孩之寶 (HAS) 2003 Q1 法說會逐字稿

Good morning and welcome to Hasbro's first quarter earnings conference call.

I'd like to inform all parties, at this time, that you are in a listen-only mode until we open for questions and request answers.

And also this call is being recorded.

With us today from the company is the Senior Vice President of Investor Relations, Karen Warren, and at this time, I'd like to turn the call over to Miss Warren.

Thank you, ma'am, you may begin.

Thank you, Kathy, and good morning, everyone.

Thank you for joining us.

With me this morning are Alan Hassenfeld, Chairman of the Board and Chief Executive Officer, Al Verrecchia, President and Chief Operating Officer and David Hargreaves Senior Vice President and Chief Financial Officer.

On today's call, we'll be we will be reviewing our financial results for the first quarter and highlighting the performance of some of our key products and brands.

We will conclude by opening the call to your questions.

To better understand the earnings results it would be helpful to have the press release and financial tables available.

We have again provided a table on the major segments and given additional information in the press release regarding the segments as well.

If you don't have a copy of the release it is available on our web site, Hasbro.com, under corporate information with the investor relations press releases.

Before we begin our formal remarks, let me note that members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters which are inherently subject to risks an uncertainties.

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

Some of those factors are set forth in the company's annual report on form 10-k including under the heading forward-looking information and risk factors that may affect future results; and the company's quarterly reports on form 10 q including under the headings other information and forward-looking statements and factors that may affect future results; and the company's current reports on form 8 k; and 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 or circumstances occurring after the date of this conference call.

Now I would like to introduce Alan Hassenfeld.

Thank you, Karen.

Welcome back from your emergency appendectomy.

Al, David and I certainly did not want to do this call without you today.

Good morning, everyone and thank you for joining us.

Let me start off by saying how pleased I am with our first quarter performance.

We continue to be both focused and disciplined in our approach to delivering on our stated strategies and clearly we are seeing positive results from those efforts.

Whether it is driving revenue growth through innovation in our core brands, as we have done with Transformers; developing exciting global products like 4 Wheel Friends and capturing emerging trends like Beyblade or improving our performance internationally where product momentum has driven growth over and above the favorable impact of exchange rates, we have not lost sight of the need to deliver increased shareholder value.

We remain focused on continuing to improve profitability by growing our core brands and developing new products as well as reducing our costs.

In the first quarter, we increased revenues by 2.1% versus a year ago and delivered earnings of 1 cent per share beating consensus estimates.

In our individual segments, game revenues grew a strong 21% while international also enjoyed excellent growth both before and after the effects of FX.

Sales were down in the toy segment, but up 7% in shipments versus a year ago if you exclude Star Wars which we began shipping in the first quarter of 2002 in anticipation of the movie release.

I will be talking more about these segments a little later as well as discussing the current economic and retail environment and briefing you on what Hasbro is doing in the area of corporate governance.

But now I'd like to turn the call over to Al to review our earnings in more detail.

Al?

Thanks, Alan, and good morning, everyone.

I, too am very pleased with our first quarter performance.

Clearly, our strategy is working.

Many of our products like Transformers and the Trivial Pursuit 20th Anniversary Edition are continuing to do well at retail, carrying momentum we enjoyed last year into the first quarter.

Consumers are responding positively to our products and the aggressive marketing we are putting behind them.

In the quarter, we grew the business excluding both the decline in Star Wars and the favorable impact of foreign exchange, demonstrating our ability to grow without being dependant on a major entertainment property.

You should know that while we won't break out Star Wars numbers for you, we did ship more product in the second quarter last year than we did in the first.

In addition this quarter, we repaid the remaining $200 million of notes that were due on March 17th and we ended the quarter with $310 million of cash.

Expense reduction also continues to be an area of focus.

Let's take a look, a closer look at the numbers.

First quarter worldwide net revenues were $461.8 million, up 2.1% compared to $452.3 million last year.

These results include a 5% favorable foreign exchange impact.

The favorable exchange impact on revenue reflects stronger international currencies.

For example, the euro averaged $1.07 in the first quarter of 2003, compared to 87 cents in the first quarter of 2002.

While this increased U.S. dollar revenues, it also increased U.S. dollar expenses and balance sheet values including receivables and inventory.

Further, because our international segment loses money during the first quarter, the translation impact on earnings is negative.

For the first quarter, we reported a net profit of $1.2 million or one cent per diluted share.

This compares to a loss before the cumulative effect of the accounting exchange of $17.1 million or 10 cents per diluted share a year ago.

Including the cumulative effect of a change in accounting principle related to the adoption of FAS 142, the net loss for the first quarter of 2002 was $262.8 million or $1.52 per diluted share.

Now I would like to 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 May.

In the U.S. toy segment, revenues were $153.4 million compared with revenues of $200.9 million last year.

This reduction is attributible to the lower shipments of Star Wars.

Absent Star Wars, toy revenues grew 7% with the core brands of Transformers and Play-Doh up double digits and continuing momentum in Beyblade and FurReal Friends.

Toy operating income was $5.3 million for the first quarter compared to $26.2 million last year.

The lower income primarily reflects the reduction in Star Wars revenues.

Although Star Wars was not a profitable brand for us in 2002, it did make a significant contribution to fixed overhead recovery during the first quarter of 2002.

In the games segment, revenues were $112.2 million, an increase of 21%, compared with revenues of $92.8 million last year.

The revenue increase is primarily in board games driven by the continuing strength of the Trivial Pursuit 20th Anniversary Edition.

Nonlicensed training card games were also up, but licensed trading card games including Pokemon were down.

Games operating profit was $18 million compared to a loss of $2.5 million last year.

The improvement reflects a higher revenues and increase in margins due to product mix and fixed cost reductions.

International segment revenues were $175.4 million compared with revenues of $136.1 million in the prior year.

This represents an increase of 12% in local currency and 29% in U.S. dollars.

The revenue growth can be attributed to both core brands with Transformers, Play-Doh, Playskool and Magic, The Gathering all up double digits.

That's both in local currency and U.S. dollars.

The continuing momentum of Beyblade in many international markets, and the solid performance in board games.

Internationally we incurred an operating loss of $6 million during the quarter compared to a loss of $29.1 million last year.

This improvement is is attributable to the higher revenues as well as the impact of our cost reduction efforts.

Fixed cost declined in local currency trends.

Moving on to margins.

Let me provide you with some perspective on the first quarter.

Gross margin as 52.7% compared to 63.2% last year reflecting changes in product mix.

The improvements in gross margin achieved by games and international were more than offset by the gross margin decline in toy primarily associated with the lower Star Wars revenues.

While Star Wars is a high gross margin product line it also carries higher royalties and amortization.

This is probably a good time to comment about raw material prices.

While we have not been significantly impacted by either raw material or transportation cost increases through the first quarter, commodity prices and transportation costs have been increasing.

While this will impact us over the course of the year, there are currently too many variables, such as the economic conditions in both the U.S. and China as well as the price of oil to quantify the impact.

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

Research and development expenditures for the quarter were $30.5 million compared to $33.2 million a year ago.

The decrease primarily reflects the timing of expenditures.

Royalties for the quarter, as expected, decreased by $17.6 million to $33.8 million or 7.3% of revenues due primarily to reduced shipments of Star Wars.

These lower levels should be maintained now that we have reduced our dependence on product related to major movie entertainment properties.

Advertising expense was $53.2 million or 11.5% of revenue for the quarter.

Up in both dollars and when expressed as a percent of revenues compared to a year ago.

This is consistent with the strategy we shared with you where our advertising expenditures would increase as we continue to rebuild awareness of and drive growth in our core brands and new product introductions.

Selling, distribution and administration expense was $139.9 million, flat to a year ago.

A savings associated with cost reduction programs are offset by the impact of translating international costs at higher foreign currency exchange rates.

Absent the impact of foreign exchange rates, SD&A they would have been down $5 million or 3.6%.

Amortization expense declined for the quarter by $5.3 million to $16.2 million primarily reflecting lower amortization of Star Wars property rights in the non-movie year.

Interest expense for the quarter decreased by $4.5 million to $15 million reflecting higher cash balances and a pay down during the last 12 months of $324.9 million of long-term notes that have a 7.95% coupon.

Now turning to the balance sheet.

Receivables, at $287 million, are in line with last year and day sales outstanding reduced by one day to 56 days.

Inventories decreased by approximately $10 million from a year ago to $222.3 million, reflecting continued focus on supply chain management.

The balance sheet also shows that total debt net of cash decreased by $281 million compared to the end of the first quarter, 2002.

With the paydown of $200.3 million of notes during the first quarter, our debt to cap ratio declined to 41% compared to 53% last year.

Our long-term goal remains to reduce our debt to cap ratio to 25 to 30%.

In closing, while we are off to a good start, we still have nine months to go.

Our very successful first quarter performance has not led us to change our expectations for the full year, but rather they have made us more confident in our ability to deliver them.

We believe we can grow the business 3% to 5% over time.

In 2003, we expect a decline in major entertainment licenses will be offset by growth in our core brands and new products, although this may not be the case in the first half of 2003.

We remain focused on improving profitability and enhancing shareholder value.

With that, let me turn it back to Alan.

Alan?

Thank you, Al.

Now let me touch upon some of the key product drivers from the first quarter.

Globally in toys, new products in our core brands are enjoying strong sales.

Our new Play-Doh products are being received well.

The entire line of Transformers continues to shine, and some of Playskool's new offerings in the U.S. have been helping us gain shelf space in the preschool area.

Our innovative new product introductions from last year, FurReal Friends and Beyblade, have been excellent performers since their introduction and we are keeping the heat on.

Just last week, we launched the Beyblade Rip Zone at Toys "R" Us.

Now on the second Saturday of every month, kids can show up to compete at Beyblade tournaments at some 200 TRU stores around the country.

Our FurReal frenzie that took place at retail in the fourth quarter continued in the first three months of the year.

Our cats are selling well both in the U.S. and internationally, and the kitten, which is now in full distribution is purring at retail.

Look for the newest entry , Go-Go my Walking Pup, to hit some markets at the end of the second quarter.

Also making its debut will be Tiger's Thin- Tronix, a revolutionary new line of fun, ultra thin products, including a fully functional poster phone and poster radio.

Other items of note in the second quarter include products from the new Disney Pixar release, Finding Nimo, which hits the theaters on May 30th and NakNak, our new line of stacking action figures, which is off to a terrific start.

McDonald's launched a month-long NakNak happy meal promotion on April the 4th.

In games we continue to see plenty of momentum in our large portfolio of brands.

We enjoyed great trade support in the first quarter following a very strong fourth quarter.

Our retailers have embraced games as a terrific traffic builder.

Clearly leading the way in the U.S. has been the 20th Anniversary Edition of Trivial Pursuit.

This game has remained the top selling board game in the industry and we kept the heat on by continuing to run commercials during the first quarter.

Look for this product in Europe during the fourth quarter since it celebrates its 20th anniversary there in 2004.

Wizards of the Coast had a solid first quarter as well.

Magic - The Gathering is celebrating its tenth anniversary this year and we have lots of great plans in place.

New this year are trading card games for both the Simpsons and NeoPets.

As you are probably aware, our contract with Nintendo for the Pokemon trading card games ends in September 2003.

We have moved away from the Pokemon TCG when we were unable to negotiate a renewal that met the criteria we set for any new license negotiation.

Now let me switch gears and cover some new ground this quarter.

I'd like to give you a sense of the significant strides we have been making in the corporate governance area over the past couple of years.

Let's begin with the big picture.

At Hasbro, good corporate governance means being committed to being shareholder value while conducting ourselves with integrity with all of our constituents.

The Board of Directors is there to oversee this mandate.

As such, the makeup of our Board is important.

Since the beginning of 2001, we have added a total of six new members to our Board, supplementing the expertise we can draw upon in key areas such as retail, technology, international, entertainment, consumer products and finance.

All six of our new members are independent, reinforcing our commitment to further strengthening our corporate governance practices.

Additionally, during the same period, we also reduced the number of insiders we had on our Board from three members to two, Alfred Verrecchia and myself.

Over the next two years, we expect there will be two additional members of our Board retiring.

This will provide us with an opportunity to further diversify the expertise of our Board.

Only independent directors sit on our three main board committees, and that has been the case for quite some time.

Additionally, we have a high degree of financial expertise on our audit committee, with, we believe, a minimum of two members meeting the definition of financial expert.

To assist us in our recruitment efforts, our Board adopted independent standards they are actively using in selecting new Board members.

This year, our Board took the additional step to propose to our shareholders that our Articles of Incorporation be amended to eliminate the classification of the Board of Directors.

This is the most recent example of our commitment to strong corporate governance.

We're also moving forward in a number of other areas.

We have adopted charters for all of our committees.

We have implemented a self-assessment methodology for these committees and the Board as a whole.

Our outside directors now engage in regular executive sessions without management present and we are in the process of finalizing a set of comprehensive Board governance principles.

A lot of this good work will be showing up on our corporate website soon.

In short, we are very pleased about the continued progress we are making in this very important area.

In closing, we are certainly happy with the way things are going.

We have stayed disciplined in executing our objectives and you can be sure our focus will be continuing on delivering another successful year for our shareholders.

Just a couple of other thoughts before we open the call to your questions.

The current economic and retail environment during this time of geopolitical uncertainty is definitely a concern.

But, as the first quarter indicates, consumers are responding to our product offerings.

Let me talk a moment on severe acute respiratory syndrome, SARS.

Thankfully, none of our employees or their families have been directly affected.

And at this point, SARS is having a minimal effect on our business.

We have put in place many contingentcy plans for our offices, and while the goods are flowing normally, we are having extensive dialogue with our far eastern partners.

We have a team monitoring the situation here in the U.S., China and Hong Kong 24/7, and we will respond appropriately if the situation calls for it.

While none of us have direct control over how SARS will evolve in the weeks and months ahead, we remain vigilant in managing those areas we have the ability to impact and we will remain proactive.

Let me reiterate what Al said to you a little earlier, we are off to a good start but we still have three quarters to go.

We have not changed our expectations for the full year, just become more confident in our ability to deliver them.

You have our committment that we will stay disciplined and focused on delivering increased shareholder value.

And with that, David, Al and I would be happy to take your questions.

Thank you.

And at this time, if you would like to ask a question, please press star and then one on your touchtone phone and we'll take your questions at this time.

Please press star and then one on your touchtone phone.

And our first question comes from Sean McGowan.

Your line is open.

Please state your company.

Hi.

From Gerard, Klauer, Mattison.

Thank you.

Good morning, Shawn.

Good morning.

The two questions I had related to - one to Star Wars and then second, more generally, to kind of the atmosphere of retail.

On Star Wars, would you characterize this statement as accurate that, "While you are expecting a lot less in revenue this year, you would expect it to contribute to EPS" and did that, in fact, happen in the first quarter?

And regarding retail sales, can you comment a little bit on what affect you think this shift in the Eastern timing had and are you expecting this to be a better performance as a result?

John, knowing the way I handle things, Al answers the difficult question on Star Wars.

I get to do retail sales.

Al?

Good morning, Shawn, how you doing?

Very well.

Dave, you may want to comment on this as well.

Star Wars was not a profitable brand for us for the full year 2002.

So the decline in the Star Wars volume that you would expect in 2003 off of 2002 would actually have a - should actually have a positive impact on EPS.

However, during the first quarter of 2002, Star Wars did contribute to the bottom line.

And that's because as we went through the year and we didn't see the volume coming as we had originally anticipated, we had to increase the amount of royalty expense that we were accruing.

And that happened during the latter quarters, not during the first quarter of '02.

Can I follow up on that a little bit more specifically then?

I would assume that with this extension in the life of the contract and more time to make up the expected sales now that the guarantee's been reduced, that you should be able to accrue it at a significantly lower rate.

So, is that happening and did the brand, in fact, contribute positively in the first quarter of '03?

Yes.

With the renegotiation of the Star Wars contract, as we said earlier, that we will accrue at a lower effective royalty rate and Star Wars should be a profitable brand for us.

That said, shipmentss during the first quarter of this year were not that significant.

Shawn, on your retail question, will you repeat it?

It had to do with the - generally the mood and how much it was affected by the Easter shift and do you expect the second quarter received by retailers to pick up as a result of Easter having shifted to the second quarter?

Well.

Shawn, first of all, as far as shipments that pertain to Easter, last year Easter, I think, was the 28th of March.

This year, it was the 19th.

No matter what, in both last year and this year, our shipments for the Easter sets did take place in the first quarter.

The only thing that I can say is that the initial look that I've had on what was, you know, the point of sale at retail this Easter versus last Easter, this Easter, as I think most people thought, was stronger because it was the three weeks later, and you were beginning to get into a little bit of warmer weather.

We seem to have excellent POS off of Easter this year versus last year.

It can only be helpful if retail had a good Easter, and it looks like they did.

Thank you.

Thank you.

And our next question comes from Tony Gikas.

Your line is open.

Please state your company.

US Bancorp Piper Jaffrey.

Good morning.

Hi, Tony.

A couple questions.

Do you think you are benefiting from the cocoon effect if you will?

I mean, are - do you think the company and the sector is benefiting from keeping the family closer to home?

Are they renting more movies?

Are they buying more toys and games?

And then the second question would be, could you just give us a quick update on the timing of expected cost savings this year from the realignment plan?

And was there any impact to the first quarter from the expected cost of reductions?

David do, you want to handle the second part?

In terms of the cost savings, as you would have seen, SG&A was exactly in line with budget.

In line with last year for the first quarter.

However, absent the foreign currency movements, SG&A would have been $5 million lower than last year.

In addition, we did have some cuts in the first quarter associated with closing some of our retail stores that Wizards of the Coast used to have.

Having said that, we had previously given guidance that for this year, of the second hundred million of savings that we were going to make, we said $50 million gross of last year that there would be $30 million this year and $20 million next year.

We're still very much on track to achieve that previous guidance.

You'll also remember that last year included $28 million of costs associated with implementing cost-saving actions.

So as you look at this year, you should say an additional $30 million of savings plus you will not have a repeat of the $28 million of costs associated with driving them.

We're still very much on track with that guidance we gave earlier.

Tony, as far as the cocooning effect, I think there are two effects that we looked at.

One was what people dubbed the CNN/FOX effect on the coverage in Iraq, which I think over the first two or three weeks of the war, I think people did stay at home and did very much avoid, you know, were watching television to see what was happening.

Needless to say, that effect is over with now.

As far as cocooning, to the best of our ability, I think there has been a little bit of help from that philosophy of cocooning where people are spending more time with family and obviously not traveling as much.

I think you'll see in the first quarter that we put up on games, that must have played a little bit into it.

Thanks, guys.

Thank you and our next question comes from David Leibowitz.

Your line is open.

Please state your company name.

Burnham.

Good morning. (multiple voices)

Two brief questions.

One, your order book right now for the balance of the year, are you ahead of where you were last year at this point?

David, our order book is fine, but we don't do that.

Okay.

And second of all, you're introducing the Thin-Tronix line to retail this month.

Are you in any way capacity constrained on what can be produced in that line this year?

No, we are not capacity constrained.

And you have three SKUs of which two are being introduced this month?

Uhm.

I think that, yes, two of the three are being introduced this month.

And lastly, are there other products which we didn't see at Toy Fair which might be introduced and have an impact on this year?

David, in the business that we're in, as you know, we're willing to search the four corners of the world for new creativity as well as our own own creativity in house.

And this business has become one where you can introduce product at any time of the year and yes, there are things we have found that we will not be mentioning today that could come into the line this year.

Very good.

Thank you.

Thank you.

And our next question comes from Brett Jordan.

Your line is open.

Please state your company.

Advest.

Good morning.

Good morning Brad.

Couple quick questions.

One is an order of magnitude, I'm not sure if you're going to answer it.

But last year for Star Wars, was the second quarter the peak shipment quarter for that?

Brad, yes, it was.

Okay.

And then going back to Al's comment earlier on the raw material pricing volatility, what percentage of your raw materials have you fixed for this year's expected production, I guess, going forward on the resin pricing?

I couldn't give you an exact fix in terms of what percentage we have fixed.

We have contracts that give us some price protection going forward, but off hand, I just don't know what percentage of that has been fixed.

You have to keep in mind one other factor here.

Given that virtually all of our toys are produced in the far east, resin, paper board prices could increase, but whether or not our vendors will pass that price increase on to us remains to be seen, because they've got to take into consideration a lat lot of other factors.

So it becomes difficult for us to: number one, determine how much of any price increase is going to impact our P&L.

Then we're not buying a lot of raw materials out there because our vendors make so much of the product for us.

Okay.

And how was G.I. Joe?

G.I.

Joe's doing just fine.

Thanks.

Thank you.

And our next question comes from Felicia Kantor.

You're line is open.

Please state your company.

Hi, good morning.

I have a couple of questions.

Good morning, Felicia.

Good morning.

You guys mentioned that point of sales Easter, the retailers had a good Easter.

Prior to the quarter, you also had expressed caution regarding revenues that revenues would probably be down year-over-year.

On the call, despite your strong quarter, you did still express some caution, but I'm wondering, you know, regarding the second quarter outlook the original thought that maybe revenues are deep down year-over-year, has that changed?

Second of all, I was wondering if you could just give directionally - did you gain market share both domestically and internationally?

And if you could touch on some areas that were the strongest and somewhere would you like to still see some growth.

And then finally, wondering if you could give specifically what foreign exchange impact was to earnings?

Felicia, this is Al, how are you doing?

Hi.

In terms of the second quarter and what we're saying for the full year, I gonna be pretty consistent with what I said a moment ago in the conference call.

We expect that the decline in the major entertainment license will be offset by the growth in core brands and new products, but that may not happen during the first half.

And when you take a look at the performance during the first quarter, we're very pleased with that.

But foreign exchange, you know, had a benefit in - while we grew the business absent foreign exchange and absent Star Wars, you know, we still didn't grow it without the impact of foreign exchange.

So we'll just see how the second quarter goes.

In terms - what was your second question?

Market share.

Market share.

We're assuming we're picking up market share.

I can't give you any hard numbers at this point in time because we don't have any statistical data that's come out like NPD that can tell us where we are as of the quarter.

But based upon the sale of our products and where we are, we're being told we are -- from some of the retailers, we believe we're picking up market share, yes.

And then foreign exchange impact to earnings?

Yeah, really, the impact on revenues was $22 million, but there was really no impact on earnings because what happens with in translation if you translate foreign revenues at a higher rate, you also translate foreign expenses at a higher rate.

And our international business actually loses money in the first quarter, which means we are translating your more expenses than revenues at a higher rate so it's actually a negative during the first quarter for Hasbro.

In terms of translation, we probably would have picked up a little in terms of transactions but but (INAUDIBLE) so really neutral on the bottom line and the 22 million gain on the top line.

Great, thank you.

Okay.

Thank you.

And our next question comes from Margaret Whitfield.

Your line is open.

Please state your company.

Breen Murray.

Good morning.

You mentioned that the point of sale data suggested that Easter this year was stronger than last.

Could you comment on the current state of your inventories at retail?

And also, you mentioned you were making some inroads in the preschool area.

What product lines are driving that?

And lots of new entertainment characters popping up in action figures, Turtles, Hulk, would you comment on the competitive issues there and how that might affect your boys' business down the road?

Margaret, first of all, our inventories are in good shape at retail.

We're pleased with that.

On the action figure side of things, Turtles is back, yes.

Hulk is coming.

We're finding that we're doing very, very well in the boys action area with, you know, Transformers, G.I.

Joe, Zoids, Beyblades, as you know, we've also just come out with NakNak.

We're excited by what we're seeing in the number of kids that are being moved into the boys action aisle.

And that bodes well for all of us.

Okay.-

And what was --

preschool.

What is driving your market share in roads in the preschool aisle?

Margaret it's an interesting phenomena for us.

I think that people were like the overall offering that we were bringing to market this year.

It's across the board and the one thing that we do know is that as we do go into the third and fourth quarter, we definitely will have more retail space on our preschool lineup for the year.

Okay.

And finally, could you just give us directionally the magnitude by which Star Wars volume increased Q2 versus Q1 last year.

Was it two to one, three to one?

I know its with a trickle in march if you could directionally give us some help there.

Margaret, this is Al.

We're not going to give specific information like that.

Okay.

Just wanted to try.

Nice try, Margaret.

Thank you.

And our next question comes from Joseph Yurman.

Your line is open.

Please state your company.

Bear Stearns.

Hey, guys.

Hi, Joe.

Couple questions here.

Alan, I was hoping you could talk about the electronic hand held market and what you are seeing there.

And as far as Thin-Tronix, maybe could you talk about a strategy and whether there is an opportunity to bring that product into some alternative distribution like RadioShack and Best Buy?

And then maybe, Alan, a bigger picture question.

Fully realizing the company's commitment to how it's perceived than just performing at the higher standards for the community.

What are the opportunities to use the G.I.

Joe product right now to leverage sales but at the same time not wanting to capitalize on the war theme?

And just a couple of housekeeping questions if you could give me cash flow from operations and Cap Ex for the quarter.

Joe, as far as Thin-Tronix is concerned, yes, there is an opportunity for us to open up alternative channels of distribution and surprising enough it wouldn't be just the RadioShacks and some of the electronic areas.

It's also the lifestyle areas at certain department stores.

Okay.

So there is a real good opportunity there.

Not only on Thin-Tronix, but actually on some of the other products that will be coming with this year.

As far as corporate social responsibility is concerned, look, that's something that's very important here, as you all know to Hasbro, but it's something that I have real, and we all have real sensitivity, as far as G.I.

Joe is concerned.

And for the time being, we are trying to do nothing that, you know, would put G.I.

Joe in the front.

We're just going along as if things were normal but we are doing other things in CSR that, as far as the things that we do, we have not been great at letting people know all of the, I think, the things that we are doing.

David?

In terms of capital expenditures, $9.2 million for the quarter.

In terms of cash flow from operations, clearly we are cash flow positive during the first quarter because our receivables come way down.

But at the same time, our inventories start to build a bit.

The rest of the information I think you need to get there will we've now included on a schedule of supplementary financial data included depreciation, amortization and I've given you capital.

Joe, you had asked about electronic hand held --

Yeah.

Which is not really that big a segment for us anymore.

It was down a tad.

But it's on diminimous numbers really in the quarter.

Okay.

Great.

Thanks a lot.

Thank you, our next question comes from Dean Giaconacas.

Your line is open.

Please state your company name.

My questions are answered, thanks.

Thank you.

Our next question comes from Jill Krutick.

Your line is open.

Please state your company name.

Hi, good morning.

Smith Barney.

Good morning, Jill.

Good morning.

Could you perhaps give us a flavor for international versus domestic this year if you anticipate that the international market should exceed the domestic market and what you are seeing among the various key European countries.

And secondly, perhaps you could share with us some of your balance sheet goals over the next few years.

Thanks.

Good morning, Jill.

This is Al.

In terms of the international versus domestic market, I don't think the international market will exceed as a percentage of our total volume of the domestic market.

We've typically have been somewhere in the range of 60/40 domestic.

All that can change in a given year a little bit and maybe be - maybe the market - the international market could go to, you know, 45 or 42.

I don't see it being greater than 50%.

In terms of what's driving the business, we're getting a strong response to our product line in both our core product line, which would be Playskool, Play-Doh, Magic-The Gathering, the board game business, and in the European market, Trivial Pursuit 20th Anniversary Edition hasn't been shipped yet.

So it's the other board game business that's doing very well.

FurReal continues to do well and Beyblades are doing well throughout Europe.

In terms of the countries, the big countries, France, Germany, the U.K. are all doing well.

France and the U.K. in particular, but even Germany is doing better for us this year versus last year and the smaller countries are also doing well.

In terms of the balance sheet goals, I think we've said we'd like to get our debt / cap down to 25% or 30% over the next year or two.

And given that we don't have a lot of debt maturing, in order for to us do that, we'd probably have to go into the market and perhaps buy back some bonds.

But that will depend upon what they are selling for and what makes the best economic sense for the company.

I think inventory levels are probably at a level, you know, they might get a little bit low, but I think they're down pretty low right now.

I don't know that we can get, you know, significant reductions in inventory.

I still think there's some opportunity for to us improve receivables and days sales outstanding, but we continue to work for cash on ta day-to-day basis.

Great.

Thanks a lot.

Thank you.

Our next question comes from John Taylor.

Your line is open.

Please state your company.

Hi.

I'm with Arcadia.

Good morning.

Good morning, JT.

Hi.

A couple of things here.

The amortization expense declined and I gather some of that's related to Star Wars.

Is there anything on the amortization line that's going up that might offset what might have been a larger decline in amortization for the Star Wars property?

No.

Basically underlying amortization related to intangible assets on our balance sheet is consistent between last year and this year and a major difference is the extent to which we're amortized the Star Wars property rights.

Okay.

Which relate to -- we're doing it basically on a sales .

Right.

Okay good.

And then, uhm, there was - a few weeks ago when we were all sort of debating the likelihood or the wisdom of going into Iraq, there was some concern about backlash against multinationals U.S. , multinationals elsewhere in the world.

Have you gotten any inclination from Europe, I guess, in particular, that consumers are turning a cold shoulder to U.S. products?

JT, let me make a stab at that.

The answer is as far as Hasbro's concerned, no.

You are damned if you do, damned if you don't.

We don't think we pushed the Hasbro name as much as we should have in the past and therefore we really go underneath the radar screen trading under things like Actionman, Beyblades, Monopoly, Clue.

So we have not seen it.

A know there have been any number of articles that have talked to some of the Americana names, like Coke and McDonald's.

We're not seeing any type of boycotting at this moment.

Okay.

All right, good.

And then one of the things that can affect Q4 and Q1 of course is early shipments of Q1 product that take place in Q4.

Was there any meaningful difference between what you guys were able to get in at the end of Q4 of '02, which would take away from Q1 this year?

Was there any shift there?

No, there was not, JT.

Okay, super.

Thank you.

Thank you.

And our next question comes from Mike Wallace.

Your line is open.

Please state your company name.

Hi.

UBS Warburg.

I want to ask you about the international division from a profit perspective since that seems to be the biggest swing factor to getting to your 10% goal.

Could you talk about some of the things you've done to take costs out and are those finished?

Is there still work to do there this year in terms of getting the costs down?

And are you comfortable that international, as a division will be profitable this year?

Thanks.

Mike this is Al.

I think both David and I will probably have some comments.

The kinds of things we've been doing in Europe are the same things we've been doing domestically, and that is trying to focus on reducing non value-added activities, especially those in the administrative side.

We've done a lot of consolidation in Europe.

We used to have 17, 18 different countries.

We're now down into three regions.

We're doing more shared services throughout Europe and the rest of international.

And we've just really focused and tried to consolidate activities.

Some of the things we've done domestically have also impacted the international operations.

We brought all of our IS into one center here in the United States, which operates 24 hours a day, seven days a week and serves the entire world.

So we've been able to reduce expenses elsewhere in the world in doing that.

We've continued to focus and bring down inventory which reduces the need for warehouse space.

It's those kind of activities.

Dave, do you want to add anything to that?

yeah, I think in the first hundred million in cost savings we got, we consolidated a lot of our acquisitions domestically.

In the second million of cost savings we've gone after, that includes a lot of consolidation of acquisitions in international markets.

So, for example, at the beginning of last year, we had a Hasbro U.K., Tiger U.K. and a Wizards U.K..

Now they are all in one location.

We repeated that in Italy and in the far east and other markets around the world.

Does that answer --

Yeah, it's just -- so I think you were, what, down 1% last year in terms of margin?

Is it safe to assume that that will be slightly profitable this year?

Could you be a little more specific with that question?

Well, the international division --

We're clearly expecting international to bounce back to profitability this year for a number of reasons.

One being the cost savings.

Two being the benefit of foreign exchange and three, some of the product lines that were doing very well here in the fourth quarter of last year were only starting to get full distribution throughout all of Europe this year.

As an example, Beyblade has really only just started to ship in Germany during March.

So due to product momentum, lower costs and exchange rates, we believe that international will bounce back to profitability this year.

Okay.

Thank you.

Thank you.

Our next question comes from Jan Leob.

Your line is open.

Please state your company name.

Good morning, Jeffries and Company.

Hi, Jan.

How are you doing?

Can you just answer how you view cash as it relates to your debt to capital cap ratio because on the call, you've just said your goal is 25% to 30% and you hope to get there in a year or two.

Depending on how you look at cash, you could be there today or you are there today.

So how do you view cash or in other words, how do you view net debt in your debt to total cap, is question number one.

Then number two is, considering that and your free cash flow for this year, and Alan's beautiful speech on maximizing shareholder value, what are we going to do with the cash?

Jan, first of all, thank you for the complement on shareholder value.

Jan, this is Al.

I'll let David talk about, you know, how we view cash and the impact on debt to cap ratio.

In terms of what we do with our free cash flow, I mean, clearly we want to focus on first of all reducing debt.

You know, then the question becomes, you know, there's a potential for acquisitions, increased dividends, buyback shares, those are all opportunities that we'll evaluate and clearly in terms of whether we increase the dividend or buy back shares, that will be a Board decision and clearly the Board will then make that evaluation.

But our first use of cash today is to reduce debt.

But David, you want to have some comments on that, I'm sure.

Yeah.

When we talk about our debt to cap goals.

We're ignoring cash.

We're talking about a debt on the books versus the total cap.

If you include cash then you are right, given our cash flow generation, we, on a net debt basis, we could have no net debt by the end of '05.

By the end of '04, sorry.

But we still are talking about debt to cap being in the 25% to 30% range because we're not sure we'll buy that many bonds in.

Yeah, Jan.

One of the things we have as a goal is to regain our A credit rating with the rating agencies, and be able to go back into the commercial paper market.

So we're focused on that and that's kind of one of the guiding principles at least for the near term.

And when do you think your next up with the rating agency?

You know, our guess at this point in time would be sometime in, you know, in terms of when they would give us our rating back.

My guess is probably sometime in '04.

Maybe this time in '04.

They are going to want to see progress over a, you know, some period of time.

As that would be, I guess I wouldn't expect it to happenduring '03.

Okay, thank you.

Thanks, Jan.

Thank you.

Our next question comes from Sean McGowan.

Your line is open.

Please state your company.

Yeah, follow up questions.

First, what are you seeing at retail regarding the closings of various retailers stores and what impact are you seeing?

Are you getting back from other retailers?

Secondly, any plans to market Actionman in France as inaction man? [laughter]

Shawn, as far as your second, no, we do not.

No different than what we think of the Yankees here in Boston as an inactive group.

Not unless they were going to sell well, then I'd consider it.

As far as - we might do that here in the United States though, Shawn.

As far as the retailers and the threatened closings of a couple of retail stores, we have not as yet seen any impact.

How about the whole K-Mart thing, which is under way?

How are they looking at as a customer and what impact have you seen from some of the other retailers as K-Mart scales back stores?

Well, we've clearly been doing business with K-Mart during the last year.

As they close stores, the amount of volume we have done with them relative to past years has declined.

You know, they are expected to come out of Chapter 11 and we would expect to continue to do business on them on a go-forward basis.

Some of the other operators, FAO, Zany Brainy and that group, they haven't been a significant part of our volume, certainly not compared to a K-Mart, Target, people like that.

And if they close stores, you will see some impact but I'm assuming that that volume will be picked up by other retailers.

Okay, thank you.

Okay, Shawn.

Thank you.

And our final question today comes from Joseph Yurman.

Your line it open.

State your company name.

Bear Stearns once again.

Just a follow up on the rating agency discussion.

David or Al, could you discuss kind of any, I guess, operational restrictions that your lenders currently have on you, whether it's pledge receivables or inventories?

And does that preclude you from looking at things like a bolt on acquisition or share buyback before the rating agencies maybe change their overall view on the credit rating of the company?

I think in terms of our working capital bank facility with our bank group, yes, there still are restrictions and they do have securitization on the receivables and some of the inventory, and they did have it on intangible assets, but now that's been released.

In terms, there is a springing mechanism which will release receivables and inventories, we expect this year.

In terms of, there are some restrictions in terms of what we could do in terms of acquisitions, but that's clearly not been a problem because we have not been looking at any acquisitions.

And I think our banks although the agreement is fairly restrictive, I think our banks are fairly happy with how we performed over the last two years and would always be willing to discuss any amendments we went to look for.

In terms of the rating agencies, I personally struggle to see how a rating agencies can look at us today and come up with the same conclusion on our rating as they did two years ago, given it would return to profitability and would we paid down 54% of our debt.

However, it's up for the rating agencies, you know, to determine, you know, what rating they give.

And at the moment we met with them recently, I would hope that they are considering reviewing with their credit committees whether they take the negative outlook off.

But that's clearly a decision for them and their credit committees.

Okay.

Thanks a lot.

Let me thank everyone and by for now.