Hasbro, Inc. (HAS) Q2 2007 Earnings Report, Transcript and Summary

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 in today's call and it is available on our website at hasbro.com. We would also like to point out that on this call whenever we discuss earnings per share or EPS, we're 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 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. 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 warrants. And 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, SPIDERMAN and STAR WARS, all made significant contribution to the quarter. The TRANSFORMERS movie opened on July period was an unprecedented six and a half 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 since this past weekend 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 had 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 by 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, our over 240 licensing partners that we are working with around the globe. In addition to the TRANSFORMER cell phone game from Glu Mobile and the highly regarded video game from Activision, you will 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 brand 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 are talking about. And while I am 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-MAN2 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 different movies with these properties. And of course, STAR WARS continues to exceed everyone's expectations. May I 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 the declines in the DUEL MASTERS trading card game and plug and 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, GAME OF LIFE TWISTS & TURNS, LITTLEST PET SHOP game, Electronic CATCH PHRASE Music and CANDY LAND CASTLE. Also shipping this fourth in the toy side is the POWER TOUR GUITAR, the ROSE PETAL Cottage, The PEYTON MANNING NERF FOOTBALL and SQUAWKERS 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 category. 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 TRANFORMERS 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 am 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% to our $163.6 million. In constant dollars, revenues were up 29% or $151.5 million. The strength in our business was broad-based. We've a number of product categories up significantly year-over-year. Free School business was up a strong 19%, driven by the continued success of our PLAYSKOOL brand. The boys business more than doubled with shipments of TRANSFORMERS and SPIDER-MAN 3 movie-related product lines. The girls' category was up a strong 21%, with significant growth from LITTLEST PET SHOP, BABY ALIVE and our FUR REAL FRIENDS line. The tweens 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 games business grew 3% compared to a year ago. North American 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 products 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 of the impact of the 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 cost associated with the higher sales volume, incentive compensation accruals, the impact of foreign exchange and inflationary increases. The decrease in percentage terms reflects the leveraging of our fixed cost price. 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 am 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 $499.7 million a year ago. In the last 12 months, we have generated in excess of $400 million in operating cash grow. 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 for Lucas warrants for $200 million, paying $70 million to MARVEL as part of our 5-year agreement, utilizing approximately $94 million to repurchase 3.2 million shares of Hasbro's stock and lastly, so far this year, we have returned $45 million to our shareholders in dividends. Our receivables of $417.7 million were up a $127.2 million compared to $290.5 million last year, reflecting both the 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 day 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. So 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're 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.

Good morning

Just first a couple of housekeeping, just 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 minimum.

Minimum, okay. And then, if I understand this correctly, if the TRANSFORMERS movie was going to hit certain threshold, 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 in plans 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. The studio gets its money obviously from the box office. There is a bit of participation on the part of Hasbro in the net as there is a bit of participation from the studio and some of the licensing. But for the most part, we are going to make our money on the sales of toys, games and licensing revenue.

Again good at avoiding these questions. And then --

We do have very small percentage in AO [ph] it's too early to tell.

At this time, we are not anticipating any thing material.

Yes.

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. Bank of America.

Hey Michael.

Hey good morning. Just a couple of 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 are talking in retail, just want to confirm that?

That's true.

Okay. And then due to 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 falls, you feel like you are adequately staffed, if you think that there is going to be pent up demand or if there is 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 are in good shape there.

Meaning there is enough in the channel. There won't be... there won't be outage, you are not concern about --?

about shipping, so I am 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 just going to want to pick up their option for TRANSFORMERS 2, what is the... what can you disclose about 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 is excited about TRANSFORMERS 2, but no date has been set as yet, yes.

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 chop a license from some where else?

I mean that's not an issue right now.

Okay, thank you.

Thank you. Your next question comes from Margaret Whitfield; you may ask your question and please state your company name. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: Sterne, Agee. Congratulations.

Thank you Margaret, good morning Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: Good morning. Could you give us the comparative of 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 are not going to give individual sales volume for individual product lines, but I was just trying to do is give people the sense that the SPIDER-MAN 3 is doing very well at retail. It's also doing well from our revenue perspective, but we are not going to give individual product line sales. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: Okay. And you mentioned a number of countries where TRANSFORMERS have yet to open, when would those movies... move openings occur?

Generally speaking within the next week to ten days. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: Okay.

I think the U.K. opens on 27th July; I think Japan is August 4th, so coming up real soon. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: And you mentioned the possibility of a second TRANSFORMER movie, what about other brands, what are you talking about in terms of perhaps GI Joe or other brands in terms of movie's?

Well, there's nothing we can announce at this point of time. Obviously, there are number of brands that we think have the potential for theatrical release and we are looking into several opportunities now, but nothing that we are in a position to announce at this time. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: So, it sounds like it would not be next year, it would be '09 or later for these additional movies?

Yes again, there is nothing we can announce at this point in time. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: 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 March shipment standpoint, STAR WARS was down during the quarter, but it is still exceeding everyone's expectations in terms of where the actual numbers are. And coming in the first quarter of '08 we have the STAR WARS animation. So we are really excited about the brand and it will clear the B1 as the top toys brands globally this year. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: 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 are going to commence shipping. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: Probably next year though?

I don't have the date yet. Margaret B. Whitfield - Sterne, Agee & Leach, Inc.: Okay, that is 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 and Sean, how are you doing?

Pretty good. I am going to hit on a couple of questions sort of being asked, but from the different angle. SPIDER-MAN, are you saying all that you expect there to be meaningful shipments still to happen in the second half of the year?

Yes.

Okay. Andwould you say that the reserve rate that you are taking against SPIDER-MAN is that normal at this point?

When you say reserve rate --?

Well,there is always reserve for mark down money or whatever you put ahead of 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 a more of an increase in this quarter. Actually, was where I thought it would be even if I thought that the sales would be where they were thought more of a gross margin improvement and is there something about SPIDER-MAN and TRANSFORMERS that is not pushing up the gross margin as much as like STAR WARS would have?

Not at all, I think EASY BAKE oven $10.4 million.

Is that where that has been, that's was my related question, is that all in costs of sales?

That's not essentially in gross margin.

Okay.

The best part of it.

Okay, that's big part of it then?

Yes.

Okay. Tax rate for the year then ex-Lucas warrants. Are you saying that you expected for the year to be 28.1%?

Yes I think so. It's our best judgment in this time and the mix of our profits between high and lower tax jurisdictions around the globe, but at this time 28.1 has to be right now.

Okay. 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 your planning?

I don't know. But we have to sort of do fairly a complex calculations which --.

Which you are happy not to do again?

Right, which we are happy not to do again. So I mean I am sure you going to be covering this later, revised $0.21 or not $0.22.

Okay. Another question related to... could you quantify how much STAR WARS was down the quarter?

No, we don't want to get in to that but it when you say absolute dollar, percentage wise, it was down probably about what we... actually was down less than we expected and I mean its performing above our expectations both from March shipments and at retail.

Okay. And then two other questions on the balance sheet, I think David, you said accounts receivable reflects shipments in markets with longer terms, could 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, okay. And then, the inventory increase relative to the sales increase, any further color on that?

Well, I think we are looking for strong shipments at the beginning of the third quarter at least because we have only just... the TRANSFORMER movies are only just broken and people are coming in for obviously re-orders and we are still shipping it out of TRANSFORMERS, and a lot of momentum in our other brands. So, I think... as Al said, we are 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 have 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 say your company name. Anthony N. Gikas - Piper Jaffray & Co.: Piper Jaffray. Good morning guys.

Good morning, Tony.

Good morning, Tony. Anthony N. Gikas - Piper Jaffray & Co.: Just a quick follow up here on SPIDER-MAN. First, I think you had indicated that your expectations on that product line, with that it would be a corporate average operating margin, is that tracking in line with your expectation or potentially exceeding? And then second question, may be just characterize the trajectory the 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 will let David talk about the gross margin. Yes, I... we will clearly maintain with every 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. But I think our shelf space in the boys' category is it's going to be just fine. Obviously, I think when we you get into the back half of the year, all of the retailers begin to move space around within a given category product, but you don't expect to loose 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 the most I can say about trajectory. David, you want to talk about the GM?

Yes, actually what we said before on we were talking primarily about operating margins, and we said that SPIDER-MAN, we projected it would be as profitable as to rest of our line on corporate average. If it wasn't tax substitution, we took a full out of fixed cost to the extent it was incremental, it becomes very profitable. So I think clearly, it's incremental and SPIDER-MAN would certainly be a good contributor to profit this year. Anthony N. Gikas - Piper Jaffray & Co.: Okay, thanks.

Thank you. Our next question comes from Gerrick Johnson. You may ask your question and please state your company name.

Hi, BMO Capital Markets. I had a question on royalty expenses, you told me in higher than the first quarter and as the percent of sales about 1 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?

We still ship fairly significant SPIDER-MAN in the second end 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 rookie item. So I think I said in the call, low teens to high because there were certainly a very high mix of entertainment property and that could be both; SPIDER-MAN, and FANTASTIC FOUR, and TRANSFORMERS and STAR WARS.

Okay. Any update on the share buyback?

No, no I mean we still got a $102 million I think on open authorization. We did buy during the second quarter and of course we are doing the Lucas warrants, which was effectively a buyback, so no; we would be inactive in the second quarter when we have some outstanding.

Okay and can you also give us the amount of licensing revenue in a quarter or licensing income in a quarter from third party distribution of TRANSFORMERS?

That's kind of a number we disclosed here.

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

Our gross business is doing very, very well. As David indicated, it was I think was up 21% for the quarter and that's certainly being driven a lot by BABY ALIVE and in PET SHOP, in FURREAL. And PONY continues to do well, but would it have been higher than that without Webkinz? Probably so, I mean Webkinz is also very popular brand and doing very well in the marketplace. So, we are doing well and we are certainly ahead of our expectations in that regard. Could we have been even higher than that, again without some of the competition, perhaps.

Okay, alright. Thank you very much.

Thank you.

Thank you. Your next question comes from David Leibowitz. You may ask your questions and please state your company name.

Burnham. Good morning.

Good morning David.

Briefly, what was the currency impact on your earnings overseas? You just showed gross operating number of 11 for us?

We told you what it was for revenues and the fact is that on earnings it was minimum because, what happens is our overseas earnings were about $11 million. I think we said and so obviously, we have got revenues and then we got a lot of cuts. Well both for revenues and cuts, both get translated it to new rates which are higher than last year. So the revenues were impacted, its over cuts 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 we should we be anticipating international earnings to grow faster?

You go back in history, how 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.

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

We don't give targets really other than we said what we thought, we had this longer term objective to sort of make 12% operating profit and we made a 11.9% last year. I think we said we are on track to make it 12 this year, 12 or better. So, that's as far as we'll grow in terms of any 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 50... if it's roughly half of your revenue, what percentage of earnings should it represent on an annual basis?

Well I've just said that international tends to be lower than the U.S. because of the relatively high fixed cost. They don't have the same economy to scale and tends to have to have a marketing of sales organization in each of the Europe or global companies. We tend to have to file statutory accounts, impacts accounts, take order separately so you don't have the same economies of scale what we do in the U.S. where we have got 300 million plus consumers serviced by one infrastructure. So as a result, international up 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.

I am not going to give you a precise number.

I am not asking for a precise number, but should it be 20%, 30% I mean there is 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 through the 10-K, you'll see the segment break out and that talks about the operating profit for the international segment versus the North American segment. I think if you look that over last several years then see what that percentage is. We are going to forecast with that percentage is for this year because; in fact it will be a forecast which we don't want to do. But in terms of what it has been historically, if you go to 10-K which I don't have in front of me at the present time, you can get that break out.

Okay, I'd like to just point out that you have many changes international including in terms of the management team and manufacturing facilities. As a consequence, I am not sure in the last two or even three years would be a good number, but whatever related to 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 have this time?

That's something that, we are not going to get into any 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 etcetera. 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 the case-by-case basis including TRANSFORMERS 2.

And given again, let's talk ineffectual property for a moment, are you going to have greater revenue this year from out licensing than you did a year ago?

Probably so, but I don't want to get into a forecasting but --.

Again, I understood, okay. 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 a great incremental shipments, is this going to be merchandised that is already out there so you are restocking or is this going to be new SKUs which have not yet hit the shelves?

I think it'd be a combination of both, but to be a lot probably more new product.

Thank you very much.

Thank you, David.

Thank you. Our next question comes from Dean 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 2Q matching shipments in Q1, did that actually work out that way?

It was marginally down.

Marginally down, okay. And then for overall, MARVEL with that have been up because you chew in or because FANTASTIC FOUR was included Q2 versus Q1?

Actually when I am saying marginally down; I am thinking of total MARVEL in second quarter versus total MARVEL in first quarter.

Okay. And then how does TRANSFORMERS, just so we can get a sense really, your shipment of TRANSFORMERS, is that bigger than MARVEL or is it smaller?

Yes, you are talking in the second quarter or --?

Yes, in the second quarter.

It was bigger.

Okay. And now when you look at the back half of the year in MARVEL, would you expect shipments in the back half of the year to be bigger than the first half of the year?

Yes, that cuts in our forecasting, Joe [ph] 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 on 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 with that follow the Excitement around the DVD release and so we will see what the retailers come back for in terms of orders and is a revenue product as well.

Yes.

Willthat follow through with the TRANSFORMERS too because that was released later, closer to July. Would that make a difference?

Well, for sure it makes a difference because you are coming out almost two months differential, can say something like the SPIDER-MAN but people 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 Sword [ph] type of movies coming in May, you fill the pipeline, you release and then during the fourth quarter, you can have very good quarters with that, but it may be still down from the first time you ship in and if you are filling up pipeline, but that doesn't happen in all cases. And that's why I am hesitant to say that something would up or down, it 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 a 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.

We were just talking about 20 game shipments.

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

Oh, they do, okay, so a lot of that stuff --.

Yes, the TRANSFORMERS was a pretty good brand, before the movie. So we've been shipping all year long sort of non-movie product, the traditional TRANSFORMER line.

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

That is correct.

Yes, yes, third and fourth quarter.

Okay. And then can you just talk to STAR WARS year-over-year, was it down, better... last time 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.

Okay,thank you.

Thank you. Our next question comes from Tim Conder. You may ask your question and please state your company name. Timothy A. Conder - A.G. Edwards & Sons, Inc.: A.G Edwards. Yes, just a follow on little bit on Dean's question 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 that we said earlier that well, 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 preschool, I think David said 19%, girls 21%, tweens is up 5%. So we had good balance across the product line and in both the North American and international segments although with a heavier weighting towards the entertainment properties for sure. Timothy A. Conder - A.G. Edwards & Sons, Inc.: Okay. And then along that same line, were your domestic shipments... have you weighted in these entertainment properties given that again SPIDER-MAN has been up there, but you were doing your initial shipments of TRANSFORMERS. And also I think in the first quarter and the fourth quarter conference call you mentioned the importance of SPIDER-MAN and TRANSFORMERS, how that should benefit your business in '07. So in the quarter itself, heavier domestic or international, and then just again color around that?

It would have been heavier domestically versus international and that has more to do with the -- Timothy A. Conder - A.G. Edwards & Sons, Inc.: 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 tally yet. So you have a later release schedule in some of the international markets. So that will face the shipments little bit differently, what's your second part of your question Tim? Timothy A. Conder - A.G. Edwards & Sons, Inc.: Yes, I mean you said I think... 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 are anticipating with the movies this should give a significant boost year-over-year to your international business?

And we still feel that way, I mean, to give an example, gone in Australia, I think Australia retailer has the largest retail in history of Australia and that was driven a lot by TRANSFORMERS, where it had opened, movie had opened. So yes, in terms of the weighting from the international versus domestic ultimately yes, we are seeing that taking place. And certainly by I think year-end it will... that will prove itself out. Timothy A. Conder - A.G. Edwards & Sons, Inc.: 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 were shipped, just a little bit more geographic color, segments that were stronger South Latin America, Europe, parts of Asia?

Well, I think we need to look international, I mean Europe had a very strong quarter and it represents a significant piece of international whereas, we are 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. Timothy A. Conder - A.G. Edwards & Sons, Inc.: Just off of a smaller base obviously?

Yes, so if you look at 49% in aggregate, Europe was a bit below that and the rest of the world was above that. Timothy A. Conder - A.G. Edwards & Sons, Inc.: 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.

Hi, I am with Arcadia. Good morning. Hi I have got a couple of questions; so international looks great and TRANSFORMERS was not shipped in a couple of markets. So I wonder if you could talk about what the drivers were in some of those markets. Are there any particularly strong product lines here? And then the second question is, as you are looking at your order book form up for the second half, I wonder if you are noticing any impact from the popularity of research in video game business particularly the... that we, I don't know that you'd be able to identify that but, there's a lot of V [ph] parties going on and 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 shipment, 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 is doing well internationally as is TRANSFORMERS, MARVEL and STAR WARS. So it's good balance across the business.

Okay.

In terms of video game business, certainly, I think that when video games are popular, all are fighting for share of wallet and if video games are very strong they are going to take a greater share of wallet and they typically would and it impacts lots of peoples 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, board game business is so back-end weighted that's where I think we really see whether or not that's having a dramatic impact. And 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 had been strong, we have had good... we have had great products. In other years, we slipped when we didn't have a product line and the video game business didn't have a strong year. So I tend to think in general, in individual company it tends to be more around individual products and we said we got a good product line for the fourth quarter, but we will wait and see.

Okay. Let me follow-up on one, two if I can. So TRANSFORMERS, I think turned out to be better than a lot of people expected and then there were couple of retailers that placed bets on a varying strengths on different properties and I am wondering if you picked up any kind of unexpected retail programs, focus on third or fourth quarter that might benefit that business this year. You didn't expect say 30 days or one month of time?

I think so, I think that there were some retailers who are always cautious about how well movie is going to do and I think that they have been pleasantly surprised by not only the box office, but more importantly the sale of the TRANSFORMERS product line. As I said we already sold full retail of 3 million action figures. With that coming back a lot stronger than it might otherwise have comeback and we see that is a 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. And at this time, let me turn the call back over to the speaker.

Thank you, Shirley. I would like to thank everyone for joining the call today. A replay will be available on our website after 2:00 PM this afternoon. Thank you very much.

Thank you. This does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.