Mattel Q2 2009 Earnings Call Transcript

Jul.17.09 | About: Mattel, Inc. (MAT)

Mattel (NASDAQ:MAT)

Q2 2009 Earnings Call

July 17, 2009 8:30 am ET

Executives

Dianne Douglas - Investor Relations

Robert A. Eckert - Chairman of the Board, Chief Executive Officer

Kevin M. Farr - Chief Financial Officer

Analysts

Gregory Badishkanian - Citigroup

Sean McGowan - Needham & Company

Hayley B. Wolff - Rochdale Research

Robert Carroll - UBS Securities

Timothy Conder - Wells Fargo

Jake Hindelong - Monness Crespi Hardt

Linda Bolton-Weiser - Caris & Company

Margaret Whitfield - Sterne, Agee & Leach

Anthony Gikas - Piper Jaffray

Drew Crum - Stifel Nicolaus & Co.

John Taylor - Arcadia Investments

Tim Gary - Pozina Investment Management

Operator

Good day, everyone and welcome to the Mattel second quarter 2009 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Dianne Douglas. Please go ahead.

Dianne Douglas

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

Certain statements Bob and Kevin make during the call may include forward-looking statements related to the future performance of our overall business, brands, and product lines. These statements are based on currently available operating, financial, economic, and competitive information and they are subject to a number of significant risks and uncertainties which could cause our actual results to differ materially from those projected in the forward-looking statements. We describe some of these uncertainties in the risk factors section of our 2008 annual report on Form 10-K, as well as in our 2009 quarterly report on Form 10-Q and in other filings we make with the SEC from time to time.

Mattel does not update forward-looking statements and expressly disclaims any obligation to do so.

Information required by Regulation G regarding non-GAAP financial measures is available on the investor and media section of our corporate website, Mattel.com. under the subheading financial information and earnings releases.

Now I’d like to turn the call to Bob.

Robert A. Eckert

Thank you Diane and good morning. Much like the first quarter of this year, throughout the second quarter we saw the continuation of economic malaise on a global basis. That said, we are encouraged with the positive momentum we are seeing at point of sale for our brands like Barbie, Disney Princesses, Hot Wheels, Matchbox, Apples to Apples, and Fisher Price Friends.

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

If you’ll recall during last year’s second quarter, we experienced double-digit revenue increases boosted by contributions from toys tied to 2008’s key summer entertainment properties, Batman, Speed Racer, and Kung Fu Panda. The second quarter is typically a key shipping period for summer related projects and represented the largest shipping quarter for those products in 2008.

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

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

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

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

Kevin M. Farr

Thank you, Bob and good morning, everyone. I will begin my review for the second quarter with a discussion of worldwide gross sales shown on exhibit 2 of today’s press release. Total worldwide gross sales for the quarter decreased 20%, including a 6 percentage point negative impact from changes in foreign exchange rates. The remainder of the decline was about equally driven by the lack of toys geared to summer entertainment properties as compared to last year and the continuation of retailers tightly managing inventory.

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

On a regional basis, sales in Europe were down 29%, including a 9 percentage point negative impact from exchange rates.

Sales in Latin America were down 23%, including a 13 percentage point negative impact from foreign exchange. And sales in Asia-Pacific were down 20% including a 9 percentage point negative impact from changes in exchange rates.

I will now review our core categories and brands for the second quarter. Mattel girls and boys brands -- worldwide sales for the Mattel girls and boys brand segment were down 25%, including a 7 percentage point negative impact from changes in exchange rates. Worldwide Barbie sales were down 15%, including a 7 percentage point negative impact from foreign exchange. Barbie sales in the U.S. declined 5% and Barbie sales in international markets declined 20%, including an 11 percentage point negative impact from foreign exchange.

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

Worldwide sales of other girls brands were down 23%, including a 7 percentage point negative impact from exchange rates. Sales in the U.S. were down 4% while international sales of other girls brands were down 32%, including a 9 percentage point negative impact from foreign exchange. The sales decline worldwide was driven primarily by High School Musical and Polly Pocket.

Worldwide sales in the Wheels category were down 28%, including a 6 percentage point negative impact from changes in currency exchange rates. The worldwide decrease is driven primarily by sales decline in Speed Racer’s product. To remind you, our Speed Racer sales last year were split between the Wheels and Entertainment categories, depending upon the type of the product.

For core Hot Wheels, which did not include Speed Racer last year, worldwide sales were down 10%, including a 9 percentage point negative impact from foreign exchange. Domestic sales increased 10% and international sales declined by 19%, including a 13 percentage point negative impact from foreign exchange.

Worldwide sales at our entertainment business, which includes games and puzzles and Radika, decreased 32%, including a 6 percentage point negative impact from changes in foreign exchange. The overall decline in entertainment was primarily attributable to lower sales of toys geared to last year’s three key summer movie properties, Batman, Speed Racer, and Kung Fu Panda, as well as the Cars entertainment property primarily outside the U.S.

Fisher Price brands -- worldwide sales for Fisher Price brands decreased 14%, including a 5 percentage point negative impact from changes in currency rates. International sales of Fisher Price brands decreased 19%, including a 10 percentage point negative impact from foreign exchange. And Fisher Price sales in the U.S. declined 9%.

Worldwide core Fisher Price decreased 13%, including a 5 percentage point negative impact from changes in exchange rates. U.S. sales of Fisher Price core declined 8% while international sales were down 19%, including a 10% percentage point negative impact from foreign exchange.

Fisher Price Friends sales declined 15%, including a 4 percentage point negative impact from foreign exchange rates. Sales of Fisher Price Friends in the U.S. were down 10%, while international sales were down 19%, including an 8 percentage point negative impact from foreign exchange.

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

Now let’s review the P&L which is shown on exhibit 1. Our gross margin in this year’s second quarter was 45.2%, which compares to last year’s margin of 44.5%. The improvement was primarily due to price increases, which were effective January 1st, as well as lower royalties and savings from the global cost leadership program, partly offset by cost pressures from commodities and foreign exchange.

Advertising expense was $89.8 million, or 10% of net sales, compared to 10.5% in 2008. Selling, general, and administrative expenses decreased by $64.1 million, to $283.8 million. As a percentage of net sales, SG&A expenses were 31.6% compared to 31.3% last year. The year to year dollar improvement includes approximately $22 million of lower litigation related expenses, $20 million of net savings related to our global cost leadership program, and $14 million of foreign exchange benefit.

As previously reported, in the first quarter we recorded a $21 million charge for a legal settlement reserve for product liability related litigation. In the second quarter, we adjusted this charge down by $5 million, primarily due to insurance recovery.

In the quarter, our global cost leadership program delivered net savings of approximately $32 million. In addition to the $20 million reflected in SG&A, there were savings of roughly $9 million in cost of goods sold and $3 million in advertising. We are on track to deliver net savings of $90 million to $100 million for 2009 and cumulative net savings of

$180 million to $200 million from this program by the end of 2010.

Operating income during the quarter was $32.5 million compared to operating income of $30.6 million last year. The improvement was driven by gross margin improvement and lower advertising and SG&A expenses, partially offset by the lower sales.

Interest expense was $17.5 million versus $16.6 million in 2008. The increase in interest expense versus last year is due to higher average interest rates, partially offset by lower average borrowing.

Interest income was $2.5 million versus $7.3 million last year. The lower interest income was due to lower average investment rates, as well as lower average invested cash balances during the quarter.

Other non-operating income expense was income of $6.3 million versus expense of $6.4 million in 2008. The current year income relates primarily to foreign currency exchange gains versus foreign currency exchange losses last year.

This quarter’s income tax expense of $2.3 million includes discrete tax benefits of $2.5 million compared to prior year’s expense of $3.1 million. The estimated 2009 full-year effective tax rate continues to be 22% to 23%.

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

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

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

Receivables were $747.2 million, or 75 days of sales outstanding, four days lower than last year. Factory increased from $73 million a year ago to $81 million. [Prior to factory], days sales outstanding decreased two days.

Inventories at $589.6 million were down $86.5 million or 13% versus the prior year. Our total balance sheet debt increased by $37 million from the prior year. Year-to-date payments of $140 million of maturing long-term debt have been more than offset by short-term borrowings.

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

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

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

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Gregory Badishkanian with Citi.

Gregory Badishkanian - Citigroup

Obviously you did a great job in cutting costs and in terms of earnings in a tough environment, can you talk a little bit in terms of sort of the cost of goods going forward in terms of China and other input costs and how you see that playing out over the next few quarters?

Robert A. Eckert

Okay, I’d be happy to do that. I think as we indicated in our analysts meeting, we are seeing some declines in our oil-based input costs from the record high levels that we experienced last year and in that analyst day presentation, we gave you a simple five guidelines that provide a basic understanding of how the seasonality of our business impacts our financial results. And there’s many factors that impact our gross margin, not only input costs but also freight and distribution, royalties, FX, mix and tooling, just to name a few.

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

Gregory Badishkanian - Citigroup

Okay, good. And kind of just looking at the retail level in the U.S. and internationally, can you talk a little bit about inventory levels at the retail level and how they progressed and are you seeing kind of a replenishment of 1-to-1 now or are they still reducing inventories?

Robert A. Eckert

No, Greg -- you know, we have our best visibility into that in the U.S. so let me focus first on the U.S. numbers. On a year-to-date basis, our retail sales, our POS is now down in the low single digits and that’s driven by last year’s Speed Racer product. The retail inventories -- and remember, we calculate those using our shipments in and what we get from the POS data, are now down in the U.S. mid- to high-single-digits. You may recall I think we started the year at plus 8% in retail inventories. Through the first quarter, retailers burned off all of that increase and we finished the first quarter down a little bit. We are now accelerating that decline through the second quarter, so I’d say retailers are still very cautious on their inventory positions, as are we. Our inventories, as Kevin just mentioned, are down 13% through the second quarter.

Internationally, I think it continues. You know, everything we see in the U.S. is happening overseas and probably at more pronounced levels. So not only do we have the foreign exchange, which I think is a -- I think the U.S. dollar is 12% stronger than it was a year ago and things like the lack of entertainment properties. But the contraction of economies outside of the U.S. is more pronounced than we see in the U.S. and retailers’ reluctance to either make the inventory bet or frankly our reluctance to ship too much into retailers, given credit conditions and issues with credit insurance and the like, probably make the burn-off of inventories even more pronounced overseas than they are in the U.S.

Gregory Badishkanian - Citigroup

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

Robert A. Eckert

Well, I think in general, Europe is the most challenging area of the world for us. I’m not aware -- I can’t think of any economy or any unemployment level that isn’t 10% or more. I know of a country or two where the reported unemployment is 20% and my sense is unemployment levels tend to be under-reported in Europe.

Retail conditions are tougher in Europe than they are in the U.S. I remember going through a country review just the other day where we talked about the fact that there’s just no credit insurance available in this particular country and we used to rely on credit insurance before we shipped to some small retailers, so we’re pretty tight with our shipments as a result of that.

So in general I would say Europe is the toughest place to do business today. The more emerging markets continue to do relatively well for us.

Gregory Badishkanian - Citigroup

Great. Thank you very much.

Operator

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

Sean McGowan - Needham & Company

Thanks, guys. I have a couple as well -- Bob or Kevin, can you comment on what we can expect regarding full-year SG&A year-over-year comparisons? Pretty hefty reduction there. You have outlined that you are on track to save that money but $64 million down year over year, is that the kind of improvement that we can expect there each quarter?

Robert A. Eckert

Well as you know, we don’t give guidance but I think we are working on -- a couple of things seem to be working for us. Obviously for-ex has been working for us here and that will continue in the third quarter and then for-ex I think last year the Euro averaged about $1.34 in the fourth quarter. It’s currently $1.40, so that may turn on us.

But with the global cost leadership program, I think we are on track. In fact, it’s true -- we’re running a little ahead on our savings expectations through the first half. However, we’ll be making more investments in the second half related to initiatives intended to drive further savings in 2010.

So for the balance of the year, we expect to deliver about $90 million to $100 million for the full year, with the $40 million to $50 million of net savings, should be evenly spread through the third and fourth quarter.

We also benefited from lower legal costs in the second quarter, as well as in the first quarter. And as you know, we’ve been incurring significant legal costs over the last couple of years related to MG&A and recall related litigation.

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

For the first half of 2009, litigation related legal costs decreased by $33 million, primarily for MGA litigation related, partially offset by a $16 million net charge related to legal settlements for product liability litigation, which most of that charge was taken, or all that charge was taken in the first quarter this year.

So we are hopeful that our legal costs related to litigation will be lower in 2009 as we continue working on resolving recall related litigation and progress with the MGA litigation. However, we will continue to make the appropriate level of investments in legal fees until these legal matters are resolved.

Sean McGowan - Needham & Company

Okay, good. Thank you. A couple of other quickies then -- on the taxes, could you go back over what it was that made this particular quarter so low? Did you say it was $2.5 million of a credit?

Kevin M. Farr

I think there’s a couple of things. I think yeah, there was discrete period item of $2.5 million that we had to recognize in the quarter under GAAP. I think when you look at the second quarter, you have to look at the first half tax rate. We benefited in the first quarter from losses, so we had to take the rate for the year and apply that to the first half results. Our expected rate for the year continues to be 22% to 23%, which would include those discrete period items. So I think as you look forward, you should be using a 22% to 23% rate for the full year and for the third quarter and fourth quarters, and we would expect our 2010 tax rate, as we’ve indicated before, to be similar to our effective tax rate, part of the tax act of 2006 which was approximately 27%.

Sean McGowan - Needham & Company

Okay, and last question, and this is either for you or for Bob -- given the discrepancy between ship-in and sell-through, and it’s been that way now for some time, at what point are we sort of at the point where you just can’t go any lower -- you know, there has to be some kind of parity then between ship-in and sell-through. Are we there, are we past there, are we about to be there?

Robert A. Eckert

Well, Sean, one never knows. As I visit stores and not just looking in the toy aisles but looking broadly at retail, there is just a lot less inventory available period and we don’t make those decisions. We do encourage retailers to focus on the point of sale and replenishment and get ready for the holidays and that’s the message we have to them but unfortunately, we don’t get to tell them how much to carry.

Sean McGowan - Needham & Company

Okay. Thank you very much.

Operator

We’ll take our next question from Hayley Wolff with Rochdale Research.

Hayley B. Wolff - Rochdale Research

Most of my questions were just asked but can you -- when you talked about the inventory destocking, is much of it attributed to Walmart moving to a new store format? Can you parse out that piece?

Robert A. Eckert

Well, we don’t really discuss results by individual retailer. I will tell you that the large sophisticated retailers are really tightly managing inventory. We tend to have a pretty good point of sale growth at the large sophisticated retailers with lower inventory levels. So their report card, or our report card with them looks quite good and I think it’s fair to say that’s a reasonable conclusion across really big retailers.

Hayley B. Wolff - Rochdale Research

Okay. Can you give a little more detail on Barbie in the U.S., sell-in versus POS, given that you had relatively easy comps against last year? I’m just trying to get a sense of why it was down this quarter versus having a nice sell-in last quarter.

Robert A. Eckert

We’re still feeling good about Barbie. The POS here in the U.S. is still up in the double-digits, and what we can read out of market share results from NPD suggests Barbie share continues to grow, whether we measure it against the doll business or against the total toy business. And within Barbie, a number of segments seem to be doing well, particularly at retail -- the Princess segment, the beach segment, I Can Be, Collector’s. Probably the one area we are seeing declines in Barbie is in entertainment, this year’s Thumbelina versus last year’s Mariposa, which is consistent with the strategy to reduce our reliance on those large entertainment properties that Richard Dixon is leading.

So the POS is holding up well. We’re just now starting to see some POS increases outside of the U.S. Australia, Canada, Brazil, Italy, Chile, are now up in POS and even some of the other large markets that were still declining in POS, the rate of decline has lessened, so we’re starting to see some improvement there.

The brand is re-energized, the retail sales are responding. If the trends continue, the shipments will ultimately take care of themselves. I would say in the U.S. in general, I think as Kevin mentioned, inventories are pretty tight. We have seen some growth in inventories in the U.S. but not nearly the rate of growth that we see in point of sale at the U.S., so kind of in a days supply measure, or however one might look at it, things are down.

Hayley B. Wolff - Rochdale Research

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

Robert A. Eckert

I don’t know what the quarterly number is last year. I think as Kevin said, the trends on litigation expense have been favorable for a couple of quarters but remember as you model all this stuff, litigation is inherently risky. You never know the outcome, you never know the -- [multiple speakers] -- when and so I would hate to get too forward looking on it, other than, as Kevin mentioned, we expect full-year costs to be down. They’ve been down in the first half consistent with our expectations and we don’t have anything new that would indicate that the second half should be different than we expect for that.

Kevin M. Farr

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

Hayley B. Wolff - Rochdale Research

All right. Okay, great. Thanks, guys.

Operator

We’ll take our next question from Robert Carroll with UBS.

Robert Carroll - UBS Securities

Just going to the global cost leadership program for a second, I know you mentioned that you guys are running ahead of schedule. I mean, is that pulling forward? Like the progress that we’ve seen in Q1, is that pulling forward what would have been in Q2 or are you guys getting more ambitious in terms of what you think the 2010 goals are in terms of the additional spend?

Kevin M. Farr

No, I think it’s just timing, as I mentioned. I think we are running a little ahead on savings through the first half. As I said before, we expect to make more investments in the second half related to initiatives to drive further savings in 2010 to achieve that cumulative $180 million to $200 million for 2010. So our view is that we are on track to deliver $90 million to $100 million net savings from the program in 2009, as well as the cumulative net savings of $180 million to $200 million by the end of 2010.

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

Robert Carroll - UBS Securities

Okay, but I mean in terms of -- I mean, you guys have done a really good job laying out in terms of breaking out where that 90 and 100 was coming from there -- I mean, so those initiatives are still in place, there’s not necessarily anything new, it’s just a timing issue?

Kevin M. Farr

That’s correct.

Robert Carroll - UBS Securities

Great, and then secondly, just looking -- I mean, in terms of market share overall with the somewhat tighter CPSIA regulations coming in for August in terms of the product labeling, are you guys seeing any sort of consolidation at retail around some of the larger manufacturers? I mean obviously just at the margin but any color would be great.

Robert A. Eckert

Yes and no -- and again, to what can we ascribe certain improvements in share for some of the larger players -- is it because consumers favor large brands when times are tough? I think history is consistent with that. You know, some of the larger companies have really good properties right now and really good toys and good toy sell and those sorts of things. So in general, I think the environment is conducive for market share gains by the large company. That said, there’s some relatively small toy companies that are doing quite well even in this environment, with some really creative, innovative products.

So again, it’s hard to tease out what’s due to what. I think some of the large companies are doing quite well, a couple of the small companies are doing quite well and a bunch of people are probably struggling right now.

Robert Carroll - UBS Securities

That’s great. Thanks, guys.

Operator

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

Timothy Conder - Wells Fargo

Thank you. Just a follow-on on one of the earlier comments -- Bob, you were talking again about year-to-date point of sale in the U.S. is down low-single-digits, I think was what you said and then inventories are down mid to high. And then international POS and then inventories, I don’t think you finished that thought or if you did, I missed it and I apologized.

Robert A. Eckert

No, we really, Tim, don’t try and present that data because it’s just a lot looser out there. We don’t have as much good point of sale data as we do in the U.S. I would say overall the trends that we see in the U.S. are consistent around the world -- that is, point of sale is outperforming retail inventories but I don’t think it would be productive to kind of try and get into the numbers.

Timothy Conder - Wells Fargo

Okay, no, that’s fine, Bob. And then regarding your market share, and a couple last questions, it sounds like you are alluding that you continue, you and a couple of the other larger players, are gaining market share in general domestically. Is that the same international also that you are seeing those trends?

Robert A. Eckert

Again, the data is not as strong. I would say where we do have data in Europe, we’ve given back some share. We’re not gaining share and as I may have mentioned last quarter or the quarter before, in tough times economically I think the well-known and established brands are favored and as we get into some markets in Europe, we’ve got some really well-entrenched local brands that have done really well.

So our market share performance in the U.S. is ahead of where we are in Europe. I would say in other parts of the world, more times than not the trends are probably closer to the U.S. than Europe but again, the data is a little sketchy out there.

Timothy Conder - Wells Fargo

Okay, and then Kevin, in the other income, you mentioned for-ex. Was that predominantly anything related to Venezuela?

Kevin M. Farr

Yeah, I think with regard to the quarter, other non-operating income was $6.3 million compared to an expense of $6.4 million in the second quarter last year and as you’ve indicated, a higher income versus the prior year is due to foreign currency exchange gains, primarily related to U.S. dollar cash balances held by our Venezuelan subsidiary compared with losses by that same subsidiary last year.

So going forward, the U.S. dollar cash balances held by our Venezuelan subsidiary may create paper gains or losses that will be reported in non-operating income or expense is a retranslate [inaudible] and the parallel exchange rates at the end of each quarter.

Timothy Conder - Wells Fargo

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

Kevin M. Farr

I can give you the EPS impact. It was a negative $0.05 for the quarter and year-to-date, it’s a negative $0.04.

Timothy Conder - Wells Fargo

Okay. And lastly, any comments on how your price increases for the fall set -- getting any push-back from retailers or are those fairly well holding? Just a little additional color there.

Robert A. Eckert

Tim, they are holding. We’ve been consistent with discussions we’ve had with retailers about our need to recognize the reality of today’s environment and a whole basket of costs, as Kevin mentioned -- commodities, labor, transportation, all sorts of things. We have been more modest with our price increases this year as compared to last year but we are still running at gross margin levels below our targets and we need to keep working on that.

But I would say we are pretty well locked and loaded with our prices for the fall and our real priority now is working with retailers to make sure we’ve got the right promotional plans in place to drive traffic into their stores and drive our toys out of their stores.

Timothy Conder - Wells Fargo

Okay. Great, thank you, gentlemen.

Operator

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

Jake Hindelong - Monness Crespi Hardt

First couple of questions are on revenue -- just from Kevin’s comments, it sounds like the entertainment impact on the second quarter was probably about 7% of the revenue decline. And then just looking forward, based on the product lines that you’ve got coming out of the mix and going into the mix, is it fair to think that in that 4Q that Avatar could offset the entertainment declines from the other properties?

Robert A. Eckert

Well, I’ll do the forward part because that’s always my favorite thing to talk about, which is we don’t do that, so you’ve got to make your own estimates of what launches when and where and those sorts of things. I think Kevin’s seven points is about right.

Kevin M. Farr

Yeah, I think that’s in the ballpark.

Jake Hindelong - Monness Crespi Hardt

Great. All right.

Kevin M. Farr

You know, with regard to the fall last year, we obviously had Batman, so I don’t think Avatar is the size of Batman.

Robert A. Eckert

No, and it’s a later property.

Jake Hindelong - Monness Crespi Hardt

Got it, great. And then on advertising expense, as a percentage came in well on the decline in revenue. Do you think that you may even exceed your previous commentary on being at the low-end of your expected range for advertising spend?

Robert A. Eckert

Well again, we don’t get into forward-looking numbers. I think consistently we’ve said historically we’ve been in sort of the 11% to 13% range of advertising as a percentage of sales and our objective is to get to the lower end of that this year. We’re a little bit higher than we wanted to be last year because the revenues didn’t materialize in the fourth quarter, so the good news is this year we’ve got time to adjust.

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

Jake Hindelong - Monness Crespi Hardt

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

Robert A. Eckert

Yes.

Jake Hindelong - Monness Crespi Hardt

Okay.

Robert A. Eckert

Both.

Jake Hindelong - Monness Crespi Hardt

Got it. Thanks.

Operator

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

Linda Bolton-Weiser - Caris & Company

Just a question about the other girls category. High School Musical being down, I thought that there was a new movie or something that would be expected to drive that this year. Was the POS for High School Musical down as well?

Robert A. Eckert

Let me scramble to look it up. I believe the answer to that is yes, Linda, but I’ll double-check. High School Musical is one of those properties, it clearly is down in sales and it is one of those properties where I do specifically recall we ended last year with more inventory than we wanted, so sales are going to be down just to burn off the inventory.

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

Linda Bolton-Weiser - Caris & Company

Okay. And then --

Robert A. Eckert

Linda, I don’t want to do specific data by specific brand, but it’s pretty flat at POS. It’s not a big number either way.

Linda Bolton-Weiser - Caris & Company

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

Robert A. Eckert

No, we do hope to rejuvenate Polly. It’s an important brand to us. We are seeing what we hope are some early signs of improvement in the U.S. behind a couple of segments, one I recall was designables, the other was shimmering splash. It is a big brand. It’s had a lot of competitors come into its space and we haven’t turned the corner yet on Polly but it really is an important brand to us and one of our core brands and we want to see it do better. It’s too early to get excited about what we saw in the U.S. this quarter but we are certainly hopeful about Polly and it is clearly our intention to rejuvenate Polly.

Linda Bolton-Weiser - Caris & Company

Okay, and then just on the cost reduction program, I’m just wondering if some of those costs are going to come back into the flow of things when your top line growth improves in 2010 and 2011. Are you pretty committed to keeping those costs out now that you’ve taken them out?

Robert A. Eckert

Well I think, as he’s talked specifically about 2010, Kevin mentioned what our objective is for the program and again, it’s very early. We’re only a couple of quarters into the program but we are on track with what we expect to do and our objective with this program is to make sustainable structural changes in our infrastructure. Again, it’s early but so far, so good.

Linda Bolton-Weiser - Caris & Company

Okay. And then Kevin, could you remind me what the special other income that was pretty large in the fourth quarter of ’08, so I can think about that for the comparisons? There was something like $19 million of other income in fourth quarter ’08.

Kevin M. Farr

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

Linda Bolton-Weiser - Caris & Company

Okay. And then can you just remind me, I didn’t catch what you said on the gross margin change, what was the mix and commodity cost affect on the gross margin? Was mix favorable?

Kevin M. Farr

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

Linda Bolton-Weiser - Caris & Company

And commodity costs were up or down?

Kevin M. Farr

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

Linda Bolton-Weiser - Caris & Company

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

Kevin M. Farr

SG&A was $20 million.

Linda Bolton-Weiser - Caris & Company

Twenty million -- okay, that’s it. Thanks a lot.

Operator

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

Margaret Whitfield - Sterne, Agee & Leach

Good morning, everyone. Bob, as you look into the holiday period, I would love your views on what Mattel product lines you think will work well and whether or not you think there will be later shipping this year because of the tight retail management. That’s my first question.

Robert A. Eckert

Well, I suspect there will be later shipping. We are certainly seeing, particularly international markets, a real trend towards kind of just-in-time receipts. They don’t want to take much of an inventory bet and some of these customers are unable to take much of an inventory bet, given the financial conditions outside of the U.S.

I think we have some very innovative product for the quarter, for the year. I’m very high on the mind flex game, which is a really cool nifty, unique thing. I’m very high on the yellow matchbox truck, Rocky the Robot Truck, which I think is the coolest toy I’ve seen in a long time. We are doing well with Hot Wheels overall. Hot Wheels core, Cars is doing well, Trick Trax is doing well. We’ve got the Battle Force 5 television show coming online this fall.

So I think our core brands are in good shape with pretty good innovative product. A chart I believe I showed at analyst day was if you try and measure our share, not just of overall toy sales but of those top 100 toys in any given year, we tend to do really well with the top 100 toys, because of the innovation we’ve put behind the brands. And I don’t have any reason to believe this year is going to be much different.

Margaret Whitfield - Sterne, Agee & Leach

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

Robert A. Eckert

Well, neither of us will know that until we get through the fourth quarter. You know, the toy business is pretty hard to predict and we’ll know that when we look backwards. It’s hard for me to figure that out looking forward and even if I did have a handle on it, we just don’t talk about those kinds of projections.

Margaret Whitfield - Sterne, Agee & Leach

In terms of your commentary on strong holiday properties, you didn’t mention Barbie and what’s going on with Fisher Price with the declines in both core and Fisher Price Friends?

Robert A. Eckert

Well I think Barbie continues to have really good momentum. We’ve seen consistent, sort of week after week after week point of sale growth this year in the U.S. and I am hopeful that the -- what we are seeing in early signs of POS improvements overseas materialize and strengthen, so our core Barbie business was something that we counted on heavily this year with the absence of entertainment related properties and so far, it seems to be working out, so I don’t want to -- you know, we love all of our children and in this company, we particularly love Barbie when she’s doing well.

And what was the second part of your question?

Margaret Whitfield - Sterne, Agee & Leach

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

Robert A. Eckert

It’s hard to tell with Fisher Price. You know, the core business, kind of core toys and the core friend properties seem to be holding their own at point of sale. We are seeing double-digit declines kind of in the teens for some of the more expensive things in the Fisher Price line, like power wheels or what we call baby gear. You know, the high chairs and bouncers and monitors and those sorts of things.

So I’m not overly optimistic about those areas doing particularly well this year. I think the core and the basic friends business will be fine.

Margaret Whitfield - Sterne, Agee & Leach

And finally, American Girl, the new dolls that you have introduced this year, how are they performing?

Robert A. Eckert

They are doing fine. We are holding our own in American Girl. Retail, the stores are up. Now remember, we’ve got still through this quarter the advantage of the boutiques in Boston and Minneapolis that we didn’t have year ago and that’s probably driving the improvement in the store side of the business.

The portfolio is doing well but we are up against the Kitt Kittredge movie last year, which was a really strong marketing program driven by the folks who made the movie. So we are holding our own but the good news there is that we don’t have any issue with retail inventories and those sorts of things. What we sell is what consumers buy.

Margaret Whitfield - Sterne, Agee & Leach

Final, final question -- have you decided on any price increases for the spring line for next year?

Robert A. Eckert

We have not. It’s still early in those discussions. We need to see how the costs are coming in. We need to see what opportunities we have in our own cost reduction programs because that’s important. We have to get a handle on the environment. We haven’t made those decisions but we will be over the next few months.

Margaret Whitfield - Sterne, Agee & Leach

Okay. Thank you.

Operator

We’ll take our next question from Anthony Gikas with Piper Jaffray.

Anthony Gikas - Piper Jaffray

Good morning, guys. I have a few questions as well -- during the quarter, you talked a little bit about where the cost savings came in, including cost of goods. Could you update us on the long-term goal, so the $180 million to $210 million over the next, you know, this year and next, where those cost savings are coming in relative to cost of goods, SG&A, et cetera?

Second question, how is the private label business doing at retail right now? Are we seeing consumers trading down in this category much? And then I have a follow-up.

Robert A. Eckert

Okay, I’ll take the first one on the global cost leadership program. So we expect this year’s savings of $90 million to $100 million and if you look at the first half of 2009, we generated approximately $50 million through the first half. There’s about $35 million reflected in SG&A. There was about roughly $12 million of savings in cost of goods sold and $3 million in advertising. And we are on track to deliver that 90 to 100 as well as for the $180 million to $200 million next year.

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

Anthony Gikas - Piper Jaffray

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

Robert A. Eckert

It’s really too early to tell. I mean, we are working on things like SKU efficiencies and that hits the entire supply chain, so those things are evolving and we are making good progress but it’s too early to give you guidance for ‘010 P&L classification of those savings.

Anthony Gikas - Piper Jaffray

Okay.

Kevin M. Farr

And I don’t, Tony, have specific numbers on private label, and it will be really more pronounced in the holiday season, whatever happens, but I can go back to the last holiday season and I think there are probably three groups of products that did well the last holiday season and are likely to continue to do well now. That is established brands from the large companies that spend a lot of time, energy, money and innovation on those established brands. Certainly there’s some very innovative products coming out of some smaller companies that are allowing them to gain share and I suspect just broadly in this kind of economic environment, private label will at least hold its own and the fallout comes from the people who are kind of the smaller companies that don’t have new innovations. They don’t have established brands, they don’t have a lot of innovations, and as the sophisticated retailers are looking to optimize their productivity of their toy departments, fewer SKUs, that will probably help the established brands that do well and it will probably help private label that generates good margins for retailers.

So I don’t know of anything today that is inconsistent with what I think are the broad economic trends.

Anthony Gikas - Piper Jaffray

Okay, and just two little follow-ups -- Bob, you tend to be fairly conservative. How are you looking at the holidays? Are you planning very conservatively for the holidays in your opinion? And then the last question would be just a follow-up on Tim’s question on the market share -- the data points we are getting on toy sales here in the first half is that sales were maybe down 1% or 2%. Is it fair to say that you’ve maintained your share in the first half?

Robert A. Eckert

Yeah, we probably picked up a little bit but I think all the data, as I try and triangulate this stuff because the data isn’t always great but if I look at point of sale, if I look at the NPD data, it’s all telling the same sort of story to me -- that is, at POS, we are just a little bit south of flat again, right now, driven by Speed Racer. We had -- we had pretty good POS increases in the first quarter and as we now anniversary the movie entertainment properties, we’re giving some of that back. I don’t see anything that’s really inconsistent with -- our POS is a little bit on the south side of flat and retailer inventories are more on the south side of flat than that. Whether I look at NPD, whether I look at POS or whether I talk to retailers, I think it’s a pretty consistent message.

Am I overly conservative? I don’t know. I think the environment in which we are in, looking at retail inventories, they are certainly very conservative and as I say, they are planning cautiously about the holiday season. If you look at our inventories, you know one of the big issues in this business is making too many toys and what it does to your margin structure when you do that and as I’ve said all year, this is going to be a tough year from a top line standpoint. To use Kevin’s term that he uses every day around here, realistic revenue assumptions -- so far, we’re exactly on track with having realistic revenue assumptions and being able to build profits despite that.

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

Anthony Gikas - Piper Jaffray

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

Robert A. Eckert

Yeah, well, that’s the toy business. Every holiday we’re taking a chance. We’re still going to end up with hundreds of millions of dollars in the toys and those are being produced -- what’s our inventory, Kevin, right now?

Kevin M. Farr

Right now I think it’s --

Robert A. Eckert

Five-hundred million dollars?

Kevin M. Farr

It’s around $500 million.

Robert A. Eckert

So you’ve got $0.5 billion worth of toys that haven’t yet cleared, so that’s what we own, let alone what retailers own. So you know this business as well as I do -- this is a high bet business. If you look at the history of Mattel, we’ve been able to make those best, 8,000 SKUs at a time, all over the globe every year and come up with a pretty good cash flow business and I don’t think this year is going to be any exception, other than the environment is tougher out there. The good news is unlike last year, we have more time to plan the environment and as you see, we’re managing the infrastructure, we’re managing the advertising expense, we’re managing the costs to recognize that revenues are going to be a challenge but we don’t want that to hold us back.

Anthony Gikas - Piper Jaffray

Okay. Thank you, guys, and good luck.

Operator

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

Drew Crum - Stifel Nicolaus & Co.

Great. Good morning, everyone. I wonder if you could talk about what entertainment properties are going to be shipping in the third quarter and related to that, what type of commitment you are seeing from retailers for Toy Story?

Robert A. Eckert

We’re starting to ship -- there’s just a little bit of Toy Story, Kevin, in the second quarter, wasn’t there?

Kevin M. Farr

Yes.

Robert A. Eckert

So we are starting to ship Toy Story as we speak. We have good commitments from retailers around the world on Toy Story. You know, clearly that’s an evergreen property in the toy business, like Cars has become an evergreen property for us and we all have high expectations for that?

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

Drew Crum - Stifel Nicolaus & Co.

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

Robert A. Eckert

I don’t know --

Drew Crum - Stifel Nicolaus & Co.

Like there was a question on Avatar --

Robert A. Eckert

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

Drew Crum - Stifel Nicolaus & Co.

Okay, fair enough. And Bob, could you spend a minute on just discussing the disparity and performance for Barbie, domestic versus international? I think we saw a similar spread in the first quarter -- some additional color there.

Robert A. Eckert

I think there’s two things going on. One is the discrepancy between Barbie U.S. and International is very typical of the discrepancy overall between U.S. and International and again, I think the economic environment we are in is tougher overseas than it is right now. Retailers, there are many retailers struggling outside of the U.S. and we are very mindful every day of how much we are going to ship into retailers because we --

Kevin M. Farr

We want to get paid.

Robert A. Eckert

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

The second thing is the 50th anniversary, which really accelerated the momentum of Barbie, you know, Barbie finished strongly in the fourth quarter last year but we did even better in the first quarter this year. I think the 50th anniversary is a bigger deal in the U.S. than it is in some markets. It is a big deal in other markets but it’s a bigger deal here.

Drew Crum - Stifel Nicolaus & Co.

Okay. And one last question -- Kevin, can you just give us the status of that money market fund that you were carrying as a long-term asset? Has that been converted to cash yet?

Kevin M. Farr

Most of it has been converted to cash. I think we have collected about $67 million of the cash and we’ve got $14 million more to collect and we think we are going to collect that in the fourth quarter, early in the fourth quarter.

Drew Crum - Stifel Nicolaus & Co.

Okay. Thanks, guys.

Operator

We’ll go next to John Taylor with Arcadia Investments.

John Taylor - Arcadia Investments

Good morning. I’ve got a couple of questions as well. Let me follow-up on Drew’s question on Barbie, the difference between U.S. and international for just a second -- so all the changes you made in repositioning and all that stuff, have those been -- are those being sort of simultaneously introduced around the world or are they kind of leading in the U.S. and following later internationally?

Robert A. Eckert

No, I would say they are. It is a global change. I guess I probably failed to mention one other thing that I think will play out internationally -- the portion of the business done by the big entertainment properties, you know, those direct to DVD movies we make, is a higher percentage of the business outside of the U.S. than it is inside of the U.S. So as we are strategically reducing reliance on the entertainment segment in favor of a more balanced portfolio in Barbie, we probably see more of an impact of that overseas than in the U.S. Is that reasonable, Kevin?

Kevin M. Farr

That’s correct, Bob.

John Taylor - Arcadia Investments

Okay. All right, good. And then the -- sort of the product line innovations, the new products, are you pretty much on a global [shift] about the same year rather than starting here and next year doing it internationally?

Robert A. Eckert

Yes, I think almost everything is launched globally. You know, there are some of the really higher priced, really innovative things are going to be starting in the larger, more sophisticated markets as they always have done but over time, certainly over the last 10 years, both we and other toy companies have done a lot more global launches than we used to and almost everything is global today.

John Taylor - Arcadia Investments

Right. Okay, good. And then in terms of your promotional spending, I wonder if you could talk about the mix between sort of classic media TV versus point of sale versus other kinds of things -- any changes in that mix that’s significant?

Robert A. Eckert

Not significant on a short-term basis but clearly over time, we are reducing our reliance on broadband media. We are doing more Internet. That’s where eyeballs are shifting. We are recognizing that. We are spending more money there. We continue to invest in point of sale, so I think that the long-term secular trend isn’t changing but I don’t know if there’s any short-term change worth mentioning, Kevin.

Kevin M. Farr

Yeah, I don’t think there’s much of a change this year. We are doing things with regard to Barbie on Facebook and Twitter and other things which aren’t things that cost us money, it’s just time. But I think this year, the mix is pretty relative to what it’s been in the past.

John Taylor - Arcadia Investments

Okay, good. And then last question, so last year everything was sort of melting down during the most intense shipping months and so retailers were freaking out at the end of the year and I’m assuming there probably wasn’t a lot of first quarter shipments that were done in the fourth quarter. Do you think things changed very much this year? I mean, obviously a lot depends on how things sell through but do you think -- could you talk about that a little bit?

Robert A. Eckert

You could get some. Clearly we’ve got some big new important licenses, as you know, that we take over next year. So retailers may want to get a head start on some of those things. They did in general finish with higher inventories than anybody wanted last year, so there are -- you know, one could make the argument that they ought to be more eager to buy spring product at the end of this year. That said, my history always suggests when somebody has lower inventory, they really like it. They get focused on cash flow too and they are now comping those numbers as they do their measures and they said inventory was blank last year, why should it be blank plus this year? Let’s keep it tight.

So you never know but I absolutely agree with the premise of your question, that it was really tough at the end of last year to sell anybody anything, whether you were in our side of the business or on the retailer side of the business and one thing I am encouraged by, as I talked to retailers, they understand that. They certainly understand that it was a real scramble last year and we have all had a -- both sides, both retailers and manufacturers have had time to plan and respond this year and we should be relatively better off for that.

John Taylor - Arcadia Investments

Okay, very good. Thank you.

Dianne Douglas

Operator, we have time for one more question.

Operator

We’ll take our final question from Tim Gary with Pozina Investment Management.

Tim Gary - Pozina Investment Management

I have a question for Bob and then one for Kevin. Bob, you’ve cut back a lot on advertising to make sure that’s not out of whack with sales. But are you learning any lessons from that cut-back that would suggest that as you go forward, maybe you would have a different relationship relative to sales when you are back to more normal sales levels?

Robert A. Eckert

Well, you know, the old adage of half of the advertising doesn’t work, I just don’t know which half. We’ve clearly spent an awful lot of time and effort in this company answering that question. We do know which half isn’t working and that’s the half that is not being spent right now.

So the pay-off of the work we’ve done, pretty sophisticated work in the consumer goods industry in terms of advertising effectiveness, have allowed us to develop internally some key principles, and these principles tend to play out around the globe. What time is the right time to advertise, how much does one advertise, on what kinds of products? And I do think there are some structural benefits, some lasting benefits to that discipline. That being said, you know, we spend around 11% or 13% of sales in advertising. That’s high relative to the consumer goods industry. We do invest in these brands. They are responsive to advertising and we are going to continue to be big advertisers.

Tim Gary - Pozina Investment Management

Okay. And then Kevin, you talked about gross margins for the coming quarters as improving, assuming that your assumptions that you made about cost when you did your price increase were to hold. Could you just tell us how things have been tracking versus those assumptions?

Kevin M. Farr

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

Robert A. Eckert

I think it’s fair to say we’re on track on virtually every line in the P&L right now with what we expected. Again, everybody remember it’s early and it’s spring training and that whole bit but we are on track almost to the tee at where we expected to be right.

Kevin M. Farr

Right, and I think the point that I also made was that there’s a lot of moving parts in gross margin so it’s hard to predict with things like for-ex and royalties and tooling, so when you look at it overall, it’s difficult to project but I think our assumptions with regard to where we thought input costs would be are -- we’re on track.

Tim Gary - Pozina Investment Management

Okay. Very good. Thank you.

Dianne Douglas

All right. Thank you for participating in the call today. There will be a replay of the call available beginning at 11:30 a.m. Eastern Time today. The number for the replay is 719-457-0820, and the passcode is 4864704. Thank you.

Operator

Once again, that does conclude today’s call. We do appreciate your participation.

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