孩之寶 (HAS) 2005 Q1 法說會逐字稿

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

At this time I would just like to inform all parties, your lines are in a listen-only mode until we open for questions and answers.

Also, this call is being recorded.

If you have any objections, please disconnect at this time.

At this time, with us today from the Company is the Senior Vice President of Investor Relations, and I would like to turn the call over to her, Ms. Karen Warren.

Thank you.

You may begin.

Thank you, Kathy, and good morning, everyone.

Joining me today are Al Verrecchia, President and Chief Executive Officer, and David Hargreaves, Senior Vice President and Chief Financial Officer.

To better understand our first-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 our call this morning you will hear brief remarks from Al;

David will review the financial results; and we will then open 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 are 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 Report 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 the 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.

Thank you for joining us.

Before turning the call over to David, who will provide a more detailed financial review of the quarter, I would like to share some thoughts on the first-quarter performance.

The results we reported today, although mixed, are in line with our expectations and are consistent with the guidance given on our webcast from Toy Fair.

As we indicated in February, we expect the seasonality of our business to continue the trend of being more weighted to the back half of the year, even with the shipment of Star Wars in the first quarter.

We're pleased with the first quarter Toy Segment performance, as revenues were up 9%, reflecting the initial shipment of Star Wars products.

However, the Games Segment revenue was down significantly from a year ago, primarily attributable to a decline in our trading card game business, as well as the increased seasonality of board game shipments.

In addition, the International Segment was down slightly year-over-year.

As you know, the board game business is Hasbro's crown jewel.

It is without a doubt our most profitable business and generates strong cash flow.

We (technical difficulty) and are clearly the market leader.

Given this, many of you may be concerned when you hear the board game shipments were down.

If there's one message I want to get across relative to the board game business, it's that the fundamentals of this business have not changed, and our board game business remains sound around the globe.

What has changed is the timing of when our customers take product.

Typically, 70% of our board game sales to consumers take place in the fourth quarter, with approximately 38% in the month of December.

With an increasingly higher percentage of our business continuing to shift from freestanding toy retailers to mass-market and alternate channel accounts who have a real focus on managing inventory, a higher percentage of our volume is shipping in the fourth quarter.

Now let's take a look at how some of our brands did this quarter.

There were a number of our carry-forward products that continued to do well.

Some examples include Mission Paintball, The Trivial Pursuit 1990s Edition, and Sorry Card Revenge from the game segment, along with Littlest Pet Shop, My Little Pony, and Miric (ph) from the Toy group.

Following a very good 2004, we had a successful worldwide midnight madness launch of the Star Wars product line on April 2nd, driven in part by the strong collector base.

With the movie release of Star Wars set for next month, May 19, momentum has continue to build at retail over the last couple of weeks with strength across both our Game and Toy categories, reinforcing our expectations that 2005 should be a very good year for Star Wars.

Outside of Star Wars, the action figure category, as expected, was down.

We do not expect any significant improvement in the near-term, given that we are not shipping our new Action Man and G.I.

Joe product lines until later in the year.

In the (indiscernible) electronics area we have established ourselves as a market leader with the success of VideoNow.

In the first quarter, our software sales continued to be strong with a cumulative attachment rate of 4.3-to-1 disk to players.

In general, if we look at POS for both Toys and Games through mid-April, or Easter to Easter, there is nothing that causes us to be concerned about our achieving our full-year goals.

In terms of the overall business environment, not much has changed.

We expect the retail environment in 2005 will continue to be challenging.

While we have some clarity with regard to Toys R Us, we will have to wait until later in the year to better understand the intentions of the new owners.

Additionally, we still don't know if KB will emerge from bankruptcy.

All of this has led to a lot of discussion about potential store closings.

Bottom line, it remains unclear just how many storefronts the industry may lose and when.

In addition to the sluggish retail environment, the high cost of oil continues to put pressure on raw material costs, particularly resin and transportation costs, all the more reason to remain focused on bringing new and innovative products to the marketplace, increasing our market share, and continuing to manage expenses.

Innovation continues to be the key to our success.

We have a lot of new and exciting product, much of which is shipping later in the year.

While it's not possible to review all of them today, let me highlight a few.

In the Games area, our plans call for a much broader plug-and-play offering and additional DVD and GVD games, including SHOUT About Music and SHOUT About Television.

One of our great classics, Monopoly, is celebrating its 70th Anniversary, and we will be introducing two new anniversary editions, the Monopoly 70th Special Edition Game in the US, and the Monopoly Here & Now Edition in Europe.

Capitalizing on our success in the electronics area, we have a great lineup planned for the fall, including ChatNow;

ION, our educational gaming system; and of course the reintroduction of Furby.

We continue to believe that the electronics category is a growth area for the Company.

Before I turn the call over to David, let me say that although the results we reported today were mixed, they were in line with our expectations and we remain confident in our ability to grow revenue and improve earnings this year.

David?

Thanks, Al, and good morning, everyone.

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

First-quarter worldwide net revenues were 454.9 million, down 4% compared to 474.2 million last year.

These results included a 7 million positive impact (technical difficulty) change.

As Al mentioned, we expect that most of our revenue growth will come in the second half of the year.

In addition, the first half will include a high mix of Star Wars, which has a relatively low operating profit margin due to higher royalty and amortization expenses, which are non-cash.

Given these factors, I am pleased our continued focus on containing overhead expenses enabled us to post a 1.5 million operating profit during the first quarter.

Now let's look more closely at the performance of each of our three major segments, US Toys, Games and International.

US Toys was our strongest performing segment this past quarter.

Revenues were 166.5 million, up 9% compared to 152.4 million last year, reflecting the shipment of Star Wars products in advance of the May movie release.

Operating profit for US Toys was 7.9 million compared to 1 million last year, consistent with the increasing volume, the high mix of Star Wars, as well as the benefits of our expense reduction programs.

In the Games Segment, revenues were 99 million, a decline of 22% compared with revenues of 127.6 million last year.

This is primarily due to a decline in our trading card games.

Both Duel Masters and Magic the Gathering were down year-over-year.

We also experienced lower shipments in the board game business.

And as Al has explained, we believe this is related to a shift in retailer buying patterns, not a weakness in the board game business.

The Games Segment had an operating profit of 1.2 million compared to 19.6 million last year.

This is primarily due to the decline in volume, especially trading card games, which have a higher margin than our traditional board game business.

International Segment revenues were 177.9 million compared to revenues of 180.7 million in the prior year.

This represents a decrease of 2% in US dollars and 5.5% in local currency.

The revenue decline in local currency can be primarily attributed to reductions in Beyblade and Action Man, which were not fully offset by the increase in Star Wars shipments.

The International Segment incurred an operating loss of 8.7 million for the quarter, compared to a loss of 10 million last year.

This reflects improved gross margin and reduced operating expenses, partially offset by an increase in Star Wars-related amortization.

Turning now to earnings, for the quarter we reported a net loss of 3.7 million, or $0.02 per diluted share, compared to earnings of 6.5 million, or $0.03 per dilute share a year ago.

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

Earnings before interest, taxes, depreciation and amortization were 42.6 million compared to EBITDA of 45.7 million last year.

Gross margin was 63.5% compared to 60.6% last year, primarily due to shipments of Star Wars product.

With the shipment of Star Wars product in advance of the release of the final movie, we expected gross margin to improve significantly.

Offsetting this will be increases in royalty and amortization expenses.

In fact, royalty expenses increased 25% to 40.9 million, and amortization expense increased 62% to 24.8 million.

Research and product development expenditures were essentially flat at (technical difficulty) compared to 55.3 million last year.

Selling, distribution and administration expense was down marginally at 136.6 million.

Absent the favorable impact of -- absent the impact of foreign exchange rates, SG&A would have been down 3.6 million or 3%.

Interest expense was 7.7 million, reflecting overall lower debt levels.

The other income and expense line includes a 5 million non-cash unfavorable marked-to-market adjustment to the Lucas warrants.

This compares to a 1.7 million favorable adjustment in the first quarter of last year.

The 2005 expense was primarily due to the increase in our stock price during the first quarter.

Also included in other income is a 4.1 million of interest income on a settlement of refund claims with the IRS.

The Company had a pre-tax -- had a tax expense in the quarter despite a pre-tax loss.

This is due to the fact that there is no tax deduction for the marked-to-market of the Lucas warrants.

Excluding the effect of the adjustment of the Lucas warrants in 2005 and in 2004, the effective tax rate would have been 28% in both years.

Now turning to the balance sheet, receivables were 199.6 million, down 6.6 million compared with last year.

Days sales outstanding were flat at 39 days.

Inventories increased by approximately 44 million from a year ago to 232.7 million.

You will recall, lower fourth-quarter sales resulted in higher year-end inventories.

While it will take some time to work these down, the quality of this inventory remains good.

Our debt-to-cap ratio declined to 28% compared to 33% last year.

And we ended the quarter with 877 million of cash.

In the first quarter, our Board of Directors increased the quarterly cash dividend payable in May to $0.09 per share from the previous quarterly dividend of $0.06 per share.

We also amended our bank credit agreement in March.

Highlights of the new agreement include flexibility to increase dividends and repurchase shares, an increase in acquisition capacity from 100 million to 400 million per annum.

Both of these amendments require maintaining a debt-to-cap ratio at or below 30%.

The agreement also eliminated the minimum EBITDA test and the spring lien (ph) for trademark and patent collateral.

Lastly, the new agreement reduced our interest rate by 5 basis points for certain types of borrowings.

As a result, Standard & Poor's increase its senior unsecured debt rating, acknowledging Hasbro's strong competitive position in the toy industry, good product line diversity, and moderate capital structure.

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

(OPERATOR INSTRUCTIONS) Margaret Whitfield.

Ryan Beck.

I was wondering if you can give us an update on your assessment of the Job Creation Act, and what this could mean for repatriation of some foreign earnings.

And secondly, I wondered if you could characterize the current inventory level at retail and in-house for the board game business.

David, you want to take the first one?

Certainly, we're looking at repatriation under the American Job Creation Act.

We haven't yet approved a plan with our CEO or taken anything to our Board of Directors.

The reason we haven't done that is that the Act as passed didn't fully do what it was intended to by Congress, and there is a need to pass for the IRS or Treasury Department to have a technical correction passed by the Congress in order to get the tax consequences in line with what was intended.

Right at the moment, until this technical correction is passed, it makes a substantial difference in the amount of tax that we would pay on repatriation.

And until this is really passed, we're not going to finalize our plans.

Thank you.

In terms of the inventory level of the board game business, and I'll talk on a global basis, it's not significantly different than it was a year ago.

Shipments are down in the board game business so we don't have an inventory issue at retail.

And in terms of our own inventory, we begin to build inventory in the game business, but it is not any -- it's not significantly different from a year ago.

Don't forget, we produce about 75% of our board games in our own factories.

The other 25% come from overseas because they're more electronic.

I wondered if you could give us your current industry data in terms of your market share statistics.

Well, the only market share statistics that would be out there at this stage of the game would be NPD through February.

And NPD is a derived number in that it doesn't have either Wal-Mart or Toys R Us reporting.

So I really wouldn't put a lot of stock in that number at this stage of the game.

The only thing that I would give you would be more intuitive than anything else.

Could you provide some intuitive data?

I don't think we've lost market share or gained market share.

Certainly in our board game business, I would say given the strength of Star Wars we probably gained market share in the action figure category.

But those are relatively short-term numbers.

So I don't think you can talk market share at this stage of the game, given where we are during the first two months.

How about trading card games?

Any hope for a turnaround in Magic or Duel Masters in the near-term?

Well, yes.

I'm very confident that Magic will continue to do fine.

Magic had a fabulous year last year.

It exceeded our expectations by a wide margin.

So comparing year-over-year, I'm not surprised that it's down.

You're always a little disappointed when it is, but I'm not surprised by it.

And also, the first release that we did was not as well received by the Magic players compared to last year's first release, and we have several releases to go.

The number of Magic players continues to grow.

The number of tournaments continue to increase worldwide.

So I'm certainly not concerned about Magic.

Duel Masters, a lot of people look at Duel Masters and start to compare it to both Yu-Gi-Oh and Pokemon, which is not a fair comparison.

We're trying to build Duel Masters into another Magic, only at a little lower age grouping.

It continues to do well in the hobby trade, which is where we build that business.

If you look at the mass-market, you would say that Duel Masters is not doing well.

But if you look at mass-market for Magic, you wouldn't say that Magic does very well, because neither one of those are mass-market product lines.

Now if it becomes a real hot product like the Yu-Gi-Oh or Pokemon several years ago, then the mass will tend to pick it up.

So I'm very pleased.

I'm very comfortable with Magic.

And Duel Masters is a slow build.

And I would say it will take a couple of years to build that brand to where we want it to be.

Thank you.

Tony Gikas.

Piper Jaffray.

A couple of questions.

We've seen a couple on the toy manufacturers now report a soft March quarter.

What are you hearing from the retailers in terms of the category?

What's your expectation for growth on a full-year basis in the category?

And are you seeing the level of support from the retailers that you had expected?

The second question would be, how is pricing holding up overall in the category today?

And then, any visibility on the expectations from Toys R Us post closure of that acquisition?

Let me get to the last one first, Tony.

We haven't heard anything out of Toys R Us.

There's been a lot of speculation.

As I said in my comments, I think we're going to have to wait until the new owners take hold to see what their intentions are.

I think several people, or several of us, are looking at the closing taking place during the back half of the year, and probably don't expect a lot of changes until either the back half of the year or probably in '06.

But we haven't heard anything out of Toys R Us other than the fact that they want to be in the toy business and they're going to continue to be in the toy business.

In terms of our retailers and full-year growth, we're hearing from our retailers that they're pretty confident and feel pretty good about the toy industry.

In terms of the support we're getting this year, the only thing that I can look at here at Hasbro is the support that we got for midnight madness on Star Wars.

We had a lot of support from our major accounts, both here and in the European markets, and it did very, very well.

And they were very pleased with what happened.

Easter was okay.

It came earlier this year.

But obviously this is a game that's won or lost in the back half of the year with all the new product, and that's when most of the promotions come out.

So I think other than supporting some of the movie properties that are coming out, most of the support you're going to get in terms of promotions won't come until the back half of the year.

But we haven't heard anything from our major accounts that they are disenchanted with the toy industry or don't think it will be a pretty decent year.

Obviously there are a lot of things going on out there.

The price of oil and consumer spending and all those factors will have an impact.

But other than that, there's nothing inherent in the business itself.

When you talk about pricing, are you talking about retail pricing?

Yes.

I haven't seen anything happening this year.

Obviously it's very early in the year, and any pricing competitiveness generally takes place in the fourth quarter.

I would say that over the last several years, prices in the toy industry, in the traditional toy industry, have tended to come down as opposed to go up.

And my guess is you may see a little change in that this year given that a lot of people are having to raise prices to counterbalance the increases in raw material costs.

Just a quick follow-up on that.

If we get support from Wal-Mart and the majority of the Toys R Us store base stays in place for the year, do you think that the category could show some growth this year or at least stabilize following a few soft years?

Well, that gets us into projecting, and I wouldn't want to do that.

I would certainly say that I think that Hasbro would show some growth.

I don't want to talk about anybody else in the industry.

One of the issues you have here, Tony, is what is the toy industry, because some of the electronics that we do and some of the innovative product that we're putting into the marketplace is not necessarily thought of as traditional toy product, and may not even be picked up in some of the toy numbers.

So as we look at our business, we think there is a real opportunity for us to grow this year, and we don't see anything on the horizon that's looking for a particularly down year for the industry in general.

But time will tell.

Innovation generally wins out.

If you've got great product, people will buy it.

Okay, thanks.

Dean Gianoukos.

J.P. Morgan.

Just wondering, can you quantify the drop in board games versus the drop in card games?

And then, can you also discuss whether you think the board games has been affected by what seems to be more DVD-based games?

And then finally, can you comment on your inventory overall, both how you look at it at retail and internally?

In terms of the -- let me just take the last one first.

In terms of the inventory, as I said, our inventory at retail is fine.

We don't have any issues out there.

I mean, in our business there are always pockets of inventory, but nothing that would be abnormal.

In terms of inventory in-house, it's a bit higher, and that is a carryover from last year when the fourth quarter was not as successful as we had anticipated it.

But the inventory is in good shape.

It's good inventory.

We shouldn't have any problem selling it and working it down over the next several months.

In terms of the trading card game business and the board game business, obviously we're not going to give you specific numbers.

But a much greater percentage of the decline in the segment came from the trading card game business as opposed to the board game business.

I think that answers your questions, Dean.

Have you seen an impact on the board game business due to DVD games?

Yes, it's a little (indiscernible) to tell.

I would say that in some respects, if somebody's going in and they're looking to buy Trivial Pursuit for the first time, they might have bought the Trivial Pursuit DVD version versus the non-DVD version.

On the other hand, if I look at Trivial Pursuit, the entire brand, it's grown significantly over the last couple of years.

So I think in that category, in that case I would say no it hasn't.

Some of the game videodiscs like SHOUT About Movies, is somebody buying that versus the board game?

It's a little early to tell.

And I don't necessarily think it will be one-for-one cannibalization, but I'm sure there is somebody out there who would have bought a board game and now they are going to buy a DVD game.

I think over time we have to look at the overall category of a given brand.

And as we do more of those games, we will be able to get a better read.

So if we do a Candyland version with a DVD, is the overall Candyland brand growing.

We expect it will grow.

So I would say net-net it's incremental business and not a cannibalization.

Okay, thanks.

David Leibowitz.

A few unrelated questions.

Number one, this is, I believe, your fourth Star Wars movie that you have had product for.

This is the third coming.

, Okay.

On the prior two, what percentage of your sales of product were done before the movie actually opened, and what percentage came once the movie was out in the field?

David, I don't have that number handy, and I don't want to reach for that.

But I would say that as a percentage more volume would come after the movie than before the movie.

Understood, but no idea about whether it's 50, 70, 80%?

I would be guessing.

I don't have the number in front of me, and I don't want to guess.

Okay, I'll call back later in the day then.

Next question, if I may.

In terms of your gross operating margins, are we going to see sequential improvement this year?

Between quarters, probably not, David, because I think highest Star Wars shipping quarter, and Star Wars has a very high gross margin, is probably going to be the second quarter.

And then it would probably be slower in the third and higher again in the fourth as we support the DVD release.

So I think that we will probably see a small reduction.

For the year our gross margin would still be up, but I think quarter for quarter it will reduce a little bit as we go through the year, which is also common for us.

We usually start up about 60 and then drop as we go through the year.

And that is because a lot of our newer product, which is yet to be valuated in (ph) etc., comes later in the year.

And the carryover product, which is higher margin, ships primarily early in the year.

So that wouldn't be out of line with prior years.

And the last question before I go back into queue, the retail take-away versus shipments, are you out of balance at the moment, both domestic and international where there is less take-away than shipping in?

No.

If you take the games, for example, we talked about our board games business shipments in being down, but we talked about the POS on games being pretty good and similar to last year.

I think if there's any out of balance, it is still that so much of our product retails in the last part of the year to consumers, and we have had a habit of trying to ship in product obviously from our perspective more evenly throughout the year.

And this is an ongoing trend that's been going on for several years now, both domestically and internationally, that the retailers, with there just-in-timing into the ordering patterns and they're better technology that allows them to flow merchandise, just want to take it later and later and later.

So there will be an ongoing trend, I believe, to less shipments by manufacturers being done in the first quarter and indeed the first half of the year.

Let me just add to that.

POS off-the-shelf take-away is running well ahead of shipments, certainly domestically where we have much better POS numbers than we do in the international arena.

I say international because we get good numbers in Europe, and you don't see it much in the way of take-away in some of the other countries.

But David is correct;

POS is running ahead of shipments by a fairly substantial margin.

Thank you very much.

I'll be back in the queue.

Tim Conder.

A.G. Edwards.

Two questions here, just to continue that line of thought on the market share data.

If you would ex out Star Wars and then just look at everything else in your business, how is the POS trending year-to-date here?

And then secondly, if you could make some comments on Furby, how that is shaping up at this point?

In terms of POS excluding Star Wars for the first three months, it's still pretty good.

When you look at POS, you can look at raw numbers.

But then I think you have to go back and sort of peel the onion back a couple of layers because you're going to look at what kind of promotions you ran in the first quarter this year versus promotions you ran last year.

And that can vary substantially from one year to the next, both here and in Europe.

But as I said in my comments, if we look at POS through April, comparing Easter to Easter a year ago, there is nothing in the POS that would cause us to think we shouldn't be able to achieve our full-year revenue and profit goals for the year.

Obviously when you look at POS during the first two weeks of April, you're going to get a skewing for Star Wars, and that could take away from something else.

And then it begins to level off.

So you can't just look at the raw numbers themselves.

In terms of Furby, it's on track for its reintroduction.

There's a lot of enthusiasm for it, and we're anxious to ship.

Thank you, gentlemen.

Elizabeth Osur.

It's Liz Osur at Smith Barney.

Just two quick questions.

We keep hearing year after year, quarter after quarter about the shift in retail orders to the second half to the fourth quarter.

Could you just address when you think this will come to an end or just the percentage of sales that you wouldn't expect to end up in the fourth quarter as sort of an end point of when we reach the end to this transition?

And then second question, if you could kind of touch on video game competition and how concerned you are about Sony's new PSP and other trends in that market?

In terms of seasonality, I don't know if -- when you get to the end, because as retailers begin to continue to manage their business more effectively and have better information systems, and we understand how better to manage the supply chain, there is going to be continuous improvement on a go-forward basis.

I think probably, except maybe for another year or two, that will be more incremental with the mass-market and other channels.

I think what you see happening right now is with some uncertainty in the freestanding toy retailer, who typically would take goods in earlier in the year because they are in the business year-round, as they begin to focus much more on managing their inventory, I think that's a bigger shift that you're seeing this year.

And that will be probably impacting next year as well.

But going forward I think you're going to continue to see incremental moves towards seasonality.

If you're selling, as we do, 70% of our board game to consumers in the fourth quarter and 38% of it in December, there's going to be a continuing drive to have shipments more match consumers' buying habits.

And we have to manage through that and the retailers have to manage through that as well.

They have got to be able to move all those goods through and get them onto the shelves.

And as those systems improve, you'll see that seasonality continue, all else being equal.

In terms of the video game business, I don't know that the video game business is going to be any more or less competitive with the new PlayStation Portable than it was with PS2.

You get ups and downs depending upon what piece of software is out there, and we've been competing with the video game business for a number of years now.

I wouldn't look at the PSP being significantly different.

I can't imagine it is going to have any bigger impact than when GameBoy Advance first came out.

Okay, thanks.

Sean McGowan.

This is actually Gerrick Johnson for Sean from Harris Nesbitt.

Two questions regarding games.

First on -- for any comments on Duel Masters.

It's interesting, so can you tell us what portion, or give us a channel breakdown for Magic and Duel Masters and what portion of each brand is shipped to specialty and what portion to mass?

I don't have that number in front of me right now, but I would tell you that if I look at Magic the Gathering and I look at the top 10 customers we have around the world, only 1 mass merchant would turn up in the top 10.

And that, depending upon when you look at that, not always is in the top 10 for Magic.

So Magic does not have a big impact in the mass-market channel.

But I don't have the exact number.

Duel Masters should be the same, although it might be a bit more mass-market as the brand builds, because it is more directed towards some of the kids.

But that's about the best I can do.

Typically speaking, neither one of these would have big mass-market distribution unless Duel Masters or a trading card game really takes off and begins to develop the attributes of the promotional toy like Pokemon did and Yu-Gi-Oh did.

But Duel Masters continues to be the number one trading card game and among the top-selling toys of all toys in Japan.

So it's doing very well.

It's very strong.

But it takes a couple of years for that business to develop.

And it all comes in the early stages from the hobby channel more so than it does mass.

Next question on games, would you say board games and trading card games may have lost shelf space and open-to-buy dollars at mass at the cost of games and TV games and things of that nature?

I don't think trading card games have lost shelf space to either board games or plug-and-play games.

I mean, these are trading cards and they're found on racks closer to the register.

They don't really get shelf space in the traditional sense.

In terms of plug-and-play, most of that tends to be in the electronics area.

So I'm not sure -- I certainly do not see Hasbro losing any shelf space to its traditional board games to either plug-and-play or DVD games.

DVD tends to be in a different section of the store than the traditional board games aisle where you have got to have them alphabetically.

But we have certainly have lost any shelf space.

And in terms of open-to-buy, I haven't seen any evidence of that yet.

Thank you.

John Taylor.

I'm with Arcadia.

I've got a couple of questions.

Could you talk a little bit about what's going on brand trend wise in international?

Are there any sort of big-ups or big-downs that are influencing that first-quarter comparison?

And then maybe give us a quick update on alternative channels distribution in the US as that has become a theme that people are kind of talking about.

And then, Duel Master in Japan, I wonder if you could give us a sense of what's going on there in terms of shipments or over-the-counter.

In terms of brand trends internationally, I don't see anything significantly different internationally than I see in the US.

The only thing I would say is in Europe the year probably suffered from a decline in Beyblades this first quarter where Beyblades had been a much bigger brand in terms of the percentage of their business then in the US.

Beyblade -- if we look at the total volume over the years done in Beyblade, 60% of that was done in the international markets, primarily Europe, versus about 40% in the US.

And typically speaking, we do 60% of our business domestically and 40% internationally.

So that impacted their first quarter.

Other than that, they had a very successful midnight madness in Star Wars.

Their games business is solid.

Action figures, they're suffering from the decline of Action Man and they have got a new line coming out later in the year, as we have with G.I. Joe.

So I don't see any major trends that are different in the international arena than there are in, say, North America.

And I say North America, and I am sort of putting Canada in there as well.

In terms of alternate channels, we continue to grow our business significantly in the food, drug chains.

The business continues to grow well.

So I think over time you'll see a greater percentage of our business in the alternate channels than have been in the last couple of years.

But mass is also picking up.

So the split between mass and alternate channels will take some more time to develop, even though the alternate channels are growing at a double-digit rate.

And I'm sort of excluding from that warehouse clubs, which we've been doing business with for a long time.

But the electronics store, electronic boutiques stores, some of the music stores where our DVD games and GVD games have done well, that all continues to grow double digits.

In terms of Duel Masters in Japan, it continues to be very strong.

It is clearly the number one trading card game in Japan.

And when we look at overall sales in Japan, Duel Masters has been pretty consistently in the top 10, and in many cases in the top 5 for quite a while now.

So it's doing very, very well in Japan.

I wonder if I could follow up on the international brand question.

So if you were to look at the year-on-year decline in board games, was that more concentrated -- I mean, was the decline about equal in both markets or was that more concentrated one versus the other?

In the trading card business the decline was more concentrated in the US market than it was the international market.

Some of that has to do, though, with the introduction of Duel Masters, which was introduced earlier in the US than it was in the international market.

But in terms of Magic, Magic has pretty much been the same.

In terms of the board games business, I don't see any dramatic difference between -- in terms of shipments between the international and European and the US market.

Great.

Thank you.

David Leibowitz.

Thank you very much.

Very briefly, you mentioned in the press release that sales had a favorable currency impact of 7%.

Is that -- internationally?

Is that --?

(multiple speakers) million dollars on the conference call, we said.

And what about earnings?

Really we made a loss during the quarter.

So when you translate the loss, which was very, very small, back at foreign currency rates, it's really insignificant in the first quarter.

And the tax rate as a consequence of this?

The tax rate, as I said, absent the impact of the non-deductibility of the marked-to-market of the Lucas warrants, would have been 28% both this year and last year.

And the last question, if I may.

The third and fourth quarter have been playing tag with one another as to which would be the largest quarter of the year in the last five years.

Traditionally at Hasbro the third quarter was the largest, and the last several years the fourth quarter was the largest.

How do you see the year showing up this year?

That's a hard one, David.

I think the business, again, it gets more seasonal, and it wouldn't surprise me if the fourth quarter were larger than the first quarter.

But that remains to be seen.

Thank you.

That's it.

Thank you, everyone, and have a good day.