孩之寶 (HAS) 2003 Q4 法說會逐字稿

Good morning and welcome to Hasbro's fourth quarter 2003 earnings conference call.

At this time all participants will be on a listen-only mode until the question and answer session.

Also today's call is being recorded.

If you have any objections you may disconnect at this time.

With us today from the company is the Senior Vice President of Investor Relations, Karen Warren.

Thank you, Wendy, and good morning, everyone.

Thank you for joining us.

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

On today's call we will be reviewing our financial results for the full year and fourth 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 that we issued earlier today.

The press release includes information regarding non-GAAP financial measures discussed in today's call.

If do you not have a copy of the release it is available on our website at 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 and similar matters which are 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 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 effect future results and the company's current reports on form 8(K) and in today's press release.

All this (inaudible) review such factors together with any forward-looking statements made on 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 Al Verrecchia.

Thank you, Karen.

Good morning, everyone, and welcome.

Thank you for joining us.

We are very pleased with our 2003 performance as we delivered strong results in what turned out to be a challenging retail environment, highlighted by aggressive price cutting and promotional activity at the retail level along with the continuing rationalization of stores.

Revenues grew a solid 11.4% and 6.9% in local currency driven by Beyblade, Video Now, Furreal Friends, board games and many of our core brands including Transformers, Play-Doh, Magic: The Gathering and My Little Pony, to name a few.

Worldwide core brand drivers as a category grew 23%.

All of our major segments performed well, reporting strong growth in both revenue and operating profit.

We achieved an operating margin of 11%, exceeding our previously stated goal of 10%, even with a number of actions and associated charges in the fourth quarter.

Earnings for the year before the accumulative effect of accounting changes more than doubled to 98 cents per share compared to 43 cents per share last year.

In the fourth quarter we ceased toy manufacturing operation in our facility in Valencia, Spain, and we announced the closure of the remaining Wizards of the Coasts retail stores.

Both of these actions make strategic and financial sense for the company and its shareholders.

Another positive action we took in the quarter was the tender offer for our outstanding 8.5% note due in 2006.

Pursuant to the tender we purchased an aggregate principal amount of $167.3 million in December.

Looking ahead the retail environment is likely to remain challenging and more seasonal as consumers have been conditioned to shop later and later.

While it is difficult to know how the changes at retail are going to play out, we believe that remaining focused on our own strategy for success will best serve Hasbro and its shareholders.

We know that parents and kids are still going to buy toys and games so let's talk a bit about how Hasbro can best prosper in this new and challenging retail environment.

Much of the answer lies in our 2003 performance.

The diversity and depth of our product line portfolio drove solid top and bottom line growth in 2003.

We believe the best way to deliver on our growth targets in any environment is to have innovative products that consumers want.

When we bring great products to market like we did with Video Now and Furreal Friends, we are creating value and excitement at retail.

Through product innovation and aggressive marketing strategies we will continue to invest in opening up new categories and providing value for the trade and the consumer.

As we deliver products that consumers want, we would expect to continue to gain shelf space in the coming years in both traditional retail locations and new channels of distribution.

Lastly we need to maintain our focus on improving our operating efficiency, especially as it relates to taking costs out of the supply chain, as well as exiting areas of the business that are not profitable.

Now let me turn the call over to David Hargreaves to discuss our fourth quarter and full year results in more detail.

David?

Thanks, Al, and good morning, everyone.

In 2003 we substantially improved our profitability and strengthened our balance sheet.

I am particularly pleased we were able to achieve our operating profit objectives during the year in which we took a number of actions and associated charges that will benefit us in the future.

The most significant of which were: severance payments of $18.4 million related to the cessation of manufacturing operations in our Valencia, Spain facility; charges of $14 million for exiting leases and severance from employees of the remaining Wizards of the Coast retail stores; and a $20.3 million charge related to the bond buyback primarily comprised of a premium we paid to bondholders that participated in our December tender offer.

Finally the bankruptcy filing with K-B Toys did not have a significant impact on our fourth quarter results.

In fact we took a charge of less than $1 million.

When I review the P&L I will talk in more detail about how these events impacted the various line items.

Let's take a closer look at our results beginning with revenue.

For the fourth quarter revenue was up 13% to $1.1 billion, with a number of core brands and innovative new products performing well.

For the year we grew revenue 11.4% to $3.1 billion, even absent the favorable impact of exchange rates we grew revenue 6.9%, up against tough comparisons related to Star Wars and other movie properties.

We had strong growth from a number of our brands this year with board games up 11% and our core brand drivers up a solid 23%.

Some of our top core brand performers included Transformers, up 85%, Magic: The Gathering trading card games, up 37%, and Playskool was up 34%.

And we had solid results from two new introductions, Video Now and My Little Pony.

Beyblade, in its second year domestically, performed exceptionally well representing $335 million or 11% of worldwide revenues.

It's greatest strength was in the international segment where it was introduced into a number of new markets.

Now looking at our segment results for the year.

U.S. toy segment revenues were $1.1 billion, up 6% compared with revenues of $996.5 million last year.

A number of brands performed well, including Beyblade, Furreal Friends, Video Now and core brands such as Transformers, Playskool and My Little Pony.

For the full year operating profit for U.S.

Toy was $92 million compared to $75.7 million last year, an increase of 22%.

In the game segment revenues were $804.5 million, up 9% compared with revenues of $739.8 million last year.

The board game business remained strong with many brands and products performing well, including Twister Moves, Magic: The Gathering trading card games and the Trivial Pursuit brand.

Games operating profit improved to $175.3 million compared to $124.5 million last year, an increase of 41%.

This performance takes an operating margin that was already in the high teens last year to 21.8% this year.

Revenues in the international segment were $1.2 billion compared with revenues of $970.8 million in the prior year.

This represents an increase of 8.8% in local currency and 22% in U.S. dollars.

The revenue growth can be attributed to a number of brands including Beyblade, which was strong in many international markets.

Our board game business also performed very well and we had many other core brands including Magic: the gathering, Playskool, Monopoly, and Transformers that were up significantly.

International operating profit improved by $86.1 million to $91.3 million this year, reflecting a significant revenue increase and substantial fixed cost reductions associated with business efficiency programs.

Now let's take a look at earnings.

For the fourth quarter including the charges we have already spoken about net earnings were $76.6 million, or 43 cents per diluted share, compared to net earnings of $62.2 million, or 36 cents per diluted share last year.

For the year, earnings before the accumulative effect of accounting changes more than doubled to $175 million, or 98 cents per diluted share, compared to $75.1 million, or 43 cents per diluted share in the prior year.

Earnings before interest, taxes, depreciation and amortization, were $460.6 million, compared with EBITDA of $365.4 million a year ago.

Gross margin for the year was 59% compared to 61% last year.

The 2003 results include the $18.4 million of severance expense associated with cessation of our manufacturing operations in Valencia, Spain.

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

Research & Development expenditures were $143.2 million, or 4.6% of revenue, compared to $153.8 million a year ago.

This is an area where we continue to drive efficiencies by doing more design and engineering work in the orient, although concept development is still primarily still done in the U.S. and Europe. [inaudible] expense for the year was $248.4 million or 7.9% of revenue, compared to $296.2 million, or 10.5% a year ago.

This reduction primarily reflects lower shipments of Star Wars.

Advertising expense was $363.9 million, or 11.6% of revenue for the year, up both in terms of dollars and when expressed as a percent of revenues.

This is consistent with a strategy we shared with you at the beginning of the year.

We expected advertising expenditures would increase as we continued to drive growth in our core brands and launch new products.

SG&A expense was $674.5 million, or 21.5% of revenue, compared to $656.7 million or 23.3% of revenue a year ago.

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

As I mentioned last quarter, on a 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 the full year results.

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

This had an impact of $10 million for the quarter and $26.2 million for the year.

Additionally, with the strong full year results the management incentive plan provisions are up significantly.

Distribution costs, which are volume related, also increased.

Lastly we had expenses associated with our ongoing business efficiency program.

This is where we recorded the charge of $14 million related to the exiting of leases and severance for employees of the remaining 67 Wizards of the Coast retail stores.

Amortization expense declined for the year by $18.5 million to $76.1 million, primarily reflecting lower amortization of Star Wars property rights in a non-movie year.

Operating margin was 11% compared to 7.8% last year, an improvement of 3.2 percentage points.

As I mentioned last quarter the charges we have taken did not impact our ability to achieve our stated operating margin of goal of 10% or better for this year.

Interest expense for the year decreased by $25 million to $52.5 million, due primarily to the repurchase and maturity during the last 12 months of $367 million of high coupon long-term debt.

There are a couple of items worth noting in the Other Expense line of the income statement.

Firstly, there was a charge of $20.3 million related to the December bond tender offer.

Second, as a result of adopting FASB statement 150 there was a charge of $13.6 million, or 8 cents per diluted share, related to adjusting the Lucas warrants that are classified as liabilities to their fair value.

As previously noted there had 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 the stock price.

Our tax rate for the full year was 28.3% compared to 27.9% a year ago.

Now turning to the balance sheet.

At year end we had $520.8 million in cash compared to $495.4 million a year ago.

Our cash position increased even after paying down approximately $367 million in long-term debt.

Our debt to cap ratio declined to 34% compared to 48% last year.

Our receivables at $607.6 million, or 49 days sales outstanding, decreased by one day compared to a year ago.

Inventories decreased by approximately $21.2 million, or 11% from a year ago, to $169 million, reflecting our continued focus on supply chain management.

We have reduced inventories by 50% since the end of 2000 and this is the lowest year end level in the last 14 years.

The balance sheet also shows total debt net of cash of $190.8 million, a decrease of $394 million compared to a year ago.

This reflects both our strategy to deleverage as well as the strong cash generating ability of the underlying business.

In the last three years we have reduced debt net of cash by over $1 billion.

In summary, in 2003 we grew the top line substantially, improved our profitability and significantly strengthened our balance sheet.

All of the company's major segments performed well, especially international where a combination of revenue growth and cost reductions enabled us to achieve substantial improvements.

We believe we are well-positioned for the future and remain on track to achieve our stated financial goals.

With that let me turn it back to Al.

Thank you, David.

As most of you know our strategy has been to shift significant research and development and marketing dollars to the development of core brands and new products, away from major movie entertainment properties.

We continue to believe this is the right strategy for Hasbro.

Given the change in strategy in 2001 we indicated 2003 would be the first year we would see meaningful top line growth and we did.

All of our business segments, toys, games, international and the properties group, performed well for us.

Both core brands and new product introductions contributed significantly to our growth in 2003.

As we have said, the key to our revenue growth is innovation.

It is the basis from which we have grown both shelf space and market share.

Innovation is the foundation for everything we do.

In the toy group we focus on achieving core brand growth in three ways, entering new segments, entering new categories and reinventing our existing product lines, all of which led to increased shelf space in 2003.

U.S. toy core brand drivers as a group grew 25% in 2003, with significant year-over-year increases from Transformers, Play Doh, My Little Pony and Playskool.

The strong performance from these core brands more than offset some disappointments we had in core brands like Tonka, Super Soaker and Nerf.

However, these are terrific brands and we are focused on improving their performance in 2004 with new innovative products and promotional programs.

In addition we had tremendous performance from a number of products outside of our core brands including Beyblade and Furreal Friends, both enjoying strong sales for the second year in a row.

We also added another great brand in 2003, Video Now.

This year we have even more innovation underway for all of these brands.

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

We have a solid performance in all of our major board game categories in 2003.

In fact, based on sales data from our top five U.S. retailers, for the second year in a row Trivial Pursuit 20th Anniversary Edition was the number one board game in the industry, Twister Moves was the number one new game, Telephone was the number one selling new offering in the preschool game market, and Bulls-Eye Ball was the number one new skill and action game in the industry.

We've talked a lot of about Trivial Pursuit, a great example of extending an existing brand.

In 2003 we introduced several new Trivial Pursuit products that grew the brand a strong 26%.

In 2004 we will be celebrating the 20th Anniversary Edition of Trivial Pursuit in Europe and introducing the 90s Edition in the U.S.

Other brands that have performed well in the games group include Clue Effects, Battle Ball, Silly Soccer, Operation and, of course, Monopoly.

Now let me talk a bit about the international segment.

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

As David mentioned, revenues in the international segment grew 22% in 2003, driven by growth in core brand drivers, which were also up 22%, as well as Beyblade and Furreal Friends.

All allowing us to increase shelf space and grow market share.

In addition, our continuing cost reduction efforts contributed significantly as expenses were down in local currency which is a key element in returning the business to historic profitability levels.

Bottom line, we accomplished what we set out to do.

We turned this segment around and have it moving in the right direction.

Let me summarize with a few closing points.

First, with the diversity and strength of our product line we are well positioned to achieve our longer term revenue growth target of 3% to 5% per annum.

Clearly the growth we delivered in 2003 was well above target, driven in part by the success of Beyblade.

Now I am sure some of you are asking, what happens if there's a precipitous decline in Beyblade in 2004?

Let me start by saying Beyblade was strong in the fourth quarter, continues to have momentum in retail and will be supported with more exciting new product in 2004.

As we have told you in the past there will be runners in the toy business and when we have one we will take advantage.

However, we are no longer dependent on any one brand or category to be successful.

We had strong performance across all the key segments of our business this year.

Core brand drivers as a group grew 23%.

Our games business was solid worldwide and products like Furreal and Video Now performed very well, further demonstrating the depth and diversity of our product line as well as the innovation from our research and development efforts.

In the end the toy industry is all about new products.

We are in the new product business.

Yes, there are some exceptions.

Clearly Play Doh, Easy Bake, Light Bright and our board games business would be great examples of Evergreen product lines.

But you need new toys and games each year to stay vibrant and keep the brands relevant.

It's really about delivering innovative new products each year.

As has been the case since 2001our focus has been and will continue to be on new product innovation and the development of strong global brands.

This is what will drive top line growth for our business in 2004 and beyond.

We have a strong product lineup for 2004 and we are confident in our ability to grow revenue again this year, although I suspect the growth will come in the second half of the year as consumers shop later and later and retailers continue to manage inventory levels more closely.

Lastly, and most importantly, we have a strong management team that is energized by both the challenges and opportunities that lie ahead. 2003 was a good year for Hasbro and while we have made substantial progress over the last couple of years the good news is we still have a lot of opportunity to grow and improve profitability going forward.

And we expect to achieve our operating margin goal of 12% or better by 2005.

Thank you and now David and I will be happy to take your questions about our 2003 performance.

Thank you.

At this time if you would like to ask a question please press star one on your touchtone phone.

You will be announced by name prior to asking your questions.

To withdraw your question, you may press star two Once again, to ask a question press star one.

Our first question comes from Dean Gianoukos.

Sir, you may ask your question, please state your company name.

Just a couple of questions.

First, I didn't catch maybe where you said that $18.4 million was charged for Valencia in the income statement.

Second, do you have a sense of FX to the bottom line for the quarter?

Third, what is it that's working well in Playskool and delivering the growth?

And then as far as Beyblade, you said you are going to support it.

Do you expect that brand to be up or down as you head into this year?

Thanks.

Dean, firstly the $18.4 million for the severance in Spain is in cost of goods sold.

I mentioned it as one of the reasons why our gross margin was a little bit down year-on-year.

Secondly, with regard to exchange rate in the quarter, the translation impact versus a year ago contributed about $5 million to pretax earnings, or about $3 million after tax.

There also would have been some transaction impact which would have been about another $3 million.

So we are kind of talking about $8 million pretax, $5 million after tax.

In terms of the year, the translation impact was about $11 million pretax and we also had a further impact of about five or $6 million on transactions which comes from material price variance.

So after tax it probably would have been about $15 million for the year.

And the final part of your question -

Maybe I should take that, David.

In terms of Playskool, it's coming from a wide variety of products, both in the infant category as well as the preschool category, so it's not limited to any one product.

I mean clearly Major Powers did well this year as well as our Air Activity products.

So, it's a wide variety of products.

In terms of Beyblade we have a lot of new products coming in 2004 but we are not going to get into individual line item forecasts for the year.

Okay.

Thanks.

Thank you.

Tony Gikas, you may ask your question and please state your company name.

Good morning, Piper Jaffray.

A couple questions.

Could you just comment on the success of the increase in sales and marketing spend over the holidays?

Did you reach your goals?

Do you think the return there was in line with your expectations?

And then improving the operating margin toward 12% over the next couple of years, could you give us some areas where we might see some specific cost reductions or improvements?

Good morning, Tony.

In terms of the marketing program, as we stated at the beginning of the year, we were going to be increasing our marketing spend throughout the entire year and certainly the fourth quarter was where a lot of that happens given the seasonality of the business, to support both our new products as well as our core brands.

We did that and we were very pleased with the growth we had in both those categories.

I mean, we haven't finished the postmortem to see if there was any one particular product or advertising commercial that worked as well or better than expectations or perhaps didn't meet expectations, but on an overall basis we were very pleased with the marketing effort going forward.

In terms of the cost savings, we don't have any specific targets in terms of dollars and cents.

It's an overall goal to continue to prove our efficiency.

I would suggest, though, that the supply chain is going to be one area of focus.

It's certainly an area that our key customers are looking at and one that we've been paying a lot of attention to.

But there's no area of the business that will go without further review.

Okay.

Al, do you have your market share numbers at the end of the year for the U.S. and international by any chance?

No, we do not.

That doesn't come till sometime probable in February.

Thanks, guys.

Okay.

Thank you.

Margaret Whitfield, you may ask your question and please state your company name.

Brean Murray.

Good morning and congratulations.

Thank you, Margaret, good morning.

Al, you had mentioned that the outset investing in new categories and new channels given the consolidation.

I wondered if you could elaborate on both points?

And, David, I wondered if you could give us some general comments on the trends you see in expense categories and margins over the course of '04.

Margaret, in terms of new categories, I think Video Now is an excellent example of a new category we got into this year.

When we looked at our overall product line we want to take GI Joe and Transformers [inaudible] like that into new categories.

BTR was another example of trying to take products into new categories.

In terms of new channels of distribution, probably the word new is a little misused.

I'm not sure there's any channel out there that would be new in that we haven't been involved with, but I think we are going to focus more of our attention into some of those categories.

You are talking about drug chains, you are talking about grocery chains and areas along those lines.

With regard to expense categories, we clearly don't give forecasts for individual line items.

But that said, if you look at some of the broader, medium term objectives that were previously outlined, I mean they still hold true, we would expect [inaudible] to come down a bit further as we continue to wean ourselves off of movie licenses.

Certainly '04 may go up a bit, more in '05, which is a Star Wars year.

Advertising has increased this year.

We are certainly going to maintain, maybe even increase that a little bit as we continue to drive our core brands and introduce new products.

And SG&A, we've got a stated objective out there but we want to get SG&A below 20% by '05.

So certainly we'll be trying to do that.

As a follow up could you comment on the status of your retail inventories, both in the U.S. and overseas, at year end?

Our inventory's in good shape across the board both at retail as well as at factory levels.

So they are fine.

Also with your debt net of cash coming in at good levels, does this open you up for actions on the dividend share buyback or acquisition?

Well, certainly as we approach our target of 25% to 30% the board will take a look at our cash utilization and make those decisions at the appropriate time.

Okay.

Thank you.

Thank you.

Jill Krutick, you may ask your question and please state your company name.

Thanks very much.

Good morning, Smith Barney.

In terms of shelf space you mentioned your shelf space was up over 2003.

I'm curious if you could give us a sense by how much and what your preliminary thoughts are for 2004 in terms of shelf space.

Secondly, you touched on new categories as Video Now.

I'm curious if interactive educational toys is an area that you would be looking to enter in 2004?

Then in terms of retail inventories, you commented on your products at retail.

Do you get a sense that the retailers are being much more difficult in terms of taking new product or do you sense that your product momentum is shaping up into sort of an open to buy kind of theme here at retail?

Thanks.

In terms of shelf space, I know that we increased shelf space.

I don't have a percentage.

I could go by store by category.

I know where we have improved shelf space both domestically and internationally.

But overall, to give you a percentage it's not something that we have calculated.

In terms of presenting a line for '04 and in talking to our customers about the number of skews they are going to be carrying in the spring and anticipated fall plan-a-grams, again, it looks like we will be increasing our shelf space.

In terms of the educational toy category, we've talked about this in past calls.

I think when we have innovative new product that has appointed difference will come to the marketplace in that category as well as any other category.

Educational toys, I think, has always been a good category.

I think of late some of our competitors have been recognized for innovative products.

We are working on a number of things and when we have the right product we will come to market.

In terms of our inventory, our inventory levels are very good at retail.

Overall I think inventories are pretty good.

The business was strong in the last part of the December and for sure retailers were not taking a lot of merchandise in.

So I suspect that inventories at retail overall are in pretty good shape.

In terms of our product line going forward we are confident that we are going to be getting the support we need to make the products work, at least that's the indication we've been getting from retailers thus far.

That's very helpful, Al, thank you.

Okay.

Thank you.

Karen Miller you may ask your question and please state your company name.

Good morning, Bear Stearns.

Could you please go over Cap Ex for the quarter and for the full year, please?

Karen, capital expenditure, I believe, was $20 million in the quarter and $63.1 million for the year.

Great.

And a couple more housekeeping items.

In the fourth quarter your sales were up about 12.7%.

What would that have been adjusted for foreign currency?

Talk about the year figure, you didn't give a fourth quarter figure, I believe.

I think the exchange rate impact was fairly similar in the fourth quarter, maybe marginally higher to what it had been for the year.

It was actually, just one moment, I just need to do the calculation here.

It was actually 6.8% up, absent the impact of FX for the year, 6.9%, and for the quarter it was up 7%.

So very much the same, 6.9% for the year and 7% for the quarter.

A couple more items if I may.

What else is in the Other Expense line besides the expense of the tender offer and the $13.6 million FASB 150?

We always get a number of things in there.

It includes things such as bank fees, some of the gains and losses on foreign currency, hedging or forward contracts that we do get in there, and there's some other miscellaneous items.

We always have an ongoing amount of those other items.

And lastly now that you have done such a good job in strengthening your balance sheet, what are the rating agencies, what are their comments, I think the next move for you would be a target of investment grade?

I think it's up to the rating agencies to decide.

Clearly, if you look at our numbers the kind of ratios we've got, I certainly believe the ratios we've got today warrant an investment grade rating.

I think the banks have already recognized that in the unsecured deal that we did.

I think for bonds markets they have already recognized that in the premium we've been attracting.

So I think the rating agencies will obviously look at that now.

Do you have a scheduled meeting or is there a scheduled review that you go in and, when's the next meeting.

We meet with them probably quarterly.

I think we are scheduling March for our next round of meetings with them.

Okay.

Great.

Thanks a lot.

Thank you.

Dan Perlin you may ask your question and please state your company name.

Aridian Asset Management.

Good morning.

Good morning.

Just a couple of followup questions on cash flow.

David, can you give us a number for operating cash flow and a rough idea of what working cap was for the year?

Number one.

Number two, can you talk about timing on usage for cash, let me take a step back for a second.

Over the next couple of years can you give us a framework for how to think about Hasbro's cash flow generation, what kind of magnitude that could be let's say over two or three years and then what's the timing in terms of making a decision how to best utilize it whether it's dividends or share repurchase or something else.

Operating cash flow this year was $454 million.

And we usually talk about our free cash flow and we back out our capital expenditures of $63 million.

Okay.

In terms of free cash flow go forward, we've done exceptionally well in working down our working capital over the last few years.

As I said our inventories are about half the level they were three years ago and the lowest level in 14 years.

So our ability to further reduce inventory or further reduce receivables is very limited go forward.

So I think our cash flow may be a bit lower than this over the next few years.

That said, it's still very high over the last few years by historic standards.

I think in terms of the uses of cash.

In the short term objective continues to be to pay down debt.

We still have $700 million of long-term debt on our book but that's offset by $500 million in cash.

But in the short term we will pay down debt.

And then longer term that will really be at the boards discretion but we will look at, I don't think we are going to re-embark on a program of growth through acquisition and it will really be up to the board to determine if we are going to return some cash to shareholders and how we do that, whether it's by dividend or by stock buyback.

Okay, thanks, David.

Thank you.

David Leibowitz, you may ask your question and please state your company name.

Burnham Securities and let me add my congratulations for a great quarter.

Thank you, David, good morning.

A few things, Al.

First, at the November get together there were two products you did not show us, they were under wraps.

With Toy Fair opening in two days can you tell us what we should be looking for when we go through on Friday?

I will tell you after we talk the wraps off.

Okay.

Second of all you mentioned BTR.

Can you give us some indication whether or not that's a category your carrying forward with and is there a real hope that this can blossom into something that's going to be perpetual?

Yes, we are going forward and, yes, there is a hope that it is going to blossom into something perpetual.

I think there are lots of toys you come out with that we hope are going to blossom into something perpetual, but we are still very high on BTR.

We got off to a bumpy start in '03 in the sense we didn't have all the products delivered on time and so that put us a bit behind the eight ball.

But we are clearly going forward with it in '04 and we put some high expectations for it.

Also, three categories you didn't mention were Micro Machines, Cushion, Star Wars, is there anything you can update us with those names or are they really things of the past.

Certainly not thing of the past.

Micro Machines we sold this year and it did pretty well for us.

Star Wars had a pretty good year given the fact that it wasn't a movie year.

Cush was there, it's not a lot of dollars, but it was there.

So they are ongoing product lines for sure and going forward we will have some new development on Micro Machines and certainly in '05 we have the next Star Wars movie.

Last question if I may.

Dollar sales of products not being brought into the '04 line, how much do we have to make up to be on an even footing with the year just ended?

I haven't actually made that calculation yet but clearly this is a new product business and I think rough and tough most people in this industry of our size probably have to replace somewhere in the neighborhood of 25% of the volume, sometimes a little bit more, sometimes a little bit less.

But we've had a good year.

We've got more product going forward rather than less product going forward.

Thank you very much and again great year.

Thank you.

Thank you.

Thomas Russo you may ask your question and please state your company name.

Hi, it's Thomas Russo, Gardener Russo Gardner.

Congratulations, not just on a year or the quarter but also on the direction which has been set in place over the last three years.

I think you've just shown a remarkable ability to tighten up the organization and the results are coming through, so congratulations.

Thank you, Tom.

A couple of questions, Al, first for you and then for David.

The first, Al, you cited your innovativeness and the ability to get products to market this year and when we've met in Rhode Island, you've described how the organization, by moving back to Rhode Island, has been able to become much more effective.

What grade would you give yourself at this time in terms of where you think you might end up in effectiveness in spotting ideas early and then taking them through your channel to products quickly and effectively?

So where do you stand on that process?

Well, I think we do a good job but I think there's always room for improvement.

I don't think you can ever say that you are, on a scale of one to ten, you're at the ten.

I think you just continuously drive and focus and just be relentless in trying to find new and exciting products.

And that's the way we look at it all the time.

Similarly , if you think about the amount of leverage that you might get through accessing China both for manufacturing and R&D, what remains to be extracted from that new infrastructure and how far along in the [inaudible], are you there do you think?

Well, there are certain elements that we are pretty far along.

We do a lot of engineering in the Far East.

Now we are beginning to do more of the design, the ideation is still pretty much based here in the U.S. and in Europe and we will do more and more design in the Far East and ultimately we will even do some concept development.

I think we are fairly early on in the process there in that you have to work with vendors, whether they be people who are manufacturing product for you or they are outside sculptures that design studios in the Far East.

Just like everything else, the doing of good job with the more experience they get, the better they get at the process and understand your company the more effective you become.

We are relatively early on in the design element and pretty far along in the engineering piece of that.

Okay.

Then, Al, for you, the last would be with Playskool, having stumbled badly for several years and now having seen this year's results kick in, what do you suspect the reorder rates will look like and how early are you on in the repenetration of that sector with the Playskool category?

I'm not quite sure I understand, in terms of reorder rates, I mean we presented our 2004 line.

I think it's been very well-received.

We know we are going to have overall for the year more shelf space.

The line is growing each and every year.

Order patterns are not something that you follow the same where you used to.

You work with your suppliers, the product line is put into the plan-a-gram and then you flow the goods as to merchandises sold.

So it's not a question of somebody ordering x-number of pieces as much as it is flowing the merchandise.

And that's because we, as well as the retailers, want to manage that inventory very closely.

But Playskool is an important line for us.

It's had another solid year, good year of growth and we are expecting the same in '04.

Thank you.

David, just two quick questions, the first, will there be any charges for K-B Toys that will surface this year separately from those that surfaced late last year?

No, we certainly don't believe there will be any.

Okay.

And then what is your position on currency for '04 as it might impact either translation or transaction in light of what hedges you may or may not have on?

We never do any hedging on translation.

We do do some hedging on transactions.

And we have currently locked in between, to give some certainty to the business, about 50% to 60% of our purchases which are foreign currency based next year.

So that will clearly give us a bit of a pickup versus this year because we locked in a lot of this year's at this time last year, we really get a bit of a gain go forward.

Related to that, to the extent that your sourcing is increasing through China, how does it work in terms of foreign currency exposure?

Are you effect getting dollar costs through there?

Yes.

Most of the things are Hong Kong and U.S. dollars.

I mean one thing I should also point out is while we've had getting a little bit of benefit from exchange rates we are also being offset by a lot of cost pressure in the system.

Some commodities have been going up, things like pensions and health care costs have been going up.

So those kind of things are clearly offsetting some of the benefit we are getting from exchange rates.

Thank you very much.

Congratulations.

Thank you.

Joe Yurman you may ask your question and please state your company name.

With Bear Stearns.

Nice job, guys.

Thanks, Joe.

David, speaking about your last point with cost pressures that you see for '04, explicitly are you forecasting higher raw materials costs as well as ocean freight costs into some of your planning and I was wondering if you could give us guidance for what your Cap Ex budget for '04 would be?

Thank you.

In terms of cost pressures, we are anticipating some increasing costs but we are not anticipating anything that substantial in terms of extraordinary.

One of the areas where we may see a bit of increase is out of the orient.

As we've said in the past, because we deal with third party suppliers who give us a price at the beginning of the year and basically required to hold to that, they have not been able to pass any of the cost increases from resins or packaging this year to us.

As you go into a new year and they are quoting new prices for new products you may see some escalation there.

But then again watch for still a lot of surplus capacity in the Chinese manufacturing vendor base.

There will be some pressure on them not to pass these increases through.

The second question related to, can you just remind me?

Cap Ex budget for '04.

We have previously given guidance for go forward, we think our Cap Ex will be in the $70 million to $90 million range.

That's what we believe we need to sustain our business go forward.

We came in a little bit below that this year at $63 (million).

And I think our budget for next year is pretty much in the center of the $70 million to $90 million guidance.

Okay.

Thank you.

Derrick Irwin you may ask your question and please state your company name.

Hi, I'm calling from Advest.

With regard to Video Now, can you talk about the break out between consoles and software cartridges that you've been selling?

Also, just a piece of house cleaning, the $13.6 million with regard to the warrants, was that an after tax number?

It looks like that in the press release.

Could I answer that one first?

It was both before tax and after tax, because it's nondeductible.

Right.

The only thing I will say about the Video Now hardware and software, the software has been selling at about a four to one ratio to the hardware.

Other than that we don't give specific line item information.

Okay.

Thank you.

Thank you.

Sean McGowan you may ask your question and please state your company name.

From Harris Nesbitt Gerard.

Morning Sean.

Good morning.

I'll just ask the question directly, any sense of what EPS would have been in the quarter without the various charges?

Clearly if you do the math and you add back Spain, Wizards and the deck, you get from 43 cents to 65 cents and for the year it goes from $98 to $120.

Now that said, I mean obviously, you are looking forward to next year and with said business efficiency is an ongoing process at Hasbro, so while we certainly do not anticipate charges of this magnitude, we could have some smaller charges in '04, as we indeed we did in '02.

Okay.

Regarding the Lucas warrant charge, is that why the tax rate bumped up there or were there any other charges that were not tax deductible?

Primarily due to the nondeductability of Lucas warrant value adjustment.

Okay.

Another question.

Can you talk a bit about how K-B wasn't a bigger factor in the quarter?

What assumptions are behind that in terms of repayment, what their plan is going to be?

I don't want to get in two much specific detail but clearly we are exposed to the tune of $15.5 million.

Now, we are assuming some recovery, we are being prudent in our assumption of what we might eventually recover.

So there is clearly a loss that we need to sustain.

What we are doing, is we are charging against reserves which were built up over a number of years.

We built these reserves up in order for us to be able to handle something like this if it occurred.

If you looked at the 10(Q) at the end of the third quarter, we had over $50 million globally in bad debt provision.

So most of any potential loss on K-B will be charged against that and as I say we did take a small charge against income of less than $1 million.

So then obviously it's your assessment that even net of that the reserves on a companywide basis would be adequate?

Yes, we are certainly very comfortable our reserves for bad debts are adequate.

Okay, last question.

When does the shipment of Brad's product in Europe really begin in ernest?

Are you already shipping that and can that have a nice impact on the first half?

We are shipping, began shipping in January.

We are excited about the opportunities and we will see what happens.

I would remind people, in Europe we have rights for Germany, France, some of the smaller, Belgium, Austria, countries.

We do not have rights in Spain or the U.K., and we have rights in Latin America.

So we are excited about the opportunity.

Great, thank you.

Thank you.

Our final question comes from Stephen McCoil.

Sir, you may ask your question and please state your company name.

Lord Abbott.

Two questions.

First with regards to the fixed cost restructuring program can you clarify, did you benefit through 2003 by the planned $30 million on a gross basis?

And then would you still continue to anticipate benefiting by a further, I think it's $20 million in '04, on a gross basis?

And then, secondly, you've said you expect to grow revenues 3% to 5% over time.

You obviously just ended a year with market share gains and with the anticipation of product trends continuing to be strong through 2004, is it fair to expect that you would grow in excess of that 3% to 5% in 2004?

Let me take that one then I will let David answer the other questions.

We are not going to forecast for any one particular year.

We do feel we will grow revenue, again, in '04.

And we want to stand by our longer term range of 3% to 5%.

With regard to the SG&A costs, last year SG&A was $656 million and we said to people that that included $28 million of charges associated with our business efficiency program.

So if you excluded that and got the incremental $30 million of fixed cost savings, you would have been down at about $600 million for this year and in fact we do basically believe we are there, although that's hidden because if you look at our SG&A line it shows $674 million.

And the reason it's $674 (million) and not $600 (million) is fourfold.

Firstly, about 38%, 39% of all our expenses are overseas and foreign currency.

And that had to be higher translation rates had an impact of making overseas SG&A expenses higher by $26 million.

The second thing is we have had a successful year, certainly against our original plans.

And as a result we've increased our management incentive provisions by $23 million.

Thirdly, due to the revenue growth the shipping and distribution part of SG&A, which is variable with volume, is up by $13.5 million, and finally the Wizards, the $14 million for the exiting leases and severance of employees for the Wizards stores is in this line at $14 million.

So I've given you $76 million of items.

And if you back them off of the $674 million of imported SG&A we are clearly underlying half delivered the fixed costs savings we have committed to.

I think as you go forward absolutely we expect to deliver the remaining $20 million during '04, in fact the closing of the Wizards stores contributes most of that.

So right now we are confident that we have delivered on the second hundred millions of cost savings that we've been talking about.

Maybe just quickly to followup on that, is it fair to anticipate, absent the Wizards, benefit in '04 a further $20 million?

No.

We had always envisioned it one way or the other, we would reduce our exposure or exit, either sell the business or exit the stores in some way.

So that was always part of it.

It wasn't incremental to.

Okay.

Great.

Thank you.

Thank you, all, and we look forward to seeing you at Toy Show.