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Executives

Dianne Douglas – Senior Vice President Investor Relations

Bob Eckert - Chairman and Chief Executive Officer

Kevin Farr – Chief Financial Officer

Analysts

Felicia Hendrix - Barclays Capital

Gerrick Johnson - BMO Capital Markets

Sean McGowan - Needham & Company

Margaret Whitfield - Sterne, Agee & Leach

Drew Crum - Stifel Nicolaus & Company, Inc.

Greg Badishkanian - Citigroup

Timothy Conder - Wells Fargo

Robert Carroll - UBS

Linda Weiser - Caris & Company

Tim [Gehring] – Pzena Investment Management

John Taylor – Arcadia Investment Corporation

Mattel, Inc. (MAT) Q1 2009 Earnings Call April 17, 2009 8:30 AM ET

Operator

Welcome to the Mattel, Inc. first quarter 2009 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Dianne Douglas. Please go ahead, ma'am.

Dianne Douglas

Good morning. As you know, this morning we reported Mattel's first quarter 2009 financial results. In a few minutes, Bob Eckert, Mattel's Chairman and CEO and Kevin Farr, Mattel's CFO, will provide comments on the results and then the call will be opened for your questions.

Certain statements Bob and Kevin make during the call may include forward-looking statements related to the future performance of our overall business, brands and product lines. These statements are based on currently available operating, financial, economic and competitive information and they are subject to a number of significant risks and uncertainties which could cause our actual results to differ materially from those projected in the forward-looking statements.

We describe some of these uncertainties in the Risk Factors section of our 2008 Annual Report on Form 10K as well as in our 2009 quarterly reports on form 10Q 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, www.Mattel.com under the subheading Financial Information and Earnings Releases.

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

Bob Eckert

Thank you Dianne and good morning everyone. Our first quarter results were as expected as we continue to weather the economic storm. That said, there were some bright spots with domestic Barbie sales up double digits and our share of U.S. toys continues to be above a year ago. We are experiencing solid POS performance and both our inventories and retailers inventories are declining.

We also reported a positive trend in the gross margin line and we are making progress in controlling costs. Still, we are operating in a sea of challenging economic news with March marking the sixth consecutive month of lower same store retail sales though many retailers pointed to the late Easter as part of the decline.

While there are pockets of optimism with some reports of consumer confidence improving and new claims for unemployment benefits tempering, a lot needs to happen between now and the all important holiday season. Earlier this week our annual report to shareholders was posted on our website for shareholders and other stakeholders. Every year you have come to expect a theme or word to drive the year. This year’s call to action is deliver which I shared with employees worldwide at the start of the year.

As I said in my letter to shareholders, companies that deliver improved execution during the tough times will be the ones best positioned to capitalize on the economic turnaround which will most certainly occur. To be successful in 2009 we need to deliver on improving execution across the supply chain and throughout the company by realigning our infrastructure, trimming the number of SKU’s we are developing and reducing capital spending by doing only business critical projects and doing them exceptionally well.

We also need to continue doing what we do best, bringing magic to the lives of children through innovative new play experiences as well as through the revitalization of our classic and time-honored brands. The success we experienced this quarter domestically with Barbie is a great example of this winning formula. It would have been pretty hard not to have heard that the world’s best selling doll of all time was celebrating a birthday. As David Letterman put it, “How do we know this?”

We know this because Barbie was everywhere with more than 8.6 billion media impressions worldwide. She was on TV, the Web at retail, on the news stand and even the catwalk. She has her own Facebook page with more than 90,000 friends. She is tweeting on Twitter, she is blogging, and she was the belle of New York Fashion Week. She had a birthday bash in her very own Malibu dream house and parties in Paris, Argentina, India, Italy, Japan, Brazil, Columbia and Toronto to name a few.

She opened her first retail store in Shanghai and boasted Barbie Boutiques in Bloomingdales, New York, Fred Segel in Santa Monica and Coed in Paris. While it was an exciting month of celebration and some incredible groundwork was laid now the hard work begins translating the passion and energy from the 50th celebrations to sustainable worldwide performance for the brand. I am confident we have the right team in place and that we have the right dolls, promotions and partnerships to continue the celebration throughout the year.

While we experienced growth domestically in some of our key brands like Barbie, Hot Wheels and Fisher-Price Friends, we have work to do in international markets and with other key properties. The first quarter is just that, the first of four quarters culminating in the key holiday selling season.

Moving forward our challenge is clear as is our goal; to deliver improved execution and great toys and we aim to do just that.

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

Kevin Farr

Thank you Bob. Good morning everyone. I will begin my review for the first quarter with a discussion of worldwide gross sales shown on Exhibit 2 of today’s press release. Total worldwide gross sales for the quarter were down 15% including a 7 percentage point negative impact from changes in exchange rates. U.S. sales were down 6% and international sales were down 23% including a 13 percentage point negative impact from foreign exchange.

On a regional basis, sales in Europe were down 26% including a 12 percentage point negative impact from exchange rates. Sales in Latin America were down 21% including a 17 percentage point negative impact from foreign exchange. Sales in Asia Pacific were down 15% including a 13 percentage point negative impact from change in exchange rates.

I will now review our core business and brands for the first quarter. Mattel Girls and Boys brands: Worldwide sales for the Mattel Boys and Girls brands segment were down 15% including a 9 percentage point negative impact from exchange rates. Worldwide Barbie sales were down 5% compared to last year including a 10 percentage point negative impact from foreign exchange. Barbie sales in the international markets decreased 15% but were essentially flat excluding the impact from foreign exchange. Barbie sales in the U.S. were up 18%. Barbie’s growth in the U.S. was driven primarily by both core lines and products supporting Barbie’s 50th anniversary.

Worldwide sales of other Girls brands were down 27% including a 9 percentage point negative impact from exchange rates. International sales of other Girls brands were down 33% including a 13 percentage point negative impact from foreign exchange and sales in the U.S. were down 14%. The growth in Disney Princess and Little Mommy was not enough to offset declines in Polly Pocket and High School Musical. Worldwide sales in Wheels decreased 14% including a 7 percentage point negative impact from changes in the currency exchange rates. The worldwide decrease was driven primarily by sales declines in last year’s Speed Racer property. To remind you, our Speed Racer sales last year were reported in both Wheels and Entertainment depending upon the type of product.

Core Hot Wheels which does not include Speed Racer declined 3% worldwide including a 10 percentage point negative impact from foreign exchange. Core Hot Wheels sales increased double digits in the U.S. and were up low single digits internationally excluding the impact of foreign exchange. Worldwide sales of our Entertainment business which includes games and puzzles were down 21% including a 9 percentage point negative impact from changes in foreign exchange. The overall Entertainment business decline was driven primarily by lower sales of our Cars Entertainment Property internationally and last year’s Speed Racer property. Our games business performed relatively well in the U.S. but declined internationally.

Fisher-Price Brands: Worldwide sales for Fisher-Price brands were down 17% including a 5 percentage point negative impact from changes in the currency exchange rates. On a regional basis, international sales of Fisher-Price brand sales decreased 25% including a 12 percentage point negative impact from foreign exchange while sales in the U.S. declined 10%. Worldwide core Fisher-Price was down 17% including a 6 percentage point negative impact from changes in exchange rates. International sales were down 26% including a 12 percentage point negative impact from foreign exchange and U.S. sales at Fisher-Price core were down 9%. Fisher-Price Friends worldwide sales declined 7% including a 5 percentage point negative impact from foreign exchange rates. International sales were down 20% including a 9 percentage point negative impact from foreign exchange while sales of Fisher-Price Friends in the U.S. grew 5% due to strength in Disney products.

American Girl Brands: Sales of American Girl brands were down 4% primarily due to lower sales from the direct channel business as Easter shifted from the first quarter last year to the second quarter this year. Our retail channel sales increased due to the November openings of our two new stores in Boston and Minneapolis.

Now let’s review the P&L which is shown on Exhibit 1. Gross margin was 44% compared to 43.2% last year. The improvement was primarily due to price increases which were effective January 1 that helped mitigate cost pressures from commodities and foreign exchange. Advertising expense was $84.1 million or 10.7% of net sales compared to $103 million or 11.2% of net sales in 2008. Selling, general and administrative expenses decreased approximately $13.3 million to $317 million. As a percentage of net sales SG&A expenses were 44.4% compared to 35.9% last year.

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

Operating loss during the quarter was $55.2 million compared to a loss of $36.5 million last year. The increase in the loss was primarily due to lower sales and a legal settlement reserve partially offset by gross margin improvement, lower advertising and lower SG&A expenses.

Interest expense of $15.9 million was essentially flat versus 2008 as higher average borrowings were offset by lower average interest rates. Interest income was $3.5 million versus $8.5 million last year. The lower interest income was due to lower average investment rates as well as lower average invested cash balances during the quarter.

Other non-operating income of $2.1 million versus expense of $15.8 million in 2008. The current year income relates primarily to foreign currency exchange gains versus foreign currency losses last year. Income taxes provided a benefit of $14.5 million which translates to an effective rate of 22.1% compared to prior year’s benefit of $13.2 million.

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

Now turning to the cash flow and balance sheet. Cash used for operations for the quarter was $215 million compared to $264 million 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 $404.9 million, down $220 million from prior-year first quarter primarily due to lower beginning cash balances of $618 million this year versus $901 million last year.

Receivables were $563 million or 65 day sales outstanding, six days lower than last year. Factoring increase from $86 million to $101 million. Prior to factoring days of sales outstanding decreased four days. Inventories at $487.9 million were down $46.3 million or 9% versus 2008. In light of the uncertain global economic environment we are no longer providing days of supply information.

Our total balance sheet debt decreased by $10 million from the prior year. Our debt to total capital ratio ended the quarter at 30.5% versus 28% in last year’s first quarter. Capital expenditures were $20 million, down from last year’s $33 million.

So, to summarize, as Bob mentioned this quarter’s results met our expectations. We expected top line challenges from softness at retail, foreign exchange headwinds and an entertainment light year. Despite the top line pressure we have made progress with aligning our prices and input costs, executing our global cost leadership program and tightly managing our cash and capital expenditures.

That completes my review of the financial results. Now we would like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Felicia Hendrix - Barclays Capital.

Felicia Hendrix - Barclays Capital

Kevin, I was just wondering on the gross margin side I was wondering if you could just talk us through the main drivers of the decline. Was it just mainly costs that you have talked about before or are there other drivers such as mix?

Kevin Farr

I will take you through the increase in gross margin. First quarter gross margin improved 80 basis points to 44% compared to last year’s first quarter of 43.2%. The pricing increase we took effective January 1 helped to mitigate cost pressures from commodity and foreign exchange but as you mentioned gross margin was also positively impacted by mix and others so that summarizes those main drivers.

Felicia Hendrix - Barclays Capital

On your inventories was there any FX impact there?

Kevin Farr

No. Really our inventories are dollar based, upon dollar based input costs so there is not much of an impact from foreign exchange.

Felicia Hendrix - Barclays Capital

Can you just walk us through a little bit more and help us understand why you are not providing days of supply even though I think we can get that ourselves?

Kevin Farr

I think it really relates to we don’t really have good transparency into the economic environment. As we look at inventories and are doing days of supplies it is very forward looking and was based upon what we thought would happen in the next quarter. We don’t have good visibility to that so we are not providing that information.

Felicia Hendrix - Barclays Capital

Bob, you are going to love this question. I was wondering how Easter was and I’m wondering if you are seeing any improvement at retail since the quarter and a lot of people are talking about bottoming and I’m wondering if you are seeing actual improvement?

Bob Eckert

We have. If we look at year-to-date point of sales through last week, so Easter is in both years really not the quarter end it is quarter end plus a week or so because of Easter. Our point of sale is up in the low to mid single digits. All of our core brands including Barbie and Hot Wheels and core Fisher-Price have been growing at retail and so the retail inventories as we calculate them are not below year-ago and you will recall we started the year with retail inventories up a bit over prior-year so it is pretty clear those stocks are being well worked off.

In general, what we saw was good POS performance up until the end of the quarter when we started having the Easter year-ago comparisons and then once that cycled through and we looked at the beginning of the second quarter we saw the POS rebound back to where it was growing again on a year-to-date basis.

Felicia Hendrix - Barclays Capital

Thanks for that color. I kind of started out thinking you weren’t going to answer that. You surprised me.

Operator

The next question comes from Gerrick Johnson - BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets

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

Bob Eckert

I think all of us in the supply chain whether it is retailers or manufacturers like us or probably even those who make a lot of the goods and run a lot of toy plants are planning conservatively as it relates to sales this year. Clearly the industry took a hit in the fourth quarter of last year for the Christmas season. The toy business here in the U.S. was down about 5% which at the time I thought was a big deal until I heard about a bunch of other categories after Christmas. So I think it shows up.

If you look at our POS growing and retailer inventories down, our inventories down we don’t have visibility into some of the manufacturing plants but I am sure their inventories are down. I think that is indicative we would rather chase demand this year if it shows up than get ahead of ourselves and build extra inventory across the supply chain.

Gerrick Johnson - BMO Capital Markets

You mentioned inventories. I was wondering, last year at this time you were building up some early inventory for movie related tie ins. So excluding those entertainment properties what is your sort of like-for-like comparison there on inventory?

Bob Eckert

It is pretty good. If we just look across the core brands our inventories have come down in most of the core brands. We clearly have backed up stuff like Speed Racer out of Hot Wheels and if you looked at Hot Wheels the inventories are down and those sorts of things. I think the general conclusion that retail inventories are coming down is accurate. Clearly we are not building as much movie related property inventory as we were in the prior year but it is more than that.

Gerrick Johnson - BMO Capital Markets

One last thing on Barbie, I know there is a lot of stuff going on there in terms of shipments. Last year you ended the holiday 2007 pretty heavy and that was being worked down in the first quarter of 2008 and then this quarter you had some big shipments for some special promotions and feature shops. I was wondering how is the POS data looking on Barbie?

Bob Eckert

It was a strong quarter for Barbie. Sales were up. Our shipments were up really in response to double digit POS growth here in the U.S. I think it is a combination of a couple of key factors. First is obviously the 50th birthday celebration. There was a lot of buzz. We had terrific retailer support. We had things like the Then and Now promotion where we featured the new interpretation of the 1959 doll. But also important the core doll performance improved.

An example there I think is the Ike and Bea segment which encourages girls to try on different personalities and explore the world and different possibilities. That is selling well. I think the third thing is competitively Barbie is gaining momentum. Barbie is gaining share in dolls and she continues to gain share even when we measure Barbie against the total toy universe.

So my view of this is other properties come and go and I’m sure there will be more properties that come and go but Barbie is the best selling brand in the history of toys and I don’t see that changing.

Operator

The next question comes from Sean McGowan - Needham & Company.

Sean McGowan - Needham & Company

Kevin can you give us a sense on the cash balances how much of that is in the U.S. versus off shore?

Kevin Farr

I think with regard to cash balances off shore a substantial balance of the cash balance is off shore and as you know as a global company Mattel generates cash all around the world. Our cash management strategy related to cash balances, working capital, funding and capital deployment considers a number of factors including interest rates, exchange rates, and tax implications.

We do have the ability to access off shore cash and use it when and where we need it, potentially subject to taxation. Our goal is to balance these factors in order to optimize the returns on the utilization of cash.

Sean McGowan - Needham & Company

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

Bob Eckert

I wouldn’t want to get specific to any retailer but I think broadly speaking this environment favors number one brands. As people rationalize their inventories and their business just as we rationalize our inventory and our business end up focusing on the cores and like in so many other categories the top 20-30% of our SKU’s does 80% of your business whether it is our business or a retailers business. If somebody is going to focus on the top 20-30% of its SKU’s the odds are we are going to have our fair share or in fact more of those than most.

Sean McGowan - Needham & Company

Kevin, that $21 million profit liability set aside there can you talk about that a little bit more and specifically say whether or not that was kind of expected? Was that something you kind of expected to have in the quarter going into the quarter? Finally, what should I be looking for a full year tax rate? Is that still around 22-22.5%?

Bob Eckert

Let me do the first one, since I am probably more familiar with the recall litigation and Kevin is obviously more familiar with the taxes. As Kevin said, the charge was for a legal settlement reserve related to the product liability litigations.

There are several cases here with a variety of jurisdictions all over the world but we have had some discussions with some of the plaintiffs which have reached a point where the accounting rules have required us to establish a reserve. These cases are not yet settled and there is no guarantee they will be but we believe we are taking the right steps to resolve them.

We don’t give guidance, so I don’t want to get into what the costs might be in the future. But the fact is we have been working on trying to resolve these cases and we have made enough progress that it is time to set up the financial reserve for it.

Sean McGowan - Needham & Company

I know you wouldn’t want to give guidance especially it would be difficult to predict something like this but would it be fair to characterize that as payments that you are probably going to have to make anyway and you are recognizing the expense now?

Bob Eckert

No, I don’t think it goes that way. Maybe Kevin you are better at the accounting FASB5 or whatever in here?

Kevin Farr

We are looking at the cost of settling versus the cost of litigating at this point. We have had discussions with, as Bob said some of the plaintiffs’ attorneys and we think a settlement is probably the way we are going to go. We don’t know that for sure.

Sean McGowan - Needham & Company

That’s what I mean. If you were going to settle you would have had some expense down the road. You are just taking some portion of that now?

Kevin Farr

Yes, so we are accruing what we think that potential settlement is and if we in fact do settle then those costs will be expenses that we will incur over the period that the settlement pay outs are required.

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

Operator

The next question comes from Margaret Whitfield - Sterne, Agee & Leach.

Margaret Whitfield - Sterne, Agee & Leach

Bob, how do you keep the momentum going for Barbie? How did Thumbelina perform? Can you grow any market share gain that Barbie made overall in the fashion doll segment?

Bob Eckert

Let me start with Thumbelina. Thumbelina is doing fine but Thumbelina isn’t performing as well as Mariposa did in the prior year which was quite impressive. Broadly across the product line as in all of our brands some of the segments do better than others but most of the segments in Barbie are doing well. We continue the momentum with what looks to be, to me and to some of our customers, a really strong product line for the fall. We have got terrific promotion plans in place with our key customers. I think they recognize we have regained momentum in the doll business and they are treating Barbie accordingly.

Obviously it is early and we don’t like to get ahead of ourselves [inaudible] but I think a lot of you have been exposed to where we are on Barbie and what we are doing with the products and with the positioning of the brand and we have got some energy behind it. Now it is our job to capitalize on that.

Margaret Whitfield - Sterne, Agee & Leach

And the share, can you quantify the pick up?

Bob Eckert

I won’t because that is a pretty small segment. I will just tell you that if you look at that small sort of NPD defined thing of either fashion dolls or dolls it is a sizeable share gain. Among the best share gains we have across the company. We are gaining share across the company and we are gaining share in most segments across the company. Clearly we are gaining share in infant-preschool. We are gaining share in dolls.

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

Margaret Whitfield - Sterne, Agee & Leach

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

Kevin Farr

I sure can. On the top line it was 7% negative impact. About 1% favorable impact on EPS for the quarter.

Margaret Whitfield - Sterne, Agee & Leach

Finally legal. What was legal in Q1? What was legal expense in Q1 versus OI?

Kevin Farr

Legal expense was $11 million lower than last year.

Margaret Whitfield - Sterne, Agee & Leach

The total was?

Kevin Farr

We haven’t provided that information.

Operator

The next question comes from Drew Crum - Stifel Nicolaus & Company, Inc.

Drew Crum - Stifel Nicolaus & Company, Inc.

I wonder if I could start with Barbie. Just reconcile for us the variance between the performance domestically and overseas absent foreign currency impact.

Bob Eckert

Most of it was the foreign currency impact so if you look at it on a constant currency basis the overseas business was fine. It didn’t grow as well as we did in the U.S. There are two issues there. One is Barbie specific. We don’t have as well developed a collector business outside the U.S. as we do in the U.S. and a lot of the 50th anniversary sorts of product lines are in the collector arena.

Secondly I would say just broadly speaking in international we see more issues with some economies, with some customers and I think Barbie to some degree was a victim of that. I think if we looked across the businesses internationally Barbie probably out performed most of our other major categories.

Drew Crum - Stifel Nicolaus & Company, Inc.

Somewhat related to that, can you give us an update as to what is happening with the Bratz legal situation?

Bob Eckert

Well, there haven’t been a lot of changes. Despite the public pronouncements I haven’t seen anything that would lead me to conclude that MGA sincerely wants to resolve our differences at this time. We are still awaiting the judges final rulings from Phase I of the case which if you recall resulted in a unanimous jury verdict in our favor last year.

We are also preparing for a Phase II trial that is scheduled for March of 2010 and that will include our claims of trade secret theft against MGA. We will continue pursuing this path until it is ultimately resolved. But I don’t think there has really been any significant change over the last couple of months.

Drew Crum - Stifel Nicolaus & Company, Inc.

On the advertising, it was I guess as a percentage of revenue near the low end of the range. Is that kind of the goal or target as you progress through 2009?

Kevin Farr

Yes. I think if you go back to last year our 2008 advertising rate was higher because sales were lower than expected. In the future in 2009 we want to get advertising as a percent of sales back to the right level. We are using realistic revenue expectations for 2009 and advertising expense in Q1 2009 was 10.7% of net sales versus 11.2% in Q1 2008. Our historical ratio has been in the 11-13% range and we expect to be at the lower end of this range for 2009.

Operator

The next question comes from Greg Badishkanian – Citigroup.

Greg Badishkanian - Citigroup

Just to clarify did you say POS in the U.S. is up low to mid single digit year-to-date?

Bob Eckert

Yes. That is year-to-date through last weekend.

Greg Badishkanian - Citigroup

Incorporating the Easter effect.

Bob Eckert

Correct.

Greg Badishkanian - Citigroup

That is very strong. What do you think is primarily driving that?

Bob Eckert

Historically the toy business holds up pretty well in tough economic times. Again, even though the industry declined a bit in the fourth quarter last year clearly the economy was jolted at the end of last year and consumer spending declined and again relative to other categories I have seen the toy industry did reasonably well. I think that is continuing. I think consumers have sort of stabilized a little bit in terms of their mindset about where the world is going. We see that a little bit in the consumer confidence numbers. I just believe it anecdotally. I think the toy business again will hold up relatively well.

Greg Badishkanian - Citigroup

Internationally, if we take out FX and I am doing my math right it looks like it was pretty consistent I think around negative 10% excluding currency in the fourth quarter and the first quarter roughly. Is that right? Also, has that kind of stabilized throughout the quarter or have you noticed any changes sort of coming out of the first quarter into the second quarter?

Bob Eckert

I don’t want to go into the second quarter but your facts are absolutely correct. I think on a constant currency basis the fourth quarter was down 9% and the first quarter was down 10%. But I do want to clarify that despite it being below a year ago the quarter’s revenues for our international business matched our expectations. There really are three layers of issues here. First, as you pointed out is for-ex. The dollar is 14% stronger than it was a year ago.

Secondly, I still see broad economic issues especially in Western Europe. I just don’t think the European countries are performing as well, or I guess to do this in a negative sense, they are performing worse than the U.S. economy is.

Third and I think this is an important issue, is there are some very specific retail customer issues around the globe. Some of this is related to customer’s overall open to buy. As their local currencies have weakened or they have tough fourth quarter what a retailer can buy whether it is toys or any other thing since most of the world’s purchases are related to the U.S. dollar becomes an issue. Some of it also is just related to specific financial terms issues. As we said last quarter our goal is not to get ahead of our customer’s ability to pay for the goods before we ship them.

I think it is going to be a challenging year for international but we have planned for solid profit performance and so far again it is very early but we are absolutely on track with where we expected business to be.

Operator

The next question comes from Timothy Conder - Wells Fargo.

Timothy Conder - Wells Fargo

Bob, along that same line again you said both your U.S. and international channel inventories are down year-over-year. Is it fair to say putting all this together that the most work you still have to do on the channel inventory front remains international or are you starting to feel pretty comfortable where those inventories are both domestically and internationally in the channel?

Bob Eckert

It is a little bit like the baseball season. The Cards are off to a pretty good start. It was a tough day yesterday but the Cubs will be back. Oh, we were talking about inventories. No, I would say we finished the year cleaner or at least as clean in international retail inventories as we did in the United States. Our goal last year was to collect the cash and make sure we finished cleanly and didn’t get ahead of retailers. I think that worked out pretty well. That doesn’t mean they are buying more today. Inventory is still not a positive thing to have anywhere in the supply chain so we are not seeing them rebuild inventories but I would say the level of inventory at retail in international on a year-over-year change basis is probably at least the same if not better than the U.S.

Timothy Conder - Wells Fargo

So again at the end of the day you feel comfortable with your inventories internationally in the channel and in the U.S. where they are currently? Basically you are not seeing any further de-stocking going forward at this point?

Bob Eckert

I don’t do a lot of going forward and if I am a retailer I am going to try and cut inventory even more no different than Kevin Farr gets up every morning and looks at our inventory and tries to figure out ways to bring it down. I don’t want to get at what a retailer might do. It is early in the baseball season and the Cubs lost one yesterday but they will be back. That’s all I have to say about that.

Timothy Conder - Wells Fargo

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

Kevin Farr

I think we are tracking to what we said we were going to do. I think we are looking for additional opportunities but I think at this point in time what we are on track to do is deliver $90-100 million net savings for 2009 and a cumulative $180-200 million by the end of 2010 related to our global cost leadership program. There are three drive lines that will result in significant savings including a reduction in force of 1,000 heads were implemented in November of 2008.

The second drive line is a coordinated overhead efficiency strategic plan that includes structural changes to lower costs, improve efficiencies working on things like SKU reduction, off shore and outsourcing IT, cost in international regions which is being implemented and additional global procurement focus to leverage Mattel’s global scale.

Then on the timing of savings we expect approximately $60 million of savings related to last year’s reduction of force to be evenly spread throughout the year and the remaining savings weighted more towards the end of the second half of 2009.

If you look at the first quarter we delivered $18 million in net savings with the majority of those savings about $14 million in SG&A.

Bob Eckert

The other thing I would add to that is while it is not a cost and expense from a P&L standpoint, certainly CapEx is on track. We want to manage cash flow very importantly around here, control costs as well as control spending on CapEx. That is another one that was down versus year ago and right on our plan for the year.

Kevin Farr

Right it was at $20 million in the quarter versus $32 million last year. I think our goal is to get back to where we were several years ago which is below the $150 million level in CapEx. We are tracking to that through the first quarter.

Timothy Conder - Wells Fargo

Bob, again you mentioned you were gaining share in infant-preschool. Can you reconcile that I guess with the numbers? It has kind of been a little challenging the last couple of months on Fisher-Price. Is that just basically clearing out some inventories at retail because your wholesale shipments are down? Maybe kind of help us there reconcile.

Bob Eckert

There are a couple of things. One, we are clearing out some inventories. My recollection of the NPD data is the infant and preschool segment or category was down at about the same level that the overall toy industry was down. Again, according to NPD our sales grew at infant and preschool at about the same rate that our sales grew overall across the toy business so we gained share in infant and preschool at about the same rate that we gained share across the total toy business. Our POS looks pretty good but a couple of the areas that I think might shed some light on why it is difficult for you to reconcile the numbers is we have been challenged in two sub-segments of Fisher-Price. One is Power Wheels. Our Power Wheels business is down. It is a $200-300 item and it is not in the peak season and it is the kind of thing that I think both consumers and retailers are going to hold back on as long as they can in terms of a purchase. So that is really not in the infant and preschool NPD data but it is in our Fisher-Price shipments.

The second thing is what we call baby gear. Sort of the juvenile products business. That business has been a good growth driver over the last several years for Fisher-Price but we are transitioning right now into the Precious Planets line for baby gear and our baby gear business has been soft for the last couple of months. The point of sale has improved in the last couple of weeks but it is still early in the transition. Those two, if you recall are sub-segments within Fisher-Price have been pretty soft from a shipment standpoint and might help reconcile why the shipments, the POS and the market share doesn’t triangulate as well as they do in some of the other categories.

Timothy Conder - Wells Fargo

Lastly, Kevin just a clarification regarding the for-ex impact to EPS, you said roughly $0.01?

Kevin Farr

It was $0.01 favorable on EPS for the quarter.

Operator

The next question comes from Robert Carroll – UBS.

Robert Carroll - UBS

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

Bob Eckert

Retail?

Robert Carroll - UBS

Not so much retail but retailers. As people are coming to you guys are you seeing a reallocation of shelf space towards some of the larger operators away from some of the smaller who are maybe a little more vulnerable to the changes that are coming in?

Bob Eckert

I would almost defer that question to retailers. Clearly compliance with the new regulations is something that is very important to Mattel. We have been on this for years, not just months. So we are obviously in very good shape as it relates to compliance. I think the answer to your question is probably best coming from retailers than from us.

Robert Carroll - UBS

Is it possible that some of the smaller guys who aren’t as well prepared as you guys could end up with some of the shifting of the market share might help support what is going on?

Bob Eckert

Yes, I think in general and I will go back to what I said about the economy. In tough times the people who execute really well are going to do better than the people who don’t execute really well.

Operator

The next question comes from Linda Weiser - Caris & Company.

Linda Weiser - Caris & Company

On the topic of raw material costs, I assume that it was still a negative impact on the gross margin versus prior year because you didn’t mention it as being one of the positive factors. I know you hate to give projections but is that a favorable effect on gross margin that we will start to see maybe towards the end of second quarter or is it more a third and fourth quarter phenomenon that we will see in your results?

Kevin Farr

I think for the quarter you are right. I think our price increase helped mitigate cost pressures in commodities and foreign exchange but we didn’t see lower input costs. I think as you know there has been a lot of volatility in input costs over the last couple of years particularly during our peak production season. We are seeing some declines in our oil based input costs from the record high levels we experienced last year. However, while these costs were not as high during peak production in mid to late 2008 overall our basket of input costs are still above year-ago levels. So we implemented a modest price increase for spring and fall 2009 products and as you probably know due to our manufacturing cycle there is also typically a lag of several months before input cost changes are reflected in our cost of goods sold.

Generally our cost of goods sold in the current quarter is heavily weighted to inventory that was made in the prior quarter. In addition we purchased about half of our products from third-party vendors who generally quote prices to us about 9 months in advance of our selling season. We are, due to the rapid rise of input costs over the last couple of years, in some cases we have allowed our vendors to increase their prices after the original quote so now we are renegotiating prices with vendors to recapture savings as some of the input costs began to decline from record high levels.

The products manufactured in our own plants and the impact of changes in the input costs reflect in our cost of goods sold sooner so with respect to seeing this showing up in our P&L it is really going to depend on what those input costs are when we buy them which our peak production season starts in June, July and August. Our goal is to improve gross margin over time and if costs continue to moderate we should expect to see improvement sooner.

Linda Weiser - Caris & Company

Just on Barbie, the point of sale growth in the U.S. of double digit and you said shipments were up 18%, if point of sale was up only 10 you are still shipping in more than the consumption growth. Should I be worried about that? Did you actually rebuild inventory in Barbie at retail? Can you comment on that?

Bob Eckert

Yes, again as I said Barbie has regained momentum in the Girls toy business and I think retailers are responding to that both in terms of how they allocate their shelf space and how they allocate their promotions, how they allocate their business. Barbie is growing in Girls and as I said Barbie is growing in the total toy business. So, I think retailers are more encouraged about Barbie’s performance and they are responding accordingly.

Linda Weiser - Caris & Company

In terms of the 50th anniversary it seems like there were a lot of events and things driving that whole phenomenon in the first quarter. Can you name any specific events or things that are quite special later in the year that are going to continue to drive that later in the year?

Bob Eckert

We have a lot of promotions and even some of the dolls; I know this really stunning Golden Anniversary doll, the one with the gold dress, really is just out at point of sale right now so we haven’t seen much of an impact of that sort of segment yet. So we are going to continue to have things throughout the year but again this is not just about the 50th anniversary. That is important and that was certainly a catalyst but I feel better about where we are across the Barbie brand than where we have been a couple of years ago.

Linda Weiser - Caris & Company

On a couple of the other product lines, I think you mentioned that Cars internationally declined. Does that mean Cars was actually up in the U.S.?

Bob Eckert

My recollection of the point of sale was it was probably down a little bit but certainly not the magnitude that it was internationally. Cars really has turned into an evergreen property. I think we are in year four of Cars. My recollection is that maybe even year two was bigger than year one.

Kevin Farr

Correct.

Bob Eckert

Year three we started to see some drop off and year four there is some drop off but it is fairly stable. It is still a huge business for us. Even last Christmas was one of the top six or seven brands in the toy industry. It is still a good business. It isn’t growing. We are anxious about getting some more intellectual property on Cars which Disney is working on. To me it is kind of another Toy Story or Batman or any of those evergreen properties. It is going to sell fine but not grow in the absence of new stuff, new entertainment, but when the new entertainment comes up you kind of get another sizeable increase.

Linda Weiser - Caris & Company

In your 10K I noticed that the incentive compensation expense in 2008 was significantly lower than in 2007. I think it was $50 million versus $84 million in 2007.

Bob Eckert

I think it was $15 million.

Kevin Farr

Correct.

Linda Weiser - Caris & Company

I said $15 million. Obviously it is kind of hard for an outsider to project this, but what should we think about for 2009? Somewhere kind of in between those two numbers?

Bob Eckert

No, that would be forward-looking and I don’t want to get into that. The fact is, we did not earn a robust bonus last year. We are going to have to perform better if we want to earn a bonus this year. When the shareholders do well we do well. When the shareholders don’t do well we don’t do well. I said that in May of 2000. I say it today. That is what has happened. Our goal this year is to deliver better results. When we deliver better results the shareholders will benefit and the employees will benefit. We are in this together.

Linda Weiser - Caris & Company

Can you just say again, I didn’t catch the quantification of the legal reserves in the SG&A. Can you just give me the quantification of that again?

Kevin Farr

Approximately $21 million.

Operator

The next question comes from Tim [Gehring] – Pzena Investment Management.

Tim [Gehring] – Pzena Investment Management

Could you once again on the point of sale just for the quarter, I know it is up through last weekend but for the quarter was it up or what?

Bob Eckert

My recollection is that point of sale in the U.S. for the quarter was just south of flat. Again, there is roughly a three-week Easter bill period and all three of those weeks were in the first quarter prior-year and two of the three weeks were in the second quarter this year. So, again what I would think of on more of an apples-to-apples basis you get the benefit of all three weeks we were up a bit. My recollection is, and I don’t have the data right in front of me, but my recollection is we were just a little bit south of flat at the end of March.

Operator

The next question comes from John Taylor – Arcadia Investment Corporation.

John Taylor – Arcadia Investment Corporation

Kevin I don’t know if you will do this for us but in Q2 of last year you were loading in the entertainment properties for the summer. I wonder if you could give us a sense of roughly how big that might have been in aggregate?

Kevin Farr

I don’t have that information handy so I can’t answer that question.

John Taylor – Arcadia Investment Corporation

I would imagine you are making pretty substantial progress if you haven’t completed some things already but can you characterize kind of what you are seeing in terms of unit pricing in contract negotiations with the Far East? It sounds like there is some capacity taken off line as people have gone out of business but there are a lot of people that want to make sure they stay busy with important people that are going to be around for a few years like you guys. Are you seeing anything? Can you throw us any bones in terms of potential unit savings you are seeing in those negotiations?

Bob Eckert

That is our line with them every day. We are going to be here for a long time and we are going to make more toys and sell more toys than anybody else in the toy business so we would like to work with you but in order to work with us you have to comply with all of our safety standards. You have to comply with how we want people treated in your plants. We have to make high quality toys at low cost. So we are seeing some I guess I would characterize it as we are seeing vendors come to the table with a recognition that their cost may not be as high as they were. But it is an ongoing discussion.

John Taylor – Arcadia Investment Corporation

Overall though you think you are going to make some progress off of the hyperinflation the last year?

Bob Eckert

Yes.

John Taylor – Arcadia Investment Corporation

Maybe claim some back. Thailand has been a little bit volatile lately and you have a lot of Barbie going on there. Can you talk to us about how concerned you are or maybe contingency plans for that?

Bob Eckert

It is actually a Hot Wheels plant or die cast car plant in Bangkok. The plant is running well. My believe is we missed like one day of production about a week ago. We have very good relationships there with our employees. We are not in the center of the action if you will in terms of physically where confrontations have taken place. So it is something about which we are concerned but we do have other facilities that make die cast cars and we have not lost any productivity out of our Bangkok plant so far.

John Taylor – Arcadia Investment Corporation

Post Toy Fair, we haven’t really talked much about sort of things that you were really happy with reception wise from Toy Fair. I wonder if you could talk about that a little bit and particularly maybe comments on reception for some of the new digital efforts.

Bob Eckert

I’d start with one of the things that is selling right now is the $35 little dinosaur screecher I think is the name of it. One of the problems I have is sometimes the product name changes during its lifecycle before it is launched. That is a $35 toy in spring and generally speaking $20 or $10 do better than those. So I am a little encouraged by that. What we are seeing though is people are tightening up and lower price items in general are doing better than higher price items. I think higher priced items have to be really special to do well. Coming out of Toy Fair they loved the little Matchbox truck that does all sorts of stuff. The Mindflex game which is about $80 at retail I think generated more buzz than anything I am aware of out of Toy Fair. The Elmo Hand is sort of a lower priced way to play with Elmo. So I got the sense from retailers and from folks who have been around the toy business a long time our line looks pretty good in the fall but we will have to see. Obviously we are coming out of Toy Fair feeling good and it is better than coming out of Toy Fair feeling lousy. It is not all that often that we come out of Toy Fair feeling lousy. That is the nature of the human optimism.

John Taylor – Arcadia Investment Corporation

In terms of the, I don’t know how you would quantify this or if it is possible or not, but this whole retail de-stocking question in the U.S. If it is a 100 meter dash or whatever how much of that do you think has burned through? How much pain does a retailer need to go through, how many days out of supply before they get around to writing a re-order? Can you give us any sense of kind of how much of the weight reduction has taken place versus how much still has to happen before people start loading in for holiday?

Bob Eckert

This is purely my opinion so take it for what it is worth. It is an opinion. I don’t have insight into what a retailer is going to do. But my sense is the heavy lifting is over. As I look at the data and I look at what the inventory level was going into this year and I look at what the inventory level is coming out of the first quarter again we were up in inventory versus prior-year at retail at the end of last year.

We are now down in inventory versus prior-year at retail so the change during the quarter was fairly sizeable. I just don’t hear as I am talking to customers, I don’t hear people talking about inventory today like they were talking about inventory in January. So it is anecdotal. It is opinion. I think a retailer is going to act like we are this year which is how low can I get the inventory? Our inventory was down 9% this quarter versus prior year and our inventory was up at the end of last year versus prior year. So look at our own change. We get up every morning and try and drive that as well as we can. I think our retailers are no different. My sense is the heavy lifting is probably behind us.

Operator

The next question comes from Gerrick Johnson - BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets

I just want to follow-up on something that JT was talking about with the supply chain. It appears WalMart is pulling a few less things on a couple of Fisher-Price SKU’s because of a supply [inaudible] and I am wondering if you could discuss your supply chain and your dedicated suppliers and their health and stability over there in China?

Bob Eckert

I’m not aware of the specific toys you are talking about. In general I will tell you our supply chain is running well. We are delivering good quantities to customers. Our service levels are fine. Across 8,000 SKU’s you are always going to have some issues. You are always going to have too few of some toys and too many of other toys. But I wouldn’t characterize it as anything out of the normal right now. Certainly vendors come and go. We have more vendor disruptions in 2007 and well into 2008 than we are having today. Our vendor base is pretty stable right now. I think we are in better shape right now in vendor support and performance than we have been in at least the last two years.

Gerrick Johnson - BMO Capital Markets

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

Bob Eckert

We don’t know. That is the sort of game of chicken we all play here. Everybody wants to chase demand and in the moment of truth are we going to be able to fill the order. Retailers want to get their inventories down and we want to get our inventories down but both of us want to be able to fill the orders for either customers or consumers respectively. I don’t sense any issue right now. Let me be clear, either at retail or at Mattel I don’t sense the inventory is too low that we have a problem. We are filling orders every single week around here and retailers are supplying toys to consumers every week.

Operator

That does conclude our Q&A session. Ms. Douglas I will turn the conference back over to you for any additional or closing comments.

Dianne Douglas

Thank you. There will be a replay of this call available beginning at 11:30 a.m. ET today. The number for the replay is 719-457-0820. The pass code is 9488344. Thank you for your participation.

Operator

That does conclude today’s conference call. Thank you again for your participation. You may disconnect.

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Source: Mattel, Inc. Q1 2009 Earnings Call Transcript
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