孩之寶 (HAS) 2006 Q1 法說會逐字稿

Good morning and welcome to Hasbro's first-quarter earnings conference call. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

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

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

Thank you and you may begin.

Thank you and good morning, everyone.

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

To better understand our first-quarter results, it would be helpful to have the press release and financial tables available that we issued earlier today.

The press release includes information regarding non-GAAP financial measures discussed on today's call.

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

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.

Additionally unless we specify otherwise when we compare our earnings or EPS to the first quarter of 2006 to our earnings or EPS for the first quarter of 2005, the 2005 numbers are adjusted to include the amount of stock compensation expense under FAS 123.

A supplemental schedule attached to today's earnings press release provides a reconciliation of our reported earnings and EPS for the first quarter of 2005 to the numbers as adjusted for stock compensation.

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 during the 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 financial performance, product plans and the economic environment.

There are many factors that could cause actual results and experience to differ militarily 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 and today's press release and in our other public disclosures.

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.

Thank you, Karen.

Good morning, everyone.

Thank you for joining us.

We are very pleased with our first-quarter performance.

Revenues were up 5% in constant dollars with many of our core brands continuing to perform well around the world.

For the quarter we reported a net loss of 4.9 million or $0.03 per share compared to a loss of $7.2 million or $0.04 per share in 2005.

In addition, we continued to actively purchase shares as part of our share buyback program.

The Board of Directors increased our quarterly dividend to $0.12 per share, the highest it has been in our Company history.

Overall our business is good with all major product categories performing well.

Although as expected our boys business was down from a year ago, given the decline in Star Wars.

Excluding the decline in Star Wars, the boys business was up significantly from the prior year driven in part by the strong performance of TRANSFORMERS which improved significantly year-over-year.

On a global basis, Star Wars continues to do well.

Our shipments were $51 million this year compared to $101 million in the prior year.

We should mention this is the first quarter we are reporting under our new management structure.

As we previously announced in February, beginning in 2006, we are managing our business in North America as one segment, which includes what was formally the U.S.

Toy and Game segments, as well as Mexico and Canada, formerly part of the International segment.

I would add that under the leadership of our newly appointed Chief Operating Officer, Brian Goldner, the integration of these markets and businesses into the North American segment is proceeding well.

Revenue growth in the first quarter was driven in part by the strong performance of the North American segment where revenues increased 7% year-over-year.

We are particularly pleased with the performance of our board game business.

The category was up 11% year-over-year in the North American segment with a number of games performing well, including CANDY LAND, SCRAMBLE, MONOPOLY and the GAME OF LIFE.

If we look at retail sales in the U.S. for our top four accounts moving into the second week in April, which allowed for an Easter to Easter comparison, our toys and games are selling well.

Board games, preschool, girls and seasonal goods were all up, as the balance of the boys business, excluding the decline from Star Wars.

Overall our trading card game business was down from a year ago due to the decline in DUEL MASTERS and the reduction of royalty income.

However, MAGIC THE GATHERING, our preeminent trading card game was up 48% year-over-year as new releases have been well-received with more to come in each of the remaining quarters.

In the International segment, revenues were up 2% in constant dollars, reflecting strong performance from MONOPOLY, PLAYSKOOL and LITTLEST PET SHOP.

Partially offsetting this were declines in Star Wars and trading card games.

While we feel good about the business for the full year, it is worth noting that the second quarter will be challenging.

You may recall we shipped $147 million of Star Wars product in the second quarter of '05.

Even if our first-quarter trend of an approximate 50% falloff continues, we will have to make up over $70 million in volume.

We feel very good about the new product lineup for 2006 and the table we are setting for 2007.

As we began to think about 2007, we are very excited about the opportunities given the anticipated July 4, 2007 release of the TRANSFORMERS move, as well as all the great Marvel properties, including the scheduled release of Spider-Man 3.

Later this year you will start to see initial product shipments associated with the Marvel license.

We believe it represents a great opportunity for Hasbro over the next five years.

Going forward we will continue our strategic focus on bringing innovation and excitement to a broad range of products in our toys, games end twin electronics categories with a focus on our core brands.

In closing, we have a lot of great plans ahead.

We're excited about the breadth and depth of our product line and remain focused on continuing to create shareholder value.

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

David?

Thanks, Al, and good morning, everyone.

I'm pleased with the results we reported today.

Given the difficult comps with Star Wars and the timing of Easter, we delivered a very solid topline performance with revenues up 3%, including an 8.7 million negative impact from foreign exchange.

Before I go into more detail on our results, there are a number of things that I would like to point out that impacted the quarter.

Firstly, the adoption of FAS 123R, expensing stock price compensation.

This resulted in a 6.2 million pretax expense during the quarter, and as we indicated in February, we are not restating our 2005 reported results.

But we have included a table in our press release that provides 2005 quarterly results that include the effect of stock price compensation.

Secondly, as Al said, we are reporting under our new segment structure.

Accordingly, in our press release today and on this call, we have restated the prior year's segment results to reflect this change.

We have also restated segment data to reflect the impact of FAS 123R.

This gives a more meaningful picture of segment performance.

And finally, the first quarter of 2006 comprised 14 weeks compared to 13 weeks in 2005, so there is an extra week of salaries and other fixed expenses.

Now let's take a closer look at our topline results.

Worldwide net revenues were 468.2 million, an increase of 3% when compared to 454.9 million last year.

In constant dollars, revenues were up 5% year-over-year.

North American segment revenues were 310.3 million, up 7% compared with 288.7 million last year.

As Al mentioned, we grew revenues in all of the major toy product categories except boys.

In the preschool business, our core PLAYSKOOL brand performed well.

In the girls category, LITTLEST PET SHOP increased significantly.

In the tween category, both NERF and SUPERSOAKER experienced double-digit growth.

TRANSFORMERS was a strong performer in the boys category with the brand nearly doubling as compared to last year.

But as expected we did experience a significant decline in the boys category due to Star Wars.

Al has already talked about the games category, so let me move onto operating profit.

North American operating profit increased to 4.8 million compared to 4.6 million last year.

The benefit of higher revenues were largely offset by the impact of mix changes and the extra week of expenses.

Revenues in the International segment were 145.5 million compared to 153.1 million a year ago.

This represented a decrease of 5% in U.S. dollars.

However, revenues increased by approximately 2% or 2.8 million in local currency.

There was only one other brand that I want to mention other than those Al has already talked about, our MONOPOLY brand.

Internationally MONOPOLY was up double-digits driven by the success of MONOPOLY HERE & NOW, MONOPOLY EXPRESS and the 2006 (indiscernible) WORLD CUP EDITION.

After a successful anniversary celebration last year, we are particularly pleased with how well this core brand is doing.

The International segment incurred an operating loss of 8.3 million compared to a loss of 7.9 million last year, impacted for the most part by a declining gross margin related to changes in product mix.

Now let's take a look at earnings.

In the quarter we reported a net loss of 4.9 million or $0.03 per share, including a stock-based compensation expense of $0.02 per share.

This compares to a loss of 3.7 million or $0.02 per share in 2005.

However, 2005 did not include the effect of stock-based compensation expense of $0.02 per share.

In other words, on a like-to-like basis there was a $0.01 per share improvement.

Earnings before interest, taxes, depreciation and amortization were 33.5 million compared to EBITDA of 42.6 million a year ago.

Gross margin for the quarter was 60.3% compared to 63.5% last year.

The decline is primarily due to changes in product mix, most notably the decline in Star Wars volume.

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

As expected, [loyalty] and amortization expense declined due to lower Star Wars volume.

Research and product development expense was 38.2 million or 8.2% of revenue compared to 31 million or 6.9% of revenue a year ago, reflecting our investment in Hasbro owned brands and new product initiatives, as well as the extra week of expenses.

Advertising expense was essentially flat at 54.9 million or 11.7% in revenue compared to 54.2 million or 11.9% in revenue last year.

SG&A expense at 147 million or 31.4% in revenue was up a little on a percentage basis and increased by 10.4 million compared to a year ago.

The increase in absolute dollars spent is primarily due to the extra week and the expensing of stock options.

Excluding the impact of nondeductible expenses related to the Lucas warrants, our underlying tax rate for the quarter was 26.1% compared to 28% a year ago.

Now let's turn to the balance sheet.

At quarter end cash and short-term investments were 729 million compared to 876.9 million a year ago, down 147.9 million.

Over the past year, we have been returning our excess cash flow to our shareholders through our share buyback program and higher dividends.

During the first quarter, the Company repurchased 4.5 million shares of common stock at a total cost of 93.7 million.

This was in addition to the 2.4 million shares we repurchased for 48 million in 2005.

This leaves $208.3 million of remaining authorization under the $350 million share buyback program.

In the first quarter, our Board of Directors increased the quarterly cash dividend payable in May to $0.12 per share from the previously recorded dividend of $0.09 per share.

This marks the third year in a row Hasbro has increased its dividend, and it is now the highest it has been in our history.

In an effort to improve our yield on short-term cash and diversified risk, we began investing in option rate securities.

These are reported on the balance sheet as short-term investments.

Our receivables at 221.9 million were up 22.3 million compared to 199.6 million last year.

Days sales outstanding were 43 days compared to 39 days last year; however, absent the impact of changes in securitization DSOs would have been down three days.

Inventories were down by approximately 19.5 million from a year ago to 213.2 million with approximately 3.8 million of a reduction due to the impact of foreign exchange.

At the end of the quarter, our debt to cap ratio was 24% compared to 28% last year.

In summary we are off to good start this year with a number of our core brands performing very well, including PLAYSKOOL, TRANSFORMERS, and our MILTON BRADLEY and PARKER BROTHERS board games.

Clearly Star Wars was stronger in the quarter than we expected; however, it is still very early in the year, and there is a tremendous amount of business yet to be done.

Given this, we are not changing our outlook for the year.

We still believe it is unlikely that we will be able to grow revenues in 2006, but it is more likely that we will be able to increase earnings per share on a reported basis.

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

(OPERATOR INSTRUCTIONS).

Sean McGowan.

Harris Nesbitt.

I have two questions, maybe the first one for Al and then for David.

Al, what would you say is the outlook for your board game business in the second quarter?

Do you expect that kind of improvement to continue into the second quarter?

And David, if you could just address how the EPS impact of the Star Wars revenue shifts as the year goes on?

Is the revenue dollar as profitable in the first part of the year as it is in the second part?

Good morning.

I'm not going to get into forecasting sales for any element of the line.

We certainly have a lot of promotional activity that we're going to be putting behind the board game business for the entire year, including the second quarter.

We want to fix this business from a year ago, and we have got some exciting new product coming throughout the entire year.

So we are certainly looking for improvement.

But as to forecasting a specific number, I don't want to do that.

In terms of Star Wars, certainly at the variable contribution margin level, it would be consistent throughout the year.

Obviously in the early part of the year when sales overall are lower and you are spreading your fixed cost over a lower sales base, that brings down the overall profitability of any brand at the operating profit level.

But on a contribution, variable contribution margin level, it will be consistent throughout the year.

Tony Gikas.

Piper Jaffray.

Just going back to the board games business a little bit, could you provide a little bit more color on what was the primary drivers there?

Was it price or volume or new product introduction?

Was it domestic, international?

The second question, how meaningful could transportation surcharges be in the back part of the year?

And the third question, the International segment down in the quarter, maybe just a little more color there and your expectation for the year?

Okay, Tony.

I will let David talk about the impact on transportation cost in a moment.

In terms of the board game business, if you remember last year our board game business was pretty solid in the International arena.

Where it fell off was in the domestic market.

We are up, as I said, about 11% in the U.S. in the first quarter.

The International business was flat with the year ago.

So we are very pleased with that, given that the games business was pretty strong last year in the International markets.

In terms of what is driving it, you know I think it is a combination of a lot of factors.

We are promoting the games.

We have not significantly changed the price.

We have seen just a general uptick in business.

In fact, from a promotional perspective, we actually have a little bit less promotion going on in the first quarter this year than we did a year ago in that one of our major customers did not anniversary a buy one/get one free that they ran last year.

We came out of last year in a good position inventory-wise.

So I'm sure that has helped a little bit.

But we have had good retail movement with the games business in the first quarter.

Hopefully it will continue, but it has been driven mostly by the domestic at this point, which we would have expected given that is where the falloff was last year.

In terms of the overall International business, it is up 2% in constant dollars.

I think the falloff in Star Wars proportionately was a little heavier in the International market than it was in the North American and particularly the U.S. market.

But I'm really comfortable about where we are internationally.

Now remember internationally we are not including Mexico and Canada.

That is part of our North American segment.

Our business in Canada is very strong, so overall we're feeling pretty good this early part of the year.

In regard to the price of oil and the price of gas and what that may mean for us, clearly at $75 a barrel, we will start to see increases in gas prices already happening.

However, while it has not been helpful, we don't think there will be a material adverse impact.

I say that for two reasons.

The two areas of transportation which potentially could be impacted are ocean transport from the Orient vendors to the U.S.

West Coast port.

The freight carriers have been adding a lot of capacity, and it is very competitive in terms of their bidding at the moment.

We have been able to lock in rates for '06 which are actually a bit better than we had in '05.

We have also locked in the amount of bunker surcharge that we have been paying.

With regard to the other component, which is really from our warehouses to our customers, yes, that will clearly be impacted by the price of gasoline.

However, it should also be noted that about a third of our volume is shipped overseas from the Orient, so our customers actually pay that part of the transportation.

So overall I would certainly agree that it is not helpful that these costs are increasing, but also it is not going to be materially adverse to our potential profitability.

Elizabeth Osur.

Citigroup.

Just two lines of questions.

First, I was hoping you could give a little more detail on retail inventories specifically in the board games business now that it has had such a strong first quarter?

And then just in general in terms of where inventories stand in the U.S. versus international?

In terms of our -- we came out of last year generally with a pretty good inventory position at retail.

That remains the case right now.

Other than an item or two which you always have in this business, our inventories were in very good shape at year-end.

Our inventories at the end of the first quarter or even if we look at it through the middle of April, we're comparing Easter to Easter, we are in good shape in the sense that our retail sales are running at a level pretty consistent with what we're shipping out.

So we are not really building inventory in general.

That is the case both here and in the major European and major international markets.

Okay, thanks.

And then could you just point out a little bit more on the gross margin decline and maybe any other major factors besides the decrease in Star Wars sales that had an impact on gross margin?

I think clearly everyone has always known that Star Wars is a very high gross margin item for us, and then we give a lot of it back on the [warranty] and amortization line.

I think the decline in Star Wars is clearly a significant impact.

I think the other thing is although not as significant we have had the cost increases year-over-year.

I think the other thing is that is another element in our mix, we used to get some royalty income on [UDL] trading card games.

We did not sell them, but we had a patent on the play patent.

So as UDL trading card games, which we did not sell, have come down, our royalty income, which is a straight pass-through to the bottom line, has declined fairly significantly.

So that had another impact on margin.

So I think it is number one is Star Wars, mix in other areas, including the UDL royalty income, growth in our PLAYSKOOL which tends to be less profitable at the margin level, and a little bit in terms of the cost increases.

Thomas Russo.

Hi, David.

Any developments you want to share with us about the traditional toy/game retailers?

Then possibly speak a little bit if anything is developing in the electronic commerce side for your business that is beginning to be meaningful?

I'm not sure we can (indiscernible) your first question?

State the health of your retailers.

How did the concentrations look by retailer?

What is the development?

Is there anything of note this quarter and possibly later throughout the year in terms of the pattern of orders and where business is being done?

I don't see any significant changes there.

The top four accounts last year or the same top four accounts this year in terms of the U.S. segment.

If we look at our custom makeup and order pattern and things of that nature, I don't see anything dramatically different.

Obviously it took less Star Wars.

You know when you have a movie, they will take goods earlier in the year than they otherwise would have.

But in terms of ordering patterns, in terms of who the major customers are and who is running promotions, no significant changes at all.

I think one of the other things is a year ago we talked about a lot of uncertainty in the retail toy industry because at that time no one was sure what was going to happen with Toys "R" Us, no one was sure whether Kmart was going to stay in the toy business, and people really did not know where KB was going to be emerging from Chapter 11.

So I think it was some of those fundamentals about specialty toy retailers and Kmart being a big box retailer.

I think a lot of that uncertainty that we had a year ago has clearly diminished as we come into kind of a first-quarter issue.

Thank you.

Share repurchase, the amount that you discussed year-to-date was considerable, and what would your plans be going forward with a balance of 108 million?

Well, our Board has authorized 350 million as you know.

We have got 208 million outstanding.

We have clearly said that it is our intention to return excess cash flow to shareholders.

So I think from that you can assume that we will continue to be buying on a similar level as '04 was.

Obviously it depends a little bit on the price of the stock as well.

I think you can basically assume that we will continue with an aim of finishing out the current authorization.

Okay.

And then last question, David, the currency impact, where is it most forcibly felt?

It seemed like there was a high degree of swing in currency.

Where is it most dramatic?

I think if you look at Europe, I think for the first quarter of last year the Euro was roundabout just over 130.

And if you look at the Euro this year through the first quarter, it has been just below 120.

So I think that was the most significant swing as we translate Euro-based revenues and earnings back to U.S. dollars and Sterling was very similar.

Sterling I think was the differential year-over-year is about similar on Sterling as it has been on the Euro.

David Leibowitz.

Briefly you mentioned the lineup of Marvel products to be shipped later this year, and you seem to place a bit more emphasis on it than you did on the last phone call.

Is there going to be more product shipped than you had originally anticipated?

I don't think so.

You know when I say that, when we made the comment the last time around, I don't think we had a particular number in place.

The comment I'm making this morning, I'm not making it in reference to any particular number.

We will have some product we will be shipping in the fourth quarter, but I don't have a forecast for that at this point in time.

Okay.

Also you made mention of your four largest retail accounts.

What percentage of your total volume do they account for?

They probably represented last year somewhere in the range of about 80, 82%, and they will be about the same this year.

Okay.

That is in the U.S.

Okay and internationally?

Well, internationally if we take our top four accounts, that number would come down obviously because some of the top four accounts don't participate internationally or certainly not at the same level.

So my guess is they are probably somewhere down around the 60% level, David.

Okay.

Lastly, in terms of licensing, there has been quite a bit mentioned in the casino industry about the licensing of your various product titles.

Can you give us some sense of how much this represents to you since it is obviously all going right to your pretax line?

Well, first of all, it does not all go directly to the pretax line.

There are expenses associated with that.

But no, we don't disclose the amount of licensing income we get from the gaming.

John Taylor.

Arcadia.

I have got a couple of questions.

Dave, on the week of extra expense in the first quarter, when do you get that back, which quarter?

We don't.

We actually have a 53-week year this year.

Okay.

Great.

Now I wonder if you could talk a little bit about kind of what the key objectives are in the digital world either as it relates to licensing cellphones or Flash games or anything like that?

Maybe give us kind of a sense of what you expect to be able to talking about later on in the year?

And then another one on the TRANSFORMERS movie, do you guys happen to know what the target age for that movie is, a three-year age group or what the rating target is?

What I'm wondering is, is it going to be as appealing to twentysomethings who grew up with TRANSFORMERS as it is to kids who might be watching TV now?

And then the last question is, talk a little bit about the MAGIC increase.

What is going on behind that number?

Let me answer the one on TRANSFORMERS because that is a quick one.

Yes, we expect it to appeal to a broad range.

The collectors are very involved in this movie, and we have been communicating with them online ever since we announced the movie.

So collectors and kids will both enjoy this movie.

It will be live-action with a lot of CTI, so it should be a fun movie.

In terms of the digital world, I think that we are exploring a lot of possibilities.

When we look at where our brands might do well, the first question is, how do we participate?

Should we license, should we joint venture, should we actually be the seller of the content or perhaps even a piece of hardware on the line.

We are evaluating all of those things.

I think probably one of the hottest areas today is cellphone gaming, and we are certainly licensing our brands.

We are also looking at opportunities where we can participate in a bigger way.

So it will be more to come as we get into the year as we explore some of these areas and find out a bit more about the economic model, you know, where is the revenue really generated?

Where is the money really made, and where is the best place for Hasbro to participate?

In terms of MAGIC, I think there are a couple of things that are affecting MAGIC.

Primarily though, it is the nature of the releases.

Last year when we introduced I believe it was KAMIGAWA, it was not well-received by the MAGIC players at all.

Obviously when you do that, you have a series of releases that go along with that.

We began to put out the new releases towards the latter part of the last year and that was RAVNICA.

That has been received very very well.

I think what is happening is that people are coming back into MAGIC because they like the quality of the release as compared to last year when they did not like the release of KAMIGAWA.

I think in addition to that, and this is my own view, I don't have any qualitative or quantitative data to support this.

But I think the notion and the popularity of poker has come down a bit.

I'm sure that has had some impact, and we certainly feel that intuitively because we know who some of the players are.

But I don't have numbers to support that, so I will say that right upfront.

That might also explained part of the improvement in board games as well.

Yes.

Interesting.

Can you give us a quick update on the MAGIC online subscribers or any key metrics on that one?

Well, we don't release key metrics.

I will say two things.

One is surprisingly MAGIC ONLINE did not really fall off even with the paper game last year when the paper version did fall off.

We have a new system coming up -- I think it is May, David -- which will give us a lot more capacity.

But MAGIC ONLINE continues to do very very well, and we've got some new technology that will allow us to do a lot more internationally and get paid.

We've got to get a payment system that would work called PayPal so that we could get credit card data on that further stuff in an international environment.

So we have got those two things really coming on board.

So we would expect some nice growth from MAGIC ONLINE this year.

Back to the TRANSFORMERS question, do you know what the rating objective is?

Is it going for --?

That would be PG-13.

Okay.

Thank you.

Dean Gianoukos.

All my stuff is pretty much answered, but are you willing to tell us whether the Marvel shipments will be material, or is it going to be pretty small?

Well, it depends what you mean by material.

Can you make up (multiple speakers) Star Wars stuff that is falling off?

I don't think we're going to be shipping a couple hundred million dollars worth of volume in the fourth quarter of Marvel, no.

No, but I mean can it offset any -- I mean material $50 million, can it be $50 million possibly?

No, I don't want to put a number on that because we're still in the process of developing and getting that productline set for what we're going to ship into the fourth quarter and product availability.

So it is not a number that I'm comfortable with at this point in time.

Margaret Whitfield.

Ryan Beck.

Following Toy Fair, I wondered if you could discuss where you saw the most enthusiasm from retail for your current productline?

And for Q2 where you face difficult Star Wars comparisons, what do you think could be the key toy drivers in the quarter?

Well, in terms of the enthusiasm from the retailers, they were enthusiastic about the entire line.

But no, I think that like a lot of things we were doing with our preschool line, I think they were enthusiastic about some of things we are doing in toy electronics.

They like the plans we have coming for TRANSFORMERS.

With the movie coming on, they are certainly excited about the longer-term opportunity with Marvel.

They really like the MONOPOLY HERE & NOW which did so well in Europe, so there are a number of things.

They like TJ BERRY TALES, which is a preschool product that we have coming on later this year.

BUTTERSCOTCH from PONY was something that they were all excited about.

So it was across a broad category.

In terms of the second quarter, we are going to continue to ship the productline that we have been shipping, and I think it is going to be very challenging for us to overcome.

We could be $70 million plus decline in Star Wars from a year ago.

We have some new product coming certainly in G.I.

JOE, ACTION MAN, preschool, our board games business, but a lot of new product comes in the second half of the year.

So time will tell.

And for David, could you give us a current feel for what the diluted share count post this buyback might be currently?

Well, we are still at 137 million for the average for the first quarter, but that has to recognize that there were some (inaudible) exercising options last year.

So we started this year with more shares than we had beginning in '05, and then a lot of our buyback happened in the back half of this quarter in terms of you take an average.

So it happened fairly late in the quarter, so it did not reduce it by as much as you would expect.

I think '04 would clearly if we keep buying the share count is going to come down.

I mean we have bought 2.4 million and then another 4.5 million.

If we finished out the 208 million, we would probably see about another 10 million reduction in share count.

The other thing you have to take into account is for Lucas.

If you remember, we have to each quarter look at the most -- which is the most dilutive way of reporting earnings.

Do you treat the Lucas warrants as a liability, or do you treat them as equity?

If you treat them as equity, then you have to include a higher share count in there as well and back out the interest -- so backout the cost curve.

So clearly there is an underlying trend that will be downwards if we finish out our current authorization.

That would probably be about a 10 million reduction from where we are today in terms of share count.

Each quarter you have to work out whether we are going to include the Lucas warrants as equity or not.

Finally, the $0.09 loss last year from the electronic games was that mainly in Q4, or was some of that in Q3 as well?

Nearly all of the electronic games last year was plug-and-play and happened in the fourth quarter last year.

Tim Conder.

A.G. Edwards.

Again, most of my questions have been answered, but just a couple of housekeeping items.

Could you remind us what your CapEx plans are for this year and anything for next year?

In relation to the cellphone gaming, at this point are you leaning towards more in-house or looking to partner more with the videogame companies?

And then finally, you talked about the input costs overall.

Could you just remind us on your price increase relative to those input costs, should you mostly neutralize those, especially given the recent increases in the input costs here with fuel?

If you want to take the cost, and I will come back on the (inaudible).

Firstly, let me talk about capital.

We're giving longer-term guidance that our capital in order to sustain our business it will be in a range of 70 to 90 million a year.

We gave that guidance a few years ago which tended to be at the low end to the middle of that over the last few years.

I think we spent just over 11 million in the first quarter this year, which is very similar to the first quarter last year.

Moving on to input costs, I think clearly as the price of a barrel of oil goes up, people automatically think it is going to impact resin prices.

However, resin prices depend a lot more on supply and demand and how much capacity is available as well.

During the first quarter of '06 despite oil going up, ABS and polypropylene, which were two resins, we used the most actually have not gone up at all.

In fact, most of last year they were sort of fairly constant having gone up very dramatically in the fourth quarter of '04.

I think if you look at paperboard, which is big for us because of the games business, right now in the first quarter we are paying about what we paid during the average of '05.

Again, there was a big increase in that in the end of -- in the fourth quarter of '04.

So in electronic components in terms of LCDs and ICs and memory, that is variable.

But on average I think that is not seeing any undue price pressure just at the current point in time.

So overall our commodity price increases and the influence of that is not too great thus far.

In terms of pricing, we did take some small increases on some carryover items.

But I think the most important thing to note is that when we go out and cost a product with our vendors, they give us a cost based on the most current market conditions for the new item, and we price that accordingly.

Once they give us that price, they have to live with that for the life of the product.

Now because we change a lot of our line every year with Star Wars last year and TRANSFORMERS this year and Marvel next year in terms of the bulk of it, the fact that we shouldn't have a lot of churn means that we are always getting fairly up-to-date cost on the price according to the latest costs.

In terms of the cellphone business, currently we are licensing some of our properties out.

I think longer-term we're looking at whether we should continue to just license or whether we want to joint venture and partner with some people.

I suspect that we will do some partnering along the way.

We're trying to understand who best and how best to do that.

This is more of a longer-term view.

Currently our licensing agreements tend to be in the three-year range.

We're not signing long-term deals.

So if we see a change in the landscape, we will be in a position to react to that.

Okay.

And then, David, again do you anticipate the pricing overall here to mostly cover the input costs as it stands now?

Yes, I think over the average of the full year.

Obviously who knows what oil is going to go to and what that will mean for gas prices.

But in general we would anticipate that the pricing that we take will cover our cost increases and should not lead to any material reduction in our margins.

Great. (multiple speakers)

At the same time, I think both Dave and I say that with one caution.

There has been all kinds of speculation as to where the price of oil could go and where the price of gasoline could go.

I think if you woke up one morning and found out that gasoline was at $5.00 a gallon or the price of a barrel of oil was $100 a gallon, I suspect that all bets would be off.

So I'm not sure where that inflection point is.

David is correct, but let's not make it be absolute.

Right.

Well understood.

Thank you, gentlemen.

Thomas Russo.

Two follow-ups on the shares outstanding.

What were your quarter-end shares outstanding?

If you have that number?

Off the top of my head, I don't have that.

I have the average for the quarter, which was 177,029.

In terms of the end of the quarter, I mean we bought back 4.5 million in the period.

So I would imagine we're down about 2 million from that average so (multiple speakers).

Okay.

And the 4.5 you said happens for the later part of the quarter anyhow?

Yes, we did not start our buyback until after we had announced our year-end results in early February.

Okay, good.

And then taking the Lucas dilution to its maximum, assuming that the most --?

174 250. 174,250,000.

That is perfect.

And then taking the Lucas at its worst case, what would be the full dilution at its peak?

Well, if you treat it as equity, our requirement is to settle the Lucas warrants even with 100 million in cash or 110 million in stock if they put them to you.

But what you have to do is you have to take 110 million stock and divide it by the current stockprice.

Okay.

Thank you for joining us this morning.

Karen, anything else you want to add?

No, we will have a replay of the conference call this afternoon on our website after 2:00 PM, and we thank you again for joining us.

Have a good day.

Thank you.

That does conclude today's teleconference.

Everyone may disconnect at this time.