孩之寶 (HAS) 2007 Q2 法說會逐字稿

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

At this time all parties will be in a listen-only mode.

(OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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

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

Thank you, Shirley, 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 second quarter results, it would be helpful to have the press release and financial tables available that we issued earlier today.

The press release includes information regarding non-GAAP financial measures discussed on today's call and it is available on our Web site 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 will 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 objective.

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

Some of those factors are set forth in our annual report on Form 10-K, 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.

Although it's only the first half and we have a lot more business to do, it's hard not to be pleased with our year-to-date performance.

Second quarter revenues increased 31%.

That's on top of a 34% increase in the first quarter.

Second quarter operating profit improved substantially from the prior year, as did net earnings, excluding the mark-to-market adjustments associated with the repurchase of the Lucas Warrant.

Now I know many of you will be pleased that with Hasbro's repurchase of the Warrants in May, this is the final mark-to-market adjustment.

Clearly, revenue growth has been strong, but more importantly it's been balanced both in terms of product lines and geography.

Second quarter revenue growth for the North American and international segments were 24% and 49% respectively driven in part by good performances from a number of our brands including Littlest Pet Shop, PlaySkool, NERF, Baby Alive and a number of board games.

On the entertainment front, Transformers, Spider-Man, and Star Wars all made significant contributions to the quarter.

The Transformers movie opened on July 3rd with an unprecedented 6.5 day opening for a non-sequel movie setting new records at the box office with revenues of $155.4 million domestically and $93.6 million internationally.

Box office revenues through this past week ended amounted to over $400 million globally and the movie has yet to open in the U.K., Germany, France or Japan.

By all measures, Transformers has been an unqualified box office success.

As delighted as we are with the box office, the success of this movie is about taking the Transformers franchise to the next level for Hasbro.

Since we launched the movie-related product line in early June, retail sales have been strong around the globe.

If we look at one key indicator of sales, action figures, U.S.

retail sell through has already exceeded 3 million units since the launch.

Complementing our extensive product line of toys and games are over 240 licensing partners that we're working with around the globe.

In addition to the Transformers Cell Phone game from Blue Mobile and the highly regarded video game from Activision, you'll see Transformers on back-to-school merchandise, apparel, bedding, footwear, and many other accessories.

This is all part of our strategy to broadening the reach of our brands and taking them to a new level.

Another franchise that is expected to be one of the top performers in the boy's category this year is Spider-Man 3.

Since the strong opening at the box office in early May, there's been a lot written about whether or not toy sales are meeting expectations.

First of all, it does depend upon whose expectations you're talking about.

And while I'm not going to get into a discussion about our expectations for individual product lines, I will say that if we look at domestic retail sales since the launch week, Spider-Man 3 has significantly outperformed Spider-Man 2 for the comparable period.

As we head into the fall, the expected release of the Transformers and Spider-Man 3 DVDs should provide us with an additional opportunity to drive sales of the brands in the all-important fourth quarter.

Finally, when we think about the potential long-term success of both the Spider-Man and Transformer franchises, it's hard not to get excited about the potential for additional movies with these properties.

And of course, Star Wars continues to exceed everyone's expectations.

Let me take a moment to talk about the games business.

Overall, the games business is performing about as expected.

Traditional board games were up 3% year-over-year, although the games and puzzles category was essentially flat due to declines in the Duel Master trading card game and plug-in play games.

However, the game business is heavily weighted to the back half of the year, with over 60% of board games being sold in the fourth quarter.

To that end, in July we began shipping Are you Smarter Than a Fifth Grader?

It's a great game that really captures the essence of the television show and is doing very well at retail.

In addition, we have a number of other new games planned for this year including The Game of Life Twist and Turns, Littlest Pet Shop Game, Electronic Catch Phrase Music, and Candy Land Castle.

Also shipping this fall from the toy side is the Power Toy Guitar, the Rose Petal Cottage, the Peyton Manning NERF Football, and Sqwawkers McCaw, our talking parrot.

These are just a few examples of what's coming in the second half as we have many new initiatives planned for each of our major product categories.

We had a great first half.

And while we expected the revenue growth for the year to be front-end loaded given the release of the Transformers and Spider-Man 3 movies, we do expect to grow the business in the second half, although not at the levels achieved in the first and second quarters.

In closing, we feel very good about our business as we enter the all-important second half.

We have a lot of momentum given the broad-based strength of our product line and are excited about the opportunities that lie ahead.

Thank you for joining us.

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

David?

Thank you, Al, and good morning, everyone.

I'm very pleased with the results we are reporting today.

For the quarter, we delivered worldwide net revenues of $691.4 million compared to $527.8 million last year, an increase of 31%, or $163.6 million.

In constant dollars revenues were up 29%, or $151.5 million.

The strength in our business was broad-based, with a number of product categories up significantly year-over-year.

The pre-school business was up a strong 19%, driven by the continued success of our PlaySkool brand.

The boy's business more than doubled with shipments of Transformers and Spider-Man 3 movie-related product lines.

The girl's category was up a strong 21% with significant growth from Littlest Pet Shop, Baby Alive, and our FurReal Friends line.

The tween's business was up 5% with the NERF and Super Soaker brands performing well.

Lastly, while games and puzzles were essentially flat year-over-year, the board game business grew 3% compared to a year ago.

North America segment revenues were $449.4 million compared to $362 million last year, an increase of $87.4 million, or 24%.

North American operating profit for the quarter was $41.8 million, or 9.3% of revenue compared to $30.4 million, or 8.4% of revenue last year.

The improvement is primarily a reflection of the higher revenue, which was partly offset by higher royalties and a $10.4 million provision related to the Easy-Bake Oven product recall announced last week.

Revenues in the international segment were $227.6 million compared to $153.2 million a year ago.

The segment was up an impressive 49% in U.S.

dollars and 41% in local currencies.

The international segment reported an operating profit of $11.3 million compared to a loss of $8.1 million last year.

The improvement is primarily a function of a higher revenue.

Now let's take a look at earnings.

For the second quarter, we reported net earnings of $4.8 million, or $0.03 per share.

Excluding the $36.5 million mark-to-market expense on the Lucas Warrants, earnings were $41.3 million, or $0.24 per share and this compares to $27.1 million, or $0.07 per share in 2006.

Earnings before interest, taxes, depreciation, and amortization were $68 million compared to $76.8 million a year ago.

The decrease year-over-year is primarily due to the impact of a Lucas mark-to-market on earnings.

Gross margin for the quarter was 60.5% compared to 60.1% a year ago.

Gross margin was negatively impacted by obsolescence and other costs related to the Easy-Bake Oven recall.

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

Royalty expense increased by $32.3 million to $62.5 million as our business this quarter is heavily weighted to entertainment-based properties.

Research and product development expense marginally declined to $38.8 million compared to $39.6 million a year ago.

Advertising expense year-over-year was relatively flat on a percentage of revenue basis, although it did increase in absolute dollars from $60.5 million to $79 million, or 11.4% of revenue.

SG&A expense at $164.5 million, or 23.8% of revenue compares to $147.4 million, or 27.9% of revenue a year ago.

The dollar increase is due to a number of factors including higher shipping and warehousing costs associated with the higher sales volume, incentive compensation accruals, the impacts of foreign exchange, and general inflationary increases.

The decrease in percentage terms reflects the leveraging of our fixed cost base.

Other expense for the quarter was $27.2 million and included the $36.5 million unfavorable mark-to-market expense to the Lucas Warrants.

This compared to a $15.3 million favorable mark-to-market a year ago.

I'm sure you are as delighted as I am that there are no longer any Lucas Warrants and therefore no future mark-to-market adjustments.

Excluding the impact of the Lucas Warrants and other discrete tax events, our underlying 2007 tax rate was 28.1% compared to our 2006 full-year underlying tax rate of 27.6%.

Now let's turn to the balance sheet.

At quarter-end cash and short-term investments were $525.6 million compared to an aggregate of $489.7 million a year ago.

In the last 12 months we've generated in excess of $400 million in operating cash flow.

While the amount of cash flow is significant, we have made a number of large cash payments in 2007 including exercising our rights to purchase the Lucas Warrants for $200 million, paying $70 million to Marvel as part of our five-year agreement, utilizing approximately $94 million to repurchase 3.2 million shares of Hasbro stock, and lastly, so far this year, we have returned $45 million to our shareholders in dividends.

Our receivables at $417.7 million, were up $127.2 million compared to $290.5 million last year, reflecting both a significantly higher sales volume and changes in our sales mix towards markets with longer payment terms.

This change in mix also accounts for the change in days sales outstanding increasing from 50 days to 54 days in 2007.

Inventories increased to $352.5 million compared to $258.5 million a year ago, reflecting both the growth and the timing of our business this year.

At the end of the quarter our debt-to-cap ratio was 27% and remains well within our 25% to 30% debt-to-cap target.

In closing, having delivered a very successful first half, we are now focused on delivering a strong second half, laying the foundation for future revenue growth, and maintaining the financial discipline that has allowed us to significantly improve profitability and create value for our shareholders.

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

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Felicia Hendrix.

You may ask your question and please state your company name.

Hi, Lehman Brothers.

Good morning, guys.

Good morning, Felicia.

Just first, a couple of housekeeping.

For the Easy-Bake recall, what was that impact to EPS?

David?

Essentially it was $0.04.

$0.04.

Okay.

And then the foreign exchange impact to EPS?

The foreign exchange impact on EPS was minimal.

Okay.

And then, if I understand this correctly, if the Transformers movie was going to hit certain thresholds, you guys were going to be able to participate in some of the box office.

Is that correct?

And if so, I was wondering if those hurdles have been hit or are on plan to hit?

Well I think when we announced the movie, we indicated that we were not financing any of the movie in that but we retained all of the merchandising rights.

So for the most part, Hasbro makes its money in selling toys, games and all of the licensing income.

You know, and the studio gets its money, obviously, from the box office.

There is a bit of a participation on the part of Hasbro in the net as there is a bit of participation from the studio on some of the licensing, but for the most part, we're going to make our money on the sales of toys, games and licensing revenue.

You've done good at avoiding these questions.

We do have a very small percentage in (overlapping speakers) -- too early to tell.

Not anticipating anything material.

Okay.

Okay.

And then Spider-Man, was it profitable in the quarter?

Yes.

Okay.

Great.

Hey, good quarter.

Thanks a lot.

Thank you.

Thank you.

Our next question comes from Michael Savner.

You may ask your question and please state your company name.

Good morning.

Banc of America.

Hey, Michael.

Hey, good morning.

Just a couple more questions on Spider-Man just to get some more granularity.

I think you said that sales had exceeded that of Spider-Man 2.

I assume you were talking retail, just wanted to confirm that?

That's true.

Okay.

And then, do you have the comparable metric on retail sales for Spider-Man 3 versus Spider-Man 1 and kind of your comfort with pipeline inventory heading into the fall.

Do you feel like you're adequately stocked, if you think that there's going to be pent-up demand or if there's probably more than enough to get you there?

And then I have one follow-up.

I just don't have the number in terms of Spider-Man 3 versus Spider-Man 1 so I can't answer that.

When you talk inventory, were you referring to overall or just with Spider-Man?

Just with Spider-Man.

Yes, we're in good shape there.

Meaning, there's enough in the channel?

There won't be out --

-- shipping, so I'm not concerned about the level of inventory in the channel nor with our ability to hit our forecast for the year.

Perfect.

Thanks.

And then, the second question.

Assuming that DreamWorks is going to want to pick up their option for Transformers 2, what is, what can you disclose about the timing of when that movie could come to market?

Is that an '09 event or is that probably too soon?

It's too soon to say.

I mean I think everyone's excited about a Transformers 2, but no date has been set as of yet.

Do they have any kind of limit by which time they have to make a decision or you get the license back or you could shop the license around somewhere else?

(Overlapping speakers) I mean that's not an issue right now.

Okay.

Thank you.

Thank you.

The next question comes from Margaret Whitfield.

You may ask your question and please state your company name.

Sterne, Agee.

Congratulations.

Thank you, Margaret.

Good morning.

Good morning.

Could you give us the compare to what Spider-Man 2 did at that same point in time in terms of revenues?

You said Spider-Man 3 exceeded Spider-Man 2.

We're not going to give individual sales volumes for individual product lines, but I was just trying to do is give people a sense that Spider-Man 3 is doing very well at retail and it's also doing well from our revenue perspective.

But we're not going to give individual product line sales.

Okay.

You mentioned a number of countries where Transformers had yet to open.

When would those movie openings occur?

Generally speaking within the next week to 10 days.

Okay.

I think the U.K.

opens the 27th of July.

I think Japan is August 4th.

So coming up real soon.

And you mentioned the possibility of a second Transformer movie.

What about other brands?

What are you talking about in terms of perhaps G.I.

Joe or other brands in term of movies?

There's nothing we can announce at this point in time.

Obviously, there are a number of brands that we think have the potential for a theatrical release and we're looking into several opportunities now, but there's nothing that we're in a position to announce at this time.

So it sounds like it would not be next year, would be '09 or later for these additional movies?

Again, there's nothing we can announce at this point in time.

In terms of Star Wars, could you give us an update?

Was there an increase, a decrease?

I assume it was a decrease in Q2 year-over-year?

Yes.

From our shipping standpoint, Star Wars was down during the quarter, but it is still exceeding everyone's expectations in terms of where the absolute numbers are and coming in the first quarter of '08, we have the Star Wars Animation so we're really excited about the brand and it will clearly be one of the top boy's brands globally this year.

Okay.

And finally on Easy-Bake Oven, are you going to be shipping out a new modified version, and if so, when?

We will be shipping Easy-Bake Oven in the future, but I don't have a date yet as to when we're going to commence shipping.

Probably next year, though?

I don't have a date yet.

Okay.

Fair enough.

Thank you.

Thank you.

Our next question comes from Sean McGowan.

You may ask your question and please state your company name.

Thank you.

With Wedbush Morgan.

Hi, guys.

Good morning, Sean.

How are you doing?

Pretty good.

I'm going to hit on a couple of questions that have been asked but from a different angle.

Spider-Man, are you saying, Al, that you expect there to be meaningful shipments still to happen in the second half of the year?

Yes.

Okay.

Would you say that the reserve rate that you're taking against Spider-Man, is that normal at this point?

When you say reserve rate --

Well, there's always reserve for markdown money or whatever you put ahead at the time.

Is this just in line with what you would do with any other product?

Yes.

Okay.

I would have thought that the gross margin might show more of an increase in this quarter, actually, it was where I thought it would be, but if I thought that the sales would be were, I would have thought more of a gross margin improvement.

Is there something about Spider-Man and Transformers that is not pushing up the gross margin as much as like Star Wars would have?

(Inaudible) I think Easy-Bake Oven can --

Is that where it is then?

That was my related question.

Is that all in cost of sales?

That's all essentially in gross margin.

So that's part of it.

Okay.

That's a big part of it then.

Yep.

Okay.

Tax rate for the year then ex the Lucas Warrants, are you saying that you expect it for the year to be 28.1%?

Yes, I think so.

It's our best judgment at this time.

It depends on a mix of our profits between high and lower tax jurisdictions around the globe, but at this time 28.1 looks to be --

Okay.

Now, if I take the $36.5 million Lucas charge and I divide it by your fully diluted shares, I actually get $0.22.

So what's off on that by $0.01?

I don't know, but we had to sort of do fairly complex calculations, which--

You're happy not to do again.

Right.

Which we're happy not to do again.

I'm sure you're going to be calling us later.

Anyway, it's 21 and not 22.

Okay.

Another question.

Can you quantify how much Star Wars was down in the quarter?

No.

We don't want to get into that, but it was -- when you say absolute dollars or percentage-wise, it was down probably about what we -- actually, it was down less than we expected.

I mean it's performing above our expectations both from our shipments and at retail.

Okay.

And then two other questions on the balance sheet.

I think David, you said that accounts receivable reflects shipments and markets with longer terms, can you elaborate on that a bit?

Yes, our international business was up 49%, our domestic business was up 24%.

And in general, we give longer terms to international customers, especially when you get down into Latin America.

Okay.

And then the inventory increase relative to the sales increase, any further color on that?

I think we're looking for strong shipments at the beginning of the third quarter, at least, because we're only just -- the Transformer movie's only just broken and people are coming in for obviously reorders and we're still shipping a lot of Transformers.

A lot of momentum in our other brands.

I think, as Al said, we're expecting our business to be up in the second half, but not as much as it has been in the first half.

Okay.

I think we've got the inventory to support that.

Thank you.

Thanks, Sean.

Thank you.

Our next question comes from Tony Gikas.

You may ask your question and please state your company name.

Piper Jaffray.

Good morning, guys.

Good morning, Tony.

Good morning, Tony.

Just a quick follow-up here on Spider-Man.

First.

I think you had indicated that your expectations on that product line was that it would be a corporate average operating margin.

Is that tracking in line with your expectation or potentially exceeding?

And then second question, maybe just characterize the trajectory that Transformers is on?

You guys tend to do a fair amount of comparison of revenue numbers.

Maybe you could help us a little bit there.

And then third question.

Just maybe talk a little bit about shelf space changes that we could be expecting in the second half of the year.

Will you be maintaining all of the shelf space that you've gained related to Spider-Man?

Let me take the last two and then I'll let David talk about the gross margin.

We will clearly maintain whatever shelf space we have right now and probably pick up shelf space in the second half versus a year ago.

I would talk about that in terms of also overall categories.

I think our shelf space in the boy's category is going to be just fine.

Obviously, I think when you get into the back half of the year, all of the retailers begin to move space around within a given category or product, but we don't expect to lose any space in the third and fourth quarter.

In terms of the trajectory, Transformers is doing very well and it's moving in the right direction.

That's about most I can say about trajectory.

David, do you want to talk about the GM?

I think what we said before, we were talking to (inaudible) about operating margins and we said that Spider-Man, we're projecting would be as profitable as the rest of our line or corporate average.

If it was in fact substitution and [we] took a full load of fixed costs to the extent it was incremental, it becomes very profitable.

So I think, clearly it's incremental and Spider-Man will certainly be a good contributor to profit this year.

Okay.

Thanks.

Thank you.

Our next question comes from Gerrick Johnson.

You may ask your question and please state your company name.

BMO Capital Markets.

I had a question on royalty expense, it was $12 million higher than in the first quarter and as a percent of sales, about one percentage point higher.

Now, Transformers dominated the quarter and had a lower royalty rate and most of your Spider-Man shipments were first quarter, why was this higher, this royalty number higher in the second quarter?

Well, we still shipped fairly significant Spider-Man in the second quarter as well and we did ship a lot of Transformers.

And as we said, Star Wars is continuing to do very well, which is a relatively high royalty item.

So I think I said in a call that royalties were high because there was certainly a very high mix of entertainment property and that would be both Spider-Man and Fantastic Four and Transformers and Star Wars.

Okay.

Any update on the share buyback?

No.

No.

I mean we've still got $102 million, I think, on open authorization.

We did buy during the second quarter and, of course, we redeemed the Lucas Warrants, which was effectively a buyback.

So we've been active in the second quarter and we have some outstanding.

Okay.

And can you also give us the amount of licensing revenue in the quarter or licensing income in the quarter from third party distribution of Transformers?

That's not a number we disclose, Gerrick.

Okay.

And finally, performance of girl's in the quarter, at your expectations and what's the expectation going forward and what I'm getting to is, are you seeing any competitive pressures from things like Webkinz or Shining Stars or anything like that?

Our girl's business is doing very, very well.

As David indicated, it was, I think it was up 21% for the quarter and that's certainly being driven a lot by Baby Alive and Pet Shop and (inaudible) and Pony continues to do well.

But would it have been higher than that without Webkinz?

Probably so.

Webkinz is a very popular brand and doing very well in the marketplace.

But we're doing well and we're certainly ahead of our expectations in that regard.

Could we have been even higher than that?

Again, without some of the competition, perhaps,

Thanks very much.

Thank you.

Thank you.

Our next question comes from David Leibowitz.

You may ask your question and please state your company name.

Burnham.

Good morning.

Good morning, David.

Briefly, what was the currency impact on your earnings overseas?

You just show a gross operating number of 11.4.

We told you what it was for revenues and the fact is on earnings it was minimal.

Because what happens is our overseas earnings were about $11 million, I think we said, and so obviously we've got revenues and then we've got a lot of costs.

Well both those revenues and costs both get translated at the new rates which are higher than last year, so revenues were impacted but so were costs and the profitability impact was marginal.

Okay.

Also, the international income is a much smaller percentage of total than revenue.

Is there going to be any leveling off or should we be anticipating international earnings to grow faster?

You go back in history our business internationally is more back half skewed than domestically.

In addition, fixed costs internationally are slightly higher due to the fact that they don't have the economies of scale that you have in the United States.

As a consequence, we tend to be less profitable internationally in the first and second quarter and usually more profitable in the fourth.

That said, David, if revenue remains at 49% international, is there any target we should be looking for in terms of international earnings?

Well, we don't give targets, really, other than we said that we thought we've had this longer-term objective to sort of make 12% operating profit and we made 11.9 last year.

I think we're on track to make the 12 this year or 12 or better.

That's as far as we'll go in terms of giving margin objectives.

In other words, 12% margins international?

No.

Globally.

No, my question was, if we just take the international portion of the business, if it's roughly half of your revenue, what percentage of earnings should it represent on an annual basis?

What I've just said, that international tends to be lower than the U.S.

because of the relatively high fixed costs.

They don't have the same economies of scale.

You tend to have to have a marketing and sales organization in each of the European or global companies.

You tend to have to file a statutory accounts to tax accounts, take orders separately.

So you don't have the same economies of scale that we do in the U.S., where we've got 300 million plus consumers serviced by one infrastructure.

So as a result, international operating margins tend to be lower over the full-year.

Okay.

That doesn't answer the question, but we'll move on to the next point.

Well, I'm not going to give you a precise number.

I'm not asking for a precise number but should it be 20%, 30%?

I mean, there's a world of difference between a lower number and if it's going to be half of sales.

Does that mean 40% of earnings or 30% of earnings or 20% of earnings?

David, if you go to the 10-K, you'll see the segment breakouts and that talks about the operating profit for the international segment versus the North American segment.

I think you can look at that over the last several years and see what that percentage is.

We're not going to forecast what that percentage is for this year because, in fact, it would be a forecast, which we don't want to do.

But in terms of what it has been historically, if you go to the 10-K, which I don't have in front of me at the present time, you can get that breakout.

Okay.

Let's just point out that you've had many changes internationally including in terms of the management team and manufacturing facilities, as a consequence, I'm not certain in the last two or even three years would be a good number, but we'll let it ride at that.

Let's turn to the Transformers movie 2.

Would you have any rights to the movie itself getting a piece of the action greater than what you had this time?

That's something that we're not going to get into a discussion on, but certainly, as we go forward, including Transformers 2 or any other theatrical property we get involved with, we always take a look at what the economics are and whether or not we want to take more -- a bigger piece of the action, invest, et cetera.

Thus far, we have chosen not to finance the movie and therefore not participate to any great degree.

Whether or not that changes in the future, we'll take on a case-by-case basis including Transformers 2.

And given, again, let's talk intellectual property for a moment.

Are you going to have greater revenue this year from outlicensing than you did a year ago?

Probably so, but I don't want to get into a forecasting (inaudible).

Again, understood.

And the last question.

In terms of the Marvel merchandise that's still to be shipped and you said on the Spider-Man you expect incremental shipments, is this going to be merchandise that is already out there so you're restocking, or is this going to be new SKUs which have not yet hit the shelves?

I think it'll be a combination of both, but there'll be a lot -- probably more new products.

Thank you very much.

Thank you, David.

Thank you.

Our next question comes from Deane Gianoukos.

You may ask your question and please state your company name.

Hi.

I just have a couple of questions.

First, you had talked last quarter, I think, about Spider-Man shipments in Q2 matching shipments in Q1.

Did that actually work out that way?

It was marginally down.

Marginally down.

Okay.

And then, for overall Marvel, would that have been up because you threw in -- or because Fantastic Four was included, 2Q versus Q1?

When I said marginally down, I was thinking of total Marvel in second quarter versus total Marvel in (inaudible).

Okay.

And then how does Transformers, just so we can get a sense really, you know, your shipment of Transformers, is that bigger than Marvel all-in or is it smaller?

Are you talking in the second quarter or --

Yes, in the second quarter.

It was bigger.

Okay.

And then when you look at the back half of the year and Marvel, would you expect shipments in the back half of the year to be bigger than the first half of the year?

That gets into a forecasting drill, which we don't want to do.

I think generally speaking, when you have a movie property, the heavier shipments tend to come earlier than they do in the back half, but obviously that depends on a lot of factors so.

But in our typical planning, we would look for volume to be perhaps down a little bit in the second half versus first half, but that's not always the case.

It varies.

And would that follow --

(Overlapping speakers) excitement around the DVD release and, you know, we see what the retailers come back for in terms of orders.

And there's a lot of new product as well.

Would that follow through with Transformers, too, or because it was released later closer to July, or would that make a difference?

Sure it makes a difference because you're coming out almost two months differential from, say, something like Spider-Man.

If you go back over the years and look at Star Wars, each and every movie in each and every year has been a little bit different.

I think you start off with the thought that if a movie's coming in May you fill the pipeline, you release and then third and fourth quarter you can have very good quarters with that, but it may be still down from the first time you ship in as you're filling that pipeline.

But that doesn't happen in all cases.

That's why I'm hesitant to say that something will be up or down.

Depends upon how well the DVDs do and just how well retailers overall.

We have certainly seen cases where the back half has been even greater shipment volume than in the first half when the movie has been released in May.

Okay.

And then, when you said Transformers was bigger, were you including licensing revenues?

I know you don't want to give numbers and I totally understand that.

No, we were just talking about toy and game shipments.

I think, also, you have to understand that licensing revenues tend to kind of quarter lag from the shipment by our licensees.

Oh, they do.

Okay.

So a lot of that stuff --

(Inaudible) You know, Transformers was a pretty good brand before the movie, so we've been shipping all year long sort of non-movie products, the traditional transformer line.

But most of the licensee shipment that was shipped in in the second quarter, the revenues will come in the third quarter?

That is correct.

Yes.

Third and fourth quarter.

Okay.

And them can you just tell us, Star Wars year-over-year, was it down less than it was in the first quarter year-over-year or more or either?

I don't have that number in front of me, Dean.

Okay.

Thanks a lot.

Great quarter.

Thank you.

Thank you.

Our next question comes from Tim Conder.

You may ask your question and please state your company name.

A.G.

Edwards.

Just a follow-on a little bit to Dean's questions there.

Can you give us, as a percent of total revenues or just an outright dollar number if you combine Spider-Man, Transformers, and Star Wars for the quarter?

No, we don't release that level of detail.

I will say, as we said earlier, that while certainly the entertainment properties, and by that we mean Star Wars, Transformers, and all of the model properties, certainly weighed heavily in the quarter.

We were also up in pre-school, I think David said 19%, girl's, 21%, tweens is up 5%.

So we had good balance across the product line in both the North American, international segments, although it was a heavier weighting towards the entertainment properties, for sure.

Okay.

And then along that same line, Al, were your domestic shipments heavier weighted in these entertainment properties given that, you know, again, Spider-Man's been out there, but you were doing your initial shipments of Transformers?

Also, I think, in the first quarter or the fourth quarter conference call you mentioned the importance of Spider-Man and Transformers, how that should benefit your business in '07.

In the quarter itself, heavier domestic or international?

And then just, again, color around that.

It would have been heavier domestically versus internationally and that has more to do with the --

Release timing?

Release dates.

Because obviously, we released July 3rd here in the U.S.

and as we said earlier, it hasn't yet opened in Germany, France, the U.K., and Japan.

And I think this past weekend it did open in some places in Latin America, although I don't have that data yet.

So you have a later release schedule in some of the international markets, so that will phase the shipments a little bit differently.

What was the second part of your question, Tim?

I mean, you'd said, I think, Al, in, I think it was the fourth quarter or first quarter conference call that historically international Spider-Man has done very well and Transformers has done well with the products you've had previously and you were anticipating with the movies this should give us significant boost year-over-year to your international business.

Yes, and we still feel that way.

I mean to give you an example, down in Australia, I think an Australia retailer had the largest retail in history of Australia and that was driven a lot by Transformers where it had opened, the movie had opened.

So yes, in terms of the weighting from the international versus domestic, ultimately, yes, we're seeing that taking place and certainly by, I think, year-end that will prove itself out.

Okay.

And then in general, again, you guys had a fabulous quarter here, but in general can you give us with all your products, including the entertainment that was shipped, just a little bit more geographic color, segments that were stronger South, Latin America, Europe, parts of Asia?

Well, I think when you talk international, I mean Europe had a very strong quarter and it represents a significant piece of international whereas we're just getting started in places like Asia and Latin America.

Australia did very well.

The growth outside of Europe, in international markets but outside of Europe, is actually higher than it was in Europe.

Just off of a smaller base, obviously.

Yes.

So if you looked at 49% in aggregate, Europe was a bit below that, the rest of the world was above that.

Okay.

Okay.

Thank you, gentleman.

Thank you.

And our final question comes from John Taylor.

You may ask your question and please state your company name.

I'm with Arcadia.

Good morning.

I've got a couple of questions.

So international looks great and Transformers was not shipped in a couple of markets.

I wonder if you could talk about what the drivers were in some of those markets?

Are there and particularly strong product lines there?

And then the second question is, as you're looking at your order book form up for the second half, I wonder if you're noticing any impact from the popularity of resurgent video game business, particularly the Wii?

I don't know that you'd be able to identify that but there's a lot of Wii parties going on.

Are you seeing any of that show up in retailer confidence about the board game business for the second half?

Thanks.

In terms of the Transformers shipments, it wasn't that we haven't shipped into those markets, I just think the flow of goods was more heavily weighted towards the domestic versus the international during the first half of the year.

But we have shipped Transformers in virtually all of the markets.

I can't think of one where we haven't shipped Transformers yet.

That said, Playskool continues to do well internationally, My Little Pony, Pet Shop, Baby Alive, all doing very well, Super Soaker's doing well internationally, as is Transformers, Marvel, and Star Wars.

So it's good balance across the business.

Okay.

In terms of the video game business, certainly, I think that when video games are popular it, you know, we're all fighting for a share of wallet.

And if video games are very strong, they're going to take a greater share of wallet than they typically would and it impacts lots of people's business including ours.

But that's sort of an intuitive feeling as opposed to one that I could actually quantify.

The board game business, I think we'll have to see what happens during the all-important fourth quarter, because the board game business is so back end weighted, that's where I think we're really see whether or not that's having a dramatic impact.

In the end, I think it all boils down to product.

If we look back over the years, we've had strong game years when the video game business has been strong because we've had great product.

In other years, we've slipped when we didn't have a good product line and the video game business did have a strong year.

So I tend to think in general, an individual company, it tends to be more around individual products and we think we've got a good product line for the fourth quarter, but we'll wait and see.

Let me follow-up on one, too, if I can.

So Transformers I think turned out to be better than a lot of people expected and then there were a couple of retailers that placed bets on varying strengths on different properties.

I'm wondering if you picked up any kind of unexpected retail programs focus in the third or fourth quarter that might benefit that business this year that you didn't expect, say, 30 days or a month or --

Yes, I think so.

I think that there was some retailers who are always cautious about how well a movie's going to do and I think that they've been pleasantly surprised by, not only the box office, but more importantly, the sale of the Transformers product line.

As I said, we've already through retail sold over 3 million action figures.

So they're coming back a lot stronger than they might otherwise have come back and we see that as part of the reason we think we can grow the business in the third and fourth quarters.

Okay.

Great.

Thank you.

Thank you.

Thank you.

At this time let me turn the call back over to the speaker.

Thank you, Shirley.

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

A replay will be available on our Web site after 2:00 p.m.

this afternoon.

Thank you very much.

Thank you.

This does conclude today's conference.

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