孩之寶 (HAS) 2005 Q4 法說會逐字稿

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

At this time, all parties will be in a listen-only mode. [OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

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

And 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 fourth quarter results, it would be helpful to have the press release and financial tables 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.

We would also like to point out that on this call, whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share.

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

We'll then open the call to your questions.

Before we begin our formal remarks, let me note that during this call and the question-and-answer session that follows, 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 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, our quarterly reports on Form 10-Q, our current reports on Form 8-K, in today's press release, and other public disclosures.

All [INAUDIBLE] should review such factors together with any forward-looking statements made in this 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.

Before turning the call over to David to take you through a detailed review of our financial results, I'd like to make some comments about our performance.

Overall, we had a good fourth quarter.

Revenues were up 1%, to $1.1 billion, or 3% in local currency.

Earnings per share increased to $0.48, including a $0.13 negative impact from the tax provision related to the repatriation of foreign earnings.

Absent this tax provision, earnings per share were up 39% to $0.61 per share.

For the full year, revenues increased 3%, to $3.1 billion, and earnings per share increased 14% to $1.09.

Excluding the impact of the tax provision for repatriation, earnings per share were up 27% to $1.22.

In addition, operating cash flow was up significantly to $496.6 million.

Without going through all the environmental factors we've talked about in previous quarters, it is worth noting that we accomplished all of this in what continues to be a challenging environment.

The growth for the full year and fourth quarter was driven principally by the excellent performance of our STAR WARS line of products.

In fact, for the year STAR WARS generated $494.1 million in revenue, including co-branded products like STAR WARS Monopoly, and our very own Darth Tater.

STAR WARS is an example of Hasbro at its best, as measured by everything from product development, marketing and retail distribution to our partnership with Lucas.

The team did an excellent job and it shows in the results.

I know all of you are probably wondering, how is Hasbro going to make up the anticipated decline in STAR WARS revenue?

First of all, the revenue doesn't just go away.

I fact, in the case of STAR WARS, this couldn't be more true.

STAR WARS is a long-term strategic license to Hasbro, and we expect the brand to contribute meaningfully to our business this year and in the future, but clearly not at the level it was in 2005.

Secondly, I want to reiterate something we have said before.

It is our job to manage this Company for our shareholders over the long term.

In doing so, we have to be able to manage revenue volatility and focus on continuing to improve profitability and deliver strong cash flow.

That said, let's put this current revenue challenge in a perspective with some recent history.

The decline of BEYBLADE revenue from 2003 to 2004 and the decline in POKEMON revenue from 2000 to 2001, in both instances, after steep product declines we still improved our profitability.

The volatility oftentimes associated with a very successful product line doesn't automatically lead to a decline in profitability.

Finally, we are not a one product Company.

In fact, many of your are investors in Hasbro precisely because of the breadth and depth of our product line.

In 2006, we'll continue to bring innovation and excitement to a broad range of products in our toy, game and twin electronic categories.

You'll be hearing more about this on Friday at our investor meeting at Toy Fair in New York.

On Friday, we'll also be talking more about our recently announced organizational changes.

The changes are intended to enhance what we already do well and further improve the way we go to market.

But more about that on Friday.

Moving on to the rest of the business, let's take a closer look at how some of our major product categories performed this year.

The girls' business globally was up significantly with strong performances from LITTLEST PET SHOP, MY LITTLE PONY, and FURBY.

In the boys business, as I previously mentioned, STAR WARS had a terrific year and was, in fact, a top performer from an overall industry perspective.

When you have a brand that performs this well, it usually comes at the expense of other boys' properties, including our own.

In this context, our boys action figure business other than STAR WARS was down.

However, there was good news in the category.

We had a successful fourth quarter launch of our new G.I.

JOE SIGMA 6, which we expect to be one of our growth trends in 2006.

Transformers had a solid year coming in about at our expectations, and as we gear up for the movie in 2007, you can expect to see a lot happening with Transformers in the months ahead.

Action Man's ADAM, our new European action figure, was launched in the fourth quarter.

With good television ratings and new momentum behind this brand, we expect it to do well in 2006.

NERF did exceptionally well this year, up 70%.

This brand has grown steadily over the last couple of years and it's a great example of the success we have had with our strategy to grow certain core brands by contemporizing them.

In the twin electronics category, we have clearly established ourselves as a market leader in this important and growing segment.

This year the strength and depth of our line has resulted in numerous awards, including I-DOG and VCAMNOW being named to the Toy Wishes Hot Dozen.

I-DOG also appeared in Time Magazine's special issue, "Most Amazing Inventions of 2005."

Along with I-DOG and VCAMNOW, which we couldn't keep on the shelves, we had a number of other strong performers in this category, including CHATNOW, a two-way radio communicator in its first year of introduction, and ZOOMBOX, a portable projector which had a successful test market during the holidays and will be shipping nationally in 2006.

While the twin electronics category has been very good for our business, I would be remiss if I didn't say there was still a lot of work to be done in improving profitability of this important category, something we will continue to focus on in 2006.

In the plug-and-play category, we introduced a number of new games in 2005.

Unfortunately, our performance was well below expectations.

While we did have great success with both DreamLife, our first plug-and-play game targeting girls, and the STAR WARS Lightsaber game, the balance of our plug-and-play line did not do well.

This resulted in inventory obsolescence and customer allowance charges in the fourth quarter, which negatively impacted the profitability of our games segment.

In our global game business, the results were mixed.

The international board game business was up a strong 5% for the year, helped by the success of Monopoly here and now throughout Europe, while the U.S. game segment was down year-over-year.

In looking at the profitability of games, the traditional game board business continues to deliver margins in the high teens, although in our domestic segment, this was offset by the poor performance in the plug-and-play category and the overall softness in trading card games.

Be assured we are very focused on improving the performance of the domestic games business in 2006.

In closing, we did a lot of things well in 2005.

Clearly, there are areas in the business where we can and will do better.

Going forward, the environment remains challenging.

Although the recent announcement that Toys R Us will be closing 87 stores is a bit of a positive, coming in at the lower end of some expectations, however, store rationalization by retailers remains an issue along with the continuing focus on inventory management.

Also given the continuing rise in the cost of doing business, the need to continue to improve our business process effectiveness is even greater.

That said, I feel very good about your 2006 product offering and the table we're setting for 2007, as well as the recently announced changes in our organization.

Needless to say, I am especially pleased with the promotion of Brian Goldner to Chief Operating Officer.

Brian is clearly one of the industry's most creative and talented executives and I look forward to working with him in the years ahead.

As always, we remain focused on continuing to create shareholder value, and, while increasing revenue will be the real challenge in 2006 as we anniversary a very successful STAR WARS product line, it is more likely that we will improve earnings per share and continue to generate strong cash flow.

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

David?

Thanks, Al, and good morning everyone.

I am very pleased with our performance this year.

We grew revenue.

Earnings were up significantly in a difficult environment.

The balance sheet continues to look great.

We ended the year with $942.3 million of cash after spending a total of $220.5 million repaying maturing long-term debt, buying back stock, reacquiring our digital gaming rights, and purchasing Wrebbit Puzzle Company.

STAR WARS exceeded our revenue projections.

It was a strong contributor to earnings and was highly cash flow positive.

As for the amortization of property rights and the majority of the royalties were non-cash expenses.

In fact, we generated operating cash flow of $496.6 million during 2005.

Now let's look at our full year results in more detail.

Worldwide net revenues were $3.1 billion, an increase of 3% when compared to $3.0 billion last year.

This was driven by the strong performance of STAR WARS, most notably in the U.S.

Toys and international segments.

STAR WARS generated close to $500 million in global revenue with about one-third coming from our international segment and the balance from our U.S.

Toys and Game segments.

This compares to approximately $100 million of STAR WARS revenue in 2004.

In our segments beginning with U.S. toy, revenues were up $1.1 billion for the year, up 12.8% compared to $953 million last year.

In addition to STAR WARS, we had strong contributions from a number of other Hasbro-owned brands, including LITTLEST PET SHOP, FURBY, and NERF.

Core PLAYSKOOL performed well, although pre-school licenses such as BOOHBAH and SHREK were down.

U.S.

Toys segment had a number of new twin electronic products, such as I-DOG, ChatNow and VCAMNOW.

These performed well, although in aggregate the revenue contributions from these new initiatives were not enough to offset the year-over-year decline in VIDEONOW.

U.S.

Toys segment operating profit was up significantly to $80 million, compared to $7.2 million last year, primarily due to higher volume and improved product mix, as well as lower advertising and product development costs.

In the Games segment, revenues were $730.6 million compared with revenues of $796.0 million last year, a decline of 8.2%.

The trading card game business declined $43.6 million with both DUEL MASTERS and MAGIC: THE GATHERING down year-over-year, however, I would note that MAGIC did improve significantly in the second half following the release of 9th Edition and the launch of [Ravnika.]

The traditional board game business was down $48.9 million with performance mixed in the major consumer categories.

The adult board game category was down primarily due to Trivial Pursuit, which was particularly strong in 2004 with the release of a 1990s edition.

In fact, Trivial Pursuit declined $32.8 million year-over-year.

The family game category improved year-over-year due to a strong performance of Monopoly.

The children's game category declined, primarily due to difficult counts from a license game, OPERATION SHREK.

Game segment operating profit decreased to $69.5 million compared to $137.6 million last year, reflecting lower overall segment volume, in particular high margin trading card games and charges associated with being overinventoried with a number of new plug-and-play initiatives.

As Al mentioned, the performance of the game segment will be a key area of focus for us in 2006.

However, it is worth mentioning that the traditional board game business continued to deliver operating margins in the high teens.

Revenue in the international segment was $1.2 billion compared to a year ago, which represented an increase of 3.1% in U.S. dollars and an increase of 3.2% in local currency.

Similar to our U.S. business we had strong performance from STAR WARS and new product introduction such as FURBY and LITTLEST PET SHOP.

We also had a number of games that did well including Monopoly Here and Now.

Partially offsetting this was a $62.6 million decline in BEYBLADE, as well as declines in VIDEONOW and trading card games.

International operating profit was $148.1 million compared with $140.8 million last year.

The improvement is primarily due to higher volume and lower advertising expense, partially offset by higher royalty and amortization expense associated with STAR WARS.

Now let's take a look at earnings.

For the year net earnings were $212.1 million, or $1.09 per share, compared to $196 million, or $0.96 per share a year ago.

Excluding the $25.8 million tax impact of a repatriation of foreign earnings under the American Jobs Creation Act, net earnings were $237.9 million, or $1.22 per share.

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

Earnings before interest, taxes, depreciation and amortization were $521.6 million compared with EBITDA of $438 million a year ago.

Gross margin for the year was 58.3% compared with 58.2% last year.

Although relatively flat year-over-year, there were a number of things that impacted gross margin.

STAR WARS had a favorable impact that was partly offset by lower volume from high margin trading card games and lower margins for our electronic toy and game lines.

In addition, margins were negatively impacted by some obsolescence charges on overstocked positions, in particular plug-and-play products.

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

As anticipated, amortization and royalty expense increased due to the high shipments of STAR WARS products.

In looking at the comps, royalty expense in 2004 was also high being impacted by product shipments associated with the SHREK, BEYBLADE and the Disney licenses.

Research and development expenditures were $150.6 million, or 4.9% of revenue compared to $157.2, or 5.2% of revenue a year ago.

Advertising expense was $366.4 million, or 11.8% of revenue for the year compared to $387.5 million, or 12.9% of revenue last year.

The reduction is due to a change in our product mix with the higher percentage of our volume related to STAR WARS, we did not need to spend as much on advertising.

SG&A expense at $624.6 million, or 20.2% of revenue, was down on a percentage basis [INAUDIBLE] increased by $10.2 million compared compared to a year ago.

The increase in actual dollars spent is primarily due to higher incentive compensation provisions.

Absent that, we have been successful in offsetting cost inflation in the areas of salaries, health care and pension benefits by driving efficiencies and process improvements throughout our business.

Operating margin was 10.1% compared to 9.8% last year.

Other income net of $30.9 million included $24.2 million of interest income in 2005, an increase of $16.4 million, primarily due to higher cash balances and higher rates at which we earned on those balances.

Our tax rate for the full year was 31.8% compared to 24.6% a year ago.

Income tax expense for 2005 includes $25.8 million related to the repatriation of $547 million of foreign earnings pursuant to the American Jobs Creation Act of 2004.

Income tax for 2005 was also reduced by approximately $4 million due to a settlement of a prior year IRS examination.

The underlying tax rate for 2005 was 24.9% compared to an underlying rate of 25.9% in 2004.

The year-over-year decrease reflects higher earnings in low tax rate jurisdictions.

Now let's turn to the balance sheet where by every measure we showed improvement this year.

At year end, cash was $942.3 million, an increase of $217.3 million compared to $725 million a year ago.

Our debt-to-cap ratio improved to 24% compared to 28% last year.

Our receivables at $523.2 million were down $55.5 million compared to $578.7 million last year.

Day sales outstanding were 44 days compared to 49 days last year.

Inventories were down by approximately $15 million from a year ago to $179.4 million with approximately $5.4 million of the reduction due to the impact of foreign exchange.

During the year we generated $496.6 million in operating cash flow or free cash flow of $426 million after capital expenditures of $70.6 million.

Over the last five years operating cash flow has exceeded $2.1 billion.

In summary, we finished 2005 with a strong P&L, an even stronger balance sheet, and we generated significant cash flow.

Going forward, we will continue to operate with a financial discipline that has served us well and created value for our shareholders.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Blaine Marder with Loeb Partners.

Your line is open..

Hi, guys.

I think I just heard your free cash flow number was $426 million, is that correct?

Yes, 496 of operating cash flow less $70 million in capital expenditure..

I'm looking at your market cap which is about 3.7 billion, that's about 11% of your market cap, which an insanely high and very good number.

You should be congratulated.

But I want to understand is how you are going to use it?

Did you buy back any stock in the fourth quarter?

We did buy some stock back in the fourth quarter.

We only spent about $18 million against our authorization.

And the reason for that is twofold.

At the beginning of the quarter, we were at our working capital peak and we didn't have a lot of domestic cash.

That was part of repatriating the moneys from overseas, which in fact, we can't use that for buy back, anyway.

But certainly a lot of the cash flow we generated in the year came in the fourth quarter.

And in addition, soon into the fourth quarter we started negotiating with Marvel and we felt we had no material -- we had material, non-public information and, therefore, shouldn't necessarily be buying during that period of time.

I think we're well positioned to continue with our buy back program now.

Okay, would you consider perhaps a Dutch Tender Offer?

You have so much cash it's insane.

If I applied a 30% debt to cap and used your cap, used your cash you could take out a significant percentage of market cap.

I don't understand what the hesitancy is here?

Firstly, a lot of the money that we just brought back under the terms of the American Jobs Creation Act cannot be used for either increasing dividends or buying stock back.

Secondly, ultimately, how we use our cash is a decision for the Board.

That said, our first priority is to invest in our business, and To the extent that there is excess cash over and above that, we probably will return it to shareholders.

We have over $300 million left on our authorization and we have been increasing dividends in the last few years.

There's a good chance we will be returning some to shareholders.

Whether we choose to do that via Dutch Tender as opposed to ongoing open market purchases, it depends on a number of things.

It depends on our Board and it depends on where the stock is at any given point in time, as well.

Okay, guys, very good year.

Thank you.

Thank you, our next question comes Tony Gikas with Piper Jaffray.

Your line is open.

Good morning, guys.

My congratulations, as well.

Couple of questions.

You talked about potentially seeing some additional cost control or reductions during 2006.

Can you be more specific where that's coming from?

It sounds like maybe in the games business.

Also, how could '06 earnings benefit from mix during the year?

Okay, I'll take the first one, Tony.

In terms of cost control reductions, we aren't planning any specific reductions.

I think we will just continue to try and improve our business process effectiveness as we have been in the last couple of years.

It isn't an issue where we have identified some organizational structure that we're going to revamp and have layoffs or anything like that.

In fact, the reorganization that we recently announced as a combination between Toy and Game is not a cost reduction effort.

And probably any savings we make there would be incidental and probably be reinvested into other areas of the business.

What we are really focusing on is the business process improvements we have, just doing things a lot better and more effectively than we have in the previous year.

I think we've had a lot of success with that.

It doesn't always have to come in the form of head count reductions.

In the form of mix, I'll let David take that one.

But certainly that will have some impact on that as a result of the STAR WARS brand.

But David?

I think there's a number of things that bode well in terms of profitability next year or margin.

Firstly, STAR WARS was, obviously, a very large part of our mix this year.

It's gone from being a non-profitable brand in '02 and it was certainly profitable in '05.

However, whenever you get strength with a license like STAR WARS in the boys action figure market, it does take away some of the sales of things like Transformers, G.I.

JOE, and ACTION MAN, and all of these properties that we own and really don't pay any royalties on are, obviously, more profitable as they bounce back next year.

Indeed, we did a lot to relaunch G.I.

JOE SIGMA 6 in the back half of the year.

We relaunched Action Man ATOM in Europe in the back half of the year, and there was new program and newness in Transformers in the back half of the year.

I think we see all of those brands growing as we go into in 2006 and STAR WARS comes off a bit.

I think the other thing is I spoke in the conference call when I made my formal remarks, I said that we had a number of charges, obsolescence charges associated with our plug-and-play business.

I think this year we came with a very broad plug-and-play line, which didn't perform as well as we would have liked.

I think the plug-and-play industrywide was a bit off as a category.

And as a result, we had fairly significant obsolescence and markdown charges associated where our plug-and-play line.

I think the other area where we feel we should get better next year is Magic: The Gathering, particularly in the first part of this year was down.

The KAMIGAWA release wasn't that strong.

As we got into the second half of the year and we released the 9th Edition and then launched Ravnika, Magic sales have picked up pretty well, and Magic: The Gathering is 71 of our highest gross margin brands.

They're probably the main areas where I see margin [TAPE GOES BLANK] the fact is which will help margins as we go into next year.

Okay, two quick follow-ups.

Any update on key incremental product flow for 2006 that you can update us, today?

I know we'll get to see a lot of this later this week and then second question, an update for us on your operating margin goal, at least, maybe the longterm goal?

In terms of the product offering, I think, probably the best thing to do is wait until Friday when we show you the 2006 product line.

In terms of the operating margin goal, it's unchanged.

We said originally back in '01 that we wanted to get to 10%, and thereafter we thought we could get to 12% or better.

It's been a very difficult couple of years in the toy industry, we've had a lot of headwinds, and we are making progress, our margin's up a bit this year, and we certainly haven't given up on the goal of getting to 12% or better over time.

Okay, thank you.

Thank you, and our next question comes from Elizabeth Osur with Citigroup.

Your line is open.

Thanks, just a couple questions.

First of all, could you talk about the B-Daman line?

You had originally talked about that as a potential offset to the STAR WARS decline next year?

Could you just speak about how initial sales were on the product and what kind of reception you're getting?

Okay, B-Daman did very well in Canada, started off well in Europe, did not do as well here in the U.S. as we thought it would.

I think TV placement had a lot to do with it.

Excepting a few small markets, we're not going forward with it next year.

Okay, thanks.

And then with regard to just looking out at the model for next year, obviously, one of the reasons advertising came down was the increase in STAR WARS sales.

But should we think a return to prior levels as being in the high 12% area?

That's probably reasonable, yes.

And then longer term, just kind of big picture, can you give us some sense of how we should be thinking about the Marvel license and how that might compare to the STAR WARS license in terms of profitability or other expectations?

We don't want to get into forecasting here.

But there's no question that the Marvel license is a very important license.

You look at the characters between Hulk, Fantastic Four, and, of course, Spiderman.

We have the movie coming in '07, so we're certainly excited about the prospects.

I think the profitability in the line will be very good for us, as long as the movie does well and the product line does well, we're very confident that it will.

I think over the next at least five years we're expecting great things from that license.

Time will tell.

Okay, and then sorry, last question, just housekeeping, could you comment on the size of the inventory obsolescence charge this quarter?

David, you want to comment on that?

Basically, I think, if you look at our Games business there's three different parts to it.

There's the Trading Card Game business.

There's the Electronic, which would include plug-and-play and game video discs like Shout, and there's the traditional Board Game business.

I think I said on the call that our traditional Board Game business was still making operating margins in the high teens.

Seeing as we delivered under 10% overall, that means something was seriously down, and, in fact, we made an operating loss of $23 million in what we would call the Electronic Game area, which included all the plug-and-play, and the game video discs, such as Shout.

Okay.

And that took place primarily in the domestic market.

If you look at the DVD game business in Europe, it did very, very well.

That was really focused on the domestic game market.

Okay, thank.

Thank you.

Our next question comes from David Leibowitz with Burnham.

Your line is open.

Good Morning.

Good morning, David.

A few things.

First, if we leave out STAR WARS from the equation, how many dollars worth of 2005 sales will not be in the line for 2006?

David, you ask this question every year.

I know.

Eventually I'm going to get an answer.

I give you the same answer every year.

No, I don't have the exact number handy.

But I think in general, you look at this industry somewhere in the neighborhood of 25% to 30% of your line will be brand new each and every year.

I think if you look at 2006 versus 2005, you know, you're probably talking somewhere in the neighborhood of the same percentage.

That includes any decline in STAR WARS.

Second of all, the, getting back your rights to electronics, how much were the dollar sales of electronics when it was not within your capacity to run them?

I think what you're referring to is our digital gaming rights.

Correct.

And when we talk about our digital gaming rights, that goes back to the time we had Hasbro Interactive Entertainment.

At that point in time we were doing primarily PC-based games.

If I remember, we had a couple of hundred million dollars in revenue but we were losing about $125 million a year.

That's why we sold that business to Infogram/Atari.

We acquired those digital gaming rights this past year for about $65 million because we think we're in a better position to exploit those rights than Atari was given the financial improvement in our business the last couple of years.

That doesn't mean we're not going to do some licensing because we certainly are continuing to do some licensing.

This would be a future growth opportunity for us.

It's kind of hard to say that we had revenue going back five years ago of $200 million and losing 125 it's probably not an apples-to-apples comparison.

Could you tell us what Infogram/Atari did with the line last year?

They were probably doing somewhere between $70 million and $100 million wholesale with our brand.

Given that the average royalty rate is probably about 10%, that means we were potentially getting anywhere up to $7 million, up to.

I think on a go forward basis, we believe our digital games rights are worth a lot more than that which is why we spent $65 million to get them back.

There's a huge industry out there for licensed games in the digital area.

We believe that wholesale, people that we license could be doing hundreds of millions of dollars with our gaming rights and we would get royalties off of that.

And the last question somewhat related.

What percentage of your line in '06 will be electronic in every format?

I don't have that answer.

Okay, thank you very much.

Thank you.

Thank you.

Our next question comes from Sean Mcgowan with Harris Nesbitt.

Your line is open.

Hi, guys.

Good morning.

A couple questions I think should be pretty quick.

First one, did you see any meaningful increase in returns in your -- given your increase in electronics?

Specifically, thinking about ChatNow and things like that.

Was there any uptake in returns?

No, ChatNow was fine.

I-Dog was fine.

VCam was fine.

So it was nothing like what we had had in terms of VideoNow a year ago.

Plug-and-play, you know, we've had not so much returns as markdown provisions and allowances.

Okay.

And I also want to ask about VideoNow, is there any repeat of what happened last year?

Didn't it have like a price reduction and then some retailers came back for protection on that?

No, VideoNow is fine.

We came with VideoNow XP, which was a much lower priced item.

We didn't do anywhere near the volume of VideoNow that we did in '04, which was a very big VideoNow year.

Yes, I just got concerned because we saw it at Target for $20 last week and I was afraid of a repeat.

How did STAR WARS in the fourth quarter, is that a number you can give us?

STAR WARS, as you know, it was 494 in total for the year.

There was just over $100 million in the fourth quarter.

Okay, great.

Thanks.

The last thing, any color on geographics performance on revenue?

What were the strong markets?

What was up?

What was down?

Thanks.

In general, Europe had a good year.

I think if you went through the market, we had a very good year in the U.K.

I think the U.K., in general, was -- the market itself was flat.

France was up.

Germany was in the market, now down.

Spain had a good year, Italy was down a bit.

It was sort of mixed in Europe.

But if I look at the three majors, our strongest country in Europe would have been the U.K.

Canada had a very good year.

Mexico was okay.

Then the rest of the countries are pretty small in relationship to the overall.

But the mix between international and domestic, we made pretty much the same in that 60/40 area.

Thank you very much.

Okay, Shawn.

Thank you.

Our next question comes from Thomas Russo with Gardner, Russo.

Your line is open.

Hi, good morning.

Congratulations, Al on the organizational change, as well as all the good numbers.

Thanks, Tom.

Brian, I'm sure is certainly excited about the COO spot.

So congratulations.

A couple of questions.

With the plug-and-play, to what extent has there been any collateral impact do you think on the core board game trademarks, if those plug-and-play properties extended off of your traditional boards?

The games that did not do well did not use any of our branded, typical branded games, so we did not have a Monopoly plug-and-play, for example.

It was MX Dirt Rebel and a couple of others that really didn't do well.

Other than STAR WARS, there weren't any truly branded plug-and-play games.

In STAR WARS, the Lightsaber game was one of the plug-and-play games that did very well.

I don't think there will be any collateral -- any negative impact as a result of the plug-and-play games.

Okay.

And so the migration off of the core board games into the electronic enhanced versions, such as the game of [life] or some of the other games where you've added electronics, that was not part of the same electronic trouble this --

No, where we have extended some of our traditional board games into -- I wouldn't call it electronics, but we've had the DVD version.

A couple of years ago we had the Trivial Pursuit 20th Anniversary DVD version.

So we've done DVD versions of some of our board games, and they've been quite successful.

Great.

Talk a bit about the China supply efforts and how is that working?

Is it becoming really quite a non-issue or is there anything going on there we should be aware of?

Last year was probably, you know, a better year than the year before that in that there had been, coming into the year, a lot of speculation about port delays on the West Coast.

We did not incur any port delays and we didn't have any difficulty getting our product to market.

Cost increases continued to be an issue around the world, whether it's China or here in the U.S. depending upon where raw material prices are and labor costs continued to rise, in those parts of the world, although China remains a very competitive place to do business.

I don't see anything unique in China.

We have not had any difficulties in terms of the Asian flu or anything like that.

So-so far so good.

Okay.

Currency seemed to have a relatively muted impact in light of the fact that your fourth quarter sensitive as a Company, your back half of the year sensitive and currencies would have been more adverse towards the end of last year than the beginning.

I'm surprised that the currency wasn't more impactful.

I think you're right.

In the fourth quarter this year, we ran about a $1.20 against a year ago as $1.35 in the prior year.

We clearly were adversely impacted by currency in the fourth quarter, slightly in excess of $20 million.

But for the first three quarters of the year, we had made money because the average rate for the first three quarters of '05 was higher than the average rate for the first three quarters of '04.

I see.

It became very -- in the first three quarters we were gaining from currency and in the fourth quarter we lost because of currency, but it netted out to be about flat for the whole year.

I see.

David, could you give us the STAR WARS only impact?

Lift to operating cash flow, you gave us the almost $400 million lift to revenues, how much of an impact in light of the non-cash charges, as well as operating profits, would you suggest that STAR WARS added to the operating --?

Clearly, it was very significant.

People know, I think we said at the analyst meeting in New York last year, that we were charging, through the P&L between royalties and property right amortization about $0.30 on the dollar.

So if you figure we did $500 million worth of STAR WARS, 30% of that would have been expense through the P&L.

But most of it, other than $35 million we had to pay on the release of the royalty, the last part of the royalty, most of that was non-cash.

We feel extremely good about having $496 million of free cash flow last year.

But STAR WARS was certainly a major contributor, and it won't be repeated to the same level next year, or this year, '06.

Yes, thank you, David.

The next question comes from Margaret Whitfield with Ryan Beck.

Your line is open.

Yes, good morning, everyone.

Congratulations.

Thank you, Margaret.

In looking at how well STAR WARS did in trying to model forward by quarter '06, it would be helpful to understand the ebbs and flow.

I think you said it was over $100 million in Q4, how much was the second quarter contribution in '05 to top line?

Basically, we have our analyst meeting on Friday where we try and answer some of your questions, but you're getting us to answer them now, so you're stealing our material.

But, basically, Quarter 1 STAR WARS was $90 million, Quarter 2 STAR WARS was $128.8 million, Quarter 3 it was 116.7, and Quarter 4 it was 104.2, and that comes up to 440 which is STAR WARS branded.

Then we also had some co-branded such as STAR WARS Monopoly and Darth Tater, for example, and then there was a Tactic STAR WARS.

That was another 53 million in total.

I think the breakdown of that by quarter was 11 million in the first quarter, 18 in the second, 10 in the third, and 15 in the fourth.

So then the follow-on, I know you don't want to discuss your toy line, but is there anything in the first half line, particularly in Q2, to help you against the big number that STAR WARS contributed?

We're not going to get into forecasting the line other than to say clearly there will be some fall off.

So that would be the challenge.

STAR WARS continues to do well in retail.

It's not like we won't be shipping any volume.

But I'm not going to forecast any particular product that's going to make up for the STAR WARS in the second quarter.

Will there be any shipping of Marvel product late in the year in '06?

Yes, there's a good possibility that we will be shipping Marvel product in the back half of '06.

The [tween] segment was not listed as one where you expected improvement in profitability in '06, with VideoNow dragging the segment down in '05, do you have a better outlook for '06 for tween products all in?

It wasn't so much VideoNow in '05, I think it was because there were products in the tween category that made money and did well for us, the best example of that being I-Dog.

It's the overall profitability of the category that we're working on.

I think we will see improvements in '06.

Okay, could you comment with the retail consolidation, what you're seeing in terms of retail inventory levels, as well as interest in shipping products currently?

Well, I think, in general, the inventory at retail is in pretty good shape.

I think that certainly Toys R Us has commented that their inventories were substantially lower than a year ago, which was a real focus for them.

I think they felt pretty good about where they finished the year.

I think the other retailers, in general, who have been practicing inventory management for a while now all finished the year in pretty good shape.

In terms of their attitude coming into the first part of -- the early part of '06, they seem to be in a good frame of mind.

And so far, we haven't seen any abnormal hesitancy to take part.

They are very focused on managing inventory.

That's an every day way of life for both the manufacturer and the retailer.

I think they came out of the year feeling pretty decent about the season and how they finished up.

Did you grow with all three major retailers in '05?

No, we did not grow with shipments in, with all of the retailers in '05.

Did you grow with two of the three?

I'm not going to get into forecasting.

I think that I would tell you our volume was down with one retailer we've been really focused on overall inventory management, POS was good with those people, though.

So I look at the combination of both.

Okay, thank you, Al.

All right.

Thank you.

Our next question comes from John Taylor with Arcadia.

Your line is open.

Hi.

Congratulations from me, too.

I've got a question kind of about the STAR WARS contribution.

One of the things you intended to do by renegotiating that was neutralizing impact on profitability, I'm wondering if you could talk at all about -- you know since the amortization accruals and all that stuff are pretty clear in advance and there's a disconnect between cash and accrual here.

Was there much variance in the contribution margin from the STAR WARS line?

Did it pull up, pull down, was it about the same as the consolidated total?

I think if you go back and follow the history, in '02, we said that STAR WARS was a break even business.

It wasn't making any money, even at a contribution level.

We were having to chargeoff, pre-negotiation we were having to charge off almost $0.50 on the dollar to cover our commitment to Lucas.

At our analyst meeting this time last year, we said that as we came into '05 we expected STAR WARS to be profitable, but not as profitable as other brands in our line because the effective royalty and amortization rate was closer to about 30%.

We've exceeded our volume expectations this year fairly significantly from what we expected coming into the year.

As a consequence, we're now spreading our commitment to Lucas in royalties and amortization over a higher volume base which means the effective rate comes down.

So coming out of '05 STAR WARS was as profitable as our corporate average.

However, still not as profitable as some of our other boys lines, such as Joe, Transformers and Action Man that was partly substitutional for those brands, and we expect them to come back next year

Okay, great, thank you.

That's a good answer.

Are you guys thinking at all about core versus non-core anymore?

If not, it's a quick answer no.

If so, could you talk a little bit, try to quantify those changes year-on-year?

We do think about core and non-core.

We tend to focus more on what we call owned and operated brands, those brands that we really own or control for a long time such as STAR WARS.

But going back during the last several years, we had this term core brand drivers that were about 11 to 12 brands that we really wanted to focus on.

I think, in general, over the last five years we've done a decent job in that area, although we haven't done as well as I had hoped we would have done.

This year, we had sort of a mixed reaction, as David mentioned earlier, G.I.

Joe, Transformers, Action Man were down for the year due primarily because of the strength of STAR WARS.

On the other hand, MY LITTLE PONY was up, NERF was up.

We've had a mixed bag but we still do focus on that, no question about it.

As you're looking into '06, do you think the core area is one which can snap back?

I mean, how are you thinking about that?

I think we're going to have a much better year in PLAY DOH and in PLAYSKOOL.

I think when you see the line on Friday, you'll come away with that same feeling.

Monopoly had a good year, which is another core brand.

And we expect it to have a good year next year.

We expect G.I.

Joe, Transformers and Action Man all to improve.

I would expect that, and, of course, Magic: The Gathering, Magic was down this year, although it began to come back in the fourth quarter.

It's doing well in the early part of '06.

I think the core brand drivers, as we refer to them, will have a much better year in '06.

Last question.

I think you guys were distributing BRATZ at least in some European markets.

Was that a material number in '05?

And any update on plans going forward?

No, it was not material in '05.

We're pretty much out of BRATZ with the exception of France, where we're still going to be distributing some product for them.

But not a material number.

Okay, thank you.

Thank you, our next question comes from Felicia Hendrix with Lehman Brothers.

Your line is open.

Hi, guys.

By now I have housekeeping questions left.

Wondering if you could just elaborate what was in the other income line?

I think the largest part of the year-over-year improvement was, clearly, in interest income.

We had significant cash balances throughout the year and the rate -- the interest that we were earning on those balances, obviously, kept going up every time the Fed increased their rates, short term interest rates.

I think there was like a 16 million year-over-year improvement in interest income.

And then there was a couple of other things in there.

I think other expense included the Lucas mark-to-market which was less this year than the last year.

I think there was a small gain on the sale of an asset in Valencia, a factory there in the early part of the year.

But, clearly, interest income reflecting higher cash balances and higher rates at which we earned interest was the major factor.

Last year, we also had a writedown of our Infograms shares that we held.

We had a writedown, somewhere in the region of 6 million to 8 million last year.

So that was a large factor.

Talking about options expense now, I was wondering if you could give us some color how we should think about that in our numbers for '06?

I know in your filings you say in '06 the pre-tax expense should be about $16 million to $17 million Should we use that number?

Pre-tax we're thinking that it will be about $20.5 million next year, which is equivalent to net, that's about 50 and that's about $0.08 per share.

We're going to be adopting on a prospective basis so we won't be restating '05.

But just for your information, '05 would have also been about $0.08 a share.

When you said pre-tax $20.5 million next year, you mean '06, right?

'06, yes, sorry.

In your filings, you also usually break out your revenues by boys toys, games and puzzles, and pre-school toys, and other.

I was wondering if you could do that at this point?

That would be in the K.

Do you have also in front of you the breakout of royalties in R&D expense?

I do.

I think we --

You report it together, but --

Our royalties for the year were $223 million -- sorry, $247 million.

And research and development was $150 million.

$150 million, okay, I think that's all I have left.

Thank you.

I mentioned it separately on the call, I think.

Thank you and our final question comes from Elizabeth Osur with Citigroup.

Your line is open.

Thanks.

I apologize if I missed this but, I didn't hear any reference to your pricing increases this year?

I know Mattel said last week they were looking for low single-digit increases again this year, but they're going to be implementing those after Easter instead of in January last year.

Could you guys just comment on what you're doing in terms of pricing?

Thanks.

We did not comment in the -- on the call in terms of price increases.

Price increases have certainly, one, sort of arrow in the quiver in trying to deal with the increase in cost of doing business.

I think our position going into '06 will be the same as it was in '05, and that is there will be individual product lines where, perhaps, we will take price increases, but the notion of taking an across the board 2% to 3% price increase at any particular time is not something we've announced.

Okay, thanks a lot.

Thank you.

Okay, I guess if that's the last question, I would just remind everyone to join us on our web cast, or perhaps in person at our analyst event this coming Friday in New York.

Thank you very much.