孩之寶 (HAS) 2005 Q3 法說會逐字稿

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

At this time I would just like to inform all callers that you 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 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.

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 third-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.

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 and the economic 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 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.

Good morning everyone and thank you for joining us.

We are pleased with our third-quarter results.

Net earnings were $92.1 million, including a favorable mark-to-market adjustment of $570,000 attributable to the Lucas warrants.

This compares to net earnings of 88.7 million and a 5.1 million favorable Lucas adjustment last year.

Net earnings per diluted share, which are not impacted by the Lucas mark-to-market was $0.47 for the quarter, an increase of 9.3% compared to the $0.43 per diluted share last year.

Global revenues were up 4.3%, driven by Star Wars and a significant increase in our games business excluding trading card games as well as a strong performance of other Hasbro brands.

Globally our games business was driven in part by our strong plug and play offerings as well as a number of DVD and GVD games that takes some of our most established core brands like Candy Land and Trivial Pursuit to a new platform.

The response to these games at retail thus far has been terrific.

In addition, the entire Monopoly brand has been doing well both here and abroad driven in part by the global 70th anniversary celebration.

However, not all of the business improved year-over-year.

As we mentioned earlier in the year, some of our action figure business including G.I.

Joe, Action Man and Transformers has been impacted in part by the strength of Star Wars.

In addition, both Dual Masters and Magic: The Gathering trading card games were down year-over-year.

However, we are beginning to see improvements in the Magic; the Gathering Trading card business with the recent release of the Ninth Edition, and Ravnica.

In fact, if we looked at the business quarterly, it would show that we have narrowed the decline significantly in the third quarter compared to the first half of the year.

In terms of segment performance, the games segment was our strongest performing segment with revenues up 7% from a year ago, experiencing strength in both board and electronics games partially offset by the decline in trading card games.

We indicated to you to earlier in the year that our games business would be more back-end weighted.

Our performance in the third quarter is consistent with that expectation and our outlook for the full year has not changed.

The U.S. toy segment had a good quarter with revenue up 6%, driven by Star Wars as well as a number of other brands including Furby, Nerf, Transformers, Playskool, and Littlest Pet Shop.

International segment revenue was up marginally year-over-year with strong performance from Star Wars partially offset by the decline in Beyblade, Action Man and trading card games.

Given that we have shipped just about all of our new product, let's take a closer look at how some of our major product categories performed this quarter.

Certainly Star Wars continues to be a very strong brand for us globally and with the DVD release on November 1, we would expect a very solid fourth quarter.

In the action figure category, we just started shipping our new G.I.

Joe Transformers and Action Man productlines and they are all off to a good start.

We are also very excited about the potential of the B-Daman, a new initiative recently launched in the U.S. after having very successful launches in the UK and Canada.

And Nerf also had a very good quarter.

In our girl's business, Littlest Pet Shop, which is in its first year of reintroduction continues to be a strong performer around the globe, as is My Little Pony, which will be supported by My Little Pony, A Very Minty Christmas, a movie that is being released nationwide in select theaters this holiday season.

The release is part of an initiative between the Hasbro Properties Group and Kid Toon films.

In our tween electronics category we have a great product lineup including i-Dog, a sleek and stylish palm sized interactive musical pet, which is an exciting accessory to the pocket iPod and other MP3 players.

VCam, a digital video camera specifically designed for tweens in the new larger and smarter Furby.

Just last week all three of these items were recognized as hot dozen picks in the U.S. by Toy Wishes Magazine.

Several years ago, based on the consumer insight that 8- to 12-year-old kids were leaving the toy aisle, we developed a strategy around tween electronics to provide exciting and innovative products to this important consumer segment.

Since then we have been working closely with our major retailers and they too have bought into this strategy.

Therefore this fall you will see at many of our major retailers a tween electronics aisle, featuring a number of our products including VideoNow, Chat Now, Zoom Box, VCam, i-Dog, as well as our great lineup of plug and play games.

This is something we're very excited about here at Hasbro.

By the way, I should mention that in addition to the Toy Wishes hot dozen recognition, at the annual Dream Toy Event, held by the British retailers two weeks ago, Hasbro had four out of the top 12 toys with Monopoly Here and Now, B-Daman, Furby and the Star Wars Darth Vader voice changer mask receiving the honors.

In terms of the overall business environment, there has been a lot written about the impact of the high cost of oil, the revaluation of the Chinese yuan and overall consumer sentiment.

All these factors continue to post challenges to the industry.

In a moment, David will update you on how some of these factors have impacted our business.

As we look ahead with the higher cost of gasoline and expected increases in home heating costs, it remains to be seen how much of an impact this will have on consumer spending during the holiday season.

That said, the holiday season is going to come and people are going to buy toys and games.

With the diversity, strength and innovation of our productline and our performance year-to-date, we remain confident in our ability to grow revenue and improve profitability this year.

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

David?

Thank you, Al, and good morning everyone.

As Al said, we are pleased with our topline performance this quarter with both the U.S. toys and games segment delivering solid year-over-year growth.

However, operating profit for the quarter was impacted by the higher mix of electronic games which I will talk about later.

Also impacting operating profit was the higher mix of Star Wars and the associated royalty and amortization expenses.

Star Wars is however very cash-flow positive.

Firstly the amortization of property rights is a non-cash item and secondly, having paid 35 million in the second quarter, all guaranteed royalty payments have now been made.

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

Now our third-quarter results beginning with revenue.

Worldwide net revenues were 988.1 million, an increase of 4.3% compared to 947.3 million last year driven by strength in both the U.S. toys and games segments and most notably by the strong performance from Star Wars.

U.S. toy revenues were 393.1 million, an increase of 6.3 million compared with revenues of 369.7 million last year.

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

U.S. toys had an operating profit of 34 million, compared to 20.8 million last year, consistent with the higher revenues.

In the games segment, revenues increased 6.9% to 252.9 million, compared with revenues of 236.5 million last year.

The segment experienced strength in board and electronics games including Candy Land and monopoly brands and plug and play games such as Star Wars Lightsaber, MX Dirt Rebel, Dream Life and Wild Adventure Mini Golf.

The strength in board and electronics games was partly offset by a decline in trading card games with both Dual Masters and Magic: the Gathering down year-over-year.

As Al mentioned, we are beginning to see improvements in Magic: the Gathering with recent releases of Ninth Edition and Ravnica.

Operating profit in the games segment was 45.5 million, compared to 46.4 million last year.

Profitability for the segment was impacted during the quarter by an exceptionally high mix of electronic games.

While the margins on these games are still good, they are not quite as good as for our traditional board games.

International segment revenues of 333.1 million were marginally up compared to revenues of 331.6 million in the prior year, but down 1% in local currency.

We had strong performances from Star Wars and new product introductions such as Furby and B-Daman as well as a number of other toy and game brands including My Little Pony, Littlest Pet Shop, and the Parker Brothers and Milton Bradley board games.

Partially offsetting this was the decline in Beyblade, VideoNow, and trading card games.

International segment operating profit was 45 million for the quarter, compared to 48.8 million last year.

This primarily reflects increases in Star Wars related amortization and royalty expenses, as well as the decline in trading card games.

Turning now to consolidated earnings.

For the quarter we reported net earnings of 92.1 million or $0.47 per diluted share.

This compares to net earnings of 88.7 million or $0.43 per diluted share a year ago.

The 2004 earnings per share amount has been restated due to the required adoption of EITF 04-08 in the fourth quarter of 2004.

Earnings before interest, taxes, depreciation and amortization were 187.9 million, compared to 168.6 million last year, a $19.3 million improvement.

Gross margin was 55%, compared to 55.3% last year.

Consistent year-over-year, but down compared to the first two quarters.

Third-quarter margins are historically the lowest as we ship a higher percentage of new products and higher priced fourth-quarter items.

In looking at the expenses for the quarter, as anticipated, amortization expense increased due to the higher shipments of Star Wars product.

Royalty expense was also impacted by Star Wars this quarter, but was consistent with a year ago when we had significant royalty payments associated with shipments of Shrek, Beyblade, and Disney branded products.

Advertising expense was 118.8 million or 12% of revenue, compared to 129.4 million or 13.7% of revenue last year.

The reduction in actual dollars spent on advertising is primarily in the toy segment due to a change in product mix.

With the higher percentage of our volume related to Star Wars, we do not need to spend as much on advertising.

Selling, distribution and administrative expense at 162.1 million increased by 10.9 million for a number of reasons including higher warehousing expenses, higher incentive provisions, and the X impact on translation of international expenses.

The other income and expense line includes a non-cash favorable mark-to-market adjustment of 570,000 due to the Lucas warrants.

This compares to a 5.1 million favorable adjustment last year.

This year's results also include higher interest income due to higher cash balances and interest rates.

Now turning to the balance sheet, there are a number of positive to highlight.

Receivables were down 16 million to 681.5 million.

This decrease reflects both improved collections and an increase in the amount of receivables securitized.

As a result, Days Sales Outstanding were 62 days compared to 66 days last year.

Inventories increased by 13.7 million from a year ago to 330.8 million.

The increase is in anticipation of higher fourth-quarter shipments.

The balance sheet also shows total debt net of cash of 44.6 million, compared to 345 million a year ago, an improvement of 300.4 million despite payments related to reacquiring our digital gaming rights from Infogrames and the acquisition of the assets of Montreal-based puzzlemaker, Wrebbit.

Our debt to cap ratio improved further to 27%, compared to 30% last year.

The improvement we have made in our debt position was noted by Fitch ratings when they upgraded Hasbro's outlook from neutral to positive in August.

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

Through the end of the third quarter, the Company had repurchased 1.53 million shares under this program at a total cost of 31.8 million.

Before we open the call up to your questions, I would like to give an update on some issues that I touched upon last quarter.

Firstly the American Jobs Creation Act.

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

Secondly, while we are feeling the impact of rising commodity prices, the Chinese currency revaluation, and increased transportation costs, much although not all of this impact, was anticipated and built into our costing and pricing strategies as we began the year.

In addition, we have a large games business which is not impacted as much as toys by plastic resin prices.

Finally, we have and we continue to work to offset these increases through negotiations with our third-party suppliers and by other supply chain initiatives.

Given all of this, I would like to reiterate what I have said consistently this year; that while we recognize these cost pressures, we do not expect them to have a material impact on our ability to achieve our full-year financial goals.

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

(OPERATOR INSTRUCTIONS) Tony Gikas.

Piper Jaffray.

Good morning guys.

A couple of questions.

Could you characterize the retail environment on an international basis, particularly your two or three largest markets?

And where do you see the most potential for incremental growth on an international basis?

Okay, in terms of the retail environment, I would say that Europe is clearly the biggest portion of our international sales effort.

The business has been real strong in the UK.

It has been okay in France; it's been pretty good in Spain.

Germany is tough again.

Those are some of the major countries in Europe with today's retail environment.

In terms of our Canadian business, it has been strong.

In terms of the growth potential going forward, I think the biggest growth areas for us longer term would be the Asia-Pacific markets as well as the Latin and South American business as well.

We've got a good business in Mexico.

That business is pretty healthy.

Second question.

You are sort of hinting that the gross margin perhaps may not be impacted as much as some are expecting.

Could you characterize the impact of that gross margin potentially next year?

Well, I'll let David talk about that for a moment.

I think what we're trying to say is that there has been an awful lot written about the negative impact of the high cost of oil, about the Chinese yuan revaluation, other raw material costs, transportation costs.

Our point is that we try to manage through some of these and mitigate some of that through improved efficiencies within the supply chain as well as a number of other strategies.

We will continue to do that on a go-forward basis.

In terms of where '06 will be, that is going to depend a lot upon what happens to raw material costs, as to what happens to oil and other base prices.

But David, do you want to add anything to that?

I think certainly we're not planning that commodity prices are going to fall back significantly from where they are today or that oil and gasoline prices will.

So part of the good news about this business is that a very high percentage of our line is new each year.

So as we develop next year's line and we cross products and we price products, we are obviously doing so in order to make the kind of margins we've made historically.

So that is a bit different to where you've got -- you're selling the same product year after year and you have to sort of take price increases on the same product.

I think on our games business, that is where we have a much more stable productline which is similar from year-to-year, i.e. Monopoly game, Candy Land game.

I think clearly the pressures in our games business are not as great.

There are increases in paper and board and print but they are not nearly as much as in plastic resins.

How far in advance can you lock in agreements with your manufacturing partners and transportation partners?

And has that changed over the course of the last six or twelve months?

No.

We tend to lock in for the year.

So one of the reasons we're not feeling the full impact of commodity price increases this year is because we locked in with the majority of our third-party suppliers in China at the beginning of the year.

Similarly we did do some lock in on fuel surcharges with our ocean freight carriers.

So as we go into next year, we will lock in albeit at a higher level, but as we price our productline and cost our productline for next year, we will reflect that higher level.

Okay, thank you.

Sean McGowan.

Harris Nesbitt.

A couple of questions also I think for David; it should be pretty quick.

On the plug and play games and just electronics in general, how much lower are the margins on those products?

Yes, I think what we said is in this quarter in particular we had a lower high mix of lower margin electronic plug and play games and a lower mix of high margin trading card games.

I think as you look at these overall -- firstly, this extraordinary high mix of electronic games is anticipated to reduce in the fourth quarter when we expect to ship higher mix of traditional board games.

And although the operating product margins for games, for electronic games are good, they are not as good as for traditional board and trading card games.

I think we look at the margins on traditional board and trading card games in the high teens whilst the margin on most of our electronic games tend to be in the low to mid teens.

That's helpful.

Thanks.

Looking at the advertising decline, just to try to get a sense of how much of that is driven by the mix or Star Wars, could it have been down anyway if the percentage of sales in Star Wars was the same or is it really -- is that really what is driving it all?

Everything is relative.

Through the years back, our advertising over the whole year was running about 10% in sales and we said we were going to spend a bit more in advertising and last year it went up to about -- it went probably higher than we think long term.

It went up to about 13.7.

As you come into this year, I think there's a couple of things.

One, we're probably not spending quite as much across the board and more significantly in this quarter, because we had a relatively high mix of Star Wars again, we just don't need to spend anything like 10, 11, 12, 13, 14% to advertise Star Wars.

It is just such a well-known productline anyway.

Let me add one other thing to that, Sean.

We are also shifting some of the dollars we had that would going into TV media into more in-store promotions which would not be on the advertising line but found elsewhere in the financial statements.

And we have seen that happen over the last several years where we're doing a lot more in the way of in-store promotions than we used to do.

Okay, that's good.

Last question again for David, looking at accounts receivable if you exclude -- I guess it is not a traditional factoring arrangement but that securitization -- what do the day's receivable look like if you look at it that way?

We are still down year-on-year because the reduction is both due to collections.

I think they are down about two days because of the improved collections and about two days because of the increase in the amount securitized.

Okay, thanks.

If I can -- maybe a question for Al.

Are you at all concerned about the plug and play category?

And is that getting crowded?

How do you feel about your position in it?

There has been some commentary made about inventory of plug and play games.

I think that tends to be at the lower end of the pricing scale.

We are pretty comfortable with the offering that we have.

We've got good placement and very good selling.

So I am not -- I don't want to say yet that we are not at all concerned.

You're always concerned when there is some inventory in a given category.

But that inventory tends to be at the lower end and with some of the games that haven't been as design intensive as some of the stuff that is coming out now.

But our Mission Paintball is still doing very, very well, as is the Lightsaber game.

So we've got a good designed product.

We're not seeing any problems there.

Good, thank you.

David Leibowitz.

A few questions unrelated if I may.

First in the last several years, there's been a flip-flop of whether the third or the fourth quarter would turn out to be the largest of the year for Hasbro.

As we sit here right now, how does that look for 2005?

We're not going to forecast our business for the fourth quarter.

You'll have to wait until after Christmas, David.

Okay, second question.

The trade for the most part has seen your 2006 line.

Which items are they talking about very positively?

Well, the trade is in the process of seeing the line right now.

We have previews that are going on.

So the trade has not yet seen the entire line.

That is going on as we speak.

So that is a question that I would be in a better position to answer if I chose to answer it in about two weeks.

Okay, I'm batting 1000 so far.

Just two more quick questions if I may.

In terms of Star Wars and having met all your royalty payments through the balance of the contract, can you talk to us about what products might be in the Star Wars lineup over the next couple of years?

I am not -- when you say what products.

I can tell you that Lucas has announced that they are going to be doing several things over the next several years including the re-release of the Star Wars movie in IMAX theaters in 2007.

We are looking at TV animation and that is going to be followed although not announced yet as to what year with live-action television.

So there's a lot of entertainment over the next several years that's coming from Star Wars.

And I am sure that our product design will be consistent with what we see in the TV animation or the live action.

But clearly action figures and role-play items will be a significant part of that line.

The last question.

Without identifying specific products, could you tell us how many dollars worth of sales will not be in products brought forward next year?

In other words, the hurdle for next year, just to breakeven with this year?

We typically don't release those kinds of numbers but it would be premature at this stage of the game because you've shipped so much new product and you really have to see how well it does during the holiday season.

I am anxious to know that as much as you are, but we really won't know that until we get into the holiday season.

Thank you very much.

Tom Russo.

A couple of questions.

First a note of congratulations on the remarkable deleveraging.

The numbers David gave today are really quite shocking.

What thinking forward knowing you'll generate continued cash flow, what do you think about with this now unleveraged balance sheet -- priorities for spend -- reinvesting the cash flow?

I think clearly we have a couple of debt maturities that come up, one in the last quarter of this year and one early next year and obviously we will be looking to pay those down and certainly no intent to refinance those at the moment.

Second thing is, we did get authorization by our Board in the second quarter this year to buy back $350 million worth of stock.

We have not been buying back that aggressively thus far, because domestically we are at our working capital peak and only a very small amount of our cash on hand is in the U.S.

However as we go into the fourth quarter, our working capital needs reduce dramatically and inventories probably come down by about half, receivables usually reduce, and our accrued liabilities go up.

So we therefore have got to anticipate in the fourth quarter -- we would certainly have the domestic cash available to potentially accelerate our share purchase activities, assuming the price is right at the time.

So I think pay down some debt.

We do have this authorization on share buyback.

We have said many times that our growth, medium-term growth, longer-term growth of 3 to 5% on average over time is primarily organic growth.

We do not have a growth through acquisition strategy.

And we would never say no to some compelling opportunity, but there is certainly nothing that we would consider compelling at this point in time.

We recently reacquired our digital gaming rights; we acquired a small company up in Canada called Wrebbit which does 3-D puzzles which we have been distributing for a number of years.

So I think if we see productlines/companies where we can create value for the shareholder, we are certainly not afraid to do that.

The other thing we have done in the last couple of years is we have increased our dividend in each of the last two years.

I see.

Good.

And what is the cost, David, of the receivables that are securitized?

How much do you give up for that increased securitization?

As I said, we have little to no cash in the U.S. whilst we are at our working capital peak.

So we would be borrowing one way or the other whether just go to the banks or effectively doing it by the securitization to fund some of our working capital.

The cost of the securitization because it is really giving you access to A-rated commercial paper is actually lower than the cost of us drawing down on our bank facility.

I see.

Then will the repatriation of the foreign held cash help alleviate the type of pressure that you are looking at now?

What will that likely do to your tax rate reported this year, fourth quarter and full year –- the repatriation of the cash?

We have made a disclosure in the Q. If we bend back, you have to bend back a base amount and then you also are allowed to bend over and above that an amount back under the benefits of the American Jobs Creation Act.

So if for example and we clearly have not got a finalized approved plan yet -- but if for example we were going to bend back about 50 million pace and 500 million under provisions of the Act, we have indicated that we would have about $40 million or up to $40 million of tax to pay.

Now that would be both -- that would include both federal taxes, some state taxes and importantly, dividend withholding taxes in some of the foreign tax jurisdictions from which we would be remitting the funds.

So as it stands at the moment, if we were to bring 550 million back, you are probably looking at up to $40 million in terms of a tax bill.

Blaine Marter (ph).

Can you give us the amount of securitization in dollars year-to-date and what was it in each of the quarter so far?

Yes I can.

Give me a few seconds.

At the end of the third quarter, we had $157.1 million worth of receivables securitized.

That compares to 102.9 million at the end of the second quarter and 62.6 million at the end of the first quarter, which is when our receivables are at their lowest.

If you look to a year ago at the year end 2004, we were 206.1 million and at quarter three in 2004, we were at 128.3 million.

That's helpful, thank you.

And you say this is your lowest cost of borrowing domestically?

Yes, by doing the receivable securitization and that should be financing our working capital needs buy back basis, it is actually cheaper than drawing down on our bank facility.

What I'm getting at is you essentially at the end of this year have no debt net of cash.

I don't know the structure of that debt as far as what you're bringing back but isn't there some way you can arrange your capital structure such that you could do a more significant share repurchase?

I mean -- $30 million -- you are a $3 billion market cap company.

And I don't understand why you wouldn't just do it at all at one time.

Why signal to us you're going to buy it in the fourth quarter?

Why not just do a Dutch tender and get it all done at one time?

I really don't understand.

I'm not going to comment on exactly how and when we're going to buy back our stock or indeed the eventual magnitude of that.

Obviously we have gotten authorization up to 350 at the moment.

I have explained why we have been relatively modest thus far.

Remember when we repatriate cash under the provisions of the American Jobs Creation Act, buying back your stock with the cash you repatriate or paying a dividend with that repatriated cash is specifically excluded.

So that is something that we have to take into consideration.

Right.

I understand.

But at low single-digit type organic growth, it is really not that exciting.

You have got to be a little bit more aggressive when you have no debt with the size of your enterprise.

So any way, I hope you would consider that.

Thanks.

Elizabeth Osur.

Citigroup.

Just two quick questions.

First I was hoping maybe you could comment a little bit more about pricing increases for next year to overcome any cost increases you are facing.

Both you and Mattel have talked today about that.

Just wondering if you could either comment on the size of price increases that might be likely or just give us some historical context for what kind of price increases you've gotten in the past?

This is Al.

In terms of our pricing strategy for '06, that is something that we are in the process of developing and we will continue to develop that over the next several months based upon our estimate of where we think raw material costs will be and other cost impacts we have.

Pricing -- price increases is certainly one of the arrows in our quiver in terms of dealing with cost increases, but it is not the only one.

As David said earlier, negotiating with our vendors, product design can have a significant impact on reducing costs and other efficiencies within the supply chain.

So those are all things that we're going to be in the process of working on over the next couple of months as we develop our plan for '06.

In terms of what has happened in the past, generally speaking price increases have been moderate at best and in the range of a couple of percentage points.

One of the things David said earlier on in the call is that we have a lot of new product that comes every year.

So in terms of an apples-to-apples comparison, which is really the only place you can look at price increases in terms of continuing product, we try to deal with the margin issue with our new product as well as continuing product.

And therefore, moderate the need for price increases as we are very anxious to hit certain pricing points.

Okay, thanks.

Just one more question.

If we think about the impact of the loss of the Star Wars movie in next year's revenues, when I look at my own forecast, we have always thought about Star Wars in a non-movie year being about one quarter of the size of Star Wars in a movie year.

Can you just comment on that assumption or give us some kind of context?

I think it has been all over the lot.

If you look at a movie year on a given brand, whether it be Star Wars or any other major property, clearly it will come off the year after the movie.

But it can come off much more than 25, much more than 75% and sometimes much less than that.

It really varies over time and surely even with the Star Wars movie, the first movie the second year, it came off much more significantly than it has both in the second movie and probably what will happen in the third movie.

So it is kind of hard to forecast.

Okay, thanks.

Dean Gianoukos.

I was wondering if you could just comment as to whether the traditional board games basis alone saw increases this quarter?

Thanks.

Oh, yes, very significantly.

Our board games -- the segment itself was up 7% and that included a decline in the trading card game business.

So if you would have taken that out, our traditional board game business was up significantly.

And that's excluding the plug-in play or are you including the plug and play in that?

Even if you exclude plug and play.

Even if you exclude plug and play, but plug and play has to be part of the traditional game business today.

Okay.

Excluding the plug and play, were you up significantly on just the board games or no?

Yes.

Okay, thank you.

Joe Yurman, Morgan Stanley.

Three questions here.

One, I want to try to pick up on David's question, but I will try to go at it at a different way as opposed to giving an actual number maybe.

Al, you have been very clear about a belief that the industry is becoming even more seasonal.

But have really talked about that in terms of the games business.

I'm wondering as we think about modeling fourth quarter particularly coming off a down 6 topline comp last year, if you think that overall not just games that it is becoming more of a fourth quarter business such that we have to think about it that way?

My second question would be really just one about positioning within the industry.

What strikes me is versus your largest competitor it appears that you are getting more of your sales from your own properties as opposed to giving up some to someone else.

And I would just ask maybe directionally if you can talk about the HPG business and its contribution to some of the top line?

And then David, just a housekeeping question regarding cash flow from operations and CapEx for the nine-month period.

Thank you.

Okay, Joe.

In terms of seasonality, I don't think there is any question -- let me separate retail sales from manufacturing shipments.

I don't know that retail sales have become anymore fourth-quarter dominant than they have in the past.

A lot will depend upon what properties will come out the beginning of the year.

So you can get an uptick in POS during the earlier part of the year based upon a movie coming out such this year we had Star Wars and in another year you'll have other movies.

Or you can have a hot product does very, very well.

Typically it is a fourth-quarter business especially when you talk about the board game business.

We have seen manufacturers for the last several years now trying to align their shipments and they want to flow their merchandise into their stores more in line with POS.

That means we are seeing from a shipment standpoint a greater degree of seasonality than we might have seen years ago.

I think that is particularly impactful when some of the mass-market customers have picked up share of market over the last several years.

They are very, very focused on managing inventory and they are very good at it as well.

So clearly I think from our perspective, the business tends to become more seasonal than it has in the past.

The flip side of that is we're trying to develop product and we're trying to do things that creates some business during the first half of the year and that can be in terms of the kind of product we offer, ala, our Super Soaker gun, some of our outdoor product or promotions that we run in order to mitigate some of the seasonality.

But board games are probably the best example of seasonality, where a good 40% of the board games that are sold at retail sell during the month of December.

And I don't see that changing over the next several years.

In terms of the Hasbro Properties Group, we don't break out individual numbers, but clearly we are licensing out our brands in noncompeting categories and that is making a nice contribution to both the top line and bottom line for the Company.

In terms of cash flow, clearly as we progress through the nine months year-to-date, we are a user of cash as our inventories and receivables grow to their peak quarter end, which is really the third quarter end.

Last year during the first nine months of the year, operating cash flow was a use of 93.7 million.

This year usage has only increased from year-end to the end of the third quarter by 4.5 million.

So we are showing a $90 million, an approximate $90 improvement in cash flow through the first nine months this year versus a year ago.

The only thing I would encourage is because of the nature of the Star Wars licensing agreement, I just feel that there is a cash flow story here that tends to get masked either by the accounting of the warrants or the non-amortization aspect of this business.

And so to the extent that you can articulate that or front load that, I think that would be helpful.

I think we tried to.

I think I started the call by talking about the Star Wars cash flow nature and then when I talked about the balance sheet, I talked about debt net of cash having improved by 300.4 million year-over-year despite having spent over 100 million to buy back the digital gaming rights to acquire the assets of Wrebbit and to buy back $31.7 million worth of stock.

Fair point, but the stock is down and I think it is because there's a focus on GAAP earnings versus what is clearly a cash flow story.

Okay, I think we have certainly tried to stress the positive cash flow generation of our business.

Thanks, David.

John Taylor, Arcadia.

Good morning.

I've got a couple of questions.

One, let me try this one.

Has Star Wars year-to-date been material and can you give us a sense of how big it is?

I think what David earlier was getting at was kind of the replacement challenge of next year and that is going to have to come up on top of the table pretty soon.

That is the first question.

Second is can you talk at all qualitatively about B-Daman and maybe share a story or two about what you have seen in other markets on that?

And then the third question is you mentioned the favorable uptick in the Magic: The Gathering segment.

I wonder, could you talk about maybe the load-in quantity delta in the third quarter this year versus the equivalent edition last year?

Just kind of give us a relative size?

It sounds like you were characterizing that as filling the whole a little bit.

I'm just curious as to that.

So maybe chew on those a little bit.

Thanks.

Let's go to the last one first in terms of Magic.

What we have said throughout the first part of the year is that we believe there were a couple things happening with Magic but primarily it was a collection of somewhat of a negative reaction to the first release that we had back in the first quarter.

So what we were looking to see is when we came with our new release which was first the Ninth Edition which took place about a month ago and Ravnica, which has just been released -- we wanted to see an uptick there.

We have seen that.

Now when I say an uptick, this is coming from folks who are collectors and are magic players that are writing in, talking about the edition and how much they like it.

It is coming back from hobby shops which are reordering and taking in much more product than they took earlier on.

So it looks like it is beginning to turn around.

But it is still early and I want to see what happens over the next four to six weeks because the first printing is out.

It seems to be selling well, but that is all information that we get from hobby and hobby stores we don't get the same kind of POS that we would get from a major retail like Target, Wal-Mart and Toys R Us.

So I really don't want to start quoting those kinds of numbers just because I'm just not sure enough of them but internally we think it’s turning around.

In terms of B-Daman, we launched B-Daman both in the UK and in Canada earlier than we have launched in the U.S. and that has to do with the placement of the TV programming as well.

The reaction in both those regions has been very, very strong.

People start to tend to compare it to how well Beyblade did under similar circumstances.

Those are nice numbers to look at but it is really very early on and we need to see what happens as we get into the holiday season.

But certainly the initial reaction to B-Daman in both the UK and Canada is talked about in the same context as how well Beyblades did.

I don't want to for a moment forecast that B-Daman is going to be as strong as Beyblades.

It is much too early to tell.

But the initial reaction has been very, very strong.

And the television programming, the ratings have been very strong as well.

In terms of Star Wars, everybody talks about what a great year we're having and we are having a great year in terms of is it material to Hasbro for sure?

And you can see that in terms of POS and what we ship.

And folks are now beginning to say what is going to happen next year?

I would remind people that several years ago when we set forth our strategy, we indicated there are going to be years where you're going to get a kick because of the movie and you will do well in that year.

And then next year that movie property will come down but we've got other new product that will come in its place.

And on balance, we would continue to grow the business and improve profitability, albeit the growth the year after a movie like a Star Wars or like a product like a Beyblades or back a few years ago, Furby might not be as strong.

We would continue to improve profitability as opposed to what used to happen in the past where we would have a significant decline in profitability and in some cases lose money.

So we know that that movie property will probably soften a bit in '06.

We still think Star Wars will be a strong brand.

We've got a strong lineup of product that we're introducing to our customers now.

And hopefully, we will continue to grow the business and improve profitability.

That is certainly our goal for '06.

Let me follow up on that.

So just put question on the table, can you give us a sense of what Star Wars has represented the first nine month shipments percentagewise?

I think what you're talking about is all fair, particularly since the profitability -- while it is positive on Star Wars -- still relative to the rest of your mix is probably not favorable.

So you will be able to replace it with lower dollars but can you give us any sense percentagewise of that's looked like so far?

No.

We don't release that amount of detail unless it is required in a 10-Q or 10-K and we would make any appropriate releases.

But beyond that, we don't give specific productline shipments.

All right, thank you.

Gary Cooper, Banc of America.

Thanks.

Asked and answered, thank you.

Sean McGowan, Harris Nesbitt.

It's a cash flow question.

I think Joe Yurman had asked about CapEx in the quarter.

I don't remember if you answered that.

Did you?

No, I didn't.

I think it was 11.7 million -- 11.8, I'm sorry.

11.8.

Okay, thank you.

Can I just correct that capital expenditure.

It was actually 16.2 in the third quarter and 11.8 in the first.

So 16.2.

Mr. McGowan, your line is open.

My question has been answered, thank you.

Tom Russo, your line is open.

Sorry I was disconnected a moment ago.

The last question for me is the plug and play category and the discussion that occurred earlier about the different margins between traditional board games; high teens and then the electronic games, low teens.

I am not sure what happens to some of the traditional board games that are being modified to have an electronic component.

Is that the category that is called plug and play or what precisely were you referring to there?

No, you have electronics or technology in several different games.

You have a traditional board game and then what we will oftentimes do is do a DVD version.

We did that with Trivial Pursuit as an example.

We have done that with Candy Land this year.

Then you have plug and play and plug and play are games like Mission Paintball, Lightsaber.

We have an MX Rebel game and this is a game that you just plug directly into the television and play with it on the television screen.

So when David is talking about the plug and play category as having good margins but not as good as board games, that is what he is referring to.

I see.

And then your experience on the fully burdened costs of rolling out Candy Land DVDs, Trivial Pursuit DVDs, do they cost substantial amounts to convert to the software as a digital version?

If so, how do you recoup that from an accounting standpoint and over the life of sales?

The issue with something like the DVD game is not a manufacturing cost.

The issue there comes in the development cost, and that includes having to go out and get all the rights that you may have that you may want to use.

So for example, if you've got a DVD game that is including clips from television shows, you have to get rights from those television shows whoever may own them.

If you want to do something with regards to movies, you've got to get the rights.

And that is where the cost is as opposed to the specific manufacturing per se.

When you get into the plug and play, you have the technology issue and again, you have the development cost.

So it is more the development cost than it is the manufacturing cost.

I think one thing to add is when you do DVD games based on your own brands like Candy Land, in that case as opposed to something like Shout, you don't have to go out and get content.

You don't have to pay anyone a royalty.

So something like a Candy Land DVD game can be very profitable.

It has got enhanced play value versus the traditional game and can stand some additional pricing.

The other thing that has happened -- this is a question that has been asked on a number of occasions is -- does the DVD version cannibalize the traditional board game?

What we have seen thus far is no, that is not happening.

We have seen overall growth in the category and hopefully that will continue.

Thank you for the answer and sorry again for being cut off earlier.

Thank you.

I guess that's it.

If there are no more questions, thank you and you all have a good day.

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

Thank you all for participating.