孩之寶 (HAS) 2002 Q2 法說會逐字稿

Good morning and thank you all for holding, this is the operator.

And at this time I'd just like to inform you that you are in a listen only mode until we open for questions and answers.

Also, this call is being recorded.

And I'd like to welcome you to Hasbro's 2nd Quarter earnings conference call.

At this time I'd like to turn this call over to 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 and thank you for joining us.

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

Al and I will review the Company's 2nd Quarter performance, but before we begin, Karen is going 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, which are inherently subject to risks and uncertainties.

There are many factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements.

Some of the factors are set forth in the Company's annual report on form 10-K under the headings 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 8-K and in today's press release.

All listeners should review such factors together with any forward-looking 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 and circumstances occurring after the day of this conference call.

Thank you, Karen.

On today's call we will review our 2nd Quarter results, highlight some of the top products and brands from the quarter as well as outline some of our key initiatives for the balance of the year.

We will conclude by opening the call to your questions.

I am pleased with our 2nd Quarter performance.

Worldwide net revenues were up 7% and operating profits were $14 million compared to a small loss last year.

The business is vibrant as we continue to execute on the plan we shared with you 18 months ago.

Beginning with cost reductions and operating margin improvement, 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 as evidenced by an improvement in SG&A expenses year to date.

Second, growing our core brands.

We enjoyed another quarter of strong retail sales performance with many of our Hasbro-owned brands and products.

Evidence that our focus on growing core brands is the right strategy for this company and its shareholders.

Third, managing the business for cash.

We have continued our focus on strengthening the balance sheet.

Inventories are down this quarter, debt, net of cash is down and we have had no draw-down on our domestic bank line at the end of the last three quarters.

When taken altogether, the bottom line is that we continue to be on track to achieve our financial goals for this year.

Now I will turn the call over to Al to review the quarter in more detail.

Al?

Thanks, Alan.

Good morning, everyone.

As Alan mentioned, we're on track to achieve our financial goals for the year.

Our brands continue to perform well in retail and we are on target with our expense reductions.

At quarter end, our balance sheet was much-improved from a year ago.

I will talk about this later when I review the balance sheet in more detail.

So let's begin with the P&L. 2nd Quarter worldwide net revenues were $546 million, an increase of $35 million or 7% from the $511 million last year.

This is the first time in nine quarters that revenues have increased year-over-year.

It's worth noting that our business was still up over 7% year-over-year when you exclude the impact of Star Wars, Pokemon and Jurassic Park from both years.

Debt net, our base business, continues to be strong.

In the 2nd Quarter, we reported a loss of $25.9 million or 15 cents per diluted share.

These results compare to a net loss of $18.3 million or 11 cents per diluted share in the 2nd Quarter of last year.

The results include a non-cash charge of $28.6 million or 17 cents per diluted share, related to a decline in the value of the Company's investment in Infogrames Entertainment SA.

For those of you who are not familiar with Hasbro's investment in Infogrames, here's some background.

In January of 2001, we sold Hasbro Interactive and Games.com to Infogrames.

At the time of the sale, the combined businesses had incurred operating losses of over $100 million in each of the prior two years.

As part of the proceeds, Hasbro received approximately 2.9 million shares of Infogrames common stock with a carrying value of 19.62 euros per share.

In the 30 days prior to the end of the 2nd Quarter, the stock had been trading in the range of 3.2 to 5.8 euros.

Based on the recent stock performance it was appropriate to write down the shares by $28.6 million after tax.

Again, this is a non-cash charge.

Although we are disappointed in Infogrames stock performance, we still believe they are a good long-term strategic partner that will bring value to our brands in the digital world as well as providing a guaranteed quality income stream to Hasbro over the next 14 years.

Moving to FAS 142, although it didn't impact the 2nd Quarter results, we adopted the new accounting standard, FAS 142, goodwill and other intangibles.

During the 2nd Quarter, the Company recorded a non-cash, after-tax charge of $245.7 million, as a cumulative effect of the change in accounting principal, related to the adoption of FAS 142.

The charge is entirely related to goodwill in the U.S.

Toys segment.

The charge is retroactive to the beginning of the year and will impact year to date results.

Once again, this is a non-cash charge.

2nd Quarter operating profit was $14 million or 2.6% of net revenues.

This compared to a loss of $41,000 last year.

Earnings before interest, taxes, depreciation, and amortization, EBITDA, was $60.1 million or 35 cents per share for the quarter.

Compared with 51.3 million or 30 cents per share, a year ago.

Gross margin improved by 4 percentage points to 64.1%, compared to 60.1% last year.

Reflecting improved product mix.

Now let's take a look at expenses for the quarter.

We continue to be on track to take an additional $100 million in expenses from the business over the next three years.

While there have been some cost savings year to date, in 2002 we have been absorbing the expenses associated with implementation of our cost-reduction programs.

We expect most of the benefit from the savings to be fully reflected in 2003 and 2004 results.

Research and development increased for the quarter to $36.8 million, compared to $29.9 million a year ago, reflecting the increased emphasis on new product development that is part of our stated strategy to grow our core brands.

Royalties for the quarter increased by $25.8 million to $65.7 million or 12% of revenues.

As we've said, we expect royalty expense to be higher in 2002, primarily due to the high royalty rates associated with Star Wars.

We are accruing for Star Wars at a royalty rate that is significantly higher than what is stated in the contract.

It is sufficient enough to cover the minimum guarantee.

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

Advertising expense was $58.5 million or 10.7% of revenues for the quarter, an increase of $7.4 million compared to a year ago.

We expect advertising expense as a percent of revenue to be approximately 10.5% for the full year.

We continue to be pleased with the progress we have made in reducing SG&A expenses, which declined in the quarter by $5.1 million to $152.1 million.

Year to date, SG&A declined $19.8 million to 29.2% of revenue, compared to 31.9% of revenue last year.

This is a trend we expect will continue as SG&A expense reduction remains one of our top priorities.

Amortization expense declined for the quarter by $6.1 million to $22.8 million, primarily due to the adoption of FAS 141 and 142, partially offset by the amortization expense associated with Lucas Property Works.

With the adoption of these accounting requirements goodwill and certain other intangibles are no longer amortized.

Amortization of goodwill and intangible assets with indefinite lives in the 2nd Quarter of 2001 amounted to $12.7 million.

Elimination of this amortization and its related tax effect would have resulted in a net loss of $10.4 million in the 2nd Quarter of 2001.

We expect amortization expense to be approximately $100 million this year.

Excuse me.

Interest expense for the quarter decreased by $7 million to $18.3 million, primarily due to lower short-term debt and the benefits of the debt refinancing we completed in the 4th Quarter of 2001.

Other income and expense was $30.7 million in the 2nd Quarter, this is primarily attributable to the writedown of Infogrames stock, partially offset by $10 million of interest income received from the U.S. tax settlement.

Our tax rate for the quarter in year to date was 26%, compared to 32% a year ago.

Due primarily to the change in accounting rules for the amortization of goodwill and other intangibles and to a lesser extent, smaller operating losses in jurisdictions with no tax benefits.

Going forward, we expect our tax rate to be 26%.

Now turning to the balance sheet.

We accomplished a great deal this quarter.

We repurchased $50 million in 2003 bonds, reducing our debt obligation in March of 2003 to just under $275 million.

We made a payment of $120 million to Lucas Licensing Limited.

It is our third payment to date and part of the total minimum guarantee of $590 million.

This means 80% of the minimum guarantee has been paid.

We have one final guaranteed payment of $120 million due at the release of Episode 3, expected in May of 2005.

I'm pleased to say that even with both the bond repurchase and our Lucas payment, we had no draw-down on our domestic bank line at quarter end.

Lastly, we finished the quarter with just over $57 million in cash.

Receivables increased from the last quarter by approximately $80 million.

Our quality of accounts receivables has continued to improve as past due accounts receivable declined 21% year-over-year.

Day sales outstanding increased by 9 days as compared to a year ago.

This is due to a number of factors, including lower sales program costs, timing of shipments during the period and the mix of our revenues.

Inventories decreased by approximately $57 million or 17% from a year ago to $280 million.

Even though we did bring in some additional merchandise to afford us some protection from the potential of the west coast dock strike.

There were a number of factors that contributed to the decrease in inventories year-over-year, including improved inventory management and efficiencies achieved as part of our ongoing supply chain management improvement program.

The balance sheet also shows that total debt, net of cash, decreased by $201 million.

Reflective of the strong cash generating ability of the underlying business.

Our long-term goal is to reduce our debt to capitalization ratio to 25 to 30%.

As I mentioned earlier this quarter, we reduced our current long-term debt by $50 million by repurchasing a portion of the 2003 notes that are due next March.

In anticipation of the expected questions regarding Star Wars, let me take a moment to provide you with some additional information.

Many of you have asked how much of the minimum guarantee has been expensed through our P&L?

As I mentioned, of the $590 million minimum guarantee, we have paid 80% of $470 million.

Through quarter end, we incurred and expensed approximately $250 million in royalty expenses.

As we said earlier in the year, in our 2002 plan, we are managing the brand conservatively.

With revenue planned at significantly lower volume levels than 1999.

In part due to a tighter, more focused product line.

However, shipments to date are in line with expectations and we are accruing at a higher royalty rate, which should be sufficient to earn out the minimum guarantee.

Obviously, the key to achieving our financial plan for the year with Star Wars will be the sustainability of the line in the back half of the year.

Also, as we have said before, Star Wars will not be one of our more profitable brands.

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 our form 10-Q in August.

In the U.S.

Toys segment, revenues were up 18% to $199.6 million, compared to $168.6 million last year.

In addition to Star Wars, many of our core brands performed well this quarter.

For example, Easy-Bake, Lite Brite, Playskool and Transformer shipments were all up over 10% in the quarter.

The toy group is profitable for the quarter, even with the significant increase in royalty expense associated with Star Wars.

Segment operating profit was $14.6 million for the quarter, up substantially compared to a small loss last year.

Overall, we are very pleased with the progress of the U.S.

Toys segment.

In the Games segment, revenues were $152 million compared to revenues of $162 million last year.

The revenue decline can be primarily attributed to the anticipated decline in licensed trading hard games as well as a decline in electronic games.

Overall, the traditional board game business continues to do well with net shipments increasing over 6% year-over-year.

This segment was profitable for the quarter, although it was a decline from profitability levels in the comparable period last year.

This was primarily attributable to the decline in volume.

International segment revenues were up 10% or $15.8 million to $174.3 million, compared to revenues of $158.5 million in the prior year.

This represents an increase of 5.7% in local currency.

We had strong performance from Star Wars as well as a number of core brands, including Transformers, Action Man and Monopoly.

This segment reported a lower operating loss than a year ago due to higher volume and the implementation of expense reduction initiatives.

I also want to remind everyone that beginning in 2002, the segment reporting was changed to coincide with the business realignments we announced last summer. 2001 data has been recast for comparability.

In closing, we've continued to made excellent progress this quarter on our strategic initiatives to further align our businesses and run them more efficiently.

Our stated strategy of focusing on our core brands is working and we're on track to achieve our financial goals for the year.

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 working to make Hasbro a stronger company, we remain focused on our financial goals of reducing expenses, improving our operating margin, debt reduction, managing the business for cash and profitability and driving growth in our core brands.

We have been pleased with the health of our business in the 1st half with inventory levels at retail in good shape, overall business at some of our major retailers has been good with toys being highlighted as a favorable contributor.

We entered the second half of 2002 with a strong, well-balanced portfolio of Hasbro-owned brands and products along with some key strategic alliances.

That being said, we are still early in the game with 2/3 of our volume coming in the second half.

To achieve our plan for the year, we will need a continued healthy retail environment.

Now to our segments.

First, the U.S.

Toys segment.

Beginning with boys action.

We remain the industry leader in this category with all of our key product drivers performing well at retail.

It is still early in the year, but so far G.I.

Joe, Transformers, Tonka, Beyblades, Zoids, Medabots and Star Wars have all done well and are poised for a good second half.

Transformers, Robot in Disguise, was the top performer in the category, up an impressive 47% in retail sales in our top five U.S. accounts.

As we continue to build upon the Transformers, nearly 20-year legacy.

In late August, the Cartoon Network will begin airing the Transformer Armada series, premiering with a movie special.

We will also be adding a new component to the line in the fall, Mini-con Transformers, we expect to deliver another great year for the classic Hasbro brand.

Beyblades, introduced late last year. is a brand we will be watching over the coming months.

Retail sales have soared in the U.K. and Canada after the introduction of Beyblades television programming, following the trend that e-kara saw in Japan.

In the U.S., programming began earlier this month on ABC Family and we are seeing a similar increase in retail sales domestically.

Zoids -- newly introduced late last year had another great quarter.

In a short amount of time, we have established ourselves as the leader in the action figure model kit category.

As part of our strategy to expand the brand to younger children, this fall we will introduce Zoids action figures.

We believe Zoids has the potential of becoming a long-term brand for Hasbro.

Preschool sales increased significantly this quarter, up 61% in retail sales in our top five U.S. accounts.

Continuing to drive the growth was both Mr. Potato Head, who is celebrating his 50th birthday this year and Bob the Builder, which continues to perform well at retail.

In the fall, we will be introducing many new products, including the Air-tivity table, Magic Screen Learning Pal, Tummy Time Picture Show and the Yard Crew Grill.

In the girls, in creative play area, we have a number of new offerings that will be coming in the second half.

After e-kara's success in 2001, and remember, it was the girl's toy of the year, we will be introducing the e-kara headset.

Another new product that has had great early response from retail is FurReal Friends, coming soon, our Queasy Bake Oven and our Lite Brite Cube.

Both great examples of how we're leveraging our core brands.

Marking the first major introduction in many years in these categories.

Over the past year, we have been planning a global launch of a new toy line based on one of Japan's hottest new children's properties, Hamtaro.

Programming was just introduced in the U.S. last month on the Cartoon Network and we are enthusiastic about prospects for our fall lineup of products.

Nerf delivered a great quarter.

U.S. retail sales were up 70% in our top five accounts, driven by the introduction of many new products this year, including the Light-up Football.

Moving on to the Games segment, we are continuing to focus on three key drivers.

First, bringing successful, innovative new games to market.

Second, further strengthening of our core brands and lastly, designing programs to create excitement at retail in this category throughout the year.

In the 2nd Quarter, our board game business at our top five U.S. retail accounts was up 10% and a strong 28% year to date.

This quarter retail sales at our top five U.S. accounts were up in all major categories with family games up 14% and children's games up 10%.

As we continue the aggressive advertising we began last quarter, our board game business continues to do well.

We have two key brands that are enjoying successful product extensions this year, Monopoly, the American edition, and the special 20th anniversary edition of Trivial Pursuit.

These games demonstrate our commitment to strengthening our core brands.

For the Fall, we have some great new games in our lineup across all key sectors.

We are particularly excited about a new electronic guitar game called New Jam.

Which combines kids two favorite activities, music and games.

New Jam is really Bop-it meets the guitar.

Moving on to Wizards of the Coast.

Magic, the Gathering trading card game continues to be a solid brand for Hasbro.

We've had great initial response to our recent launch of Magic the Gathering on-line.

With an estimated 6 million players of Magic the Gathering trading card game worldwide, we now offer game play 24 hours a day, seven days a week with over 1600 Magic cards available to purchase digitally.

I also want to touch upon on the Hasbro Properties Group or HPG.

Chartered with further enhancing the exposure and potential of our core brands, HPG provides revenue from licensing our intelectual properties beyond toys and games into a wide variety of consumer product categories.

These categories include publishing, apparel and gaming.

One recent example of leveraging our brand was the announcement of a Monopoly-themed shopping mall in Atlantic City.

The mall will be transformed into an entertainment and retail complex called Park Place on the Boardwalk.

The complex fully integrates many of our Monopoly icons.

We continue to make exciting in-roads in the publishing arena working with Scholastic, [INAUDIBLE] and many others.

We currently have over 200 titles at retail.

Featuring key Hasbro brands like Tonka, Mr. Potato Head, Scrabble, Play-Doh and many other core brands.

In the world of comics, Transformers, published by Dream Wave, has been the number one comic book for the months of April, May, June and July, even beating out Spiderman during the launch of the Spiderman movie.

Now I'd like to take a minute to talk about our strategic partnerships.

Beginning with Star Wars, in terms of product sales and our outlook for the year.

Our tighter, more focused line had a solid quarter with major product categories performing well, particularly action figures.

We also had a couple of sell-out situations with Light Sabres and Yoda action figures.

The heart of the business the action figures.

When we compare the rate of sale of action figures today to 1999 Episode 1, they are doing very well and we believe this is a good indicator for how the line will perform for the balance of the year.

As Al mentioned earlier, our sales to date are in line with our expectations.

Going forward, the key to achieving our financial plan for the year with Star Wars will be the sustainability of the line in the back half of the year.

We expect to benefit from new products, the holiday selling season and the anticipated release of the video and DVD in November.

We will be focused on driving revenue with new products such as interactive R2D2 and Yoda.

A unique new light sabre from our partnership with Tomy and additional 12-inch and 3-3/4 inch action figures.

We're pleased with the Star Wars lineup for the fall and the new additions to the line demonstrate our ability to respond quickly to the market and more aggressively pursue products that perform well.

I would also like to talk about our Disney offerings.

Lelo and Stitch, Disney's summer release, has done very well at the box office.

And the retail response to our line has been good.

With the video and DVD being released in early December, we could have another boost in sales later in the year.

We were very excited to learn that Disney is extending the line with both a television series and direct to video sequel slated for release in 2003.

In closing, we had a good quarter.

The business is on track year to date.

We are enthusiastic about the second half of the year because we have some great new products augmenting what we believe to be an already-strong product line.

We will be supporting the line with promotional programs throughout the fall and holiday season.

Going forward, we continue to be focused on growing and leveraging our core brands, which are our -- our most important assets in terms of building sustainable shareholder value.

Before I take your questions, I do want to comment about the Batman license.

Having managed the brand for the last 10 years, we did have a good sense of the value of the Batman license.

We did have the right of first negotiation, and we made a very appropriate offer.

Warner wanted significantly more money.

We decided to stay true to our stated strategy of not going after licenses that we considered too expensive.

We felt we could better utilize these dollars growing our own brands and developing some new ones rather than focusing on someone else's intellectual property.

With that, I'd like to thank you for joining us and Al, David and I will now take your questions.

Thank you.

And at this time, if you would like to ask a question, please press star 1 on your touch-tone phone.

We will take you questions.

Thank you.

At this time, please press star and then 1.

Our first question comes from Jill Crodick and your line is open.

Please state your company.

Thanks very much.

Good morning, it is Salomon Smith Barney.

Hey, Jill.

Hi there.

Can you give us a sense of what kind of expectations you have for Star Wars in the second half.

Does it meet kind of your one-thirds, two-thirds that you eluded to during your comments?

And secondly, I was curious given that the core business was doing better year-over-year, if you could provide us with what the revenues and product picture look for your overall core business, specifically.

And that would be it.

Thank you very much.

Jill, as far as Star Wars is concerned in the second half, no, it does not have to meet the one-thirds, two-thirds test.

Star Wars, because of the movie itself, ends up having more in the first half than it needs to have in the second half.

But we would like a strong video release.

Al, do you want to take the --

Yeah, good morning, Jill.

This is Al.

I certainly don't want to forecast but we're feeling very good about the growth in core brands and clearly, growth in core brands has a much more favorable impact on profitability than licensed properties, just for the mere factor that you don't have the royalty to pay in our core brands.

First half results were good and we feel, you know, real positive about what's likely to happen in the second half of the year.

Could you perhaps tell us how it panned out for the quarter, or the first half, specifically?

No, we're not going to give you individual sales numbers, per se.

Okay.

Thank you.

Okay Jill .

Thank you.

And our next question comes from Margaret Witfield.

And your line is open.

Please state your company name.

Bryn Murray.

Good morning.

I wondered if you could breakdown where the impairment of assets fell in terms of which product lines?

Also, both Mattel and Jax this morning have eluded to, you know, difficult conditions in the industry as regards retailer buying patterns.

Thus far I have not heard anything to suggest you're seeing the same?

And finally could you talk about how the Star Wars line this time differs from last between the kid and collector market?

I sense the kid business is stronger, perhaps the action figure price cut in June stimulated that.

And I wondered if you could comment?

Thanks.

Jill, this is Al.

I'm going to turn your question on 141 142 over to David.

First of all, Margaret before I turn it over to David, good morning.

Good morning, Alan.

Go ahead, David.

We said that the charges related to our U.S.

Toys segment under the FAS 142, you had to look at the total goodwill on a particular business segment.

And if you look at our Toys segment it carried goodwill associated with a number of acquisitions over the last three years, including Laramie (ph), Odd Zone (ph) and Captori (ph), Tiger, Belu (ph) and Wowie (ph).

And a little bit of all of that goodwill or part of the goodwill from all of those acquisitions was written down.

Okay.

Okay.

As far as comments that other people have made on retail.

Margaret, we had, you know, I think an excellent quarter and the reason we had an excellent quarter was basically retail take-away was excellent, our retail inventory levels are in great shape.

Right now, again if everything continues, I could smile.

We like what we're seeing, we've got wonderful programs in place for the back end of the year, but retail is still very vibrant, really across-the-board at Hasbro.

As far as the Star Wars question is concerned about, you know, kid versus collector.

I think we definitely have gotten more kids into the business, especially because of the role playing products such as the life sabres.

We have been a little bit short on light sabres and we're actually adding for late part of 3rd quarter, 4th Quarter, a wonderful new light sabre.

And the figure movement, I think the only difference that we've seen in the figure movement is that we have been able to control much better than we did in 1999, what we were putting out and if there was one character out in assortment of 12 that was weak, we were removing it very quickly or re-weighting the assortment.

And just in general, we -- we do need to have a good second quarter but -- I mean a second half, but we like the position we're in.

Just to put it in perspective, your 18% increase in U.S.

Toys, how does that relate to what the industry did in the period or what your takeaway did?

I -- as far as what the industry did, I really don't -- haven't looked at those numbers in the 2nd Quarter.

And obviously one of the things that people should begin to be aware of is we are gaining shelf space.

And I don't know who we're taking it away from, but we're definitely gaining shelf space.

In what segments, Alan?

Everything right now.

Obviously we're gaining it in the boy's aisle in a strong way.

We're gaining it in preschool.

We've gained it in creative play.

Again, through the first half we did very little in the girls area but we think that the lineup that we've got, especially as you see Hamtaro coming on and the e-kara headset, I thing you'll see us being very strong in the girls area in the second half.

And the Games business is just chugging along very nicely.

Thank you.

One other comment, Alan, and as our retail takeaway is running at a higher rate than shipments.

So retailer inventories are declining.

So we would assume that the toy business overall normally grows low single digits, relative to these numbers?

-- I guess --

Not sure where you got that, but --

I guess so.

Thanks, Margaret.

Thank you.

And our next question comes from David Lebowitz.

And your line is open.

Please state your company name.

Bernham and thank you very much.

Good morning, David.

Don't talk to me about the Yankees.

I wouldn't think of it.

Okay.

I could talk to you about the Red Sox, but I wouldn't mention the Yankees.

Briefly, a few questions.

One, have you ever stated what you need to break even on Star Wars in terms of revenue level this year?

No, we have not.

And we don't intend to.

Okay.

Number two, you said your key lines were all up double digit and better and yet year-over-year were up 7%.

Where are we falling short?

In other words, where have we seen less than 1-4 revenues?

I think there are a couple of places.

I think trading card games we said were down, particularly in the licensed trading card area, Pokemon, and some of the sports trading card games.

I think Tiger through the first half of last year, we were still shipping quite a few robotic pets and interactive toys and that's down versus the first half of last year.

And then there's a couple of other areas like connects and international, where we've given up the distribution in some markets.

And finally, Super Soakers had a relatively poor first half of the year.

Largely related to the weather.

So, I think there are four areas where we've actually been down, offsetting some of the benefits in the other toy lines.

And lastly, have you quantitied how much a change in the euro/dollar relationship means to both your top and bottom line?

Where for argument's sake, the euro which is already appreciated by more than 12% year-over-year, what that means to you for let's say every five-penny increase in the value of the euro?

Well, we haven't really speculated on whether the euro's recent runnup is going to continue through the balance of the year or not and we haven't really changed our full-year expectations that dramatically.

But clearly, if it were to stay at that higher level, it would give us some benefits.

And the last question, are you right now running ahead of or behind your accumulation of markdown money?

You know, you're amortizing markdown money quarter by quarter.

Is the revenue base exceeding what will be needed or are you running behind and you may have to add to your markdown money?

Are you saying our reserves for markdown money?

Yes, reserves, excuse me.

No, we're running fine.

Okay, thank you very much.

Thank you.

And our next question comes from Gary Cooper.

And your line is open.

Please state your company name.

Banc of America Securities.

Good morning, Gary.

Good morning.

A couple of questions.

First off, the G.I.

Joe performance.

You mentioned it being strong, but you didn't mention it in the up plus 10% category.

So I was wondering if you could maybe break that out for us?

And I was wondering if you could quantify what revenue was, let's say last year and maybe what you anticipate it's going to be this year for the Batman and the Justice League and Loony Toons licenses and so forth.

And then lastly, staying with the euro impact, could you tell us what the euro impact was in the current quarter?

Thank you.

David, do you want to talk about the euro impact in the quarter first?

Yes, as you know, the run-up in the euro was fairly light during the quarter and it impacted revenues on translation by about $6 million, favorable impact translation of revenues.

On translation of earnings, unfortunately we lose money internationally during the first half of the year.

So the stronger European currencies contributed to a greater loss on translation, that was partly offset by a very small pickup on transactions, that's where our European affiliates buy from Hong Kong in U.S. or Hong Kong dollars.

But again, that was partly limited because we had hedged some of our forward purchases.

So, probably less than a million dollars on the bottom line during the first half.

Gary, can you repeat your question on Batman to see if I'm going answer it?

Just wanted to get a sense for how big it is?

How important it is to you.

It's diminimus.

I mean it is not great at all.

It's -- it's very small.

Okay.

And then could you comment on how G.I.

Joe did?

And then one last question, you mentioned the licensing revenue that you're receiving for your properties.

Could you maybe give us some idea of how fast that business has grown in the last couple of years?

Um, Al.

Yeah, G.I.

Joe is up over 10% year to date, year to date June.

And it is up even more than that, retail takeaway.

We just didn't mention every single item.

It wasn't intentional that we left it out.

All right.

In licensing revenue over the last couple of years has been increasing at -- greater than 10% a year.

Okay?

Thank you.

Thanks, Gary.

Thank you.

And our next question comes from Felicia Cantor.

And your line is open.

Please state your company name.

Hi there, from Lehman Brothers.

Hey Felicia.

Hi, couple of questions.

One is, I was wondering if you could remind us the magnitude of the royalty stream that you're expecting from Infogrames?

And the next question is when do you expect the international business to be profitable?

And then finally, I'm not sure if you can comment on this, but I was wondering if you thought there was any merit to this Super Soaker lawsuit?

Well, first of all, Felecia, you're right, I'm not allowed to comment on any lawsuits.

And to be very honest with you, since I'm not going to comment, we have a wonderful inventor that we've been paying for years and years, but, again, we take everything seriously.

And so, you know, we still have to look into this.

As far as royalty -- not royalty streams, what was your second part?

The royalty stream from Infogrames, that's confidential.

We have a confidentiality agreement, and although there is a guaranteed minimum going out for 14 years.

Felicia, did you have a third part?

I did, I had another question, I was wondering when you expected your international business to be profitable?

Internationals should turn profitable as it has most years in the 3rd Quarter.

Okay.

And then just a follow up to something that you said earlier regarding Star Wars.

You said that one of the good things that you have more flexibility this year because as you see some action figures may be not really working at the retail level, you can kind of re-weight the assortment.

And I was wondering what you were doing with the underperforming action figures?

What we end up doing is, we basically remove those from the assortment.

And in most cases, Felicia what it is, is when you take a weighted assortment, sometimes some of the, you know, more one-off figures are the ones that give you the trouble.

And so they're the ones that are weighted, anyway.

You might have two pieces in an assortment of 24 or 36, and those get moved to markets where they haven't basically been offered for sale yet.

The other thing, Felicia, this is Al, is it's -- the key here is how quickly you change the assortment.

So that you don't run into an inventory problem at retail.

And over the last couple of years we had a lot of focus on that, not just on Star Wars, but all of our boys' action lines.

And we do a pretty good job in changing the assortments pretty quickly and reacting to point of sale information.

Thanks Felicia.

Thanks a lot.

Thank you.

And our next question comes from Dean Jenaukis, and your line is open.

Please state your company.

J.P. Morgan.

Just a couple of questions, first, on the action figure price card for Star Wars, can you tell us if you subsidized that?

And then secondly, are you still looking for 10% operating margins next year?

This is Al.

I'll answer the second question first.

Yes, we're still looking to achieve our goal of 10% operating margins for next year.

In terms of the price reduction, when you say subsidize it, you know, clearly it becomes part of our promotional program and whatever subsidation we do have in there, we accrue for.

O.K., thanks.

Thank you And our next question comes from Thomas Russo, and your line is open.

Please state your company name.

Hi, good morning.

Good morning, Al, the question about the underperforming lines.

Could you just describe for a second what that might suggest about your just in time manufacturing capabilities and whether or not it suggests that the supply channel has been made more adjustable on your behalf?

That's the first question of a couple of them.

O.K. are you talking about our ability to change assortments in reaction to figure categories?

Yes, exactly.

Yeah, well, we've been making action figures for a long time.

And one of the things we did a couple of years ago in the Far East is to really focus with our vendors on being able to change assortments very quickly.

And so in doing that in manufacturing processing, we do some pre-build of new figures.

We don't repack things out to finish good status as quickly as we used to.

Giving us the opportunity to re-sort very quickly.

Now, a key to that is reading POS at retail.

So, we're looking daily as to what's moving, what's not moving and then we're talking with our retailers get their sense of it.

And then we make decisions a lot quicker than we used to in terms of getting to the information back to the Orient, so we can re-sort.

We have to be careful because the assortments don't always work the same way in different geographic parts of the world.

So, the assortment may move in one direction in the U.S. and another direction in Europe.

So, we just have to keep working at that and managing it as effectively as we can.

What sort of savings might you get from being able to more precisely target in this particular area?

Well, it's hard to say the kind of savings.

What you do, is you minimize the impact of markdowns because if you have less goods on the shelf than on selling, less markdown money you have to provide.

And clearly in the toy industry, not just Hasbro, but, you know, virtually all of the toy manufacturers can point to years where they've had substantial markdowns for products that haven't worked.

So, anything you can do to minimize that represents substantial dollars in a given year.

Uh-huh.

Thank you.

And then David, when you refer to the question on impairment, I'm wondering if for compensation purposes, whether if you have some ROIC-based compensation plans, what the value of those acquisitions remain in your denominator?

In terms of what's left on our books, there was $314 million of goodwill on U.S.

Toys segment.

And essentially we took it $294 million pretax.

It was 245 after tax.

So it was really very little goodwill left on the books of our U.S.

Toys segment in relation to those acquisitions.

And it will still get into return on assets, et cetera, calculations.

So, that 314, will stay as a base on which you have to earn a return, determining incentive comp?

I think during the course of this year, given our programs set earlier, yes.

As we go forward, we'll probably maybe adjust the program to reflect the new base, but then you adjust the levels, as well.

So, it will go out of the base for assets, to determine whether your return on assets is being that when you have incentive comps?

Well we have not made that decision yet with the [INAUDIBLE] of the board.

I see.

Okay.

And then my last question is really for Alan or Al.

And it has to do with the presentation throughout about activity at the top five retailers.

What are -- what is the reason for the migration toward the focus on the top five?

Is it that they actually end up capturing so much that by focusing on just that subset we capture most of the domestic market?

Or how is it working that we now talk about performance at the top five?

I think that on a domestic basis, Tom, they do represent, you know, almost 70% or maybe, you know, around that number.

And to try and, you know, get all the ducks in order, they are representative, though, in general of what's happening across all of retail.

And, you know, again, at some point in time we will be able to capture a little bit more of the international flavor, which we don't do today.

And the reason for that is in each and every country you have a different top five retailer.

But the reason that we do it is strictly because it is easy to point out to everybody the trends that are going on.

Al?

Yeah, the additional point is we get very good point of sale information from those top five.

Once you get beyond the top five point of sale information becomes a bit spotty.

And that's the other issue you get when you go into the international markets, especially those markets outside of Europe and Canada.

Al, are there any quirky mix, you know, sort of pricing mix issues that happen by focusing on the top five in terms of their purchasing power?

No.

Versus what happens with the smaller retailers.

None whatsoever, Tom.

O.K., thank you for your help.

Thanks Tom.

Bye.

Thank you.

And our next question comes from John Taylor, and your line is open.

Please state your company name.

Hi, I'm with Arcadia.

Good morning.

Hi, J.T..

Hi.

I wonder if you'll tell us what the first half of '02 Pokemon revenues were versus what they were the first half last year?

I think, yeah, J.T., one of the things that we put in to try and guide everybody was if you were to take Pokemon and you were to, let's see, if you took Pokemon and Jurassic Park out of the quarter and then took Star Wars out, our business was still up at least 7%.

We don't really, I think, want to go to, you know, talking Pokemon every day of the week.

Okay.

Okay.

And then -- what are you -- what are you guys seeing in terms of ad rates for the second half, particularly around the holiday period?

Any material change from last year?

Not much of a material change at all, J.T.

Again, we -- we have, you know, committed a lot of our plans, but with the fuel that we have going into the second half as far as product movement, the thing that we need the most and I think we've captured this year, is the partnership with the retailer on doing what you call, you know, their white space ads and their co-ops and their promotions.

And that's where I think you would find us having greater depth and breath that, you know, in any time with the retail partnership, again, ad rates will be up slightly because, again, we're into one of those things called a political year.

Right.

Right.

Okay.

And then Magic online, you briefly touched on that, can you give us any sense in terms of what your expectations are as it relates to subscribers or users or any metrics like that by the end of the year?

J.T., I will tell you that, you know, first we had the beta, you know, the beta test launch.

And then we basically did the live launch about, you know, three weeks ago.

We know that out there, there are are six to seven million Magic players.

We've lost some because they couldn't find a place to play Magic.

I will tell you, and I won't give you numbers of what we're doing in the first three weeks, because, you know, that's not necessarily real yet.

But we have been absolutely gratified, pleased by the way this launch has gone and hopefully we will be able to show people that there are other revenue models that work online other than pay per play.

Because, as you know, the way you, you know, pay on this proposition is your buying digital decks of cards.

So, we couldn't be more pleased, but it is very early in the game, so I don't want to -- you know, in the past I've gotten ahead of myself.

I'm not allowed to get ahead of myself any longer.

Okay.

And last question, if you look at your -- what you've got on the plan for Star Wars this year, can you give us a sense of what the U.S. versus international breakdown might be?

U.S. would probably be close to 2/3 of the volume and 1/3.

I mean it could be 30%, 70%, but it's approximately 2/3, 1/3.

Yeah, that's the case.

I'm sorry, I didn't --

2/3 in the United States, 1/3 rest of the world.

O.K. great, thank you very much.

Thanks J.T..

Thank you.

And our final question comes from Tony Guykis.

And your line is open.

Please state your company name.

U.S.

Bankcorp Piper Jaffray.

Hi, Tony.

Good morning guys.

Couple questions.

Can you give us a little bit more color on the international retail environment and what are your expectations for the second half of the year?

What's working on an international basis?

What isn't working?

And then a couple of other follow-ups?

Tony, that's not an easy one because, you know, you go market by market.

We all wanted to talk about a global world and an international world, but when you talk about retailing, things are different in England than France and Germany.

Overall, you know, we're working real hard here at going market by market and seeing, you know, some pretty good changes both, you know, Hasbro's made some changes in management, we are doing, let's -- let's start with the U.K.

The U.K. overall is -- is improving.

They do have something, which I want to be careful because it -- it might not be a full-year thing, but Beyblades has gone from on the market to hot to white hot as they say in the U.K.

And overall, our business is healthy throughout the European theater.

In Australia and New Zealand, it is, you know, it is a very comfortable, it is not a big business, but it is growing nicely.

Mexico is doing well.

And, let's see, in Peru and Chile and Argentina, are too small to really comment on at this point.

And again, you know, because, we, you know, we changed our philosophies in Argentina to make sure that we were not, again, exposed to the peso-fication, you know, of the dollar.

Star Wars has done well internationally.

Our Games business continues to do well internationally.

And one of the things, Tony, that you will see more and more from Hasbro, this is an initiative really led by Al.

We are making sure that more and more of our line and I would like to think that by next year, 70 to 70% of what you see us doing in the United States will be running around the world.

Can you give us a sense on an international basis of, you know, what's happening with your market share?

Are you maintaining or growing market share?

Tony, I think in the first half because I don't have, you know, exact numbers, because we don't get the same data, you know, as early.

But I would tell you we're -- we're holding our market share and growing it a small amount through the first half.

I think you will see us absolutely grow market share in the second half around the world.

Tony, one comment, when you talk market share, I think it is important, at least for our company, we need to look at the market share of our core brands.

Because in any given year in this industry, a hot product, whether it is a Pokemon or Who Wants to be a Millionaire game, can spike market share for a given company and then when that particular product line goes away, the market share comes down accordingly.

And clearly that's what's happened, you know, to Hasbro, when you had Pokemon you get a spike.

And, you know, when Pokeman comes off or declines.

So, we try to look at the market share of our core brands and clearly our core brands, board games, toys, we are increasing market share and more importantly we're increasing shelf space.

So, we like to focus on the core brands only because licenses can come and go.

In the international markets I mean is there any change with the retail environment in terms of, you know, a move toward some of the mass merchants?

Are they taking more market share, anything there we should aware of?

I think that -- I think both Alan and I would agree that if you go to, you know, the U.K. and France and Germany, the big retailers, the hypermarkets, they continue to do -- have a big share of market and they continue to grow.

So, I think the phenomena we see in the United States is -- is happening, you know, perhaps at a -- at a different level, but the same thing is happening in the international arena as well, especially in Europe.

And in Canada, there is no question it is being dominated by a couple of players.

Tony, the only country that I know of that -- and there are probably some others that still, where the hyper markets, the [INAUDIBLE] the people like that, have not really, you know, taken hold, is really Italy, still.

And I think Germany, you know, still likes its, you know, small, you know, some of its small shops, but in general, you really -- the hyper markets, especially, are beginning to throw their weight around.

Just a couple quick questions.

Can you give us a quick update on the capital expenditures for this year?

And then the second question, on the $100 million of cost savings, I think earlier we had talked about it being 50/50, part of it in '03, part of it in '04.

Any update on where the majority of those cost savings are going to be coming from?

And what's been the cost savings, you know, year to date this year?

Because I know that you guys have begun the process, is there anything that's been realized material so far?

David, will you take those?

Yeah.

I think, in terms of capital expenditure thorough the half, we're at about $26 million.

We gave guidance earlier for the year that we'll be in the $70 to $90 million range.

I certainly think at this stage we will be at the bottom end of that range, maybe even a little bit below.

So, that's the capital.

In terms of the cost savings, we have been very active both in the first quarter and the second quarter in identifying cost-saving reactions.

You haven't seen a lot of favorable impact in our SG&A expense because we've had a lot of costs in terms of severance which offset it.

We've probably spent close to $20 million in the first half on restructuring-type actions.

So, absent that, our SG&A would be down $39 million as opposed to $19 million through the half.

I think there is about 430 positions which were eliminated during the first half of this year.

This is permanent positions.

We've consolidated our four offices in Hong Kong, we've further consolidated Tiger and Laramie offices.

We've had major reductions in Wizards of the Coast in Seattle, come off of their Pokemon peak.

And we've been doing other rationalization of back room activities both here and in Europe.

In Europe, we put Tiger U.K and [INAUDIBLE] U.K. into our Hasbro U.K. headquarters.

So, those are the type of things we're doing.

We're right on track.

You won't see many of the savings this year, you will certainly as you go into '03, start to see a lot of those benefits coming through.

Thanks for your help, guys.

Thanks Tony.

And let me just close the call by thanking everyone for spending the time with us and we'll see you real soon.

Bye-bye.