孩之寶 (HAS) 2007 Q1 法說會逐字稿

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

[OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

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

Thank you, and good morning, everyone.

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

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

The press release includes information regarding non-GAAP financial measures discussed on today's call and is available on our website at Hasbro.Com.

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

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

We'll then open the call to your questions.

Before we begin, 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.

These forward-looking statements may include comments concerning our product plans, anticipated product performance, business opportunities and strategies, financial goals, and expectations for achieving our objectives.

There are many factors that could cause actual results and experiences to differ materially from the anticipated results or other expectations expressed in these forward-looking statements.

Some of those factors are set fourth in our Annual Report on Form 10-K, in today's press release and in our other public disclosures.

We undertake no obligation to update any forward-looking statements made today 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 the financials I'd like to make some comments about our first quarter results.

Even though this is only the first quarter, it's hard not to be pleased with our overall performance.

Revenues were up $157.1 million or 34% and net earnings were $32.9 million or $0.19 per share compared to a loss of $4.9 million or $0.03 per share a year ago.

I'm particularly pleased that the growth was broad based with all major product categories performing well in both the North American and international segments.

Revenue growth for the quarter was pretty balanced between our model business and all our other Hasbro business, with the number of our brands continuing to do very well, including Littlest Pet Shop, NERF, Play-Doh, My Little Pony , Playskool, Transformers, and board games.

Operating profit was $53.7 million or 8.6% of revenue compared to last year's loss of $2.1 million, and puts us track to achieve our full year goal of a 12% or better operating margin.

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

In the Boy's business, we're off to a great start with the Spiderman 3 product line.

In fact, retail sales from the launch week significantly exceeded retail sales for the same time period for Spiderman 2.

Retail sales since the March 24, launch have been strong and we would expect this trend to continue as we head into the May 4, movie release.

Star Wars continues to do very well as we began shipping our 30th anniversary product line.

Transformers was up a strong 21%, driven by the strength of our classic figures.

With the upcoming live action movie release set for July 4th there's been a lot of excitement among the fan base not to mention the new generation of kids that are being introduced to the Transformers brand.

Movie related products just started shipping in April from the Far East and is expected to be on shelf June 2.

Our Girl's business continues to do very well.

Up 62% in the quarter.

The strength of the FurReal Friends, My Little Pony, Baby Alive, and Littlest Pet Shop product lines continue to take shelf space from the competition.

In the tween category Nerf continues to do exceptionally well, up 72%.

This brand has grown steadily over the last couple of years and is a great example of the success we have had with our strategy to grow core brands.

Also doing well was the latest addition to the I-brand.

The I-see the Penguin which helped the I-brand business double its revenues year-over-year.

Both our Playskool and Play-Doh businesses were up an impressive 20% plus with a busy basics line continuing to contribute nicely to the Playskool Line.

Our games business was up 8% for the quarter with our top performer Monopoly up 22%, in addition we have a number of other classic games that perform well including Scrabble and Operation.

As part of our strategy to grow revenue over the long term by stretching the boundaries beyond what we know as traditional toys and games, in December we shipped Tube Tunes, our musical toothbrush to a test market in New York City.

The product went into full distribution in February with all of our major retailers and a number of pharmacy chains carrying the product in the oral care aisle.

Since we hit full distribution, sales have averaged over 100,000 units per week.

And to take a phrase from the music industry, we just went platinum with retail sales in the first quarter exceeding 1 million units.

Needless to say we are very pleased with the initial results.

International segment revenues which exclude Canada and Mexico grew 42.2 million or 29%, and 30.7 million or 21% in constant dollars with Europe, Latin America, and Asia Pacific all up.

We continue to expect our international business to do well this year, given the momentum we have in our core brands and the new product introductions, as well as the upcoming release of the live action Transformers and Spiderman movies.

Both of these properties have historically done very well internationally.

In closing, we created a lot of momentum with our core brands and new product initiatives in 2006 that has continued into 2007, and while we are pleased with our first quarter performance, we also recognize that it's just a first quarter.

Keep in mind that in addition to the two upcoming major movie releases, this is the seasonal business that is heavily weighted to the back half.

Bottom line, it was a great first quarter but we have a lot more business to do in '07 to deliver on our full year financial targets.

Now, I will turn the call over to David to talk to you more about the details of our first quarter results.

Thanks, Al, and good morning, everyone.

I too am very pleased with the results we reported today.

For the quarter we delivered worldwide net revenues of $625.3 million compared to $468.2 million last year, an increase of 34% or $157.1 million.

In constant dollars, revenues were up 31.4% or $147 million.

Our top line growth reflects strength in our core brands, new product initiatives, as well as shipments of our Marvel product line.

North American segment revenues were $421.1 million compared to $310.3 million last year, an increase of $110.8 million or 36%.

North American operating profit for the quarter was $45.3 million or 11% of revenue compared to $4.8 million or 2% of revenue last year.

The improvement in operating profit is primarily due to the higher revenues.

Those of you familiar with our industry would understand there's a lot of leverage associated with the top line growth we had this quarter.

Revenues in the international segment were $187.7 million compared to $145.5 million a year ago.

The segment was up 29% in U.S.

dollars and 21% in local currencies.

The international segment reported an operating loss of $108,000 compared to a loss of $8.3 million last year.

The primary reason for the reduction in the operating loss is a higher sales volume.

Now let's take a look at earnings.

For the first quarter, we reported net earnings of $32.9 million or $0.19 per share.

This compares to a net loss of $4.9 million or $0.03 a share in 2006.

Earnings before interest, taxes, depreciation and amortization were $90.6 million compared to $33.5 million a year ago.

Gross margin for the quarter was 61.1% compared to 60.3% a year ago, the improvement in gross margin is due to changes in product mix.

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

Royalty expenses increased by $24.3 million to $50.3 million as our business this year is more heavily weighted towards entertainment based properties.

Research and development expense declined by $2.9 million to $35.3 million or 5.7% of revenue compared to $38.2 million or 8.2% of revenue a year ago.

The decrease primarily reflects the fact that we had exceptionally high expenditures in the first quarter of last year related to development of our Net Jet product line and other electronic games.

Advertising expense increased to $67.6 million compared to $54.9 million last year; however, it decreased as a percentage of revenues to 10.8% compared to 11.7% last year.

SD&A expense at $156.9 million or 25.1%of revenues compared to $147 million or 31.4% of revenue a year ago.

The increase in actual dollars is primarily due to expenses associated with our higher sales such as shipping and distribution.

While the significant reduction in percentage terms reflects for leveraging of our fixed cost base.

Other income for the quarter was $2.1 million and included a $7.9 million non-cash unfavorable mark-to-market adjustment to the Lucas warrants.

This compares to $3.3 million unfavorable mark-to-market a year ago.

Excluding the impact of the Lucas warrants and other discrete tax events, our underlying tax rate for the quarter was 27.9% compared to our full year underlying tax rate of 27.6% in 2006.

Now let's turn to the balance sheet.

At quarter end, cash and short-term investments were were $703.6 million compared to $729 million a year ago.

While the combination of cash and short-term investments has decreased by $25.4 million, we have generated significant cash during the last 12 months; however, we have utilized $437.1 million to repurchase 20.8 million shares of Hasbro stock.

We contributed an additional 25 million to our pension plans, and we paid 78.5 million in dividends to our shareholders.

Our receivable at $327.1 million were up $105.2 million compared to $221.9 million last year, primarily reflecting the higher sales volume, overall day sales outstanding were 47 days compared to 43 days last year.

The increase in DSO's is due to a change in our sales mix towards markets with a longer payment terms and a lower mix of FOB shipments.

Inventories increased to 265.4 million compared to 213.2 million a year ago to support for growth in our business including anticipated product requirements for the upcoming movie releases.

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

The small increase is due to a decline in shareholders equity as a result of our share buyback program.

In summary we are very pleased with our first quarter performance and the progress we are making against all of our financial goals.

Our balance sheet is strong and we are generating good cash flow which is being returned to our shareholders by our increased dividend and share buyback program.

As a result of our first quarter performance, we are feeling more confident about our ability to meet our full year financial goals, but it is only the first quarter and it is premature to significantly change our full year expectations.

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

[OPERATOR INSTRUCTIONS] Our first question today is from Michael Savner and please state your company name.

Hi, good morning, thanks, Banc of America Securities.

Two questions if I could.

First and I think -- you started to say this at the beginning of the call but I might have missed part of it.

When we try to think about the amount of entertainment related toy shipments in the second quarter, how much directionally came out in the first quarter related I guess to probably Spiderman and Fab Four, and then the timing of the Transformers, just so we can think about the product flow in the second quarter and how much might have already been shipped into the channel and then the second question I think it was in February you talked to us a little bit about having some big announcements in '07 regarding your digital and casual gaming strategy so obviously you haven't made any announcements today but maybe can you just give us an update on where that might be headed this year?

Sure, Michael.

In terms of the first question, keep in mind that we just started shipping the Transformer product for the movie in the second quarter, so I would expect probably the second quarter would be very similar in terms of the mix between the entertainment and non-entertainment properties and I'm assuming you're talking entertainment, you're really talking the Spiderman and Transformer movies.

Yes.

Spiderman really was a first quarter shipment although we assume it would be shipping in the second quarter as well and then we have Transformers coming up in the second quarter so I wouldn't think there would be any real significant change there.

Would it be fair to say that most of the Spiderman product was shipped in the first quarter or could there be a material amount shipped in Q2 as well?

No.

There should be a fair amount shipped in Q2 as well.

Again, we'll have to see how well the movie goes.

The movie breaks on May 4, and if things go well, you still have the month of May and June to ship, let's see how well the movie does.

In terms of the digital, we continue to work in that area, we have been talking with a number of people about how to really exploit our properties in the digital world and while we're not ready to make any announcements today, I would remind people that we indicated at the Analyst meeting at Toy Fair that whatever we do we wouldn't expect any significant impact on earnings during '07.

It would be more impactful in '08 but I'm sure we'll be announcing something later on this year.

Thank you very much.

Thank you.

Our next question is from Margaret Whitfield and please state your company name.

Sterne Agee.

Good morning everyone, congratulations.

Thank you, Margaret.

Al I was just wondering if you could give us some sense as to how much of this top line relates to retailers restocking shelves after the holiday?

Well, I think there are a couple of factors affecting our shipments in during the first quarter.

One, we finished the year as, did many of our retailers in a very good inventory position at the end of '06 so clearly there was some filling of the channel.

I think also the shipments in for the Spiderman movie was also another factor, but I also think that our product line is very strong and some of the marketing programs that we put fourth in the last half of last year as well as the first quarter this year have had a significant impact because of the $157 million or 34% increase in volume, it was pretty balanced between the Marvel properties and our core brands, like My Little Pony, Littlest Pet Shop, et cetera, And a lot of that is just good sell-through from a strong product line.

You mentioned you had gained shelf space--.

-- alignment has been pretty good during the first quarter.

You mentioned you gained some shelf space in girls.

What products in particular and who are you taking it from?

Well, you always take from the competition obviously but Littlest Pet Shop, My Little Pony, Baby Alive, FurReal Friends, those girl's brands had a great year in '06 and it continued to do very well in the early stages of '07.

And I guess with the top line, I would have thought maybe gross margins would have kicked up even more.

Any limiting factors or is that sort of a bogey as to what might be expected if revenue trends continue strong?

Well I don't think there's any bogey.

I'll let David comment.

I think in our gross margins, most of the costs in the gross margin classification are variable and tend to vary with volume.

You notice it's a lot of leverage in our below the gross margin line by the time you get down to operating profit, our operating profit for the first quarter was very strong, so about 7 percentage point improvement.

Okay, thank you.

Thank you.

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

Piper Jaffray.

Good morning.

Congratulations, guys.

Thank you, Tony.

Couple quick questions.

Could you maybe just, to follow-up on the Spiderman, characterize the timing of shipments the first half of the year versus the back half of the year?

Second question, how did Star Wars continue to perform during the first quarter, and then maybe just a little bit about does Spiderman contribute positive to pricing when you factor in sort of net of the royalties?

Is there any way to characterize that for us and then I have a quick follow-up.

Sure.

Just a clarification.

I'm going to let David talk about the last question, but in terms of pricing.

Oh, I know.

David do you want to take that one and then I'll come back?

Yes, I think what you mean, because we have a high royalty on some of these entertainment properties, that we came to price the product a bit higher in order to cover the royalty which therefore means we need a higher gross margin to start with and I think the answer is yes, Tony, so to the extent that we had some gross margin improvement in the quarter, certainly partly that is due to the fact that we've got entertainment product which tends to have higher pricing in order to cover the royalties.

Is that what you meant?

Right.

And even net of the royalties is it contributing positive is I guess what I'm trying to get at.

I'm not going to get into the specific profitability at the operating level of individual product lines, but we said at Toy Fair that the Marvel property even with a fairly significant royalty would be as profitable as the rest of our line assuming it was [Inaudible], to the extent it's incremental and you're leveraging your fixed costs which we clearly did in the first quarter it becomes highly profitable.

Tony, on the first two questions, let me go to Star Wars first.

Star Wars continues to do very well at retail, in terms of our shipment, while I won't give you specific numbers, our shipments for the first quarter of '07 were just a tad bit below first quarter of '06, so we continue to do very well with that line.

In terms of Spiderman 3, first half, second half, that's a tough one because it depends on how strong the movie is and how well the product does after that so we ship in in the movie and then we flow the product after that, so hopefully the first half shipments are real low compared to the full year but that will depend upon the strength of the movie.

Okay, and then a quick follow-up.

Could you just talk a little bit about shifting allocations at retail?

It seems that the some of the retailers are giving more shelf space to some of the Girl's product lines.

Maybe just talk a little bit about retail shelf shifts?

Yes.

As I mentioned in our opening comments, we're gaining shelf space especially with our Girl's line, based on the strength of Littlest Pet Shop, Pony, FurReal Friends and Baby Alive and it was a strong category for us last year and it continues that way this year.

I mean, we know we're going to pick up space in the Boy's section with two movies but that can kind of go back and forth depending upon what's showing, so we're really excited about the space we're picking up in the Girl's category and that's based upon the strength of the product line.

And do you think that retailers are expanding overall shelf space this year for the toy category coming off a pretty terrific finish to '06 and toy sales have been off to a really good start this year.

Are they in aggregate allocating more shelf space to the category this year?

I think it's a little early to say that.

No one has come to me and I haven't seen any significant change at retail.

It depends upon what promotions are are being run, but I haven't seen any material change yet but I think we'll see how the year goes.

Certainly, they had a much better year last year than in previous years, so we would expect to at least hold the space and whether they expand it or not we'll see how the business goes throughout the balance of the year.

Thanks, guys.

Thank you.

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

Hi, I'm from Wedbush Morgan.

I have a couple of questions.

When you are talking about right at the opening comment was business growth was pretty well balanced between entertainment and everything else, do you mean, I mean, if I want to deconstruct that comment, do you mean that roughly half of the increase in dollar volume was due to entertainment properties and the rest of it was due to the other products in the business?

I would say just a tad bit more, a little bit more than half was due to the Marvel properties and the rest was due to the rest of our product lines and that would be again Transformers, game business, Girl's business, right across the category.

Great.

That's very helpful.

Two other questions.

One, kind of a mechanical question on taxes for David.

Let's say we saw a bit of an increase in stock price that results in a charge for the Lucas Warrants.

Mechanically on the tax rate if hypothetically there were a pull back at some point during the year, does that mean that the tax rate for that period would be a lot lower than the 27% then?

Yes, it would.

Okay.

And then the final question, whether it's Al or David, just comment generally about what you're seeing most recent trends on production costs including Chinese currency and labor rates?

David?

Yes, actually, coming into the year everyone talked about oil coming down and maybe commodities would come down and we would get a lot of favorable benefit, we were more cautious than that which is proving true because certainly orders have gone up a bit and as I said before resins are not directly related to the price of oil anyway, are not highly correlated, I think that said, we really haven't seen much movement.

I think commodities have traded in a very narrow band during the first quarter of the year.

We're not seeing any problems in terms of freight costs or capacity, so I think we're in pretty good shape there.

With regard to the currency, I think the Chinese currency to one, when it originally broke in the Spring of '05, people told you about could we have a 10 or a 20% revaluation.

What we said at that time is before any revaluation would be a fairly small and fairly gradual, and I think the original change was about 2.4, 2.8%, something like that and since then in sort of a year and two-thirds it's moved by another 5%, so I think the revaluation thus far has been about 7%.

So I think if anything, we anticipate it would continue to be fairly slow and fairly gradual, though we do see revaluing and I think something like a 10% change in the value of the Chinese currency would have to take 1 percentage point pricing across our line in order to offset that.

So it's not something that we see as a major issue.

Thank you very much.

That's helpful.

Thank you.

Our next question is from [Felicia Hendricks] and please state your company name.

Hi.

Lehman Brothers.

Good morning, guys.

Good morning, Felicia, how are you doing?

Great.

Two questions.

First, getting back to the R&D, David, I know you explained in the quarter kind of the higher comps versus last year and why that was, but if I look back ten years R&D as a percentage of sales it was high.

It's been historically higher in the first quarter than it was in this quarter, so just wondering why it's lower, if that's kind of a run rate we should think about but then just shifting as I think about the year, would that be more normalized?

And then just bigger picture, probably for both of you.

In the release you mentioned that it's just the first quarter and there's still a long way to go and then at least twice in the conference call you mentioned that, just wondering, is there anything we should be reading into that or concerned about because it seems like things are going pretty strong.

I'll take the last question and I'll let David talk to you about R&D.

No, look, things are going well and we feel good about our business going forward, but it's only the first quarter and it's not a caution that I think that there's something brewing out there or there's a headwind but we do have two major movies that have not been released.

The business for the industry, it's heavily weighted towards the holiday season, so it's good to be ahead in the early part of the ballgame but you have to finish strong to win the game, and so it's just a caution that we don't want people to get too far ahead of ourselves.

Certainly while we're excited about the year and the things that we have in front of us, neither David or I are changing our expectations for the full year at this stage of the game.

It's still a little bit early to do that.

With regard to development, we clearly have the cash and the financial capacity to spend whatever we need in development in order to develop a compelling line go forward.

That said, we probably will find that development expenditures this year will actually be lower than last year , and that is for two reasons.

Firstly, as I said in the first quarter, we were lower because we had some exceptionally higher expenditures last year in terms of the Net Jet product line developing that which we launched this year and some other electronic games.

For the balance of the year, we will be anniversarying or we will be comparing to the development we spent against the Marvel line last year.

Now, we didn't sign the deal with Marvel until the first quarter of last year, and we had a compressed time to develop a line, so we clearly had additional spending or higher than normal spending in order to develop the Marvel line in a compressed timing period last year.

So I think this year development will be down versus last year but we're spending whatever we immediate to to develop compelling lines to go

Okay, but other than that, just your strategy with R&D hasn't changed?

Our strategy hasn't changed, no.

Great.

Thank you.

Thank you.

Our next question is from John Taylor and please state your company name.

I'm with Arcadia.

Good morning.

Good morning, John.

Hi.

I've got a couple of questions here.

One is on Transformers, is your channel load in the U.S.

and internationally going to be in the same time frame or is there a delay in the movie release abroad?

I think most parts of the world, it's staying date so it should be real close.

Good so that's mostly second quarter then.

Yes.

And then when you guys did the deal with Marvel, was there any component that allowed you to use old tools for the classic lines and so on and if so I'm wondering if there's any potential meaningful margin impact maybe not in a material sense to Hasbro Inc.

but does that make the line look a bit more profitable?

I think we had the opportunity to use some old tools.

On the other hand, we changed the size of the figures this year, so our ability to use the old tools was minimal.

I don't think we've accrued it, but I don't really think we've come up with a sort of an old/new line.

In effect our tune-in was very high because in order to, with its compressed development cycle I talked about, in order to ramp up to launch quantities, we had to sort of double, triple, quadrupole tool some items so our tooling actually has been a bit higher because of the Marvel line.

Okay, great.

And then on the, you broke down for Sean the kind of the new versus core growth kind of thing.

I wonder on the core side, can I combine Margaret's question with Sean's question and how much sort of the growth in Pony and Board games and some of the carry forward key products do you think was attributable to restocking shelves from what seemed like an exceptionally clean fourth quarter sell-through?

Or was a good amount of product new to 2007 introduced and began to ship in the period?

Well, it's always difficult to answer that question because people can be filling the shelves with continuing product as well as new product.

What we look to is POS and POS during the first quarter was up significantly from a year ago.

We have the best numbers in the U.S.

And in Mexico and Canada and anecdotally the business was up pretty significantly POS wise, and in Europe as well.

We don't get good information in Latin America or in the Asia Pacific region, so I think a lot of it is due to the strength of the product line as well as perhaps filling the pipeline, but POS and this is adjusting for Easter as well, and also adjusting for the fact that last year had an extra week in the quarter but both on a quarter to quarter and calendar year basis, our POS was up significantly during the quarter.

Okay, thank you very much.

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

Burnham, thank you, and good morning.

Good morning, David.

A few questions totally unrelated.

First, on Transformers, what the is your proprietary ownership and is there any financial rewards to you from the movie beyond your product sales?

David do you want to take that one?

Yes.

We own the Transformers IP.

We developed that back in the early '80s all though the product concept was brought to us by an inventor and by [Inaudible] so we do have some kind of legacy royalties associated with Transformers, more due to the product than to the brand and the brand name.

As far as when we get into the movie, to create that the studio is creating a new look and feel, there will be some royalties payable to a studio in relation to that, but we still own the Transformers brand and in terms of all the licensing out, what we're doing into various categories such as back-to-school, publishing, video games, party goods, we will get the licensing income from those goods as well.

And David, we did not finance the movie nor do we get a percentage of the gross.

Okay, now, if there is to be a Transformers 2 movie, would you get any piece of the movie itself or is that still the ownership of the production company?

Well, we have a confidentiality agreement in the contract so I really can't comment on that, and when Transformers 2, should it come a along then we'll talk to the studio about that then.

Okay, second question, and I have only two more, the Lucas warrants, is there a cap dollar limit if the stock were to continue running A?

And B, how much longer do you have to pay off on the stock appreciation?

Yes, in terms of the warrants, there is a core production where we, Hasbro, can call the warrants if the stock gets $33, we can either call them for $200 million in cash or $220 million of stock.

And then in terms of the amortization of the property rights that goes through the length of our agreement which actually goes out to 2018, but the need to mark-to-market the Lucas Warrants goes away in January or '08 when Lucas's put option expires.

Okay, so we're talking then only another seven or eight months?

That would be mark-to-market, yes.

Okay, and the last question, given the strong and relatively clean sell-through in the fourth quarter, did you in fact have less markdown money to pay out than originally budgeted and if so, does that also impact the amount to markdown money you were budgeting for this year?

David, you want to take it?

Yes.

If we believe that we've got markdown related to our shipments in in 2006, then we're required to provide for that at the end of 2006.

As it happens, we knew that we were fairly clean and we wouldn't have a lot of markdowns, so we actually provided a bit less and I think when we talked about our fourth quarter earnings, we talked about one of the reasons the fourth quarter was so strong was that we had less markdowns, less obsolescence, and we were just very clean last year.

So it was lower because our line was strong and we didn't have a lot of close-outs or problem inventory, but at the same time, that is not impacting our first quarter of '07.

And for the full year then, it does not impact the amount to markdown money you've set up?

Right.

As a reserve?

We will make accruals as we go throughout the year based on our history.

Now, last year, we had a very good year.

The year before, we had some problems I think with Plug & Play, and the year before that we had problems with VideoNow Color, so we will look at our -- we are accruing based on history which doesn't just include last years good performance but also doesn't reflect the particularly bad performance in '05 or '04.

Okay, finally, are there any areas right now where you are concerned you might not have adequate production capability for the new line-up?

No.

Excellent.

Thank you.

Thank you.

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

Good morning.

Gardner, Russo, Gardner.

Congratulations on a great quarter.

I just have a question about the dilution from the Lucas warrants, David.

What would be your inclination once the shares pass through the $33 per share level for a sustained period of time?

Well, I think that would, whether we decided to exercise our call or not is obviously something we're going to discuss with our Board of Directors.

If indeed the stock gets to $33, I know we had a good run today, but a short while ago that seemed a long way away.

In terms of the dilution impact, as you know, we are already including in our fully diluted share count an amount for the shares equal to what it would take to settle at the moment.

Thereafter, all 15.7 million shares don't suddenly come into share count.

We basically account for them on a Treasury basis, so it's only to the extent that in the money.

Yes.

So it's not that you suddenly get a lot of dilution being added on at any point in time.

We've been including them in at a level based on a put, they would if the stock goes up, they would start being calculated on a Treasury basis, so no major impact of additional dilution as it goes up, no.

Okay, thank you.

And then David, just a brief outlook on your currency exposures for the rest of the year.

Are there any particular items that we should be alert to in light of the currency impact in the first quarter and then rolling forward?

Obviously, the current deduction of currency is proving pretty favorable to us because our international business tends to buy in Hong Kong or U.S.

dollars and sell in euros or pounds so right at the moment, currency movements are fairly favorable for us and at this stage, we have locked in a lot of our requirements for the balance of this year.

I'd say most of our requirements for the balance of this year.

And that was done at what sort of levels relative to the kind of lofty levels we have now.

Right.

We did some of that, we've done it progressively.

Yes.

From maybe the middle of last year through the second half of last year, and then we brought it up as we run into the first part of this year.

Thank you, David.

Thank you.

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

Hi, I just had a couple of quick questions.

On the Marvel contract, could you give us an idea on your shipment in the first quarter, was Spiderman half of that shipment?

Was he the majority of it, was he less than half and then I didn't hear you say, did you say if any Fantastic Four had shipped relative to the movie in the first quarter or is that coming in the second quarter?

And then also, on Marvel, can you give us a sense of what percentage of your shipments are international and then if you have an idea how much higher you are shipping internationally than the previous contract did?

Thanks.

In terms of the shipments in the first quarter for Marvel, probably about 75% of it was for Spiderman.

We did ship some Fantastic Four.

Very little.

The movie date on Fantastic Four is 6/15 and the product release date is 6/2.

Yes.

So we will be shipping in mainly the second quarter for that as well.

Yes.

In terms of the mix between international and domestic on the Marvel stuff, I don't have that number handy.

Do you have an idea whether you're doing a lot better internationally because of your footprint than the previous contract did?

I haven't looked at that.

I know we're doing well in all regions and I know we expect Spiderman to do well internationally as it has traditionally done well internationally as has Transformers.

I just don't have the number handy at this point in time, and I do know that the initial launch of the product in March did very very well both here and internationally.

Okay and then just one other thing.

When you talk about your shipping like an Itsy Bitsy Spiderman, or Spiderman Board game, when you talk about how much Marvel contributed is that all in that number or would Itsy Bitsy Spiderman be in with Preschool stuff?

No, when we talk about Marvel properties, we're talking about all categories.

Great.

Then just one final little question, Easter, you didn't mention Easter.

Did that have a significant impact on the quarter?

I don't think it had much of an impact on the quarter in terms of shipments, given that Easter was what, March 31 or the week after?

First week of April.

So most of the shipments were made and would have more of an impact on POS.

Okay, good quarter.

Thanks a lot.

Thank you.

Thank you.

Our next question is from Rick Church and please state your company name.

Good morning.

[Cowen Capital].

Just a quick question with respect to your initial commentary, you stated that first quarter was obviously very good but you weren't inclined to change your guidance for the rest of the year.

Could you refresh our memories as to what your guidance is for the year?

Thank you.

Rick, this is Al.

We don't give guidance.

Our comment was that typically in the toy business, you've got somewhere in the neighborhood of a good 60% plus of the business is done in the back half of the year, so we were just cautioning people that while the first quarter was up we have a long way to go.

We don't give guidance.

I think what David did say at the meeting we had with analysts in February is that we thought that '07 was likely to be above trend year, and that our longer term forecast is to grow revenues in the range of 3 to 5%, but that was all we said and all we typically do say.

Was there another part to the question?

No.

Next question.

Thank you, our next question is from Gerrick Johnson and please state your company name.

Hi.

BMO Capital Markets.

Of the $50 million in royalty expense, how much of that was Marvel?

We're not going to specifically tell you how much of the royalty expense in the quarter was Marvel.

Okay, how much--?

We have a contractual relationship with Marvel and as Al said, we don't disclose that.

Now, Marvel might actually disclose that number because it is a different level of materiality for them but I think if they mention a number, it won't be Hasbro specific.

It will be royalties from the license which will include all other licensings as well.

Okay.

Can you tell us how much of the royalty guarantees you have left to expense?

Then we would be telling you what the royalty expense is.

Okay.

Can you tell us what the average royalty rate was you used to accrue for Marvel in the quarter?

No.

We've said before, we're very comfortable.

We're on track, we're very comfortable when we did the deal that we would earn out our minimum guarantees and we said at year-end, that we were more comfortable with it, with our ability to earnout coming into '07 than when we were when we signed a deal in '06 and am I a fraction more comfortable today than I was in February?

Probably yes, so we're very comfortable with earnout, our minimum guarantees.

We're not going to tell you how much they are or what the percentage is or how much we accrue or expense any quarter.

Okay, I can't think of another way to ask that question anyway so we'll move on.

I know you touched on it but how would you characterize the sell-through so far on Spiderman at your plan, above, below, any specific lines, maybe action figures versus Board games or whatever, selling better than others?

Well, if we take a look at the launch, the first week of the launch exceeded the similar period for Spiderman 2, so that was a very positive sign for us.

Was that better than you had expected?

Yes.

I would say that we are performing better than expected or better than planned thus far, both in terms of our shipments in as well as POS, but forecasting that prior to the movie is always a bit of a guessing game anyway, so you could be up or down a little bit and I wouldn't read a lot into that until the movie breaks.

All right thank you.

Thank you.

And our final question is from Sean McGowan and please state your company name.

Still with Wedbush.

Two quick follow-ups.

On Star Wars, it sounds like if you're saying in the first quarter was down just marginally from last year that maybe you're not expecting a major fall off?

I mean, I know we haven't seen the full impact of Spidey and Transformers, but are you a little bit more bullish on that category this year?

Would you think it would still be down a lot?

Well, certainly in our planning, we would have taken it down and it's performing better than planned both from a shipments perspective and POS, which is really good.

On the other hand, none of the major movies where the competition for Star Wars dollars will come from this year have actually been released.

So we'll just have to wait and see.

I think Star Wars, it's still going to finish the year very very strong.

It's just really ingrained in the culture today.

The product line is great.

You've got the anniversary year so there's a lot of promotional activity going on and then next year you're going start to have the animation, so I think we're going to see a good year out of Star Wars.

Exactly where it finishes up versus our plan remains to be seen, once all the movies break.

Okay, thank you.

And last question and this really harkens back to the commentary you guys were offering at Toy Fair which I thought was very helpful in terms of how illustrated you really are looking at '08 and '09 very closely and recognizing that '07 is above trend.

Given this very strong opening quarter for the year and the factors that are driving at least much of it, it would seem to me that you're looking at maybe a challenge in the first quarter of next year and as we get -- things kind of continue to play out pretty well, we find ourselves in a situation where maybe the fourth quarter doesn't need would be quite so strong and would like to have a strong first quarter of next year, should we expect every quarter this year to have up revenue given that kind of eyeball on Q1 '08?

Listening to your preamble, I'm not quite sure how to respond.

Look, we said that we would be certainly a bit front end loaded as you ship into fill the channel for both the Spiderman, Transformers, and Fantastic Four movies, and as to how the rest of the year goes, that will depend on the success of those movies.

Obviously we think it's going to be good and we think it's going to be above trend, but we've got to wait and see what happens.

What we're really pleased about though, is the overall strength of the rest of the product line.

The Girl's business, our Preschool business, Nerf, those are all brands that are doing very very well and hopefully, that will continue the balance of the year, but this is the toy industry and I like to count wins after I get them.

Okay, thank you.

I'll now turn the call back to the speakers today.

Thank you.

I'd like to thank everyone for joining the call today.

The replay of our call will be available on our website after 2:00 p.m.

Thank you very much.

Have a great day.

Thank you, and this concludes today's conference.

You may disconnect at this time.