孩之寶 (HAS) 2002 Q1 法說會逐字稿

Good morning, and welcome to Hasbro's first quarter earnings conference call. We would like to inform all parties that this call is being recorded.

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

Thank you,

. Good morning, everyone, thank you for joining us.

With me this morning from our management team 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 the company's first quarter performance, however, before we proceed our lawyers would like Karen to read the following Safe Harbor statement. Karen.

During the course of this conference call members of Hasbro management may make forward-looking states, which as you know are inherently subject to risks and uncertainties. There are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in a forward-looking statement.

Some of those factors are set forth in the company's annual report on form 10-K under the heading "forward looking information and risk factors", in the company's quarterly reports on form 10-Q under the headings, "other information and forward-looking statements", and the company's current reports on form AK and in today's press released. All listeners should review such factors together with any forward-looking oral statements made in this conference call.

The company undertakes no obligation to make any revisions to the forward-looking statements contained in this conference call, or to update them to reflect events or circumstances occurring after the date of this conference call.

Thank you, Karen.

On today's call Al Verrecchia and I will review our first quarter results, and then I will highlight some of the key products and brands from the quarter as well as some of our key initiatives for the balance of the year. We will conclude by opening the call to your questions.

Before I turn the call over to Al, I'd like to make a couple of comments about the quarter. Most importantly, we believe we are on track to achieve our financial goals and remain well positioned for the year. We are encouraged by the strong retail sales performance of many of our key brands and products, evidence that our strategy of growing core brands continues to well.

Although revenue was down marginally for the quarter it is consistent with our full year plan and in line with retailers' shifting buying patterns as they and we continue to focus on supply chain management. As part of our ongoing cost reduction program we are on target to take an additional $100 million in expenses out of the business over the next three years.

We do not plan to take any one time charges in connection with the cost reduction program. We expect many of the costs associated with implementing the reductions to offset the benefits in 2002 with actual savings expected in 2003 and 2004.

The company remains focused on improving operating margin. Our short-term goal in 2003 is to return to our historic levels of 10 to 11 percent but we need to do better for the longer term.

Now I'd like to turn the call over the Al to review this quarter in more detail. Al ...

Thanks Alan. Good morning everyone.

As Alan said, we are on track to achieve our financial goals for the year. First quarter worldwide net revenues were 452.3 million compared to 463.3 million last year.

For the first quarter we reported a net loss of 17.1 million or 10 cents per diluted share. This compares to a loss of 24 million or 14 cents per diluted share a year ago.

The 2001 results exclude a 1.07 million or one cent per diluted share charge related to the adoption of FAS 133.

Excuse me.

Earnings before interest, taxes, depreciation and amortization, EBIT, was 32.1 million or 19 cents per share for the quarter compared with 34.4 million or 20 cents per share a year ago.

Now I would like to briefly review the performance of our three major segments, U.S. toys, games, and international.

More detailed reporting will be included in Form 10-Q in May.

First the U.S. toys segment.

Revenues were 200.9 million, a 27 percent increase compared with revenues of 158.5 million last year. As

mentioned, retail sales were strong for the quarter with many core brands performing well.

Shipments of Transformers, G.I. Joe, and Nerf increased significantly year over year. We also began shipping Star Wars Episode II related products in the quarter. This segment had an operating program of 26.2 million or 13 percent, compared to a substantial loss last year.

In the games segment revenues were 92.8 million compared with revenues of 104.6 million last year. A revenue decline can be attributed to the anticipated decline in both licensed trading card and board game shipments.

Although first quarter board game shipments were down from a year ago, our retail sales for the first quarter at our top five accounts in the U.S. were up 46 percent year-over-year. Well some of that increase can be attributed to Easter coming two weeks earlier.

Retail sales of our board games remain strong through last week, and we are confident we will meet the full year plan for the board game business. As anticipated we did experience a decline in trading card gains year-over-year primarily related to licensed trading card gains.

International segment revenues were 136.1 million compared with revenues of 156.9 million in the prior year. This represents a decline of 10 percent in local currency and 13 percent in U.S. dollars.

Well we do want to keep talking about Pokemon. Pokemon was still strong in the first half of last year internationally.

When you exclude Pokemon from this quarter, international revenue was up four percent year-over-year.

I also want to remind everyone that beginning of 2002, the segment reporting was changed to coincide with the business realignments we announced last summer.

First quarter 2001 has been

for comparability.

Moving on to margins, gross margins for the quarter were 63.2 percent compared to 59 percent last year, reflecting improved product mix.

Now let's take a look at expenses for the quarter. First we are on track to take an additional 100 million in expenses out of the business over the next three years.

As Alan mentioned earlier, we are not planning on taking a one-time charge. We expect that the cost reductions and the cost associated with making these reductions will offset each other in fiscal 2002 with actual savings expected in 2003 and 2004.

Royalties, research, and product development. R and D increased slightly for the quarter to 33.2 million compared to 30.3 million a year ago.

Royalties for the quarter increased by $25 million to 51.5 million, or 11. 4 percent of revenues due to additional shipments of licensed product including Star Wars and Disney. As we said last year, we expect royalty expense to be higher in 2002 primarily due to additional revenue from Star Wars as well as the first full year of Disney.

While we would expect royalty expense in 2002 to be approximately 11 percent of revenue, it should be lower in 2003 and 2004 reflecting the anticipated decline of license entertainment properties as a percentage of our overall product mix.

Advertising expense was 46.9 million or 10.4 percent of revenue for the quarter down

compared to a year ago.

We expect advertising expense as a percent of revenue to be approximately 10.4 percent for the full year and flat with last year.

Selling, distribution and administration expense declined by 14.6 million to 139.2 million primarily due to reductions in sales and marketing and distribution.

We are pleased with the progress we have made in reducing the SG&A expense in the first quarter of this year and throughout last year. We expect this trend to continue, as SG&A expense reduction is an area of focus.

Amortization expense declined for the quarter by eight million to 21.4 million. With the adoption of FASB 142, good will and other indefinite

intangibles are no longer amortized.

Amortization the first quarter of 2001 of these assets amounted to $13 million. Removing this amortization and its related tax effect would have resulted in a net loss of 17.2 million in the first quarter of 2001.

Interest expense for the quarter decreased by 6.3 million to 19.5 million primarily due to lower short-term debt and the benefits of the

financing we completed in the fourth quarter of 2001.

Our tax rate for the quarter was 26 percent compared to 32 percent last year due primarily to the change in economy moves for the amortization of good will and other intangibles.

Before I move onto the balance sheet I want to mention that we are in the process of evaluating the potential impact that the adoption of FASB 142 accounting for good will and other intangible assets will have on Hasbro. As many of you know, this statement addresses the accounting and reporting of good will and other intangible assets subsequent to their acquisitions.

When the analysis is complete we will provide you with more information.

Now turning to the balance sheet.

Receivables have increased from last year by approximately 31.9 million. This is due to a number of factors including the timing of our first quarter shipments, which is heavily weighted to the month of March coupled with a lower mix in shipments of products, which typically have shorter term like trading card games and certain electronic items.

While day sales outstanding increased from approximately 50 days to 57 days also due to the timing and mix of our first quarter shipments, the quality of accounts receivable has continued to improve as

receivables declined 14 percent year over year.

Inventories decreased by approximately 74.5 million or 24 percent from a year ago to 232.2 million.

There were a number of factors that contributed to the decrease including improved inventory management and efficiencies achieved as part of our on-going supply chain management improvement program.

The balance sheet also shows that total debt net of cash, or net debt, decreased by 232.8 million reflecting off the strong cash generating ability of the underlying business. Our long-term goal is to reduce our debt to cap ration to 25 to 30 percent.

We plan to pay down our 2003 notes that are due next March with the cash flow we are generating. In fact, if we paid off the notes today, and by the way we do have enough cash on the balance sheet to do this, it would reduce our debt to cap ratio from 48 percent to 40 percent.

In part, as a result of the progress we have made to improve cash flow and reduce debt, we were able to restructure our total bank facility, decreasing it to 380 million from $650 million.

The amended facility extended maturity date to March 2005 and February 2003 and lowered interest rates. At quarter end we had no draw down on the domestic line.

Going forward we will continue to be aggressive in managing our cash flow requirements.

In closing, we've made good strides this quarter on our strategic initiatives.

And we continue to be on plan to achieve our financial goals, and remain well positioned for the year. This quarter we continue to see evidence that our core brand strategy is working, with strong retail sales performance in many of our key brands and products.

New product development is also an important part of our growth strategy with products like

,

, and

, we're off to a great start. Something Alan will talk more about shortly.

We are confident that we are making the right move for Hasbro. We have a lot more to do this year, and the management team remains focused on improving operating margins and growing the business.

With that I'd like to turn the call back to Alan to talk about some of our key products and brands, Alan.

Thank you, Al.

As we continue to make Hasbro a stronger company we remain focused on our financial goals, and driving growth in our core brands. We have a strong well-balanced portfolio for 2002, and we're off to a good start in the first quarter.

First the U.S. toy segment. As Al mentioned we had a very strong quarter in both revenue and operating profits.

And we have stated a key to growing our long-term operating profit is the domestic toy business. With operating profits in the U.S. toy segment this quarter of 13 percent, we are moving in the right direction and making progress towards our goal of returning Hasbro to historical operating margins.

Beginning with boys, we remain a leader in this category with retail sales up a strong 13 percent in our top five U.S. accounts. Transformers: Robots in Disguise was the top performer in the category.

The response to our new line, Transformers

, has been strong as it is a continuation of the strategy we began in 2001 of returning to the core Transformer.

This fall we will be adding a new segment,

Transformers that add new play elements and features.

G.I. Joe enjoyed tremendous growth this quarter, up a strong 48 percent in retail sales in our top five U.S. accounts.

This is the fifth straight quarter of revenue growth in both shipments and retail take away. In 2001 we began to build this brand by opening up new fronts, expanding beyond collectors to kids.

Last year we targeted kids with our G.I. Joe double duty. This year our strategy includes re-introducing the three and three quarter inch action figures with G.I. Joe versus Cobra.

In the fall we will be launching or 12 inch army rangers as well as a new policeman, fireman, and other key figures.

As you can see we are not leaving any flank exposed to the competition.

, newly introduced late last year, had a good first quarter and we are leaving the charge in the action figure model kit category. First launched in the 80s in Japan this Japanese

line is a category that has translated very well into the toy arena.

We do believe

will continue to be a great brand for boys this year and has the potential of becoming a long-term brand.

Play School, retail sales were up significantly for the quarter.

Driving the growth was both Mr. Potato Head who is celebrating his 50th birthday this year and Bob the Builder which continues to be a significant part of our preschool strategy.

In the girls we create a play area.

Play Dough was off to a good start this quarter with retail sales in our top five U.S. accounts up 28 percent. We have a number of new offerings that will be coming in the second half in their creative play area which include the Eazy Bake Oven and our Light Bright cube.

Both are great examples of how we can leverage core brands.

In our goal to capture more between market we continue to be successful with our music category.

Hit Clips was up double digits in retail sales this quarter after a tremendous 2001. In addition to adding many new artists to Hit Clips we are also targeting this technology to a younger audience with Kid Clips featuring Disney tunes and players for preschoolers.

This is a natural extension for this brand, but not all is perfect in the toy sector. The Super Soaker business was flat.

The entire Robotic category, which was strong through the Easter season last year, became insignificant this year.

Now I'd like to talk about a couple of our strategic partnerships.

Our Disney brand is continuing to do well. Our products this year are a wonderful mix of both Disney branded names and some properties.

This year we will be introducing a line of princess play sets for girls, and die cast vehicles for boys, as well as doing work on Toy Story and the summer release of

.

Turning to Star Wars, we're looking forward to the May 16th release, and the culmination of over 18 months of creative work on Episode II: Attack of the Clones.

From what we have seen of the movie it is much more kid directed with more action sequences and more colorful characters, bottom line more excitement. Our line is tight and focused and full of action features, and product goes on sales tomorrow.

Moving on to the games segment, we're continuing to focus on three key drivers.

Firstly, bringing successful, innovative, new games to market. Secondly, continued strengthening of our core brands.

And lastly, designing programs to create excitement at retail in this category throughout the year.

In the first quarter we were very focused on driving demand for the traditional board games.

We increased media spending and had a number of planned promotional programs with our top retailers. As Al mentioned the overall board game business continues to do well with retail sales in our top five U.S. accounts up a strong 46 percent in the quarter.

Year-over-year retail sales in all major categories increased.

We also have a number of new games we'll be launching this year that demonstrate our commitment to strengthening core brands.

Set for release in the second half, Monopoly: The American Edition, then the special 20th Anniversary Edition of Trivial Pursuit. We have found that co-branded games work very well.

With both Disney and Star Wars we have a number of games that we will be co-branding this year. After a very successful launch last year of Monopoly: The Disney Edition, we introduced Sorry: The Disney Edition.

Both of these games were top performers this quarter, and demonstrate the strength of our core brands and the Disney name.

One last comment I want to make about both the U.S. toy and game segments as it relates to this quarter. Easter had no impact on year-over-year shipments. Although it was two weeks later last year, shipments for Easter would have been in stock at retail or in transit by the end of the quarter last year, as well as this year.

To get a better sense of the strength of our overall business in 2002, we included the holiday in each year and looked at retail sales for our top five accounts for the first 15 weeks.

Sales were up substantially in a number of key categories.

Boys - up 11 percent for the 15 weeks, compared to 13 percent for the quarter. Board games up 30 percent, compared to 46 percent for the quarter.

Core

up nine percent, compared to 20 percent. And Play-Doh was up 10 percent, compared to 28 percent.

As many of you do your retail store checks, it will show that we have a lot of product that is moving well, and we have gained shelf space in the quarter.

No I'd like to talk to you about the international segment.

As Al mentioned, our recent performance has been disappointing. As it relates to Pokemon, the international market lagged behind the U.S. with Pokemon still strong through the first half of last year.

In fact, the business would have been up four percent, excluding Pokemon.

That being said, this is an area with great opportunity for us.

We are taking active steps to turn this business around. We recently have added new management in a number of key markets, and we're looking for additional opportunities to not only reduce expenses, but to increase sales, gain market share, as we are doing in our domestic markets.

This is a major focus for us this year and going forward.

In closing, our management team has been strengthened by the addition of several new executives in key positions throughout the organization.

This will ensure that we have the best possible talent to execute our strategy of driving innovation and growth in our overall business, particularly our core brands, both domestically and internationally.

We are off to a good start for the year, with a first quarter that delivered on our financial targets, and we remain well positioned for the full year.

Thank you for joining us, and now, we'd like to open the call to your questions.

At this time we are ready to begin the question-and-answer session.

If you'd like to ask a question, please press star one on your touch-tone phone. You will be announced prior to asking your question.

To withdraw your question you may press star two. Once again, if you'd like to ask a question please press star one on your touch-tone phone.

Our first question comes from

. You may ask your question.

Please state your company name.

.

Congratulations. Two questions.

Could you comment on the level of shipping of Star Wars in the quarter, and what we might expect in Q2? And also, the K-Mart situation, how it might have impacted your Q1 and possible Q2.

David, why don't you take that?

Yeah,

, this is David Hargreaves. Clearly we do not keep specifics on individual lines by quarter, but we can tell you that consistent with our more conservative full year projections, we shipped less than 2/3 of what we had shipped in the first quarter of 1999 to support Episode I.

And this is despite the fact that this year we're filling the retail pipeline world wide through a concurrent launch of the movie, whereas in 1999 the movie was much later in overseas markets.

You asked about the second quarter?

Right.

We still believe that our two largest Star Wars shipping quarters will be the second quarter to support the movie release, and the fourth quarter to support the video release and holiday sales.

OK. And K-Mart?

In regards to K-Mart, our shipments to K-Mart during the first quarter of 2002 were 40 percent down versus the first quarter of 2001.

Thanks,

.

Thank you.

Thank you.

Our next question comes from

. You may ask your question.

Please state your company name.

Thank you, good morning, Solomon, Smith, Barney.

Good morning, Jill.

Good morning.

Could you perhaps clarify on the royalty expenses whether that includes R and D, as well the 11 percent target this year? Could you please clarify that?

And secondly, could you give us any gauge of what your overall revenue outlook is for the year? And whether this should kind of fall in line with your long-term targets, or you know, be above it for Star Wars, or whatever other key products you're launching.

And finally, on the gains outlook for the year, the point-of-sale data being so incredibly strong maybe you could juxtapose why there was revenue decline in that, and whether there was some market share issues that may have played out as well. Thanks a lot.

Jill, David is going to answer the first part which is on the royalty and the R and D.

Yeah, Jill, the royalty number of 11 percent will be just a pure royalty number and does not include research and development. That is separate.

So how can we sort of back in - you reported as a royalty and R&D number. Can you give us a sense of how that entire will look for the year then please?

R&D will not be substantially different year over year versus last year. However our royalties will be up at about 11 - just over 11 percent versus just over seven percent last year.

This is clearly due to the fact that this is a big Star Wars year for us which had the, as you know, a high royalty rate. In addition this is the first full year in our Disney relationship.

Yes we had Monsters in the fourth quarter last year in the U.S. but this year we had Monsters internationally. We had

and

and a number of new non-movie related Disney products.

Jill, Al's going to handle the revenue question.

OK.

Thank you.

If you want to repeat that though.

Yeah. Would you repeat that for me?

I guess I'm trying to get a sense of what you're looking for overall for revenue targets for the year. I think you've indicated sort of a mid single digit revenue long-term target.

Perhaps you could put this year in perspective of a longer-term target.

Well as you know Jill we don't want to forecast revenues.

You know I will tell you that we expect revenues to be up for the year and I will confirm that we expect revenues over a longer term to be, you know, in the, you know, three to five percent growth range but beyond that we don't want to forecast anything for the current year.

Perhaps you can within the quarter give us a sense of how your core product sales broke out year over year and how that performed.

Well, let Alan talk first of all about your other question which had to do with the game business and then we'll come to your other question.

OK. Jill the game question, you know, a longer answer than I'd like to give.

Through September of last year the game business was excellent. In October and November it slowed down measurably and as we went into December we were a little bit worried but then December turned out to be an incredibly good game month.

On top of that, one of the things that we have believed here for years is that we have not taken advantage of the first quarter and really talking to retailers that we felt that January, February and March could be very strong game months as long as we had games on shelf because many times they collapse that department. What we did was we worked it in November and early December with a number of our major customers in planned promotions in both in store and in newspaper and more advertising, and boy oh boy, finally people have gotten the message that by shipping, I mean, we had to ship a certain amount out by the end of December for that in order to make the sets that the retailers set up for the early, for the first couple of months, and boy oh boy, we finally had proved a point that games do sell in January, February, and March. OK?

OK, thank you.

OK, thank you.

Thank you.

Our next question comes from

. You may ask your question.

Please state your company name.

Good morning,

, Goldman Sachs.

Hi, Chris.

Hi.

Could you just update us on your plans with respect to Wizards of the Coast retail stores? I see that in full year 2001 in the K it seems like the retail division lost about 37 million.

All right,

, Al's going to handle that.

I always get the ...

I give him the tougher questions,

, it's a rule here.

Yeah, We've been looking at that, you know, certainly for the better part of last year and the early part of this year.

And I think over the longer term that's clearly not a part of our ongoing strategy. In the meantime, we're trying to operate those businesses as effective as we can.

I think the business suffered in '01 as did most retail operations, but going forward we would like to reduce our exposure in that area.

We're actually, have closed I think now 16 stores, excuse me, about six or eight stores. Also I want to mention that part of last year's loss, about 16 million of it, David?

Yeah, 16 million.

Yeah, was part of a write down having to do with FAS 121, which was an impairment test we had to do.

So that's a piece of the 37 million last year, but longer-term we don't look at the retail business as being a strategic fit for the company.

Thanks,

.

Thanks a lot.

Thank you.

Our next question comes from

. You may ask your question. Please state your company name.

U.S. Bank Corp Piper Jaffray, good morning.

Hi, Tony.

A couple of question for you. Maybe just elaborate a little bit more on the Star Wars product line.

What's going to be the key drivers in this quarter? And then secondly, what are going to be the key drivers for turning around the international business looking forward?

And will we see growth in 2002, and what might that be? Then the third question would be could you just be a little more specific on the drivers to the increase in the gross margin during the quarter?

Maybe just address some of the cost savings efforts?

Let me take the key drivers and product on Star Wars, because what we have done is gone back to almost, let's say, pre-1999 days, and the strength of the Star Wars category has always been in the array of action figures and vehicles that surround that, and not necessarily playing with some high-falutin' idea. So we have really focused ourselves to have an array of figures and vehicles and that there is one higher-end unit that we love, which is the R2-D2 robot.

But, in general, this is a much, much tighter line than we've brought to market, and we've gotten really a wonderful reception to it.

As far as the key drivers in the international market, one of the things that we think that we have needed to do more of is we need to design - you know, we have always talked about our portfolio of core brands, and we have not taken advantage of those core brands as much as we should have on a global basis. And we are on, as we've had sort of a single-mindedness here on focusing on core brands, first domestically, this is the year that we're really laying the groundwork to - for 2003 for, really, a major push on our core brands.

You'll see by 2003, Hasbro presenting a much more global face to its product line. When I say a global face, much more will travel around the world.

Al?

Yeah, on the gross margins, Tony, there are a couple of things that are happening.

First of all, it's just the general focus of us trying to improve gross margins - you know, some of that's coming in our own factory. Some of that's coming as a result of product design.

Another key driver this quarter would be Star Wars shipment. Star Wars have a particularly high gross margin, but they also have a particularly higher royalty, so the net operating profit is, typically, lower than we would have on the traditional boys' line or action figure category.

Just - OK, then. Going back to international, should we expect any growth in the international business this year, or is it flat to down business?

I think we'll grow the international business this year - definitely. I think one of the things that's happened in the international business, over the last couple of years, is Furby and Pokemon were very strong pieces of the business.

Furby had a very, very strong run in the international arena, and it lasted beyond the softening here in the U.S. side.

So as that - as that's come down, the rest of the business has been pretty flat. We've seen some growth this year.

If we take out the Pokemon in the first quarter, the base international business grew about four percent, and as Pokemon becomes less of a factor, as Alan said, the rest of the core brands that were beginning to drive, will improve divisions as the year goes on.

But we do expect growth in the international business this year.

Thank you.

Thank you. Our next question comes from Brett Jordan.

You may ask your question. Please state your company name.

. A couple quick questions, and one of them also on the card business, about

how that faired in the quarter.

And then following up on some of the Star Wars' questions. Do you have a feeling for, given the tighter product line program-over-program comparison on retail allocation of peg space, really sort of what kind of square footage you're going to get there?

Well Brett, let me try and answer the square footage.

The line is a much tighter line, but more importantly for us in working with Lucas I think all of us realize that there were too many licenses that had been awarded last time around, and to be specific, and I'd rather not mention companies, but there are three key toy areas that were given back to us that we were not involved in last time around. And we should say that we are not really exploiting those areas because we want the Star Wars business.

Let us say that we want to make sure that the demand is proper and we keep it a little bit hungry.

As far as shelf space it concerned, I'd say it's definitely down from last year, but that is mainly because we have been, all of us, a lot more selective in the type of products that we're going to put out there.

On the

,

is doing very well. The one thing that I would mention to you with

is that every other year we do four introductions of

and then the odd year is three introductions, so 2002 will have three releases rather of

whereas last year we had four.

But if we take a look at the movement at retail, and we look at the number of playing tournaments,

is up and is doing very well.

OK, and then quick, two quick number of questions.

One sense your willing to quantify your operating margin target for next year, would you care to throw our a target range for this year given you're on track for your expectations? And also on the pawning of

for Star Wars, is there any granularity I guess is there a royalty guarantee check that is due with the launch of the program, or is it going to be relatively smooth with the product sell through?

David, you want to take that?

Yeah, with regard to payments there is another payment due to Lucas concurrent with the release of the movie.

And again, you know given the volumes we're projecting we're certainly accruing

at a level which will meet our financial commitments to

over time.

What was, sorry, the first part of the question again?

going out with your forecast range in operating margin this year.

You were talking about ...

Yeah.

In terms of operating margin we said earlier back

that we expected to improve our operating margins this year but we would not get all the way back to the 10 to 11 percent which we had enjoyed in recent history and expect to get back to next year. So we were 7.4 last year so clearly you know our range is better than 7.4 but below 10 in terms of the guidance that kind of you can derive going in.

Thank you.

Thank you. Our next question comes from Melissa Williams.

You may ask your question. Please state your company name.

Hi,

.

Good morning Melissa.

Good morning Alan. I first wanted to ask could you guys better clarify the Pokemon numbers for us?

You know last year you gave us how much the business had declined year over year on a quarterly basis and also if you could tell us whether it's all in international or whether there's some in the game segment as well.

David?

Yeah. I think Melissa if you go back to 2000, as you know from previous reporting, Pokemon was $990 million for us.

It was immense and while most of the decline from that very large number occurred last year, it was still a significant brand for us last year and there will still be some reduction year on year. Most of that reduction will occur during the first half in international markets where Pokemon continue to be strung.

So I think once we get through the first half, we will not be using Pokemon as a reason why we're down year over year in any market.

OK.

So the piece and the games business is relatively steady year over year?

No, the trading games for Pokemon are included in our games segment.

So that would be part of it but more so internationally.

It really was not that big a number in the games area.

In the United States Melissa it was much heavier in the international.

OK.

And are we on a point now with our international segment reporting that everything that is sold in international markets is reported in that segment?

Yes.

Finally yes.

Great.

And then finally could you comment on retail shelves with the board game business. Given the sell through rates that you saw over the counter in the first quarter, are there shelves to restock or were they basically stocked in the fourth quarter?

I think, Melissa, what you're seeing in supply chain management is where we were shipping almost equally, not equally during the year, but people would take a lot more basic games in on an equal basis.

That's changing around a little bit as we were trying to prove a point in the first quarter. I will tell you that our retail levels, right now, of gains is in excellent shape, and barring any accidents we should have a very good second quarter in the game business.

In shipments?

In shipments.

Thank you.

Thank you.

Our next question comes from

. You may ask your question.

Please state your company name.

Yes, good morning.

Hi, David.

I have three totally unrelated ones.

First, did I hear Al Verrecchia correctly to say that you would take any

assets if they turned up in the second quarter? Under the new FAS treatment?

No, I didn't hear that, David.

OK.

What was the statement, and when do we do the assessment, and when might it be taken if there has to be a write down?

David, you want to take this?

David.

Actually, no, David, a number of companies have announced impairment charges in adopting the new standard, and we are in a process of looking at this.

We'll have an answer by the second quarter. The financial accounting standard board recognized when adopting this standard was very complex and very different, and required much detailed work.

And in fact, within the rules gave the appropriate time for companies to complete it. I think as you know, Hasbro has been very

over the years, and has substantial good will on it's balance sheet.

But we do not know yet if there will be an impairment on adopting a new standard. And if indeed we do, I think it's important to note that clearly it will not be a cash charge, and it will not impact our EBITDA.

That last part is understood, but what you're saying then is, and let me make certain I do have this right, you will do the assessment during the second quarter, and at the end of the second quarter if there is going to be a change you will let us know at that time what you believe the change will be?

That's exactly right.

And when it will be?

That's correct, David.

Thank you. Second question, we spoke earlier about return to historic profit margins.

Given the cyclical nature of the business the last several years, what are the historic profit margins that we are targeting?

David, this is Al.

We're talking about the historic operating margins of between 10 and 11 percent. We expect to achieve that in 2003, and we've also said longer-term though we feel we need to do better than that.

And, David, I want to also just add one thing.

Remember, this management now is dedicated to taking out some of the cyclicality of our business by focusing on our core, core brands.

Excellent.

And the last question - now that Toy Fair is a distant memory, could you tell us which items did better than you expected at Toy Fair, in terms of demand, and which ones were lesser performers than originally hoped for?

David, this is where I get a little bit personal, because, you know, when we bring toys to market, they become our children, and I don't want to pick one child over another.

We really did have, across the board, an excellent Toy Fair. And, yes, I am sure that, you know, at the end of the day, a few products have fallen out, because they weren't received well.

I think we're making those decisions well. But everything that we were banking on at Toy Fair happened.

All right, I was thinking it's not like Woebegone, where everything is above average. Were there any four or five standouts you would like to talk about?

David, first of all, first quarter is a little early. The new products we've shipped, such as BeyBlades, Medabots and Zoids, are doing very well, and some of the new product - you know Bob the Builder's doing very well.

Most of our new product doesn't start to ship until second or third quarter, so it's kind of hard to say whether or not a product has exceeded or fell short of expectations, given we haven't shipped a lot of the products.

I can't think of anything off hand, although, as Alan said, I'm sure that something might have fallen out as a result of the retailers not liking it.

But, overall, I can't think of anything, so it couldn't have been that substantial.

OK.

And just the last thing about - getting back to Star Wars. And I don't want to beat a dead horse ...

We won't let you.

Well, there aren't any horses in the new one, you told me.

But, recently, you just mentioned that the second and fourth quarters are the significant quarters for Star Wars sales of merchandise.

But I thought the third quarter would be important, since that's when you release, or introduce, all the year-end product for Star Wars.

David, this is Al.

I think what David was saying is that when we look at the percentage of Star Wars volume shipped, two and four tend to be a little stronger. It's not that three won't be a good quarter, but the fourth quarter should be stronger.

And, again, this is part of our slowing of merchandise and managing inventory levels with our retailers.

You know, one last thing I think we should mention at this point in time.

There's no question that Star Wars is a big movie this year, and there'll be a lot, receive a lot of notoriety, and it's certainly a part of our line. But Hasbro is a lot more than just Star Wars.

And I think the last thing that we want to do, although we'll clearly try and answer all your questions as best we can about Star Wars, we don't want to turn the entire performance of Hasbro in 2002, you know, into a discussion about Star Wars. Star Wars while part of our program is only a part, and not nearly as significant a part of Hasbro as it was in 1999.

Thanks, David.

Thank you very much.

Thank you. Our next question comes from

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You may ask your question. Please state your company name.

Hi, it's

. Congratulations, Alan, Al, and David, for your continued work on tightening up the balance sheet and the income statement.

Thanks, Tom.

Your welcome.

A couple of questions. The first would have to do with, for Alan, for Al rather.

Just to give us an update, Al, on the order of magnitude of the benefits received from your increasing outsourcing to Asia, manufacturing, R and D, and then the logistics of interconnecting your market with the sourcing done abroad. How far has that come along, and how much is left to extract from those savings, first question?

OK, I'm not sure I can give you a dollar number, but in terms of our outsourcing, we've been outsourcing for a lot of years, and I don't know that we'll do any more or less outsourcing. I mean most of, virtually all of our toys are made in the Far East, and probably 25 percent of the games.

That can vary a little bit from year to year depending upon a product mix. You know, more electronic, handheld games move more in the Far East versus less.

In terms of doing more R and D in the Far East, we started that. We're probably in the third inning of a nine inning game as it reflects, as it impacts the R and D.

So I would say that the benefits you're going to get in moving more R and D to the far east would be more reflective in 2003 and 2004 results than they would in 2002, although you know, we have begun to move some of that R and D overseas.

OK.

And the next question, Al, is a general one. You referred to in the text of today's release 100 million of cost savings, plus another 100 million to come, but that they phase in a bit awkward manner.

We wont see the benefit of the first 100 because of the costs associated with steps to prepare for the next 100. And during 2001, much of the benefit was clouded over because of the steps to get the first 100 million of cost savings.

When it all finishes, you know, adjusting for the savings from the sale of video, R&D savings and what have you and then adjusting for the operating savings that you're generating last year and continuing through this year, what is the order of magnitude of cost savings versus say the last year with interactive? I mean is it - is it a knowable number?

David, why don't you take that

Yeah.

I think we really started our cost saving efforts back in 2000 and even

interactive we made some savings in 2000. As you know in 2001 we got almost about 100 million out of the business and we're going for another 100 million over the next few years and you're right.

You're going to see a lot of benefit of that this year. You'll probably see about 50 percent of it at least next year with the balance coming primarily in '04.

If we - when we've achieved this I think you'll be able to look at Hasbro and say even absent the impact of selling interactive and

which took some cost out of the business you're going to see that our total cost space in R&D, marketing, sales and administration will be down about one third from the original 2000 base.

And that's the order of magnitude, 300 million?

No, that's more in a magnitude of about 250 million.

OK.

remind you of is when we talk about this, the first 100 and the second $100 million ...

Yup.

That's excluding the impact of getting out of the Hasbro Interactive business.

OK. Good.

And

maybe just a second from you to talk about the - your view of the inter-relationship between increases in the royalty payments and then increases in advertising spend in light of the movement and mix that might be suggested by the higher royalties payment and the possibility that that might free up some formerly spent advertising dollars.

So in the first quarter advertising was constant, royalties up sharply. How do you see those working through the years, the relationship between those line items and mix?

I think if you see - if you look at Star Wars

clearly it's a product that you can price at a small premium and therefore it's - product cost is a percentage of its sale prices lower so we get a better gross margin. However, we give a lot of that gross margin back in terms of royalties, and we pick a little bit up again in the fact that advertising of Star Wars would tend to be lower ...

Lower.

... than for something that is not as well known, and is not a movie, and all the promotion that goes with that. So I think, you know, Star Wars has a higher gross margin.

It has a very high royalty rate, and a slightly lower advertising rate.

Yeah, and I suspect that I should congratulate you for continuing to advertise at the same level as the prior year even with that shift, and even with the fact that advertising

must have come down a lot, so you're share of voice must be up considerably.

Thank you, Tom, we'll accept any congratulations.

OK, good.

And then Alan, for you the last question. How much concern do you have on the state of retail?

There was a write-up recently about Toys R Us and some concern over how they're conducting their re-sizing. And then clearly there was a question earlier about K-Mart's shortfall.

How do you test the waters of retail right now, Alan?

Tom, not an easy question.

I'm not sure I have that great answer. I will tell you that our working relationships with, whether it be with Toys R Us, whether it be with K-Mart, or Wal-Mart, or Target, or Kay-Bee, and the rest, is as good as we've had as a working relationship in a long time.

K-Mart does have a long hard row. I think they've brought on some very good management.

Hoping it'll work, but again, to protect our shareholders we're going to have to be, you know, cautious, and you know, all I can say is I wish them the best of luck.

As far as Toys is concerned, we're working harder than ever in trying to help them find and bring people into their stores.

I'm a believer in

. I learned, and

and the team that they have.

I think right now, right now I think,

, a lot is going to depend upon the consumer and the consumer's appetite and what the different retailers do to differentiate themselves in order to get store traffic. Otherwise I can't comment any further.

OK, thank you, and congratulations on that hard work.

Thanks.

Thank you. Our next question comes from

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You may ask your question. Please state your company name.

Hi, Bank of America Securities.

Morning, Gary.

Morning. Just a couple of questions, sorry about the Star Wars topic, but Alan, could you maybe talk a little bit about, and I understand there's differences this time around than last, but in terms of Star Wars, what will it, sort of, dislocate at retail?

Probably licensed property, but can you talk about some other products, whether it's yours or in the industry, that'll probably feel the impact of Star Wars?

And then, secondly, your inventory line was down very significantly, and I'm wondering.

It surprises me a little, because I would have thought inventory would have been up in anticipation of a large Q2 shipment of Star Wars products. So can you talk about why it was down and whether, you know, the mid-200 million range is sustainable going forward?

Thanks.

Well, I think first of all,

, as far as Star Wars is concerned, and what's it going to displace - well, it will displace things that were, you know, yesterday's story, such as Jurassic Park.

I will not comment whether it will displace any competitive product, but it will.

We feel, though, that - very comfortable in the segments that we are in in boys' toys.

Transformers continues to be that combination - that robotic combination of transforming a toy. G.I. Joe, obviously, is riding a crest of, you know, American patriotism, and we've tried to open on every front possible there.

When you talk about Zoids - that is doing more in the category of - and heaping in a new category in the toy industry. But there is this action figure model kit category, which the Japanese originated, and it seems to have caught on, you know, very well here.

So I'm not totally sure. I think that one of the things I will go out on a limb - and everyone's quaking around me when I go out on a limb.

I think you will find definite, definite growth in the boys' aisle in 2002. So, yes, some things will be taken away by Star Wars, but, in general, that boys' aisle will expand, as Star Wars and other things will drive people to that aisle.

As far as inventory is concerned, for the last year and a half, Al and his team have been stressing, day in and day out, supply chain management. I think we have learned to do things differently and probably are a little bit ahead of the curve with, you know, everybody, in the sense of really being able to manage the flow of our goods, whether they be from our factories to the retailers or our partners' factories in the Far East.

Al, I'm not sure if you want to add anything.

Yeah, I think that - I think you've said most of it, Alan.

I mean, there are areas of the business where we're probably down as low as one might expect to get, but there are some other areas of the business where we have opportunities. To be honest with you, you know, a product like Star Wars doesn't spend much time in inventory.

It comes in and goes right out to the customers. So we don't need to stock a lot in the first quarter to fill shipments for the second quarter.

Thanks, Gary.

Thank you.

Our next question comes from

. You may ask your question.

Please state your company name.

Hi, I'm with

, good morning.

Hey, J.J., how are you doing?

Hi, good.

J.J. it's snowing here, and we're not happy.

Well it's raining here, you know, so it always does.

I have a couple questions. You mentioned on the international side that without Pokeman sales would have been up four percent.

I wonder is there a way you could give us a sense of how much the robotics business was in Q1 of last year, and if you said that earlier I got on a little bit late, I apologize. The second question is on the roll out of Star Wars by channel.

Are you pretty much, are you pretty much available everywhere tomorrow, or are you kind of phasing in the mass market, you know, distribution, international?

Just kind of give us a sense of what that schedules looks like.

And then the last question I guess is probably for David, and that is, OK, so operating margin we're going to see some improvement this year off of what you had last year despite a four percentage point increase in the royalties. So is there a way you can help us think about how that four percentage points plus my breakdown by line, in other words, what are the most important lines in picking that up and making it up.

Thank you.

David, do you want to answer the last one?

Yeah, in terms of the operating profit, we said it would improve, even while royalties are going up by about four percentage points. I think where that's going to come is certainly a little bit in

.

There will be some in amortization. And there will be some in cost of goods sold.

So our gross profit will be a bit higher.

So it sounds like it's pretty evenly distributed amongst a number of accounts.

It's not really concentrated in any one line item?

I think certainly in gross profit, because Star Wars does have a good gross profit margin to help cover the higher royalties.

And then I think over and above that we'll get a bit of a pick up in amortization and on

as I said.

OK, thanks.

Cost of sales being the largest.

Great.

, I don't have the, I know on the robotics it's at least a 20 million swing in shipments in the sense that last year was at least 20 in the first, if not a little bit more, and it was

low this year. OK?

That works, thanks.

Thank you. Our next question comes from

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You may ask your question. Please state your company name.

Hi, Merrill Lynch here.

Hi

.

How are you doing?

Good.

Thanks.

That was a good set up there.

I just had - I wanted to find out a little bit more about what was - what efforts were underway in sort of turning around the electronics segment and what's going on at

, sort of an update there.

, well with the

-

has been - has now become part of the overall toy group and one of the things that you'll definitely see

majoring in is obviously in this whole area of music that we - that we've seen growth in for the last two years, continued to see strong growth in Hit Clips.

We are looking on other concepts through the

group that marry the two.

And as far as

in the gaming side of things, all of that is now coming under the umbrella of Milton Bradley.

Again what we tried to do is to consolidate that, to shrink it somewhat but we feel very comfortable today that we know the direction we're heading. We're not going to be all over the place and again if you know in time if the robotic category begins to come back in a new format, right now it's just over proliferated, not something we feel like wasting time and dollars on.

OK. So you feel like the robotics is just a function of an over supply, not an overall secular decline in the interest in the category?

No, I think it is very definitely an overall decline in the category. I think the market - any time you have a leader such as we were and then so many other people begin to copy or borrow your concepts that we could not protect, it begins to become saturated and that's what happened in that area and right now it's going to take I would say a year or two at least for that category to be worth investing dollars in.

OK. Great.

Thanks a lot.

Thanks

.

Thank you and with our final question, here is

. You may ask your question.

Please state your company name.

Hi, Lehman Brothers.

How are you?

Hi

, last but not least.

That's right.

OK.

I just wanted to touch quickly upon the accounts receivables on the balance sheet. At the beginning of the call you guys walked us through why that was higher year over year mainly due to timing of first quarter shipments.

So I'm just wondering if there's any other details you want to elaborate with that and then also since it is a timing issue, should we see that reverse itself in the second quarter?

David>

... I think our accounts receivable was as Al explained, we're a bit higher year-on-year due to the fact that we shift Star Wars into the pipeline late in the quarter, and none of those monies were due at the end of the quarter. I think also there was a lower mix of

and electronic product which all used to be shipped FOB on very short terms.

Trading card games as well.

Yeah, and trading card games were down a bit as well.

So I think it's probably and we also had a very low receivables and

last year in the first quarter. So I think as we go through the year, the year-over-year increase, which we experienced in the first quarter, is not going to be repeated.

It's difficult to think that we're going to be able to get receivables much down below last year's levels in terms of

, but we shouldn't have this year-over-year increase either.

Great, thank you.

Thank you.

Take care and thank you all again for joining us for this conference call. Bye for now.

That concludes today's conference call.