孩之寶 (HAS) 2004 Q4 法說會逐字稿

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

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

And also at this time this call is being recorded.

If you have any objections to please disconnect.

At this time with us today from the Company is the Senior Vice President of Investor Relations, Ms. Karen Warren.

Thank you, ma'am, you may begin.

Thank you, Kathy, and good morning everyone.

Thank you for joining us.

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

To better understand our fourth quarter 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 on today's call.

If you don't have a copy of the release it is available on our website at hasbro.com.

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 product and brands.

We will conclude by opening the call to your questions.

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.

These forward-looking statements include expectations concerning earnings, operating margins, revenues, and the retail environment.

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

Some of those factors are set forth in our annual report on Form 10-K, including under the heading forward-looking information and risk factors that may affect future results, and our quarterly reports on Form 10-Q, including under the heading forward-looking statements and factors that may affect future results, and in our current reports on Form 8-K and in today's press release.

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

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

Now I would like to introduce Al Verrecchia.

Al.

Thank you, Karen, and good morning, everyone.

Before turning the call over to David to take you through a detailed review of our financial performance, I'd like to make a couple of comments about our overall business, particularly the steep decline in U.S.

Toys segment operating profit and the softness we experienced in the boys business globally, as well as the 2005 product offering that we are very excited about. 2004 was indeed a challenging year for the toy industry.

Consumers shopped later and there was a fair amount of uncertainty in our customer base.

In this environment we delivered $3 billion in revenues compared to 3.1 billion last year, which on a constant dollar basis represents a 7 percent decline in revenue.

Yet, we were still able to marginally improve profitability and generate good cash flow ending the year with no net debt.

Going into the year we anticipated the steep decline in BEYBLADE.

However, we expected our new product offerings to offset this decline and while they performed well we did not anticipate the softness in our boys business beyond BEYBLADE.

Overall on a worldwide basis we had a good year in the games business, driven primarily by DVD and plug and play games and a number of other new product introductions.

Although the traditional board game business was a little soft here in the U.S., which we attribute primarily to the overall softness at retail.

Let me now talk about 2 of the more significant factors contributing to the decline in operating profit in the U.S.

Toy segment.

The overall decline in the boys business, including BEYBLADE, had a significant impact on the Toy segment profitability given that the boys business is a much higher margin business.

We also had a major new product launch last year with VIDEONOW Color.

An established market leader, VIDEONOW Color was voted toy of the year by Toy Wishes Magazine.

Last year we sold more than 1.2 million players in the U.S. with a strong attachment rate of 3.5 to 1 discs to players.

And in the first 5 to 6 weeks of 2005 we continue to sell significant software.

In the PLAYSKOOL division in the fourth quarter we introduced VIDEONOW Junior, which got off to a strong start with preschoolers further solidifying the strength of the NOW brand.

There's no question that VIDEONOW Color, from a market acceptance and brand standpoint, is a clear success.

From a financial standpoint, it was not nearly as successful.

There are a couple of reasons for this.

First of all, VIDEONOW Color is a longer lead item and we had to make a call in the Far East based on early test market results which later proved to be incorrect.

The bottom line, we overestimated the market demand.

Additionally, given the popularity of VIDEONOW Color retailers used the item to drive store traffic.

Early in the holiday season one key retailer featured a player at a significant discount.

Given the price competition in the marketplace it wasn't long before that became the everyday price, creating significant margin erosion for our customers.

We were then asked by our customers to work with them to mitigate some of the margin erosion.

Given the success of the now brand and the importance of the brand going forward, we felt it was the right decision to work with our customers.

We created and funded a number of promotional programs to support both our customers and the brand.

Unfortunately this had a significant negative impact on the U.S.

Toys segment profitability.

Going forward we have a very strong product offering from the NOW brand that we are showcasing at Toy Fair with more cutting edge innovation and much improved profitability which we believe will further solidify our leadership position in the Tween Electronics category.

In addition, we will be introducing I-DOG, a musical interactive pet, and, of course, you've all heard about Furby.

The new Furby is larger, smarter, better and we're looking forward to its return.

A couple of industry experts that saw our Tween Electronic line commented.

Hasbro is the Company to watch out for.

They really are going to blur the vision between toys and electronics.

In the boy's area we expect a substantially improved line in 2005 with many new product introductions and the release of Star Wars, Episode 3, in May.

We have a new and expanded transformer line and in 2006, in association with Dream Works and Paramount Pictures, we anticipate the release of a live action motion picture based on transformers with Steven Spielberg as the executive producer.

For both G. I. Joe and Action Man our plans include major changes to the line.

We are basically reinventing these brands.

In 2005 our game strategy includes a strong lineup building off of our core brand successes including the 70th anniversary addition of Monopoly.

We also plan to expand our DVD and plug and play platforms as well as introduce many new innovative games across our entire portfolio.

Next week we'll be showcasing our 2005 toy and game product lines at Toy Fair, which we will webcast.

In closing, while 2004 was below our expectations, we remain focused on creating value for our shareholders.

We are very excited about the opportunities that lie ahead and we believe our 2005 product line confirms that the investments we're making in innovation and new product development are working.

With that, let me turn the call over to David.

David.

Thanks, Al, and good morning, everyone. 2004 was a year during which we continued our focus on expense reductions, generated good free cash flow and delivered earnings per share ahead of last year despite lower revenue.

We have now fully delivered on our commitment to take 200 million of expenses out of a business over the last 4 years.

In addition, with our continued focus on generating cash flow and paying down debt we have strengthened the balance sheet to the point where we ended the year with significant cash net of debt, something we have not achieved since 1997.

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

For the year revenue was 3 billion compared to 3.1 billion last year.

These results include a 77.9 million positive impact from foreign exchange and a 37.7 million decline in revenue related to the closing of the Wizards of the Coast retail stores.

The performance of our 3 major segments, U.S.

Toys, Games, and International, was mixed.

U.S.

Toy segment revenues were 952.9 million for the year compared to 1.1 billion last year, reflecting softness in our boys business including a 97 million reduction in BEYBLADE.

For the full year operating profit for U.S.

Toy was 7.2 million compared to 92 million last year.

The main contributors to the reduction in Toy profitability were -- the lower volume of high-margin boys brands; the relatively low margin on VIDEONOW; and the expenses associated with ensuring a clean market going forward; and the charges associated with organizational and starting changes we made in December.

In the games segment revenues were 796 million compared with revenues of 804.5 million last year, a decline of 1 percent.

Many new product introductions, including DVD and trading card games, performed well.

Partially offsetting an over weakness in the traditional board game business.

Our trading card game business finished the year up with domestic launch of Duel Masters more than offsetting the impact of one less relate(ph) to Magic: the Gathering.

Games operating profit decreased to 137.6 million compared to 175.3 million last year, reflecting a change in the mix of our trading card game revenues and higher development and royalty expenses associated with DVD games.

Revenues in the international segment were 1.2 billion compared to a year ago this represented an increase of 1 percent in U.S. dollars and a decrease of 5.6 percent in local currency.

While we had a number of strong performances from a number of core brands and new product introductions, this was offset by a weakness in the boys business, including a $132 million decline in BEYBLADE revenues.

Excluding BEYBLADE the international business was up a strong 15 percent year-over-year.

International operating profit increased significantly to 142.1 million compared with 91.3 million last year, due primarily to increased gross profit arising from higher revenues on high margin products such as Magic: the Gathering, and FurReal Friends.

And because 2003 included the charge related to ending toy manufacturing in Spain.

Now let's take a look at earnings.

For the fourth quarter net earnings were 82.1 million or $0.44 per diluted share compared to net earnings of 76.6 million or $0.41 per diluted share last year.

For the full year earnings were 196.2 million or $0.96 per diluted share compared to 175 million or $0.94 per diluted share before the cumulative and effective accounting change in 2003.

Additionally, earnings per share for 2003 have been restated due to the required adoption of EITF 04-08 in the fourth quarter of 2004.

This accounting change required us to include the dilutive effect of our convertible debt in the computation of diluted earnings per share.

There is a table in our press release today that provides quarter and full year diluted earnings per share computations.

Earnings before interest, taxes, depreciation and amortization were 438.2 million compared with EBITDA of 460.6 million a year ago.

Gross margin for the year was 58.3 percent compared to 59 percent last year.

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

Research and development expenditures were 157.2 million or 5.2 percent of revenue, compared to 143.2 million or 4.6 percent of revenue a year ago.

The increase reflects higher development costs associated with electronic toys, electronic games, and DVD games.

Royalty expense for the year was 223.2 million or 7.4 percent of revenue, compared to 248.4 million or 7.9 percent of revenue a year ago.

This reduction primarily reflects lower BEYBLADE revenue partly offset by an increase in Star Wars and the Disney charge as well as entertainment based on DVD games.

Advertising expense was 387.5 million or 13 percent of revenue for the year, reflecting increased support for a number of major product launches.

SG&A expense was 615.4 million or 20.5 percent of revenue, compared to 674.5 million or 21.5 percent of revenue a year ago.

We are pleased to see this decrease as a percent of revenue and on a dollar basis.

Savings associated with cost reduction programs and a reduction in bonus accruals were partly offset by the impact of translating international costs to higher foreign currency exchange rates.

Absent the impact of foreign exchange rates, SG&A would have been down 76 million or 11.3 percent.

Amortization expense declined for the year by 5.5 million to 70.6 million.

Last year's results included write-downs related to certain discontinued product lines.

Operating margin was 9.8 percent compared to 11 percent last year.

The decline can be primarily attribute to the U.S.

Toys segment.

Interest expense for the year decreased by 20.8 million to 31.7 million, reflecting our lower debt levels.

There are a couple of items worth noting in the other expense line of the income statement.

2004 includes a 12.7 million positive adjustment to the Lucas(ph) warrants which are carried on our balance sheet as a liability at fair value.

In 2003, this amount was a charge of 13.6 million. 2004 also included a 9 million charge to write-down the value of our common stock in Infogram's(ph).

Finally, in 2003, there was a 20.3 million premium related to the December bond tender offer.

Our tax rate for the full year was 24.6 percent compared to 28.3 percent a year ago, due to a higher proportion of our earnings being made in lower tax rate jurisdictions.

Now turning to the balance sheet.

At year-end we had 725 million in cash compared to 520.7 million a year ago.

Our cash position increased even after paying down 55.7 million in long-term debt during 2004.

Our debt-to-cap ratio declined 28 percent compared to 34 percent last year and is within our target range of 25 to 30 percent.

Our receivables at 580.4 million were down 27.2 million compared to 607.6 million last year.

Days sales outstanding were flat at 49 days.

Inventories increased by approximately 25.4 million or 15 percent from a year ago, to 194.3 million, with approximately 7 million of this increase due to the impact of foreign exchange and the balance from lower than expected fourth quarter sales.

The balance sheet also shows cash net of debt of 80.2 million.

This compares to debt net of cash of 190.8 million a year ago.

During the year we generated 359.5 million in operating cash flow or free cash flow of 279.3 million after deducting capital expenditures of 79.2 million.

Over the last 4 years we have generated free cash flow in excess of 1.4 billion.

In summary, I believe that over the last few years we have demonstrated financial discipline, strengthened our balance sheet and built a more stable product base.

As a result, we were able to deliver solid financial results in a year when revenues were down.

Going forward, I believe Hasbro is well positioned to continue enhancing shareholder value.

With that, Al and I will be happy to take your questions.

Thank you.

And at this time if you would like to ask a question please press star, 1 on your touch-tone phone and we'll now take your questions.

Once again, please press star and then 1 on your touch-tone phone.

Thank you.

Our first question comes from Felicia Hendricks.

Your line is open.

Please state your company name.

Hi, with Lehman Brothers.

David first wanted to thank you for that diluted EPS table.

It was extremely helpful.

I have a couple of questions.

One is just a short question.

Wondering if you could just touch on what was the impact to board games in the quarter.

Usually that's a pretty good business for you.

The bigger picture, you, Al, did mention that with the VIDEONOW you worked with retailers on that product and just given the continued margin pressures in general at retailers, I'm wondering if you're seeing kind of a slippery slope.

In other words, are there other areas that you're going to be asked to step up to offset the margin pressures that they're seeing in your other lines?

And that's it.

Thanks.

Okay.

Thanks, Felicia.

In terms of the board game business, both here and in the U.S., the board game business was stronger in the fourth quarter than obviously the first 3 quarters.

Board games come very late in the year.

I think we saw a little bit of softness in the U.S. side and we attribute that to the overall softness at retail.

I think what happens during the last couple of weeks of the holiday season when folks have bought that key item or two that they want, then they're sort of going down the game aisle looking for a few more gifts, they start to pull some games off, and that's when an awful lot of games are sold.

But there's a general slowdown.

Instead of picking up 2 or 3 extra games, they may pick up one or 2.

But other than that the board game business was healthy.

It was up in Europe although it came very, very late.

There were, I think it was during the last week before Christmas, not only us, but a lot of our retailers saw double and triple digit increases in the toy business compared to a year ago.

In terms of VIDEONOW Color, I think a couple of things happened.

I think first of all, our retailers used that, as I said a moment ago, as a loss leader.

Secondly, I thought what we saw in the market was a general decline in prices in consumer electronics.

So clearly you could go out and buy a portable DVD player at a much lower price than in the previous year.

So that drove down the overall price levels which we had to respond to.

Going forward, we're going to be coming out with a -- an expanded line in the NOW category but we will be at lower price points and we will be more profitable.

As we take use of newer technology and we develop products recognizing that we have to come at a lower price point.

In terms of working with retailers, those are always done in an ad hoc basis.

Certainly in my years of business in the industry it's not a standard practice.

I think you do it periodically where facts and circumstances require it.

I don't think it establishes a precedent, though.

It's not something that I'm particularly concerned about.

Okay.

And as we think about VIDEONOW as kind of a razor/razor blade type of product your tire(ph) issue actually seemed nice.

Just wondering, though, if we should start seeing in '05, because that product, even though you're making some new introductions, that product has been out for a while now.

Should you start to benefit from the software part of it?

From the higher margin software part of it?

Yes, we should.

If we look at the -- we still sold even this year a number of black and whites where the attachment rate was a little over 5.

So I think you'll see the attachment rate on VIDEONOW Color grow in '05.

And then we've got, you know, new versions of -- and an expanded line in the VIDEONOW brand coming.

So I would expect to see the tie ratio increase.

Great, thank you.

Our next question comes from Sean McGowan.

Your line is open.

Please state your company name.

Hi, from Harris Nesbitt.

David or Al, whichever, can you comment on plans for repatriating foreign income?

And, David, could you perhaps give a little more detail on how to get to the 25.7 million in aggregate pretax charges?

Thank you.

Okay.

Firstly, as I think people know, we have a lot of cash that we've generated overseas, and indeed we have, you know, continued opportunities to invest that overseas.

However, with the passing of the American Jobs Creation Act there will be an opportunity to bring a large amount of this back at effectively an 85 percent reduction on the normal tax that you'd pay.

We're still looking at the guidance which has come out of the Treasury Department.

I think their first guidance came out about January 14th.

Clearly there are, if you repatriate these funds, there are some things that you can do with it.

Invest it in the business, pay down debt, but also things that you can't do in terms of buyback stock or pay higher dividends.

So we're really, at the moment, still analyzing all the requirements and trying to work out a strategy which we'll eventually take to our board.

But I think it is highly likely at this stage that we will see some opportunity to bring some of the cash back at a beneficial tax rate.

But as I said, there are limited uses that you can put that to.

Okay.

And the unusual charges in the fourth quarter? --.

We mentioned on the earlier call there was a charge of about 9 million related to our Disney license.

There was a charge of about 9 million related to a further write-down of our Infogram stock.

That was originally on our books way back for about 60 million and we've had successive write-downs and it's now on our books for about 4 million.

I don't think we can anticipate any more of these in the future.

The final charge was in a region of 7 million and that was fore headcount reduction, say severance and outplacement costs associated with the actions that we took in the fourth quarter, primarily in the Toy group.

And we've mentioned those back in December.

Are those all in the fourth quarter and can you tell us where they show up on the P&L?

They're all in the fourth quarter.

The Disney charge is primarily in the royalties with a little bit on amortization.

The Infogram is in the non-operating expense and I spoke about that.

The headcount reduction is primarily in R&D and SG&A lines of the statement.

Thank you.

And in the segment basis it's primarily in the Toy group.

Thank you very much.

Our next question comes from Jill Krutick.

Your line is open.

Please state your company name.

Thanks very much, Smith Barney.

I was hoping you could elaborate a bit on the weakness that you saw in the boys business.

Which product lines specifically were you feeling the pressure and are there other competitors that were doing better in certain other areas within boys, perhaps video games was eating into that business as well as the games business?

I'd like your views on that.

Secondly, what kind of inventory levels are you seeing at retail now, both domestically and internationally?

And I might have 2 more if I have time.

Thanks.

Thanks, Jill.

Good morning.

In terms of the boys business, let me speak specifically about the action figure business.

The action figure business was soft both here in the U.S. and in Europe.

A number of our customers complained that it was not a good year for action figures.

For us, G. I. Joe, Transformers and Action Man, all action figure categories, were down.

There are a couple of reasons for it.

I think, G. I. Joe, first of all, doesn't have TV entertainment, and, therefore, that hurt it a bit.

Transformers, we had television.

It got on late and it didn't resonate well with kids this year.

Action Man, a similar story.

Transformers, we've got a strong line coming in '0, and we're expecting the motion picture in '06.

And both G. I. Joe and Action Man, we're really reinventing those lines and you'll see brand-new product lines coming probably late in '05, early part of '06.

But I don't think it was a result of specific competition from either video games or anything else.

It just happened to be, I think, a weak year overall in the action figure category.

I mean, those brands have done well when they've had strong video game seasons in the past, so I don't think it's necessarily reflective of competition from that category of product.

In terms of inventory levels, generally speaking our inventory levels are good.

There are always a couple of pockets either with a given customer around the world or a given product category but on balance we're fine with our inventory levels both at retail and our own warehouses.

Okay. 2 other questions, if I may.

The timing of the Star Wars sell-in, if you can give us a sense of how you feel that's going to play out up until the movie release.

Secondly, cash uses.

If you anticipate returning more cash to shareholders over the next year.

Thanks.

Okay.

I'll let David talk about the cash to shareholders.

Would you just repeat that question on Transformers again, Jill?

No, it was the timing of Star Wars.

Oh, the timing of Star Wars?

We should be able to start shipping that primarily in the second quarter.

We've shipped a little bit of product, the teaser product, but it's primarily a second quarter line this year with the movie coming in May.

Okay, thank you.

David.

Yes, as far as returning cash to shareholders, in a very short term I think I made it clear that any funds that we bring back from overseas, paying a high dividend or buying your stock back is not an acceptable use of those funds.

However, I also mentioned on the call that over the last 4 years we generated 1.4 billion of free cash flow.

And assuming if we continue to generate at that rate go forward, which is certainly our plan, we would clearly have to examine the various uses of cash.

We're certainly not going to sit on a pile of cash because that gives you a very low return.

Acquisitions aren't embedded in our core strategy of growing 3 to 5 percent a year, but obviously you'd never say never to a compelling acquisition.

So I think absent the compelling acquisition it most likely that over the coming years we will increase the dividend or buy stock back or a combination of both.

But ultimately that's a board decision.

Thank you very much.

Thank you.

And our next question comes from Tony Gikas.

Your line is open.

Please state your company name.

Good morning, Piper Jaffray.

Couple questions.

Previously you had given us some long term operating margin goals.

If you will, maybe you could just give us a quick update there.

Second question.

As it relates to Star Wars could you just refresh us on what were the total sales related to the previous Star Wars product line over the life of that line.

And what -- give us any parameters at all as what the impact could be this year and also maybe characterize the impact to EPS.

I think it was pretty limited in the last go around.

Also, how well does the video release of the Star Wars movie late this year, historically how has that impacted sales of the toy product line?

Good morning, Tony, it's Al Verrecchia.

Let me go to the Star Wars information first.

Other than the first movie back in 1999, I guess it was, we typically don't release individual product line revenues.

So I'm not going to get into what the specific product line did.

I will say that Star Wars had a good year, a very good year in '04.

It was one of those lines that surprised us on the upside in terms of our original expectations.

So it's given us a good feeling about the outlook in '05, both us and our retailers.

But ultimately we'll have to see once the movie releases and, you know, as to how well it does.

In terms of the video release, videos typically are always better than not having the video.

Some video releases have significant impact on the business, others less so.

So we'd certainly much rather have the video release come because it gives us another piece of entertainment to market against but I wouldn't want to get into any forecasting as to what the actual results will be.

And I'll let David comment in a minute in terms of profitability because there is a difference between profitability and cash, which we have spoken about.

In terms of our goals, we had set a goal of 12 percent operating margins and all better.

That goal was for '05.

That's still a goal, although I'm not going to forecast that given some of the uncertainty going on in the marketplace today.

There's a possibility we're facing a number of store closings and in the short term that can have -- it can have an impact on your business, but certainly, you know, we need to improve our operating margins and that goal is still there, as is the goal to grow the business on average 3 to 5 percent a year over time.

So we've not backed away from that.

I just don't want to forecast that given some of the uncertainty that's existing with our customers both here and elsewhere in the world.

David, you want to comment on the cash/non-cash profitability of Star Wars?

Yes.

Hi, Tony.

I think the last big year for us on Star Wars was 2002.

Clearly at that time we were making statements to you all that Star Wars was not a very profitable product line for us.

Certainly below the average, and not much better than a breakeven.

And we were doing that because we had a lot of prepaid royalties and a lot of amortization for product rights to amortize.

In January of '03, you will recall that we successfully renegotiated our license with Lucas.

They gave us a $85 million reduction in our royalty commitments and also gave us an extra 10 years, from '08 to 2018, in which to exploit the property and earn out the minimums that we had committed to.

As a result of this, Star Wars is back in a mold where it will be a profitable product line for us.

Not enormously profitable, because we still have quite a bit of royalty and amortization to expense.

And certainly that's on our income statement basis.

On a cash flow basis, most of the royalties, other than $35 million, which is yet to go out of the door, were prepaid, and the amortization is a non-cash charge.

So as of today, we're sitting here with kind of 16 years to sell and exploit and earn out against one of the most successful toy line properties ever, and we've only got 35 million of cash to go out of the door.

So from a cash flow point of view, this is going to be very positive in '05 and over the next 13 years.

Okay, thanks.

That's very helpful.

Can I have just a couple quick follow-ups?

Could we assume that the next launch of the Star Wars product line could be similar in size to the last launch of that product line, just directionally, guys?

Then second question, what percentage of toys in 2004 were technology or electronic, you know, oriented, and what should that trend be in 2005?

Well, we're not going to forecast the volume on Star Wars even directionally.

Obviously, we're excited about the line.

It had a good line in '04 and we feel good about it for '05 but time will tell.

I don't have a specific percentage of toy and games that were electronic, per se, because there are products that, you know, have electronics incorporated in them that would not necessarily be considered, you know, electronic toys in the way you and I might think of them.

I wish I had that number but I don't.

But clearly Tween Electronics going forward we expect to be a bigger part of our business and I think technology-based toys will be a bigger piece of the business going forward.

Now, DVD games are sort of technology-based.

They might not be considered electronic toys in the true sense of the word, the way we think of them, the way a VIDEONOW or handheld video game may be.

But I don't really have that overall percentage.

Okay.

Thanks, guys.

Thank you.

And our next question comes from Margaret Whitfield.

Your line is open.

Please state your company name.

Ryan Beck, good morning.

I wondered if you could -- a few questions.

Will BEYBLADEs be ongoing in'05?

Furby, what was the revenues last reported in '99 and when will the product make its debut and then if David could just give us some general directional thoughts on gross margin and expense trends in '05.

Margaret this is Al.

Hi, Al.

Yes, we will have BEYBLADE in the line in '05.

In terms of Furby, I don't believe we ever released any actual numbers in terms of Furby.

There's been speculation out there that there was many as 40 million pieces sold but those aren't our numbers.

It will be released later this year, probably a fall item.

Okay.

Margaret, in terms of any guidance for '05, I mean, one thing is we were going to do an analyst meeting at Toy Fair in about 2 weeks time and that's usually when we give any guidance go forward.

So that will be webcast, so I think you'll have an opportunity to listen to that.

I think just briefly, though, I mean, the big impact is clearly Star Wars.

Star Wars has a very high gross margin and drives gross margin improvement, but at the same time, it has relatively high royalty rates, so royalties will probably go up, and it has high amortization, so amortization will probably go up.

Offsetting that, Star Wars generally requires less advertising than other product lines because of the movie driving the interest.

So I think, you know, that's probably basically going to be the impact of Star Wars and maybe when we meet at the analyst meeting we might be able to give a bit more on the overall '05.

Could you comment on your overall market share, how it might have changed in '04 and specifically how it might have changed in your main categories?

Well, I think clearly the -- we don't have the final market share numbers, but I would say that, you know, given the decline in BEYBLADE and the overall weakness in the boys business, you'll probably lose some market share.

On the other hand you pick up market share in other categories.

I mean, market share is a very dangerous number in our business because individual products in a given year you can pick up and then get back large chunks of market share, but in the main I think our market share probably remained flat with a year ago.

Okay.

Thank you.

Thank you.

And our next question comes from David Leibowitz, your line is open.

Please state your company name.

Burnham, good morning,

Good morning, David.

Don't you live in Philadelphia?

Not that I'm aware of, but who knows.

Few questions, totally unrelated one from another.

First, what are your balance sheet goals for '05 in terms of debt and equity and how much debt can we pay down?

Okay.

David?

Yes, we have, I think, some long-term debt maturing in, I think, it's November of '05.

And if I remember correctly, I think that's in the region of 70 million.

So we would clearly expect to pay that down without refinancing that.

And then in '06, we have another tranche of our long-term debt maturing and we would expect to pay that down without refinancing that.

I think the '06 notes, it's about 32 million that is due.

So other than that, we really don't have any proposals at the moment to go back and retire long-term debt.

On the balance sheet today, you will see that the current installment of long-term debt increases significantly.

That's because our contingent convertible debt is putable at the end of '05.

Now, we do not anticipate that the holders of those converts will put it to us, but we have to, for accounting rules, have to classify it as current portion long-term debt.

If they don't put it, that will go back into long-term debt at the end of '05.

Okay.

Second question, what percentage of the '04 line has been dropped, or how many dollars worth of sales were dropped going into this year?

David, I don't have that number.

I mean, typically in this industry, you know, anywhere between, you know, in the range of 20, 25 percent of your line can be new every year, sometimes a little bit more, sometimes a little bit less.

But I don't have that number specifically.

Okay.

And you don't have a dollar amount, which is more important than the percentage of the line.

I meant percentage of sales that will not be carried forward into '05 from '04.

No.

Okay.

Just 2 last questions.

Is there any way we can compute from the numbers that are publicly out there how much revenue you need from Star Wars to avoid a hit to the balance sheet for your carrying value?

No, it would -- if you looked, we do disclose how much prepaid on Star Wars is and I think it's disclosed how much amortization is there.

You would have to kind of form some kind of expectation of sales we can generate between now and the end of 2018, and kind of divide back into the outstanding amounts to be earned off and come up with a rate and try and work out if that's within our variable margin.

Rather than you have to do that, I can tell you that we're very comfortable at the moment that we will earn out our commitments to Lucas over the, you know, extended time frame that we now have.

And given that, although we're certainly not anticipating any new movies, we do believe that there will be ongoing support either publishing or TV animation or whatever, to the Star Wars brand.

And lastly, when we go through the showroom next week, which lines are you most excited about, A, and B, which lines might be the sleepers that you're having your fingers crossed that this really could take off?

David, that's like asking which one of my children do I love the most.

Obviously, there is one who you do prefer but that's neither here nor there.

But, obviously there are toys that the traders already giving you kind feedback on.

There are those that are in the line, perhaps not on a unanimous vote of the committee, but based on what you're hearing, you consider, yes, these might actually be the ones that takeoff.

And there's always a hierarchy.

Let me not use the word takeoff.

Certainly we're going to be showing you at Toy Show the key product lines for 2005.

We don't -- during the last couple of years we haven't brought down the entire Hasbro portfolio but we focus on those top fifty products or product lines between toy and game that we think will be the real drivers in 2005.

So what you hear at Toy Show will be those items we think will be the real drivers in 2005.

Okay.

Thank you.

Thank you.

Our next question comes from Dean Gianoukos.

Your line is open, please state your company.

Hi.

Just a few questions.

Can up give us the FX impact to the bottom line?

Can you give us the decline in BEYBLADES for the fourth quarter?

And then also, I know you talked about some of the details of the charges.

Can you actually give us the dollar amount and the different income state line items?

If you don't want to do that on the call we can call afterwards but it would be good to get that information.

Finally, going forward, should we expect a more normalized tax rate?

Thanks.

They're all yours, David.

I think in terms of where the charges were, I did give Sean, I think, some kind of indication that Disney was about 9 million, Infogram's about 9, and the headcount reduction, severance, outplacement about 7.

And the P&L lines, Disney was royalties and a little bit of amortization, Infogram's non-operating and headcount primarily R&D and Admin.

Can you break that up at all or you don't want to give that level of detail?

You mentioned a couple line items.

-- information so I can do that in a one on one I'm sure.

Thank you.

In terms of, if you could just remind me what the next part of it.

The quarterly decline on BEYBLADE and the FX for the bottom line.

In terms of the BEYBLADE it was 59 million in the fourth quarter, down 59 million, because I think we'd been running somewhere around 80 million and it probably dropped to just over 20.

In terms of the impact on the bottom line, that's always kind of difficult because there are 2 impacts.

There's the impact of translation and there's the impact of the transactions where our international affiliates are buying from the orient in either Hong Kong or U.S. dollars.

But the impact of translation during the fourth quarter was about 5 million on the earnings before income taxes.

Okay.

And then just the tax rate going forward.

Should we expect to the go to normalized -- what you've had in the past?

I think it will be more normalized, yes, because as you are seeing from our segment reporting our U.S.

Toy business did not have the best of years and International had a very strong year and we generally have lower corporate tax rate jurisdictions overseas.

And I think it's the U.S.

Toy segment profitability we covered next year that will take us back to a more normalized rate.

Having said that if we do bring any money back under the American Job Creation Act, while it's a much reduced tax that we'd have to pay there still is a tax.

So for an example, if we were to bring 500 million of funds cash back from overseas we would probably have a tax bill in the region of $30 million or so to do that.

So that could clearly distort the rate if, indeed, that happens.

Okay.

Thanks a lot.

Our next question comes from John Taylor.

Your line is open.

Please state your company name.

Hi, I'm with Arcadia.

Good morning.

Good morning, John.

I got a couple of questions.

I think you mentioned that you did something to help, A, their push product through the channel, or something in the fourth quarter that impacted what add to sales.

Did you do anything in terms of inventory valuation on the excess inventory that you were not able to sell in the fourth quarter -- that's the first question.

Second question is, I wonder if you could hang some numbers on gross margin issues looking forward, i.e. kind of what the delta in plastics prices is and what kind of labor inflation you're seeing in China, and the -- as I recall, BEYBLADE was north of 400 in '03.

I might be wrong on that.

Say it again.

335 million.

335.

Okay.

So you've still got a little bit of BEYBLADE, it looks like.

I wonder if you could talk about, you know, kind of visibility and how the merchants are dealing with that.

Last question is, alternative channels.

We've heard a little about, you know, retailers like Albertson's and drugstores and stuff like that.

Maybe talk a little bit about how meaningful that is and whether that's a sustainable trend in your view in terms of growth.

Thank you.

Okay, John.

In terms of the inventory valuations.

Well, first in working with the retailers what we did is put some promotional programs together and did some promotions around the software in addition to the actual VIDEONOW Color players.

We did take some inventory valuation for what we had in our warehouse and that's been reflected in our 2004 results.

I'll let Dave talk about the gross margin and some of the cost increases and how that's shaping up for this year.

In terms of BEYBLADE, it will be in the line for '05.

It did reasonably well this year in terms of our expectations, you know, and we'll see what happens in '05.

In terms of the alternative channels, and I'm referring now to grocery, drug chain, some of the specialty stores, the amount of business we put through those channels this year grew substantially.

Overall they're still a relatively small percentage of our business, but it is growing both here and internationally, and particular over in Europe, and we are continuing to focus on those channels.

Each of them have a little different model to do business and we'll have to, you know, adopt our product line to meet their needs, but we think it's an important channel of going forward.

As do we think, you know, our direct to consumer business going forward will play a larger role.

David, you want to talk about the gross margin cost increase impact?

Yes, I mean, clearly there are cost increases particularly in resins and oil-based products.

I think let's not forget that we have a very large part of our business which is the board game business which isn't so impacted, it is more board and print.

In addition, to the extent that our international business is buying from the orient in either U.S. or Hong Kong dollars and the euro and pound sterling have been significantly increasing in value over the last couple of years, that's done a lot, certainly, for the European business to mitigate the impact of these cost increases.

Obviously we don't know where rates are going to go, FX rates, are going to go next year.

But having said what I have, that rates have mitigated a lot of the impact so far for Europe and we do have a board game business, the overall impact of the cost increases coming out of the orient are not that dramatic that we expect a decline in gross margin next year due to it.

Certainly some of the costs we've managed to pass on, you know, to our customers, because a lot of them bring product in from the orient as well and they've had the same kind of cost increase pressures and are familiar with that.

So we'll certainly be able to pass some of those on and we're not expecting gross margin deterioration because of this next year.

Okay, thank you.

Let me follow up on BEYBLADE if I can.

What was left or what you did do in '04, could you give us U.S. versus non-U.S. breakdown of that revenue?

In terms of '04's volume, in terms of BEYBLADE, it was a bigger volume in the international arena than there was in the U.S. business.

It's probably maybe 70/30 international versus U.S. in '04.

BEYBLADE was actually more successful in Europe than it was in the U.S.

It had a very, very strong year in the U.K. in '03.

It's one of those unique products that happened to do very, very well in the U.K., disproportionate to typically what happens with our -- the mix of our business.

And that's what drove a higher percentage of the business in the international arena, both in '03 and '04.

And, therefore, the decline was also greater internationally than it was in the U.S.

Okay, thank you.

Thank you.

Our next question comes from Carla Cassella.

Your line is open, please state your company name.

Hi, I'm Zephrin on Carla's behalf.

We've heard recently from some toy retailers that reduced advertising has contributed to the decline in toy business in the U.S. over the past several years.

I wondering if you had a comment on this, if you agree with this and what are your plans for your advertising budget for '05, or, you know, do you have any changes in your advertising strategy coming up in '05?

Well, you know, in terms of the percentage, we actually spent more on advertising dollars this year than we did last year.

I think was probably you're referring to is that the advertising has become very fragmented.

So you have that message coming at you or going at the consumer from a variety of sources, and it causes it to be fragmented.

But we, and I can't speak to anyone else, we certainly increased our advertising and promotional activities in '04 versus '03.

We would expect that trend to continue in '05.

Okay.

Great.

Thank you.

Thank you, our next question comes from Tim Conder.

Your line is open.

Please state your company name.

Thank you.

A. G. Edwards.

Couple of questions here.

Given the trend in sales for movie sequels, I know there's a little bit of variance but in general they seem to be a little lower thereafter.

Are you anticipating more in Star War sales from the Episode 3 here than Episode 2?

Second question, Duel Masters, how did that perform relative to expectations in '04?

And then could you maybe talk about what your expectations are looking out a couple years for DVDs as a percentage of your overall game sales?

And then finally, just maybe outline for us here in '05 the TV programming for Transformers and G. I. Joe.

Okay.

In terms of movie sequels, I'm not sure I'd look at Star Wars Episode 3 as a sequel, although I guess in the terminology of Hollywood it probably is, but this is sort of an ongoing story there, and in terms of our forecast, we're not going to forecast any specific numbers.

I think we've been, over the history of Star Wars, been surprised too many times.

We have forecasted up and it's come down, we've forecast it down, and it goes up.

All I'll say again is the brand had a very good year in '04 and it certainly raised the confidence of both us and our retailers in terms of the '05 expectations.

But, you know, we'll see when the movie breaks in May.

In terms of Duel Masters, I'd say Duel Masters met our expectations.

It was neither below or above expectations.

It was stronger in some geographies of the world than others but it was on balance with our expectations.

In terms of DVDs going forward, you know, I think it will depend on a number of factors.

DVD games have been very successful both here and in Europe and in particular in the U.K..

And depending upon when interactive television and more broadband gets into the home, technology is going to change and I think you'll see us migrating to those new technologies.

Our strategy is that people are going to play games in a variety of formats, everything from a board game to a cell phone, and we want to make sure that they have the ability to play Clue, Risk, Scrabble, any of those games in each and every one of those formats.

So it's not so important to us as to which format.

We have to be there with all of them and we'll see how technology develops, but I would think that DVD games would certainly be popular for the foreseeable future.

In terms of TV programming, we have TV programming, new programming coming for both G.I.

Joe and Transformers, along with a redo of the G.I.

Joe line.

That will come during the back half of the year, early part of '06.

Okay, thank you.

Thank you.

Thank you.

And our final question comes from Thomas Russo.

Your line is open.

Please state your company name.

Hi, good morning.

It's Gardner Russo Gardner.

You have mentioned that you have in your inventory of historic hits latent revenues going forward and you've pointed that to "My Little Pony" and other release over time.

What's your appraisal of the vitality of that portfolio and what are you doing at the moment -- launch into exploiting that?

Good morning, Tom.

It's Al.

Hi, Al.

We think the portfolio brands that we have sort of in the vault is very, very valuable.

I think Furby is just one example.

Littlest Pet Shop is another one.

We've introduced Littlest Pet Shop.

We're bringing back Furby this year, we brought back Pony this year and we've got some other surprises that you'll see both at Toy Show and the years ahead.

But, you know, we have a strong portfolio of brands and, you know, we clearly believe that there's an opportunity for us to exploit those brands and be successful with that.

And we're going to continue to do that.

So I think you're going to see a lot of the products that we've -- and brands that we've used in the past come to market again.

Now, we're going to contemporize those products so you'll see a bigger, better, more exciting Furby this year than you saw the time before.

And each and every one of those products will be enhanced for today's kids.

But it's a great portfolio, a lot of opportunity, and we continue to mine it.

Great, great.

Could you also just talk for a second, Al, about maybe if any new hires to help build out your team that you might highlight now if not during our upcoming -- ?

Well, there haven't been any, you know, significant changes in terms of the senior management group who are the people that you would typically see.

So, you know, you're in the Toy Fair, and you're at the analyst meeting.

You're going to see Brian Goldner, Dave Wilson, Frank Bifulco, Dave Hargreaves and others.

Certainly this past fall we had sort of a reduction in force where we wanted to realign our development efforts into some of those categories that we see as the growth opportunities going forward.

So, we're clearly bringing on people in the engineering and R&D area that have experience in the Tween Electronic category, people who can help develop the kinds of products we see as the opportunity going forward.

Same thing in the games group where plug and play and DVD games.

Those aren't people that you would typically see every day, but we're constantly looking to improve the skill set here at Hasbro, not just for new hires but also from training and developing and giving people experiences.

We've got a top leadership development program we've been operating now for a couple of years where about 200 of the senior managers around the world are attending a one week development course.

And we've started that in August of '83 and we'll continue that now.

About 130 people have been through it thus far so it's training development as well as a blend of new hires.

Thanks a lot.

Okay.

Thank you and we invite all of you to join us at Toy Fair and look at what we think is an exciting 2005 product line.

Thank you all for joining us this morning.