孩之寶 (HAS) 2006 Q2 法說會逐字稿

Good morning and welcome to Hasbro's second-quarter earnings conference call. At this time, all parties will be on 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 from the Company is the Senior Vice President of Investor Relations, Karen Warren.

Thank you and good morning, everyone. Joining me today are Al Verracchia, President and Chief Executive Officer, and David Hargreaves, Senior Vice President and Chief Financial Officer.

To better understand our second-quarter results, it would be helpful to have the press release and financial tables available that we issued earlier today. The press release includes information regarding non-GAAP 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 for the second quarter of 2006 to our earnings or EPS for the second 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 press release provides a reconciliation of our reported earnings and EPS for the second 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 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 in 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 Verracchia. Al?

Thank you, Karen, and good morning, everyone, and thank you for joining us. Revenues for the quarter were $527.8 million, a decline of $44.6 million, or approximately 8% compared to a year ago. Year-to-date revenues were $995.9 million, a decline of $31.4 million, or approximately 3%.

While no one likes to see a decline in revenue, in this instance, given the anticipated decline in Star Wars, our top-line results for the quarter and year-to-date are better-than-expected and our underlying business is performing well. In fact, the balance of our business is up $40.2 million or 9.4% for the quarter, and $102.8 million or 13.2% year-to-date.

On a global basis, Star Wars continues to do well, as shipments were $61.8 million in the quarter compared to $146.6 million a year ago. Year-to-date, Star Wars shipments were $112.9 million compared to $247.2 million last year.

For the quarter, we reported net income of $27.1 million, or $0.07 per share, compared to net income of $26 million, or $0.11 per share in 2005. These results include stock-based compensation expense in both years.

During the quarter, we continued to actively purchased shares as part of our buyback program. David will cover this in more detail later in the call.

Overall our business is good, with all major product categories performing well during the second quarter. The boys' business, other than Star Wars, was up $2.6 million, or 5% from prior year, driven in part by solid performances from G.I. Joe and Transformers. In our girls' business, both Littlest Pet Shop and My Little Pony continued to do well, with Littlest Pet Shop up over 100% compared to a year ago.

In the tween category, Europe was up 63%, and iDog continues to have good momentum at retail. In the preschool business, Playskool was up a strong 25%, driven by the success of our Busy Basics line. Play-Doh, celebrating its 50th birthday this year, was up 7% compared to a year ago.

Our global board game business was up 2.3% year-to-date and 1.9% in the quarter, with good performance from a number of games including Clue, Monopoly and The Game of Life. However, I would remind everyone that typically more than 65% of our retail business in games is done in the fourth quarter of the year. Magic: The Gathering, our pre-eminent trading card game, continues to do well. It was up 19% in both the quarter and year-to-date.

While I feel good about our business throughout the first half of the year, there's a lot more business yet to be done, with the fourth quarter being the most important. I believe we are well positioned from a product standpoint as we continue to demonstrate our strategic focus on bringing innovation to a broad range of products in our toys, game and tween electronics categories.

In the coming months, we are scheduled to ship a number of new products, including TJ Bearytales, iCat, the U.S. edition of Monopoly Here & Now, Butterscotch, our Shetland Pony from the FurReal Friend line, and a new Trivial Pursuit game, the '80s addition. These are just a few examples of what's coming for the fall, along with many other new initiatives planned for each of our major product categories.

As we began to think about 2007, we are very excited about the opportunities that lie ahead, with the anticipated July 4, 2007 release of the Transformers movie, as well as all the great Marvel properties, including the scheduled release of Spider-man 3 on May 4th.

While I won't forecast volume, I will say we do have high expectations for both Transformers and Spider-man 3 next year. Both are based upon a similar approach we honed with Star Wars last year in our great example of Hasbro at its best, as measured by everything from innovative product development, impactful marketing and retail distribution, to our ability to work effectively with our licensing partners.

We're excited about the breadth and depth of our product line and the opportunities that lie ahead. That said, we will continue our focus on increasing our operating efficiency, improving profitability and creating value for our shareholders.

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

Thanks, Al, and good morning, everyone. With our second-quarter results, we are becoming increasingly confident that we will grow full-year earnings per share for the fifth consecutive year. This is despite a potential decline in revenues due to the exceptional performance of Star Wars in 2005.

In part, this reflects the work we've done over the last five years. Firstly, we have taken out cost and reduced our breakeven. And secondly, we have managed for business the cash, paid down debt and strengthened the balance sheet. As Al said, we feel good about our outlook for 2007, with Transformers movie and our first full year with the Marvel license.

During the quarter, we repurchased approximately 10 million shares of common stock at a total cost of $192.6 million. Since quarter end, we have spent the remaining $16.2 million available under our $350 million share buyback authorization.

Before I go into more detail on our results, I would like to point out that having adopted FAS 123(R) in the first quarter, our second-quarter results today include a $3.8 million pretax expense for stock-based compensation. 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 second-quarter results that do include the effect of stock-based compensation.

Additionally, in our press release today and on this call, we have restated the prior-year segment results to reflect the impact of FAS 123. This gives a more meaningful picture of our segment performance.

Now let's take a closer look at our results. Worldwide net revenues were $527.8 million compared to $572.4 million last year, down 7.8%. North American segment revenues were $362 million compared with $388 million last year. North American operating profit for the quarter was $30.4 million, or 8.4% of revenue, compared to $25.4 million, or 6.5% of revenue last year. The improvement was due to the expected decline in the amortization and royalty expenses.

Revenues in the international segment were $153.2 million compared to $172.5 million a year ago. This represented a decrease of 11.2% in U.S. dollars and 10.4% in constant dollars. The international segment incurred an operating loss of $8.1 million compared to income of $1.2 million last year, primarily due to the decline in revenue.

Now let's take a look at earnings. For the quarter, we reported net earnings of $27.1 million, or $0.07 per share, which includes a stock-based compensation expense of $0.01 per share. This compares to net income of $29.5, million or $0.13 per share in 2005, which did not include the effect of a stock-based compensation expense of $0.02 per share.

Earnings before interest, taxes, depreciation and amortization were $76.8 million compared to EBITDA of $85.9 million a year ago. Gross margin for the quarter was 60.1% compared to 60.7% last year. This small decline is primarily due to changes in product mix.

Now let's take a look at expenses for the quarter. As expected, royalty and amortization expenses declined due to lower Star Wars volume. Research and product development expense was $39.6 million, or 7.5% of revenue, compared to $36.5 million, or 6.4% of revenue at year ago. As we indicated at Toy Fair, R&D spending will be higher due to the investments we are making in the development of the Marvel product line.

Advertising expense was $60.5 million compared to $65 million last year. As a percent of revenue, it was essentially flat year-over-year. SG&A expense is $147.4 million, or 27.9% of revenue, increased as a percent of revenue and increased 6.1 million in dollars. Compared to a year ago, the increase is primarily due to the expensing of stock options in 2006.

Other income and expense included a $15.3 million non-cash favorable mark-to-market adjustment for Lucas warrants. This compares to a $5.7 million non-cash favorable adjustment in the second quarter of last year. Due to accounting rules for mark-to-market adjustment, it excluded from earnings per share in both years.

Excluding the impact of non-deductible items, which included the income related to the Lucas warrants, our underlying tax rate was 27.4% compared to 27% a year ago. The 2005 tax rate of 27% also excluded a $4 million favorable adjustment, primarily resulting from the settlement of an IRS examination.

Now let's turn to the balance sheet. At quarter end, cash and short-term investments were $489.7 million compared to $642.8 million a year ago, down $153.1 million. During the last 12 months, we have utilized $327 million of our cash to repurchase shares, while increasing our quarterly dividend from $0.09 per share to $0.12 per share.

Our receivables at 290.5 million were down 57.7 million compared to 348.2 million last year. Days sales outstanding were 50 days compared to 55 days last year. Inventories were down by approximately 4 million from a year ago to 258.5 million. At the end of the quarter, our debt-to-cap ratio was 26% compared to 28% last year.

During the quarter, we received an upgrade from Fitch ratings to BBB from BBB-. The upgrade was based upon both Hasbro's strong earnings and cash flow generation, and was an acknowledgment of our financial discipline.

We also negotiated a new five-year bank facility. This revolving facility is for $300 million, expandable to $500 million and may be used for general corporate purposes. As an investment-grade facility, there are minimal restrictions on Hasbro's ability to make investments, pay dividends or repurchase shares.

In summary, we are off to a good start this year with a number of our core brands performing very well, including Playskool, Littlest Pet Shop, Magic: The Gathering, Transformers, Monopoly and Nerf. Clearly, Star Wars is performing better than we expected when we set our plan for 2006.

Given our performance in the second quarter, I believe we remained on track to achieve our financial goals for this year. And as I said at the beginning of the call, we are becoming increasingly confident that we will grow earnings per share for the fifth consecutive year, despite a potential revenue decline.

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

(OPERATOR INSTRUCTIONS) Margaret Whitfield from Ryan Beck.

Good morning and congratulations. Well, you mentioned a lot of the product lines that performed well for you in this quarter, and then some that will be shipped in the second half. Where do see the greatest retailer excitement in terms of some of the products?

Well, I think a couple of things. I think first of all people are very excited about the strength of Littlest Pet Shop and My Little Pony. There is a lot of excitement about Butterscotch, the Shetland Pony. Some of the board games, especially Monopoly Here & Now. Some of the new stuff we have in Transformers. TJ Bearytales has been well-received. That and I think just a general feeling that there is a lot of innovation throughout the product line.

Also, been hearing about shortages in the Far East in terms of raw materials, electricity. Anything going on that would affect your ability to ship in the second half?

Nothing substantial. I mean, certainly for the last couple of years we've seen shortages and some outages of electricity here and there, and increases in labor. And some of the OEM supplies are merging farther inland to try and compensate for some of those cost increases. But I couldn't say today that those factors are endangering our ability to meet our sales forecast for the last half of the year; certainly nothing we see yet.

Okay, thanks again.

Sean McGowan from BMO Capitol.

David, if you could talk about what the components are of Other income, only if there is anything notable that changed year-on-year. I know that is where the Lucas --

That was probably the most substantial thing, in that this year the mark-to-market on the Lucas warrants was about 15.3 million, whereas last year we had a favorable Mark-to-Market of 5.7. So we've had something like a 9.6 year-over-year increase. Last year, we also had, I think, a legal settlement which went into Other Income on a case in Spain. And I think the other is primarily interest income.

And that legal settlement was an expense last year or an income?

Okay. I think the important thing to note is that the mark-to-market on the Lucas warrants is not in our EPS number.

Right. Okay. In [SG&A], could you talk about where the changes are that would lead to an increase in dollar cost despite a decrease in revenue?

Yes, I think the biggest thing, as you know, we are not restating last year's financials; we have in some of the segment reporting that (indiscernible) regulations -- we didn't restate the financial statements for last year for FAS 123(R). So the single biggest part of the $6 million year-over-year increase is $3.8 million pretax for FAS 123(R) stock compensation expense.

And I think if you look year-to-date, I think it's important to remember that during the first quarter, we had an extra week, because we had -- because this was a 53-week year for us this year. So we had an extra week of expenses in the quarter.

Okay, that is helpful. When you talk about the full-year earnings per share target, could you just remind us of what the basis of comparison is? What is the basis that you were using for last year?

We can only really talk on a call like this in terms of as-reported earnings per share. And so when you look at as-reported earnings per share last year, I think we were 101, and that does include the tax on repatriation of overseas earnings. I think if people excluded that, they would come up with a higher number. In terms of the --

That is what the basis is, the as-reported? Hello?

(technical difficulty) is the as-reported. Sorry, it's actually 109. It's 101 if you back out stock-based compensation from last. So 109 is the as-reported (multiple speakers).

Okay, great. Helpful. Two other quickies. The board game comparison, you gave us -- I think Al said it was 1.9% in the quarter on a global basis. Can you tell us what that was in the U.S.?

Yes, U.S. was up about 1.25 and the international segment was up about 7%.

Okay, and the last one. Are the revenues from Play-Doh included in the Playskool comparison that you did?

I don't think so, no.

I thought Play-Doh was a Playskool brand now.

Well, it is, but when we talk about Playskool, I was talking about the Playskool core brand. Play-Doh is a preschool branch. But if I look at the Playskool brand itself.

Okay. So your comparison numbers on Playskool exclude Play-Doh?

I believe so.

Okay, thank you.

Liz Osur from Citigroup.

Thanks. I guess two questions. First, could you speak a little bit about point of sales and how it might differ from the (indiscernible) that you're seeing in particular in the board games business?

Okay. In terms of point-of-sale, our point of sale for board games excluding Star Wars is up about 8%. I think if you include Star Wars, with the (indiscernible) Star Wars board games, it's up about 6% overall.

Okay, thanks. Second kind of unrelated question --.

-- and that is in North America.

Oh. Do you have the global number then?

Not --

-- not really because you (multiple speakers).

(multiple speakers) level of information and degree of specificity.

Okay. So do those numbers then increase your confidence that the board games business is going to continue to recover in the second half?

Well, we certainly feel better about it. But as I said in the call, 65% of the board game business at retail is selling during the fourth quarter, with about 40% of those done during the month of December.

So we are certainly pleased that we are ahead and we've got some great games coming, but it is awfully back-ended. So I wouldn't raise the flag and declare victory yet.

Okay. And just another question on the retail environment. Can you speak to what the impact might be from Amazon.com and Toys "R" Us kind of pursuing their own separate Internet strategies online? Do you think of that as an opportunity in opening up a new retailer or do you not expect it to have an impact?

Well, we've done business with both people. I'm not sure that it's going to have a substantial increase in our overall volume. It could shift a little bit from one retailer to another. But I think longer-term, we look at the Internet as a place we want to do a lot of business, both through our retailers as well as HasbroToyShop.com.

Okay, thanks a lot.

Tony Gikas from Piper Jaffray.

Hi. Good morning, guys. Congratulations on a good quarter. A couple of housekeeping questions. Could you just comment on the tax rate during the quarter, and then what we should be using for the balance of the year and next year?

Also, what are you thoughts on Star Wars product sales for the balance of the year? Are you hearing anything from retailers at this juncture that would perhaps make you a little bit more optimistic about that line in the back half of the year?

And then the third question would be any update for us on the Transformers movies? I think it is set for the Fourth of July, but maybe you could just talk about the launch date, the budget, etc.

All right, David, do you want to talk about the tax rate?

Yes. Basically the Lucas mark-to-market isn't tax impacted. And therefore that gave us the very low (technical difficulty). If you look at the underlying tax rate during the quarter, it was 27.4%, which compared to 27% a year ago. We're expecting our underlying rate will be about 27.4 or 27.5 this year. And I think go-forward into future years, we at this stage would still see it somewhere in the 27, 28% range.

Okay. Tony, in terms of Star Wars for the balance of the year. We shipped about $113 million in the first half of the year, and in a non-movie year, that is a lot of volume for any product line, especially a boys' action figure line. That gives us a pretty good feeling in terms of what we will do for the full year. Retailers are also very surprised by the strength of Star Wars, and we have a lot of new product coming in the back half of the year.

That said, it is non-movie year; it will come down from the year ago. And the question is how much it will come down. So far, it has held up well up against the movies -- certainly between Cars and Superman and Pirates of the Caribbean, there is a fair amount of competition out there. But thus far, it has held up well. So we feel good about it, but we will have to wait and see what happens for the third and fourth quarter.

In terms of the Transformer movie, I was actually out on the set this past week. We are on schedule; we're still looking at a July 4th '07 release date. Everything is on schedule. The budget is approximately $150 million in terms of production budget; then you've got the marketing and all that sort of thing. So this will be a big movie, be a lot behind it. There are a lot of important partners signed up and we are excited about it.

Two quick follow-ups. Is there any meaningful royalty income from just the use of the Transformers' brand? And then, David, maybe on the tax rate, I guess you are giving us the core underlying tax rate. Can you help us out with what the net rate will be for the year?

I'll turn it back to David in a moment. You know, in terms of -- you know, Transformers is our property. So certainly, the sale of all the toys are royalized. We have licensed out Activision to do the video game and we have a lot of other licensing opportunities. So there will be a fair amount of licensing revenue coming in in '07 and beyond. But keep in mind this is our brand, so we will be doing a lot of the product ourselves.

No, I guess I meant that for that use of the movie, will the Spielberg group be paying you to use the Transformers brand? Is there any meaningful payment?

(multiple speakers) not a lot of money there; it's not a significant amount of money there. What we wanted is we wanted a great movie to push the brand forward. We're getting some revenue, but it's not a meaningful number.

Okay.

The answer on the underlying tax for is no, I can't give you any guidance for the year. Because the main item, which is excluded from the tax calculation, is the Lucas mark-to-market. And that is dependent on where our stock is going to go. If our stock ended the year the same as it started, there wouldn't be a Lucas mark-to-market, and our underlying tax rate would be 27.4%.

So unfortunately, I don't know where our stock is going so I can't calculate the Lucas [mark-to-market] and I can't calculate what we're going to report as an actual tax rate.

Okay, thanks.

Tim Conder from AG Edwards.

Actually this is Adam (indiscernible). A couple of questions, Al. What is your proposed response to reduce days sales outstanding and how do you plan to do that?

Say that again.

I think our days sales outstanding have already reduced to 50 from 55 last year. So I think we were down 5 year-over-year.

Okay. And also, regarding the selling process, how are you guys streamlining the selling process now to make it much more easier for your customers to work with you?

Well, one of the things we did at the beginning of the year was combine the game and toy group into the North American segment. So we've got one consolidated sales organization working with our customers. And thus far, our working relationship with our customers has been very, very good. And we get a lot of complements. During the past year, we received vendor of the year award from a number of major customers; we're category managers for a number of major customers. So we continue to work at that all the time, as does everyone else in our industry. But we do a very good job in that area.

How often are you guys meeting with your customers? What are they telling you regarding the challenges in the marketplace to configure your orders and products and be able to price your products much more efficiently to work with you?

Well, in terms of meeting with our customers I dare say there's not a day that goes by that we don't have people meeting with our major customers. So we meet with them on a regular basis. I mean, for sure, weekly.

In terms of discussions regarding the product line, those discussions are ongoing all year long. Certainly at the beginning of the year, you are making plans and initial forecasts. After that, you are honing those forecasts based upon per shipments and what is moving over-the-counter and what the rate is, and you're adjusting the mix and things of that nature, you are working on promotions.

I mean, we are working with our customers right now in terms of the Transformer movie in '07, setting up plans for that, as well as the Spiderman movie. So those things are ongoing, every day of every week.

The final question, as CEO of the Company, what is your top initiative for 2007 and how would you like to accomplish that?

Sell more toys and make more money.

Thank you very much.

Scott Barry from Credit Suisse. Our next question is from Tim Conder from AG Edwards.

Thank you, operator. I don't know what happened earlier there. A couple of questions, Al. Can you give us a little bit more color on G.I. Joe and Transformers? I know you mentioned it briefly in your opening comments, but how is that year-over-year, the performance of those two lines? I know you've got new product there.

And then also, if we could just get the ending share count at the end of the quarter, given that you did some repurchase in the quarter.

And then finally, can you just give an update -- are we still looking a couple of years out on your long-term financial goals of roughly that 12% operating margin?

Okay. In terms of G.I. Joe and Transformers, they are up about 5% from a year ago. They were up to in total about 2.6 million, as I said, about 5% from a year ago. So the absolute numbers in the sales aren't huge, but the reception to the new product line, especially in G.I. Joe, has been very good -- that's Sigma 6, well as the new stuff we have coming in Transformers. And we have more new Transformer and G.I. Joe stuff coming later in the year. So we are pleased about that.

In terms of the 12% operating margin, that is something that -- I don't see that as a longer-term goal; I see that more as a medium-term goal. That is something that we went to strive for -- if we don't achieve it this year, we certainly want to look to it over the next couple of years, the next two to three years at best. And what was the other question you had, Tim?

Just at the end of the quarter, the actual share count outstanding at the end of the quarter. Because obviously you repurchased during the quarter and it's an average share count that you report.

(multiple speakers) we had an average shown on our financial statement of 169 for the quarter. In terms of at the end of the quarter, it was 164,456,000.

And that is basic again?

That is basic.

Great, thank you.

And that compares to a [169,648,000], which was the average for the quarter.

And as far as renewing that authorization --?

That is something the Board has to do, and I'm sure the Board will consider that in due course.

Great. Thank you.

David Liebowitz from Burnham.

Thank you very much and good morning. A couple of brief questions, totally unrelated. First, how much '06 expense do we have related to next year's Transformer movie as well as the Marvel products that will be introduced this year as part of the overall Marvel contract?

David, do you want to --?

Yes, I think in terms of Transformers -- I mean, that has been in our line and we develop the Transformer line every year. Obviously, we are spending a bit more this year. but we look at that as sort of normal course.

I think back at Toy Fair I did say that having signed the Marvel deal back in January that we weren't expecting significant revenues this year, material revenue this year, but we could potentially incur about an extra $10 million of expense, primarily in the R&D area.

I think you misinterpreted the part about Transformers. Specifically, do you have expenses having to do with the movie that you are expensing this year?

(multiple speakers) -- the movie, we don't pay any of the expenses for the movie. That is all down at the studio.

Okay, good. Thank you on that. Second, in the second half of last year, excluding Star Wars for the moment, did you have any strong products that are either out of the line or that did you are not expecting to see comparable results on?

Surely they were things out of the line. Duel Masters has been coming down. (Indiscernible) has been coming down. There will be sales of both of those this year, but they are certainly down from a year ago.

Some of the Now products --

Some of the -- yes -- some of the Video Now stuff will be coming down. I mean, iDog continues to do well at retail; I'm not sure we'll look at the same volume next year. But we have iCat coming later this year. There are a lot; I just don't have that list handy right now.

No, that is okay. I just thought if there were one or two items that really stuck out, where we might see a $30 million, $40 million shift in revenue because of their departure from the line.

Not other than Star Wars.

Yes, other than Star Wars, that would be it.

Okay, great. And the last question, again second half related. The brand new lines that will be shipping in, are any of them going to be production constrained in anyway, based on basically the orders you now have in hand and what might be anticipated in the way of reorders?

Based on our plans, no. But if something takes off and goes way above what we and our customers have forecasted, you can always run into shortages, especially if something really spikes up in a short period of time. But that is the nature of the business. I mean, there is a fashion component to the business, and because of that you can always run into capacity constraints. But right now, I don't see any major capacity constraints on the horizon that would cause us to miss our plan.

And very final question, as of now, do you anticipate paying more or less markdown money than you did in '05?

David, do you want to --?

Yes, I think clearly '05, we, along with other companies, kind of got caught with overshipping the plug-n-play items into the market. And I think we'd made it clear at the fourth quarter and full-year results last year that we had lost about $23 million in the plug-n-play category, of which a large part of that was marked down ; there's been obsolescence and tidying up the marketplace. So clearly we would expect markdowns to be lower this year than last year.

Thank you very much.

John Taylor from Arcadia Investment Corp.

Good morning. I've got a capital of questions about the properties for next year, I think. Spider-Man, remind us if you would when you can begin shipping product and what exactly do you get to ship early? I guess what I'm getting out is will there be any Spider-Man 3 product when you start to ship earlier than the movie comes out? That is the first question.

And then second question has to do with the Transformers movie. So, Al, you were out on the set. Can you give us a sense of who the movie is squarely targeted at? Because you know, there's a lot of retro interest among 20-somethings anyway in the Transformers property. And I'm wondering if this is going to be more of a kids' movie, or how they are going to position it age-wise. That is the second question.

And then the third question is, if you could give us a quick update on where you stand in licensing things. You just did this with Navarre. I'm wondering if they've told you how many SKUs they plan to put out or maybe give us a sense of what the financial impact of that might be. Was there much of an upfront or is it going to be all sort of back-end royalty driven? Maybe give us a sense of what that structure looks like. Thank you.

Okay, in terms of Spider-Man 3, we can ship -- when you say earlier. I'm assuming you mean the latter part of '06 as opposed to '07.

Right.

Yes, we have the ability to ship some product in the back half of this year. It won't be a lot. But there will be some Spider-Man product in the back half of this year that is associated with the Spider-Man 3 movie. Again, it should not be significant. I would look at the Spider-Man 3 product as an '07 product line.

In terms of the Transformer movie, it is being -- I think the target audience is pretty wide, it's going to appeal to the collectors. You know, as you say, the retro, the 20-year-olds, the kids who played with that back in the '80s. But it is very broad and I think will also appeal to the kids. So it's going to be a movie that, again, has a broad audience. It's not focused just at kids. It's a movie I think you'll enjoy, as well as young boys.

Do you know what rating they are going for?

Probably be PG-13.

Okay, great. And then back to the Spider-Man question for a second. Has Marvel helped you or ToyBiz helped you with any tools and so on from older stuff or is this all an all-new toolset?

Primarily, this is a new tool. I mean, anything you do a line, there are probably some old tools you can use at times or different pieces of things that you'll add new tools to. But primarily this is in all-new line, because we are also coming up with a little different size in some cases. So there will be a lot of new stuff.

But we'd been working very closely with the Marvel people. So they are also helping us on design and things of that nature. So it is a good team effort.

Okay. Great.

In terms of your last question on digital gaming, I don't think we are going to talk about any specific deal, but I think, as you know, we were out of this business for a while and then we paid 65 million to get our rights back from Atari for most of the digital gaming area last year.

And we are on track -- that is working out well for us. As you know we've done deals with Activision on the Transformer movie; we've done deals with Navarre, with GluMobile. We are doing a lot of deals out there in this space and that whole part of the strategy of repurchasing those rights is certainly on track.

Let me ask it a slightly different way. I'm wondering whether the market, as you go to market with the unique properties that you've got, whether most discussions have to do with upfronts in terms of your expectations, or is it more sort of they pay as they -- I'm looking for kind when upfront -- if there's going to be an upfront, is it going to be concentrated in '06 or is that something that is most likely to hit future numbers?

I think with all our licensing deals, there is often a minimum guarantee and an advance component. But we don't generally recognize that through our P&L until it is earned.

Okay. So coming back to that, has Navarre told you when they expect to have something close to a full product line?

We're not going to talk about big deals with people that we do business with.

Oh, okay. Okay, thank you.

Thomas Russo from Gardner, Russo & Gardner.

Hi, good morning. First, for Al. HasbroToy.com strategy, how do you actually go about fulfilling those orders and how do you plan to invest to scale up that capacity?

Right now, we are using a third party to do the supply chain workforce, and we will continue to do that. We have some plans of our own that if we scale up to a certain level, then it will pay for us to bring that fulfillment inside. But right now we are using third parties.

Okay, good. And then for David, a capital of quick ones. The difference between stock-based expenses this year versus last, how much of that is a function of the Black-Scholes calculation changes that have taken place because of interest rates and share price? How much of that is a function of the amount of stock option grants actually awarded or recognized?

Well, I think we haven't actually issued any options or grants this year thus far. And obviously, when we put forecast in, it's based on what we propose taking to our Board at some time this year.

I think essentially, we are assuming that the overall grants are sort of similar in nature to last year. And that last year, I think, stock option expense, using a consistent method, would have been about 22 million. And I think in this year in our planning it was about 20.4 million.

So 20.4 versus 22?

Yes.

But the change would have been and share price. So would you suspect you'd actually give out more option shares to get to the same -- how do you expect it to work in terms of the impact on, say, dilutive effect? In light of the fact that the shares are probably lower?

(multiple speakers) anything yet this year, so it really depends what the Board approves. So it's very difficult to answer that question at the moment. But I think from a planning perspective, we are not assuming that our stock-based compensation expense is materially different in '06 to what it was in '05. And it was just about $20 million or it was just about $0.08 per share, which was about $0.02 a quarter. We are assuming very similar this year.

Okay. David, the Other expense increase from 16 million for the first half to 22 million in the second half -- the first half of this year -- involves mainly what?

Mainly the Lucas mark-to-market.

Okay. And then the decline in the amortization from 52 to 37?

Declining amortization is basically related to amortization of our Star Wars property rights.

Okay. So there is a component that is amortization of tool and die, isn't there?

We have an underlying amortization of about $60 million to $65 million a year that relates to property rights primarily acquired in entirely in deals like the Milton Bradley deal, Supersoaker Company, Laramie deal we did with, the Golub transaction, the Tiger transaction. The intangible assets that we acquired in those deals, the amortization of that is about $60 million to $65 million a year.

And then the other variable component is the amortization of our Star Wars property rights, which in movie year can be 35 million-ish, and in a non-movie year will be substantially less.

Right. And something like the Tiger component or some other component, you have yet to write them off -- are they still considered balance sheet --?

We only did the deal on Tiger in '98. So even if you are amortizing the intangible assets you acquired, like the Tiger name and some of the property rights that we acquired, even if you are doing it over 10 years, that would go out to 2008.

Just for your information, years back, people used to use a lot longer amortization periods. So on the Milton Bradley deal, there was more like a 30- or 40-year amortization of the Milton Bradley name.

Thank you, David. Thanks, Al.

Thank you. Let me now turn the call back to Karen Warren.

Thank you. I'd like to thank everyone for joining us today on the call. A replay will be available on our website after 2 PM today. Thank you very much.

Thank you and this concludes today's conference. You may disconnect at this time.