孩之寶 (HAS) 2003 Q3 法說會逐字稿

Good morning.

Thank you all for holding.

Welcome to the Hasbro Third Quarter Earnings Conference Call.

We would like to inform all parties at this time you will be in a listen only mode until we open the call for question and answers.

Also this call is being recorded.

At this time I would like to turn the call over to the company's Senior Vice President of Investor Relations, Ms. Karen Warren.

Thank you for joining us.

With me this morning are Al Verrecchia, President, Chief Executive Officer, David Hargreaves, Chief Financial Officer.

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

We will conclude the call by opening the call to your questions.

To better understand the earnings results it would be better to have the press release we issued earlier today.

If you don't have a copy of our release it is available on our site, Hasbro.com.

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, similar matters which are inherently subject to risks and uncertainties.

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

Some of those statements are set forth on the company's annual report on Form 10K ,including under the heading Forward-Looking Information and Risk Factors That May Affect Future Results. and the company's quarter report 10Q, including under the heading Other Information and Forward-looking Statements and Factors That May Affect Future Results.

And the company's current reports on Form 8K and on today's press release.

All listeners should review such factors together made with any forward-looking statements made in the conference call.

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

Now I would like to introduce Alfred Verrecchia.

Al?

Thank you, Karen.

Good morning, every one, thank you for joining us.

We tried not to be pleased with our third quarter performance and continuing improvements.

Revenue was up 18%, operating margins were up 20% from a year ago, and earnings increased 54% year over year, prior to our accounting change.

Our strategy of focusing on core brands, and new product innovation, continues to work as we continue to gain shelf space on market share.

Our success continues to be fueled by growth in our corporate brands as well as new and innovative product lines.

Over two-years ago we focused on growing our core brands, reducing our reliance on major entertainment properties, improving our operating margins and reducing debt.

As you have tracked our progress over the last couple of years, I think you will agree the management team continues to execute on this strategy and remain focused on achieving our longer-term goals.

Now let me turn the call over to David to discuss our third quarter results in more details.

Thanks, Al.

Good morning, every one.

We delivered a good third quarter.

Our results year-to- date have us on track to achieve our financial markets for the year.

In the quarter, excluding the impact of favorable foreign exchange, we grew revenue 15%.

This growth came from a number of product lines, including, Transformers, Video Now, Fur Real Friends, Trivial Pursuit and Bey Blade, which have performed exceptionally well, both domestically and internationally.

Before I get into the details of our results, I would like to take a closer look at the effect of foreign exchange in our business.

Exchange rates had a positive impact on revenues due to stronger national currencies.

Specifically the Euro averaged $1.13 in the third quarter of 2003, compared to 98 cents in the third quarter of 2002, an increase of approximately 15%.

Not only did this increase revenues, but it also increased international expenses when translated into U.S. dollars and consequently, masked some of the SG&A savings we are achieving.

Foreign exchange also had a positive impact on international earnings, and increased balance sheet amounts, including receivables and inventory.

I will talk more about some of these impacts later.

Moving on to the P&L, third quarter worldwide net revenues were $971.1 million, up 18% compared to 820.5 million last year.

These results include a 3% favorable foreign exchange impact.

For the third quarter, we reported earnings of 85.8 million, or, 48 cents per diluted share.

This is before the cumulative effect of adopting a new accounting standard, FAS 150, which I will also discuss in more detail later.

This compares to net earnings of 55.8 million or 32 cents per diluted share a year ago.

Now, looking at our segment results.

The U.S. toy segment, revenues, were $377.3 million, up 23%, compared with revenues of $307.2 million last year.

A number of brands performed well in the quarter, including Bey Blade, Farewell Friends, Video Now,and core brands such as Transformers, Playskool and My Little Pony.

U.S. toy operating profit was $45.8 million for the third quarter, compared to $25.5 million last year.

In the games segment, revenues were $250.2 million, up 11% compared with revenues at $225.9 million last year.

The board game business remains strong with adult games up an impressive 54%.

Many brands and products performed well, including Monopoly, Trivial Pursuit 20th Anniversary Edition, Bullseye Bowl, and our Magic the Gathering Trading Card Game.

Games operating profit improved to 58.3 million, compared to 48.4 million last year.

Revenues in the international segment were $328.1 million compared with revenues of $268.5 million in the prior year.

This represents an increase of 13% in local currency, and 22% in U.S. dollars.

The revenue growth can be attributed to a number of brands including Bey Blade, which was strong in many international markets, and core brands such as Magic the Gathering, Playskool and Transformers, which were all up significantly.

International operating profit improved to 38.5 million compared to $9.9 million last year, due to revenue increasing, as well as for planned reduction in fixed costs.

Moving on to margins, let me provide you with some perspective on the third quarter.

Gross margin was 56.8%, compared to 58.2% last year.

This partially reflects significant shipments of Video Now hardware during the third quarter.

As previously discussed, there is a relatively low gross margin on the hardware, but a very good margin on the software, which was shipped in more significant quantities in the fourth quarter.

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

Research and development expenditures were $38.8 million up $2.1 million compared to $36.7 million a year ago.

This is reflective of the timing of expenditures and offset some of the savings we had in the first half of the year.

Royalty expense for the quarter was $82.5 million, or 8.5% of revenue, compared to 85.2 million, or 10.4% of revenue a year ago.

This reduction primarily reflects lower shipments of Star Wars.

Advertising expense was 105 million, or 10.8% of revenue for the quarter, compared to $82.9 million for the last year.

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

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

Al will be talking about this later in the call.

SG&A expense was $168.5 million or 17.4% of revenue.

Compared to $153.8 million, or, 18.7% a year ago.

We are pleased to see this decrease as a percent of revenue even though there is an increase on an absolute dollar basis.

This may be contrary to your expectations.

Be assured that we are delivering on our underlying fixed cost savings.

However, there are a number of factors that are masking this in the quarter and in our year-to-date results.

Firstly, we have the impact of translating international expenses at higher foreign currency exchange rates.

This had an impact of 4.6 million for the quarter, and 16.1 million year-to-date.

Additionally, with the strength of our business year-to-date, management incentive provisions are up as well as distribution costs which are volume related.

Lastly, there have been some additional expenses associated with our ongoing business efficiency program.

Some of these factors are expected to continue into the fourth quarter.

In particular, we are looking, we are the--in the process of evaluating the viability of a international manufacturing facility and other under-performing operations.

These reviews could result in operating charges in the future including as early as the fourth quarter.

However, we believe any potential charges in the fourth quarter would not be of a magnitude that would prevent us from delivering on our stated operating margin goal of 10% or better for the year.

Amortization expense declined for the quarter by 2.9 million to 19.3 million, primarily reflecting lower amortization of Star Wars property rights in a non-movie year.

Interest expense for the quarter decreased by 5.3 million to 12.6 million, reflecting strong cash flow and the repurchase of maturity during the last 12 months of 252.2 million of long-term notes that had a 7.95% coupon.

Effective the beginning of the third quarter, we adopted FASB Statement Number 150, accounting for certain financial instruments with characteristics of both liabilities and equity.

This new accounting standard requires that the value of the warrants we granted to Lucas in relation to the Star Wars brand be classified as a liability and subsequently adjusted to fair value through earnings.

These warrants, with their put and call features, were previously recorded in equity at their historic value of approximately $108 million.

Upon adoption of FASB 150, we reclassified the historic value of the Lucas warrants from equity to current liabilities.

A charge was recorded as the cumulative effect of accounting change totaling 17.4 million.

To adjust the amount of the liability to its fair value on the date of adoption.

During the third quarter, we recorded an additional charge of $1.5 million related to the increase in the fair value of the warrants through the end of the quarter.

This charge is a component of other expense in the income statement.

It should be noted that there will be further non-cash charges or income in future quarters as we continue to update the fair value of the warrants to reflect changes in our stock price.

Now, turning to the balance sheet.

Receivables at 879.7 million are up only 10% despite an 18% increase in revenues in the quarter.

As a result, day sells outstanding have decreased from 6 days to 88 days to 82 this year.

Inventories at $289.4 million are $7.3 million higher than a year ago.

However, absent foreign currency translation, inventories would have been down, even with the increase in the volume of our business.

This primarily reflects momentum of our product line and the continued focus on supply chain management.

The balance sheet sheets also shows the total debt net of cash decreased by 324 million compared to the end of the third quarter 2002.

Our debt to cap ratio improved 43% from 51% last year.

Our long-term goal remains to reduce our debt to cap ratio to within a range of 25 to 37%.

These balance sheet sheet improvements and our strengthening financial position are now being recognized by the credit markets.

As a result, we are in the process of negotiating a new unsecured bank facility and hope to have it finalized shortly.

I am also pleased to report that Moody's have put us on the blue for an upgrade in our credit rating.

In closing, while we are pleased with our strong performance year-to-date, and at this time we are confident that we will achieve our targets for the year, I would remind every one that the critical holiday selling season has only just begun.

Going forward, we will continue to be focused on our stated financial objectives of cost reduction, margin expansion, cash generation, and paying down our debt.

We remain committed to providing sustainable earnings growth and enhancing shareholder value.

With that, let me turn it back to Al.

Thank you, David.

Our revenue growth this quarter has been driven by innovation, as we continue to focus on core brands, new product introductions and aggressive marketing, all of which have resulted in a significant increase in shelf space and market share.

We are cautiously optimistic about the upcoming holiday season, as several of our key customers have reported improving results in the last couple of months, with toys among the better performing categories.

Given the performance at retail of some of our key product such as Transformers, Bey Blade, My Little Pony, Fur Real friends I believe we have been a major contributor to the improved performance in the toy category.

Also we are very pleased about our inventory position at retail.

Now let's take a look at some of the brands that have contributed to our improved performance.

First core brands.

In the Playskool category we have a number of brands performing well, including, Play-Doh, and our Yard Cool line, particularly the Yard Cool Talking Grill.

We have also launched a new segment called Little Big Kids posting solid results with both Speed Stars and Go-Bots.

This new line has helped us to significantly increase shelf space globally for Playskool, and early indications for retail look good for the holiday season.

It is fair to say that My Little Pony is exceeding our expectations, we launched this brand globally in the third quarter, with an aggressive media program, complimented by an extensive merchandising program from our Hasbro Properties Group.

HPG has signed up 30 licenses, you can expect to see My Little Pony in apparel, home goods, publishing, and visual entertainment in addition to the strong portfolio of games, toys and puzzles.

A key element of growing core brands is to keep them fresh and relevant by launching new themes this year.

This year we introduced Transformers Armada, which is being supported by a wide range of marketing initiatives.

Year to date, our Transformers brand has more than doubled in revenue and is one of the strongest performing core brands this quarter.

Earlier this year we spoke to you about expanding core brands into new categories.

BTR, or Built To Rule is an excellent example.

BTR is a new brick construction toy line that uses themes from our three we will known brands, G.I.

Joe, Transformers, and Tonka.

We began shipping BTR in September.

Although not yet a significant contributor to the top line, the initial response by retailers has been very positive.

Building upon our leadership in the board game business, we have the most successful single new product in the entire toy and game industry last year, Trivial Pursuit 20th Anniversary Edition.

TP 20 continues to perform very well this year, further validating our ability to substantially grow the Trivial Pursuit core franchise.

We will continue to aggressively build the Trivial Pursuit brand with this year's release of the [Sixteenth] Edition and the introduction of Trivial Pursuit DVD Pop Culture Edition, a new format that melds Trivial Pursuit traditional board game play with DVD to enhance consumer appeal.

Finally early in 2004, the 20th Anniversary Edition will be released internationally.

Other examples of core brand extensions in the game segment this fall include Twister Moves, and Jenga Extreme.

The Magic the Gathering trading card game, celebrating it's tenth anniversary, was up a strong 54% for the quarter and 30% year-to-date, as it continues to be one of our top performing brands.

Let me shift gears now and talk about how we respond quickly to new trends.

As we have said, we are in the new product business.

This means consistently developing new products and brands that are relevant to today's kids.

Previous successes in this category would be Hit Clips, and E-kara.

One of the strong launches in this quarter was Video Now, with early indication that would suggest a very strong year.

We expect to have approximately 70 titles from top-rated TV shows available for the holiday season.

Look for this as a key driver with some of our major retailers.

Innovation also keeps our games portfolio vibrant and relevant, enabling us to appeal to a greater number of consumers each and every year.

Early this year we have introduced a number of new games performing well.

These include Elefun, a revival of a preschool classic, Bullseye Ball, an enticing table-top arcade game from Tiger games that anchors our tween offering..

Let me talk about strengthening existing brands, it is about continuing to evolve into the second or third year of its life and beyond.

Bey Blade, our battling tops were first introduced last year and continue to be one of the hottest boy's properties on the market.

They have become an important contributor to our year to date performance, both domestically and internationally.

Innovative new products such as Beyblade Arcade challenge, and the remote control top with launcher, continue the momentum for the brand into the holiday season.

Fur Real Friends is another excellent example of building a new brand.

Last year we had great success with both the cat and the kittens, which continued to do this well, and this year we have extended this brand in enhanced technology, in our new release, Go-Go, My Walking Pup.

Retailers consider Go-Go a strong candidate to be among the most sough after toys this holiday season.

My strategy also involves entertainment properties.

As we said in the past we will not be dependent on hot movies.

But we need to be where kids are, and of course the economics of the deal have to be right.

Disney recently released a platinum version of The Lion King, and early indications on the product line have been very good.

In November, Disney will be releasing Brother Bear, just in time for the holidays.

As you know, major movie entertainment properties will always be part of our mix.

This year in keeping with our longer term strategy, we expect our product lines themed to major movie entertainment properties to represent less than 10% of revenue.

Now, let me talk a bit about the international segment.

As most of you know, it has been a key area of focus.

Year to date we have seen strong performance to many of our core brands, including Play-Doh, Transformers, My Little Pony, board games, and Magic the Gathering, as well as from new product introductions such as Beyblade and Fur Real Friends.

This is another example of you us doing more and more product on a global basis, something we didn't do as well in the past.

International operating margins have improved significantly this quarter to 11.7% compared to 3.7% a year ago.

A direct result of the increased revenue growth and cost reductions.

Overall, I am pleased with our international segment to date and believe we are positioned for a strong finish to the year.

Having heard about so many of our products, let me point out that innovation is only part of the story.

As we said last quarter, we have a very strong fully integrated marketing and public relations program.

We will continue to be very aggressive this holiday season.

Now let me summarize with five key points.

First of all, while we have made substantial progress over the past couple of years, we still have a long way to go.

We are energized by both the challenges and the opportunities that lay ahead .

Secondly, we have a strong management team that is focused on achieving its goals.

We believe Hasbro is well positioned for the future and the results we reported today add credence to the belief.

Third we are very confident in our ability to achieve long-term financial goals.

Fourth we remain committed to delivering sustainable reliable profitability for our shareholders.

Last, but certainly not the least, each of you can do your part.

I want you to dig deep.

This isn't a time to be frugal.

We have a great product line-up for the holidays, so make sure you buy lots of Hasbro toys and games in the coming weeks.

With that, David and I would be happy to take your questions.

Thank you.

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

We'll take your at this time.

Once again, please press star one on your touch tone phones.

One moment, please.

Thank you.

Our first question comes from Sean McGowan.

Your line is open.

Please state your company.

Good morning, thank you.

A couple of questions, if I may.

First a quicky.

Do you guys fund in any way promotions that we see at retail, such as Toys "R" Us, buy one get one free for board games.

Two, could you talk about what your involvement will be in the Bratz product line in Europe in '04.

Third, David, how much did currency contribute to EPS.

And the final question, would you prefer that we buy Hasbro toys or Hasbro stock.

Good morning, Sean.

This is Al.

You can buy a little of each, actually.

How about a buy one, get one free on that?

Going back to the promotion, we do a lot of things with our customer.

There are some promotions that we fund, some that they fund, and some that we jointly fund.

So to say that any particular one promotion is funded by Hasbro or one of our customers, I would have to look at the specific promotion.

But most of these promotions are a combination of factors, funding from both of us as well as the customer.

In terms of Bratz, and David; correct me if I am wrong here, we have Bratz for France, Germany, Belgium, Holland, Greece, Turkey, in most of continental, or mainland Europe with the exception of UK, and I believe, Spain.

In addition, we have Mexico, Chile, and Peru.

David, you want to take the currency question?

Yes, in terms of the impact on earnings, during the quarter, the translation impact was $2.4 million, or $0.013 cents per share, and the translation impact year to date was 4.6 million, or $0.025 cents.

In terms, we also get a bit of benefit from transactions, as well as translation, that's very difficult to determine, but it's probably in the range of 0 to 5 million year-to-date.

It also gets complicated by the fact that we do do some hedging and forward options as early as last year when the rates looked quite attractive.

I think for the quarter, it is clearly, you know, 1 to 2 cents per share, and year- to-date, much more in the region of 2 to 4.

Thank you .

Thank you, our next question comes from Bret Jordan.

Your line is open please state your company name.

Advest.

Just a couple of questions, one relating to the Video Now hardware impact on margins in the quarter, could you give us a feeling for what portion of the couple hundred basis point impact was Video Now?

Yes.

I said it was partially the reason, probably about half of it.

The other part of it is a couple of things in there, but one certainly is, we had a lower mix of Star Wars this year, If you remember, Star Wars has a very high gross margin, and when we kind of gave it back on the routine amortization line.

So that is Star Wars, and, fairly significant shipments of Video Now hardware.

We just said the hardware doesn't have a great gross margin.

But the software which was shipped is more significant in the fourth quarter has a really good gross margin.

You expect to ship 70 titles on the shelf for the fourth quarter?

Yes, we do.

As far as the manufacturing facility closure potential in the fourth quarter, do you have an feeling for what the impact will be there?

No, we are still assessing liability, and we need to talk to our workforce and their representatives in we, do in fact decide to change the nature of business there.

So we can't come up with a number, but what I did say, we did not believe that any charge in the fourth quarter would be of a magnitude to stop us meeting our previously disclosed operating profit objective of 10%.

Thank you.

Your next question comes from John Taylor.

Please state your company.

Hi, I'm with Arcadia, good morning.

Hi, John.

You guys are still taking charges through the income statement as operating costs relating to restructuring, so on, could you give us kind of a year-to-date total of what that number looks like, and I gather if you do do something on the international front, you will treat that the same way.

So maybe just kind of quantify that for us.

That is the first question.

The second question, the savings you have generated from restructure moves over the last couple of years, could you give us a sense of what that looks like year-to-date, maybe how it breaks down between the U.S. and the international.

Then, the last question on the product front, so, you introduced Trivial Pursuit 20th last year, and it is providing pretty good momentum this year as is Beyblade.

Are there any of the product lines introduced in 2003 that looks like they are promising in terms momentum going into the next year as you're starting to plan things?

Let me pick up the product side first, John.

In terms--terms of the game side we have had great success so far with Twister Moves, Bullseye Ball, Clue FX, and Jenga extreme.

Clearly you have to get through the holiday season, but if the momentum keeps going with those games as it has been and continues through the holidays, they should be strong performers for us next the year.

In terms of some of the toy brands, certainly Transformers, G.I.

Joe, Playskool, and Beyblades, as long as they continue their momentum through the holiday season, we would expect them to continue into 2004 as well.

David, do you want to talk about--

Yes, with regard to the one-time costs in associated with our ongoing business efficiency, this year thus far is about $11 million.

As we said on the second quarter call, we had some expenses associated with getting out of some under-performing product lines, as you also know we have been also been reducing our number of Wizards of the Coast retail stores.

So the next part of the question was, are our underlying savings, kind of still on track and what could we expect?

We said, coming into the year, that of the second hundred million of costs that we would take out of the business, we had taken 50 million gross out last year, but that had been kind of hidden by a $28 million of one-time charges so you saw net 22 last year but the gross was 50.

We said that you would see an additional gross of $15-30 million this year with a final 20 million coming next year.

So we are on track to deliver for 30 million we promised this year, while it is being offset by a number of factors, as I said, the translation impact of foreign SG&A costs and the fact that we spent this 11 million again this year in terms of on going business efficiency improvements.

Finally, your question was about how many of the underlying savings of international?

Yes, if you take those gross amounts, split that between U.S. and international.

Yes, we took basically 100 million out of our business in '01, and the second 100 of our business was going to come in '03, '04.

Of the second hundred million the major portion is internationally.

So it is relatively higher international than domestic with the second hundred million.

Okay, great.

Thank you.

Thank you, our next question comes from Tony Gikas.

Please state your company.

Yes, U.S.

Bancorp Piper Jaffray .

Congratulations, guys, great quarter.

Thanks.

A couple of retail oriented questions.

Maybe you could just characterize your thoughts on the general retail environment right now.

I know you indicated inventories look like they're in good shape, but how do you feel about the retail environment going into the holidays.

The second part of the question, could you characterize the shelf space increase that you expect going into the holidays, and how much of that you might maintain going into 2004.

The third part, your thoughts on sort of the generic or mass merchants own branded product.

Who do you think they are taking market share from, is it the smaller guy?

Then I might have one follow-up?

Okay, in terms of the retail environment, I think it's been a tough environment all year.

I think there has been a lot of focus on managing inventories, earlier in the year, there were retailers who were trying to reduce inventories, I think in general, all of them, both domestically and internationally, are trying to flow goods more effectively and work hard at improving their management of the supply chain.

That said, certainly during the last several months, we have seen a number of our key retailers report good comp store numbers, and several of them have commented that toys have been among the stronger categories.

That certainly makes us feel better going into the holiday season, than if toys were a weaker category.

You know, that said, I have been in this business a long time, as has Alan and lots of others.

Each year, we are surprised by something, something it is positive, sometimes it is negative.

So we are feeling good about where we are, we like our inventory position, we like the way our products have performed thus far, but we're just going to stay focused and we will see what happens.

In term of shelf space, we said at the beginning of the year we had to come up with a much stronger product line, we had to gain shelf space and improve our market share.

I think we have done that thus far and will continue to do it in 2004.

So I don't see us losing shelf space in 2004, you know, a lot of those decisions will obviously be made by the trade over the next several months as they look at new product lines and they see how certain products perform during the holiday season.

In terms of a branded goods, house brands, who it is taking away from?

You know, it takes away from everybody, obviously.

Whether it--it probably takes away more from those companies that don't have strong brands.

I think a company like Hasbro that has very strong brands has a better opportunity to compete against house brands than companies that are selling non-branded goods.

But, you know, clearly, it takes away from every one.

Okay.

Then the increase in ads spent, would you characterize that driving sales in line with your expectations or better than your expectations.

Do you have an early read on that at this point?

I--it is a little early to say.

We have to see how things are performed during the holiday season.

Some of the testing we have done with the ads, we are certainly very pleased with the results thus far, but, you know, this is a holiday season business.

I think we will be in a much better position to answer that question once we get through the holiday season.

Okay, thanks guys.

Thank you.

Our next question comes from Carla Casella.

Your line is open, please state your company.

Hi, it is Carla Casella from JP Morgan.

I know that we are seeing a lot of additional doors opening up with additional holiday toys this year, including grocery stores, some drugstores.

I wonder if there is any way to quantify how much of your growth is coming from new doors versus just pure internal, I guess, growth, I would say, of existing sales through existing doors?

Carla, this is Al Verrecchia.

We certainly continue to focus on opening up new channels of distribution.

We have certainly made a lot of great strides during the last year or two.

But as we look at this year's performance thus far, I would say that most of our growth is being driven by our key customers, those customers that we have been doing business with for a number of years.

That doesn't mean that we are not improving the amount of product we are selling through some of these other doors, but some of the product that is going through these other doors, is actually going through our key customers first.

I think Toys "R" Us and KB Toys are actually managing the toy department for some of the grocery and/or drug chains.

But in general, I think our growth is being driven more by our regular customer base more so than new channels.

Okay, great.

Thank you.

Thank you, our next question comes from Jill Krutick, please state your name.

Good morning from Smith Barney.

Great quarter.

Congratulations.

Thank you.

The point-of-sale data are you seeing point-of- sale at retail exceed that of your rate of shipments are they pretty much--are you continuing to see a reduction in inventories at retail.

Secondly, can you give us a flavor for the key drivers internationally, which key markets are doing better than others and how you expect that to play out over the next year?

Thanks.

Thanks, certainly our point of say has been pretty good all year long.

At this time of year, when the toy industry is filling the pipeline, you will always see more shipments than POS, but part of that is due to the traditional filling of the pipeline.

With that said, we are very pleased with our inventory position at retail.

We think it is in excellent shape, in terms of where we wanted to be compared to the previous years.

So, you know, POS is good, we have had, you know, good sell in.

Now we are looking forward to a, you know, good sell through during the holiday season.

In terms of the international market, we're having a very strong year in Europe.

And it's pretty wide-spread.

I think, the UK, France, Italy, Spain, probably doing an overall better job than, say, Germany.

You know, Germany's always the tougher market I think, for everyone, both in terms of retail as well as the manufacturing, although we've got some good product momentum in that part of the world as well.

Okay, so your rate of shipments are, right now, exceeding your point-of-sale data, is that correct?

No, you wouldn't find anyone's rate of--rate of shipment should exceed POS right now, because you are filling the pipeline.

Okay.

But POS has been very good for us all year long.

This is a time when you would build inventory.

But the inventory has to be there for the holiday season.

So I would--anyone whose shipments are not exceeding POS at this point in time has got a problem.

Okay.

Thanks very much.

Thank you.

Our next question comes from David Liebowitz.

Please state your company name.

Burnham Securities.

Good morning and again, let me add my congratulations for the quarter.

Thank you, Dave.

Couple of questions.

One, you mentioned that several of your products are selling particularly well.

Are you likely to have shortages in any of your lines this year?

Probably.

You know, I mean, you want to manage your inventories, you want to flow goods, and as a result of that, you probably miss some sales, but I don't think there's going to be any significant shortages.

Okay.

Second of all, David touched upon the Star Wars situation.

I am not certain I understood.

You took a write down because of new accounting standards?

I thought when you put in--

No, we didn't take any write down on Star Wars.

As part of our deal with Star Wars, we gave him warrants way back, in 98.

We subsequently put a put and call feature on them.

What's happened is, this new FASB 150 says that certain items or instruments that have characteristics of both equity and liability should be recorded as a liability.

So up until now, we had, the property rights associated with the Lucas warrants, in the equity, basically recorded in the equity side, at the historic value, which was about 108 million.

Under the new FSAB you had to reclassify that from equity to liability, and you have to market to market to its fair value.

So we had to--the fair value of those warrants, given our stock price appreciation since they were issued, as of the first day of the third quarter, was 125 million.

So we had to take a $17 million charge, non-cash charge, in order to mark those to market.

We then had to take a further $1.5 million charge as we updated from the fair market value of those warrants from the first quarter--from the first day of the third quarter to the last day of the third quarter.

And go forward, as our stock price changes, we will--if it goes up, we will occur for the charges, if it goes down, we would actually get some income results from marking to market, the fair value of those instruments.

So there was no write down on Star Wars, let's be very clear about that.

This is purely an accounting change regarding instruments that have characteristics of both liability and equity.

Now, at some point in time, if those warrants or options are exercised, what impact does that have on the carrying charges, does that vanish?

If Lucas came and put their warrant to us, tomorrow, and we paid them $100 million in cash, which we have the option, to pay in cash or $110 million in stock.

If they came tomorrow and exercised their put, and we settled for $100 million in cash, we would have settles $125 million on our books at the moment, $125 million for 100 so we would book a $25 million gain.

Again, it is all non-cash.

It is not an accounting rule that I think has a lot of logic, but I don't like them.

Okay, when is the first put feature, when is the first date of putability?

They can put them any time within five-years, from January 30 of this year.

Of '03?

Of '03.

Because we added the put and call feature when we renegotiated at the beginning of this year.

And, one other question.

If sales Star Wars product live up to your expectations or exceed your expectations, does that change the accounting treatment on anything?

Not on this instrument, no.

But on the equity side of the balance sheet, just what you are carrying?

No, they have really -- if sales exceed expectation, it doesn't make any difference.

The only time this goes away is either when when they exercise their warrants or exercise their puts.

Until then, we will be required to mark to market each quarter.

The good news is we only have to take a charge if our stock is going up.

Okay, thank you very much.

Thank you.

Our next question comes from Linda Bolton Weiser.

Please state your company.

Oppenheimer.

I just wanted to follow up on what you said about the sell in and the sell through matching in the quarter.

Don't you think if retailers on a secular long term basis are reducing inventories over the long term, that you won't see periods where you will have -- I mean, why is it necessary that sell in be exceeding point-of-sale at this point?

This is Al Verrecchia, Linda.

You are right, retailers and manufacturers want to flow goods and manage the supply chain.

But you are coming into the holiday season.

You are coming into the big Thanksgiving shopping day, a lot of promotions going on, an awful lot of activities.

So you will find shipments during the month of September and October, and perhaps even November, could very easily exceed point of sale as they build up, because you can't get all the merchandise through the distribution centers in time for it to hit the shelf.

So, you will find a little bit of peaking, if you look at retailers, they are always carrying more inventory just before the holiday season.

That doesn't mean that we are not doing a better job flowing inventory, it doesn't mean that the level of inventory may be not be lower than it was a year ago, but the level of inventory, I mean, the level of shipments going in is more likely to exceed POS as you build towards the holiday season.

That is going to happen just within this short window or win the holiday season.

You know, they are getting their sets ready for Christmas, and different promotions, so they are bringing in goods in anticipation of this.

Okay, thanks a lot.

Thank you.

Our next question comes from Margaret Whitfield.

Please state your company name.

Brean Murray.

Good morning.

Hi.

I wondered if you could comment, you mentioned you think you are making inroads in market share, what categories -- where do you think you are gaining?

Also you mentioned again, reiterating the goal 10% operating margin.

This year I wonder what you could give us in terms of what is a goal for next year and long term.

And also, while major retailers and some of their toys have been some of the strongest performers, I wonder if you could comment on promotion, provides discounting at this early stage relative to previous years?

Okay, in terms of shelf space and market share, I think we are gaining market share in our traditional categories, I think Playskool and the preschool area, we are gaining in the boys's area, I think we are gaining shelf space in what we would call the tween with products like Video Now.

I think it is pretty much across the board.

We are also having a pretty good year in our game business.

I think our market share, our shelf space gains are coming pretty much across the board.

In terms of operating margins, I think we stated some time ago that we looked to achieve a 10% or better operating margin this year.

We want to be at 12 or better by '05.

We are sticking to that.

Then longer term, we need to do even better than that.

In terms of the amount of discounting that is going on, you know, I am not sure that it is any--at least to date is any greater or less than it was a year ago.

Different retailers run different promotions, both domestically and internationally.

As I look at our product line, very little of it has been discounted thus far.

You know, we are pleased with that.

We will see what happens as we go through the holiday season.

Okay, thank you.

Thank you.

Our next question comes from John Taylor, your line is open.

Please state your company.

Hi, again, I want to follow up on the Bratz agreement.

Can you tell us anything about what the margin impact of a deal like that might be?

I mean, that has the potential of being a fairly significant revenue number, it would seem.

Can you give us a sense of how you are thinking about that?

What we ought to be expecting?

Not really.

I don't want to get into forecasting.

I mean, obviously, we haven't had to develop the product.

On the other hand, we will be promoting it.

You know, we have a distribution deal with MGA.

I don't know that the margins on that product line will be significantly different than our overall product line.

Okay.

So you guys are doing the promotion, you are not sharing that with MGA?

Well, just one thing to clarify.

This year, we are only doing it in some of the smaller markets, it is the beginning of next year that we pick it up for some of the larger markets.

All right.

Is that a multi-year agreement?

Yes, it is.

In terms of promotion, certainly MGA is going to be--you know, they have their own promotional plans, but, you know, we will have our plans as well, you know, in the markets, we are distributing the products.

So both companies will be promoting the brand.

Okay, thank you.

Thank you, and our final question comes from David Liebowitz.

Your line is open.

Yes, in electronics, is there any update on that status, Al?

Yes, as you know, we put the product into the marketplace earlier in the year.

We had some problems with how it was being merchandised, where it was being merchandised in the store.

Packaging wasn't necessarily right and had some problems with the commercial.

We made changes to both the packaging and the commercials.

It is back in the marketplace.

We will see how it performs during the holiday season.

And, you had test marketing, I believe you said in the last conference call in New York, is it in broader distribution right now?

Yes, it is.

Thank you very much.

Thank you all, and have a good day.

Thank you, and that does conclude today's Hasbro teleconference call.

Every one may disconnect at this time