孩之寶 (HAS) 2006 Q4 法說會逐字稿

Good morning, and welcome to Hasbro's fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS].

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 Verrecchia, President and Chief Executive Officer and David Hargreaves, Senior Vice President and Chief Financial Officer.

To better understand our fourth quarter and full year 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.

The supplemental schedule attached to today's press release provides a reconciliation of our reported earnings and operating profits of the fourth quarter of 2005 to the numbers as adjusted to include stock compensation expense.

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 future plans and our financial and product performance.

There are many factors that could cause actual results or 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 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.

Al?

Thank you Karen.

Good morning everyone and thank you for joining us.

Before David takes you through a detailed review of the financials I would like to make some comments about our full year results. 2006 was another good year for Hasbro and its shareholders.

We achieved the highest net earnings in the history of the Company and it was the sixth consecutive year of earnings per share growth.

Revenues were up 2% to $3.2 billion driven principally by an excellent performance from our core brands.

We had significant increases in a number of our Hasbro-owned properties, including Littlest Pet Shop, Playskool, NERF, Monopoly, Transformers, Magic: The Gathering, and Clue.

Revenues excluding Star Wars were up 11% or $273 million for the year, further demonstrating our core brand strategy is working.

It is worth noting that Star Wars did very well.

Revenues were $285 million in 2006, compared to $494 million in 2005, making it the number one Boy's property in the industry for the second year in a row.

For the year, we reported earnings per share of $1.29 compared to $1.09 per share in 2005.

Excluding the impact of the Lucas Warrant's market to market adjustment, 2006 earnings would have been $1.43 per share, a 25% increase over the prior year's results as adjusted to exclude the impact of the re-patriation of foreign earnings and include the impact of stock based compensation expense.

I'm particularly pleased with our improvement in operating margins.

For the year, operating profit was up 21% to $376.4 million or 11.9% of revenue, the highest operating profit ever achieved by Hasbro.

This was driven in part by the strong performance of our core brands, which tend to be more profitable.

We are pleased with our continued progress we are making on all of our financial goals.

Our balance sheet is strong, we continue to repurchase shares and we increased our dividend.

If you recall last year, we increased quarterly dividend by $0.03 per share to $0.12 per share.

And yesterday our Board of Directors increased the quarterly dividend again to $0.16 per share, an increase of 33% or $0.04 per share, demonstrating our continuing commitment to return excess cash to shareholders.

Now let me take a moment to talk about the global performance of our major product categories.

The Girl's business was up 21% with Littlest Pet Shop revenues more than doubling year over year.

The FurReal Friends line delivered another solid year led by Butterscotch, our new Shetland pony.

Adding to the success of the Girls category was a great Hasbro brand we brought back from the 70s and contemporized for today's girls, Baby Alive.

In the Boys business, as I mentioned, the Star Wars brand continued to do well.

The strength of this brand is clear and we expect it will continue to make a meaningful contribution to our overall performance in the years ahead.

Transformers exceeded our expectations for the year, up a strong 36%.

In 2007 you can expect continued growth in Transformers given the release of the live action movie on July 4th.

In the tween category NERF did exceptionally well this year, up 58%.

The brand has grown steadily over the last couple of years and it's another great example of the success we have had with our strategy to grow core brands

Revenues for the I brand tripled in 2006, driven in part by the continued success of I-Dog along with the I-Cat and I-Fish.

Our preschool business was up 21% with Playskool up an impressive 49% and Play-Doh up 32%.

TJ Bearytales, our new introduction in the category also did very well.

Our board game business was up 11% for the year with our top performer, Monopoly up 35% driven by the success of Monopoly here and now as well as a number of other classic games including Clue, the Game of Life and Battleship.

It's worth noting that the recently released MPD data ranked Monopoly the number one game in the United States last year.

In addition Magic: The Gathering, our preeminent trading card game was up 7% for the year.

International segment was down $29.3 million or 3%and $53.6 million or 5% in constant dollars.

You may recall that the international segment does not include Canada and Mexico, which are included in the North American segment.

If we look at all of our non U.S. business, revenues were up 1% from a year ago.

Both Canada and Mexico as well as Latin and South America and the Asia Pacific regions were all up.

From a segment standpoint the international segment declined overall due to the performance in the European market.

In the international segment, our preschool, girls and boy game businesses were all up, however it was not enough to offset the decline in Furby, Duel Masters and Star Wars, all of which did very well in 2005 in Europe.

Furby and Duel Masters declined $45 million and Star Wars was down $63 million in Europe compared to 2005.

However, given the strong performance of our core brands in Europe as well as the release of the live action Transformers and Spiderman movies, both of these brands have historically done very well in Europe, we expect a much improved European performance in 2007.

In closing we demonstrated this past year that we can grow revenues coming off a great entertainment property like Star Wars.

We accomplished this by bringing innovation to both our core brands and new product initiatives.

As we look ahead to 2007, we begin the year with retail inventories in excellent shape, down substantially from a year ago.

We have momentum in our core brands and we are excited about our 2007 product introductions.

While there are high expectations in '07 with the release of the Marvel character based movies and the Transformer movies, we are equally excited about the opportunities beyond '07.

We hope you will join us next Wednesday morning for our webcast from Toy Fair, when you can hear more about our new product line and our plans for 2007 and beyond.

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

David?

Thanks Al, and good morning everyone.

I'm very pleased with the results we reported today.

We grew revenues by 2% for the year and we achieved an operating margin of 11.9%, very close to the near term target of 12% that we have been articulating.

I'm especially pleased to note that not only are we reporting record earnings, but it is the 6th consecutive year of growth in earnings per share.

Before I go into more detail on our results, I would like to mention two items that impacted the third quarter and the full year -- fourth quarter, sorry.

First is the required mark to market on the Lucas warrants.

For the full year, the adjustment was a nonoperating expense of $31.8 million, this compares to an income of $2.1 million in 2005.

The second item I wanted to mention is stock compensation expense.

At the beginning of this year, we adopted FAS 123 R, which required us to record an expense for equity awards.

For full year, 2006 results include expenses totaling $21.7 million compared to no expense in 2005.

As previously indicated, we had not restated our 2005 reported results, however, in our press release today and on this call we are referring to 2005 segment results as adjusted to reflect the impact of FAS 123 R, as we believe this gives a more meaningful comparison.

Now let's take a closer look at our results for the full year.

Worldwide net revenues were $3.2 billion compared to $3.1 billion last year, an increase of 2% or $63.9 million.

In constant dollars, revenue was up 1.2% or $36 million.

Our top line performance is a solid indication of the success we have had had in growing our core brands.

North American segment revenues were $2.1 billion compared to $2 billion last year, an increase of $91.7 million or 4.5%.

North American operating profit for the year was $276 million or 13% of revenue compared to $165.7 million, or 8% of revenue last year.

There are three major factors that contributed to the $110 million improvement in operating profit.

Firstly, the revenue growth of $92 million, second we had a change in mix to more profitable core brands, and lastly we did not have significant product related charges this year.

You may recall, last year we had significant charges associated with our plug and play games product line.

Revenues in the international segment were $959.3 million, compared to $988.6 million a year ago.

The segment was down 3% in U.S. dollars and 5% in local currencies.

As Al mentioned, we had significant reductions in Furby and Duel Masters along with a sharper decline in Star Wars.

International operating profit was $90.9 million this year compared to $106.4 million last year.

The primary reason for the decline in profitability was for lower revenue.

Now let's take a look at earnings.

Over year we reported net earnings of $230.1 million or $1.29 per share.

This compares to net earnings of $212.1 million or $1.09 per share in 2005.

Excluding the $0.14 impact of the Lucas mark to market, 2006 earnings would have been $1.43 per share.

Earnings before interest, taxes, depreciation and amortization were $515.7 million compared to $521.6 million a year ago.

Gross margin for the year was 58.6%, compared to 58.3% last year.

This slight increase is due to the fact we had a very strong finish to the year which resulted in lower inventory obsolescence charges.

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

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 $171.4 million, or 5.4% of revenue compared to $150.6 million or 4.9% of revenue a year ago.

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

Advertising expense was $369 million compared to $366.4 million last year.

As a percent of revenue it was slightly down year over year.

SG&A expense at $682.2 million or 21.7% of revenue compared to $624.6 million or 20.2% of revenue a year ago.

The increase is primarily due to the expensing of stock options, higher incentive plan provisions and higher charitable contributions.

Other expense for the year totaled $7.4 million, and included the $31.8 million noncash unfavorable mark to market adjustment to the Lucas warrants.

This was largely offset by $27.6 million of interest income.

Excluding the impact of the Lucas warrants and other discrete tax events our underlying tax rate for the year was 27.6%, compared to 24.9% a year ago, when more of our earnings were in lower tax rate jurisdictions.

Now let's turn to the balance sheet.

At year-end, cash totaled $715.4 million, compared to $942.3 million a year ago, down $226.9 million.

During the year, we utilized $456.7 million of our cash to repurchase shares. $105 million for the Marvel Advance and we contributed $55 million to our pension plans.

In addition we reduced our long-term debt by $32.7 million and increased our quarterly dividend from $0.09 per share to $0.12 per share.

Our receivables at $556.3 million were up $33.1 million compared to $523.2 million last year.

Day sales outstanding were 45 days compared to 44 days last year.

Excluding the impact of securitization, DSOs were flat.

Inventories increased by $23.9 million from a year ago to $203.3 million as we geared up to ship Marvel product early in the first quarter of 2007.

At the end of the quarter our debt to cap ratio was 25% compared to 24% last year.

During the quarter we repurchased approximately 1.6 million shares of common stock at a cost of $39.5 million, bringing the total share repurchase for the year to 22.8 million shares.

In summary, we are very pleased with the record earnings we reported today.

Our significant growth in profitability was driven by a strong performance from our core brands which had the momentum to continue to grow in 2007 and beyond.

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

Thank you. [OPERATOR INSTRUCTIONS].

Our first question today is from Elizabeth Osur, please state your company name.

Thanks.

It's Liz from Citigroup.

Congratulations on a great quarter.

Just had a couple questions.

First could you talk to what you're seeing on the cost side, particularly with gross margin product cost, what you're seeing in terms of resin prices, whether you felt any benefit from fuel prices coming down year over year?

Good morning Elizabeth, how are you doing.

David do you want to take that?

Yes.

I don't think we will see a material impact of a change in recent change in oil price for a number of reasons.

Firstly, the price of resins is clearly not directly correlated to price of oil.

The supply and demand for resins at any given time are probably the main determinant of resin prices.

Secondly, resins or plastic really only accounts for like 4.5% of our revenues, so as you know we have a gross margin of about 58%, cost of sales is about 42%.

Within that 42% about half of that is materials, 21%, and then within that the single biggest purchase for last year is really print and board and paper, because we have a very large board game business and there's packaging that goes on all of our products.

Electronic components are about 5% of our purchases.

Really, resins are only about 5% of revenues.

So even a fairly significant increase wouldn't necessarily be material in terms of our cost of sales.

There's one other factor in that most of our purchases of toys are done through third party Chinese vendors who are required to give us a price when we launch the item and really don't have the ability to pass on increases and decreases as the price of resins move.

So in summary, I do not think the current reduction in oil prices will have a material impact on our cost of goods sold or margin.

Certainly not in the short term anyway.

Certainly not in the short term.

Thanks.

I know you talked about R&D being up in 2006 as you were getting ready for the Marvel product, as we enter 2007 and you begin to benefit from revenues there, should we expect R&D to go back to more of a normal percentage of revenues?

I think you're going to find over the long term that R&D is going to be about 5% of revenues in any one year for a variety of reasons, including, the volume number.

That could be 4.8, it could be 5.3, 5.5 so I think, for planning purposes you need to be looking over the longer term at about 5%.

Okay, thanks.

Maybe my last question, with regards to Star Wars support that you're getting maybe on the entertainment side can you just talk about what Lucas might have planned for this year, thanks.

I know he, we have got the video release this year for the 30th anniversary, and there are a lot of other events that are also planned around Star Wars for this year.

In '08 he will be launching Star Wars animation, some of which we have seen and it is very, very cool.

You know, then as you get past out into '09 we are looking at a live action.

So he's got, he and the studio have a lot going on over the next several years to support the Star Wars franchise.

That's great, thanks a lot.

Okay.

Thank you.

Our next question is from Michael Savner, please state your company name.

Good morning, thanks, Banc of America Securities.

Just a couple questions as well.

Al, maybe if you could just touch on the European market, I think you mentioned in the prepared comments that the performance was a bit weak in some of the product lines during the quarter, but I don't think you really got into why you think, why that was the case.

I know you're excited about the future prospects, but maybe just a little bit more color on why you think there might have been some underperformance in certain lines.

Secondly just on the share buy backs, obviously the stocks had a terrific run since the summer, up 60% plus, a real healthy increase to your dividend.

How are you thinking about share repurchases in '07, do you feel these levels at still the optimal use of capital or is the big dividend height, maybe an indication that you're looking to return capital in other ways, a little color on that strategy as well would be helpful.

David, why don't you take the second question, I'll come back on the European piece.

I think on share repurchase, our repurchase during the fourth quarter was lower.

I think earlier in the year when our stock was about 17 we said would be more aggressive purchase under 20, less aggressive around 30.

That was partly true.

I think go forward in '07 we will watch the market and we will be opportunistic as to how and when we spend the remaining $196 million on our current authorization.

Great.

In terms Mike, of the European market, I think there were a couple factors.

First of all we suspected Europe was going to have more challenging comps than the rest of the world in that Star Wars was forecasted and in fact did fall off much sharper in Europe where you have some non-English speaking countries than it did in the U.S.

If I remember correctly David it fell off about 57% I think in Europe and compared to say 39% in the U.S.

In addition, they had a very strong year with both Furby and Duel Masters.

And the combination of those two brands was down $45 million.

So between Star Wars and Furby and Duel Masters they had $108 million delta to make up.

One of the things that oftentimes happens is that some of the new product introductions that we launch here in the U.S. don't immediately get launched in all of the European countries and sometimes if they do, given the short window of opportunity, we're not as able to fill the market in that pipeline as quickly as we can in the market like the U.S.

So while some of the products that we launched there did well, they were not able to take advantage late in the year the way we were here in the U.S. and the reason for that is at least we saw the business at retail fall off considerably during the early -- the late November, sort of early December timeframe.

People started to cancel and then the business came back.

So we did very well at retail, but we missed some of those, those last orders that we typically would have gotten during that November timeframe.

And I think that's pretty much most of it.

There was some isolated areas in countries that did well and others didn't do as well.

But, in general, I think those are the primary reasons for Europe not performing as well.

And, Butterscotch did very well there.

But, you know, a $250 item here is GBP250 in the UK.

So pricing becomes a little bit more challenging when you convert in some of the European markets.

That's very helpful, thanks, and just to Liz's question, did you say something about Lucas' plans for a live action in 2009 related to Star Wars, did I hear that correctly?

Yes, that's TV animation in 2008.

Then I think he's doing some live action TV at a later date.

Oh, TV, not feature film.

No feature films.

Thanks very much.

Our next question is from Felicia Hendrix, please state your company name.

Hi guys, Lehman Brothers.

Two questions for you.

One is regarding Spiderman next year.

I was wondering if you could tell us if it's going to be profitable.

We're expecting some nice results on the top line, but just trying to think about as it flows through to the bottom line.

Then the second question, is there any way that you could prompt Lucas to put those warrants to you to just get them off your books already?

David, be my guest.

In terms of the Lucas warrants actually the put was at $26.

So the put is not the thing that gives Lucas value at the moment, it's the underlying warrants.

And those warrants don't expire until 2018.

So they have a good opportunity to gain in stock price for a number of years.

Although we do have a call, we can call the warrants at $33 per share.

With regard to the real problem with Lucas warrants is the mark to market.

That actually does go away in January of '08, when the put feature of the agreement expires.

So I think unfortunately we're going to have to live with the quarterly mark to market for another year.

On the other hand, each time we have to take a big negative mark to market it means our stock price is going up, so it's not all bad.

Just confusing.

Star Wars profitability?

Within Spiderman profitability, clearly when we did the deal we wouldn't have done it if we didn't think it was going to be a very good deal for our shareholders.

All I can say at the moment is that we feel probably better about Spiderman in '07 today than we did when we did the deal.

That's great to hear.

See you next week.

Thank you.

Our next question is from Tony Gikas, please state your company name.

Good morning, Piper Jaffrey.

A couple questions.

I guess I get the operating margin question this morning.

You hit your near term goal.

Is that going to be sustainable in 2007 and '08 or can we inch that a little bit higher, and are you willing to give us a target for perhaps a little bit longer term on the operating margin.

Second question, the toy sector for I guess in recent history was up in 2006 for the first time.

And maybe you could just comment a little bit there about what's changed at retail for the segment overall, and then I do have a couple follow-ups.

I'll let David talk about the operating margin, then I'll come back and talk about the market in general.

I think we have been saying for a long time since our operating margin was negative back '00 that we all wanted to hit a 10% operating margin first, then we wanted to hit a 12% operating margin.

In the longer term we think we can do better.

With regard to going into next year, clearly there's a couple of pressures in different directions.

Firstly a lot of our growth going to be driven by both Marvel and Transformers.

There will be an increase in our royalty rate next year as a percent of sales.

That should be largely offset by the fact that we're getting some leverage on the SG&A cost line because we're getting some reasonable revenue growth.

So I think whilst royalties will increase, we should be able to maintain margins and again go forward longer term, we expect to do better than 12%.

In terms of the toy sector, I think a couple of things are at work.

First of all, if you look at the overall business during the last several years, and I believe it's the 0 to 10 age group, we have seen growth in that 0 to 10 age group which is really the core of our market, not just for us but most of the other companies in the industry.

And that's grown I think at about 2% a year.

Where the falloff has come has been at the upper age group and I think that's primarily collectors.

That can be driven by what's going on in the market in any one year.

So I think underlying the business we have had some better growth numbers that didn't actually get published.

Secondly, I think should be coming at the beginning or at the end of '05, beginning of '06, a lot of us were concerned about how the economy was going to be during 2006 and what the price of oil would be and where interest rates would go.

All of those factors turned out to work in favor of the consumer, interest rates stayed low, the price of oil came down, I think people got used to the idea of paying $2.50 to $3 a gallon for gasoline.

The overall retail business was pretty good right out of the box at the beginning of '06 and stayed that way.

So I think all those factors, then you add on what I think was some really cool product that was put out into the marketplace by a number of people in the industry that drove consumers into the stores, I think there were a convergence of factors that led to a much better year.

But I'd really go back to that first one, you know, the core of the market is 0 to 10 and that's been growing for the last several years.

It's been mashed a bit by the falloff in the 10 and over group which tend to be more collectors.

Okay a couple quick follow-ups.

On the Marvel properties for this year, should we still be looking at that business as a -- the up margin there as sort of company average up margin or slightly better?

Then could you maybe elaborate a little bit on the opportunities beyond '07, what we're looking, what you're looking at in 2008?

David, you want to talk about the margin?

Yeah.

You know, to think of Marvel as being around the company average is probably an appropriate level.

Obviously we have to see how the product performs as we go through the year, but it's certainly not well below and it's certainly not well above.

So to think of it as around about the company average is probably a pretty good way to do it.

I know in '08, we have what, Iron Man and Hulk.

We have Ironman and Hulk from Marvel.

From Marvel.

Star Wars animation.

Star Wars animation is coming, that's obviously not [being a part of] Marvel.

So in terms of entertainment properties after 2007, there are a lot of things on the board that make us feel good about the opportunities we have.

Okay.

Thanks guys, great job.

Thank you.

Our next question is from Sean McGowan, please state your company name.

Hi, from Wedbush Morgan, morning guys.

A couple questions if I can.

First, could you clarify what is, what's in other expense and exactly where are the Lucas mark to market expenses, is that in interest or is that in other?

It's the $31.8 million is in other expense.

And that is largely offset by interest income.

Okay.

So that's what the offset is.

Okay.

And the --

27 million of interest income over the year.

All right.

Okay.

The tax rate going forward like for 2007, assuming no impact to the P&L of a mark to market.

I mean, in the [range] of 27, 28%.

Okay.

Second, the -- [you've done] that already.

I wanted to return now to that question about the overall industry sales.

In terms of what it is that the main industry commentators talk about as the industry growth.

Doesn't it seem like the industry grew more than what the industry says the industry grew at?

It would seem that way.

I have to be honest with you I was surprised when I saw MPD data being up I think it was 0.34% or something like that.

Because you thought they would say negative?

No, I thought it would be more positive than that.

It should be, yes.

We have to sort of drill down into the numbers, but, you know, top line was 0.34, which is a lot better than the negative 2.

But I was surprised.

I thought it would have been stronger than that.

Certainly our business was strong.

As I talked to others at various meetings just in general, most of the people were feeling pretty good about the season and where their business was.

So we have to look into that and see if there was, some particular product.

I mean, when you get a $200 million falloff in something like Star Wars, from a mathematical standpoint that's going to have a significant impact given you're talking about a $20 billion base.

On the other hand, $285 million for Star Wars was a very good number and a very positive feeling.

So I think it's a little bit of emotion versus actual numbers, and while you and I would say gee, 285 after 495, that's really great, it's still down, $200 million or thereabouts.

It just seems that the industry could do a better job of getting together and getting real accurate figures, because there's a lot of people who feel like those numbers aren't very accurate.

There's the industry, then there's MPD is not the industry.

But it winds up -- you know what I mean, it winds up being because --

We're working with them.

I think you raised a good issue.

All right, thanks a lot.

All right.

Thank you.

Our next question is from David Leibowitz, and please state your company name.

Burnham, thank you very much.

Good morning David.

A few unrelated items.

One, you indicated Monopoly was the number one selling board game last year and in prior years as I recall it had been Trivial Pursuit.

What was the reason for the leapfrogging?

I think Monopoly here and now had a great year.

If I remember correctly we sold over a million units.

And would we expect Monopoly -- by the way, the Monopoly figure does that also include the licensing income for Monopoly whatever including slot machines?

No.

This is just board game sales?

I believe so.

You're asking about MPD data and I don't want to speak for them, but I'm pretty sure it's just board sales.

Would you expect Monopoly to continue to outsell Trivial Pursuit this year?

I'm not going to get into forecasting, but we certainly expect Monopoly to continue to do very well.

When we see the line for '07 next week, which items has the trade already tell you look very promising?

Every-one of them.

We're like Lake Wobegon where everything is above average?

Like everything.

And which items do you think might have the best success or breakout potential?

I wouldn't put anything in the market that I didn't think had a great successful opportunity.

Now you're jousting with words.

No, I'm asking a very legitimate question, which items should we be, as analysts, looking to as --

Look, Transformers, we have got a movie coming, Spiderman, you know about those things.

The Playskool line grew, we have some great products there.

Littlest Pet Shop will continue.

We have got some really cool stuff coming in the, from Tiger Electronics in terms of our Squawk McGawk, it's a parrot.

To follow on with Butterscotch, we have got Net Jets, we've got the guitar, we have got a whole host of items.

We have got some cool stuff coming in the board game area.

So, the strength of Hasbro has been a broad portfolio as opposed to a single item.

But David, you have been covering the industry for a long period of time.

What we worry about are the surprises that happen every year and hopefully you get more positive surprises than negative surprises.

But I think when you see the product line, you will agree that we have a broad portfolio of very exciting product and in each of the categories.

I hope that answers the question.

Okay.

Two quickies, one, how many dollars of sales are products that will not be in the line in '07 that were in the line '06?

You ask that question every year and I don't have that at the top of mind, I don't.

I mean, in general, this is a very general question, I'm not relating it to '06 specifically, but in general somewhere in the neighborhood of 25% of the line is new each year.

And that will vary depending upon not only the success of a product line but, what the product mix was in a given year.

But I don't have that number handy.

And lastly, in terms of the Marvel line, what percentage of the line will be available at retail in the first quarter?

I don't have an actual number, but I would say a very substantial portion will be certainly available in April.

When you say first quarter you're talking March.

I know we start shipping a lot -- certainly very substantial will be available -- Ghost Rider is out there now.

But from Spiderman stuff, that will really be a lot of it, a very substantial portion will be available in April.

How much will be in there by March I'm not a hundred percent sure.

And the same thing with Transformers?

The Transformers comes in July.

So you're going to see my guess is the second quarter will be the heavier shipping month versus the first quarter.

Thank you very much.

Thank you.

Our next question is from Tim Conder and please state your company name.

Thank you.

AG Edwards.

Congratulations first of all again on a very good execution and a good year.

Thanks Tim.

Two things.

I mean, you continue to sign some licensing deals and I know this has maybe been alluded to in a couple earlier questions, but just ask it straight out.

Can you give us any color as to the percent of licensing that is -- of your total revenues, then how that has grown over the last few years.

Then secondly, just David or Al, either one just refresh us on the timing of subsequent Marvel advances.

Okay.

Let me talk about licensing.

I'm going to assume you're referring to sort of entertainment properties as opposed to licensing from indentures, things of that nature, which goes on all the time.

Obviously the percentage of volume can depend upon how successful something is in any one year.

So in '05 obviously was a strong year in Star Wars with the movie, that percentage will go up.

Then it will come down again, typically the year after that.

In general, I would say that the amount of business we do relative to entertainment licenses is under 15% of our volume.

And over the last several years in general it has declined.

It's not a smooth line obviously because of when movies may or may not be released.

But we can go back to 1999 in those areas where a third of our business was tied up in entertainment licenses and we were quote, unquote, really dependent upon that.

We're not dependent upon the entertainment licenses and I think this year just once again demonstrated that number one, we can grow the business even after an entertainment property like Star Wars without the movie and without any entertainment.

And we have delivered six consecutive years of earnings growth, and certainly, during the last six years you have had a lot of, what people sometimes refer to as tough comps due to entertainment properties.

So in general it's come down.

Typically, if you had to pick a number it could be maybe 15% of volume.

That's down from 30-plus percent years ago.

I guess I was -- maybe rephrase that also.

On what percent I guess of revenue is driven by your outlicensing of some of your properties that you're owned and you're outlicensing those against one of the examples was to some of the casinos and elsewhere?

We don't release that number.

Okay.

Has that been growing materially the last two, three, four years?

Yes, it has been growing and we would see it grow and we would expect it to grow this year.

If I remember the number correctly we have about 200 licensees signed up to support Transformers this year in a wide variety of categories throughout the world.

But in general, our licensing revenue has been increasing over the last several years.

Okay.

And then the, just a refresher, the remaining Marvel advances, the types of timings?

I think we paid $105 million in 2006, I think we have another $67 million tied up in 2007.

And then the balance is dependent on doing a Spiderman 4 movie.

If that occurs I believe we will pay in '09 or '10.

Okay.

And that's paid David, upon the release of the movie?

I believe it would be paid before the release of the movie.

Okay.

It is dependent ultimately on minimum guarantee, absent the release of a Spiderman 4 movie, it goes down by $35 million.

Okay, great.

Thank you gentlemen.

Thank you.

Our next question is from Thomas Russo, please state your company name.

Hi, it's Gardner and Russo.

David, congratulations on a great year.

Thanks Tom.

Good to talk to you.

Thank you.

Al, you'd mentioned that within Playskool both Play-Doh and Playskool were up sharply.

Playskool I think you said, was it up 49% and Play-Doh up 29%?

Yes, that's about right.

It was 49 for Playskool and 32 for Play-Doh.

And the preschool business was up 21%.

21.

It would seem to me that at some point if Play-Doh for example, Playskool continued to grow at those types of rates, they will surface fairly large revenue items even at the aggregate company-wide level.

How big are those two categories and what's the sort of reason behind this invigorated growth?

We're not going to give specific volume on each of those categories, each of those brands.

I don't have it handy right now to begin with.

But in general, we have been making a concerted effort to grow our preschool business.

That's a category that has seen a lot of growth over the last couple years in general within the industry.

If you take a look at birth rates, it's very favorable going forward.

So we are putting additional investments in terms of R&D as well as advertising and promotion in the overall preschool business.

Especially with the Playskool brand.

Playskool is an umbrella brand, we can create lots of great toys and games for kids.

So both Playskool and Play-Doh can also be sold internationally very, very well.

I mean Play-Doh is one of the brands that is sold virtually in every country in which we operate, including China.

So that's a very important brand to us, as is Playskool.

It's continuing investment.

Now, also keep in mind, in any one year, this is more applicable to Play-Doh than anything else.

You can have a unique play set or something like that that does well.

I wouldn't sit here and forecast 32% growth for Play-Doh year in and year out but it is a very strong brand and continues to grow. .

And it responded to your efforts to try to gain share in that already growing category.

Yes.

The other question for you, Al, had to do with Europe, you gave a good answer with highlighting how the $800 million of revenue shortfall split between Star Wars, Duel Masters and Furby.

In the release, the comment about the 16, let's see how it was, I think $16 million shortfall in operating profit reflected revenue declines which were only $30 million, so if it were just the revenue decline in aggregate of 30 million it would look like those last dollars sold for a very large amount of profit at $16 million of decline in operating segment profits.

Yes, I think the revenue decline was $30 million in local -- in U.S. dollars and $5 million in local currency.

Then actually the impact on the bottom line is the currency changes and [was] dramatic.

So I think you have to say that the decline reflected the $55 million decline in local currency revenues.

And I think in addition to that, there were some, compared to the U.S. where everything had gone very well and we had some reductions in obsolescence, and things like that, I don't think we had that as much in Europe.

And in addition, I think they're the main reasons.

So there was some product obsolescence still charged against Europe.

In fact it's not just the $30 million of overall revenue decline, but it's the mix, the $108 million which probably was quite profitable, Star Wars, Furby and Duel Masters in '05 that was absent.

You're right.

It's the currency reduction in volume plus some mix changes, plus they did have some obsolescence in charges which we didn't have in the U.S.

Thank you David.

Last, what are your year-end share counts outstanding?

What's your year-end shares?

Our year-end share count is 160,620,415.

Okay, great, thank you very much.

Thank you.

Thank you.

Our next question is from Dean Gianoukos, please state your company name.

Hi, JPMorgan.

Just a couple questions.

One, when you talked about the margin, I'm trying to figure out why the margin couldn't be substantially higher than this year.

If we look at Transformers only having a little single digit royalty, I think Marvel originally, we had talked about having a 15% potential operating margin, why, if we assume Transformers works wouldn't the Company margin go up quite a bit?

Is there something dragging it down, or are you just being conservative?

Then my second question is if you can give us an idea how much Marvel was shipped in the quarter, in the fourth quarter.

And is the infant care stuff that you shipped into CVS, is that under the Playskool line you're giving and if so, is that meaningful to the growth rate?

I would guess it's not meaningful at all to the total number, but is that meaningful to the growth rate?

Thanks.

I'll take the last two, then I'll let David talk on the margin issue.

We do not ship any product into CVS.

They source all of the products themselves.

We are paid a licensing fee.

So when we look at our sales, there are no sales represented by shipments to CVS.

Where is that number in?

Where do the earnings you get from that in?

The earnings would be positive of net revenues in terms of licensing income.

But it would not be when we talk about Playskool being up 49%, that would have none of the licensing revenues in that number.

Where do those numbers go?

What segment would you put those numbers in?

Licensing income is part of net revenue.

When you look at the net revenue line, it represents net sales and licensing revenue.

So the net revenue at the top line is -- includes our licensing income as well as our sales.

When we talk about individual brands being up or down, we are talking about only our sales, not any licensing income.

Okay.

In terms of how much product we ship during the fourth quarter of Marvel it was not a significant amount.

I think it was [30, $30] million maybe during the last quarter.

Then the margin issue?

David?

As we go into next year, we clearly do have higher royalties.

I don't think we have articulated what the royalty rate is on Marvel.

Particularly Spiderman is a leading property, so it's not going to be insignificant.

I think we probably have said that our royalty rate is Marvel, it wasn't Star Wars.

I think when you talk about Transformers only having a single digit royalty rate, Transformers has always had a kind of legacy royalty rate in the low single digits, which relates to when the product was developed back in the early 80s.

And then in addition to that, where we sell product or do promotions that have the new look or feel of a Transformer property which has been created by the movie, there are additional royalties to the studio and to related parties.

So Transformers are again, whilst it won't be approaching the Star Wars or the sort of Marvel type levels, there are material royalties associated with the Transformers brand, especially the movie product.

Close to double digit or double digit royalties all in on Transformers now?

I'm not going to get that precise.

What about, I would assume the licensing deals would be pretty profitable as well.

Yes, the licensing deals would be profitable, but obviously to the extent that it reflects [fairly] a new look and feel for Transformers created by the movie, the studio will get part of that.

So even your video game license for instance, you will get part of the license and the movie studio will get part.

Yes.

All right, thank you.

They are funding the movie, the promotion of the movie and they will get part of the merchandising revenues from that.

Okay, thanks.

Our final question is from Gerrick Johnson, and please state your company name.

Hi, BMO Capital Markets.

I was wondering you did not talk about the board game number for the quarter, I wonder what that number was?

Board game, I know what board games are for the year.

I don't have the number handy for the quarter.

I'm sorry, Gerry, I just don't have that number handy.

I know what it was for the year.

Was it down for the fourth quarter?

I don't believe so, but I don't have the number.

I'm just checking, I'll give it to you in one minute..

All right.

How about boys action figures, what was your market share in boys action figure this year?

I haven't seen the market share numbers out yet.

I would suspect our market share would have declined versus last year, just given the decline of Star Wars, because the overall action figure category I believe was down.

I can tell you that our overall boys business was down, but when you pull out from that the decline in Star Wars the rest of the boys business was actually up and we had a very good year in Transformers.

But I think overall because of the decline in Star Wars, we would theoretically lose market share.

On the other hand I think we will gain a lot of market share in '07.

So that depends upon properties too.

Okay.

Finally, I noticed on the press release that you called out the Lucas warrants hit in the Highlights section.

You have never done that before, why the change in protocol?

I think because it's very large and it was much higher level of threshold of materiality.

It was $0.09 last quarter, you didn't mention it in the Highlights section.

Yes, but we're really talking about the $32 million for the year, which is fairly significant I think.

And going back to your question on board games, our total games and puzzle business was up 6.3% in the fourth quarter.

We were up in puzzles, which is a very small part of that, we were up in trading card games, which is a significant part of that.

We were also up in board games.

Okay, thank you.

Thank you.

Thank you everyone for joining us today.

We hope you can join us on our webcast next Wednesday from Toy Fair.

We will be focusing on new product introductions for 2007.

And a replay of today's earnings conference call will be available on our website after 2 p.m. today.

Thank you very much.

Thank you.

This concludes today's conference.

You may disconnect at this time.