孩之寶 (HAS) 2008 Q1 法說會逐字稿

Good morning and welcome to Hasbro's First Quarter earnings Conference Call.

(OPERATOR INSTRUCTIONS)

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

You may begin.

Thank you, Shirley, and good morning everyone.

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

To better understand our first quarter 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.

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 experience 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 and 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, and good morning everyone and thank you for joining us.

Before David takes you through a detailed review of the financials, let me take a moment to comment on our results.

Even though this is only the first quarter, we are very pleased with our performance thus far, with revenues increased 13% to $704.2 million compared to $625.3 million last year.

Absent the favorable impact of foreign exchange, revenues were up 9%.

We had a strong 2007 and the momentum continues into 2008 with a number of brands doing very well including Transformers, Star Wars, Littlest Pet Shop, Playskool, Baby Alive, My Little Pony, as well as a number of our board games.

Operating profit was $61.3 million or 8.7% of revenue.

Net earnings were $37.5 million compared to $32.9 million last year with earnings per share increasing 32% to $0.25 per share compared to $0.19 in 2007.

Now let's review the global performance of our major product categories.

The boy's business was up a strong 29% with Transformers, Star Wars, and Marvel on a combined basis up 38% from a year ago.

To strengthen the Transformers brand continues to be driven by the movie-based product line which we believe is attributable to the momentum from the DVD release which was the number one DVD in the U.S.

last year and continues to be strong this year.

In addition, we've had the support of the Transformers animated series on Cartoon Network which began in early January and is the highest rated new program on Cartoon Network through the first quarter.

The Transformers animated product line will begin shipping in the Fall.

As we said in February, we expect to have a good year with the Marvel product line.

In the first quarter Iron Man product began shipping for the upcoming May 2 theatrical release and it is doing very well.

In the second quarter we'll be shipping The Incredible Hulk product line in anticipation of the scheduled theatrical release on June 13.

We also have the upcoming release of Indiana Jones on May 22 with product expected to be on shelf in early May.

The buzz has been very good on Indy and we're looking forward to having a good year with the Indiana Jones franchise.

In fact, retail expectations for all three movies, Iron Man, The Incredible Hulk and Indiana Jones are quite a bit better today than they were at the beginning of the year.

In addition initial sales of our Iron Man product as well as initial sales of a number of Indiana Jones offerings already on the market in other categories have been above expectations.

Star Wars continues to do very well.

It was up 19% for the quarter.

With the upcoming theatrical release of The Clone Wars animation as well as the television debut in the Fall, we expect Star Wars to have another very good year in the growth compared to last year.

Our girl's business continues to be strong, up 24% in the quarter driven by the success of the Littlest Pet Shop, My Little Pony and Baby Alive.

In the tween categories, Nerf and Super Soaker were both up compared to a year ago although the category was down primarily due to the decline in I-Dog.

The preschool category was up 6% with Playskool up a strong 17%, primarily due to the success of In the Night Garden in the UK.

Our games and puzzle business is up 9% for the quarter with our top performer, Monopoly, up 46% primarily due to the continued strength of Monopoly Here and Now electronic banking.

And in September, we will be launching the Monopoly Here and Now World Edition.

In addition to Monopoly we had a number of other games that performed well including the game of Life, Scrabble, Twister, Are You Smarter Than a Fifth Grader and Operation.

In the digital gaming business we couldn't be more pleased with our partnership with electronic arts.

EA Mobile has launched Monopoly Here and Now, Scrabble and Yahtzee Adventures.

In addition the iPod versions of Scrabble and Yahtzee are now available for purchase from the iTunes store.

In the console and handheld game space in the fourth quarter , EA will be launching games based on three of Hasbro's most popular brands: Littlest Pet Shop, Nerf and Monopoly.

Lastly it's been a busy time for the company in terms of positioning Hasbro for future growth.

First we signed a six year deal with Universal Pictures to produce a minimum of four movies based on Hasbro's toys and games.

Second, we acquired Cranium which is a great addition to our portfolio and lastly we purchased the global rights to Trivial Pursuit which has been a very good brand for us for a long time.

This will give us the opportunity to build the Trivial Pursuit brand beyond traditional venues and capitalize on new opportunities and entertainment, publishing and the digital arena.

In fact the Trivial Pursuit game show, Trivial Pursuit America Plays will be launching in the Fall.

In closing we're off to a good start.

While it's early in the year and there's still a lot of business to be done our first quarter performance reinforces the confidence we have in achieving our full year financial goals.

Now, I'll turn the call over to David to take you-- to talk to you more about our first

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 $704.2 million compared to $625.3 million last year, an increase of 13% or $78.9 million.

Absent the favorable impact of foreign exchange, revenues were up 9% or $53.5 million.

Our top line growth reflects the continued success we have had in growing our core brands, particularly Transformers and Littlest Pet Shop.

As we've shared with you in the past, we are committed to investing in the future growth of our business.

Our operating profit during the quarter reflects this investment.

In the first quarter, we continue to invest in both our entertainment and digital strategies including, but with a difficult digital initiative [Free Max] and building our business with electronic arts.

We are also building infrastructure in the emerging markets in locations such as Brazil and China, and lastly we had some costs associated with the Cranium acquisition.

Some of these expenses will continue throughout the year; however, they have always been contemplated in our statement that we should be able to grow earnings per share in 2008.

Moving on to our segment results, beginning in 2008, we have changed the way we are reporting our segment results.

The revenues from our business in Mexico are now part of our international segment.

As a result we have renamed the North American segment the U.S.

and Canada segment.

There was a schedule in the press release that provides 2007 quarterly segment data reclassified to reflect the new 2008 segment structure.

Beginning with the U.

S.

and Canada segment, net revenues were $428.5 million compared to $406.1 million last year, an increase of $22.4 million or 6%.

U.S.

and Canada operating profit for the quarter was $37.3 million or 9% of revenue compared to $45.8 million or 11% of revenue last year.

As I mentioned, there were some expenses associated with the investments we're making to grow our business, including, Wizards of the Coast digital initiative and the Cranium acquisition.

Net revenues in the International Segment were $248.3 million compared to $202.7 million a year ago.

This segment was up 22% in dollars and 12% excluding the impact of foreign exchange.

The International Segment reported operating profit of $13 million compared to a loss of $1.8 million last year.

The improvement in operating profit is primarily due to the leveraging of higher revenues against our fixed expense base.

Now let's take a look at earnings.

For the first quarter we reported net earnings of $37.5 million or $0.25 per share.

This compares to $32.9 million or $0.19 per share in 2007.

During the quarter, average diluted shares outstanding were 156.2 million compared to 176.7 million last year.

Earnings before interest, taxes, depreciation and amortization were $100.8 million compared to $90.6 million a year ago.

Gross margin for the quarter was 61.5% compared to 61.1% a year ago.

The improvement in gross margin is primarily related to changes in both revenue and product mix.

Now let's take a look at expenses.

Royalty expense for the quarter was $58.4 million or 8.3% of revenue compared to $50.3 million or 8% of revenue a year ago.

As already mentioned, entertainment-based product lines are continuing to play a major role in our growth.

Research and product development expenses increased $6.5 million to $41.8 million or 5.9% of revenue compared to $35.3 million or 5.7% of revenue a year ago.

The increase reflects our continued investments in new product development to grow our business.

Advertising expense at 10.9% of revenue was consistent with last year as a percentage of revenue; however, it did increase to $77 million compared to $67.6 million last year.

SG&A expense as $170.2 million or 25% of revenue was also consistent on a percentage basis, although it did increase by $19.3 million compared to last year.

The increase in dollars is due to a number of factors: Firstly, the impact of foreign exchange, secondly, increases were a part of our strategy to grow the business including the investments we're making in emerging markets and the cost of implementing our entertainment and digital strategies, and lastly, higher shipping and distribution costs associated with increased revenue and generally higher transportation costs.

These increases were partially offset by a favorable adjustment related to a pension surplus in the UK.

Interest expense increased by $5.2 million to $11.4 million primarily due to the long-term debt we issued in the third quarter of last year.

Other income net totaled $5.8 million compared to $2.1 million a year ago.

The 2007 results included a $7.9 million unfavorable mark-to-market adjustment to the Lucas Warrants.

There was no adjustment in 2008 since we repurchased the warrants in the second quarter of last year.

Our underlying tax rate for the quarter was 31.3% compared to our 2007 full year underlying tax rate of 30.5%.

Now let's turn to the balance sheet.

At quarter end, cash and short-term investments were $832.2 million compared to $703.6 million a year ago.

We have generated significant cash from operations during the last 12 months and we've raised $346 million in cash through a debt offering last September.

We have used this cash productively over the course of the last year in a number of ways including $669 million to repurchase 24.4 million shares of Hasbro stock.

We paid $97.7 million in dividends to our shareholders and finally we purchased Cranium for $68 million.

Our receivables of $388.7 million were up $61.6 million compared to $327.1 million last year.

The increase is primarily a reflection of higher sales volume and the impact of foreign exchange.

Days sales outstanding were 50 days compared to 47 days last year, the increase in DSOs is due to a shift in FOB shipments to later in the quarter and a change in our sales mix towards markets with longer payment terms.

Inventories increased $291.2 million compared to $265.4 million a year ago, primarily due to the impact of foreign exchange and to support the growth in our business.

At our analyst meeting in February, we shared with you that going forward we would measure the health of our capital structure using cash flow measures, namely debt to EBITDA of 1.5 to 1 or lower and EBITDA to interest of 12 to 1 or better.

At the end of the first quarter, our debt to EBITDA was 1.53 to 1 and our EBITDA to interest was 16.65 to 1.

If the (inaudible) money convertible debt is treated as equity, debt to EBITDA would be 1.15 to 1 and EBITDA to interest would be 20 to 1.

As Al mentioned, we purchased the global rights to Trivial Pursuit at the beginning of the second quarter.

Our investment in this established brand guarantees Trivial Pursuit will remain part of the Hasbro family.

Over the years it has been a very good brand to Hasbro.

In fact our average revenues for Trivial Pursuit had exceeded $18 million per annum for the last five years.

With the opportunity to expand around the globe and into other categories we would describe this as a very good investment for Hasbro.

In summary we are very pleased with the results we reported today and we continue to believe that we should grow both revenues and earnings per share in 2008.

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

With that, Al, Brian 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.

Lehman Brothers.

Good morning, guys.

Good morning, Felicia

A mentor once told me not to say " Good quarter" on these conference calls but this was a good quarter.

Just a few questions.

On Iron Man, I'm wondering where inventory levels stand.

We've been finding at retail it's stronger than even the retailers have expected so I'm wondering if you have been prepared for that?

You're talking about our availability to ship the market if the movie does better than people expected?

Yes.

Yeah, we have a fair amount of flexibility so that's not a concern for us.

We should be able to satisfy the market.

Great.

Now, on Hulk, I was wondering if you could just comment on that property because you seem optimistic in the preamble but it has been getting mixed reviews out of Hollywood so I'm just wondering if you think that's going to have any impact on toy sales at all?

Well, I think I'll let Brian answer his first conference call question.

Brian?

You know, we are seeing good retailer excitement about the product line and what goes on in Hollywood really doesn't affect the overall impact of our toy line.

Okay, so your internal expectations haven't changed?

That's correct.

And then just housekeeping, David, you touched on other income, you touched on the tax rate.

I was wondering what was in other income this quarter and how should we look at the tax rate going forward?

Well we got the some interest income because we have-- I think $832 million of cash so interest income is the major thing and then it's offset by some amortization of bank debt expenses and just some other things in there.

And the tax rate?

The tax rate, our underlying rate is 31.2% but the actual rate was a bit higher because there's a couple of discrete items that are not included deductibles, tax bases and purposes.

But going forward we should use the 31.2?

Yeah, go forward, I think we said-- we used to be down around 27-28, and our guidance recently has been used closer to 31 because we're recognizing we will need to repatriate some of our (inaudible) cash and there's a tax cost to do that.

So, 31 is probably a good go forward number.

Great, just wanted to make sure that's not going to change.

Okay.

Thanks a lot, guys.

Thank you, Felicia.

Thank you our next question comes from Margaret Whitfield.

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

Sterne, Agee.

Good morning and congratulations.

Thank you, Margaret.

Given the strength of your business through most of your product lines, I wondered if you could comment on the status of your retail inventories at the end of the quarter or currently.

Inventory at retail is in good shape.

I mean, at this time of the year, typically we're shipping into fill the market with some of the products like the Iron Man and Hulk movies will come later on the second quarter but in general, our inventories positions at retail are fine.

Yeah, our strengthen shipments is being matched by strength of POS.

And Spiderman didn't get a mention or as least as far as I heard.

What's going on with the TV animation and product sales?

Product sales are good.

I mean Spiderman and Marvel are overall down from a year ago which we expected but it is still doing quite well and pretty much on target.

And in terms of the factors that lead to the operating margin pressure in the U.S.

and Canada, should we expect similar pressures in Q2 or into the second half?

David?

Well what I think one of the things that we are doing is investment spending as I said in our (inaudible) digital initiative, [FleMax]some of that will continue throughout the year.

The costs we had associated with our Cranium acquisition in the first quarter, they shouldn't continue throughout the year.

There will be some costs there but basically we've restructured that business down now from our 80 employees down to about 20 employees, so those costs will be lower and in addition we'll start to get revenue from the Cranium acquisition as we move later in the year.

Some of the other costs we've had, I mean we talk about investing in our entertainment business.

We're certainly funding some script development at the moment and we bought Lisa [Licht] on who's heading our entertainment division based out in LA.

So, some of the costs will increase throughout the balance of the year, probably not as quite as high level as in the first quarter and in addition, relative to our sales which tend to be higher in the third and fourth quarter, on a percentage basis these costs will certainly be a lot less.

And Brian I wondered if you could give us an update on the GI Joe and Transformers movies to come next year?

GI Joe is about half way through production, and is on track for August of next year and Transformers will begin production looks like early June, and will be on track for July, end of June/July of next year as we currently know.

Okay, thank you and congratulations again.

Thank you.

Thank you.

Our next question comes from Greg Badishkanian.

You may ask your question.

Please state your company name.

Yeah, Greg Badishkanian, Citigroup.

Hi, guys, just a few real quick questions here with respect to retail sales, can you put a little color around that in the U.S.

And then international maybe how it compares with the industry?

In terms of our retail business, I think overall, the business is pretty good.

It's not bad.

If you read the newspaper you would probably get a sense that business wouldn't be as good as it's been, so it's better than what you might gather from reading the in the newspaper.

I think we would probably say it's been okay.

Our business has been good.

It's been good both domestically, a little stronger in the international markets.

Great.

And if you look at-- you had mentioned your inventories are in good shape-- is that-- .

would you categorize that as being down from last year, about the

It depends upon the brand but I think in general, our inventories are in line where they should be and probably we came out of last year a little bit down from the year ago so we're probably on target from where we were from a year ago.

It really depends upon when some of the entertainment properties are breaking compared to a year ago, so you can't do just a quarter to quarter comparison.

You really have to look at when certain entertainment properties are breaking and when we're shipping in, so --

Good.

Thank you very much.

Okay.

Thank you.

Our next question comes from Sean McGowan.

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

From Needham & Company.

Two questions.

Just can you give us an update on exactly where we stand on the remaining share buyback, and second one is a bit longer for Brian.

David can you address the buyback please?

I think we've got 483 million remaining authorization against a 500 million that the Board authorized in the first quarter.

Okay.

And before you ask, it's 139.6 million outstanding at the end of the quarter.

Shares, okay.

Shares.

I think you usually ask that.

Oh, I think that's JP.

Is it?

Okay, Brian, regarding the four movie properties or minimum of four that you signed, can you talk a little bit about how the economics for those deals might be different from the deals that you already had in place for movies tied to Hasbro toys?

Sean, are you referring to the Universal deal?

Yes.

Okay, so we'll begin in distribution our first movie in 2010 or 2011.

The development is just under way with Universal.

The deal terms are more favorable than Transformers deal but not material, and we will go forward in developing as David indicated, developing scripts, hiring a few people to help develop some scripts and to work on our story concepts with Universal in partnership, and then work together with the studio in producing those films.

But do these deals still contemplate a payment to the studios of royalties related to product at Hasbro sales?

Yes.

There will be a royalty.

It's not a material royalty and there also will be a payment to Hasbro.

We are a first dollar gross participant on the movies and that's the plan as we go forward.

Okay.

Thank you.

Thank you.

Our next question comes from Tim Conder.

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

Yes, Wachovia.

Let me also offer my congratulations on a great quarter.

Thank you.

A couple of items.

David?

Can you give us a little bit of color as to the investments in Brazil.

You were looking at buying out some distribution there going direct, maybe just let us know how that's progressing, when that will be completed, and then from the UK pension plan, you mentioned there was somewhat of a benefit in there.

Can you give us a little more color on that and then finally with Trivial Pursuit, any multiple of sales or EBITDA that you could give us some color on there?

So firsty, regarding Brazil, as we've said we are starting our own subsidiary down there, previously we have gone through distributer.

We've now got an office, we've now got a general manager, we've got a finance person, we've got an HR person and I think we're getting some salespeople on board.

In terms of-- I think we've dealt through about six distributors down in Brazil and we'll be progressively taking product back from these distributors over a period of time.

And I won't go into more detail about that, but it will probably be by the end of the year that we are fully up and running with our own subsidiary and we've taken everything over from distributors.

And one thing clear, it's not an acquisition, we're starting from ground zero so it's going to take a little while to get up and running.

Okay.

Secondly, in the UK, as a result of our acquisition of [Kenapark] and Tonka back in 1991, there was a pension scheme in the UK which was wound up at that time, and there was surplus, we bought annuities for all the people that were in the plan so that they got paid out their amount that was due, but there was a surplus over and above that in the plan and we've been negotiating and talking with the trustees of the plan for a long time regarding splitting that surplus between the company and the pension as a bonus for the pension, so that's really taken a lot of time to resolve and it was resolved during the first quarter of 2008.

And finally, Trivial Pursuit, I think as I said, as a brand, this has been doing on average over the last five years, in excess of $80 million of revenues for us, and we were paying a fairly significant royalty on that, so even if you were just to do a pay back analysis on buying out the (inaudible), this would be a pretty good deal but of course the other thing, what it does, it insures the brand, stays with Hasbro, and one of our major competitors doesn't bid for the license and steal it away from us, because we would then lose all of the margin that we make, the profit margin that we make, on that brand as well.

So we certainly protected our margin, we brought out of (inaudible) stream and we can take this brand into digital and blow it out around the globe so we think it's a very good acquisition.

Okay and then finally, Al, I think you gave some commentary on channel inventories.

Were those just related to the U.S.

Or were you talking also on an international basis?

I was talking in general.

Okay.

International basis.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from David Leibowitz.

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

Basically, second half this year versus last year, you seem to have more theatrical, more tie-in merchandise, more licenses.

Are we going to see this year back halfed and again with the fourth quarter be larger than the third?

Well, David, we're not going to forecast sales.

I didn't ask you to forecast.

You know we don't have we aren't going to comment on whether one quarter will be greater than another and in terms of movies breaking, that varies from the year to year.

Well that's why I asked with the breaking and the dating.

Yeah, I mean clearly Star Wars coming in August is a theatrical relation and then on television for the Fall is a positive for that part of the year.

And when do you release the product based on the Star Wars Clone Wars?

It's July.

Yeah, Star Wars is shipping throughout the year, David, as we said, Star Wars --

Understood, but are you shipping Star Wars merchandise tied into the theatrical production yet?

We will ship Star Wars Clone Wars product for the second half of the year.

Okay.

And the TV show for Trivial Pursuit, can you give us some idea of the way that contract is structured, what does Hasbro get, what is Hasbro's responsibilities, etc?

Yeah.

I mean, we are co-funding the production of the Trivial Pursuit show, and we expect that the monies we should receive back in terms of clearing that and placing that on TV stations around the country will be significant enough to sort of give us close to a breakeven on our production cost.

Now, clearly, our intent isn't to make money off of the production of the show.

Our intent is to sell more Trivial Pursuit product and make our margin on that.

So again, we think it's a good deal for Hasbro.

And are you providing the Q & A aspect of the game on TV or is that being done by your partner there?

Well, any time this is our brand and we're working with entertainment, whether it TV or movie, we control creative, we retain creative control and partner with them to make sure that the essence of a brand is kept.

And do you also participate then with any international versions of the show?

Yes, we do, David.

And is there anything in the works you can talk to on that score at the moment?

We're having conversations but nothing that we would talk about at this point.

And lastly, the theatrical productions for next year that are using your intellectual property, do you have any greater economic risk than you did the last time around because you are an active participant to contributing or what have you?

No, there's no risk.

We're not funding any of the production.

Thank you very much.

Thank you.

Our next question comes from [Todd Duvick].

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

Yes, Banc of America.

Good morning.

Good morning.

I had a quick question for you on the capital structure, which I appreciate you sharing the color this morning on your targets.

If you do have the convertible notes put to you and you also have $150 million note that matures this July, I guess a question is would you plan to refinance that in the debt capital markets, the combination of the two such that you don't have the under leveraged balance sheet and you maintain your capital structure consistent with your targets ?

Yeah.

I mean, you're certainly right, if the convertible debt converts and we pay off the $135 million as long term bonds due in July, we were below our optimal and targeted leverage ratios.

We-- our board authorized a $600 million issuance of new debt last year of which we only issued $350, so we still have an open authorization to go to the market and issue an extra $250 million if we so desire and if the rates are right at the time.

Okay.

And I guess the timing of that would just depend.

The timing would depend.

I mean one of the things that's clearly happened since we had the authorization is that longer term money has gone a bit more expensive and short-term money has got a lot cheaper, so there's a kind of of bias to continuing to fund with short-term at the moment.

Okay.

All right, fair enough.

Thank you very much.

Thank you.

Our next question comes from Gerrick Johnson.

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

Hi, from BMO Capital Markets.

Good morning.

Good morning.

Indiana Jones, I see some of that trickling out to shelves.

What's the street date for that and did you get any shipments into the first quarter on Indiana Jones?

Yeah, so we shipped some Indiana Jones in the first quarter, not very much.

We'll be on shelf really looking at the early May, and the movie of course is May 22nd.

And as a matter of other Indy product, sort of not our product but other Indy product already out in the marketplace, it's doing very well.

Yes, it is.

Okay so there were some shipments in the first quarter.

Now, in terms of of point-of-sale you said that was matching your shipments.

Were there any trends in the quarter on point-of-sale, any strengthening or weakening through the quarter?

You say strength or weakening through the quarter, you mean --

On your point-of-sale.

I understand that but you mean with point-of-sales strong with the beginning or back half of the quarter?

Yea, any sort of change?

No, I don't think there was anything unique.

Our POS has been pretty strong throughout the quarter.

I don't think we had much of an impact, a little bit of an impact given that Easter was a little earlier, but other than that, it's been right on target pretty much the entire quarter.

Right, okay.

And lastly, are you seeing changes in the way your major retail partners are doing business this year?

You want to be a little bit more specific about that?

Changes in the way they're doing business?

Well, you know, taking delivery later or more domestic versus FOB or just any sort of changes compared to last year.

No, not as it relates to Hasbro.

Okay.

All right, thank you.

Thank you.

Our next question comes from John Taylor, you may ask your question, please state your company name.

Hi, I'm with Arcadia.

Good morning.

Great way to start the year.

Thanks, JT.

Yeah, so I've got a couple of them here.

If you look at the landscape this summer with the theatrical releases you have and the ones that Mattel has, etc, There's kind of a lot more rather than the two that really people cared about last year.

So I'm wondering, from a merchandising standpoint have you got any fresh insights into the way the merchants are going to try to manage the categories, put emphasis on one or the other, can you talk about that a little bit?

And I guess what I'm ultimately interested in is whether you guys are going to have the capacity to-- the ability to ramp capacity in the fourth quarter in case one of these does happen to catch on, is the first one.

I'll let Brian take the merchandising piece of that in.

In terms of the supply chain, we're pretty flexible and I think most of this in this industry, certainly, we recognize the potential for properties to move pretty quickly and we plan for that in our production, so we will have the capacity to go up in the fourth quarter if something takes off.

Obviously it's not unlimited but it gives us a lot of flexibility and I think you saw that last year with a brand like both Transformers in particular and even Star Wars but Brian do you want to talk about the other piece?

JT, we said back in February that we believed that our six initiatives this year could quite possibly equal the three from last year, and so again, we believe that that's the case and the way we execute the programs have a lot of enthusiasm for the movie properties, but again, still fundamentally believe that the biggest properties of the year will continue to be Transformers and Spiderman and Star Wars.

Okay.

Because yeah, I think there's some thought that a number of the properties are going to be sort of in and out.

Get them done and then that's it, kind of thing but you're feeling like you got some shots at extending some legs on these?

Yeah.

Then, I think those top three properties, Star Wars, Transformers, Spiderman, will continue to perform and we've got three very exciting films and we already are seeing great results as indicated on Iron Man.

A lot of excitement around Indiana Jones and Hulk.

Great, okay.

And then I think Dave, you briefly referenced an increase in shipping and distribution costs.

I wonder if you can talk about what's lying behind that and is that part of the landscape now and give us a sense of what size that looks like?

Yeah.

I think it's coming into the year.

We certainly are (inaudible) out of China.

We anticipated and I think we've factored most of those in and I think we took the pricing in everything we need to do to protect our margin.

I think the one place that we are a little bit surprised at the moment is you've got oil up at $116 a barrel and you're talking about gasoline at $3.50 over the next couple of weeks so I think it's really (inaudible) surcharges for ocean freight and increased costs associated with shipping out to the customer, both here and in Europe, and all told, that would be in a region of about $5 million.

It certainly isn't $1 million and it's certainly not 10, probably 5-6 million is the range of our anticipation for the year, that wasn't for the quarter so that is one area where it's a bit higher than what we originally planned.

Okay, great.

And we can assume that, well that's not that big a number so never mind.

Okay, and then let's see, Trivial Pursuit, so did you guys remind me, did you have that globally already?

So or was there a piece that somebody else had?

We've had it already.

Okay, all right very good.

Thank you.

Thank you.

Thank you.

Our final question comes from Thomas Russo.

You may ask your question.

Please state your company name.

Hi, good morning.

I was, I meant that I can congratulate you, which I'll do so congratulations.

I know you meant it, so I'll accept that.

Thank you.

David, could you provide insight into why the segments were shifted?

Why the reporting segments changed like it did this term?

Yeah.

I mean essentially, it's internal-- the way we're managing the business internally in that we've moved Mexico, it was previously under North American Management when Brian was heading the North American group historically, go forward we're kind of split the responsibilities a little bit and we've got Mexico under the same manager as our rest of the world business.

Thank you, and then David, you also mentioned that the receivables may have extended or grown as a result of doing business in new markets that require longer term.

Right.

And my sense would be that in the new markets, They may be more fragile markets economically and you might go the other day in deal in those markets with shorter terms.

I think obviously that would be the lowest risk and most desired way to go if we could.

Unfortunately, the customer track is in some of these markets particularly Latin America is to have extended terms and if we want to be competitive in the market and grow our business in the market, then I think we need to make local customer (inaudible) At the same time we're obviously going to do a lot of credit checking and not take a lot of risk so we're looking for no risk but we will get extended terms.

Yeah, some of those extended terms are with very large customers that we deal with around the world so they aren't necessarily smaller customers but (inaudible) I think we'll get different terms in Latin and South America than they will in say France.

Yeah, good, thank you, Al.

And then Al and Brian, The, the, increase-- speak if you can about any shifts in the effectiveness of how you're spending your ad budget.

David referred to the Trivial Pursuit show as part of a form of marketing, once you cover your costs you're using it to drive product sales but aside from that just a more traditional measured media and other forms of communication, what's working and how is your budget shifting?

Well you know, we're continuing to create all kinds of experiences appropriate for each of the consumer audiences.

Littlest Pet Shop VIPs is really the online world as a form of entertainment and that will also tie with all of the efforts done through EA as they launch the Nintendo DS and they launch the Wii console game this third and fourth quarter so again that experience for young girl's is about the online world and the DS and the Wii system.

Uh-huh.

And that for them is entertainment and obviously, continuing to look at the theatrical business, continuing to look at our TV business between Transformers animation and the Trivial Pursuit game show, I think what we're trying to do is make sure we are there to provide an immersive brand experience anywhere and everywhere our consumers are and to do it right by consumer audience.

Great, great.

And then where you're finding your advertising spend to be most efficient these days, is there any shift that you can speak to?

Well, you know, we continue to look at the mix between broadcast, media, as well as online, and we look at it by market and we also look at it across all of the different forms or formats between network and cable and it continues to be a fine tuning process.

Thank you.

And then Brian and Al, lastly, this internet only competitive version to Scrabble that seems to have surfaced, what steps are under way to defending it?

I know that you've mentioned that you're taking Scrabble officially through new platforms, I think you said it would be available on the iPod through iTunes and other versions but at the other and what about the sort of non-licensed look-alikes?

Well, as you can imagine, our general counsel advises us not to say too much about this, but I think that the matter will hopefully be resolved in the very near term.

Thank you.

And thank you for a great quarter.

Thanks, Tom.

Thank you, at this time I'll turn the call back over to the speakers for final comments.

Thank you, Shirley.

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

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

Thank you.

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