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Hasbro, Inc. (NASDAQ:HAS)

Q1 2008 Earnings Call

April 21, 2008 7:30 am ET

Executives

Karen A. Warren - Investor Relations

Alfred J. Verrecchia - President, Chief Executive Officer, Director

David D. R. Hargreaves - Chief Financial Officer, Executive Vice President - Finance and Global Operations

Brian Goldner - Chief Operating Officer

Analysts

Felicia R. Hendrix - Lehman Brothers

Margaret B. Whitfield - Sterne, Agee & Leach

Gregory Badishkanian - Citigroup

Sean P. McGowan - Needham & Company

Timothy A. Conder - Wachovia Securities

David Leibowitz

Todd Divek - Banc of America

Gerrick L. Johnson - BMO Capital Markets

John G. Taylor - Arcadia

Thomas Russo - Robert W. Baird

Operator

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.

Karen A. Warren

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 it is available on our website at Hasbro.com.

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

There are many factors that could cause actual results and expectations 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.

Alfred J. Verrecchia

Thank you, Karen. 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 increasing 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 per share in 2007.

Now let’s review the global performance of our major product categories. The voice business was up a strong 29%, with Transformers, Star Wars, and Marvel on a combined basis up 38% from a year ago. The strength in 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 products began shipping for the upcoming May 2nd 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 13th.

We also have the upcoming release of Indiana Jones on May 22nd, with product expected to be on shelf in early May. The buzz has been very good on Indy and we are 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 and to grow compared to last year.

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

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

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

Our games and puzzle business was 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 in entertainment, publishing, and in 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 is 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 will turn the call over to David to talk to you more about our first quarter results. David.

David D. R. Hargreaves

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 continued to invest in both our entertainment and digital strategies, including the Wizards of the Coast digital initiative, Gleemax, 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 is 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 are making to grow our business, including the 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. The 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 compared 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 at $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 with a part of our strategy to grow the business, including the investments we are 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 U.K.

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 raised $346 million in cash for 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 to $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 share 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 that 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 have exceeded $80 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 via our increased dividend and our share buy-back program.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Felicia Hendrix.

Felicia R. Hendrix - Lehman Brothers

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.

Alfred J. Verrecchia

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

Felicia R. Hendrix - Lehman Brothers

Yes.

Alfred J. Verrecchia

We have a fair amount of flexibility so that’s not a concern for us. We should be able to satisfy the market.

Felicia R. Hendrix - Lehman Brothers

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 that -- if you think that’s going to have any impact on toy sales at all.

Alfred J. Verrecchia

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

Brian Goldner

We are seeing good retailed excitement about the product line and what goes on in Hollywood really doesn’t affect the overall impact of our toy line.

Felicia R. Hendrix - Lehman Brothers

Okay, so your internal expectations haven’t changed?

Brian Goldner

That’s correct.

Felicia R. Hendrix - Lehman Brothers

Okay, 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?

David D. R. Hargreaves

Well, what we get through interest income because we have I think $832 million in 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.

Felicia R. Hendrix - Lehman Brothers

And the tax rate?

David D. R. Hargreaves

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 deductible for tax basis purposes.

Felicia R. Hendrix - Lehman Brothers

But going forward we should use the 31.2?

David D. R. Hargreaves

Go forward I think we’ve said, we used to be down around about 27 to 28 but our guidance recently has been used closer to 31, because we are recognizing that we will need to repatriate some of our overseas cash and there’s a tax cost to that, so 31 is probably a good go-forward number.

Felicia R. Hendrix - Lehman Brothers

Great. I just want to make sure that didn’t change. Okay, thanks a lot, guys.

Operator

Thank you. Our next question comes from Margaret Whitfield.

Margaret B. Whitfield - Sterne, Agee & Leach

Good morning and congratulations. 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.

Alfred J. Verrecchia

Inventory at retail is in good shape. I mean, at this time of the year, typically we are shipping in to fill the market with some of the products like the Iron Man and Hulk movies will come later on in the second quarter, but in general our inventory positions at retail are fine.

David D. R. Hargreaves

Our strength in shipments is being matched by strength at POS.

Margaret B. Whitfield - Sterne, Agee & Leach

And Spider-man didn’t get a mention, or at least as far as I heard. What’s going on with the TV animation and product sales?

Alfred J. Verrecchia

Product sales are good. I mean, Spider-man and Marvel are overall down from a year ago, which we expected, but it is still doing quite well and pretty much on target.

Margaret B. Whitfield - Sterne, Agee & Leach

And in terms of the factors that led to the operating margin pressure in the U.S. and Canada, should we expect similar pressures in Q2 or into the second half?

Alfred J. Verrecchia

David.

David D. R. Hargreaves

I think one of the things that we are doing is investment spending, as I said, in our Wizards of the Coast digital initiative, Gleemax. 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 cost there but basically we’ve restructured that business down now from about 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 that we’ve had, I mean, we talk about investing in our entertainment business. We are certainly funding some script development at the moment and we brought [Lisa Litt] on who is heading our entertainment division based out in L.A.

So some of these 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.

Margaret B. Whitfield - Sterne, Agee & Leach

Brian, I wondered if you could give us an update on the G.I. Joe and Transformer movies to come next year?

Brian Goldner

G.I. Joe is about halfway through production and is on track for August of next year and Transformers will begin production it looks like early June and will be on track for July, end of June, July of next year as we currently know.

Margaret B. Whitfield - Sterne, Agee & Leach

Okay. Thank you and congratulations again.

Operator

Thank you. Our next question comes from Gregory Badishkanian.

Gregory Badishkanian - Citigroup

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?

Alfred J. Verrecchia

In terms of our retail business, I think overall the business is pretty good. You know, 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 in the newspaper. I think we’d probably say it’s been okay.

Our business has been good. It’s been good both domestically, a little stronger in the international markets.

Gregory Badishkanian - Citigroup

Great, and if you look at -- you had mentioned that your inventories are in good shape. Would you categorize that as being down from last year, about the same or --

Alfred J. Verrecchia

It depends upon the [PRAM], 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 a year ago, so we’re probably on target from where we are 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 are shipping in.

Gregory Badishkanian - Citigroup

Thank you very much.

Operator

Thank you. Our next question comes from Sean McGowan.

Sean P. McGowan - Needham & Company

Two questions; just can you give us an update on exactly where we stand on the remaining share buy-back? And the second one is a bit longer for Brian. David, could you address the buy-back, please?

David D. R. Hargreaves

I think we’ve got $483 million remaining authorization against the $500 million that the board authorized in the first quarter. And before you ask, it’s 139.6 million outstanding at the end of the quarter.

Sean P. McGowan - Needham & Company

Shares?

David D. R. Hargreaves

Shares. I think you usually ask that, Sean.

Sean P. McGowan - Needham & Company

I think that’s J.P.

David D. R. Hargreaves

Is it?

Sean P. McGowan - Needham & Company

Okay. Brain, 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?

Brian Goldner

Sean, are you referring to the Universal deal?

Sean P. McGowan - Needham & Company

Yes.

Brian Goldner

Okay, so we’ll begin in distribution our first movie in 2010 or 2011. The development is just underway with Universal. The deal terms are more favorable than a Transformers deal but not material and we will go forward in developing, as David indicated, developing scripts, hiring a few people to help to 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.

Sean P. McGowan - Needham & Company

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

Brian Goldner

Yes, there will be a royalty. It’s not a material royalty and there will also be a payment to Hasbro. We are a first dollar gross participant on the movies and that’s the plan as we go forward.

Sean P. McGowan - Needham & Company

Okay. Thank you.

Operator

Thank you. Our next question comes from Tim Conder.

Timothy A. Conder - Wachovia Securities

Let me also offer my congratulations on a great quarter. 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 U.K. pension plan, you mentioned that 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 can give us some color on there?

David D. R. Hargreaves

Firstly regarding Brazil, as we’ve said we are starting our own subsidiary down there. Previously we had gone through distributors. 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 are getting some sales people 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 sort of by the end of the year that we are sort of fully up and running with our own subsidiary and we’ve taken everything over from distributors.

I mean, one thing is clear -- this is not an acquisition. We are starting from ground zero here so it is going to take a little while to get up and running.

Secondly in the U.K., as a result of our acquisition of Kenner-Parka-Tonka back in 1991, there was a pension scheme in the U.K. which was wound up at that time and there were 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 pensioners, a bonus for the pensioners. 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 buy pay-back analysis on buying out the royalty stream, this would be a pretty good deal. But of course, the other thing that it does it ensures 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 the margin that we make, the profit margin that we make on that brand as well.

So we certainly protected our margin, we bought 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.

Timothy A. Conder - Wachovia Securities

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?

Alfred J. Verrecchia

I was talking in general, international basis.

Timothy A. Conder - Wachovia Securities

Okay, great. Thank you.

Operator

Thank you. Our next question comes from David [Leibowitz]. You may ask your question and please state your company name.

David Leibowitz

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 would the fourth quarter be larger than the third?

Alfred J. Verrecchia

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

David Leibowitz

I didn’t ask you to --

Alfred J. Verrecchia

You know we don’t, so we’re not going to comment on whether one quarter will be greater than another. And in terms of movies breaking, that varies from year to year.

David Leibowitz

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

David D. R. Hargreaves

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

David Leibowitz

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

David D. R. Hargreaves

It’s July.

Brian Goldner

Star Wars is shipping throughout the year, David, as we’ve said. Star Wars product --

David Leibowitz

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

Brian Goldner

We’ll ship Star Wars: Clone Wars product for the second half of the year.

David Leibowitz

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 are Hasbro's responsibilities, et cetera?

David D. R. Hargreaves

We are co-funding the production of the Trivial Pursuit show and we expect that the monies we 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 break-even on our production costs.

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.

David Leibowitz

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

David D. R. Hargreaves

Well, we -- anytime this is our brand and we are working with entertainment, whether it’s TV or movie, we control creative -- we retain creative control and partner with them to make sure that the essence of the brand is kept.

David Leibowitz

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

Brian Goldner

Yes, we do, David.

David Leibowitz

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

Brian Goldner

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

David Leibowitz

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?

Brian Goldner

No, we have no -- there is no risk. We’re not funding any of the productions.

David Leibowitz

Thank you very much.

Operator

Thank you. Our next question comes from Todd [Divek].

Todd Divek - Banc of America

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 a $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?

David D. R. Hargreaves

Yeah, I mean, you are certainly right. If the convertible debt converts and we pay off $135 million of long-term bonds due in July, we will be below our optimal and targeted leverage ratios.

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.

Todd Divek - Banc of America

Okay, and I guess the timing of that would just depend on a number of factors.

David D. R. Hargreaves

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

Todd Divek - Banc of America

Okay. All right, fair enough. Thank you very much.

Operator

Thank you. Our next question comes from Gerrick Johnson.

Gerrick L. Johnson - BMO Capital Markets

Indiana Jones, what -- I see some of that trickling on to shelves. What was the street date for that and did you get any shipments into the first quarter on Indiana Jones?

Brian Goldner

We shipped some Indiana Jones in the first quarter, not very much. We’ll be on shelf really looking at early May and the movie, of course, is May 22nd.

David D. R. Hargreaves

And there is a lot of other Indy product, sort of not our product but other Indy product already out in the marketplace and it’s doing very well.

Gerrick L. Johnson - BMO Capital Markets

Yes, it is. Okay, so there were some shipments in the first quarter. Now, in terms 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?

Alfred J. Verrecchia

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

Gerrick L. Johnson - BMO Capital Markets

On your point of sale.

Alfred J. Verrecchia

I understand that, but do you mean was point of sale strong with the beginning or back half of the quarter?

Gerrick L. Johnson - BMO Capital Markets

Yeah, any sort of change throughout the quarter.

Alfred J. Verrecchia

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.

Gerrick L. Johnson - BMO Capital Markets

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

Alfred J. Verrecchia

Do you want to be a bit more specific about that, when you say changes in the way they are doing business?

Gerrick L. Johnson - BMO Capital Markets

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

Alfred J. Verrecchia

No, not as it relates to Hasbro.

Gerrick L. Johnson - BMO Capital Markets

Okay. All right, thank you.

Operator

Thank you. Our next question comes from John Taylor.

John G. Taylor - Arcadia

Good morning. Great way to start the year. 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, et cetera, there is 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 sort of manage the categories, put emphasis on one or the other? Can you talk about that a little bit?

I guess what I’m ultimately interested in is whether you guys are going to have the capacity to or the ability to ramp capacity in the fourth quarter in case one of these does happen to catch on. So that’s the first one.

Alfred J. Verrecchia

I’ll let Brian take the merchandising piece of that. In terms of the supply chain, we are pretty flexible and I think most of us 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. 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?

Brian Goldner

We said to you back in February that we believe 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 Spider-man and Star Wars.

John G. Taylor - Arcadia

Okay, because I think there is thought that a number of the properties are going to be in and out, get them done and then that’s it, kind of thing. But you are feeling like you’ve got some shots at extending some legs on these?

Brian Goldner

Yeah, again, I think that those top three properties, Star Wars, Transformers, Spider-man, will continue to perform and we’ve got three very exciting films and we are already seeing great results, as indicated, on Iron Man. A lot of excitement around Indiana Jones and Hulk.

John G. Taylor - Arcadia

Great, okay. And I think, David, you briefly referenced an increase in shipping and distribution costs. I wonder if you could talk about what’s lying behind that and is that part of the landscape now? And maybe give us a sense of what size that looks like.

David D. R. Hargreaves

I think coming into the year, we certainly [cost out] [inaudible] we anticipated and I think we factored most of those in and I think we took the pricing and everything that we needed to do to protect our margin.

I think the one place that, as we are a little bit surprised at the moment, is that you’ve got oil up at $115 a barrel and you are talking about gasoline at $3.50 over the next couple of weeks, so I think it’s really bunker 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 is certainly not $10 million. Probably the $5 million to $6 million type range is 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.

John G. Taylor - Arcadia

Okay, great. And we can assume that -- well, that’s not that big a number, so never mind. Okay, and then Trivial Pursuit, did you guys -- remind me, did you have that globally already or was there a piece that somebody else had?

Alfred J. Verrecchia

We had it already.

John G. Taylor - Arcadia

Okay. All right, very good. Thank you.

Operator

Thank you. Our final question comes from Thomas Russo.

Thomas Russo - Robert W. Baird

Good morning. I was -- but I can congratulate you, which I will do, so congratulations. David, for -- could you provide insight into why the segments were shifted, why the reporting segments changed like it did this term?

David D. R. Hargreaves

Essentially it’s internal -- the way we are 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’ve kind of split the responsibilities a little bit and we’ve got Mexico under the same manager as our rest-of-the-world business.

Thomas Russo - Robert W. Baird

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

Thomas Russo - Robert W. Baird

I think obviously that would be the lowest risk and the most desired way to go, if we could. Unfortunately, the customer practice 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 meet with local customer practice.

At the same time, are obviously going to do a lot of credit checking and not take a lot of risk, so we are looking for low risk but we will get extended terms.

Alfred J. Verrecchia

Some of those extended terms are with very large customers that we deal with around the world, so they are not necessarily smaller customers. [Carfur] will get different terms in Latin and South America than they will in say France.

Thomas Russo - Robert W. Baird

Thank you. And then Alan, Brian, the increase -- speak if you can about any shifts in the effectiveness of how you are spending your ad budget. David referred to the Trivial Pursuit show is in part a form of marketing. Once you cover your costs, you are actually using it to drive product sales. But aside from that, just a more traditional measured media and other forms of communications -- what’s working and how is your budget shifting?

Brian Goldner

Well, we are continuing to create all kinds of experiences appropriate for each of the consumer audiences. Littlest Pet Shop VIPs is really the only world as a form of entertainment and that will also tie with all 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 girls is about the online world and the DS and the Wii system. That for them is entertainment.

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 are 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.

Thomas Russo - Robert W. Baird

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

Brian Goldner

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 the different forms of formats between network and cable and that continues to be a fine-tuning process.

Thomas Russo - Robert W. Baird

Thank you. And then Brian and Al lastly, this Internet only competitive version to Scrabble that seems to have surfaced, what steps are underway to defang it? I know that you mentioned that you are taking Scrabble officially through new platforms. I think that you said that it would be available on the iPod through iTunes and other versions. At the other end, what about the non-licensed look-alike?

Alfred J. Verrecchia

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

Thomas Russo - Robert W. Baird

Thank you and thank you for a great quarter.

Operator

Thank you. And at this time, I’ll turn the call back over to the speakers for final comment.

Karen A. Warren

Thank you, Shirley. I would 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.

Operator

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

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Source: Hasbro Q1 2008 Earnings Call Transcript
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