孩之寶 (HAS) 2005 Q2 法說會逐字稿

Good morning and welcome to the Hasbro's second quarter earning's conference call.

At this time I'd just just like to inform all callers that you are in a listen-only mode till we open for questions and answers.

Also, this call is being recorded.

If you have any objections please disconnect at this time.

And with us today from the Company is the Senior Vice President of Investor Relations.

Thank you, Ms. Karen Warren, you may begin.

Thank you, Cathy 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 second 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 finan -- financial measures discussed on today's call.

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

During our call this morning Al will discuss key factors impacting our results and David will review the financials.

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 to risks and uncertainties.

These forward-looking statements include expectations concerning our performance in 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 statements.

Some of those factors are set forth in our annual report on Form 10-K included 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 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.

I'm very pleased with our second quarter results as revenues were up 11 % driven by significant Star Wars volume as well as strong performances from a number of other brands.

Net earnings were up 56 % primarily due to the increase in revenues as well as increased interest income and a favorable tax settlement which David will cover later.

The USToys segment was the strongest performing business unit with revenues up 25 %.

As expected, it benefited more from Star Wars than both the game and international segments.

Additionally, we had strong performances from Nerf, Transformers, My Little Pony and Littlest Pet Shop.

The international segment had solid top line growth and improved profitability year-over-year.

The international results reflect strong performance, not only from Star Wars, but from a number of other brands as well as significant growth in all of our main categories.

Games segment revenues were down from a year ago primarily due to the significant decline in our trading card game business as well as the increasing seasonality in our board game business.

Domestically we experience softness in both Duel Masters and Magic, The Gathering trading card games, although Duel Masters continues to be strong in Japan.

Magic: The Gathering has been a great brand for more than 10 years and it has grown significantly over the past few years.

We believe the softness this year is due in part to the weak reception of our February release and the popularity of poker.

Later this month we'll be releasing a new edition of Magic: The Gathering.

This release, coupled with television programming behind Duel Masters over the second half of the year, will hopefully improve the performance of both of these brands going forward.

As we discussed last quarter, the fundamentals of the board game business have not changed and the business remains sound around the globe.

In fact, year-to-date point of sale data, or consumer take-away, both internationally and domestically has been very good.

What we continue to see is the change in the timing of when our customers take product.

Given the consumer base seasonality of the business, 70 % of the board game retail sales occur in the fourth quarter with over half of that volume in the month of December alone.

We expect an increasingly higher percentage of our total volume to be shipping in the fourth quarter.

As our customers, especially free-standing toy retailers, continue to be focused on keeping inventory levels down.

In fact, one of our key customers has made inventory reduction a top priority for this year.

As we look out to the remainder of the year, we expect the board game business to have a good year both internationally and domestically.

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

Certainly Star Wars is very strong in the first half, particularly in the second quarter.

While our plan this year calls for less Star Wars volume in the second half of the year, we do have a number of promotional programs with retailers to keep the Star Wars momentum going including promotions to coincide with back to school, Halloween, Thanksgiving and the holiday season, as well as the release of the DVD.

While the dates of the DVD release has not been announced it is expected to be sometime in November.

I would point out that not all of the Star Wars volume is incremental.

The strength of the brand does impact our other boys action figure brands.

On the plus side, Star Wars was not the only brand that performed well in the quarter.

In our girls business My Little Pony continues to be a strong performer around the globe as does Littlest Pet Shop, which is in its first year of reintroduction.

Nerf continues to be a solid contributor to the toy results and we're getting good early reads on one of our new initiatives for 2005, B-Daman.

Capitalizing on our success in the electronics area we have a great line-up plan for the fall including ChatNow, I-Dog and of course the reintroduction of Furby.

Our technology enabled games are also doing well.

In the plug and play category TV Mission, Paintball and the Star Wars Lightsaber have been particularly strong performers in the second quarter.

Monopoly was up significantly in the second quarter particularly in Europe where we had our 70th anniversary celebration last month.

The celebration was supported by a fully integrated slate of advertising promotions and public relations activities.

We have similar plans for the U.S. market beginning this fall and therefore expect Monopoly to have a very good year.

Also this fall we will be introducing additional DVD and GVD games including Shout About Music and Shout About Television along with a couple of new and exciting editions of our more established brands, Clue DVD and Trivial Pursuit Extreme.

In terms of the overall business environment, not mu -- much has changed since our first quarter conference call.

What has changed is that the general retail environment seems to haved improved during the past couple of months.

The question is, will it continue and for how long?

Also, it now I appears that KB should emerge from Chapter 11 next month with a new management team that have a great deal of toy retailing experience.

Also, potential store closings at Toys R Us will probably be more of an issue in 2006 versus 2005.

Lastly, there's been a fair amount of commentary concerning any number of factors impacting the cost of doing business.

Whether it is a potential evaluation of the Chinese Yuan, the high cost of oil which impacts petroleum based products, fuel costs or the increased cost of potential delays in moving goods from the Far East through the West Coast ports.

These factors will continue to pose challenges and only time will tell how significantly they will impact the cost of doing business.

Therefore, I thought it would be helpful if David gave you a perspective on how some of these factors could impact Hasbro's course of doing business.

In closing, while we are pleased with our second quarter performance and it reinforces the confidence we have in our ability to achieve our full-year financial goals, it's still a challenging and somewhat uncertain environment with a lot of business still to be done in the all-important second half of the year.

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

David?

Thank you Al and good morning, everyone.

Before looking at the second quarter results in detail I would just like to recap some key facts regarding Star Wars.

Firstly, driven by the release of a movie in May, Star Wars has been a major contributor to our second quarter revenues.

And we expect that this will be our highest quarter in terms of Star Wars shipments.

Secondly, as previously discussed, given the high royalties and the expense associated with amortization of our property rights, Star Wars is a less profitable brand than other boys toy lines.

It is, however, very cash flow positive because the amortization of property rights is a non-cash item and with our final payment of 35 million during the second quarter all guaranteed royalty payments have now been paid.

We do not expect to make any further cash royalty payments through to the end of our agreement in 2018.

And finally, given the historical performance and the con -- current success of Star Wars as well as Lucas's plans of a property in the future, we remain confident that sales over the remaining life of the contract will more -- will be more than sufficient to recover our related balance sheet assets.

Now our second quarter results beginning with revenue.

Worldwide net revenues were 572.4 million, an increase of 11 % compared to 516.4 million last year driven by the strong performance from Star Wars.

USToys was our strongest performing segment this past quarter.

Revenues were 209.3 million, an increase of 25 % compared with revenues of 167.2 million last year.

In addition to Star Wars, we had solid contributions from a number of our other brands including Nerf, Transformers, My Little Pony and Littlest Pet Shop.

USToys had an operating profit of 14.6 million compared to an operating loss of 7 million last year.

This improvement is consistent with the increase in volume and lower fixed expenses.

In the games segment, revenues were 142.9 million, a decline of 12 % compared with revenues of 161.6 million last year.

This is primarily due to a decline in trading card games with both Duel Masters and Magic: The Gathering down year-over-year.

We also experienced lower shipments in the board game business and as Al said we believe this is related to a shift in retail of buying patterns, not a weakness in the board games business itself.

We expect the board game business to have a good year, but with sales more heavily weighted to the fourth quarter.

Operating profit in the games segment was 13.4 million compared to 28.7 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.

Even with the year-over-year decline, it is worth noting that games made a significant contribution to our profitability for the quarter.

International segment revenues were 210.2 million compared with revenues of 179.2 million in the prior year.

This represents an increase of 17 % in U.S. dollars and an increase of 12.5 % in local currency.

The revenue growth can be attributed to Star Wars as well as a number of other toy brands including Playskool and My Little Pony and board games and to our Parker Brothers and Milton Bradley brands.

International segment operating profit was 4.5 million for the quarter compared to 2.8 million last year.

This reflects a higher gross profit associated with the increase in volume partially offset by increases in Star Wars related amortization and royalty expenses as well as increases in SD&A which primarily relate -- relate to exchange rate movements.

Turning now to consolidated earnings.

For the quarter we reported net earnings of 29.5 million or $0.13 per diluted share.

This compares to net earnings of 18.8 million or $0.06 per diluted share a year ago.

Earnings before interest taxes depreciation and amortization were 85.9 million compared to 63.7 million last year.

A 22.2 million improvement.

Gross margin improved to 60.7 % compared to 59.8 % last year.

The primary contributor to this improvement is the high mix of Star Wars product.

And as I mentioned royalty and amortization expenses increased significantly for the quarter due to the shipment of Star Wars product.

Selling, distribution and administration expense increased marginally to 141.3 million.

However, absent the impact of foreign exchange rates SD&A would have been down 1.1 million.

Interest expense at 7.6 million was marginally down compared to last year.

However, interest income which is in -- which is reported on the other income and expense line improved by 4.2 million year-over-year due to higher cash balances and higher deposit rates.

Also in other income and expense was a 5.7 million non-cash favorable mark-to-market adjustment to the Lucas warrants.

This compares to an 8.5 million non-cash favor adjustment in the second quarter of last year.

The tax expense line for the quarter, and year-to-date, includes a 4 million favorable adjustment primarily resulting from the settlement of a prior period IRS examination.

Excluding this favorable adjustment and the effect of a fair value adjustment related to the Lucas warrants in both 2005 and 2004, the year-to-date effective tax rate for 2005 would have been 27 % compared to 28 % in 2004.

Now turning to the balance sheet.

Receivables were 348.2 million compared to 307 million last year.

An increase of 41.2 million.

This increase is consistent with our revenue growth and days sales outstanding were 55 days compared to 54 days last year.

Inventories increased by 25 million from a year ago to 252.5 million.

The increase is an anticipation of higher second half sales.

The balance sheet also shows total cash net of debt of 27.1 million compared to debt net of cash of 215.5 million a year ago.

This is a year-over-year improvement of 242.6 million.

And our cash position is after second quarter payments totaling 100 million including 65 million related to reacquiring our digital gaming rights from Infogram's and our final 35 million guaranteed royalty payment to Lucas.

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

In the second quarter, the board of directors authorized a share buyback program for up to $350 million.

Through the end of the second quarter the Company had repurchased 360,000 shares at a total cost of 7.3 million.

Before we open the call to your questions, I would like to take a few minutes to give an update on some issues we are frequently asked about.

First, the American Job Creation Act.

We are finalizing our plans to repatriate cash and it is our expectation to bring back a significant amount of cash in the second half of this year.

Secondly, there has been a lot of discussion and media attention given to the many issues that are part of doing business today.

Everything from power outages in China to transportation costs.

Thus far, we have managed our way through most of these issues.

However, let me go into a little bit more detail on a couple of these issues.

Firstly, commodity prices.

Especially oil-based plastic resins.

Overall, we do not believe at this time this will have a material impact on our gross margins.

There are a number of reasons why I say this.

It's -- to begin with, about a third of our global business is board and trading card games to which the major raw material components are paper, board and print, not oil-based components.

Another significant part of our business, the international business, buys the majority of their toys from the Far East paying in U.S. dollars.

In recent years, the value of foreign currencies such as the EURO and British pound have appreciated by more than the increase in commodity prices.

This means their costs have not increased in the local currencies in which they sell and generate their revenues.

This remains true even though there has been some depreciation of these currencies in the last few months.

Finally, even for our USToy business on average only 23 % of the cost of the line is related to plastic revenue.

We are not trying to suggest that there is no margin pressure from commodity price increases but that is not as great as some people suggest.

The last item I want to mention is the potential appreciation of the Chinese Yuan.

If and when this occurs we would expect it to happen gradually over a period of time.

In addition, we anticipate the impact on finished goods prices would be partly offset by the reduction in cost of raw materials imported into China and our vendors absorbing some of the impact.

Even if it should happen this year, at this stage, we do not believe it will be material to our 2005 results.

In closing, as we've said, there are many challenges in the industry, but as we look out to remainder of the year, we believe we are well positioned to achieve our full year financial goals.

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

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Sean Mcgowen.

Your line is open.

Please state your company.

From Harris Nesbitt.

Hi guys.

Hey Sean, how you doing?

Pretty good.

I think David said that the -- the other income line had 5.7 million favorable adjustment from the Lucas warrants.

What else was in that line because it was higher than that?

David.

Yes, the other thing that I said was in there was the interest income, which was up 4.2 million in year-over-year due to higher cash balances and higher deposit rates.

Okay.

Great.

And I think you touched on this.

It might have been you, Al, talking about retail takeaway and what it -- what does that indicate for board games?

Can you give us more specifics on -- on what retail is telling you about board games through the first half?

Yes, Sean, the board game takeaway both domestically and internationally is up over a year ago.

It's been particularly strong in Europe where our POS -- it varies by country but it's been up anywhere between 8 and 15 percent compared to a year ago.

It's up less than that here domestically, but there's nothing happening at POS that would indicate to us that the board game business, is -- is --is struggling or is soft.

Most of the decline that we've had has been in the trading card game business, but people are watching inventory and are not taking in some of the board games like they used to in the past.

In the past, you'd be -- we had an early buy program.

It was low risk for the -- most of the free standing retailers to take in some of the board games early to help us smooth out our production.

That's not happening this year as they really focus on trying to -- to match their purchases with retail sales.

Okay.

Have we cycled the -- the trading card declines at this point?

Well, there's a couple of things going on there and -- and some of it is, we 're -- we're certainly able to document.

The -- the first release we put out this year was not well received by Magic Place and -- and they told us that.

We're going to be coming with a new release later this month.

We think it's a lot better and we're hopeful that that'd help turn the business around.

The other aspect that is affecting the business, at least we believe it is, although I don't have any -- any quantitative data yet to support that, is the popularity of poker.

I mean, we've seen some of the tournament play decline a bit and that's because we think some of the people are moving to the -- the poker tournaments where obviously the prizes are -- are much richer than they are --

You need to have a $7.5 million Magic: The Gathering tournament that's all.

No big deal.

Okay.

So time will tell, but we think the business is going to begin to turn around but time will tell.

We'll see how this second release goes.

All right.

Thank you very much.

Okay.

Thank you.

And our next question comes from Tony Gikas.

Your line is open.

Please state your company.

Piper Jaffray.

Good morning guys.

Hey Tony, how you doing?

Terrific, thanks.

Couple of questions for you.

Could you give us an update on the 12 % operating margin goal, where we're at there?

The ad spend in the first half of this year looked relatively flat to the prior year, which looks pretty impressive given that you've launched some new products, this -- some significant product lines the first half of this year.

What's the trend on the ad spend in the back half of the year?

And then third question, maybe you could just give us a directional comment on the state of the private label business at retail.

Is that business on de -- on a decline this year?

I'll let David talk about the operating margin and then I'll come back and talk about the advertising and product label -- or private label business.

I -- I -- I think if you talk about the operating margin goal, I mean, really the setting that goal goes back to sort of early '01 when we actually weren't making any money in '00 and we said we'd hope to get to 10 % by '03 and 12 % by '05.

Clearly we achieved the 10 % by '03.

Coming into this year we said that the 12 % for '05 remained our goal, but we were certainly cautionary in that there was a lot of difficulties within the industry including the retail environment and the situation with Toys R Us and KB and the commodity cost increases which we keep talking about.

And whilst we were cautionary but we may not achieve it this year we said that that still remains our goal and I do not think we -- we've changed our position since then.

Tony, in -- in terms of advertising accounting requires us to accrue the expense at a rate that we think will match the full year expense and we do that in proportion to the amount of advertised products sold in any one given quarter.

That's not necessarily how many dollars were actually spent or how much media was actually shown during the quarter.

In terms of our advertising we'll certainly be aggressive during the all in part -- portant second half of the year.

As of I'm sure, the rest of the initiative will be as well.

In terms of the private label business, I haven't seen any dramatic changes.

If anything, we saw a little bit of a pullback where some of our customers were going back to focusing more on -- on branded goods and a little bit less on private label, but I don't think I've seen any strategic change into thinking of -- of our major customers both here and abroad.

Okay.

Thanks.

Thank you.

Thank you.

Our next question comes from Margaret Whitfield.

Your line is open.

Please state your company.

Ryan Beck.

Good morning.

Hi, Margaret.

How you doing?

Good, Al.

Wondered if you could characterize the size of your Star Wars business and relate it to the '02 volume you did in the same period?

I would say -- let me talk about Star Wars in relationship to the first two movies.

I would say that -- I would not expect the brand to be as strong in terms of absolute dollar shipments as it was in '99 in the first movie.

On the other hand, it appears to be performing stronger than it did for the second movie in 2002.

We clearly have the all important fourth quarter and we have the DVD.

It's looking good and time will tell as to -- to how it ends up, but right now it is performing better than -- than '02, and it's -- even though we will not ship as much as we did in 1999, it's probably performing better than in 1999.

Okay.

I -- there are some shortages at retail.

When -- when would we expect to see more product on the shelves in some of the key tro -- toy drivers?

Well, product is flowing now and it -- it -- it continues to flow and we're trying to keep up with demand.

It's always a -- a guess with this as to where demand will finally be and I -- I don't think there's any question that Star Wars is -- is performing above our original expectations but the pipeline is -- is being filled now.

And with the strength in Star Wars I guess I would have thought you could have delivered more gross profit dollars looking back in time.

The margins were several hundred basis points above what you reported this morning.

Any -- any offsets to that?

Yeah, but I'll let David talk about that.

David?

Yes, I think one of the areas that we talked about our business is down is in the trading card business and trading card games historically are our highest margin item.

So, yes, Star Wars is up and it's good gross margin, but that's being partly offset by the fact that the reduction in our business thus far has been trading card games which is also a very high margin.

Good point.

On B-Daman, wha -- I think you've tested it in Canada.

Could you give us the results of those tests and when would we start to see it throughout the U.S.?

Well, the -- the early reads on B-Daman are very good, very encouraging.

We've also tested it here in the U.S. and -- and got similar results in -- relative to Canada.

We've done the same thing in the UK and we'll begin shipping B-Daman as we speak.

Okay.

Thank you.

Thank you.

And our next question comes from David Liebowitz.

Your line is open.

Please state your company name.

Burnham.

Congratulations on a great quarter.

Thank you, David.

Good morning.

I may have missed something but when you spoke about Star Wars you said it had, or I interpreted, as a negative effect on other male action figure lines?

Was that an accurate understanding of what you were saying?

What I was saying is that not all of the Star Wars volume is incremental.

You know, you put your young boy going into the store and -- and he's got a wide variety of action figures to pick from and at this time of the year he's more likely to spend his dollars on the hot movie properties, be it Star Wars or Batman, Fantastic 4 and so that will take away from some of the other, you action figure brands.

So I -- I do think that the strength of Star Wars will have an impact on brands like -- like G.I.

Joe and to a lesser extent Transformers.

And what about action men?

Same thing.

Same thing.

Second of all, in terms of the repatriation of dollars overseas can you give us some idea of how much cash you have overseas?

Yes.

Much of our cash that's currently on the balance sheet is overseas and we are still finalizing our plans, but it's not unlikely that we could end up getting back somewhere between 5 -- 500 and $550 million.

And what would the tax bite be?

We anticipate at the moment the tax bite on that, depending on in fact how much we bend back, would be in the region of 35 to $45 million.

And the next thing, you mentioned that you have brought down the debt as percentage of total cap meaningfully.

Is there still a lower percentage you want to bring it down to?

We've said for a long time that we think our ideal cap -- debt to cap ratio is a 25 to 30 percent range.

We have some debt due in -- about 70 million due in the last part of this year and then about 30 million due in the early part of next year.

Once we've repaid that, and we certainly won't refinance that, once we've repaid that, then I think what you'll find is that we will be towards the bottom end of our range.

Okay.

And just two more unrelated questions if I may.

The first one, once you attain that goal is it more likely that Hasbro might be looking for acquisitions or is that not really part of the Company's expansion plans going forward?

No, I wouldn't -- I don't think that our approach to acquisitions is based solely on where the debt to cap ratio is.

You know, we look to enhance sale to value and grow the business and if we see an opportunity out there that's really compelling, then we'll assess it.

So I would not want to give you the impression that once the debt to cap ratio gets down to a certain level that's going to mean we're going to go out and make an acquisition.

Okay.

And the last question, getting back to Star Wars, when Episode II product went out there at the end of the year you had meaningful markdowns that you had to give the trade.

Is there anything in the equation this time that makes you confident you have a large enough reserve for markdowns for Star Wars merchandise this time around?

Well, this time around, the brand is doing very well and it's -- and it's performing much better than it did in the previous two movies.

You know, in addition to that, we make the -- the adequate provisions in our quarterly financials so there's -- there's nothing that leaves either David or I to believe that we're underprovided.

And sticking with markdowns, there have been articles in the press about some of the soft goods manufacturers going after Sachs Fifth Avenue and other department store chains about the amount of markdown money they had to pay out and what -- was how it was used.

Do you face similar potential for recovery of markdown money?

I don't believe so.

Okay.

Thank you very much.

Next question comes from John Taylor.

Your line is open.

Please state your company.

Good morning.

Hi, John how are you?

I am good.

Thank you.

So, let's see, could you remind us what the timing of Duel Master shipments looked like last year?

As I recall they were pretty heavily weighted in the first half and then maybe they tailed off so is -- is my memory right on that one?

Yes, I think so.

Yes, we -- we were filling the pipeline with Duel Masters this time last year both in Europe and in the U.S. and we were still having good shipments into Canada.

So I think you're correct, not so much for Japan.

I said Canada.

I meant Japan.

Right.

Not so much for Japan but for the U.S. and for Europe, the first half was probably our biggest half.

Right.

Okay.

And then you mentioned, you think that poker's maybe negatively impacting sales of cards.

I won -- I mean, is there ever a discussion that poker might actually be hurting the -- the core board game business as well?

We've -- I don't see anything to substantiate that.

I mean, I -- there's no quantitative dala -- data that would support that.

Whereas with Magic: The Gathering organized play is an important component of the trading card game business and we're also in touch with the Magic players through these tournaments so in talking to them and seeing the number of people playing in tournaments and -- and listening to what's going on we get the sense that some of those folks are playing a little bit less Magic and a little bit more poker given the size of the part and the popularity.

We don't see that in -- in the board game business.

At least I don't have any -- any quantitative data to -- to -- to support that.

I don't think the board game business appeals to everyone from 2 to 82 as well where as the Magic player is primarily kind of 18 to 34 which is exactly in the sweet spot for poker as well.

Well, it seems like poker appeals to 5 to 82 though.

On TV every day.

Okay, and then now that you've got the digital rights back to a number of your properties, can you give us any sort of sense from 30,000 feet kind of how you're thinking about utilizing those?

You going to be using mostly license space kind of thing or are you going to make any investment to try to do some of that on your own?

JT, I think it'll be a combination.

For example, Plug & Play, we will do on our own.

Wireless, we would probably license out we don't have any plans to go back into the video game publishing business so I think it'll be a combination of factors.

Because when you talk about the -- the digital rights while the natural inclination for people is to think about video games and -- and in some of the wireless stuff, when you talk about interactive television, you talk about Plug & Play, talk about some of the educational learning platforms, those are all digital as well.

You know, DVD can be fairly ambiguous when you get into -- to digital light.

So we'll be doing some ourselves and some we'll license out.

Okay.

And then last question.

What do you still have, if anything on the balance sheet of Infogram stocks?

That's -- it's less than $10 million.

As you know, we've written that down on three separate occasions over the last four years.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from George Nissen.

Your line is open.

Please state your company.

Yes, Merrill Lynch.

All right, thanks very much.

As is seems like compared to your competition you guys really have everything on track.

I've got a couple of questions.

A lot of your competitors over the last year have been implementing some new strategic initiatives to re -- reduce their raw material costs, not in really than areas of resin but in other raw material costs by establishing a better line of communications with their suppliers.

I'm interested if you could provide some color to us on the call today as what you plan to do to reduce your raw material cost with your supplier base.

I'll let David talk about that but we've been doing that sort of thing now for quite some time.

But, David, why don't you expand upon that?

Yes, Dave, can you highlight that?

I -- I think in terms of working with preferred suppliers and trying to do -- look at global purchasing it's various commodities, these are things that we're not talking about just at the moment because we did a lot of that go back four or five years ago.

We had a number of supply chain initiatives at that time.

We're trying to drive efficiencies through IS systems as well, but we went live on an enterprise-wide system, SAP, back in 1997 and we had it installed worldwide by 2000.

So a lot of the initiatives that you -- you're -- you're saying that other people in the industry are doing, it's not that we're not doing them now.

It's we did a lot of them four or five years ago.

How are you working with the supplier base to make sure quality has obviously has been an important characteristic in Hasbro's growth, how are you guys working with the suppliers were providing you ri -- right quality components at the right time

Well, certainly, our quality engineers here at Hasbro sets specific standards.

We work with our suppliers to make sure they understand those standards.

We have quality inspections done certainly by both the vendors people as well as our people to ensure that they're being met and that's a pretty routine operation for us.

Once we set the standards, we've not had any difficulty in ensuring that our supplies meet those standards.

Okay.

You're on the engineering side are you guys score carding your suppliers?

You say quality's been a big issue?

How are you making sure those metrics are kept up?

Are you doing kind of a score carding on your supplier base?

Yes we do.

Okay.

What's been your supplier feedback on some initiatives you've had in place the last couple of years?

Have they been responsive to some of the things you're doing with them?

Yes, they have.

Okay.

All right.

Thank you very much.

Okay.

Thank you.

Thank you.

Our next question comes from Dean Gianoukos.

Your line is open.

Please state your company.

Just one quick question.

Is -- does the Star Wars business impact the board games business materially?The -- the numbers that you talked about up at retail, would -- would those be where they were or -- or has the Star Wars board games, et cetera, made a big impact this year?

Thanks.

Yes, thanks, Dean.

No, the -- we certainly have a -- a strong line of board game products, Plug & Play plo -- products related to the Star Wars brand and that's certainly been helpful here in the U.S. and overseas but the POS increase is not all related to -- to Star Wars.

Did you -- I'm -- I was -- I didn't realize, is the Plug & Play included in the board games like the Lightsaber game that's in the board game section?

Yes.

It -- it -- it's in our board game segment.

Yes.

Would -- would it be more than half of the increase or --

I don't have that number handy.

I couldn't tell you that right now.

Okay.

All right.

Thank you.

Okay.

Thank you and our [COUGH] excuse me, our final question today comes from Blaine Marter.

Your line is open.

Please state your company.

Hi, Lowe Partners Corporation.

Just a question on the share repurchase.

I wonder why the hesitation not buying more stock.

I mean, by the end of this year you're going to generate some 300 million of free cash flow you could really do -- take out 20 % of your market cap and still maintain your debt to cap target.

So I wonder why the hesitation there.

Thanks a lot.

I think you've got so separate domestic cash from overseas cash.

As I said earlier on the call, a lot of the cash we have today is overseas and if we blend that back onto the American Job Creation Act you're specifically precluded from using the patriated funds under that act for buying back stock or paying higher dividends.

So, we will be buying stock back primarily with the domestic cash that we have today and the cash that we will generate in the U.S. as -- as the year progresses.

And right now as we go into the third quarter, we are heading into our working capital peak domestically, so we're being very cautious about how much stuff that we're buying back at this particular point in time.

As you get into the fourth quarter of the year, and our working capital in terms of inventory starts to come down significantly, we start to collect some of our receivables, we will have a lot of funds to domestically generated funds available, for repurchase.

Understood.

And what will you do with the 500 million of repa -- repatriated cash?

Invest it in the business?

And I think I said earlier on the call that we have some debt to pay down, some maturing at the end of '05 and some more in '06 which is certainly permissible use and also just spending in the business in terms of R&D and advertising and job creation and capital spending.

So as I said, we're finalizing our plan at the moment so we don't have it all finalized but those are the kind of areas that we will include in your final plan.

Very good.

Thanks.

Thank you all for joining us have and have a good day.

Bye bye.