Mattel Q4 2007 Earnings Call Transcript

Jan.31.08 | About: Mattel, Inc. (MAT)

Mattel, Inc. (NASDAQ:MAT)

Q4 2007 Earnings Call

January 31, 2008 8:30 am ET

Executives

Mike Salop - Investor Relations

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

Kevin M. Farr - Chief Financial Officer

Analysts

Michael Savner - Banc of America Securities

Sean McGowan - Needham & Company

Gerrick Johnson - BMO Capital Management

Timothy Conder - Wachovia

Gregory Badishkanian - Citigroup

Margaret Whitfield - Sterne, Agee & Leach

John Taylor - Arcadia Investments

Felicia R. Hendrix - Lehman Brothers

Operator

Good day, everyone and welcome to today’s Mattel fourth quarter 2007 earnings conference call. This conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Salop. Please go ahead, sir.

Mike Salop

Thanks, April and good morning, everyone. Earlier this morning we issued a press release which details Mattel's fourth quarter and full year 2007 results. On the call today, Bob Eckert, Mattel's Chairman and Chief Executive Officer, will give a few brief remarks, and Kevin Farr, Chief Financial Officer, will provide more detail on the financials. After Kevin’s comments, we will open the call for your questions.

Before we begin, let me note certain statements made during the call and the question-and-answer session that follows may include forward-looking statements about management’s expectations, strategic objectives, anticipated financial performance, and other matters. Such forward-looking statements may include comments regarding performance of our brands and product lines, new product introductions, new entertainment properties, brand strategies, international growth opportunities, the state of economies, profits and margins, quality control, impact of product recalls, manufacturing costs, price increases, capital spending, income tax provisions, acquisitions, share repurchase, and our capital investment framework.

A variety of factors, many of which are beyond our control, affect the operations, performance, business strategy, and results of Mattel and could cause actual results to differ materially from those projected in such forward-looking statements. Some of these factors are described in our 2006 report on Form 10-K filed with the SEC and Mattel's other filings made with the SEC from time to time, as well as in Mattel's other public statements.

Mattel does not update forward-looking statements and expressly disclaims any obligation to do so. Information required by Regulation G regarding non-GAAP financial measures is available on the investors and media section of our corporate website, mattel.com, under the sub-headings financial information and earnings releases.

Now I would like to turn the call over to Bob.

Robert A. Eckert

Thank you, Mike and good morning. Before Kevin provides an overview of the financial results, I’d like to provide my thoughts on the past year as well as a look forward. Considering the unexpected challenges we faced in 2007, I believe we delivered good results. While the U.S. business was down slightly for the year, in international markets we experienced double-digit growth across all regions.

As in any year, some properties increased while others declined but we did see strong performance across many areas of our portfolio, including core Fisher Price and the Cars entertainment property. U.S. Barbie performance though was a disappointment as our two entertainment properties didn’t perform as well as the prior year’s Mermaidia and the Twelve Dancing Princesses.

Overall, our portfolio continued to generate strong cash flow in 2007 and we strategically deployed over $1 billion of excess cash during the year. We acquired the Polly Pocket brand, a property we had licensed for years, and several board games, including the popular Apples to Apples.

The dividend was increased by 15% to $0.75 per share and we repurchased 35.9 million shares of our stock, representing 9% of shares outstanding.

While we have largely moved on from the issues of 2007, the new year, like any year offers its own set of challenges, including higher costs for commodities, labor, and quality testing, along with the general sentiment of worsening economies. That said, historically the toy business has held up relatively well during uncertain economic times.

To address the margin challenges, we’re committed to pricing our products appropriately and reducing controllable costs, although price adjustments to reflect the new environment are more likely to impact the fall product line as the spring pricing has already been established.

Despite the challenges, there are opportunities to build on the momentum of our international success, as well as introduce a strong lineup of toys associated with several likely blockbuster movies -- Warner Brothers’ Speed Racer and Batman Returns, and Dreamworks’ Kung Fu Panda.

In 2008, you will also see several of Mattel's classic brands, Barbie, nearing her 50th anniversary; Hot Wheels celebrating its 40th anniversary this year; and Fisher Price, a trusted brand for more than 77 years, delivering play patterns core to the brands’ heritage but with new technologies and with new play experiences.

Coming off 2007, we are also deeply committed to maintaining and strengthening our leadership position in the toy industry in the area of quality control. As an example, we’ve developed new, more stringent standards and have openly shared them with other manufacturers.

We’ve continued our commitment to strengthen our effort as a responsible corporate citizen with the creation of a new corporate responsibility organization reporting directly to me. The organization is tasked with continuing and enhancing the company’s leadership role in this area by adding a new level of accountability to Mattel's safety and compliance protocols, managing implementation and oversight of the company’s global manufacturing principles, and coordinating and progressing green initiatives on a global scale.

As many of you may already know, earlier this month, Fortune Magazine named Mattel for the first time in 10 years to its highly coveted 100 Best Companies to Work For list, an acknowledgement of a belief I’ve had since my very first day on the job.

From my perspective, there are challenges every year. What’s important is that you work to overcome them. Our 30,000 employees are focused collectively on managing a successful global portfolio of diversified and time-trusted brands -- brands that generate strong cash flow, which we aim to continue to deploy effectively for our shareholders.

Over the past five years, we’ve paid shareholders $1 billion in dividends and repurchase $2 billion of our common stock, and today we announced our board has approved an additional $500 million share repurchase authorization.

Thank you. At this time, I’d like to introduce Mattel's Chief Financial Officer, Kevin Farr, who will take you through the financial review.

Kevin M. Farr

Thank you, Bob and good morning, everyone. Before I provide my usual remarks on the fourth quarter and the full year results, I would like to take a few minutes to detail the impact of product recalls.

During the fourth quarter, we recorded reserve charges totaling $17.3 million for last year’s product recalls. In addition to these charges, we incurred other recall related costs in the quarter of approximately $25 million. These costs primarily were comprised of legal fees, increased product testing costs, and incremental logistic costs. Collectively for our fourth quarter, results included approximately $42 million of pretax charges and costs related to product recalls.

On a full year basis, we recorded reserves of approximately $68.4 million for affected product at retail and expected consumer returns, while other incremental costs related to the recalls totaled approximately $42 million.

Consequently, our full year results include approximately $110 million of pretax charges and costs related to product recalls. Breaking these amounts down by line item in the P&L, net sales was reduced by $12.9 million in the fourth quarter and $48.9 million for the full year.

Cost of sales increased by approximately $9 million in the fourth quarter and $22 million for the full year. Advertising increased by approximately $1 million in the fourth quarter and $5 million for the full year, and SG&A increased by approximately $19 million in the fourth quarter and $35 million for the full year.

While some of these costs, this is reserve charges, should not be repeated in 2008, we will continue to incur these testing costs and, until all related litigation is resolved, additional legal expenses.

During our last conference call, we also highlighted an import license situation in Brazil. We were able to get our containers cleared in the quarter early on so this situation did not have a significant impact on our fourth quarter shipments.

I will now provide my remarks on Mattel's overall financial performance. As I walk through the financial review, I will try to highlight areas in which the recalls had a notable effect. Let’s start with a review of sales for the fourth quarter.

Total worldwide gross sales for the quarter were up 6%, including a four percentage point benefit from changes in currency exchange rates. U.S. sales were down 3% while international sales were up 18%, including a nine percentage point benefit from changes in currency exchange rates.

On a regional basis, sales in Europe were up 17%, including a 12 percentage point positive impact from foreign exchange. Sales in Latin America were up 21%, including a five percentage point positive impact from foreign exchange. And sales in Asia-Pacific were up 20%, including a 10 percentage point positive impact from changes in currency exchange rates.

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

Mattel Girls and Boys brands -- worldwide sales for Mattel Girls and Boys brand segment were up 9% including a 6 percentage point positive impact from changes in currency exchange rates. The sales increases reflect continued strength in our international markets with 19% sales growth, including a 10 percentage point positive impact from foreign exchange. The international growth was partially offset by sales declines in the U.S. of 4%.

Worldwide Barbie sales were up 4%, including a seven percentage point positive impact from changes in currency exchange rates. Barbie sales in the U.S. were down 12% while Barbie sales in international markets increased 13%, including a 10 percentage point benefit from changes in currency exchange rates.

Positive sales gains in our international Barbie Reality and our worldwide collector business were offset by continued softness in our U.S. Barbie fantasy business and declines in MyScene.

Worldwide sales of other girls brands were up 19%, including a seven percentage point positive impact from changes in exchange rates. Sales in the U.S. were up 30% while international sales of other girl brands were up 13%, including a 10 percentage point positive impact from changes in currency exchange rates.

The sales growth worldwide was driven primarily by High School Musical and Little Mommy, partially offset by declines in Winks internationally and Polly Pocket in the U.S.

Sales in the wheels category increased 15%, including a five percentage point positive impact from changes in currency exchange rates. Double-digit increases in both the U.S. and international markets were driven by strong sales of Hot Wheels and Matchbox.

Sales in our entertainment business, which includes games and puzzles, were up 6%, including a six percentage point positive impact from changes in foreign exchange. Sales of the Cars entertainment property continued to be strong, especially in international markets, and again exceeded last year’s corresponding quarter.

The entertainment business also benefited from the continued international expansion of Radica’s portfolio of interactive brands, including 20Q, FunKeys, and GirlTech products. Worldwide Radica gross sales in the quarter were $85.5 million, up from $62.5 million in the fourth quarter of 2006.

Fisher Price brands -- worldwide sales for Fisher Price brands were up 4% for the fourth quarter, including a three percentage point positive impact from changes in currency exchange rates.

On a regional basis, international sales of Fisher Price brands increased 18%, including a nine percentage point positive impact from foreign exchange, while sales in the U.S. declined 3%.

Worldwide, core Fisher Price was up 15%, including a four percentage point benefit from changes in currency exchange rates. U.S. sales of Fisher Price core were up 5% and international sales were up 33%, including an 11 percentage point benefit from foreign exchange.

The overall growth in Fisher Price core is related to continued worldwide strength in our infant and newborn products, as well as learning products, including the top selling item, Smart Cycle.

Fisher Price Friends sales declined 19%, including a two percentage point benefit from foreign exchange, and we’ve seen some properties come down from great performances in 2006.

Sales of Fisher Price Friends in the U.S. were down 23% while international sales were down 11%, including a six percentage point benefit from foreign exchange.

American Girl brands -- sales of American Girl brands were down 2%. Positive contributions from our new boutique and bistros in Atlanta and Dallas and the launch of our new historical character, Julie, were not enough to offset continued softness in our direct channel.

Now I’ll review sales for the full year. Worldwide gross sales were up 7% for the full year, including a three percentage point benefit from changes in currency exchange rates. The sales increase reflects the continued strength of our international business, which posted sales increases of 17%, including the benefit of seven percentage points from changes in currency exchange rates. Increases in international markets were partially offset by sales declines in the U.S. of 1%.

On a regional basis, sales in Europe were up 16% compared to the prior year, including a nine percentage point positive impact from foreign exchange rates.

Sales in Latin America were up 23%, including a benefit of five percentage points from changes in exchange rates, and sales in Asia-Pacific were up 15% with a seven percentage point benefit from changes in foreign currency.

I’ll now review our core categories and brands for the full year. Mattel Girls and Boys brands -- worldwide sales for Mattel Girls and Boys brands increased 8%, which included a benefit of five percentage points from changes in currency exchange rates. The sales increase reflects an 18% increase in international sales, which included a benefit from changes in currency exchange rates of eight percentage points. U.S. sales declines of 4% partially offset the strong international performance.

Worldwide, Barbie sales were up 1%, including a benefit from changes in currency exchange rates of four percentage points. Barbie sales in the U.S. were down 15% while in international markets, Barbie sales were up 12%, including an eight percentage point benefit from changes in currency exchange rates.

Softness in our Barbie Fantasy segment worldwide was driven by the underperformance of our two Barbie entertainment properties, Barbie Magic of the Rainbow in the spring, and Barbie as the Island Princess in the fall, as compared to the prior year parties, Mermaidia and Twelve Dancing Princesses.

Strength in our Barbie Collector business worldwide and our Barbie Reality business in international markets offset the softness in the fantasy lines.

Worldwide sales of other girl brands were up 2%, which included a 5 percentage point benefit from changes in currency exchange rates. The sales increase is primarily driven by strong sales of Little Mommy and High School Musical, partially offset by sales declines in Winks and Pixel Chicks globally, and Polly Pocket in the U.S.

Worldwide sales for the Wheels business was up 14%, which included a benefit from changes in currency exchange rates of four percentage points. While the U.S. Wheels business experienced positive sales growth, the strength in the Wheels business was driven primarily by double-digit increases in Hot Wheels and Matchbox internationally.

Sales in our entertainment business, which includes games and puzzles, were up 16%, with a five percentage point benefit from changes in currency exchange rates. The unprecedented success of the Cars business in its second year since the movie release and incremental sales from last year’s Radica acquisition led the growth in the entertainment business and more than offset declines in Superman. For the year, worldwide Radica gross sales totaled approximately $181 million.

Fisher Price brands -- worldwide sales for Fisher Price brands were up 8%, with a two percentage point benefit from changes in foreign exchange rates. U.S. sales were up 3% while international sales were up 17%, including a benefit of seven percentage points from changes in currency exchange rates.

Worldwide sales at core Fisher Price were up 19%, including a three percentage point positive impact from currency exchange rates.

U.S. sales were up 15% and international sales increased 27%, including a benefit of eight percentage points from changes in exchange rates.

Infant and baby gear products continued to drive the growth in both U.S. and international markets, along with products from our preschool and learning lines.

Worldwide sales of Fisher Price Friends were down 15%, including a two percentage point benefit from currency exchange rates. U.S. sales declined 20%, while international sales were down 6%, including a five percentage point benefit from foreign exchange.

As we anniversaried some record growth from 2006, we saw some properties retreat but we did see growth in Sesame Street, driven by carryover sales of 2006 TMX Elmo and this year’s follow-on products.

American Girl brands -- sales of American Girl brands were down 2% versus the prior year, driven primarily by continued softness in our direct channel and our established historical character lines. We did, however, achieve a record performance from our Girl of the Year, Nicki, and we successfully launched our newest historical character, Julie, in the fourth quarter, and our new Boutique and Bistro retail stores in Atlanta and Dallas in the second half.

Now let’s review the P&L, which is shown on exhibit one. For the quarter, gross margin was 48%, flat with last year. While gross margin benefited from price increases and favorable foreign exchange rates, these gains were offset by external cost pressures and product recall related costs. The product recall related costs negatively impacted gross margins by 70 basis points.

For the year, gross margin was 46.5%, up 30 basis points from 46.2% in 2006. Compared with the prior year, gross margin benefited from price increases and favorable foreign exchange, which was partially offset by external cost pressures and the negative impact of product recall related costs. Product recall related costs had an 80 basis point negative impact on gross margin for the full year.

For the fourth quarter, advertising expense was $284.9 million, or 13% of net sales versus 12.1% for the fourth quarter of 2006. For the year, advertising expense was $708.8 million, or 11.9% of net sales compared to 11.5% last year.

Advertising expense includes product recall related costs of approximately $1 million in the fourth quarter and $5 million for the full year.

For the quarter, selling, general and administrative expenses increased by approximately $36 million to $403.7 million. As a percentage of net sales, SG&A expenses increased 90 basis points to 18.4%.

As previously mentioned, 2007 fourth quarter SG&A expenses included approximately $19 million of incremental costs related to product recalls. Absent these costs, the increase in SG&A expenses for the quarter is primarily attributable to the impact of foreign exchange and investments in the business partially offset by lower incentive compensation.

Equity compensation expense also contributed to the increase in SG&A in the quarter, increasing from $2.7 million in the fourth quarter of 2006 to $8.3 million this quarter.

For the full year, SG&A expense of $1.34 billion increased by $106.4 million from 2006 and as a percentage of net sales, it increased 60 basis points to 22.4%. SG&A expenses for full year 2007 include approximately $35 million of incremental costs related to the product recalls.

The remaining increase in SG&A was driven by the negative impact of foreign exchange, upward employee cost pressures, and continued investment in our business. These cost increases were partially offset by lower incentive compensation.

For the year, overall equity compensation expense was $22.2 million compared to $27.5 million in 2006. As a reminder, the 2006 equity compensation expense included a cumulative adjustment for non-cash compensation expense of $19.3 million related to our historical stock option review.

Operating income in the fourth quarter was $362.1 million, or 16.5% of net sales, down 190 basis points compared with last year’s fourth quarter, due primarily to recall related costs.

For the year, operating income was $730.1 million, or 12.2% of net sales, down 70 basis points from the prior year, reflecting slightly higher gross margins offset by higher advertising expenses and higher SG&A cost, all impacted by recall related costs.

For the fourth quarter, interest expense was $26 million, consistent with the prior year fourth quarter.

For the full year, interest expense declined from $79.9 million in 2006 to $71 million in 2007, due to lower average borrowings.

Interest income for the quarter was $4.7 million versus $8.5 million in 2006, as we had lower average cash balances in the fourth quarter of 2007. For the year, interest income increased from $30.5 million to $33.3 million. In the fourth quarter, other non-operating income net was $2.8 million versus $2.1 million in 2006. For the full year 2007, other non-operating income net was $11 million versus $4.4 million in 2006. The current year income relates primarily to foreign currency exchange gains.

The income tax provision for the year increased from $90.9 million to $103.4 million. The 2007 tax provision reflects net benefits related to prior years of $42 million relating to tax settlements, reassessment of tax exposures, and tax law changes. The 2006 tax provision included a $63 million positive impact from tax settlements.

For the fourth quarter, reported net income of $328.5 million, or $0.89 per share versus last year’s $286.4 million, or $0.75 per share. The 2007 fourth quarter earnings included tax benefits of $0.13 per share and recall related costs of $0.09 per share.

For the year, we reported net income of $600 million versus last year’s $592.9 million. Full year earnings per share of $1.54 included tax benefits of $0.11 per share and recall related costs of $0.22 per share.

Earnings per share for 2006 of $1.53 included tax benefits of $0.16 per share.

So to summarize the P&L, the slight increase in full year net income resulted from increased sales volume and improved gross margin, partially offset by higher advertising expense as a percentage of sales and higher SG&A costs, all impacted by recall costs.

Turning to the cash flow and balance sheet, cash flow from operations for the year was $561 million, driven primarily by net income of $600 million. Consistent with our capital investment framework, approximately $104 million net cash was deployed to complete strategic acquisitions, including acquiring the intellectual property rights to Polly Pocket and the board game Apples to Apples.

We also continued to return excess cash to our shareholders in the form of cash dividends and share repurchases. In the fourth quarter, we paid an annual cash dividend of $0.75 per share, up $0.10 or 15% from the prior year.

Also during the year, we repurchased 35.9 million shares of our stock at a cost of $806 million, representing approximately 9% of outstanding shares. As a result of the repurchase activity, at December 31, 2007 there were 361 million basic shares outstanding.

Year-end cash on hand was $901.1 million, down from approximately $1.2 billion at the end of 2006, primarily due to the deployment of excess capital. Receivables were $991.2 million, or 41 days of sales outstanding, one day higher than last year.

Excluding the year to year change in factoring, which was down $86 million versus the prior year, days of sales outstanding was four days lower.

Inventories at $428.7 million were up $45.6 million, or 12% versus 2006 and represent 74 days of supply, which is one day higher than last year.

Our data suggest retail inventory levels of our products with our major U.S. customers finished the year above prior year’s extremely low levels. Although it varies by brand, we feel overall retail inventory levels are reasonable.

Our total balance sheet debt increased by $249 million from the prior year. During 2007, the company paid down $50 million of international debt and $50 million of medium term notes. These payments were offset by the issuance of $349 million of short-term borrowings.

Our debt to total capital ratio ended the year at 29.1% versus 22.3% last year.

Capital expenditures for the full year were $147 million, up from last year’s $133 million.

So to summarize, despite the added challenges presented by the product recalls, our overall business held up well. Our top line results reflect the strength in our international business, favorable foreign exchange, and sustained growth in our Fisher Price core business.

We enjoyed the unprecedented success of the Cars entertainment property in its second year and continued to grow our other girls business with products like Little Mommy and High School Musical.

Admittedly, Barbie’s performance in the U.S. was below our expectations but we are maintaining our strategic focus on developing the innovative products that will resonate with younger girls and capturing the opportunities available with older girls that we know still have a strong connection to the brand.

Our gross margins moved in the right direction as a result of our efforts to align our prices with increased input costs and some favorability in exchange rates, despite the added costs presented by recalls and additional testing efforts.

Finally, we continued to deploy capital in a meaningful way with a 15% increase in our dividend and share repurchases totaling $800 million during the year. As we move into 2008, we do expect to confront near-term cost pressures but we’ll continue to be disciplined and opportunistic in operating our business and effectively deploying capital.

That concludes 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 first hear from Michael Savner of Banc of America Securities.

Michael Savner - Banc of America Securities

Good morning. A couple of questions, if that’s okay -- first on the Fisher Price brand, the growth in the second half of the year obviously has been somewhat anemic. For the fourth quarter, I assume there is some comp on the TMX Elmo but with the Fisher Price Friends, what exactly drove those declines? I know last quarter you had said that Dora, the Dora brand saw a lot of declines. Is that a continuation of Dora or are there other things that just didn’t seem to be clicking in the fourth quarter?

Robert A. Eckert

Across Fisher Price, remember that early in the year of ’07, we benefited from pipeline refill as retailers ended ’06 with extremely low levels of inventory. The core products in Fisher Price did well all year. The Kid Tough digital camera, the Smart Cycle, Imaginex, Shake-and-Go Cars, Bounce-and-Go Zebra, Baby Gear did well. So core Fisher Price did well. Fisher Price Friends didn’t do as well in ’07 as ’06, and then let me talk specifically to your question on Dora, because it continues to be a top selling property for Fisher Price. It’s had a long history of success in our Friends portfolio, Kevin, I think since 2002?

Kevin M. Farr

That’s correct, Bob.

Robert A. Eckert

It came off double-digit growth in ’06 but in ’07, the line just didn’t match what it did in ’06. With all toys, we go through cycles. Last year we simply didn’t sell as many Doras as we did in the prior year when we had record growth but the bottom line is Nickelodeon has a proven track record of creating [toyetic], kid-oriented properties. They’ve done a great job of building a global brand with Dora. We’ve had a great partnership with Nickelodeon and together I think we’ve built a global product with Dora with Nick’s great content and our great toys. Dora continues to be the top-rated TV shows for kids ages 2 through 5, and we’re fully committed to the brand and we want to do a better job with it.

Michael Savner - Banc of America Securities

Bob, I certainly wasn’t trying to pick on Dora -- I’m just trying to figure out if the Friends brand was down call it 19% to 20% worldwide, was Dora the key decline or was there something else in the Friends business that wasn’t working? What was the biggest loser, I guess, for the year?

Robert A. Eckert

Well, I don’t want to go into specific product lines. I would say across the board, we had obviously more do sales below prior year than those who did above. I guess I would cite Sesame Street as one of the properties that did grow for the year. TMX continued to be popular for the first part of the year, or the first three quarters of the year and then we had the new Elmo in the fourth quarter. So Sesame Street probably stands out as the one property in the portfolio that did the best and core Fisher Price did well.

Michael Savner - Banc of America Securities

Okay, and I’ll just ask one second question, if that’s okay, on American Girl; that business has been struggling for most of this year and a little bit surprising, given you opened up the two boutiques in the past few months. Is there a change to the strategy of the distribution for that business, or is it even strategically a necessity for Mattel going forward? I mean, you could certainly craft a very cautious argument on American Girl if we are heading into a recession and consumers are pulling back that something at the high end like American Girl could be a particular risk. I mean, how do you think about it strategically being part of your business in ’08?

Robert A. Eckert

I think American Girl is important. So many people on your side of these discussions focus on the Barbie brand that I think my Barbie U.S. sales are like 6% of our worldwide portfolio today. And people don’t recognize the importance of things like American Girl and its contribution to the business, or Fisher Price and its contribution to the business. We have a portfolio of brands. In any given year, some do better than others but we’ve managed the portfolio and the portfolio has grown every year since -- at least the year 2000, and I think American Girl will continue to do well and be a positive contributor to us both strategically and financially.

Michael Savner - Banc of America Securities

Okay. Thanks very much, Bob.

Operator

Next we’ll here from Sean McGowan of Needham & Company.

Sean McGowan - Needham & Company

I have a couple of questions as well -- Kevin, can you help me understand the $0.89 reported number and the $0.13 tax benefit? What is the assumed rate that would get you to that $0.13 difference? It looks like there had to be a pretty low tax rate, even excluding the benefit of a quarter. I guess the question is what do you think is the normal tax rate that you would have seen in the fourth quarter?

Kevin M. Farr

I think if you exclude the tax benefits, I think our worldwide effective rate in 2007 ended the year slightly lower than expected. It was about 21%.

Sean McGowan - Needham & Company

That’s for the year?

Kevin M. Farr

That’s for the year.

Robert A. Eckert

Yes, the quarter just --

Sean McGowan - Needham & Company

Right, right.

Kevin M. Farr

The quarter reflects the fact that we recorded $42 million in tax benefits in the fourth quarter.

Sean McGowan - Needham & Company

Okay, that’s how it makes sense. Bob, would you care to comment on what product areas you think might have too much inventory out there as we begin the new year?

Robert A. Eckert

No, Sean, I don’t think it’s across entire brands and I don’t want to characterize it as a widespread issue. I talk to retailers and I always tell you all to talk to retail. Our calculation of retail inventories, which we do, as you know, by looking at our shipments and what we get directly from retailers on POS, suggest that the retailer inventories were up order of magnitude of 10% to 15%. But remember, it’s coming off very low levels in ’06.

As you’ll recall, our first quarter results in ’07, I believe our sales were up almost 20% and clearly, I hope we pointed out at the time, we benefited from what I would have characterized as very low levels of retail inventories going into ’07 and I think that’s been corrected as we go into ’08.

Sean McGowan - Needham & Company

And that obviously raises one of the next questions about how you see the timing of revenue in ’08 flowing, particularly with the concentration of entertainment properties around the middle of the year. Can you just comment on how you figure those entertainment properties are going to affect revenue? I mean, are we going to see a lot of that in the first quarter or is it really more second and third?

Robert A. Eckert

Sean.

Sean McGowan - Needham & Company

I gotta ask.

Robert A. Eckert

We’re not going to do that one.

Sean McGowan - Needham & Company

All right, last question then; Kevin, can you give us some commentary directionally how you think all these cost issues and pricing will affect gross margin for the year in ’08?

Kevin M. Farr

Well, I think that we are seeing cost increases from our vendors and we are experiencing them in our own plants, so when we look at these cost increases are not related to safety protocols but are also pressured from currency, from labor and commodity costs. So as we look at 2008, I think what we need to do again is do a modest increase in prices. Over the past few years, we’ve increased prices in low single digits but expect our price increase is likely to coincide with the fall product line, as Bob said, to be in the mid to high single digit range given the number of cost pressures we face.

Sean McGowan - Needham & Company

Okay, so on a run-rate basis by the end of the year, do you think you will have offset the increase in cost? Obviously you can’t recapture that necessarily in the first part of the year but do you think on a run-rate basis you’ll be there?

Kevin M. Farr

Well, I think that’s our goal but again, I think it’s going to depend upon where these costs go through the year. If they continue to rise quickly, and that may not be the case but if they are at the current levels, we’ll see how it works out with regard to whether we are able to improve margins. That’s our goal for the year.

Sean McGowan - Needham & Company

Thank you very much.

Operator

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

Gerrick Johnson - BMO Capital Management

Good morning. I was wondering if you could talk about what you think retailers are planning for 2008 and do you think there will be any changes to allocated space for the toy category at say the discounters, like Wal-Mart, Target, so on and so forth?

Robert A. Eckert

I haven’t seen anything yet. As some of you know, I like to go to stores a lot early in the year to see what inventory positions look like and see what the spring sets look like and I haven’t noticed anything specific. I guess I would comment on a recent store check I made, and again, I caution all of you not to do this, so don’t make too much of a big deal out of one store or a handful of stores, but I was in a large retailer the other day and I noticed that the store was just much cleaner set, it was easier to shop, less inventory in the store, easier to walk through the store. And you know, it seemed to me that those folks understood the benefit of lower working capital, making their stores easier to shop and not having as much inventory cluttering the middle of the floor that you had to walk through.

I think things like that will continue but I haven’t noticed anything in shelf space that causes me concern as I think about the toy business.

Gerrick Johnson - BMO Capital Management

Okay. I have two more quick ones -- regarding Barbie Girls, are you where you thought you would be in the -- I guess it’s being called the virtual playground, these days, and is Barbie Girls trending according to your plan, or how is that doing?

And then on the inventory, the 12% growth in inventory, what explains that growth in your own inventory?

Robert A. Eckert

I’ll start with Barbie Girls and maybe Kevin can talk about the inventory. We like the results we’ve had on Barbie Girls. It’s a global business now. We’re in five languages. We’ve done I think 9.5 million or 10 million registered users now. We’ve had a successful launch of what amounts to a new play pattern and it importantly keeps older girls engaged in the brand.

I would say the MP3 device that sold to get deeper into Barbie Girls last year sold okay. The price point may have been too high but we knew there was only one opportunity to get the very early adopters in, so one of the things we’ll be doing in 2008 is having Barbie Girls product that allows girls to get deeper into the virtual world at lower price points.

Kevin M. Farr

And then with your question regarding inventories, as we plan for the year, we plan the inventories to be up to support international growth and then also, due to longer lead times and clearing product into certain countries, overall when we look at our retail inventory, or our own inventories, we think we are in pretty good shape. We are not concerned about obsolescence. We do have excess inventory levels that are up a little bit from last year but overall we think we’re in pretty good shape.

Gerrick Johnson - BMO Capital Management

Okay. Thank you very much.

Operator

Next we’ll hear from Timothy Conder of Wachovia.

Timothy Conder - Wachovia

Thank you. A couple of questions, gentlemen; first of all, Bob, you characterized a little bit Barbie and framed it for us, Barbie represents in the U.S. about 6% of your total global sales. Could you do the same for Dora or maybe put Fisher Price Friends or Dora in perspective of the overall Fisher Price?

Robert A. Eckert

No, Tim, I probably shouldn’t have started that. We don’t generally disclose item by item line item sales or brand by brand, and it does mix every given year. My focus was on Barbie because for seven years, essentially I have heard a lot of people say this is the Barbie company. And Barbie is important. Barbie is the number one toy in the world. It was the number one toy in the world in 2007, but I’m just trying to communicate there’s more to the Mattel portfolio than one brand in one country, regardless of that brand and that country.

Kevin M. Farr

Fisher Price core isn’t much bigger than Fisher Price Friends, as you know, and within Friends, we not only have Dora but we have Disney, we have Sesame Street, so there’s a lot of things in there.

Timothy Conder - Wachovia

Okay. Last quarter, I think you guys gave some commentary as to what Dora did domestically and internationally, and I apologize if I missed that earlier in the conversation, but could you just refresh on that for the fourth quarter and year?

Robert A. Eckert

I don’t recall that we did disclose those things and in general, we don’t disclose specific brand lines within segments, sales by quarter or year by market.

Timothy Conder - Wachovia

Okay. Back to the retail inventory question obviously, as you mentioned already, the retail inventories are up 10% to 15% off of very depressed levels last year. Would you characterize those, Bob, what’s in the channel now as more of a normalized level, slightly elevated? Just maybe give a little more color on that?

Robert A. Eckert

I would characterize it as a normal level. Again, I ask people to talk directly to retailers but I don’t -- in conversations I’ve had with retailers, I don’t have any concerns about the overall inventory level. Again, on any given item, there may be too much or too little but broadly speaking, I don’t see a problem.

Timothy Conder - Wachovia

Okay. And then last question, please correct me if I’m wrong here, I think you characterized that your ongoing testing cost would be roughly 1% of cost of sales. Is that still valid or does that factor in any additional -- the increase in labor and so forth that’s also going on as far as the input costs?

Kevin M. Farr

No, I think you -- when we just look at the testing costs, we expect it to be about 1% of cost of sales and that will be reoccurring. And then I also wanted to mention, I think I said this in my speech, that legal expenses would continue until all related litigation is completed.

Timothy Conder - Wachovia

Okay, so we really though, Kevin, shouldn’t see any incremental testing costs -- well, maybe about a half-a-year’s work on a year-over-year basis -- is that fair?

Kevin M. Farr

Yes, I think we implemented this in mid-August, so I think prior to August, we’d expect to see year-on-year increases to --

Robert A. Eckert

Well, and some of that presumably is tied up inventory too.

Kevin M. Farr

Right.

Timothy Conder - Wachovia

Okay. Thank you, gentlemen.

Operator

Next we’ll hear from Gregory Badishkanian of Citigroup.

Gregory Badishkanian - Citigroup

Thanks. Just two quick questions here; first, can you provide any color on U.S. retail sales in the fourth quarter? Obviously inventories were a little bit higher so retail sales would lag that. And how does that compare with what you think is going on in the industry?

Robert A. Eckert

Well, you know, we communicated with consumers throughout the holiday season. We used our website, our newspaper ads. We supported efforts of retailers as they communicated with their customers about toys, safety, and those kinds of things. I think the holiday season started out very nicely at retail, right after Thanksgiving, then it got slow and then, as we all expected, it did come through and the market cleared the week before Christmas. We all knew it was going to be a late last year -- we being retailers and manufacturers like us. We talked about it but of course there’s a fair amount of anxiety until that time hits.

We ran a multi-brand advertising campaign on television at the very end of the year during the holiday season just to remind parents of the joy and fun of Mattel toys and what they bring to kids and families. I thought it was time to stop talking about lead and I’m glad we did.

Gregory Badishkanian - Citigroup

And just looking at balance sheet, have you made any share repurchases since the end of the fourth quarter? And how aggressive will you be versus how you’ve been in the last few quarters, given your share price, where it’s at now?

Robert A. Eckert

We don’t talk anything about prospective things like share purchase activity and we don’t comment in the quarter about any activity. We only announce that at the end of the quarter.

Kevin M. Farr

I think I would just add, at the end of December we essentially exhausted our previous authorization, so with the new authorization announced today, there’s approximately $500 million left on the outstanding authorization -- $501 million.

Gregory Badishkanian - Citigroup

Okay, and if you were looking back two quarters ago, just asking a different way, your view on the value of your shares now versus six months ago, do you feel better about maybe making more aggressive share buy-backs?

Robert A. Eckert

No, I apologize. We’re not going to answer that question. I’m sorry.

Gregory Badishkanian - Citigroup

Okay. Thank you.

Operator

Next we’ll hear from Margaret Whitfield of Sterne, Agee.

Margaret Whitfield - Sterne, Agee & Leach

Good morning, everyone. Bob, I was wondering if you could comment as to whether or not you grew your business last year, rather in the fourth quarter, with your top three retailers here in the U.S.

Robert A. Eckert

We don’t, Margaret, talk about specific retailers. I’d rather you ask questions to them about their business than me.

Margaret Whitfield - Sterne, Agee & Leach

Or I guess I’ll read the Q or the K.

Robert A. Eckert

I feel good about our relationships with all the major retailers. I think we did pretty well with them, but again, I’d ask you to ask them that.

Margaret Whitfield - Sterne, Agee & Leach

And it’s been painful to see the erosion in Barbie, especially this past year, in the younger age group. Are you satisfied with the entertainment approach, Bob? Can you give us some insight as to what we might expect in this new year for Barbie?

Robert A. Eckert

No, I think we do need to do some work, Margaret. Both our spring and fall fantasy lines didn’t meet our expectations. Generally speaking, the lead doll sold well but it didn’t translate into sales of the related accessories.

The reality side of the Barbie business is relatively solid. The core lines like Beach or Fashion Fever or Collectors are performing better. MyScene is doing well internationally but it is pretty well cycled through here in the U.S. And we do need to do more work on Barbie, particularly in the U.S.

In 2008, we are going to continue to focus on increasing the core reality offerings. We will continue to work on new play patterns, like some of the things you may have seen in the shelf lately, or as we talk about Barbie girls. But we also need to improve the performance of the entertainment side of Barbie and I think we’ll do that.

Margaret Whitfield - Sterne, Agee & Leach

Are you going to have two entertainment properties again this year, one for spring, one for holiday?

Robert A. Eckert

Yes, I think there’s two and there’s a little something else going on too. Margaret, I think I’d rather talk about that at Toy Fair than today, but yes, we are committed and Mariposa is on the shelf right now and we’ll have a lot of activity in the fall, which I’ll talk about in a couple of weeks.

Margaret Whitfield - Sterne, Agee & Leach

Some of us will not be at Toy Fair. I wonder if you could give us some update on what we might expect, some of the highlights that toy buyers have been excited about in terms of your new line.

Robert A. Eckert

I think I will be making a public presentation on the web, so Margaret, even if you can’t be with us in New York at what is --

Margaret Whitfield - Sterne, Agee & Leach

I will be there.

Robert A. Eckert

-- annually a 25-inch snowstorm, you can hear us on the web.

Margaret Whitfield - Sterne, Agee & Leach

Okay, and finally, tax rate, would the new year also have a 21% rate, Kevin?

Kevin M. Farr

Well, I think -- you know, we don’t give guidance but I think at this time, we estimate that the 2008 effective rate will be in the range of 21% to 23%.

Margaret Whitfield - Sterne, Agee & Leach

Okay. Thank you.

Operator

Next we’ll hear from John Taylor of Arcadia Investments.

John Taylor - Arcadia Investments

Good morning. I’ve got two questions, one about margin and one about licenses, I guess. So on the one hand, you are facing cost pressures on the production side. On the other hand, it seems like your mix is going to benefit from a stronger entertainment lineup this year. I wonder if you can give us any relative impact of those things. Kevin, I think I heard you say that you are hoping that or you are planning for a slight improvement or some kind of improvement year-on-year. Is there anything else in that margin mix that we ought to keep our eyes on?

Kevin M. Farr

I think just to clarify the prior comment, I think that long-term our goal is for margins to go up. I think in the near-term, that’s going to depend upon where external cost pressures go and how well we are able to find supply chain savings to offset these cost increases.

There’s so many moving parts, JT, as you know in our business that it’s very difficult to predict the impact of mix. I think there will be favorable impacts from the movies but we’ve gotten a lot of moving pieces and we’ll know when we look backwards whether that was positive or negative to our margins.

John Taylor - Arcadia Investments

So have you gotten -- and maybe it would be helpful -- is there likely to be any difference in the margin impact or the cost impact of labor, et cetera, in your internal versus external factories?

Kevin M. Farr

No, we’re seeing pretty noticeable increases for a variety of components and labor and transportation and the like regardless of whether we are making the products or we are outsourcing them through vendors.

John Taylor - Arcadia Investments

Okay, so pretty similar.

Kevin M. Farr

Yes.

John Taylor - Arcadia Investments

Okay, good. And then Bob, for you probably; ’07 was, from a licensing standpoint, I think relatively easy to predict, with Spider-Man and Transformers, those sort of two tent poles. It seems like the license business, and I’m ignoring Hannah for now, I guess, but this year is going to be a lot more democratic and a lot more possibility. So I wonder, are you getting any feedback from retailers yet about what their tent-pole items are likely to be and where their concentrated storewide efforts are going to be, which properties?

Robert A. Eckert

Well, of course I’d tell you Speed Racer, Kung Fu Panda, and Batman, but I suspect we’re not the only ones out there. But I wanted to make another comment when you think about licensing -- this Cars business has been nothing short of phenomenal. It grew last year, the second year with no entertainment out there, in the face of a lot of good offerings in the entertainment space. So I see Cars as an evergreen property. I think we have created 175 characters or something in Cars. I mean, it’s really done quite well and I think we are going to continue to see good retail support of the Cars line.

John Taylor - Arcadia Investments

Yeah, that’s been pretty impressive. I was wondering through -- I mean, there were -- I guess what I’m getting at is there were some storewide license focuses at some of the big retailers during last summer. It wasn’t just the toy department -- it was the whole thing. Are you getting a sense that the big retailers, any of the big three, are doing, have really decided to put their full shoulder behind something?

Robert A. Eckert

Yes, but I can’t really get into that because they compete with one another and they have their own plans and one may go in one way and another may go in another way, and I wouldn’t want to get into it.

But I think retailers generally see the benefit of these strong licensed properties and we aim to have our fair share of them as long as they are good deals for the shareholders.

John Taylor - Arcadia Investments

Thank you.

Operator

Our final question for today will come from Felicia Hendrix from Lehman Brothers.

Felicia R. Hendrix - Lehman Brothers

Good morning. A lot of my questions have been asked. I just have two quickies; one is on Radica. I know it’s a small part of your business but it did grow significantly in the fourth quarter, which is much better performance than we’ve seen for the rest of the year. I’m just thinking -- I think about Radica going forward, should we see improvement in ’08?

Robert A. Eckert

Well, I won’t give you a projection like that but I will tell you overall, we are very pleased with the Radica results. They had their best year ever. The business is growing. It is growing globally. When we made that acquisition in October of 2006, I tried to communicated that I think this is going to be a very good deal for our shareholders and again, my bias is that most deals are not good for the acquiring company shareholder. But if you look at the Radica deal, it’s done every bit of what we expected and more and I think it’s gone quite well. The integration has gone well, the expansion has gone well, the products are sharp. We like Radica a lot.

Felicia R. Hendrix - Lehman Brothers

Another question, just in the games business; were you guys interested in Cranium at all?

Robert A. Eckert

Boy, I don’t think I’d want to comment on that, Felicia. I think somebody else acquired Cranium, so I wouldn’t want to talk about anything that went on back in that time.

Felicia R. Hendrix - Lehman Brothers

Okay. I was hoping you would. And then Kevin, just a quick question for you again on the recurring costs, additional costs, specifically the legal. We can kind of back into what the COGS will be because you kind of said that, but when I think about the continuing legal expenses, I’m guessing in SG&A but how should I think about that going forward, if I wanted to model that?

Robert A. Eckert

You know, there are going to be sizable legal costs this year. We’ve got a lot of litigation around the world on things related to product recalls and we’ve got a significant case coming to trial this year that are both -- both of those issues are sizable investments in legal costs but we think they are the right thing to do.

Felicia R. Hendrix - Lehman Brothers

Do you foresee that continuing into ’09?

Robert A. Eckert

I don’t know. It depends on how things play out. I will tell you that we take our obligation seriously. We take defending our people and our business seriously and if that requires investment in lawyers, we’ll invest in lawyers.

Felicia R. Hendrix - Lehman Brothers

Got it. Okay. Thank you.

Operator

Mr. Salop, do you have any closing comments?

Mike Salop

Yes, thanks, April. There will be a replay of the call available today beginning at 11:30 a.m. Eastern Time. That number for the replay is 719-457-0820. The passcode is 2548464. I would like to thank everybody for participating in today’s call.

Operator

That does conclude today’s teleconference. Thank you all for your participation. You may now disconnect.

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