孩之寶 (HAS) 2002 Q3 法說會逐字稿

Good morning and welcome to Hasbro's Third Quarter Earnings Conference Call.

This call is being recorded.

Today's host is Mr. Alan Hassenfeld, Chairman of Board and Chief Executive Officer of Hasbro.

Sir, you may begin.

Thank you, Caroline.

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 Investors Relations.

Al and I will review the company's third quarter performance but before we begin Karen will read a safe harbor statement.

Thank you.

During the course of this conference call, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters which are inherently subject to risks and uncertainties.

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

Some of the factors are set forth in the company's annual report on report 10-K and included under the heading Forward-looking Information and Risk Factors.

And the company's quarterly reports on form 10-Q included under the headings other information and forward-looking statements and the current reports on form 8 K and in today's press release.

All listeners should review such factors 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 or circumstances occurring after the date of this conference call.

Thank you, Karen.

On today's call, we would be reviewing our financial results for the quarter, highlighting the performance of some of our key products and brands and discussing our outlook for the fourth quarter.

We will conclude by opening the call to your questions.

Before I turn the call over to Al to review financial results I would like to take some time to talk about the quarter and address a couple of issues I know on everyone's mind.

The retail environment and the disruptions at the West Coast ports.

This quarter, we continue to make significant progress on both our financial and non-financial goals.

While I was disappointed with the top line performance, I was pleased that we were able to effectively manage our bottom line with earnings up 10.4% year over year despite a revenue decline.

We have continued to manage the balance sheet, cash position is good and we are lowering our debt.

We remain focused on our goals and have continued to perform relatively well, especially as it relates to core brands in what has been a difficult environment.

Let's take a look at the retail environment.

On our last quarterly conference call in July, we said in order to achieve our plan in the second half of the career we needed a healthy retail.

In fact, in July and early August we were very positive about the retail environment as it had been good for us through the first half of the year and through July.

In mid-August to the end of September period, there was a discernible slow down at retail.

Back to school sales were below or at the low end of expectations for most major retailers.

This impacted our third quarter results as retailers were concerned about inventory levels in non-toy merchandise and the potential for weakness in consumer spending in the holiday season.

Because of this, some orders did move from the end of the quarter to October.

The retail environment was not the major reason for our decline in re new this quarter.

There are a number of factors that Al will talk about a little later in the call.

However, on the plus side, the past two weeks of retail have been good in the toy aisle.

Next, let me address the West Coast port situation.

As you know, when the Taft Hartley act was invoked, the West Coast carts reopened following a 10 day lockout.

There was little to no effect to our quarter since the lockout began very late in September and our logistical teams had planned well.

However, there are a number of factors that could impact our results in the fourth quarter.

Beginning with the backlog, it is difficult to predict how long it will take to get both the West Coast and the Far East ports back to normal.

We are working closely with retail customers in doing all we can to get product to them in a timely manner.

We will continue to work aggressively in managing the situation and we are confident that we are doing an effective job.

Lastly, we are in the process of making contingency plans for our first quarter 2003 shipments in the event that this situation is not resolved when the Taft Hartley cooling off period expires.

Now I'll turn the call over to Al to review the quarter in more details.

Thanks, Alan and good morning everyone.

In reviewing our performance for quarter, our strategy of focusing on expense reductions, balance sheet improvement and growing our core brands continues to earn results.

As Alan mentioned, we delivered on the bottom line, with profits up over 10% year over year.

Although revenue was down, we continue to execute on our strategy of focusing with core brands with many key products performing well this quarter.

Third quarter worldwide net revenues are were 820.5 million compared to 893.4 million last year, a decline of 72.8 million, or 8.2%.

The revenue decline is primarily attributable to licensed trading card games which declined by approximately $50 million year over year.

Specifically, Harry Potter and Pokemon trading card games were down.

With most of impact in the international markets as opposed to the U.S. market.

In addition, robotic pets and remote controlled toys, principally form our Tiger and [INAUDIBLE] were down 42.2 million for quarter.

Consistent within the industry trends, the robotic pet category did not perform well last year.

However, we generated significant revenue in the second half of last year with Biobugs I--Cybie and the Chi line of pets, we have impacted our quarter comparisons.

Lastly, as we mentioned last quarter, the electronic game business was down.

I would like to give you more visibility for our reasons for our decline in revenue.

We adopted a strategy about 18 months ago to de-emphasize licenses in favor of investing more of our resources into core brands.

This does not mean we are not doing new licenses.

It just means that the bar has been raised in terms of the payback we require to do them.

As some key licenses such as Pokemon been winding down, we have not rushed out to place them, instead we have been putting our resources behind building our own intellectual properties.

This has been paying dividends.

For example, GI Joe was up 82% for third quarter, and 39% year to date.

Transformers was up 65% for the quarter and 79% year to date.

And Playskool was up 49% for quarter and 50% year to date.

Over all the traditional board game business also continues to do well.

The 20th anniversary edition of Trivial Pursuit launch in the third quarter has done very well thus far.

Additionally, the Clue, Scrabble and Monopoly brands were all up, between 10 and 43% for the quarter.

While these of increases are both meaningful and gratifying, it is important to understand that because some of these brands started with somewhat low bases, our strategy for core brand volume growth is more of a slow build, as opposed to the short term, quick fix that a hot license can sometimes provide.

Over the long term, we are confident that our core brand growth strategy is a key to more reliable and sustained growth in profitability for this company.

You can see some evidence of this from our profit performance this year with some of our margin improvement in reduction in obsolescence, absolutely attributable to our increased emphasis on core brands.

I would also note that, as anticipated, Star Wars had a relatively slow quarter.

In guidance we provided earlier this year, we indicated revenue would be weighted until the second and fourth quarters, due to the timing of the movie release in May and the release of the video and DVD release in November.

To achieve our goals this year, we need to get a boost from the video release.

As well as from the new products we are shipping for the fourth quarter.

Again, it is important to view our key licensed product businesses like Star Wars in light of our previously announced commitment, to manage these businesses with more of a long-term focus, an emphasis on profitability.

This strategy means, by definition, that we will leave some business on the table in order to minimize the volatility of these licenses and avoid some of the inventory writeoffs we have had in the past.

At this time, I would like to review our segment performance as it gives us another view of our revenue and earnings for the quarter.

In the U.S. toy segment, revenues were 307.2 million compared to 325.2 million last year.

A decline of 6%.

As I previously mentioned, the revenue decline is primarily attributable to the decline in robotic pets and remote controlled toys.

Offsetting this in addition to Star Wars, we had a number of core brands that performed very well.

EasyBake, LiteBrite Playskool, GI Joe and Transformers, were all up significantly.

Zoids, introduced last year, also had another great quarter.

Despite the revenue decline, the toy group was profitable for the quarter, with operating profit up 13% year over year.

I would also add that the segment would have been more profitable if you exclude the significant increase in royalty expense associated with Star Wars.

In the game segment, revenues with 225.9 million compared to revenues of 262.2 million last year, a decline of 14%.

As was the case last quarter, revenue decline can be primarily attributable to licensed trading card games and electronic games.

As I said a moment ago, the traditional board game business continues to do well.

As result of the volume decline, operating profits in this segment declined slightly.

International segment revenues were 268.5 million compared to revenues of 279.6 million in the prior year.

This represents a decrease of 7 1/2% in local currency and 4% in U.S. dollars.

As with the game segment, the revenue decline can be primarily attributable to the decline in licensed trading card games.

Pokemon and Harry Potter trading card games were down approximately $30 million for quarter.

Said differently. if we eliminate the impact of licensed trading card games from both years, the rest of the international business was up 8%.

Contributing to the increase, we had a number of brands that performed well.

Transformers, Play-Doh, MicroMachines, and the Magic the Gathering trading card game had strong, double digit increases for the quarter and year to date.

The segment operating profit declined in the quarter due to volume decline and increases in R&D and royalty expense.

I would like to take a minute to highlight some of the retail sales data from our top five US accounts to further demonstrate some of the progress we continue to make with our core brand strategy.

As Alan indicated earlier, although the retailing volume was not strong in the quarter, we still had many core products that performed well.

In the boys category, we had particularly strong growth year over year with GI Joe up an impressive 26% and Transformers up 20%.

In addition, we had great performance from Zoids and BeyBlades.

Our board game business is up 4% in the quarter, and had a strong 19% year to date with adult games posting the 25% increase in family games up 12% for quarter.

Consistent with my earlier remarks, electronic games were down 17% for the quarter.

Hopefully this has given you some insight into revenue performance in terms of our own shipments and retail sales from our top five accounts.

Now let's take a look at earnings.

For third quarter, we reported net earnings of 55.8 million or 32 cents for diluted share.

These results compare to earnings of 56.6 million or 29 cents per share last year.

The increase in earnings per share is significant because we were able to accomplish this despite lower revenues and the impact of increased royalties associated with Star Wars.

These factors were more than offset by our cost reduction initiative, lower interest expense as well as lower amortization expense associated with the adoption of economy climates related to goodwill.

Earnings before interest, taxes, depreciation, amortization, or EBITDA, was 146.1 million, or 84 cents per diluted share for the quarter, compare with 161.3 million or 93 cents per diluted share a year ago.

Gross margin improved by over three percentage points and 58.2% compared to 55% last year.

This was primarily attributable to Star Wars, though there was also some positive impact from our growth in core brands.

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

We continue to be on track in our plan to take an additional $100 million in expenses out of the business by the end of 2004.

As we have stayed previously, we are targeting the SG&A line for these expense reductions.

I would note while there have been cost savings in 2002, we have been absorbing the expenses in implementation of the cost reduction program.

We expect most of benefits to be fully reflected in 2003 and 2004 results.

R&D increased for the quarter to 36.7 million, compared to 32.1 million a year ago.

Reflecting our increased emphasis on new product development.

Royalties for the quarter increased by 20.1 million to 85.2 million or 10.4% of revenues.

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

While we expect royalty expense in 2002 to be approximately 11% of revenue, it should be lower in 2003 and 2004 reflecting the anticipated reduction of licensed entertainment properties.

Advertising expense is 82.9 million or 10.1% of revenue for the quarter, consistent with the 10.1% of revenue we reported a year ago.

For the full year, we expect advertising expense as a percent of revenue to be approximately 10.5%.

We continue to be pleased with the progress in reducing SG&A expenses, which declined in the quarter by $16 million to 153 million, or 18.7% of revenue, compared to 19% a year ago.

For the nine months, SG&A declined by 35.8 million to 24.5% of revenue, compared to 25.8% a year ago.

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

Amortization expense declined for the quarter by 7.5 million to 22.3 million due primarily to the adoption of FAS 141 and 142.

Partially offset by the amortization expense associated with Lucas property rights.

Amortization of goodwill and intangible assets with indefinite [lines]in the third quarter of 2001, amounted to $13.4 million.

Elimination of this amortization and related tax effect would have resulted in earnings of 63.5 million in the third quarter of 2001.

We currently estimate amortization expense to be approximately 90 million this year.

Interest expense for the quarter decreased by 8.2 million to 17.9 million, primarily due to the benefits of the debt refinancing we completed in the fourth quarter of 2001, repurchasing of bonds and lower short term debt.

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

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

Now turning to the balance sheet.

Receivables increased last year by $13.3 million and day sales outstanding increased by 8.5 days from a year ago to 87.7 days.

As we said earlier, we had a substantial decline in robotics and trading card games which have shorter terms of sale.

There have been no material changes in the terms of sale to our customers year over year.

In addition to percent of past due account receivables has declined year over year.

Inventories decrease by approximately 63.5 million or 18% from a year ago to $282.1 million.

Even though we brought in selected merchandise to provide some protection for the potential of a West Coast port shut down.

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

The balance sheet also shows total debt,net of cash decreased by 303 million dollars, reflective of the strong cash generating ability of the underlying business.

At quarter end, short term debt was only 63.4 million.

Compared to 298.7 million a year ago.

Even after buying back 72 million in bonds for the third quarter.

In addition, we have purchased an additional 52 million in the current quarter, reducing our current March 2003 debt obligation to 200.3 million.

A long-term debt goal is to reduce the debt to cap ratio from 25 to 30%.

In closing we continue to make significant progress in financial and nonfinancial goals.

Earnings are up, debt is down and we are growing our core brands.

As I said earlier, our strategy for core brand volume growth is more of a slow build as opposed to the short term quick fix that a hot license can sometimes provide.

Over the long term we are confident that our core brand growth strategy the key to more reliable and sustained growth and profitability for this company.

With that, I'd like to turn the call back to Alan.

Thank you, Al.

I'd like to take a couple of minutes to talk about some of our key drivers for the fourth quarter and close with our outlook for the remainder of the year.

Beginning with highlights of our key product offerings, we do have a great line-up for the all important fourth quarter.

As Al mentioned, many of our key products in the boys category have been performing well at retail.

GI Joe, Transformers, Zoids and BeyBlades.

We continue to be a leader in the boy's category and believe we are well poised for a good quarter as we have good momentum.

As we have been saying all year, the key to achieving our financial plan with Star Wars will be the sustainability of the line in the back half of the year.

Particularly the fourth quarter.

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

While we had great initial response to new products including interactive RTD2, and new action figures, we do need do get momentum from the DVD and video release in order to achieve our plan for the year.

In the preschool area, the early indications fro, retail have been good for key product trifling.

Mr. Potato Head and Jackhammer Bob from Bob the Builder.

Also, our Chummy-Time Picture Show, which we feel will be a great holiday product received the Gold Award from the Oppenheimer Toy Portfolio.

In girls in creative play, the Lite Brite cube was chosen for the Platinum Award by the Oppenheimer Toy Portfolio, their highest honor.

Early indications also look good for the EasyBake Oven.

These products demonstrate great innovation in continued leveraging of our core brand.

Also new in the girls area, FurReal Friends was named to the hot dozen by Toy Wishes Magazine earlier this month.

In September, we launched a new line based on one of Japan's hottest new children's properties Hamtaro.

Initial retail response has been positive and we are enthusiastic about the prospects for this line for both the fourth quarter and 2003.

In the games area, there have been a number of new product introductions based on core brands that we believe position us well for the holidays.

The special 20th Anniversary Edition of Trivial Pursuit, New Jam Guitar, Simpson's Clue and the new traveling Scrabble game, to name a few.

Although it is not possible to name every product driver on the call today, I hope what I shared with you gives you a good sense of the strength and diversity of our line.

I believe we are well positioned for the fourth quarter.

In terms of the outlook for the fourth quarter, we are facing some challenges most notably the continuing difficulty of the retail and economic environment and the uncertainty associated with the West Coast ports.

Certainly a healthier economic environment would be better for all of us.

For those of you that follow the toy industry, you know that in difficult economic times the toy sector has traditionally held up relatively well.

In addition, our products are priced very favorably with the predominant part of our line priced to retail for $20 or less, we believe our ability to deliver great product at prices that provide consumers tremendous value for their money bodes well in a difficult economy.

All of this being said, we remain focused on our strategic and financial goals, which are to focus on core brands, reduce our reliance on major entertainment properties, grow revenues four to five percent per annum over the long term, reduce costs by an additional 100 million by 2004, improve operating margins, we are on track to achieve 10 to 11% operating margins for next year.

Manage the business for cash and reduce debt.

And lastly, provide sustainable and reliable profitability.

Although there might be some difficulties in the short term given West Coast dock situation in the current retail environment, it does not change our fundamental strategy and our commitment to building sustainable shareholder value.

And with that, I would like to thank you for joining us.

Al, Dave and I will now take your questions.

Thank you.

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

If you would like to ask a question, please press star 1 on your touch tone phone.

You will be announced prior to asking your question and to withdraw press star 2.

If you would like to ask a question please press star 1 on your touch tone phone.

Our first question comes from Margaret Whitfield, please stay your company name.

Breen-Murray.

Good morning.

I wonder if you could provide more detail on the West Coast situation and size the dollar amount of goods that are on the water currently.

And I know you said you had contingency plans for the first quarter but could you be more specific about your plans for the fourth quarter?

Margaret, this is a really moving target.

I will tell you that I could not be more pleased with the way our logistical teams have performed.

I would say at this point in time that we are about maybe a week to 10 days from clearing up any backlogs that we had both in the West Coast and in the Far East.

The situation has brightened a little, in the sense that we are moving goods.

We are fortunate that most of our goods travel by truck and intermodal, which means you put the -- you piggy back onto a railcar where there is still some congestion, so we are at this point not missing orders.

We are not seeing any cancellations and we are at this moment in time getting the containers that we need in the Asian ports and the shipping schedules have improved.

I think we -- there is you know a sense of uncertainty is will there be any other job actions taken by either the PMA or ILWU, right now we ship prominently into the port of Long Beach.

Long Beach has been probably one of the best ports as far as work ethic, it has been excellent and I can't thank the ILW enough for the way they have worked that port.

So right now I really can't quantify because if there is nothing further to happen, you know, no other further job actions, we are running goods pretty well.

Also, you had issues this quarter with your year over year comparisons in the robotic pets and licensed trading cards.

Would the impact in the fourth quarter, in other words, was the fourth quarter last year stronger or weaker than the third quarter in terms of sizing the comparison issue and the Q4.

Happily it was weaker.

Okay.

And finally, could you give us a sense of how your international business -- actually -- the electronic games, could you talk about that, is this a short term development or a secular trend you seeing?

Well, I think there are a couple of things that happened in electronic games.

If you remember last year, we were fairly aggressive in that area with products such as Pocks, Mags, Who Wants to be Millionaire the electronic version, and where we did have a glitch in our third quarter was where we, um, on one of our key products for this year, we held up shipment for about a month and that was on the New Jam Guitar, which is now in full supply for the last couple of weeks.

I think is a short term hiccup.

Okay, thank you.

Our next question comes from Jill Crodick.

Please state your company name.

Salomon Smith Barney.

Good morning, Jill.

You mentioned you might see a dollar shift into this fourth quarter from the third quarter.

Could you perhaps size that for us?

Jill, I don't know if I can really size it.

That was not the impact on revenue.

The impact on revenue was more, you know in the robotic area, in the card area.

I would say it was minimal.

But we did see a little bit of -- I won't say fear, but queasiness from retailers after the difficult back to school they had.

You know, one of strange things about this business and I think most businesses today is it's a little bit fragile in the sense that over the last two weeks retail in the toy aisle for Hasbro has been very good.

So very little, I think people were -- if someone had a roto, or a tab that was to be broken on November 1 because of just in time, they were able because of our systems to tighten up the delivery and then take it mid-October but hard to quantify for you.

Okay.

Could you perhaps elaborate at little bit on the contingency plans that you mentioned that you are taking in the first quarter of next year and have you started air shipments at all for your products currently into the holiday season and how do you see this playing into your inventory plans at your end?

All in one mouthful.

Jill, first on the contingency plan, there really is a contingency plan.

Remember Taft-Hartley expires I believe the exact date is December 27th.

So I think that what you will see from us is that some of our movements in the ports that we designate will possibly change.

I'd rather not get into specifics only because I don't want everyone running to where we are going.

Your second part of your question?

Related to air shipments.

Have you begun that process?

We have taken air shipments to about 2 1/2, 3 1/2 million worth of air shipments.

We have had no problem getting space and space is available if we needed it.

And it is only on either supplying some component parts to our games factory or in a couple of hot products.

But for the time being, we look pretty good right now.

Okay.

Finally, have you considered the possibility of selling some brands given magnitude of your portfolio and the difficulty in managing the ups and downs of a portfolio of products.

I think manage of the ups and downs of our portfolio has been through the licenses, the one thing that I definitely don't want to do is sell off any of our brands because those brands are our lifeblood and that is where we are putting all of our focus these days is into the brands and not into the licenses.

Thank you.

Our next question comes from Felicia Kantor.

Please state your company name.

Lehman Brothers.

Good morning, Felicia.

I have a couple of questions to focus on revenues.

They missed our forecast by 100 million and you mentioned some strengths and weaknesses.

I am wondering if you could kind of explain where the quarter fell short of the internal projections and how to think about revenues going forward and also with Star Wars, you did mention that IMAX and the DVD and video release will help stimulate sales in the fourth quarter.

What happens if they don't?

And then finally I was just wondering what you seeing internationally if you back out the effect very the Pokemon and a Harry Potter trading cards how international performed.

Felicia, good morning.

Al Verrecchia.

Let me give the revenue piece in terms of the robotic category and the trading card, those were the two categories that had the most significant impact.

In terms of our operating plan, the same two categories impacted us as compared to our operating plan.

I think going into the year we felt that the you know certainly some falloff in the robotic category.

We did not think we would get a deeper falloff internationally in the trading card game business that we got.

So from that perspective, those two categories are still significant in terms of the decline both from prior year as well as from budget.

In terms of the international marketplace, again, if we back out the trading -- the license trading card game business, the overall business is up about 8%.

This is -- you know, it is about where we thought it would be.

Clearly we are seeing better business than we did a year ago.

The international business has been a year behind where the U.S. has begun.

Again, that is in part because of the impact of trading card game and some products driving our business here are just beginning to be introduced in Europe depending on when for example television is available for a product like BeyBlades.

I think there was a third part of your question as well.

Star Wars.

As we have said all year long, we need to have a good fourth quarter in Star Wars.

We are anticipating, we have some good promotion out there.

We have the DVD as well as the video and the IMAX release, we have strong products especially in the light sabres, but we need a strong fourth quarter. .

If we don't have a strong fourth quarter we'll have to evaluate what impact that will have in our ability to earn out the minimum guarantee, over the remaining term of the contract.

The only thing I will add on Star Wars is the reason the fourth quarter begins to build so much is because of the DVD and the video your retailers plan their -- you know, the most important thing for most of us in this business is what we call white space, the advertising around it.

And we have between the first of November and the 28th of of November, an incredible amount of advertising going on by the retailers around the Star Wars sections.

And again, because that is a November, you know, event for the retailers, everything that we are doing, most of those shipments go out in the month of October.

Okay.

Talking about that, I actually of a follow-up question.

I'm hearing that some of the retail pushed up some orders, maybe about a month or so into the third quarter.

I'm wondering have you seen that and if, how does that affect your fourth quarter.

We have not seen them pushing up into the third quarter, which is over now.

Most of ours has just been working with the retailers on supply chain as far as the fourth quarter is concerned.

And I think that if anything right now because of the dock strike.

People are willing to move things up a little bit further.

But no effect for us on the third quarter.

If anything, just the opposite.

Thanks a lot.

Thank you, our next question from Brian McGolf.

Yes, Brian McGolf from Morgan Stanley.

I have a couple of questions for Al and then Alan, one for you.

Al, I was hoping you could help us rectify the orders being shifted from the third into the fourth quarter with the higher DSOs we saw in the quarter and then secondly, the fourth quarter has historically been your strongest operating margin of the year, is there any reason to think that won't be the case this year and then Alan, I was hoping you hit on market share and where did you gain share and where did you lose it and what that meant for total share of the U.S. market, because it was -- I don't know if anybody knows, but it will probably be a down third quarter for the entire industry and it is not inconceivable to think that Hasbro did gain some share this quarter.

Thanks.

This is Al.

In terms of day sales outstanding, the most significant impact on day sales outstanding comes from the decline in both the robotic pet category and the trading card game.

The trading card game and robotic category were a much shorter term.

Trading cards on 30 day terms and robotics, which came out of the Tiger came out of the Far East so they were on terms of sales between 15 and 30 days.

So you have two significant pieces of business that decline substantially, which are on 30 day or less terms.

Other than that, you know, we have certainly not changed terms of sale to any of our customers year over year.

In terms of the operating margin, the fourth quarter is the strongest quarter and we would expect that to continue this year.

Brian, normally I have to have an answer for everything.

I really can't answer you.

I don't have the numbers yet on market share.

I would guesstimate that, very quickly, in action figures we took market share, I would imagine in preschool it was flat, in creative play, I know that we picked up market share because we are having an excellent year with LiteBrite and Easy Bake and Queasy Bake and Play-Doh.

And in the games area,I think with the market share we have, I'm pretty much sure that we held it overall, except in the trading card area where I'm sure that we lost market share mainly because of in the United States anyway because of Ugio.

Thanks very much.

Okay.

Thank you.

Our next question from Sean McGowan.

You may ask your question and please state your company name.

From Gerard Klauer Madison, hi guys.

Welcome, Sean.

Glad to have you back.

Glad to be back, I think.

You might want to reevaluate.

First of question about the West Coast port situation.

Let me start off by saying, Al, that you may be the only one on the call thanking the ILW, but that's just because you are a nice guy.

How it can -- how can it be seven to 10 days of clearing up when we heard a story about a backlog a few days ago of a six to eight weeks?

Sean, when we, when the lockout began, we had approximately -- I know going into a bit of detail, approximately 600 containers were were loading in Hong Kong on the water or caught outside the docks.

We have already cleared through over 400 of those.

The last 200 of those are ships that just came into port in the last 48 hours.

The real problem that we were as much more worried about was what was going to happen because there was a real shortage of containers in the Far East and the ships being out of place.

Number one, one of our lines is already put on an extra ship and number two, where we did see a fall off on what we were getting in containers in the Far East and what we call weeks 42 and 43 and we are in week 45 right now or 46 right now, our uplift out of Far East in week 45 was on plan and any backlog will be brought out if the there is any left in the Far East this week.

And that is the way it is.

And I just -- you know, Sean, I agree with you on the ILWU and the PMA but right now I'm happy the way people have gone back to work to get us our product.

I know what you meant.

Next question is when you talk about the outlook for '03 for next year, are there things we ought to be looking out for now in conference calls during '03 are going to be considered noncore and we should look at the business without that.

It seems that there is always something we are looking at in the business and then excluding this or excluding that.

Are we setting ourselves up where we will be excluding Transformers and GI Joe?

What are the things we will have to be excluding to get a real glimpse of the company.

I wanted to answer but Al is jumping at the bit.

Ripping up a picture of me somewhere.

No, I'm as frustrated as you are hearing that.

I think only thing we are facing in '03 the recognition obviously that Star Wars will be coming down off a movie year and regardless at what level, it should be significantly lower the year after the movie year.

I think after that, we pretty much have weaned ourselves off of the impact of the hot entertainment property as we have come down, we have not replaced that, we will begin to grow core brands.

What I'm getting at now we are talking about Tiger stuff.

No, I'm not using that as an example.

I think the Tiger stuff and robotics category is simply, we didn't replace that business and should be able to replace that business in the future.

I wasn't using a that as an excuse as just as much of an explanation.

You know, I think clearly the robotics category and electronics, those are things that we ought to be able to replace and continue and grow on a go forward basis.

The only business that I would see coming off of next year that we want to come off of, would be the Star Wars movie property.

Beyond that, we should be able to show you that we are growing this business in '03, 4 and 5.

And if we can't do that, then shame on us.

Okay.

Two quickies then to finish up one for Al and one Al Alan.

Al, would you mind quantifying in dollars the impact of currency and perhaps more importantly what is outlook would be for the fourth quarter assume nothing change in the relationship of the dollar and the Euro and then for Alan, seems to be a lot of retail promotions in board games, have you seen a slowing in that segment in the second half of the year?

I'm going to let David take effects question.

Sure in it's regard to effects in the first quarter in terms of a translation impact on our revenues, international revenues, it was 9.8 million favorable versus the third quarter of last year.

With regard to the bottom line impact, there was probably less from $1 million translation impact, that is taking earnings and converting them back to dollars because really most of the money we make in international markets is in the fourth quarter that comes later.

We also would have got some benefit on transactions, that is where we are purchasing -- Europe is purchasing products from the Orient in Hong Kong in U.S. dollars and the impact on the quarter is $2-3 million.

Again, some of that we would have gone out and hedged at the end of last year or beginning of this year in order to put some certainty into our business, we would have hedged some of our exposure at the beginning of year.

Sean, in turning to retail promotions of board games, just -- I think just the opposite of what you were intimating.

Normally, with what the retailers will do is they will advertise that which they hope and we hope will bring consumers into their stores.

The biggest, you know, one that I know that is out there that Toys "R" Us just ran this past week.

I think you'll have to get the numbers from Toys "R" Us, but I don't think that they've had a stronger promotion in games in years.

And I think that people m people feel because of the uncertainties that are out there that a lot of people will stay home, do family values and play games together.

Certainly the D.C. area.

Thanks a lot.

Thank you, our next question from Brett Jordan.

Please state your company name.

Ad Vest.

The first on cash flow.

As far as the Star Wars royalty guarantees for this year, have those been paid out, if not, what is remaining or the fourth quarter.

David is going to answer this one.

Basically at this point there is no change from what we said at the end of the second quarter.

We said our total commitment is 590 million over a ten-year period, 470 million cash has been paid out leaving 120 million to be paid in 2005 and we expect to expense through the P&L this year and are still expecting that 300 million of the total commitment.

Meaning that we would have 290 million to earn out over the remaining six years 2003 to 2008.

I guess the contingent liability line on the queue at 2003 million is just trying to get a feeling for how much of that was in the first three quarters versus if fourth quarter.

I assume that contingent liability held some Lucas guarantee in it.

Of the amount on the balance sheet, it doesn't all have to come off this year.

Our payments front end loaded.

There was a payment on signing the contract and were further payments release the first of the second movies.

As I said, 470 million cash has been paid out.

There is no requirement to hit any point in terms of what we expense through the P&L at any particular quarter of any particular year.

So there is no individual annual commitments.

Okay.

I'll call you back and I'm not asking the question clearly, I guess.

On the Star Wars video launch this fall, any new skews coming out to sort of drive consumer interest in the category?

Only about 30 or 40- ah, no, I'm not sure of the exact number.

I know the R2D2 is coming out.

The arena play set coming out and probably about 25 to 30 new figures.

Okay.

And I guess you mentioned a couple times that you needed to pick up momentum with that video launch.

At what point will your order book reflect whether that has picked up or not, at what point do you think in the quarter you will have a feeling whether Star Wars will come through for you?

I think by after Thanksgiving.

Okay.

Because there is so much that is planned in the month of November by the retailers on it.

Yeah, okay, thank you.

Next question comes from David Leibowitz.

You ask your question.

Burnam securities, good morning.

Briefly, everyone is pointing to Star Wars.

Let me take my whack at it, if I may.

If the fourth quarter numbers do not come in up to expectations for whatever reason, you also to have take a one time write down or charge against the balance of your contract with or license contract with Lucas because you will not be able to make your minimums and still earn a profit?

Yes.

If it falls significantly short of expectations for balance this year, I think that would lead us to revisit our expectations over the next six years, and to the extent that we did not believe that we had enough volume to generate enough contribution to earn out our commitments, then yes, we would have to take a write off during the fourth quarter.

But clearly, with everything everything yet to happen around the video, the Imax, the new product, the retailer white space, it is too early to make that determination at this time.

Also, the alternative plans for the first quarter and even fourth quarter where you might be air shipping, what happen happens to the same inventory which is lost on the water somewhere until it gets unloaded.

Is that automatically marked down inventory of the day it comes off the ship?

Well, absolutely not, David.

But first of all I must tell you that at this point in time we are not even thinking the way you thinking.

We have a excellent plan and unless there is further disruption, we will be fine.

And also, what percentage of the first quarters merchandise might be moved via the alternative means?

Don't know that yet.

We have to keep -- we have to play this by ear over the next several weeks and as you move later into the fourth quarter obviously the goods that will be coming over would be you know, set-ups for 2003, so clearly, that is going to be good goods and you wouldn't have any issue with that.

And we will just have to see how things go as to how much of our alternative planning we're going to have to execute into that.

One other perspective on this is that our international business and our games business are clearly not being impacted by this.

And that represents over 70% of our yet to ship during the fourth quarter.

The remaining 30% is our toy business and we had enough inventory on hand to cover at least a third of our toy business, U.S. toy business requirement.

So, worse, worse, worse, case, potentially at risk, we are talking about 20%.

And as Alan has really said, at this point in time, while we had some delays, things are moving again, off the docks and boats are getting unloaded and we are getting stuff on to vessels in the Orient.

So at this time, we are not anticipating any significant off quota impact.

And in terms of the alternatives in the first quarter, incrementally, how much will those alternatives cost vis-a-vis standard delivery systems.

That is a difficult question to answer because there are several alternative actions we can take and they all have a different impact and we don't know whether they will to have take any of them.

So clearly, it would be very difficult for us to estimate that at this point in time.

I think everyone knows that flying goods in is a substantial premium over ocean freight.

But we may not have to fly that many goods in.

Okay, thank you very much.

Thanks, David.

Our next question comes from John Taylor.

You may ask your question.

Please state your company name.

Hi with Arcadia.

I got one sort of maybe big question and some smaller questions after that.

So we have got a bit uncertainty in the consumer demand question given retail skittishness.

We have got the uncertainty created by the port strike, Alan, I wonder if you could talk a little bit about how you think retailers, whether retailers were more nervous about what they are going to have on hand in particular as it relates to product they are going to it is.

And I'm not just talking about Hasbro, but I'm talking about the toy aisle in total.

And ultimately what I'm getting at sort of I guess approaches what David was mentioning.

Have you seen anything in your order book for domestic produced product particularly board games that suggest that retailers are a little more worried about what is going to arrive that they will be able to advertise and maybe they are going to basics and maybe to U.S. produced goods that you might benefit from?

I think a couple of things that we are seeing in trends right now from my call around this morning JT, it seems like basic and core products is where you know people are going to gravitate to.

So far, that is what the indications are.

That is, you know, things that are normal, whether it is action figures, whether it be construction toys.

Very strong lately have been the board game areas.

I think that also retailers at this point in time have made their selections or their bets on what will be the hot toys and that they are not going to chase something that hasn't come out of the pack yet.

Now one of the things we have been doing over the last couple of weeks with all of our retailers, mainly because of the West Coast dock strike and not knowing what the outcome would be, is we basically have been matching orders with them and where there could have been you know slippages on our part but all of that so far has gone away, and if anything, most of the retailers are trying to go to their comfort zones, things that you know are tried, true and tested in not taking you know a real -- putting a stake in the sand that is questionable.

Something that hasn't yet come to the forefront.

Even in that scenario, plans are great but you know, is there a level of confidence that the goods that are supposed to arrive will arrive in time for ads and I'm wondering if any of those guys are starting to get a little queasy, put up their hands and say maybe we don't feel confident about that and what else can we do and maybe that is a domestic supplier that benefits from that?

Well, I think that we are fine as far as our supply chain with our retailers as of today.

Again, nothing further happening.

I think that they have come back and with all of the articles that we are now reading that yes, you know, the supply chain management just in time is a great thing to have, but maybe people have cut too much time off their lead times and if anything, we are seeing people trying to move things up a little bit now.

Okay.

Now a couple smaller questions.

You probably not going to answer this, but could you give us any quantification of Star Wars revenue as total percent domestic year to date?

You correct.

We are not going to answer that.

Okay, moving along then.

BeyBlades, its been a weird life cycle, started slow and then Canada catches on, UK catches on, is this thing for real for you guys this year and are they going to be any legs in it next year?

Number one, you correct, it really jump started out of Canada after it went on live TV.

And then it absolutely went crazy in the UK when it got on TV and it has been red hot where we are short on BeyBlades and I think we definitely do have a product that is going to be strong in its second year because, JT, it is motoring very, very well.

I think there were four or five battling top properties, is BeyBlades the only one that is relative -- relevant, 80% share as far as you know?

As far as I know, yes.

What happened when BeyBlades first got out there and whether it was mistake, whether it was you know, planned, I'm not really sure.

But I think when Bay Blades was shipped early because of what we call the parallel marketed product and it began to sit when it first went on the shelves, I think many of the retailers backed off the secondary and tertiary offerings and really went strongly behind BeyBlades as they began to hear what was happening in Canada and then across in the UK.

So I think we are at least an 80% share there.

Okay and last question.

One of the challenges about Q1, the uncertainty about how long the contract lasts and then the other thing is the Chinese new year.

Can you talk about how you will manage around that because there is potentially a short window to get the first quarter done.

John, this is Al.

Look, I think throughout the entire fourth quarter and looking at the first quarter we, as I'm sure other major manufacturers, are working closely with retailers in trying to look at what may or may not happen in terms of the dock situation, getting productivity up in worrying about Chinese new year are all these things that we are aware rough.

We know the calendar very well so we can plan around that without much difficulty.

The thing that we do look at is what happens with the West Coast and as I say, we have a lot of contingency plans that we have in place and which ones we have to execute and when will depend on what happens.

One of the things we have to keep in mind is that our retailers, certainly Wal-Mart, Target, Toys "R" Uses of the world and KayBees are significant importers in their own right.

So they have a pretty good sense of what is happening in the Far East, not only from what we tell them but from the what they experience themselves.

They also have available shipping capacity.

And so, working together our real focus has been let's make sure we get the advertised goods first, the hot goods and let's focus on one of the key drivers we are looking for in '03 and make sure we get those on board first if in fact we do run into a problem.

It is something you just have to keep playing and watching you know every day.

Because things do change a lot and we have to remain very flexible.

Thank you.

Floor our next question comes from Anthony Guykis.

U.S.

Bancorp., Piper Jaffery.

Couple of questions.

In the second quarter the preschool business did pretty well - if you talked about that earlier I apologize, but how did that category do during the quarter,Bob the Builder, the Mr. Potato Head, and PlaySkool specifically?

Second question, on the cost savings, 100 million over the next couple of years, where are we year to date '02 with permanent cost savings and then how does that break down in '03 and '04, is it 50 million each year and any opportunity to accelerate that plan?

What I'm going to do is have David handle the second part of your question.

I'll have Al pull off the Playskool and Potato Head for you.

In terms of the second hundred million of cost savings, we said at the beginning of '02 we were going after the second 100 million and then the benefits in '02 will be offset by the cost of implementing the changes because we are not taking a one time charge or anything.

I think we have accelerated.

We are seeing a bit of the benefits come through in '02 and more offsetting the costs we incurring and that is in the 2 and to maybe 10 million by the time we get to the end of the year.

As we go into '03, we have already implemented actions that will give us the majority of the savings in 03.

So I think you would expect to see if we have got 10 net this year, possibly a firmer 50 next year to get it up to cumulatively you'll be seeing maybe 60 to 70 million of savings in '03 with a balance come in '04.

So we have accelerated compared to our original timetable.

In talking about the preschool business, the Playskool business and that is Playskool without any licensed properties in it such as Bob the Builder.

Is up about 49 percent for quarter.

Year to date is up 50%.

And that has a whole raft of products in it.

Bob the Builder is up significantly year to date.

But keep in mind it was really introduced in the third quarter of last year.

So last year was a fairly good sized quarter for Bob the Builder.

Quarter to quarter this year it is about flat with a year ago and up significantly because we had Bob the Builder doing the first two quarters as well.

Play-Doh, which is kind of a preschool product is also up in the quarter and then I think that takes care of most of the preschool product and preschool range.

One follow-up.

Just any update on Kmart for us, how you are doing business with them right now and is there any way to quantify what percentage of your business you are doing through Kmart right now?

Without quantity finding what percentage of our business we are doing through them, we continue to ship them, they continue to pay on time.

We are hopeful that they will be able to fulfill their plan to come out of Chapter 11 next year and so far so good.

Thanks, guys.

Thanks, Tony.

Our last question comes from Dean Gianakis.

Place stay your company name.

JP Morgan.

Hi, Dean.

I don't know if you will quantify the numbers how much you need to earn in Star Wars in the fourth quarter to be comfortable with the contract, and if you won't do that, tell us if it's significant, as a percentage of the revenue you will earn from Star Wars and tacking on to that, were you happy with the way the DVD worked in the first movie and then maybe tell us whether it needs to do better this time versus last time and then finally can you quantify to any degree where we are with GI Joe and Transformers on an annual run rate basis.

First of all, let me answer the easier part of the question which is were we pleased with the DVD and the video release off of the first of the Star Wars movies.

The answer is absolutely we were not pleased and that was because if you remember Dean, it was launched in March of the following year right around the time of March Madness and we had very little pick-up off of that.

In the past in our industry, the strongest DVD and video releases as far as affecting the toy industry have always been in the November time frame.

It give us a real chance to highlight it, you know, at retail, get the white space we need and we had almost nothing driving off of the first movie.

So we are pretty encouraged.

Again, we will have to see the results, but we are very encouraged by the timing of the DVD and video release.

And I must tell you, I have no idea what effects it will have, but should mean interesting experience to see the second part of this trilogy in the IMAX theaters and I'm sure that there -- remember, there will be a lot of advertising for both the video, DVD and IMAX movie which brings it to front of mind which is what a toy person would love to see around their property coming into the holiday season.

As far as your first two questions on giving you certain numbers, no.

I think it is important to understand that we have said all along that the second and the fourth quarter would be our biggest Star Wars shipping quarters and clearly the second was the biggest to support the movie.

I think if your question is are we planning a huge fourth quarter in order to meet our numbers for the year, we are not planning a huge quarter because as Al said we are not willing to take the risk, that we get stuck with significant inventories or any kind of mark down issues or obsolescence issues.

So I think there is a lot happening to support the brand and I think we are assuming that we clearly -- sales will pick up in the fourth quarter versus the third, but I do not think by are planning a huge fourth quarter in order to make our numbers.

And therefore incurring the risk of significant obsolescence or mark downs in the event that it didn't work.

Another point to this and not just the absolute numbers, but, it is you know the momentum that builds or doesn't build that gives you some insight as to what you think the forecasts will be for the remaining year so not just the absolute number you get in the fourth quarter.

The last part of your question I think had to did with GI Joe and Transformers.

GI Joe is up in the quarter 82% from a year ago, year to date up 39%.

Transformers was up 65% in the quarter and up year to date 79%.

So, we are getting a lot of good movement and GI Joe Transformers as we are in Playskool, Play-Doh and board games.

So the core brand strategy is beginning to work.

Admittedly some of these percentages are off lower basis, but we are seeing very, very strong and nice movement in those brands.

Thanks.

Thank you.

Thank you, everyone.

That concludes today's conference call.