孩之寶 (HAS) 2001 Q4 法說會逐字稿

Good morning and welcome to Hasbro's (Company: Hasbro Inc.; Ticker: HAS; URL: http://www.hasbro.com/) fourth quarter earnings conference call. We would like to inform all parties that this call is being recorded.

Today's host is Mr. Alan Hassenfeld, Chairman of the Board and Chief Executive Officer of Hasbro and thank you, sir, you may begin.

Thank you, Kathy. Good morning everyone. Thank you for joining us.

Joining me today are Al Verrecchia, President and Chief Operating Officer, David Hargreaves, Chief Financial Officer and Karen Warren, Senior Vice President of Investor Relations.

Al and I would like to review our performance, however, before we proceed, our lawyers would like Karen to read the following Safe Harbor statement. Karen.

Thank you, Alan.

During the course of this conference call, members of Hasbro management may make forward-looking statements as you know are inherently subject to risks and uncertainties. There are a variety of factors at this time actual results and

may differ materially from the anticipated results or other expectations expressed in our forward-looking statement.

Some of those factors are set forth in the Company's annual report on Form 10-K

forward-looking information or factors in the Company's quarterly report on Form 10-Q as if they're having other information and forward-looking statements in the Company's current reports on Form 8-K and in today's press release. All listeners should review fact

together with any forward-looking oral statements made in this conference call.

The Company undertakes no obligation to make any revision to the forward-looking statements contained in this conference call or to update

to reflect them or circumstance occurring after the date of this conference call.

Thank you, Karen.

Today I would like to review with you our 2001 performance, then turn the call over to Al to review the quarter in full-year earnings. Then I'll close with remarks of our products and some thoughts on 2002 before I open the call to questions.

2001 was a year in which we accomplished much. You only need to go back 12 months to recall the year 2000 which we viewed as an aberration when you look at our long-term results. Despite the many challenges we faced in 2001, we finished the year as a stronger and more profitable company.

In the area of expense reductions, we were aggressive all year. Excluding in our active, we reduced expenses and sales and marketing, research and development and administrative functions by approximately $100 million and we plan to continue this effort going forward. Our performance demonstrates our continuing commitment to improving profitability for our shareholders.

As we have said, our shorter-term objective is to return Hasbro to the operating margins we have enjoyed historically. Over the past five years, excluding 2000, operating margins have been in the range of 10 to 11 percent excluding one-time charges. Over the long term, we would expect to do better. To date, we have made major steps towards this goal.

Core brands was another strategic focus for us, and I'm very pleased with the strong portfolio products we delivered. Although we did not expect every core product to show improvement in the first year, we've made good progress with the brands we focused on this year. For example, G.I. Joe enjoyed four quarters of growth and finished the year up a strong 59 percent.

As we have said before, our focus on core brands and our move to less reliance on licensed product, will take longer than a year to achieve. In fact, it takes two to three years of product development to realize meaningful changes in the product mix and growth on the top line. This was the first year in a multi-year process, and while we're off to great start in our well position for 2002, we still have much to do.

2001 was also a year that presented many challenges to anyone in business. The economy and retail environment was as tough as its been in many years. In fact, most retailers throughout the fall were focused on bringing inventory down and sales really did not pick up until late in the fourth quarter. Not only were domestic retail sales weaker in many areas around the globe, there was also economic difficulty including a crisis in Argentina.

Unfortunately, that is part of our results in the fourth quarter. We had a seven-cent per share loss related to the deterioration in the financial and business markets in Argentina.

Lastly, I want to share with you how pleased we are with the ongoing performance of the toy segment. We turned this business around with a profitable year in 2001 compared to the significant loss in 2000.

Now, I'd like to turn the call over to Al to review our financial results. Al.

Thank you, Alan, and good morning everyone.

As Alan said, we have accomplished a lot this year. We reduced expenses in all operating expense categories in every quarter, and we have strengthened our balance sheets.

We have lower inventory and lower receivables and short-term debt has been substantially reduced. In fact, we had no draw down on our domestic working capital bank facilities at year-end.

For the year, we reported net revenues of $2.9 billion compared to 3.8 billion in 2002. Revenue reductions due to Pokemon, Hasbro Interactive and Furby were 1.1 billion. When you exclude these product lines, we grew our revenue by approximately $127 million or five percent.

As we stated previously, we would be a smaller but more profitable company in 2001 had we continued to reduce our dependency on major licensing products.

For the fourth quarter we reported net revenues of 988.7 million compared to 1.2 billion a year ago. Reductions in revenue from Pokemon, Furby and the sale of Hasbro Interactive were 215 million. Excluding these three product lines, revenue was up 41.3 million or five percent for the quarter.

For the year, we announced net earnings of 72.1 million or 42 cents per diluted share, excluding a loss of 11.3 million or seven cents per diluted share related to deteriorating business operations in Argentina in the implementation of FASB 133.

In Argentina, we had intercompany loans that were U.S. dollar denominators, and the devaluation of the peso resulted in the majority of the loss we reported.

The remainder was due to adjusting our assets to the net recoverable value given the severe decline in the economic environment.

On a reported basis, net earnings for the year were 59.7 million or 35 cents per diluted share. For the fourth quarter, we reported earnings of 52.5 million or 30 cents per diluted share, including the impact of Argentina. This compares to a loss of 58.4 million or 34 cents per diluted share in 2001 prior to charges related to the consolidation program and the write-down associated with the sale of Hasbro Interactive.

Earnings before interest, taxes, depreciation and amortization, EBITDA was 435 million or $2.52 per share for the year, compared with a year ago level of 268 million or $1.52 per share.

Now, I would like to briefly review the performance of our three major segments, deal with toys, games and international. More detailed reporting will be included in our annual report in March.

We are very pleased with the performance of the U.S. Toys segment. Revenues go with 787.9 million for the year compared with revenue of 744.9 last year, a six-percent increase, despite lower volume from Pokemon toys.

Excluding Pokemon, revenue was up 114.3 million or 17-and-a-half percent. Alan will talk later about the progress we've been making with core brands.

Not only did we see revenue improvement as positive turnaround this year, this segment was profitable compared to its substantial loss last year.

The Games segment continued to be profitable with total revenue of 1.1 billion compared with revenue of 1.8 billion in 2000. While the adult game business was up significantly, it was not enough to offset the substantial decline in robotic products as well as the expected decline from Pokemon trading card games, Furby and the sale of Interactive business which totaled 701.8 million.

International segment revenues were 837.2 million compared with revenue of 1.1 billion in the prior year. This represents a decline of 22 percent local currency and 23 percent in U.S. dollars. However, excluding the decline attributable to Furby and Pokemon, International revenue increased approximately five percent.

Looking at the geographic mix of our business, approximately 36 percent of revenue this year came from outside the United States. Revenues from our international customers decreased 31.5 percent in local currency and 32.9 percent in U.S. dollars.

Beginning in 2002, these segments will change to be aligned with the restructuring we announced last August. On a go-forward basis in U.S. Toy segment, we will be adding Tiger Toy products and Lifestyle Electronics. The Games segment will continue to include hand-held and tabletop electronic games including electronic games previously marketed by Tiger.

And Wizard of the Coast international revenue will be reported as part of the international segment.

Moving onto margins. Let me provide you with some perspective on the fourth quarter in the year. Gross margin for the year was 57.2 percent compared to 55.8 percent last year as reported.

Gross margin for the fourth quarter was 56.8 percent compared to 47 percent last year. In the fourth quarter of 2000, gross margin was adversely impacted by the write-down of the Pokemon trading card games inventory.

Our focus on expense reductions in the fourth quarter continue to be evident across all operating expense categories. Thus savings this year exceeded our goal of 50 to $70 million we set at the end of 2000.

In addition to the reductions associated with the sale of the Interactive business, we reduced expenses in sales and marketing, research and development and in administrative functions by approximately $100 million for the year.

Beginning with royalties, research and product development, R&D decreased in dollars for the year by 82.9 million to 125.6 million. Excluding the sale of the Interactive business, R&D was down 10 percent compared to a year ago.

Royalties for the year declined by 175 million and declined as the percent of revenue primarily reflecting a better mix of Hasbro owned properties. However, we would expect royalty expenses to increase in 2002 primarily due to the added revenue from "Star Wars" as well as the first full year of the Disney partnership.

Advertising expense declined by 162.1 million to 298.8 million for the year. This compares with 453 million last year. This is in part due to the decline in revenues, lower media costs as well as a more efficient utilization of our advertising dollars.

The advertising to revenue ratio declined to 10.2 percent compared to 12 percent a year ago.

Selling distribution and administration expenses for the year declined by a188 million, 75 million of which is attributable to the sale of the Interactive business.

Remaining 113 million consists of an $87 million reduction in marketing, sales and administration expenses related to an expense reduction program and a $26 million reduction in distribution expenses which are largely volume related.

The SG&A to revenue ratio decreased from 20.39 percent to 19.68 percent in the fourth quarter after also declining in the third quarter. For the year, the ratio increased to 23.65 percent, from 22.7 percent a year ago reflective of the decline in revenue. In dollar terms, expenses decreased in each of the four quarters.

Amortization expense for the year was 121.7 million with approximately 77.8 million in property rights and 43.9 million in pre-tax good will. With the adoption of FASB 141, good will no longer be amortized in 2002. We expect amortization will be approximately 110 million this year.

Interest expense for the year decreased 10.7 million to 103.7 million primarily due to lower short-term debt.

In the fourth quarter, we completed the sale of 250 million and two-and three quarters percent Convertible Senior Debenture due in 2001.

The proceeds were used to purchase 225 million in 7.95 percent notes due in March 2003, with the remaining proceeds used to reduce debt with longer maturities. This will have a favorable impact on the interest expense line in 2002 and beyond. We now have 325 million in 2003 maturities.

One additional uptake. The arbitration proceeding with Inferon's Entertainment

disclosed in our last 10-Q will recently settle resulting in no material changes to the amounts previously recorded.

Our tax rate for the quarter was 37.5 percent and for the year, 36.8 percent compared to 36 percent last year.

Now turning to the balance sheet. Receivables are down from last year by approximately 113.5 million due to lower revenue. Day sales are standing decreased from 53 days to 52 day.

Now, just a few words about the K-Mart (Company: K-Mart Corporation; Ticker: KM ; URL: http://www.kmart.com/) bankruptcy. As you are aware, on January 22nd of this year, K-Mart filed for Chapter 11.

Fortunately as of the date of the bankruptcy filing, Hasbro did not have material outstanding receivables due from K-Mart. However, during the 90-day period immediately preceding K-Mart's filing, we received approximately 98 million in total payments from K-Mart.

Based on our assessment of a number of factors including our estimation of the likelihood of any preference claim being asserted against Hasbro as one of K-Mart's significant suppliers, and Hasbro's legal defenses, we do not currently believe that this matter will have a material negative impact on our financial position or results of operations.

We are currently shipping K-Mart.

Inventory decreased by approximately 118 million or 35 percent from a year ago to 217.5 million. Given the particularly tough retail environment, we are pleased with how well we did with inventories this year.

There were a number of factors that contributed to this decrease, a lower level of business activity and improved inventory management and efficiencies achieved as part of our ongoing supply chain management improvement program. The balance sheet also shows a short-term debt decline to 192.3 million and total debt net of cash decreased 300 million.

As I mentioned, we had no draw down on our domestic bank lines at year-end. We will continue to be aggressive in managing our tax flow requirements.

In closing, Hasbro entered 2001 with many challenges, but we finished the year as a profitable and more focused company. We reduced our expenses by almost $100 million and have committed our sales to another 100 million in cost reductions over the next few years.

We are confident that we are making the right moves to make Hasbro

and more consistently profitable to our shareholders. We are pleased with achieving full-year profitability in the difficult retail environment.

Going forward, we continue to believe we can grow the business three to five percent per-an and we expect operating margins to return to historical levels of between 10 and 11 percent by 2003, and we anticipate doing better in the longer term.

However, we continue to be concerned with the retail in the economic environment in the first half of this year.

With that, I would like to turn the call back to Alan to talk about our product line performance and some thoughts on 2002. Alan.

Thank you, Al. Starting with games, in the first three quarters of the year, our board game business in our top U.S. accounts was strong. We did experience weakness in the fourth quarter particularly in October and November,

although the business picked up again significantly in December. At the end of the year, inventory levels for board games were in good shape at retail.

In the new product area, we combined music and game playing to create our Wheels on the Bus game. This has been the best selling new preschool game in the history of Hasbro games. Capitalizing on the success of this trend, we have three new nursery rhyme games in 2002,

Wee Little Piggies, Old MacDonald's Farm and Bingo. These games are part of the My First Games campaign where U.S. retail takeaway of our top accounts finished the year up 15 percent.

Our Get Together Games campaign helped drive our adult game category resulting in a 26-percent increase in U.S. retail takeaway at our top accounts. Our Electronic Catch Phrase, a new product introduction in '01 was a significant contributor to the success of our line.

Our two co-branded games, Disney Monopoly and Bob the Builder Memory Games continue to perform well at retail. Monopoly Disney Edition, our first co-branded product under our new partnership with Disney, was one of the most successful introductions of a co-branded Monopoly game in the 66-year history of the brand.

Bob the Builder Memory Game also stands strong success at retail demonstrating the strength of both our licensed and core brands.

Last year, we had a couple of new electronic games that, although the technology was innovative, they did not perform as well as expected.

Mags, music activated gaming system which combined music and game play, did not do very well. That being said, we think this technology does have potential and we'll be looking for other ways to utilize it going forward.

Pox had done very well up until the end of the summer. As the world began to turn upside down, we lost retail support for a major promotional program in mid-September. While the product finished the year below our expectations, we still had good sell-through and will carry it forward.

Looking to 2002, we have some great products in our lineup across all key sectors. We are particularly excited about a new electronic guitar game,

which combines kids' two favorite activities music and games.

should appeal to every one that made Bop-It such a big success.

As part of our "Star Wars" Episode II product line, the game of Life, a Jedi's Path promises to be an incredible game with players choosing between the dark path and the Jedi path.

Moving onto Wizards of the Coast, Richard Garfield who originated the trading card game concept with Magic: The Gathering has created the new "Star Wars" Trading Card Game.

The first release is planned for April prior to the premiere of the movie in May. Magic: The Gathering, the Trading Card Game continues to be strong up 23 percent for the year. We also had a solid year with our Harry Potter Trading Card Game which was launched in August.

In November, we shipped the first expansion set, Quidditch Cup, which also had an excellent response. In 2002, we will be releasing three more Harry Potter expansion sets, Diagon Alley, Adventures in Hogwarts and Chamber of Secrets and for the first time,

we will also be introducing trading cards based upon the upcoming movie.

Moving onto U.S. toys, as I mentioned we made great progress this year. We turned this business around from a bottom-line perspective. Although it was a more difficult environment to grow revenue, revenue was up 5.8 percent.

In issue-exclude Pokemon revenue for the year was up an impressive 17-and-a-half percent. In the boys' area, we remain a leader in this category in having a number of exciting new offerings. Beginning with G.I. Joe, we had a tremendous growth this year, up a strong 59 percent.

This line has been up significantly every quarter all year following a trend that started in 2000.

In 2001, we focused on broadening our line beyond collectors to include kids by introducing G.I. Joe Double Duty and the results have been great.

In the first quarter, there will be a new and expanded lineup of G.I. Joe action figures and vehicles including the legendary three and three-quarter inch action figures.

Transformers, robots in disguise, the incredible classic that Hasbro created nearly 20 years ago,

was up a strong 66 percent in the fourth quarter, demonstrating the popularity of the new segment we introduced last summer. At Toy Fair, we will be introducing another new segment called Transformers Armada featuring an exciting new play pattern for the brand.

Our focus on building our preschool business is continuing to do well. This year, along with many new introductions, the brand will be celebrating Mr. Potato Head's 50th anniversary with a nationwide tour.

Bob the Builder has continued to be a significant part of our preschool strategy showing continued strength at retail in the fourth quarter. One of Nick, Jr.'s highest rated series, the show is now also part of CBS's Saturday morning roster. We will be delivering more construction fun in 2002.

We have a number of wonderful products that make music exciting. E-kara, a handheld karaoke system has been a tremendous success selling out this holiday season. In 2002, we will be introducing a new hands-free headset system that lets you perform just like your favorite pop star.

Of course, we'll be offering many new music cartridges this year.

HitClips has continued to be very strong, up over 100 percent this year with a phenomenal mix of megastars and the HitClips collection and the recent edition of Madonna and Shaggy to the roster.

In addition, we are targeting this technology in 2002 to a younger audience with HitClips Disney tunes and players for preschoolers with the extensive Disney library of classic music like Beauty and the Beast, Lion King and Snow White, this promises to be a wonderful line.

I should also mention that Tiger Robotics did not have a good year. As we mentioned last quarter, Robotics struggled this year and Tiger didn't have the success of a Furby or Poo-Chi in its lineup.

Frankly, the market for Robotic pets was saturated. Going forward, Tiger Toy, now part of U.S. Toy, will focus its talent on innovative ways to leverage electronics much like the success of HitClips.

Most of the products I talked about are part of our core product lines. Many are extensions of existing brands, demonstrating that our stated long-term strategy while focusing on core Hasbro IP is working.

Again, I want to reiterate that top line benefits do not happen in one year with development taking 12 to 18 months, it takes two to three year cycles before there are meaningful changes to the revenue contribution.

Now, I'd like to talk about a couple of our entertainment licenses. Monsters, Inc. was our first film that is part of our Disney alliance. The movie premiered in November and was clearly a hit at the box office.

We were especially pleased with our product sales of Sulley, Mike and particularly Boo, the little girl in the movie. Boo sold out early in the holiday season. New from Disney in 2002, Return to Neverland, Lilo and Stitch, Treasure Planet and Monsters, Inc. which will be re-released in theaters internationally in the U.S. on video.

We also had Jurassic Park III. Although a good performer for us, it was not as strong as we had expected in comparison to movies I and II.

This year "Star Wars" returns with Episode II which premieres on May 16th. Based upon what I've seen of the movie, there are more action sequences, more vehicles, more colorful characters, net, net, net, more fun and excitement.

We have learned many lessons from our experience in 1999 and we are going to manage this brand differently. We found that 80 percent of our product sales came from 35 percent of the skews.

This year, you will see a smaller, stronger and more focused product line that targets kids and appeals to the collector. Our line includes highly detailed action figures, vehicles, games and then new this year, trading card games.

Each element of the line has the best of the old with a whole new level of excitement and playability. As part of managing this brand conservatively, we have taken our plan down significantly from 1999 volume levels. It is our expectation to meet our financial commitments but it will not be one of our more profitable brands this year.

With that being said, if sales exceed our conservative plan it would result in a better bottom-line performance.

In closing, 2001 was a year that we've made significant progress in reaching our long-term goals.

Even with the tough U.S. retail environment, we lowered our debt, improved our cash flow, returned the U.S. Toy segment to profitability. We accomplished a lot, but we have much more to do.

As we look to 2002, I think we were all cautious about the economy in the first half of the year. Strategically we would expect much of our focus to stay the same, reduce expenses, develop and grow core brands, reduce debt and return to historical operating margins.

We believe we are making the right moves to make Hasbro a leaner and more consistently profitable company for our shareholders.

We will be back to you with another presentation from Toy Fair on Sunday, February 10th at 1:00 Eastern Standard Time.

Our remarks will be Webcast and available by teleconference.

Let me now just thank you for joining us. Let me wish you all a healthy, happy new year and we will open the call to your questions.

Thank you. And at this time if you would like to ask a question, please press star and then one on your touch-tone phone. At this time, please press star and then one on your touch-tone phone if you would like to ask a question.

Our first question comes from Dean

and your line is open. Please state your company.

Hi J.P. Morgan (Company: J.P. Morgan Chase & Co. ; Ticker: JPM ; URL: tttp://www.chase.com/) I have a few questions.

First maybe if you could comment on whether you're going to be pinched by Argentina moving forward?

And then some numbers questions, what you expect the tax rate to be next year, what your interest guidance is next year? When you said amortization at 110 million, is that including -- does that incorporate the changes of FAS 142?

And then if you can give us a sense far as the percentage of sales where you see royalty's R&D next year? And then maybe is there -- are there -- any issues with the robotic dogs and some of the tiger stuff as far as write downs or is that -- or are you OK with where you are right now?

Dean let me try and answer one of your hundred questions. As far as Argentina is concerned we see no further problems. We have taken our hits now. As far as the robotic issue is concerned,

Dean we read and we began to see the slowdown really midyear and we were able to make sure that we are inventory clean of any robotic pets. So that will not be an ongoing issue. David, you want to try and take the tax question and ...

Yeah. I think in terms of the tax rate next year, we believe it will be lower -- this year rather -- 2000, it will be lower in the region of 25 percent. In terms of the amortization, we mentioned that in '01 goodwill amortization was 43 million and we also mentioned that amortization in '02 would be at about 110.

And I think what you've done is you've taken the 43 off of our total for '01 and said it should be lower because of the change in accounting treatment and that is very true.

However, there are other things going on in our amortization line.

We are amortizing the value of the warrants, which we gave to Lucas in association with the "Star Wars" license over the life cycle of the product line in line with the sales curve, which means a significant amortization of warrants, Lucas warrants, in 2002.

Dean, we've answered four of your -- I think four of your -- questions. You wanted some direction on interest rates I think.

Yeah, interest guidance, just interest expense and then maybe if you comment on the royalty R&D as a percentage of sales, rough guidance for next year.

Interest, we can give you some guidance. We've already said when we did our convertible that that will reduce our interest expense by about 12 million. In addition we're starting the year with 300 million of less net debt.

So clearly our average working capital will be lower. In total, I would expect we would be about 22 million down from this year's 116 so about 90 to 95 million for the interest.

OK. I'm just -- I'm sorry to ask too many, but then just the royalty R&D and then maybe could you tell us why the tax rate's going to be 25 percent? Is it just loss carried forward?

No, the tax rate this year we had been projecting 32. It kicked up at the end of the year because we had a lower mix of earnings from lower tax rate jurisdictions and some of our losses in Argentina we do not believe we'll be able to get a deduction for.

So that's why it went up from 32 planning to 36 this year. Next year, those two things go away. In addition, a lot of the goodwill that we talked about in -- with regards to amortization was not deductible -- tax deductible -- goodwill. So we clearly get a benefit from that.

With regard to the royalties in R&D, we -- that's a line that we -- don't give specific guidance on. Clearly as we go into a "Star Wars" year, our royalty rate will be higher. We have "Star Wars" and it's really the first full year of our Disney relationship. So royalties will be higher as we go into '02.

Thanks Dean.

Thank you.

Thank you. Our next question comes from Jill

and ma'am, your line is open, please state your company.

Thanks a lot, good morning, with Salomon Smith Barney.

I was hoping you could maybe give us a sense of the kind of cost savings we could anticipate in 2002 if you could perhaps frame some of that for us?

Secondly, Alan if -- maybe you can give us a sense of how Lucas is handling the "Star Wars"' license differently this time versus last time and how you see the market shaping up for secondary and tertiary licenses for "Star Wars"' products?

And then finally, I was hoping to get a sense of how large was the overall core business as you've recently defined it in terms of overall sales for 2001 and what portion of it was licensed product and how you see each of those individual pieces growing over the course of the year.

I know you've said three to five percent overall, but I was hoping you'd give us a sense of maybe those two pieces. Thank you very much.

Jill, I'm going to have Al answer one and three and I'll answer two. Al.

Good morning, Jill. In terms of the cost savings, you may recall we set a target -- an original target -- in late 2000 of $100 million and we were going to achieve 70 million during '01 and approximately 30 million in '02.

Now we've over achieved there and actually had $100 million in cost savings this year. In terms of the next $100 million, we haven't articulated any specific amount for 2002, '03 or '04 other than to say we expect to generate those cost savings over the next three years.

And we really haven't set a number that we're going to achieve specifically in 2002.

In terms of the core business question, when we originally talked about our core business, we indicated that we have approximately 2.2 billion of Hasbro owned Evergreen brand.

Into that we added approximately $300 million in strategic licenses to come up with a core of approximately 2.5 billion. In the 2.2 billion, we had approximately $300 million in the lifestyle electronics category principally marketed by Tiger. That had a very disappointing year.

That category and Tiger in general had a very disappointing year.

So that our core business overall was down by about $200 million and virtually all of that has to do with the decline in the lifestyle electronics category. The rest of the core business in general was flat although we had specific categories that did well.

Alan mentioned one in G.I. Joe. We saw improvement in Playskool. We saw Transformers pick up very nicely in the fourth quarter with some new product introductions that came late in the year.

In terms of a go-forward basis, we've said we can grow our core brands in the range of three to five percent a year. We still feel that way and in terms of whether, you know how much is going to come in the Hasbro owned versus the licensing,

I don't want to quote a specific number, but it would be our intent to drive more growth in the Hasbro owned Evergreen brands as we put more focus in that area and have licensing both through strategic licensing and entertainment

licensing become a smaller part of our business going forward.

Jill, let me try and give you some direction as far as Lucas is concerned. As we learned a number of lessons, the group at Lucas also learned a number of lessons. Firstly and very importantly to us, there are one-third less licensees.

A number of categories that were given to people that had -- that would have competed with us first time around were given to us as part of our contract going through the second and third movie.

We feel real good that the way the whole thing is coming together in the meetings that we've had with Lucas and the other partners that everybody is basically going to manage this very cautiously.

It really is the, you know as far as I'm concerned, probably the preeminent license out there and we have to protect it not only for '02 but for '03, '04, '05, '06 and '07, you know because our relationship stretches out a long period of time. I won't go into specifics, Jill of some of the things we've picked up.

The only thing that I can tell you is that we had been hurt I think last time is the words. A lot of product that was close -- fairly close -- to be duplicatory of what we were doing that will not be true this time around.

Great. Thank you very much.

Jill, one addendum to the cost savings, the cost savings that we've factored into our planning are going to be self-financing. So anything we do is built into our budget for 2002 and of course associated with those cost reductions are also built into the plan.

So actual savings probably you won't see much of that until 2003 and 2004. We just don't want to take any special charges and therefore our cost reduction programs are designed to be self-financing.

OK. Thank you very much.

OK.

Thank you. Our next question comes from Halle

and ma'am your line is open. Please state your company.

Good morning.

Good morning, Merrill Lynch (Company: Merrill Lynch & Co. Inc.; Ticker: MER; URL: http://www.ml.com/).

Good morning,

.

Hi there. A couple of questions first on "Star Wars", when we think about "Star Wars" relative to the episode one sort of as a percentage of the business that you did last time around should we be thinking in terms of a third, a half or somewhere in between?

Second question, when you're talking about the cost savings in the future, can you give us a sense of where those cost cuts will come from and maybe we should read into the new segment reporting to get an idea of where -- some of the restructuring benefits should be in the future?

I would love to project on "Star Wars" for you, but Al's next to me and he's -- you know we don't project. I will tell you that -- as far as our initial forecasts are concerned,

we are substantially below what we did last year because we want to be conservative and we really want to, you know have to stretch and make sure that it is clean at the end of the year. But that's all I'm going to say on "Star Wars" for now.

OK. How about cost savings?

David is taking that.

I think the cost savings are going to continue to be in those areas of the business that we've been focusing on this past year and that is continued reductions in the administration functions. You'll probably see some reductions in, you know sales, marketing, overhead and R&D as well.

It will impact all aspects of the business both domestic and international.

I think the consolidations that we announced earlier in the year bringing Wizards of the Coast into the game segment and bringing Tiger into the toy segment, are we selective of the kind of actions we'll be taking into the future.

And clearly as we bring those organizations together, you know we want to leverage the skills that we have in those groups and, you know and provide cost savings. I hope that answers the question for you.

Yeah. One last question actually on the lifestyle electronics when you start introducing, you know Disney tunes into -- lifestyle into the hit clips world, do you start forcing the issue of age compression again? Because lifestyle electronics was originally targeted towards teens and now you're bringing them to preschool.

Do you start forcing age compression when you do that?

I don't think so at all. I think what we're actually doing is we're opening it up. And the hit clips that will be doing the Disney tunes is a little bit of a different unit that delivers the music

and I think that we have a technology that actually down the road we'd like to use even in education. Because the hit clip technology can be taken further. So when you say compression I think by going to preschool, yes we're definitely right now in a sweet spot in the teen market and older, but we think we can also use that technology to go down lower too.

OK. Thanks a lot.

Thank you. Our next question comes from Tony

and sir, your line is open. Please state your company.

US Bancorp Piper Jaffray.

Hi Tony.

Good morning, couple of questions just a housekeeping first. Excluding the write downs related to Argentina, would the earnings for the quarter have been 37 cents?

No, excluding the write downs for Argentina, the earnings are 42 and on an actual recorded basis 35 so

.

That's for the year.

Oh for the year I'm sorry.

Yes for the quarter -- for the quarter -- it would have been 37.

OK. And any -- is it possible to, you know give us an update on the debt reduction looking forward and then how much do you think that the booming video game business impacted the traditional toy segment this holiday season?

In terms of the debt reduction, you know we've previously stated that Hasbro's

its own cash flow generating company and we should be able to generate to two to 250 million a year free cash flow, which will enable us to, you know meet all the maturities of our long-term debt certainly of the '03 funds through March '03.

If you apply what I'm saying, we should have sufficient cash on hand at the end of '02 to be able to meet those maturities without getting refinancing. Our longer-term goal we've always said is to get our debt to capitalization ratio back down to the kind of 25 to 30 percent level, which we've enjoyed historically and gives us more financial flexibility.

No material change to the debt in calendar '02?

No material change to the long-term debt. It's mainly long-term debt, which is not callable. I think we'll be building our cash in '02 to meet the '03 -- March '03 -- maturity.

And then one last question

.

Tony, Tony ...

Yeah.

Let me try and answer you on your video game question.

Yes.

We did not really see any diminution in sales of games because of the video game, all of the new platforms whether it be Game Cube or the X Box, again hard one to quantify. We didn't feel, but could we have grown more if it hadn't been there?

Of course we could have.

I think that what we are -- many of us in this industry, not only Hasbro, took a look was as we saw that we were getting into some difficult economic times I think that many of us began to prune down some of our higher priced product lines and make sure that we were hitting pricing points as we are also planning in doing in '02 that are right into the sweet spot of the consumer and our retail partners.

OK.

And just one last -- one last -- question.

OK.

A year ago, we had talked about the core revenues for the business being about 2.5 billion. Any update on that and where we are today?

I think I just mentioned that -- answer that question previously, but we're probably looking right now at about $2.3 billion overall and the big decline coming in the lifestyle electronics category this year.

I think, Tony, we'll be a much easier company to look at this year because, you know we're really down to where we want to be and we're now about ready, you know to put our growth on, but we're much -- we'll be much -- easier to follow we'll be able to delineate those cores much easier for everybody.

OK thanks.

Thank you.

Thank you. And our next question comes from David

and sir your line is open. Please state your company.

and thank you. Good morning, everyone.

Good morning, David.

Briefly before the questions, a point of clarification, Alan did you say that your shipments of "Star Wars" in '02 would be less than your shipments in '01 or did you mean that to be ...

No, no, no David.

... episode two would be less than episode one?

We are conservatively forecasting here our "Star Wars" plan and it will be substantially below what we did in 1999.

OK. That's "Star Wars" episode one not calendar the year '01. Very fine, now the questions briefly first, how many dollars worth of '01 sales will not be on the board for '02? In other words items that have been discontinued or what have you.

David, very little the only thing is obviously Jurassic Park will not be there or it will be at a very low level. Obviously what we did in Pokemon we will continue to forecast, you know internally here to be down and you know, even more conservative. But other than that very little is going away.

We had our preschool. What we did deliver in new preschool product all is coming through. There might be one item in Tonka or, you know but in general we like the hand that we're being dealt this year.

Great. Second question are going to be any one-time charges in '02 as matters stack up right now?

No.

Great. And the last question, will you be shipping "Star Wars" merchandise in the first calendar quarter or only in the second calendar quarter as the beginning of shipments?

if anything in first quarter. Really targeting to ramp up in April.

Thank you. And let me let the other questioners have their time.

Thank you, David.

Thank you. And our next question comes from Gary Cooper and sir your line is open. Please state your company name.

Bank of America Securities.

Hi Gary.

Hi, how are you guys?

Good thanks.

A couple questions. Wanted to ask about the advertising line it was down pretty aggressively in Q4 about 40 percent. Could you give us -- I don't think that's sustainable. Could you give us some idea of where you see that going forward?

Second question, in terms of the operating margin, you guys said 10 to 12 percent as a range for '03 and I'm wondering if it's reasonable to think that you can get halfway there in '02? And then the other question is, Alan you briefly mentioned Pokemon.

Can you give us some idea of when Pokemon and Furby maybe settle out? And we're talking about flat line or maybe even some growth going forward. Thanks.

David, why don't you take the advertising question.

Yeah, in terms of the advertising it's been down this year all year reflecting A, a lower level of business, B, the fact that media cuts were down and C, the fact that we've tried to, you know utilize it more effectively. I think if you look at the fourth quarter versus the fourth quarter last year, we had to charge a lot of advertising off in the fourth quarter.

We do advertising. We charge it on an accrual basis in line with sales and when our sales fell away more than we anticipated in the fourth quarter of last year, we took a disproportionate charge of last year's total in the fourth quarter last year. And in terms of the sustainability of it going forward, probably I know I talked about, but we think it will be lower than we started.

You know, Gary at least, you know as we, you know look into this year I think that you can continue to believe that those numbers are going to remain close to where they are mainly because, look there are some level -- advertising opportunities still out there and we did buy very, very well.

Just feel, you know -- we feel comfortable with that number and believe me we had a real good sell through at retail overall. And you know that's based upon the advertising dollars we spend, we must have been doing something right.

As far as Furby, I don't think as we talk in 2002 that Furby -- you'll be hearing much about Furby anymore because all of those comparisons are pretty much gone.

As far as Pokemon is concerned that's a little bit more difficult. You'll probably still here a little bit about it in first quarter because it was fairly strong in first quarter of '01 mainly in the Wizards area because of European sales.

It'd be very -- as you say I would hope that we'll begin to see -- we've got a new arrangement with Nintendo on an e-card system for Pokemon and which should be very, very interesting. That's again, Furby's out. Pokemon I think we've, you know based upon our budget

, I think we're at the low and we will begin to hopefully grow that again.

I think you also asked, Gary about our operating being 10 to 11 percent and if we thought that we could get halfway there this year.

Right.

Well I don't think we're going to

pass operating margins. We've said that we will get to the 10 to -- between the 10 and 11 percent by 2003.

We'll obviously continue to make some progress this year and to, you know, to say more than that is ...

Whether we get halfway or not I'm not sure, but we're working on it real hard. We'd like to.

Thank you.

Thank you. And our next question comes from John Taylor and sir your line is open. Please state your company name.

Hi I'm with Arcadia.

Hi John.

Hi. I got a couple questions, can you give us a sense of what you think the growth rate for your core business might look like, excluding "Star Wars", in '02? That's the first question. Second is you did some kind of subtle shifting of piecing organizationally in the August, September I think timeframe.

Were there any costs that ran through the P&L that you didn't call out as nonrecurring that don't repeat next year? And then I want to go back to the operating thing, if you won't give us an operating margin kind of goal for the year,

I wonder other than royalty R&D, which is going to reflect the "Star Wars" influence, do you expect much leverage on the operating line items? Thanks.

Al.

Yeah John, how you doing? This is Al. In terms of the growth on core brands, you know we've been saying and we'll stay with this, we think we can grow the brands in the range of, you know three to five percent and it will, you know vary from one year to the next in terms of whether we're at the low end of that or the higher end of that range.

And you know we don't want to say anything more than that in terms of -- terms our growth rate.

Well let me -- can I follow-up on that for just a second?

Sure.

Given that you don't have a lot of things that are going away, it would suggest that you've got kind of better than average momentum coming out of '01 into '02. Would you agree with that?

Yes.

OK, so we might have -- OK. OK sorry. Keep going.

In terms of the organizational changes that we made during 2001 and whether or not we had any substantial costs associated with that, that are not going to be continued.

I don't think we had anything that would be considered to be material as a result of the organizational changes we've made that are not going to be continuing on in '02 or '03.

And in terms of the -- you had a question in terms of operating margins of what kind of leverage we would get.

I guess what I'm looking for there is, you know if we can't -- if you're uncomfortable giving us guidance on sort of the operating margin line specifically seems like R&D's going to -- I mean royalty's going to go up because of "Star Wars".

I'm wondering if you expect much leverage off of the distribution line, off of G&A, you know off of some of the other line items?

Well I think overall we're not going to get a lot of leverage on the increase of volume we would expect to get from "Star Wars" and Alan talked about it in his comments earlier.

It's not a particularly profitable line for us. In terms of distribution, yeah we'll get some leverage on distribution and we should get a little bit of leverage on some of the other expense categories. But we're also going to be doing a lot of cost cutting and there are costs associated with the cost reductions.

And as I indicated a little earlier in the conference call, those are going to be self-financing. So some of the leverage will probably be used to fund some of the cost savings and the cost associated with those cost reductions during 2002. I think the real opportunity for leverage from both the increased volume and the cost reductions will come in 2003.

TAYLOR: The -- following up on the -- advertising question, Gary's question, the -- given the impact of "Star Wars" and the fact that royalties are going to go up typically there's an inverse relationship between royalties and advertising. That's probably what you're paying for.

Could you actually see some leverage on that advertising line?

I don't think so, John and it would be very hard to comment on that until we have finished, you know a lot of a negotiations that we go through on up fronts and you know, and the whole media package that we're buying.

I would say be careful there. You know I don't -- you know I think we've reached a good level right now and you're very right on the inverse on "Star Wars" normally, but we really worked hard on that number this year.

OK, thank you.

Thank you. And our final question comes from Felicia

and ma'am your line is open. Please state your company.

Hi, Lehman Brothers (Company: Lehman Brothers Holdings Inc.; Ticker: LEH ; URL: http://www.lehman.com/).

Hi

.

How are you?

Good.

I just have a couple of questions, first I was wondering if you guys -- if you could give us your thoughts on where you spend perhaps with the credit rating agencies when you, you know given your financial improvement, where you think they might start taking a look again?

And then the next question is that you've spoken a lot about cost savings, cost reductions and I'm wondering if you could be more specific where that's coming from? Is it coming from supply chain management, high chain management, optimizing product mix, you know other areas?

And then just finally, Argentina just -- the write offs in this quarter seemed like they were a large -- larger than what I would have expected part of pretax

. I'm wondering if you just kind of wrote it all of so we didn't have anything going forward of if you could explain that?

, this is Dave Hargreaves let me take

. I think obviously both our banks and our rating agencies are going to be very pleased with our performance this year having returned to profitability and reduced debt net of cash by over 300 million. I think it's a bit early for the rating agencies to go back in and start increasing our ratings.

And clearly we think if we can continue to perform in the way we did in '02 -- in '01 and continue to perform that in '02 in the expense and on the cash front, then I think we'd be looking

rating agencies moving us up again towards the end of this year.

With regards to Argentina, we basically have been there for a number of years and it's back in 1998 we were profitable. In each year since then, we've become successively less

and successively increasing in losses. I think when got to the end of '01 and had devaluation of the peso and the very bad economic environment down there,

we basically decided that we were going to be substantially changing the way we do business in that market probably

pulling out of it, maybe just going through a distributor.

And as a result, we had took a loss on the eight company zones that we've been funding accumulative losses with and the working capital requirement and we also had write downs of

and inventory. I think that's why the number was quite substantial.

, this is Al Verrecchia. In terms of the cost savings, the areas that we're going to continue to focus on are the areas that we've been focusing on this year and that is administrative functions, in particular some marketing and sales as well as R&D. Some of these are becoming more efficient.

We've been moving more and more of our R&D

cost to the Far East. We'll continue to do that.

In addition, we're doing some consolidation in the Far East and we'll continue to do further consolidations here in the U.S. side.

We set the stage for that by creating the toy segment when we put Tiger into the U.S. toy segment along with Hasbro Toy Group

and when we put Wizards into the game group. We think there's an opportunity for both those groups to leverage a lot of common skills and a lot of common activities in the marketplace both domestically and internationally.

Thanks

.

Thank you.

And thank you everyone for joining and we'll hopefully see you on Sunday.