RC2 Corporation Q1 2008 Earnings Call Transcript

Apr.22.08 | About: RC2 Corporation (RCRC)

RC2 Corporation (NASDAQ:RCRC)

Q1 2008 Earnings Call

April 22, 2008 4:45 pm ET

Executives

Curtis W. Stoelting – Chief Executive Officer & Director

Jody L. Taylor – Chief Financial Officer & Secretary

Peter J. Henseler – President and Director

Analysts

Anthony Gikas – Piper Jaffray

Linda Bolton Weiser – Caris & Company

Sean McGowan – Needham & Company

Tim Conder – Wachovia Capital Markets, LLC

Gerrick Johnson – BMO Capital Markets

David Cumberland – Robert W. Baird & Co., Inc.

Operator

Welcome to the RC2 first quarter 2008 earnings release conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Curt Stoelting, Chief Executive Officer.

Curtis W. Stoelting

Welcome to our 2008 first quarter conference call. Today I am joined by Pete Henseler our President and Jody Taylor our CFO. On the call today Jody will cover the financial results, I will provide my overview and Pete will then provide some additional sales and product line information. We’ll allow time for your questions at the end of the call.

I’ll now turn the call over to Jody Taylor.

Jody L. Taylor

Before we get started I’d like to mention that this call is being broadcast live over the Internet through CCBN’s www.Earnings.com and www.VCall.com. The replay will also be available through these web services starting tonight and continuing until April 26. I also want to remind everyone that any forward-looking statements made on this call are subject to many uncertainties in the company’s aberrations and business environments and I would refer you to the complete forward-looking statement disclosure in our first quarter release which is incorporated by reference for purposes of this call. I also refer you to disclosures made in the company’s quarterly and annual filings with the SEC.

Now, to the top line and bottom line highlights on the numbers. First quarter net sales decreased approximately 17% to $93.3 million compared with $112.6 million for the first quarter a year ago. If we try as we always do to look at a more apples-to-apples sales comparison our current year first quarter net sales excluding $1.2 million in net sales from discontinued product lines decreased by approximately 14% when compared to first quarter 2007 net sales excluding $6 million in net sales from discontinued product lines.

Our net income was $2 million or $0.11 per diluted share in this 2008 first quarter as compared with $8.1 million or $0.37 per diluted share in the prior year first quarter. In addition, I want to note that our 2008 first quarter results were negatively impacted by $1.5 million of recall related costs which equated to about $0.05 per diluted share.

On sales just for a moment regarding our sales by category and channel information that is in the release I want to point out that we have tweaked our product category and sales channels just a little bit to be more closely aligned with our strategy, our organizational structure and the material segments of our business going forward so you will see now if you’ve taken a look at that, that we only have two product categories and two sales channels that we are reporting on. Our net sales decreased in the first quarter was due to process that was seen across both of our categories, basically a 10% increase in mother, infant and toddler products and a 23% decrease in preschool and adult products and also in both of our channels of distribution. So, a 14% decrease in chain retail and a 25% decrease in specialty retailers, wholesalers, OEM and other.

From a geographic perspective approximately 22% of our net sales were derived from our international operations which is up from 20% in the first quarter of 2007 and the sales in our international segment decreased quarter-over-quarter by 7% which includes about a 5% benefit due to currency. However, I want to point out that the sales decrease in this international segment appears to mostly be a timing issue between shipments in the first quarter and second quarter.

Now, taking a look at margins and expenses, our gross margin increased a little bit to 45.6% from 44.8% in the prior year’s first quarter due to product mix and primarily a deferral in increased product costs. Because we do practice full absorption accounting in accordance with GAAP of course, this means that basically the products we purchased in the first quarter with the associated higher costs here in 2008 really haven’t been all expensed on our income statement but rather some of that is still in inventory so the entire cost will flow through in our future periods as the inventory is sold. So, as we did say on our previous call in February we still anticipate our cost of sales pressure throughout 2008.

SG&A expenses for the first quarter were well controlled but are at higher levels than the first quarter of the prior year if you’re looking at it on a percentage basis due primarily to our investment in consumer and digital marketing which we didn’t have remember in the first quarter of 2007 but which we do believe will prove to be very beneficial as well as cost effective in the future.

Covering just a couple of cash flow balance sheet items quickly, I’ll start with stock buyback first. If you recall our board of directors authorized $150 million stock repurchase program that runs through December 31, 2008. During the first quarter the company did repurchase about 931,000 shares for approximately almost $20 million, $19.9 million bringing our total purchases under this authorization to about 3.9 million shares for approximately $107.8 million.

Our outstanding debt at this quarter end here in 2008 was $103 million with cash balances exceeding $59 million. Speaking of debt, please remember that our current debt facility does expire this September and we are currently in the process of our refinancing and continue to expect that this will be completed in the second quarter.

Moving to just a few other balance sheet items, inventory is at approximately $79 million as compared to $77 million at year end and our consolidated inventory turns still remain at about 2.6 times. Accounts receivable was approximately $80 million at March 31st 08 down from where we were at year end at $110 million and our consolidated days sales outstanding is approximately 76 and at year end we were closer to 73. On the housekeeping front, cap ex for the quarter was $2.3 million, depreciation for the quarter was $3.1 million, amortization expense was $225,000 and compensation expense related to equity awards was about $1.4 million.

Looking forward our capital expenditure plan for the full year of 08 still looks to be between $12 and $13 million and depreciation is estimated to be just about the same. Amortization is still expected to be about $900,000 and compensation expense for equity awards still estimated to be about $5.5 million for the full year and our estimated tax rate is looking to come in a bit lower at perhaps 36%.

That wraps up the financial information for now and I’ll turn the call back over to Curt.

Curtis W. Stoelting

As you’ve seen our first quarter results were more challenging and lower than we expected. We were up against difficult comparisons from last year as last year we reported strong first quarter sales and profits. This year’s first quarter was negatively impacted by continued softness at retail, comparable retail sales have slowed across all channels and ordering of our products has been reduced. Additionally, we had fewer new product introductions in the first quarter 2008 then in the comparable quarter in 2007 and fewer retail promotions especially in our mom, infant and toddler products category. However, we remain excited about the new products we’re introducing throughout 2008. Pete will provide additional detail on those products later in the call.

In the face of difficult consumer spending trends and increased product costs we continue to closely monitor our margins and our costs controls. I want to make a few point in this area. First of all, we continue to work every possible angle to manage our supply chain costs and consolidate our purchasing with highly qualified and competitive suppliers. We are increasing our pricing to our consumers, we’ve talked about this before, the majority of our 2008 price increases will take effect in the second and third quarters. We are aggressively studying product margins and eliminating low volume and lower margin skews. We are tightly managing our controllable costs. Lastly, I do want to say in the first quarter, as Jody pointed out, we did incur higher operating costs primarily related to our multi check safety system and increases in our consumer/digital market. We feel these planned increases will prove cost effective in 2008 and certainly over the long run.

Despite the current top line challenges, we are profitable with positive cash flow even in our lowest volume quarter. Our balance sheet remains strong with net debt of approximately $43 million at the end of the first quarter 2008 and this gives us options to repurchase more shares or pursue strategic acquisitions. Guided by our strategic plan we continue to leverage consumer insights and digital marketing investments which guide our new product development and drive sustainable sales. We also remain committed to completing acquisitions that will build long term shareholder value.

We remain excited about the opportunities to improve our business and build momentum for future growth and profitability. Lastly, I’d like to personally thank our dedicated teams all around the world who work every day to improve our results and create new opportunities for our company. I’m going to turn the call over to one of those folks right now, Pete Henseler our President.

Peter J. Henseler

The quarter certainly proved challenging for both our current product and distribution strategies. We experienced an extremely conservative chain retail channel particularly in the area of inventory management, order flows, reorders and promotions. Across our product line our retail point of sales data while soft in the quarter still outperformed the rate of orders from our customers. Now, we expect our customers to continue this very conservative ordering pattern for the foreseeable future as our customers are clearly keeping their inventories lean and placing more of the replenishment inventory on to their suppliers’ warehouses.

In addition, we saw a very marked difference in the amount of incremental promotions in the quarter. This is a combination of some new merchandising strategies at some of our key customers as well as their continuing focus on keeping their inventory tight and in line. In our specialty channel which is a key distribution channel for us, we also saw a very conservative ordering pattern. In fact, even a much more conservative ordering pattern than our chain customers and we again expect that to continue for our customers to hold off their orders to closer to the retail take away season.

Lastly, we saw little consistency in retail POS throughout this quarter versus previous years. While we saw strong POS sales the weak proceeding up to Easter, the weeks prior and after were not as strong as in prior years which leads us to believe what has been well talked about that consumers are quite conservative in purchases in our categories.

Now, in addition to some of the comments Curt made, what else are we doing to manage through these cycles? Well, there is really three core areas that we’re really focused on and embarking a number of different initiatives on. First, given what we see is a very conservative marketplace for probably the rest of this year and facing tough cost pressures that have been discussed by ourselves and others in the industry we’re scrutinizing more diligently our products and rationalizing out of those products and those product lines that are marginal sellers for us or have poor margin prospects for the future or will not help us achieve our strategic goal. Second, given what we see as a very soft year we are going to refocus our efforts on our best opportunities and I’d like to talk about a couple of those.

The first one that we’re really quite excited about is the early sales results that we’ve had from our First Year’s Compass Booster Seat and True-Fit Convertible Seat and we will be expanding and be aggressive in both these two product lines as we expand distribution and marketing for these high value products later this year. This gives us a very strong foothold in what is a critical pre-natal mom category. In our preschool play we’ll be launching a new segment in the Thomas Wooden Railway which features RFID technology. This interactive product line will be launched in to specialty later this year.

For those of you who visited us in New York Toy Fair we also announced the launching of Caring Corners which is an innovative new young girl’s interactive dollhouse brand that combines fun interactive family play while instilling messages that support social responsibility including lessons of caring, sharing and preparing. Again, this will get us in to a new aisle outside of our traditional strength of wheeled goods and boys’ preschool.

Also, we’ve secured the matched toy rights to a new children’s television property. While I’m not going to talk about this product property specifically today because most of that product will be debuting in 2009 we will expect to have a small introductory line available for specialty in late 2008 and will officially announce this new property at the licensing show this coming June. Third, while still way too early to share in great detail we have embarked on making some major investments in a much more robust line of new products in both our core infant and preschool play for calendar year 2009 which we believe will be a much better environment for launching and allowing us to adjust for the changes we see as trends in our business.

That’s the update and now I’d like to turn it over.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tony Gikas - Piper Jaffray.

Anthony Gikas – Piper Jaffray

You provided an update on earnings guidance for the year, any update on revenue guidance? Maybe even more specifically, looking at the second quarter, does that look a lot like the first quarter? Maybe you can help us a little bit with the quarterly move? Then, what is the average price increase?

Curtis W. Stoelting

In terms of the outlook, we think that seasonality always plays a big part in this and we don’t see any major changes in ordering patterns happening until the second half of the year. Now, that could change next week but based on everything we know up to today I would not expect a change in the cycle in the second quarter. Top line is not our main focus this year, we’re really focusing on the bottom line which you got that in my comments and Pete’s comments as well so that’s really what we’re most interested in this year and I think we’re really going to focus more on new and top line growth for 2009 and beyond. We’re not giving up on top line growth, we still think we have a great ability to grow organically and through acquisitions but in the current environment I think our focus is properly on cash flow and profit. Was there a third question for you Jody?

Anthony Gikas – Piper Jaffray

Average price increases for the year across the board?

Curtis W. Stoelting

Average price increases again, it’s typical to do because of our new product and product line extensions, we built those in to the pricing, for our existing products I would say that we’ve averaged somewhere in the mid single digits, some categories more, some categories less. But, that’s what we’ve averaged on a full year basis. And again, the vast majority of those are taking place April 1 and July 1. I think our teams did a good job based on everything we had available to us.

The problem that I see and I think others see is the cost increases in China just keep coming. We tried to anticipate those as best we could but you look everyday and the price of oil and resins is continuing to be at record levels and of course, it’s well documented that all the other labor, tax, currency costs challenges that continue to increase and obviously impact the cost side of the equation. Overall, I think we did a good job and I think we’ll see how it all plays as the sales and the mix really comes in the second and third quarters.

Anthony Gikas – Piper Jaffray

Then maybe two quick ones for Jody, inventory levels were up, are you pretty comfortable with company and retail level inventories? Is this where you expect it to be at the end of the quarter? And, the recall related costs in the quarter, is that new or is that from ongoing? And, what is your expectation maybe for the next quarter or the balance of the year?

Jody L. Taylor

I’m going to work backwards starting with the recall. That really was related primarily to professional fees if you will, mostly legal that we’re incurring or expensing let’s just say on an as incurred basis. There’s nothing really new there, it’s just the ongoing legal. So, just to clarify its not new settlements, it’s not update of any new analysis or upticks in any returns or anything that we’re seeing Tony, that’s just the ongoing. We will have some of that still trickling in throughout the year here as we are finalizing just some of the details on the class action lawsuit settlement that we announced earlier this year so until that’s done we will have a little bit coming in but right now I don’t know of anything that’s going to uptick that. Obviously, we’ll keep everyone made aware of that as the time goes on.

Curtis W. Stoelting

The other question I think Tony was dealing with retail inventories?

Anthony Gikas – Piper Jaffray

Just inventories in general, yes. Company level and retail inventories.

Curtis W. Stoelting

Well, I’m very comfortable with where we are from a company level point of view. We’re starting in a little bit more of the build cycle as we get late in to the second and the third quarters. I think retail inventories are really, if anything, as Pete mentioned lean but again, I don’t see that changing until possibly the second half.

Anthony Gikas – Piper Jaffray

Jody, on the gross margins it sounded like you benefitted a little in the quarter from the deferral of product costs. Do you know how much of the benefit to gross margin was related to that?

Jody L. Taylor

No. Tony again, I would say we were up slightly and I would say that probably a good portion of that, that we were up was due to that. I don’t have the exact numbers with me but the reason I just put that in my comments was because of the way the accounting works and because we know as Curt mentioned in detail and I believe Pete did as well we are still incurring significant cost increases but we haven’t realized all of those on the income statement. So, our statement that we did make in February are still true, we still are facing some cost pressures on the gross margin line coming throughout 2008 but you did see a slight uptick here in the first quarter so I’m not cautioning too strongly I did just want to point that out.

Operator

Next we’ll hear from Linda Bolton Weiser - Caris.

Linda Bolton Weiser – Caris & Company

Can you just talk about the infant product category? Because I guess I view that as less discretionary as toy. Can you talk about what new products you shipped in, how things are going, do you think you’re gaining or losing market share in any particular areas? How’s the sell through relative to your shipments? Can you just talk about that a little?

Peter J. Henseler

We definitely have seen and the industry has reported a little bit slower business than previous year so there is maybe some modest growth to flat quarter to quarter as an industry. Some of the things that we’re seeing is as the dollar gets a little tougher for consumers in this market that the business is polarizing to either really expensive goods or to really cheap goods and we have always been a better best so we’re having to adjust a little bit to that marketplace.

As I’ve mentioned in my comments we’re rationalizing out a number of categories that we just see either no ability to make money going forward with the cost pressures that we’re going to take out and some of those are in larger dollar categories. A lot of our decrease has come from those categories. We still see the infant category as an extremely healthy category.

Our new products we’ve introduced in feeding and travel gear are doing quite well. We certainly would like a little better wind in the consumer sales to help pull some stuff along but we definitely see it more moderate than what we’re experiencing in the toy category.

Curtis W. Stoelting

Just on the comp side, Linda, last year in the first quarter we had significant new product launches with American Red Cross which is still doing very well in the market but we don’t have the incremental pipe fill that we had a year ago as well some of our new products that we launched in 2007 where the carry forward is still very good but there’s not the pipeline fill in the first quarter.

Peter J. Henseler

We just haven’t seen as much promotional support as the general statement from retail as we had in previous years which is part of keeping that inventory in line at the retail stores. All that’s had impact.

Linda Bolton Weiser – Caris & Company

The Thomas Wooten RFIF product that you mentioned, you said that was going to go initially just into specialty channels?

Peter J. Henseler

Yes.

Linda Bolton Weiser – Caris & Company

And when is that shipping?

Peter J. Henseler

That will be shipping in third quarter, late third quarter.

Linda Bolton Weiser – Caris & Company

Mattel, on their conference call, mentioned that they weren’t seeing fairly any compliancy disruptions in China right now but they did caution that the docks were heard contract is being negotiated out in California again. I wasn’t following the company back then, can you refresh on how you would handle that a few years ago and what the impact on your business and are you doing anything to safeguard against that right now?

Curtis W. Stoelting

Linda, I remember vaguely living through that and it was more of a scare than a reality and we’ll monitor it carefully this year as well. One thing that we did back then and we continue to do today is we bring product both through LA, Long Beach and Northern ports, Seattle and Tacoma so we do try to balance our import lanes, mitigate any one port being on strike for a few days or even a couple weeks. I don’t believe it will be a big issue but we will continue to monitor as the year progresses.

Linda Bolton Weiser – Caris & Company

Just back on the price increases, you said some are effective on April 1 and some July 1, can you give a rough breakdown of is it evenly split between those effective dates or is one bigger than the other?

Curtis W. Stoelting

I can’t get into specifics on that because it’s a dynamic situation. But generally the larger chain retailers do a better job of deferring increases into the new sets whereas with the smaller chains and the specialty accounts that make up a meaningful part of our business we can pretty much set the date of the price increase.

Linda Bolton Weiser – Caris & Company

But it sounds like there will be some benefit from that in the second quarter?

Curtis W. Stoelting

There will be some, but not all of it. It’s like a party you tend to fill throughout the year.

Linda Bolton Weiser – Caris & Company

This is more of a big strategic question, I’m just wondering with everything that’s going on in the macro environment which could continue for a while, I just wonder strategically if you’re not getting into too many areas, you’ve entered the skin area, you’re getting into the travel gear, granted some of these decisions were made pre-recession, but what about the idea of fewer, bigger, better? Do fewer things but do them better and make bigger brands and bigger revenue bases rather than spreading yourself among all these different areas.

Curtis W. Stoelting

I don’t really feel that way. I feel like we’re very focused and maybe we haven’t done a good enough job of articulating our focus but we’re very focused on our prenatal through preschool business and that’s really where we’re focusing our time both in terms of significant internal developments and new opportunities and I think the fact that we made some investments last year, small investments that are already starting to pay good dividends in mom-oriented prenatal products only help us in terms of our longer term marketing approach.

I think with what we’re doing with WhatToExpect.com which did pass a number of other pregnancy internet sites and is now number two in that category, again right behind – what’s J&J’s site we used to use but we don’t anymore – BabyCenter. So it’s number two behind BabyCenter and growing every day and we’re getting terrific registrations from that and we’re able to market all of our prenatal, infant and child preschool products very effectively.

So whether it’s a product for mom like skincare or a product that mom is very concerned about prenatally like travel gear, I think we’re right on strategy with all those and I think they’ll pay big dividends for RC2 and Learning Curve in the long run.

Linda Bolton Weiser – Caris & Company

On Caring Corners, when does that ship?

Peter J. Henseler

That will ship in June.

Curtis W. Stoelting

Initial shipment.

Peter J. Henseler

Initial shipment. It will be –

Curtis W. Stoelting

Most of it will really ship in July.

Peter J. Henseler

In July, yes.

Linda Bolton Weiser – Caris & Company

And is that going to be in Toys R Us, Wal-Mart and Target?

Peter J. Henseler

We’ll be penetrating all of our retail customers with that product line.

Linda Bolton Weiser – Caris & Company

Did you quantify the incremental quality, product testing costs and also the consumer and digital marketing costs in the quarter?

Jody L. Taylor

No, we didn’t necessarily detail that. We noted that was higher and that really especially on both the quality initiative and the consumer and digital marketing costs those were, if you will, incremental costs that were incurred Q1 of 08 which did not exist basically Q1 of 07 and –

Curtis W. Stoelting

[Inaudible] same level.

Jody L. Taylor

Yes. And if you’ll remember I believe on the year end call we had talked about these quality initiatives and multi-tech safety system and that really we weren’t going to be focused on what the cost was because it really is the right thing for the company to do going forward, we will reap the benefits from that and just high level from an overall cost perspective we really figured it would be less than 100 basis points impact on our gross profit margin. And I would say we definitely are tracking within that.

Operator

And next we’ll hear from Sean McGowan - Needham.

Sean McGowan – Needham & Company

Curt, anecdotally I don’t know if you have any hard data on it, I don’t imagine there would be any, but how much did the sales decline at least in the Thomas product you think as a result of the recalls?

Curtis W. Stoelting

What was your question again?

Sean McGowan – Needham & Company

To the extent that you know it or retailers are telling you, how much of the decline that you might be seeing in Thomas do you think is a function of the recall? Are consumers just saying, nah, I think I’m going to go somewhere else.

Curtis W. Stoelting

Our research shows it’s really not very much. I think it’s really old news. I think really what we’re experiencing right now is a lot of competition and frankly not a lot new in Thomas. That’s what I think is really driving the results there. It is a good evergreen as you know day in, day out good property. What we’re seeing with the retailers is they’re trimming back and holding their inventories tight but there all still doing the highly promoted products and that’s not really our ball game nor is Thomas & Friends ball game right now.

Sean McGowan – Needham & Company

Shifting gears then and I don’t know if this is for you or for Jody, but can you talk about a little bit more with specificity on what costs that you – you talk about focusing on the bottom line, so what costs can you control, what really can’t you control that’s out there and just all the factory costs, not in your control? How much is that up? How much pressure does that put on you?

Curtis W. Stoelting

I think we said before that overall, depending on the product line category, we were seeing prices out of China increasing 5 to 15%. That’s still a good range.

Sean McGowan – Needham & Company

So that hasn’t changed?

Curtis W. Stoelting

That has not changed and there are continuing pressures because of some of the things I noted, we really haven’t seen any positive trends on the costing –

Sean McGowan – Needham & Company

So that would capture resin and that would capture wages and that would capture currency, right?

Curtis W. Stoelting

For now, yes. That’s really where we are. We’re still all waiting to see what happens here as the year progresses, if there’s any additional accelerations on the costing side but we’ve tried to anticipate as best we can and build that into our thinking and our pricing and our models for the year.

Sean McGowan – Needham & Company

So what things can you do around those costs that you have more direct control over?

Curtis W. Stoelting

With new products we can manufacture them to the new levels of costing and re-price them. That’s always your best line of defense. On existing products it’s difficult especially when they’re hard tooled but we’re looking at everything we could possibly look at, our packaging costs, our cube and this also helps with a lot of sustainability initiatives out there that we’re supporting as an organization that all of our retailers are very focused on.

So there are cases where we are improving taking out packaging, reducing the packaging, reducing the cube so that we cut freight out, both for ourselves and for our retail partners. Those are two areas that we’ve been focused on, we continue to be focused on. It’s very difficult with hard tooled products to go back and re-engineer them but some of our softer products that’s possible to do and we’re looking at that option. We’re just looking at our whole supply chain.

How can we be more efficient on consolidating our purchases among high quality vendors, how can we do a better job on the logistics side, how can we – again Pete mentioned and I think I mentioned in my comments we’re just looking at low volume and low margins skews and cutting those out as a way to blend up the portfolio.

Sean McGowan – Needham & Company

Are you catching a lot of pressure from retailers for any of the infant products that have BPA type plastic in it?

Curtis W. Stoelting

It’s obviously an issue. Again you’re reading the papers. There’s a lot of disagreement in terms of the science and we’re confident that the products that we’re producing and mostly it deals with polycarbonate bottles, baby bottles. We’re very confident that the science supports the products we’re producing today are safe if used as we recommend them to be used. But we know that there is interest among consumers, or there is concern among consumers, so we’re very sensitive to that.

Sean McGowan – Needham & Company

Toys R Us put out something today saying that they believe that everything they’re selling is safe, but recognizing this concern they’re doing what they can do to reduce the amount of BPA plastics.

Curtis W. Stoelting

So we’re working alternatives and we’ll have alternative solutions for our retailers and for our consumers yet this year. But in the meantime, I think the products we have, I’m very confident that they’re safe and we will stay in tune though with what consumers want and ultimately that’s what we’re going to deliver.

Sean McGowan – Needham & Company

Last question, it should be a quick one, for Jody. What was the income tax payable at the end of the first quarter, Jody? That was a really good number at the end of the fourth quarter. Where is it now? Is it down to zero?

Jody L. Taylor

Income tax payable, I’m looking at a somewhat summary balance sheet which Clyde brought in here, Sean, but I think they’re only at about $1 million.

Operator

And next we’ll hear from Tim Conder - Wachovia.

Tim Conder – Wachovia Capital Markets, LLC

Just to continue on the question that Sean raised on the BPA and Toys R Us’ release yesterday, they’re basically saying that they’re going to eliminate by year end all the products that Toys R Us and Babies R Us containing them. Is that part of the reason besides the tough comp that you’re seeing some of the fall off there and is that an impact somewhat late last year also?

Curtis W. Stoelting

No.

Peter J. Henseler

No, Tim.

Curtis W. Stoelting

No. Obviously this is not a new issue, there has been a step up in terms of some of the press coverage on it and I think consumers are concerned. I understand that. And we’re in tune with that. Again, we have substitutes, product will be available later this year. It’s not clear to us exactly where Toys R Us is shaking out on this but if they want to be BPA free by the end of the this year, I don’t think it will have a significant impact on our business. In fact, potentially it could be an advantage for us.

Peter J. Henseler

And we’re working very closely with our customers, Tim, and we’re in line with them in terms of meeting both their needs and the consumer needs.

Tim Conder – Wachovia Capital Markets, LLC

Along that same line of thought, Washington State, and other states maybe just take that line of thought into some of the legislation that’s already been passed and some of it that’s pending and where you stand?

Curtis W. Stoelting

I don’t think we have a lot of risk on sales in terms of the Washington State legislation. But it’s important for you to note that that legislation does not take effect until I think middle of next year. I think there’s a lot that will happen in the regulatory environment between now and then. I still believe that Federal government, Congress, will enact a new safety act and I do believe that will become the law of the land and ultimately we’ll have one standard for the whole country that that’s what we support. We’ll have to see how that plays out.

But I think by mid-year, no later than July or August, we should have new Federal standards that all the states will come in sync with. That’s how we think it will fly because it really doesn’t make sense for each state to have their own rules and I think everybody understands that.

Tim Conder – Wachovia Capital Markets, LLC

On the price increases and the input costs, can you quantify somewhat the net hit that you’re anticipating this year to gross margins? I think last year Curt or Jody, one of you gave the impact of zinc, but if you put all that together for this year as you see things now, what do you think the net impact is going to be?

Curtis W. Stoelting

It ranges depending on the product category. You can pick your point along the spectrum from 5 to 15%. If you want to pick something in the middle you can do the math on that and that’s about what we’re facing on the cost side. If we get price increases which I’m confident we’ve gotten somewhere in mid-single digit range I think it can all work out given that there’s always a little bit of a timing gap.

Tim Conder – Wachovia Capital Markets, LLC

Working out meaning that there won’t be that much of a hit when all is blended and all is said and done at the end of the –

Curtis W. Stoelting

Yes, I think that’s the way we think about it. Generally there’s a quarter or two lag between us taking the cost increase and being able to pass that through and that’s what we’ve experienced in the past and that’s what I think is happening here in 2008. I think what we’re all concerned about is some additional acceleration of cost increases in China and we just watch it carefully and do the best we can because we just really don’t have the ability to raise prices mid-year. We get one kick at the cat and we’ve done that for 2008 so we’ll see how it shakes out here for the rest of this year and then we’ll do the best we can to readjust for next year.

Tim Conder – Wachovia Capital Markets, LLC

And then I think earlier you alluded to from a reorder standpoint and continue to see the pressure to be the warehouse for your retailers, I think it was Mattel mentioned yesterday that they are not foreseeing any disruptions out of China related to the Olympics and so forth but they do anticipate holding a little bit more on their balance sheet. Can you comment on your working capital items as you see them for this year on a year-over-year basis?

Curtis W. Stoelting

I don’t think it’s going to be a material impact. We always bring in extra inventory in the third quarter. We’re pretty prudent about how we do that and we make pretty good [inaudible] so I don’t think it’s going to be that much different from what it’s been in prior years.

Tim Conder – Wachovia Capital Markets, LLC

Your EPS guidance of $1.90 to $2.00, it said it excludes any additional recall charges, potential share repo and so forth, and then we’d assume then that that $0.05 of the recall charges in the first quarter is excluded from that EPS guidance, correct?

Curtis W. Stoelting

Correct.

Tim Conder – Wachovia Capital Markets, LLC

And then any update on Bob and how the renewal discussions are going or not going or any thoughts there?

Curtis W. Stoelting

We have Bob for a period of time yet and we are in discussions in terms of a longer term deal for Bob but at the current levels it’s not high on our priority list.

Operator

Next we’ll hear from Gerrick Johnson - BMO Capital.

Gerrick Johnson – BMO Capital Markets

Can you tell me how Thomas did in the quarter?

Curtis W. Stoelting

Gerrick, as you know, we don’t break out individual properties or product lines. But we have not seen a big change in terms of the Thomas business. We didn’t see any unexpected change in the Thomas business in the first quarter.

Gerrick Johnson – BMO Capital Markets

Can you say the same thing about your agricultural collectibles business?

Curtis W. Stoelting

We could go line by line, and again we’re not going to get into, I don’t know. I don’t how many wheel tractors are being sold so you can probably inform me how we did in that category.

Operator

And next we’ll hear from David Cumberland - Robert Baird.

David Cumberland – Robert W. Baird & Co., Inc.

In international Jody mentioned the timing issue affecting sales, do you expect growth still on a full year basis in your international markets?

Curtis W. Stoelting

Yes, we do. We still very good about the international markets and not just on currency, we expect there to be real growth in international and then currency will be on top of that. The plans look good, we continue to expand into new territories as well as fully penetrate some of the newer markets in Europe and Asia that we really just started penetrating within the last three to five years.

David Cumberland – Robert W. Baird & Co., Inc.

For gross margin the mix was described as favorable, in what sense was the mix favorable for you?

Curtis W. Stoelting

By way of example, I think Pete alluded to this, maybe Jody did, too. Some of the sales declined in our mommies and toddler business where frankly very low or no margin products that we rationalized and obviously when you do that what’s left is the more profitable products and that creates a positive mix.

David Cumberland – Robert W. Baird & Co., Inc.

Would it have helped also that in that category that you’ve seen fewer promotions?

Curtis W. Stoelting

I’d rather have the promotions, David, because even though they cost us some marketing money, especially our retailer promotions, are good short and long term investment. That probably did have some impact at the gross profit line but it probably hurt us at the top line and at the operating income line.

David Cumberland – Robert W. Baird & Co., Inc.

Do you expect retailers to be less conservative on promotions in the second half, the bigger part of the year and do you have some promotional space lined up for later in the year?

Peter J. Henseler

We do have promotional space lined up. As I mentioned though some of our customers are changing some of their strategies and I think you’re going to see fewer promotions but bigger promotions from them and they seem to be locked and loaded for this next couple quarters on the big movie events. We continue to see most dollars shifted there. I think there’s going to be a conservative – in the next two quarters a conservative outlook in terms of promotions but I think it will get back to more normal as we move into Q4.

Curtis W. Stoelting

David, on the MIP side I think we’ll see some improvement as the year goes on.

David Cumberland – Robert W. Baird & Co., Inc.

The release has been adjusted operating income number adjusted for recalls; do you have the same type number for net income excluding the recall costs?

Jody L. Taylor

You can take the $1.5 million net of tax which is approximately 36.5% I think we were at, is rough and tough about $1 million which is how I come up with the $0.05.

Operator

We’ll take a follow up from Sean McGowan - Needham.

Sean McGowan – Needham & Company

Pete, the property that alluded before is that the one from the dorm?

Peter J. Henseler

No. Watch PBS and you’ll –

Curtis W. Stoelting

It’s on air already on PBS, it’s very educational based which we know from our mom research is definitely in the sweet spot and again, we apologize for being cryptic but until we get a little closer to actual announcement date we can’t give you the name. We’re very excited about it.

Operator

And we’ve got a follow up from Tim Conder - Wachovia.

Tim Conder – Wachovia Capital Markets, LLC

You alluded that Thomas competition continues to be very promotional there and some of the other products and obviously hasn’t taken over the Tony business as the low end plastic, wouldn’t you see that either number one abating or number two or maybe it’s a combination of both, what’s already been done over the last year, some of those new seeds, so to speak that have been put into the market starting to look to trade up to wood, diecast and so forth?

Peter J. Henseler

Obviously it’s a little bit hard to compare year-over-year because there is new product out there, there’s a number of things happening in Thomas. One is there’s a new product out there from the Hit Toy Company that was shipped in third and fourth quarter last year. We’ve altered some of our distribution pattern as well. So it’s pretty hard to judge it apples to apples.

What we really see is, I’ve been pleased with our results here in the last two to three weeks where we’ve done some recruitment and more promotion with our key customers in that area, we feel good. Our strategy is to recruit people into wood and trade them up. Obviously it’s gets tougher when there’s a lot of other options out there in mass retail but I think strategically where we’re going is the right way to go and I think we’re starting to see some of the fruits of those investments starting to pay off here, have seen that in the last couple of weeks.

Curtis W. Stoelting

In tough economic times it’s easy for consumers to go with the lower cost, cheap plastic alternative.

Tim Conder – Wachovia Capital Markets, LLC

Pete, you’re starting to see some fruits of that you said in the last month or so?

Peter J. Henseler

Recruitment takes a while. You introduce them into it. Now whether they come back and continue to add to their system or not it’s a little too early to call it, but we’re pleased with some of the events we’ve held with some of our key customers to start recruiting new users in and as Curt said, in a tough environment where people are watching their dollars much closer and they have alternatives. Whether it’s diecast or plastic or something else. That’s what we’ve got to get through a cycle here and see what our success rate is.

Tim Conder – Wachovia Capital Markets, LLC

Potentially would you think that that should start bearing fruit for this upcoming Christmas holiday season or would that be more of an 09?

Peter J. Henseler

We would hope it’s ongoing, Tim. I can’t pin it down. As we said we’re introducing a new system later this year in Thomas wood. We haven’t introduced a new system in a couple years so it’s got new technology in it so we hope that brings a lot of excitement to the category. We feel good about where we’re going. We’re working closely with our customers to help maximize it. We’ll report in when we have some information.

Tim Conder – Wachovia Capital Markets, LLC

We’re coming up on the year anniversary of you introducing it but the take along Dora Diego products and then also upcoming I think still the new Sesame Street products, any comments on how the Dora Diego has done and then just refresh us on the launch of the Sesame Street?

Curtis W. Stoelting

You’re in the Gerrick mode now. We just can’t get into for all sorts of reasons to individual product lines or individual breakouts on that. We’ve been happy with our Nickelodeon relationship. It’s a very good relationship and the products have performed at the levels we expected them to and we’re going to continue to bring new products to market if they have a great portfolio. We’re very excited about the Sesame Street characters, bringing that into our take along world. But until we get some product out into the market, we can’t really comment. We think it will be obviously incremental and some of the Nickelodeon characters, as you know that follow other toy companies, are maybe not trending up right now but the portfolio is still very strong and there’s new characters coming this year, next year and in the future and that’s the value of that relationship.

Operator

There are no further questions.

Curtis W. Stoelting

We want to thank everybody for their time today and we look forward to keeping on contact with you throughout 2008.

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