser – Caris

[Joe Lakey] – Wachovia

[Shashawna Pollack] – Barclays Capital

Drew Crum - Stifel Nicolaus

Robert Carroll – UBS

Greg Badishkanian – Citigroup

John Taylor – Arcadia

Operator

Welcome to the Mattel, Inc. third quarter 2008 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Dianne Douglas.

Dianne Douglas

As you know, this morning we reported Mattel’s third quarter 2008 financial results. In a few minutes Bob Eckert, Mattel’s Chairman and CEO and Kevin Farr, Mattel’s CFO will provide comments on the quarter and then the call will be open for your questions.

Certain statements made during the call may include forward looking statements about management’s expectations, strategic objectives, anticipated financial performance and other similar matters. Such forward looking statement may include statements regarding performance of our brands, productions, entertainment properties, DVD releases, toy sales, retail inventory levels, input cost pressures, effects of price increases, margins, foreign exchange gains and losses, retail expansion, impact of the global economic environment, investments, liquidity and mitigation of risk.

A variety of factors, many of which are beyond our control, affect the operations, performance, business strategy and results for Mattel and could cause actual results to differ materially from those projected in such forward looking statements. Some of these factors are described in our 2007 report on Form 10-K filed with the SEC and Mattel’s other filings made with the SEC from time to time, as well as in Mattel’s other public statements.

Mattel does not update forward looking statements and expressly disclaims any obligation to do so. Information required by Regulation G regarding non-GAAP financial measures is available on the investor and media section of our corporate website www.Mattel.com under subheadings Financial Information and Earnings Releases. Now I’d like to turn the call over to Bob.

Bob Eckert

Every year at this time some event arises that gives folks in the toy industry what I like to call the early fall jitters. While that may sound a bit trite, the events haven’t been. We’ve seen port strikes, terrorist attacks, potentially deadly epidemics, global product recalls and this year we’re experiencing what is likely the worst economic crisis of my generation.

As I said during past times of high anxiety, my bet is there will be a Christmas. Kids will get toys and we’ll sell more toys than anyone else. That’s not to make light of the concerns because they’re real. As you likely heard, retailers are reluctant to make inventory bets and it will be difficult for some of our customers and vendors to obtain the funds they need to buy inventory or raw materials. It will also be hard for parents whose job status and financial well being are uncertain. As we’ve done in the past we’ll need to adjust accordingly.

On the whole, the toy industry has held up well in tough economic times and Mattel has had solid performance in both good times and bad. For the quarter we experienced good top line growth as we saw improvement in our domestic Barbie business and also nice growth in several of our key core brands including core Fisher-Price and American Girl. Outside of Barbie our other girls businesses performed quite well with this being the fourth consecutive quarter of double digit growth led by High School Musical dolls.

Growth in our International markets is being fueled by developing markets including Eastern Europe, Latin America and Asia and our US business delivered improved revenue in the quarter. As we move into the all important holiday season Mattel and Fisher-Price toys are already topping must have holiday toy lists including Barbie’s Diamond Castle, Hot Wheels Trick Tracks, American Girl’s Bitty Twins, Fisher-Price’s Laugh & Learn toys and of course Elmo Live.

While I don’t always have the best track record in predicting the hot toy for the season when I stick with Elmo I do pretty well. Elmo Live went on sale last week and early results are encouraging and consistent with our high expectations. Although most online outlet and some stores quickly sold out of initial inventories most stores where toys are sold have Elmo Live available today which is a good thing for consumers doing early holiday shopping.

For Barbie this holiday Barbie is staring in her first Christmas movie, Barbie In A Christmas Carol which launches on November 4th. I’m excited about the DVD release for two reasons. One, about 50% of DVD sales during the holiday season are holiday themed and two, for the first time we featured the holiday doll as part of a bigger program by cross promoting the 2008 holiday doll with the release of a DVD.

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

We’re also excited about the opening of two new American Girl Boutique and Bistros in Boston and Minneapolis’ Mall of America on November 1st and 15th respectively. This format has worked quite well for us as the Dallas and Atlanta locations are performing nicely.

Lastly, Disney’s High School Musical 3 Senior Year opens in theaters this Friday. We’ve been very please with the performance of this Disney franchise and suspect it will be on top of girls wish lists for the holidays.

As I said, every holiday season since I arrived at Mattel there will be a Christmas and Mattel toys will be under the tree. That said I appreciate that some families may have to make choices this year when it comes to buying toys for their children. I’m convinced that Mattel, Fisher-Price, American Girl and Radica provide superior play value time and time again.

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

Kevin Farr

I’ll begin my review for the third quarter with a discussion of worldwide gross sales shown on exhibit two of today’s press release. Total worldwide gross sales for the quarter increased 5% including a two percentage point benefit from changes in foreign exchange rates. US sales grew 4% and International sales increased 7% including a six percentage point benefit from foreign exchange.

On a regional basis sales in Europe were up 2% including a five percentage point positive impact from exchange rates. Sales in Latin America were up 18% including a nine percentage point positive impact from foreign exchange. Sales in Asia/Pacific were down 2% including a one percentage point positive impact from changes in exchange rates.

I will now review our core categories and brands for the third quarter. Mattel Girls and Boys Brands, worldwide sales for the Mattel Girls and Boys Brands segment increased 6% including a four percentage point positive impact from changes in exchange rates. Worldwide Barbie sales were down 1% including a three percentage point positive impact from foreign exchange. Barbie sales in the US grew 3% while Barbie sales in international markets decreased 2% including a six percentage point benefit from foreign exchange.

On a worldwide basis declines in My Scene and Collector were partially offset by growth in our Fantasy business. Worldwide sales of other girl’s brands increased 26% including a three percentage point positive impact from exchange rates. Sales in the US were up 19% while International sales of other Girls brands were up 31% including a six percentage point positive impact from foreign exchange. The sales growth worldwide was once again driven primarily by High School Musical. The Disney Princesses business also continued to perform well.

Worldwide sales in the Wheels category which includes Hot Wheels, Speed Racer, Matchbox, and Tyco R/C increased 7% including a three percentage point positive impact from changes in currency exchange rates, due to solid performances across all brands in the US. The worldwide Wheels business excluding Speed Racer grew 2% including a three percentage point positive impact from foreign exchange.

Worldwide sales in our Entertainment business which includes games and puzzles increased 3% including a four percentage point positive impact from changes in foreign exchange. The growth in Entertainment was primarily attributable to Batman The Dark Knight which more than offset the decline in Cars a property that continues to demonstrate evergreen status at retail.

Fisher-Price brands worldwide sales for Fisher-Price brands increased 4% including a one percentage point positive impact and changes in currency exchange rates. On a regional basis International sales of Fisher-Price brands grew 6% including a three percentage point positive impact from foreign exchange. Sales in the US increased 3%. Worldwide sales for Fisher-Price increased 7% including a one percentage point benefit from changes in exchange rates. US sales for Fisher-Price core grew 3% while International sales were up 15% including a four percentage point benefit from foreign exchange.

Core Fisher-Price achieved all time record sales in the third quarter behind very strong demand for new toys like Bounce and Learn Smart Pony and Spike the Ultra Dinosaur. Fisher-Price brand sales declined 3% with zero impact from foreign exchange rates. Sales of Fisher-Price Friends in the US were up 4% while International sales were down 13% including a one percentage point benefit from foreign exchange.

On a worldwide basis Sesame Street was slightly ahead of last year. As you know, Elmo Live launched last week and the early signs at retail are very encouraging. Additionally, in the quarter Disney performed very well in the US. American Girl brands for the third consecutive quarter American Girl brand delivered sales growth up 11% this quarter driven by growth at our retail stores as well as catalog and internet. Growth in Historical characters was driven by strong sales of Kit Kittredge movie related product.

Before I provide my usual remarks on the P&L I’d like to discuss the impact of the global economic environment that everyone is currently facing. In this quarter bad debt expense increased $10 million versus last year as a result of certain customers facing financial difficulties. Additionally, we took a $4 million write down of a money market investment and reclassified the remaining $81 million to long term investments. We expect to receive the proceeds of this investment by the end of 2009 when the underlying securities will mature.

While no one is immune from the effects of the credit market crisis Mattel’s direct exposure is very limited. We have ample liquidity to fund our business needs including beginning of the year cash, cash flow from operations and access to our $1.3 billion credit facility. Now let’s review the P&L which is shown on exhibit one.

As a reminder in the 2007 third quarter we had $39.8 million of pre-tax recall expenses which primarily impacted net sales and cost of sales. Our gross margin in this years third quarter was 46.2% which compared to last years margin of 47%. The benefit of this years mid to high single digit price increase and a lower recall related costs were not enough to offset cost pressures from commodities, Chinese labor rates, the appreciating Chinese currency and incremental product testing costs. Given the continuing cost pressures it’s likely we’ll raise prices for 2009.

Advertising expense was $223.8 million or 11.5% of net sales consistent with last year. Selling, general and administrative expenses increased about $18 million to approximately $361 million as a percentage of net sales SG&A expense were 18.5% compared to 18.6% last year. The increase in SG&A expenses is primarily due to higher bad debt expense of $10 million and the impact of foreign exchange.

MGA and recall related litigation expenses are essentially flat with last year. Equity compensation expense increased from $7 million in last years third quarter to $11.7 million this year but was offset by a reduction in other employee related expenses. Operating income during the quarter was $315.3 million compared to operating income of $310.5 million last year as higher sales were partially offset by cost pressures and higher SG&A.

Interest expense was $20.4 million versus $16.4 million in 2007. The increase in interest expense versus last year is due to higher average borrowings partially offset by lower average interest rates. Interest income was $6 million versus $6.2 million last year primarily due to lower average interest rates partially offset by a higher average cash balances due in the quarter.

Other non-operating income net was $6.2 million versus income of $7.4 million in 2007. The current year income relates primarily to foreign currency exchange gains but was partially offset by investment impairment of $4 million. Income tax provision of $69 million compared to prior years expense of $70.9 million. The year to date effective tax rate is 22.5%. Overall we reported net income of $238.1 million or $0.66 per share versus last year’s net income of $236.8 million or $0.61 per share.

To summarize the P&L strong performances from Batman, core Fisher-Price, High School Musical and American Girl as well as the benefit of foreign exchange contributed to our top line growth. Margins were negatively impacted by cost pressures and higher SG&A expenses but partly aided by price increases, lower recall related costs and foreign exchange.

Now turning to the cash flow and balance sheet, cash flow used for operations for the quarter was $667 million driven primarily by the use of cash for seasonal working capital requirements. Cash on hand at the end of the quarter was $447 million up from $277 million in the prior year primarily due to lower share repurchases compared to 2007.

We completed $40 million of share repurchase in the quarter retiring 2.2 million shares at an average price of $18.45. As of September 30th our basic share count was $359 million and we had $420 million remaining on our share repurchase authorization. Receivables were $1.713 billion or 79 days of sales outstanding down one day versus last year. Factory decreased from $132 million a year ago to $83 million, prior to factoring days of sales outstanding decreased four days.

Inventories at $751 million were up $19 million or 3% versus 2007 and represented 55 days of supply which is seven days lower than last year. Our total balance sheet debt increased by $474 million from the prior year primarily due to higher net debt position entering the year after the large deployment of excess capital in the second half of 2007. Our debt to total capital ratio ended the quarter at 37% which is compared to 29% in last years third quarter. Capital expenditures were approximately $58 million up from last years $40 million.

To summarize, we experienced revenue growth in the quarter due to the continued strong performances in Batman, core Fisher-Price, High School Musical and American Girl as well as the benefit of foreign exchange. Input cost pressures and the higher SG&A expenses continued to hamper margins partially offset by price increases and lower recall related costs.

As we enter the all important fourth quarter we remain focused on executing our business and partnering with our customers and vendors to mitigate risk and position Mattel for a successful holiday season. That concludes my review of the financial results now we’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sean McGowan – Needham.

Sean McGowan – Needham

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

Bob Eckert

No, I think in this environment everybody is tightly managing inventories. Certainly our retail customers are and we are as well. As always, we’re just trying to match supply with demand.

Sean McGowan – Needham

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

Kevin Farr

We can’t predict currency for 2008 or 2009 but Euro average is about $1.52 for the first nine months of 2008 compared to about $1.34 for 2007. In the fourth quarter 2007 the Euro averaged about $1.45 and averaged $1.37 for full year 2007. Looking at last Friday the Euro stock rate was at $1.34. I think if you compare it to the average of last year’s $1.44 it’s going to depend with regard to FX in the fourth quarter of 2008 whether the actual average exchange rates are higher or lower than the fourth quarter 2007 average exchange rates.

Sean McGowan – Needham

Any comment on taking advantage of the stock price and then stepping up the stock buy back in the fourth quarter?

Bob Eckert

All capital deployment decisions ultimately reside with the Board. I think I’d defer to them.

Kevin Farr

In the quarter we repurchased about $40.1 million or 2.2 million shares the average price was $18.45. At the end of the quarter we have approximately $420.4 million remaining on our authorization and as you know we generally don’t comment on the timing of prospective share repurchases. Bob indicated that is a Board level decision. Over time we’ll continue to execute our capital investment framework and be disciplined opportunistic as we deploy capital.

As you know last year we spend over $800 million on repurchases all in the second half and since we implemented the capital investment framework in 2003 we’ve repurchased over $2 billion of stocks so I think as you look out over the future you can expect us again to be executing within the capital investment framework.

Sean McGowan – Needham

If your looking out we’ve seen oil practically crash, it’s got to help transportation costs. At what point do you think you begin to see some of the benefits of some lower costs.

Kevin Farr

As we use oil prices as a proxy our key input costs have actually its own supply and demand so present prices do not always move immediately oil. We set our prices early this year while oil prices have recently declined these moves were subsequent to buying commodities for fall product lines. I think we should see a benefit next year if resin prices recede due to lower oil costs.

Operator

Your next question comes from Linda Bolton Weiser – Caris.

Linda Bolton Weiser – Caris

I was wondering if you could repeat the item about the write off or whatever it was, I believe it was $4 million. Could you explain that one more time? Also, in the other income expense line it looked like that was more favorable than we had expected. Was there something unusual in that line?

Kevin Farr

First let me give you a response to the write off for the $4 million impairment charge. Mattel has an $85 million investment in the Reserve International Liquidity Fund. We’re not currently able to liquidate this investment because the Reserve Fund halted redemption requests in approximately mid September. We reviewed the September 30, 2008, investment portfolio Reserve Fund and determined that the only counter party at issue was Lehman as a result a $4 million impairment charge is recognized in the third quarter.

The remaining counter parties have an A+ or better rating and mostly A1 and P1 short term ratings. The securities are mainly CD, CP, and floating rate demand notes insured by early 2009. Some maturity dates for a minor portion other line investments with Reserve Fund exceed one year. Under generally accepted accounting principles we’re required to classify this asset as a non-current asset.

With regard to your other question on non-operating income, for the third quarter 2008 non-operating income related primarily to foreign currency exchange gains in the Latin American subsidiary which was partially offset by investment impairment charge of $4 million that I discussed in my script. In 2007 non-operating income related to foreign exchange gains in the same Latin American subsidiary.

Linda Bolton Weiser – Caris

Can I ask you about gross margin performance, you did have a recall related items affecting the gross margin performance in the third quarter ’07 and I think if you excluded that I think your gross margin was down about 150 basis points year over year. That was really almost as bad as the decline in the second quarter even though you had a lot more benefit from price increases. I would like to understand that better.

Did you achieve the pricing that you expected to achieve and also maybe you could give some insight into how your cost comparison will be in the fourth quarter? How are costs in the fourth quarter of ’07 compared with the cost situation in third quarter ’07?

Bob Eckert

Regarding the last part as you know we don’t go into forward looking discussions but in general I’ll tell you our costs have risen quite a bit this year as well so we did affect the price increase that we had planned. Costs have gone up higher than planned as it relates to both key commodities, transportation, the Chinese currency and labor rates throughout Asia. In general while we had effective pricing clearly with the benefit of hindsight now our costs went up even faster. As we’re looking out into the future it’s likely we’ll continue to chase costs with further price increases.

Linda Bolton Weiser – Caris

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

Bob Eckert

Certainly the credit crisis is having an impact on the supply chain whether you look at some of our vendors, some of our retail customers or I suspect some of our competitors. Fortunately we have sufficient resources to get us through any storm like this and we’re doing well on that front. I’d rather be in the position right now being a large company with ample resources than being someone that doesn’t have access to the markets that we do.

Operator

Your next question comes from [Joe Lakey] – Wachovia.

[Joe Lakey] – Wachovia

I wanted to get an update on US global channel inventories as of the end of the third quarter, specifically if you could comment on European inventories.

Bob Eckert

In general our sell in and sell through are well aligned right now. Both are up in the low single digits, if you look at the US basis. You’ll recall that we started the year with higher retail inventories compared to prior year I think they were up about 10% or 15%. That’s all been worked off. Related to your specific question in Europe the data isn’t quite as good as it is here in the US.

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

[Joe Lakey] – Wachovia

Wondering if you guys could comment as well on retail sell through, in the end of September, early October here given concerns in the credit environment and consumer pull back overall. Do you have any comments as far as how you’ve seen trends just specifically end of September, early October?

Bob Eckert

No, we don’t’ want to comment on trends within the fourth quarter as we’re now into the fourth quarter. I’ll again just reiterate that if you look at the first three quarters of the year we’re very well balanced between what we’re selling into retailers and what they’re selling to consumers.

[Joe Lakey] – Wachovia

Did you guys have any negative impact on your borrowing costs here given the tightening in the Commercial Paper market? How is your access at this point to that market?

Kevin Farr

So far through the end of the third quarter we didn’t have any impact from higher borrowing costs. We were able to access our revolver. I think our average borrowing costs was a little over 3%.

[Joe Lakey] – Wachovia

If you could give some update on the third quarter legal spending and any outlook on the MGA and recall class actions.

Kevin Farr

I’ll give you an update on legal expenses for the quarter. As we said in January this year we are expecting incur sizeable legal costs this year. We got a lot of litigation around the world on things related to product recalls as well as the MGA case. As I said our legal costs in the third quarter were comparable with last years third quarter. About two thirds of those costs related to MGA trial, the balance relates to recall related litigation. For the MGA case which is representing the largest piece of our litigation spending so far this year costs have receded as the trial wrapped up in the summer.

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

Operator

Your next question comes from [Shashawna Pollack] – Barclays Capital.

[Shashawna Pollack] – Barclays Capital

You talked about retailers being more cautious in International markets are there any other trends that you’re seeing in International markets that are different from previous quarters and years?

Bob Eckert

Generally we’re seeing the more mature markets like Western Europe in a situation similar to North America. All of the growth we’re seeing right now internationally is in the most emerging markets of Latin America and Eastern Europe and Asia.

[Shashawna Pollack] – Barclays Capital

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

Bob Eckert

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

[Shashawna Pollack] – Barclays Capital

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

Bob Eckert

No.

Operator

Your next question comes from Drew Crum - Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

I wonder if you could comment on your outlook for product testing given the passage of the Federal legislation there are some other items percolating at the State level and several retailers have discussed doing their own testing standards. I was wondering if you could comment on that. Secondly, some thoughts on the Barbie Diamond Castle property how that’s done at retail, the DVD has not done as well as some of the others in the past. Finally, if you could just comment on the performance of the Asian market in the quarter?

Bob Eckert

We don’t see anything particularly unusual coming at us from the testing protocol standpoint. As you know we’ve been doing a lot of these tests and the industry has. The regulations are now clear and tighter and they will be changing over time. I wouldn’t say there’s anything particularly new as it relates to testing costs. As it relates to your question on Barbie, in general the doll or the fashion doll categories have been pretty sluggish for the first three quarters despite the fact that we’ve seen really good incremental volume from Disney Princesses and Hannah Montana and now High School Musical.

I think Webkinz is impacting the doll business. I also think Nintendo’s Wii is, it’s really the first game system with girl appeal and I think that’s had an impact on the category. That said, we did see growth in the US for Barbie in the quarter and it was driven by the younger fantasy segment led by Diamond Castle which partially offset declines in collection and reality products such as last years MP3 player that sold for $55 or $60.

We are cautious however about the early success of Diamond Castle because it was launched a week earlier than last year’s Island Princess but everything I’ve seen says the DVD is selling quite well and the dolls are selling well. While we’re encouraged by the domestic Barbie sales growth we obviously still have work to do. We’ll be sharing more about our future plans with everyone early next year.

In the meantime for this holiday we’re adding some magic to the Barbie holiday doll by pairing it with a classic holiday entertainment property Barbie In A Christmas Carol. The DVD on that one launches November 4th I believe it is and we cross promote the doll who appears in the movie. On shelf that doll looks terrific

Kevin Farr

With regard to Asia/Pacific our Asia/Pacific region was down 2% actual dollars down 3% local currency. If you look at continental Asia that growth was offset by lower sales in Australia.

Operator

Your next question comes from Robert Carroll – UBS.

Robert Carroll - UBS

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

Bob Eckert

No, we didn’t really see anything unusual. It’s that time of year where retailers mix and match and some are doing better or feeling better than others but I wouldn’t say overall that there was anything particularly unusual.

Robert Carroll - UBS

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

Bob Eckert

In general we’ll have a lighter entertainment category in 2009. Batman is an evergreen property, will continue to do well. Cars has been nothing short of phenomenal. If you just look at the overall sales Cars has done even better than Batman. Cars isn’t as big as Cars was a year or two ago when we had the entertainment but that’s an evergreen property for us. I think in general you’ll see 2009 be a little bit light for us, 2010 will be stronger as we introduce things like the WWE line.

Robert Carroll - UBS

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

Bob Eckert

We continue to execute against a capital investment framework that I believe the Board approved in 2002 or perhaps it’s 2003. In general we like the end of the year with a cash balance of about $800 million to $1 billion. I believe last year it was right around $900 million.

Kevin Farr

Correct.

Operator

Your next question comes from Greg Badishkanian – Citigroup.

Greg Badishkanian – Citigroup

How do you feel about the low single digit retail sales growth US and Internationally I think that’s what you mentioned compares to the industry are you taking a little share with that?

Bob Eckert

It’s always hard to tell at this time of year. The NPD data suggests I think we have that through August that in fact we’re not gaining share and they would show our sales declining at retail. We get the data, obviously from our large customers which show that our sales are increasing. I don’t have any reason to believe either way that anything is particularly unusual for us either good or bad. Kevin do you?

Kevin Farr

No.

Greg Badishkanian – Citigroup

You had mentioned in the press release that you had some of the hottest toys in the marketplace and Elmo Live was something you talked about. Are there any other stand out products and how do you think that retailers are responding to your products this year versus last year are they much more innovative or just similar level this year as last year?

Bob Eckert

I always encourage people to talk directly to retailers but I happened to be in stores this weekend and I think the toy departments look very good. I did see some Elmo Live’s out there. No every store had Elmo Live but it displays really well. The other toy that I think is incredibly innovative in merchandising is Spike the Ultra Dinosaur from Fisher-Price. That has got the best merchandising piece that I’ve ever seen in the toy business. It’s really quite impressive. Our competitors have good toys as well.

At this time of year we all get anxious about the toy business and will there be a holiday and will kids get toys but I’m sure this year will work out like all the other years and retailers will do fine.

Operator

Your next question comes from John Taylor – Arcadia.

John Taylor – Arcadia

I was wondering if you could talk at all about the macro outlook in China. Somebody just, I forget the name of it, one of the big toy factories just filed for bankruptcy and so on and I’m wondering what you’re hearing as it relates to capacity related to toy production maybe for next year and talk about the broader implications of commodity prices coming down. Shawn kind of got at this a little bit I wonder if you could expand on what all this might mean for margin next year.

Bob Eckert

It’s tight, the supply chain is tighter than any other time I’ve seen it. Certainly we have some vendors who are under pressure either because their costs are rising so quickly with the currency that they use or the labor costs that they have or labor availability. In general it’s been tight. A number of smaller vendors have left the business, there were news reports of half the toy vendors leaving the toy business but they tend to be particularly small ones.

The name of the outfit you’re thinking about is Smart Union that did fold last week, I believe it was. They are a vendor of ours, they do about 1% of our overall business and I think that’s just indicative of the fact that it’s tight in the supply chain. I don’t see it getting looser next year. I think it will continue to be tight, there’s a lot of testing, there’s a lot of competition for labor in southern China. Commodity costs it’s interesting to see the barrel oil headlines but we haven’t seen our costs come down.

Kevin Farr

I think there’s a variety of moving parts in our costs including resins, labor, currency, and the changing vendor landscape that you just talked about and testing costs related to complying with new regulatory requirements. Over last year we experienced a lot of volatility in virtually all of our input costs. We’re not going to get to the detail of our cost assumption but we are pricing for the new reality in our costs and over the long term our goal is to improve margins and given the continuing overall cost pressures it’s likely we’re going to raise prices in 2009.

John Taylor – Arcadia

To follow up on questions about inventory, everybody’s managing things a little bit tight. If Christmas does come this year what’s a likelihood that there are going to be a substantial spot outs on stores shelves and so on. Who’s going to have something in their back pocket to restock at the last minute?

Bob Eckert

I think it’s going to vary by retailer. I think some retailers are running quite lean. Other retailers have demonstrated over the past year or two that they’ll have the inventory at the end of the year. They’re buying today as if they’ll have the inventory at the end of the year and they won’t have to give toys away at the end of the year if they’re the only ones left standing. My sense is there’s going to be a number of hot properties out there not just our properties but our competitors have some good ones as well. Some retailers are going to make the bet and my sense it they’ll probably do pretty well.

Operator

Your next question comes from Linda Bolton Weiser – Caris.

Linda Bolton Weiser – Caris

I know you guys through your research on children and their behavior and development you guys are real experts on children’s behavior but what can you tell us about your research on parents buying behavior in different economic type conditions. Have you done research, will parents tend to buy the same number of items for under the tree but maybe reduce the average price point of items they’re buying? Is there something you can tell us about the buying behavior in a recessionary type economy?

Bob Eckert

Two things, first I would start with the historical facts are behavior has held up pretty well. The toy industry in general has done pretty well, relative to other industries in tough economic times. We do talk to a lot of parents as well as kids. Generally speaking they’ve always got room for one or really important things that they’re planning to buy some of which will be for the entire family.

They’ll also buy a lot of toys and sometimes in some families clearly they’ll buy more lower price toys and at other times. So far this year we haven’t seen a dramatic shift as we looked at sales by price point. Again, it’s early in the year and we haven’t really seen the holiday season yet. We haven’t seen a fundamental shift in toy consumption by price point.

Operator

We have no further questions on our roster. Therefore Ms. Douglas I’ll turn the conference back over to you for any closing remarks.

Dianne Douglas

There will be a replay of this call available beginning at 11:30am EST today. Thank you for participating.

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Source: Mattel, Inc. Q3 2008 Earnings Call Transcript
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