孩之寶 (HAS) 2006 Q3 法說會逐字稿

Welcome to Hasbro's third quarter conference call.

At this time, all parties will be in 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 Elan, and good morning, everyone.

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

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

The press release includes information regarding nonGAAP 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.

A supplemental schedule attached to today's press release provides a reconciliation of our reported earnings and segment operating profits for the third 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 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 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, 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 the 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, and thank you for joining us.

I am very pleased with our third quarter and year-to-date performance, and I feel good about our outlook for the all important holiday season.

We had a very good quarter, revenues were up 5% to over $1 billion, driven by the strength in LITTLEST PET SHOP, PLAYSKOOL, NERF, PLAY-DOH, MONOPOLY, TRANSFORMERS, STAR WARS and CLUE.

Overall our top line results for the quarter are better than expected, with each of our major regions improving year-over-year.

Revenues excluding STAR WARS were up 110 million, or 13% for the quarter, and 213 million, or 13% year-to-date.

In a few minutes David will review the financial results in more detail.

However, I do want to mention I am particularly pleased with the improvements we made in our operating profit, up 29% to a year ago to $165.2 million, or 15.9% of revenues.

Let me take a moment to talk about each of our major product categories in more detail.

STAR WARS continues to be the #1 action figure property in the industry, with shipments of 69 million for the quarter, and 182 million year-to-date.

This compares to 128 million for the quarter, and 375 million year-to-date in 2005, clearly demonstrating the continuing strength of this brand even in a non-movie year.

TRANSFORMERS and G.I.

JOE are also part of the Boys business, were both up double-digits.

Our Girls business is very strong, led by LITTLEST PET SHOP, which has more than doubled its sales from a year ago, and another solid performance by MY LITTLE PONY, which will be supported this year by the live touring stage production, the World's Biggest Tea Party.

Lastly, BABY ALIVE, one of our new girls initiatives is off to a very good start, both domestically and internationally.

In the Tween category, NERF was up 84%, and I-DOG was up significantly year-over-year, and continues to have good momentum at retail, along with I-PUPs, and we recently began shipping I-FISH and I-CAT.

In the Preschool business, PLAYSKOOL was up an impressive 67%, driven by the success of our Busy Basics and Let's Play Together product lines.

PLAY-DOH celebrating its 50th birthday this year continues to be very successful.

T.J.

Bearytales began shipping in the quarter, and the early indications at retail have been very good.

CVS, the largest retail pharmacy chain in the United States introduced a new PLAYSKOOL-branded baby care product line.

Over 50 PLAYSKOOL baby care products will be featured in over 6000 stores nationwide.

Our traditional board game business was up 12% in the quarter, and 7% year-to-date, with a number of games performing well, including CLUE, BATTLESHIP, YAHTZEE, and MONOPOLY, driven by the success of MONOPOLY HERE AND NOW.

Retail takeaway of our top four domestic customers for our board game business was up 12% for the quarter, and 6% year-to-date.

Our third quarter and year-to-date performance in traditional games is especially encouraging, and gives us good momentum going into the fourth quarter, where we typically do more than 65% of our retail business.

Magic: The Gathering, our preeminent trading card game continues to do well.

It was up double-digits for both the quarter and year-to-date.

As is normal for our business, there are also product lines that were down year-over-year, including B'Daman, Furby, and Duel Masters.

At the beginning of the year, while we did not anticipate a major decline in revenues, as we expected the strength of our core brands and new product initiatives to largely mitigate the impact of decline in STAR WARS, we did believe it was less likely that we would grow revenue.

However, our performance year-to-date clearly demonstrates that our core brand strategy is working, and that we can grow revenues coming off a movie year.

This has been a key goal of ours since 2001, when we articulated as part of our strategy, not to be dependent on a hot movie property for a successful year.

Building on the strength of our core brands and layering in the anticipated July 4, 2007 release of the TRANSFORMERS movie, as well as the release of Spiderman 3 on May 4th, we are very excited about the opportunities for 2007 and beyond.

Also coming in 2007 from Marvel is the February release of Ghost Rider, and the July release of Fantastic Four.

In 2008, they have announced plans for two additional movies, Ironman and The Incredible Hulk.

Over the next 5 years, Marvel plans to deliver major movie entertainment for a number of key properties each year.

Given the 5,000 plus characters they have in their vault, this is a tremendous opportunity for Hasbro.

When you look at what we have accomplished with STAR WARS, I think you will agree that this is an area of the business where we excel.

We do this by developing innovative products with impactful marketing programs, supported by our global distribution network.

In closing, the retail climate is better than we anticipated.

Most major retailers around the globe are cautiously optimistic about the holiday season.

Thus far the consumer has been spending, with retailers having a good Back-to-School season.

In addition, our retail inventories are in good shape.

As we look to the remainder of the year, we believe we are well positioned for the all important fourth quarter, with momentum in a number of our key brands and many new product initiatives, not the least of which are Tooth Tunes and Butterscotch.

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

Thanks Al, good morning, everyone.

I am very pleased with the results we reported today.

After the end of the third quarter, we are on-track to finish the year with growth in earnings per share for the fifth consecutive year.

Our top line performance for the quarter and year-to-date is a solid indication of the success we have had in growing our core brands.

Indeed, given the exceptional performance of STAR WARS in 2005, it is even more meaningful to have grown revenue 5% year-over-year.

During the quarter, we repurchased approximately 6.6 million shares of common stock at a total cost of 131 million.

Since June of 2005, we have repurchased 23.5 million shares, or 13% of our shares outstanding for a total cost of 465.3 million.

Before I go into more detail on our results, I would like to mention two accounting statements that had a particular impact on the quarter.

Having adopted FAS 123-R in the first quarter of this year, our third quarter results include a 5.7 million pretax expense for stock-based compensation.

As we indicated in February, we are not restating our 2005 reported results but for your reference, we have included a table in our press release that provides 2005 third quarter and year-to-date results, that do include the affected stock based compensation expense.

Additionally in our press release today and on this call, we are referring to 2005 segment results adjusted to reflect the impact of FAS 123.

This provides a more meaningful comparison to this year's segment performance.

The second accounting statement is FAS 150, Accounting for Certain Financial Instruments, with characteristics of both liabilities and equity.

This Accounting Standard requires that the value of the warrants we granted to Lucas related to the STAR WARS brand be mark-to-market each quarter.

Since the adoption of this rule in 2003, each quarter we have reported non-cash charges or income related to changes in the fair value of the warrants, which largely reflect changes in our stock price.

This quarter given the significant improvement in our stock price, the adjustment was an expense of approximately 19.8 million, or $0.09 per share.

This compares to income of 570,000 in 2005.

So when you look at our results this quarter, absent the mark-to-market adjustments, earnings per share improved by 43%, to $0.67 per share.

Needless to say, we are extremely pleased with our bottom line performance, and given the growth we have had in the top line, it was clearly a very strong quarter for Hasbro.

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

Worldwide net revenues were 1.039 billion, compared to 988.1 million last year, an increase of 5% year-over-year.

North American segment revenues were 745.5 million, compared with 712.3 million last year.

North American operating profit for the quarter was 111.6 million, or 15% of revenue, compared to 85.3 million, or 12% of revenue last year.

Year-over-year amortization and royalty expenses declined, partially offset by increases in product development and advertising.

Revenues in the international segment were 280.4 million, compared to 264.6 million a year ago.

The segment delivered 6% growth in U.S. dollars, and 2.5% in local currencies.

International operating profit was 43.2 million this year, compared to 32.9 million last year.

The improvement was primarily due to the expected decline in amortization and royalty expenses.

Now let's take a look at earnings.

For the quarter, we reported net earnings of 99.6 million, or $0.58 per share, which includes a stock-based compensation expense of $0.02 per share.

This compares to net income of 92.1 million, or $0.47 per share in 2005.

As I mentioned earlier, the Lucas warrant mark-to-market adjustment had a negative impact of $0.09 per share on the results this quarter.

Earnings before interest, taxes, depreciation and amortization were 192.6 million compared to 187.9 million a year ago.

Gross margin for the quarter was 55.6%, compared to 55% last year.

This small increase is primarily due to growth in core brands that had higher gross margins, including LITTLEST PET SHOP, Magic: The Gathering, and our traditional Milton Bradley and Parker Brothers board games.

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

Royalty and amortization expense declined due to the lower STAR WARS volume, and the strong performance of our core brands.

Research and product development expense was 44.4 million, or 4.3% of revenue, compared to 39.4 million, or 4% of revenue a year ago.

As we indicated earlier in the year, R&D spending will be higher due to the investments we are making in the PLAYSKOOL and Marvel product lines.

Advertising expense was 126.8 million, compared to 118.8 million last year.

As a percent of revenue it was essentially flat year-over-year.

SG&A expense at 169.3 million, or 16.3% of revenue, compared to 162.1 million, or 16.4% of revenue a year ago.

The increase in actual dollars is primarily due to the expensing of stock options in 2006.

Other income and expense included the 19.8 million non-cash unfavorable mark-to-market adjustment to the Lucas warrants I mentioned earlier.

While the mark-to-market adjustment was excluded from the earnings per share calculations in 2005, accounting rules require its inclusion in the 2006 earnings per share calculation.

Excluding the impact of the Lucas warrants, which is a non-deductible expense, our underlying tax rate for the quarter was 27.1%, compared to 27.2% a year ago.

Now let's turn to the balance sheet.

At quarter end, cash totaled 309.1 million, compared to 570.5 million a year ago, down 261.4 million.

During the last 12 months, we have utilized 433.5 million of our cash to repurchase shares.

In addition, we have reduced our debt by 108.5 million, and increased our quarterly dividend from $0.09 to $0.12 per share.

Our receivables at 679.4 million, were down 2.1 million compared to 681.5 million last year.

Days Sales Outstanding were 59 days, compared to 62 days last year.

Inventories were down by approximately 19 million from a year ago, to 312 million, and at the end of the quarter, our debt to cap ratio was 26%, compared to 27% last year.

In summary, we are operating from a position of financial strength.

We continue to perform ahead of plan this year, and with the strength of both our core brands and our licensed properties, we are well positioned for 2007 and beyond.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Liz Osur with Citigroup.

A couple quick questions.

First you mentioned kind of a stronger retail environment.

I was hoping maybe you could talk about shelf space in the holiday season, and how it compares to last year.

Second, I wanted to know what you attribute the strength in the board game sales to, and third just a housekeeping item if you can give us a sense of what the shares outstanding for the full year might be, that would be really helpful.

Thanks.

I will take the first two, and then have David talk to you about the shares outstanding.

In terms of the retail environment, I think that as we talk to our customers around the world, they are all cautiously optimistic.

They had a good Back-to-School season, the business has been pretty decent thus far.

So they are going into the holiday season with a good feeling, as opposed to a down feeling.

In terms of the amount of shelf space, I can only speak for us.

I think in general we have either the same or more shelf space.

It will vary by product category depending upon what lines you have in any given year, so certainly there is probably a little less shelf space for STAR WARS this year, but more shelf space in other categories.

But our shelf space and our market share is growing.

In terms of board games, if we look at the game business last year, one of the things you have to keep in mind is especially during the fourth quarter, the business was adversely impacted by the plug and play business, where there are a lot of games out there.

There were actually too many.

That hurt us for the full year, and also began to hurt us more in the third and fourth quarter where we expected to do much better.

Our traditional board games were pretty good last year.

In addition to that, last year our promotional programs were not working nearly as well.

We have made substantial improvements in them, and we have been much more aggressive this year.

I think the combination of some good products like MONOPOLY HERE AND NOW, the lack of a glut of the plug and play, and strong promotions has helped the business.

That said, most of the board game business, about 65% of it, is going to happen during the last two months of the year.

It is November and December that we will really have to make work for us.

David, do you want to talk about the shares outstanding?

I can't give you a year end number.

Our average shares outstanding for the third quarter were 161 million for the three months, because we have been buying back, the average for the three months year-to-date were 169.

Assuming if we keep buying back, and obviously that depends on a number of factors, but assuming we keep buying back, obviously it would be below these levels, below 161 for the fourth quarter, and below 169 for the average.

Now, depending on which is the most dilutive way to calculate our earnings per share under FAS 150, of course we may have to add in the 11 million shares associated with the contingent convert, possibly the 5 million associated with the Lucas warrants, and about 1 to 2 million in terms of other options and warrants.

You could get out to fully diluted of 175 or so for the quarter, and it would be a bit higher than that for the average year.

I apologize if you gave us this number.

Could you just say what the outstanding shares were at the end of the third quarter.

That's the number I started with, 161.

161.

That's great.

Thanks so much.

Thank you.

Our next question is from Tony Gikas from Piper Jaffray.

Good morning, guys.

Congratulations on a good quarter.

A couple follow up to Liz's questions.

Can you just maybe give us a little update on the rollout of floor plans at Wal-Mart and Target.

Are they coming earlier this year, or in-line with the previous year?

Second question, just a follow up on the games business.

You talked about promotional programs.

How is pricing tracking on a year-over-year basis, and then I have a follow-up.

Thank you.

Okay.

In terms of floor plans, are you talking about when they are going through the fall sets, and how many linear feet they are giving to toys?

Exactly.

I don't see a substantial difference from last year, but in all honesty, I am not sure.

I don't have the answer, but I haven't heard anything where people are giving substantially more or less space overall.

I would say they are reasonably consistent with a year ago.

In terms of games, pricing, the season is just beginning.

We will have to see what retailers do, in terms of their promotional activities.

That is something that each individual retailer does on his own.

Some retailers have already taken some actions, and I am sure more will follow.

We will see what happens in terms of the pricing the balance of the year.

It sounds the business is tracking a little ahead of plan.

Are planned volumes in pretty good shape as you move into the holidays, or are there any categories where we could see out of stock items, and then last question, just could you talk a little bit about the competition in the action figure category and the games businesses for the holidays this year?

Okay.

In terms of out of stocks, we are in pretty good shape.

There are a couple of items that we could potentially find ourselves short on.

Some of our new entries that have been extremely well received thus far, like BABY ALIVE and T.J.

Bearytales, we could run short, and we just have to see.

We're are cranking like crazy, but we will have to see what happens during the next several months.

In MONOPOLY HERE AND NOW and a few other games, but in general I don't see any huge shortages developing.

In terms of competition, I can't really speak to competition in that regard.

Some of the movies that are out this year did very, very well, and they continue to do well.

But certainly in the action figure category, STAR WARS continues to have a very good good season, and should end the year as the #1 action figure category.

TRANSFORMERS is doing very, very well.

It is just good for us at this point in time, in terms of the action figure category.

In terms of games, there is always a lot of competition in games but nothing that we see that should prevent us from doing well.

Our game business last year was off.

I don't really think it was off because of competition.

I think it was off because of things we did or didn't do in marketing our games.

It was more of our own doing than necessarily competition.

Okay.

Thanks.

Thank you.

Our next question is from Sean McGowan from Wedbush Morgan.

Hi.

I also have a couple questions.

Maybe for David.

Is the entire Lucas charge for the warrants, is that all in that other line, and if so, what else is going on in that line relative to last year?

It is all in Other Expense, and compared to a year ago, we were 5 million positive in the quarter, and I think this year we were 15 million negative, which is about a $20 million swing, and the Lucas mark-to-market was actually $19.8 million, or $0.09 per share.

So it is all there.

Everything else is just kind of as is?

There are bank fees and some other stuff in there, but exchange gains and losses, but clearly that year-over-year variance is almost entirely attributed to that.

Another question about Lucas, in terms of the shares, wasn't there a feature with a put option that wound up increasing the diluted share counts, and is that the one where is would [factor]?

What happens is, each quarter we have to look at under FAS 150, this Lucas warrant with a put option has characteristics of both liability and equity.

Liability because they can put them back to this, and we have a choice of paying in $100 million, or 110 million in stock.

The accounting rule requires us to calculate earnings per share on the most dilutive way each quarter.

So this quarter we have left in the expense, the mark-to-market expense, but have not -- but have taken out the shares.

In some quarters where the expense is lower, it is more dilutive to leave in the expense than put in the shares.

Right.

Again it is a trigger of the stock price?

Yes.

Well, it depends on the size of the mark-to-market, which is a function of stock price, yes.

When does all of this go away?

In January of '08 the put expires.

We're all looking forward to that.

So am I.

A couple of other questions.

David, it was helpful the comments on what the tax rate would have been X the expense.

How would you characterize your forecasting at this point for maybe next year, or more near term?

What would be the ongoing tax rate?

We have had a pretty good rate over the last few years, 27% I think as we plan out forward, 28 to 29, maybe better over the next few years.

finally, if you wanted to take this, David or Al, can you characterize how much better STAR WARS did so far this year versus your expectation, and I think it has performed better than all of us had figured, but could you give us some sense of how much better than your own internal plans it has been, maybe not a specific dollar figure, but how much of the positive strength in the top line is because that particular line did better?

If you look at first of all, if you look at our volume excluding STAR WARS in both years, our non-STAR WARS business is up $110 million in the quarter, and 213 year-to-date, 13% for both the quarter and year-to-date, so the non-STAR WARS business is very strong.

I think as strong as we might have budgeted or planned for.

STAR WARS is also doing better than we originally planned for.

The problem with a movie property, it is always very difficult to forecast where it is going to be the following year.

Right.

But I would say that STAR WARS is doing better than we expected, but it is not doing enormously better than we expected, because we think STAR WARS is, what happened last year is the kids got back into the STAR WARS brand.

When that happens, you know you are going to have a good year following.

When it is just a collector, it is much more difficult to have a strong year following a movie year, but with the kids getting back into the franchise and the fantasy, it always has a lot more potential for both this year, and quite frankly '07, and then we start to get into the animation.

STAR WARS is a long-term franchise that should do very well for us.

Thank you very much.

Thank you.

Our next question is from David Leibowitz from Burnham.

Good morning, let me add my congratulations.

A few questions if I may.

Do you break out in the income statement the outsourcing of licenses, or the outlicensing business?

Thank you David.

No, we don't.

No, we do not.

Is there any way one can even guesstimate what it is?

No.

Okay.

I presume you prefer it that way?

You can guesstimate.

We just won't help you.

Oh, okay. [laughter] Second question, the outlook for the brands that you indicated were not doing so well this year, B'Daman, et cetera, at what point is the decision made whether they're going to be brought forward into the '07 line or not?

I think B'Daman will not go forward, and neither will Duel Masters.

In terms of Furby, Furby is a product did very well, it had some success last year, it is down this year.

It really becomes a question as to whether or not we will develop a new Furby.

That is much more based upon new product.

In terms of B'Daman, the television programming is off air.

So we will not go forward with it.

Same with Duel Masters.

Duel Masters continues in Japan, where it does well, but it will not go forward.

Actually, it didn't go forward this year.

We were just finishing up whatever we had.

You are looking at the decline compared to last year.

So that was really a decision we made early on this year.

I suspect that you will see Furby in the future.

Wal-Mart announced their major price cuts late last week.

How many of your items were on that list?

I think we had 6 or 8, 7 items, mostly games.

And do you have to give Wal-Mart any extra compensation for having done this?

No.

We don't participate in their program.

Thank you very much.

I will queue up again if I may.

Thank you.

Thank you.

Our next question is from John Emerich from Iron Works Capital.

Congratulations David.

A couple unrelated questions if I could do them separately.

Following up on the STAR WARS, the question I would have asked is I know I saw an article recently about what the Lucas folks are doing to sustain the merchandising engine, they being no dummies, obviously.

But maybe if you could talk about that, and then I will ask another follow-up.

About what they're doing?

Yes.

I remember reading something about them really proactively stepping up to sustain the engine.

They will be I think it is '08 they will be coming with animated television programming, which is well under way.

There is talk of live action down the road, so there is a lot of entertainment that will be coming out of Lucas beginning in '08, I believe.

It is the 30th anniversary next year, '07 as well, so there is going to be some promotions around that, and in addition, Lucas Arts are going to continue to do video games, and they do have a publishing program that goes around that.

Go forward, you can look to definitely animated television, possibly live action television, along with anniversary celebrations, plus video games, plus publishing.

Okay.

Perfect.

And the second one was, things look great, the balance sheet looks great, you are going to generate another about 400 million in free cash flow over the next four or five quarters.

What are the new priorities for that free cash flow, in terms of balancing share repurchases or paying down debt, and what is the authorization remaining?

Thank you.

Yes.

I think we have got over 200 million left on our authorization, and as we've always said, the absence of a compelling opportunity, acquisition opportunity or something like that, then our priority would be to return the money to the shareholders.

After all, it is their money.

Stock buyback would continue, and then we have increased our dividend a small amount each year for the last three years, obviously that's a matter for the Board, whether they do that again next year.

In terms of paying down debt, we are at the bottom end of our debt to cap target, and we haven't got any maturing either in '06 or '07, so I do not anticipate any further debt reduction in the near term.

Thank you so much.

While I am talking I need to correct my earlier answer to Liz, when I said shares outstanding were 161 million at the end of the quarter, that was the average for the quarter.

It was actually 158,221,000 at the end of the quarter.

Thank you.

Our next question is from Tim Conder from AG Edwards.

Let me also offer my congratulations on a great quarter.

Thank you, Tim.

Just a couple of items.

Follow up on the outlicensing.

I think this question was asked in the prior conference call, but I did want to delve into it again.

Your TRANSFORMERS, your plans for the outlicensing of the property surrounding the movie release next year, and then just more of a housekeeping item, David on the CapEx here in the quarter and for the year, and then your outlook for '07?

In terms of the outlicensing for TRANSFORMERS, we will have a very aggressive program.

We have already announced that Activision will be doing a TRANSFORMER video game, and will be in a lot of other non-toy categories that we will license to third parties.

I don't recall the number of licensees that we have signed up already, but it is quite a few.

I think it is up over 80, or something like that.

So it will be a pretty aggressive program.

It is actually 120 that we have signed up to date, to support the movie in '07.

CapEx during the quarter was 22.9 million, which brings it to 52.8 year-to-date, we have previously given guidance for the longer term, but we need 70 to 90 million a year in order to sustain our business.

We have tended towards the lower end of that the last couple years.

I expect we will be higher this year, because about 50% of our capital expenditure is tooling for our product line, and given that we have got the Marvel line, the big TRANSFORMERS line, and we are investing heavily in PLAYSKOOL, I would say it will be about 85 million this year, and it could be 85 to 90 million next year would be my best estimate at this time.

And if I could circle back to the TRANSFORMERS outlicensing question.

Is there any target, a general target that you have, as far as mix from licensing versus outright product related sales?

No.

I mean clearly different product lines will have different programs, girls properties versus boys properties.

Is it a movie property, is it not?

Some of our brands work well in the video game business.

Others wouldn't.

We'll take a look at brands like My Little Pony, LITTLEST PET SHOP, TRANSFORMERS, FURBY, G.I.

JOE, and outlicense those to a wide variety of licensees and product lines.

Some of the things that are sort of more routine you see publishing, apparel, footwear, those are some of the obvious categories that we get into, T-shirts and things of that nature.

Some of them will do well in the health and beauty category.

Other product lines won't.

But we don't have a percentage of revenue goal that we are trying to achieve as a target.

That is done on each and every brand.

For TRANSFORMERS in particular, no general target?

We have some internal targets that we want to hit, but we are certainly not going to disclose that publicly.

Yes.

We have some goals and objectives, sure.

Okay.

Thank you.

Thank you.

Your next question is from Gerrick Johnson from BMO Capital Markets.

Hi.

I just want to clarify the board game statement you said earlier, 65% of board game sales happen the last two months of the year.

Is that shipments or retail take away?

Retail take away.

You didn't talk much about the Now line.

I was wondering how that business is doing, how it is doing according to your plan, and your commitment to this line and category in the future?

If you're talking about Videonow.

Chatnow, Videonow.

The line is doing reasonably well.

It is obviously down from a couple years ago, but the software continues to sell.

We are committed to the Now franchise, and in future years you are going to see new products in the Now category.

It is certainly down from a couple years ago, when we first introduced Videonow and Chatnow.

But the product is still selling for sure.

Okay.

Thank you.

Thank you.

Our next question is from John Taylor from Arcadia.

Good morning.

How are you doing?

My congratulations too.

Could you guys talk a little bit about the mechanics of the hand off of all the Marvel properties, I am curious about what arrangements have been made for inventory in the channel, and maybe how you are thinking about the potential of early spring shipments or something like that.

Maybe talk a little bit about that, and then second question is, maybe talk a little about input pricing for next year, and you have probably negotiated some contracts now, et cetera, so maybe directionally give us a sense of that.

Finally, I wonder if you could expand on the CVS PLAYSKOOL thing a little bit more.

It sounds interesting.

Thanks.

In terms of Marvel, when we negotiated the deal, we certainly addressed things in making sure the channel is going to be clean.

So when we take it over we are not going to run into any inventory problems.

The channel is pretty clean.

We don't anticipate any problems at all.

We have already shipped an item this year.

The Itsy Bitsy Spiderman, and as we get into the balance of this year, we will be shipping a few more products and then when we get in to '07, we will ship even more as we build up to the release of Spiderman.

We have also got products coming in Ghost Rider, which will come in February.

There will be a lot of activity in Marvel.

Our working relationship with them has been very good.

We are just looking forward to an exciting year with them.

For the classic Spiderman, and some of the older versions of the Marvel characters, do you guys have access to any of their tooling, or are you doing all new tooling for everything?

We have access to some of their tooling and some of their designs.

We work with their design people.

So it has been a coordinated effort, and there are some cases where we will use their tooling, and other cases where there will be new tooling.

So it is a combination of both.

Okay.

Great.

In terms of pricing for '07, there are a lot of factors that go into pricing, and we are certainly in the middle of that, talking with customers now as we go through previews, we are giving them a sense of what pricing will be for '07.

That is based upon where we think commodity costs will be, and other costs associated with running the business.

We are not looking at any significant price increases across the board type thing.

Are you seeing anything in input pricing, related to somewhat lower oil prices, et cetera, for next year on plastic?

I think there is no question.

First of all, the price of plastic, there are a lot of factors that affect the price of plastic.

The price of a barrel of oil is just one of those.

But supply and demand will have oftentimes a much more significant impact, but I would say in general, the prices of our raw materials, in particular oil-based products, have moderated, and are stabilizing and coming down a bit, whereas in the past they had been rising.

I think from that perspective we are probably a little bit more comfortable with the outlook, going into '07 things are moderating and pretty stable versus what they might otherwise have been.

The problem, JT, as you know, we live in a world where things can change rather dramatically, and you just have to be in a position to be able to respond to that as quickly as you can.

In terms of the program for CVS, we are partnering with CVS and launching 50 baby care products, ranging from baby wipes, diapers, and a whole host of other infant products that will be exclusive to CVS.

It has been launched now and is probably in all 6000 stores by now.

Initial reaction to the line and numbers that we have seen has been very, very good, above expectations, and we are excited about that over the long-term.

CVS is the largest retailer in the United States, and a great organization to work with.

You don't know offhand how many feet of shelf space you have got for the line there, do you?

I don't have the number at the tip of my tongue, no.

Okay.

Thank you.

Thank you.

Our next question is from Carla Casella from J.P. Morgan.

Hi.

My question relates to the comments from Wal-Mart about reducing prices on toys.

Are you seeing anybody else match that, or anyone coming to you to try and get better pricing for the holiday?

Do you get the sense it should be a more promotionally competitive holiday as a result?

Well, no one is coming to us asking us for lower prices.

In terms of sort of a competitive response to Wal-Mart, the recent announcement, there are bits and pieces out there, and these retailers I am sure will be responding with their own promotional programs.

There are a number of analysts, quite frankly, that issue reports on a weekly basis comparing the top 50, 100 to 150 items between Wal-Mart, Target, and Toys 'R Us.

I think we are just about to get into the season, so I am sure people will respond in a way they think is appropriate.

Secondly, Toys 'R Us having now been been under new management and ownership for this holiday season, are you seeing much change in their strategy, or how they deal with you?

We have a good working relationship with them.

We are doing some great things with them, and we think they're going to long-term be successful.

We like the new management team, and everything is a positive tone right now.

Great.

Thank you.

Thank you.

Our next question is from Margaret Whitfield from Ryan Beck.

Good morning, everyone.

Good morning, Al.

This first question is for David.

If you could review the impact Plug and Play had on your business last year?

I think it was mainly in the fourth quarter, and I am guessing it was mainly in the gross margin.

Well, it had an impact on our third, in effect that we shipped in a lot of Plug and Play items in the third quarter last year.

It had an impact on our fourth quarter in that we took a number of them back.

Indeed had some markdowns, and had some obsolescence charges.

If you remember, the Plug and Play market, the whole market, the whole industry was very crowded in the fourth quarter of last year, and was kind of saturated with product.

We took the necessary actions to clean the market up.

I think I declared in February that it was about a $23 million negative impact to us in the fourth quarter of last year, as we cleaned that market up.

That said, the items we have carried forward such as Dream Life, and now a new girls one, Designer World, and certainly earlier in the year, the STAR WARS Light Saber training game, they have done pretty well, so we took the hit in the fourth quarter last year, cleaned the market up, and it has been performing pretty well for us thus far this year.

The 23 million was in the cost of goods?

It was, that was the total costs to us.

Some of it was between, had already come off the net revenue stage to the extent it was provisions for markdowns, but most of it would have been in the cost of goods sold, yes.

Okay.

And I guess for Al, looking at the price reductions Wal-Mart took the biggest hit was on MONOPOLY HERE AND NOW, cut to 15, I see the price stayed the same at Target for now.

But have you had any cancellations as a result of this action by Wal-Mart from other retailers?

No.

Okay.

That's good to hear.

Also could you review for us what products might keep STAR WARS in the mind of the consumer in Q4?

What products do you think will be leading the charge?

We have a fantastic Light Saber that is going to certainly lead the charge for STAR WARS.

It is a force action light saber.

You have to buy one to really get the sense of what it does.

It will be a great item.

We have lots of new figures coming.

There will be plenty of new product to keep the momentum going.

And good news, transforming STAR WARS, transforming STAR WARS as well.

Okay.

Thanks and congratulations.

Thank you again, Margaret.

Thank you.

Our final question is from David Leibowitz from Burnham.

Earlier you said there were going to be two Marvel movies next year?

Three.

There is Ghost Rider, Fantastic Four, and Spiderman 3.

In going over the sales of the Marvel business that toy biz used to do, when there was more than one movie, did their sales spike, or did you discover there was cannibalization, that whichever was the movie of the moment is where the business went, and it just went from one title to the other?

Generally if you have three good movies, you will find that the overall action figure category will rise.

I think whether it is Marvel properties or any other properties we have seen over the years that it isn't so much one taking away from the other, this year, STAR WARS is doing well, but TRANSFORMERS and G.I.

JOE are also doing well.

I think what happens is that the whole action figure category will rise, and we would expect the same thing next year between TRANSFORMERS and the three Marvel properties.

It should be a strong action figure year for our business.

And lastly, you indicated that PLAYSKOOL is getting additional attention and beefing up, and you mentioned the CVS contract.

Is there anything else you can point to with PLAYSKOOL, and give us some idea of how much growth you would like to be able to attain the sales and earnings over the next year or two?

As you know, David, I will not forecast sales and earnings, but clearly we think PLAYSKOOL is a very key core brand, one of our key core brands going forward.

I think longer term at Hasbro it is going to be successful.

PLAYSKOOL has to be a successful part of our franchise.

It is a brand that is an umbrella brand with a wide variety of basically product categories in it.

We are putting a lot more R&D, a lot more promotion going forward, so we have done a lot of investment spending thus far, and I think this year is just the beginning of what you will see.

I think you will see even more in '07, and again in '08.

And lastly, then, if you're not going to talk to the sales and earnings to Hasbro, could you at least talk to share of market that you would hope to be able to gain in the category?

Again, I am not going to point to a specific market share goal, because quite frankly, it varies between domestic and international and specific countries overseas, depending upon where the brand has been launched.

But there isn't any question in my mind, that PLAYSKOOL ought to be demanding a very significant share of market in the Preschool arena.

We are going to go after it.

It is a great brand.

It has been a great brand for a long period of time.

With the investment on our part into R&D and marketing, there isn't any question why we shouldn't see substantial increases in market share beginning this year, and going forward.

Thank you very much.

Thank you.

I would like the turn the call back to Karen Warren for closing remarks.

Thank you.

I would like to thank everyone for joining us today.

The replay of today's call will be available on our website after 2 p.m.

Thank you and have a good day.

Thank you, and this concludes today's conference.

You may disconnect at this time.