Hasbro, Inc.
Q3 2007 Earnings Call Transcript

Published: 22 Oct 2007

[Operator:]

Good morning and welcome to Hasbro's third quarter earningsconference call. (Operator Instructions) With us today from the company is theSenior Vice President of Investor Relations, Karen Warren.

[Karen Warren:]

Thank you, Shirley and good morning, everyone. Joining metoday are Al Verrecchia, President and Chief Executive Officer; and DavidHargreaves, Executive Vice President and Chief Financial Officer. To betterunderstand our third quarter results, it would be helpful to have the pressrelease and financial tables available that we issued earlier today. The pressrelease includes information regarding non-GAAP financial measures discussed ontoday’s call and is available on our website at Hasbro.com. We would also like to point out that on this call, wheneverwe discuss earnings per share, or EPS, we are referring to earnings per dilutedshare. During the call this morning, Al will discuss key factorsimpacting our results and David will review the financials. We will then openthe call to your questions. Before we begin, let me note that during this call and thequestion-and-answer session that follows, members of Hasbro management may makeforward-looking statements concerning management’s expectations, goals,objectives and similar matters. These forward-looking statements may includecomments concerning our product plans, anticipated product performance,business opportunities and strategies, financial goals and expectations forachieving our objectives. There are many factors that could cause actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in these forward-looking statements. Some of thosefactors are set forth in our annual report on Form 10-K, in today’s pressrelease, and in our other public disclosures. We undertake no obligation to update any forward-lookingstatements made today to reflect events or circumstances occurring after thedate of this call. Now I would like to introduce Al Verrecchia. Al.

[Alfred J. Verrecchia:]

Thank you, Karen. Good morning, everyone and thank you forjoining us. Well, all is well here in New England. The Red Sox are in the WorldSeries, the Patriots are 7-0, and Hasbro had another good quarter. Butseriously, I hope you’ve all had a chance to read the press release we issuedearlier this morning. As you can see, we had another strong quarter, withrevenue up 18% from a year ago and operating profit up 27% to 17.1% of revenue. The strength of our business is broad-based, both in termsof geography and product categories. The North American segment was up 10% andthe international segment was up 33%, or 25% excluding the positive impact offoreign exchange. Our boys, girls, preschool and board game categories allperformed well in the quarter. In the boys category, Transformers, Spider-man, and StarWars continued to do very well and remain the top three boys properties in theindustry. Box office for Transformers surpassed the $700 million mark globally,making it one of the top films this year. In addition, Paramount launched theTransformers DVD last week and initial retail sales have been fantastic. TheSpider-man 3 DVD will be released on October 30th. We expect both of these DVDsto bring even more kids into these franchises and help drive toy sales as wehead into the holiday season. Let me take a moment to address a question that some havehad concerning the performance of the Marvel product line. The Marvel productline has performed very well year-to-date, exceeding the expectations we hadwhen we entered into the agreement. For the full year, Marvel could representas much as 8% to 10% of our worldwide revenue and it is delivering meaningfulprofitability. Given this, I believe most would agree that there is littleor not financial risk associated with the Marvel agreement. We are pleased withthe year-to-date performance of the Marvel license and we are looking forwardto the next four years. Star Wars continues to be a phenomena in the industry. It isa perennial in the category and continues to deliver significant volume, evenin non-movie years, something we expect to continue not only in the fourthquarter but in 2008 as well, given the release of the Star Wars animation. Our girls category was up 33%, driven by growth in LittlestPet Shop, My Little Pony, Baby Alive, and Furreal Friends. The preschool category was up 3%, primarily attributable tothe U.K. success of In the Night Garden, which began shipping in late July, andthe continued success of our Playskool Busy Basics product line. The over games and puzzle category was down 2%, due tosoftness it the plug-and-play trading card games. However, traditional boardgames were up 14% in the quarter and 8% year-to-date, with a number of newgames performing well, including Monopoly Electronic Banking, Are You SmarterThan a Fifth Grader?, and the Game of Life

[David Hargreaves:]

Thanks, Al and good morning, everyone. I am very pleasedwith the results we are reporting today. For the quarter, we deliveredworldwide net revenues of $1.223 billion. This compares to $1.039 billion lastyear, an increase of 18% or $183.9 million. In constant dollars, revenues were up 16%, or $161.5million. North American segment revenues were $822.7 million, an increase of$77.2 million, or 10% compared to last year’s $745.5 million. North American operating profit for the quarter was $134million, or 16.3% of revenue, compared to $111.6 million, or 15% of revenue lastyear. The improvement primarily reflects the higher revenue, which was partlyoffset by higher royalties. Revenues in the international segment were $374 million,compared to $280.4 million a year ago. The segment was up an impressive 33% inU.S. dollars and 25% in local currencies. The international segment reported an operating profit of$57.6 million, compared to $43.2 million last year. The improvement isprimarily a function of higher revenue, partly offset by higher royalties andhigher advertising expense. Now let’s take a look at earnings. For the quarter, wereported net earnings of $161.6 million, or $0.95 per share. The 2007 resultsfor the quarter include a favorable tax adjustment of $29.6 million, or $0.17per share. This adjustment related to previously unrecognized tax benefits forwhich the applicable statutes of limitations expired during the quarter. Excluding the favorable tax adjustment, earnings were $132million, or $0.78 per share. This compares to $99.6 million, or $0.58 per sharein 2006. Earnings before interest, taxes, depreciation and amortization were$259.3 million compared to $192.6 million a year ago. Gross margin for thequarter was 57.4% compared to 55.6% a year ago. Gross margin benefited fromchanges in our product mix. As we have stated in the past, entertainment basedproduct lines typically have higher gross margins. Now let’s take a look at expenses for the quarter. Royaltyexpense increased by $41.7 million to $93 million, also due to a shift in themix to more entertainment-based properties. Research and product development expense declined marginallyto $43.5 million from $44.4 million a year ago. You may recall last year wespent additional development monies due to the compressed development times forthe Marvel line. Advertising expense declined to 11.3% of revenue, althoughit did increase in absolute dollars from $126.8 million to $138.7 million. SG&A expense at $199.1 million compared to $169.3million a year ago and was flat as a percent of revenue. The dollar increase isdue to a number of factors, including higher shipping and warehousing costsassociated with the higher sales volume, higher accruals for incentivecompensation and charitable giving, the impact of foreign exchange and general inflationaryincreases. Other income for the quarter was $3.5 million compared to anexpense of $15.2 million a year ago. The 2006 results include a $19.8 millionunfavorable mark-to-market expense related to the Lucas warrants. Excluding the favorable tax event that occurred in the thirdquarter, the year-to-date impact of the Lucas warrants and other discrete taxevents, our underlying 2007 Transformers was 32.3%, compared to the full year2006 underlying tax rate of 27.6%. The higher underlying rate for 2007 reflectsthe tax cost associated with returning a portion of current year internationalearnings to the U.S. Now let’s turn to the balance sheet. At quarter end, cashtotaled $410.9 million, compared to $309.1 million a year ago, an increase of $101.8million. In the last 12 months, we have generated over $460 millionin operating cash flow and we raised $350 million in cash through our recentdebt offering. However, this cash has been largely offset by significantpayments, including

[Operator:]

(Operator Instructions) Our first question comes from Felicia R.Hendrix. You may ask your question and please state your company name.

[Shadona Paulit -Lehman Brothers:]

This is actually [Shadona Paulit] for Felicia Hendrix. Justa couple of quick questions. Congratulations on a good quarter. Was Star Warsup in the quarter?

[Alfred J. Verrecchia:]

Star Wars was down in the quarter compared to a year ago butperformed very well during the quarter.

[Shadona Paulit -Lehman Brothers:]

Okay, was it down more than in Q2?

[Alfred J. Verrecchia:]

I don’t have that number handy, to be honest with you.

[Shadona Paulit -Lehman Brothers:]

Okay. In terms of Spider-man and Transformers shipments, doyou expect them to be higher in Q3 or Q4?

[Alfred J. Verrecchia:]

Higher than -- do you expect them to be higher in Q4 thanQ3? I’m not quite sure of your question.

[Shadona Paulit -Lehman Brothers:]

Do you expect to ship more in the fourth quarter than youdid in the third quarter?

[Alfred J. Verrecchia:]

We’re not going to forecast individual product lines fromone quarter to another, but clearly Transformers and Marvel continue to do verywell and we’d expect them to do well in the fourth quarter.

[Shadona Paulit -Lehman Brothers:]

Okay. In terms of shelf space at retail, do you see anysignificant differences for the holidays this year than compared to last year?

[Alfred J. Verrecchia:]

Yes, we have more shelf space. Our shelf space has grownover the past season.

[Shadona Paulit -Lehman Brothers:]

Okay. In any specific categories?

[Alfred J. Verrecchia:]

Certainly in the girls categories, which are doing verywell, we’ve gained shelf space. The boys category, we’ve gained shelf space.Those are the two principal ones. We haven’t lost any shelf space. We’ve gainedsome space in the preschool area as well.

[Shadona Paulit -Lehman Brothers:]

Okay, and then just lastly, do you see any potential out ofstock issues, given your third quarter performance, for the holidays?

[Alfred J. Verrecchia:]

It’s always possible in the sense of something takes off.Certainly we’re selling Transformers, Marvel, Star Wars will all continue to dowell, some of the Furreal line. So there’s some possibilities out there. Itjust depends what happens with a given promotion.

[Shadona Paulit -Lehman Brothers:]

Okay, great. Thanks a lot.

[Operator:]

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

[Margaret B. Whitfield- Sterne:]

Good morning. Could you comment on the plug-and-playsegment, whether that will continue to be a drag in Q4?

[Alfred J. Verrecchia:]

Plug-and-play has not done very well for us this year and Idon’t have the numbers that we had last year. I don’t expect it is going topick up in the fourth quarter. How much of a drag, I’m not sure but it is not going to be -- it will continue todecline in the fourth quarter as well.

[Margaret B. Whitfield- Sterne:]

I guess the board games [does seasonally] strong so maybethe overall category might pick up some?

[Alfred J. Verrecchia:]

Hopefully. We’ll see.

[Margaret B. Whitfield- Sterne:]

Okay, and preschool has been doing great, a slowdown here --is it just shipment timing or what’s going on in preschool?

[Alfred J. Verrecchia:]

I hate to get into if you exclude X than there’s a balancethat’s good, but I think what’s happening in the Playskool category is lastyear during the third and in particular the fourth quarter, we shipped a lot ofT.J. Bearytales, which quite frankly hasn’t worked for us, and that’s beenpulling the preschool category down. I think without the decline of T.J.Bearytales, we’d be even stronger in the preschool category.

[Margaret B. Whitfield- Sterne:]

Given the recalls and all the publicity, could you commenton what overall toy sales at retail have been like thus far this fall?

[Alfred J. Verrecchia:]

Are you talking for Hasbro or the industry?

[Margaret B. Whitfield- Sterne:]

Either or, or both.

[Alfred J. Verrecchia:]

Our sales, our retail sales have been strong all year.They’ve been up double digits. They continue to be up double digits, althoughit has been a soft retail environment during the last month or two. So I thinkfrom an overall retail perspective, it’s been a bit soft. I know apparel iscertainly down but our business has been strong and we are very optimisticabout the fourth quarter.

[Margaret B. Whitfield- Sterne:]

When you say soft retail, are you talking about toys or ingeneral? Or could you be specific?

[Alfred J. Verrecchia:]

I think in general and I think toys has felt some of thatoverall weakness as well. If I look at it from an industry perspective --again, our business has been strong and it continues to be strong. Would ithave been stronger with a stronger retail environment? I suppose so but again,we’ve been up double digits and continue to be double digits, so it is hard tosay.

[Margaret B. Whitfield- Sterne:]

And a competitor has commented that they might have to spendmore for “demand creation”. Do you expect to do the same here in the holidayperiod?

[Alfred J. Verrecchia:]

Well, we are certainly going to be very active during theholiday period. I mean, that’s the key selling season at retail for toy andgame companies, so we have a lot of activities planned both from an advertisingand in-store promotional activity, so we are going to be very active.

[Margaret B. Whitfield- Sterne:]

Any pick-up in your plan, given the recalls? Have youincreased it?

[Alfred J. Verrecchia:]

I don’t think we’ve increased our promotional activity as aresult of the recalls. We’ve got a pretty active program planned and we haven’tseen any fall-off in our business, any measurable fall-off, anyway, as a resultof the recall, so again, that’s kind of hard to measure.

[Margaret B. Whitfield- Sterne:]

Just finally, you’re in -- a partnership with ElectronicArts was announced after the Q2 call. Could you comment as to what this maymean for Hasbro in ’08?

[Alfred J. Verrecchia:]

Well, ’08 is going to be the first year where we are actuallyseeing product delivered by Electronic Arts and we’re going to talk a bit moreabout that at the upcoming analyst event in November, but we’ve seen some ofthe initial products that they are working on and we are very excited aboutwhat we see coming down the road in 2008, and that’s going to come in ’08,although ’08 will still be a ramp-up year, so I think as you see ’08, it’s ’09and ’10, they’ll get even stronger as more and more product comes into themarketplace.

[Margaret B. Whitfield- Sterne:]

Okay. Thanks again, Al.

[Operator:]

Thank you. Our next question comes from Michael Savner. Youmay ask your question and please state your company name.

[Michael L. Savner -Banc of America:]

Thanks. Good morning. Sorry to make you answer that samequestion, guys. I want to make sure I understood it correctly. So in terms ofMargaret’s question about marketing spending in the fourth quarter, you don’tanticipate spending more than you typically would in a seasonally high period,because you are not seeing much push-back. Did I interpret that correctly?

[Alfred J. Verrecchia:]

We are going to be very, very active in the quarter. Whenyou say are we spending more because of recalls, I don’t think so. Are wespending more than last year? Yes, so we will be more active this year thanlast year but we had planned that all year long. We are not doing anythingsubstantially different as a result of product recall, so --

[Michael L. Savner -Banc of America:]

That helps, thanks. And then, just to again keep on topic ofrevisiting things you’ve already talked about, we’re hearing and some of yourcompetitors are talking about some hesitation, some anxiety on the part ofretailers, given the recalls. It doesn’t sound like you are getting the feelingfrom any of your retail partners that they are going to slow down and take await-and-see attitude, or do you think that is part of what’s been driving asyou’ve just said, a slightly softer retail environment in the last month ortwo? Are those two issues related, in your mind?

[Alfred J. Verrecchia:]

I think -- you know, I’ve been in this industry a long timeand every year at this time, retailers and manufacturers get anxious about theholiday season. Certainly I think some of the larger economic factors out thereare likely to have a more significant impact on retail sales and recalls,unless something where to happen over the next couple of weeks. So I would bemore concerned about the price of oil and things of that nature than I wouldabout the recalls impacting sales. As we talk to retailers, yes, they are anxious about theholiday season. Am I anxious about it? You know, you pick up the paper andpeople are forecasting it to be the worst holiday season in five years, yeah,you worry about that. On the other hand, when I pick up our reports and I lookat the way our product is selling, our product continues to do very well. So there is always anxiousness going on. We are alwayslooking to make sure we are -- that we’ll be active and aggressive during theholiday season and I think probably over the next several weeks, when some ofthese retailers will be dropping catalogs, we’ll get a good feel as to how theconsumer really is going to be in the holiday season.

[Michael L. Savner -Banc of America:]

Great, and then just one last specific one on theTransformers; not unexpectedly, it’s done very well this year. To what extentdo you think maybe some of the success have been front-end loaded in 2Q and 3Q,and how do you feel about what the inventory that’s out there in the channel,or do you feel that that’s not a fair assessment that the demand has beenrelatively linear and you are comfortable that it is going to continue into thefourth quarter?

[Alfred J. Verrecchia:]

Well, certainly when the movie came out or right after themovie, you get a spike in sales but the demand for Transformers continues to bevery, very high and continues to grow. Keep in mind we just, or Paramount justlaunched a DVD, and like I said a few moments ago, the initial sales have beenfantastic, so we’re seeing a pick-up there as well. So I think Transformers isgoing to be strong throughout the holiday season and I expect it to be prettystrong in 2008, because we have a lot of new product coming and there are a lotof kids that have come back into the franchise. We’ve got animated TV going on with Transformers that Ibelieve breaks in the first quarter, so we are excited about the brand and wehave not seen any fall-off, other than that peak they get right at the movieand then it levels off at a pretty high level. And from that level, it’s beengrowing right along.

[Michael L. Savner -Banc of America:]

Terrific. Thanks, Al.

[Operator:]

Thank you. Our next question comes from Tony Gikas. You mayask your question and please state your company name.

[Anthony N. Gikas -Piper Jaffray:]

Good morning, guys. Nice quarter. A couple of questions; Ijust want to go back to the retail environment and the shelf space question.Just for the industry wide, are you seeing from Wal-Mart and Target anyexpansion in shelf space for the category this year, or perhaps less? Second question, I have been getting some questions fromsome investors regarding the video game segment and do you expect the stronggrowth that that category is experiencing this year at much higher price pointscould have some impact to traditional toy sales? And then, third question, could you just give us a littlebit more color on the tax benefit, what that was in the quarter? Is there moreof that to come and what should we be using for tax rates going forward? And the last one’s a housekeeping, just the share count atthe end of the quarter.

[Alfred J. Verrecchia:]

I’m going to let David take the last two in a moment. Interms of shelf space overall, I don’t believe that the major retailers areallocating significantly more or less shelf space to toys in their stores. Iknow we’re getting more space but I don’t know that Wal-Mart or Target haveactually changed the amount of shelf space from ’06 to ’07. In terms of the video game business and its impact on toysales, you know, we get this every so many years. It depends upon obviously thesuccess of specific video games out there. We’ve been competing with them formany years now and I think it always has some impact, just like a hot toyproduct can have impact in a given year. I don’t see the success in the video game business havingany meaningful negative impact on our business either in the boys business orin the games business. We see softness in the plug-and-play category in ourbusiness but I don’t think that has anything to do with the videogame business. And then David, do you want to talk about the tax benefit?

[David Hargreaves:]

The tax benefit is clearly in earlier years, we had madesome provisions for potential taxes which didn’t arise, so therefore we arereversing those provisions and it was $30 million. And no, we are not expectingany further impact related to that. Also during the quarter, we made a decision that we wouldrepatriate about $90 million of earnings from overseas, and these earnings hadbeen made in countries with lower tax rates, and therefore, we had to take anadditional tax charge, recognizing that we would repatriate, bringing it up tothe U.S. federal rate. That took our underlying rate up from -- we’ve beenplanning at about 28% this year. It’s taken up to sort of 32.3, and as weadjusted our rate, we had to adjust it for the three quarters year-to-date sofar because we do it on an accrual basis. So that was probably in about $14million to $15 million, but it is not a discrete, one-time event. It is part ofour ongoing business. Going forward, we will -- each year we will sit down andlook at our requirements at the beginning of the year to work out if we need torepatriate current year earnings from overseas or not. We certainly have noplans to repatriate prior year earnings at this time, at this point in time. And finally, regarding the share count, at the end of thequarter our shares outstanding were $149.6 million.

[Anthony N. Gikas -Piper Jaffray:]

Okay. Great job. Thanks, guys.

[Operator:]

Thank you. Our next question is from Sean McGowan. You mayask your question and please state your company name.

[Sean P. McGowan -Needham & Company:]

A couple of questions; one, David, on royalty rates, werethey -- on any of these license properties, was the rate applied to the revenuein the quarter consistently with what it had been before, or was there anychange?

[David Hargreaves:]

No, we’re applying royalty rates consistent with thecontractual terms.

[Sean P. McGowan -Needham & Company:]

Looking at -- I appreciate the comments regardingSpider-man, Al, or just Marvel in general, being maybe in excess of yourexpectations. It would seem certainly relative to Transformers but even inabsolute terms, that maybe Spider-man didn’t meet retailers’ expectations, justbased on the amount of shelf space and the amount of products still out there. Can you tell us if you expect this to have any impact ontheir appetite for Iron Man and Hulk in 2008? And what are generally yourexpectations for those properties, relative to the ones you’ve seen so far fromMarvel?

[Alfred J. Verrecchia:]

You know, it’s interesting; there were a lot of people whenwe entered into the Marvel agreement that just sort of said, okay, it’sSpider-man and maybe there’s Hulk and there’s some other movies, but didn’treally ascribe much value to some of the other properties. That’s changed dramatically as we’ve now been able to seesome snippets and footage from both Iron Man and Hulk, and as we begin to showthat to our retailers, we’re really excited about Iron Man and Hulk in 2008. Wethink they are going to be meaningful properties. I certainly don’t think they are necessarily going to be atthe level of a Transformers or a Spider-man, but we are very excited and ourretailers are looking at Iron Man and Hulk entirely differently than they mighthave been a year ago. In addition to that, we’ve got the Indiana Jones movie fromLucas coming, so from that perspective, we are pretty excited about ’08 andsome of the newness we have and I think that Spider-man and Transformers andStar Wars will still be strong. They may be down, obviously, from a movie yearbut they will still be very strong in ’08.

[Sean P. McGowan -Needham & Company:]

And last question, probably for David, what was the timingof the actual payment to Lucas during the quarter? I presume that this is thelast we’ll have to make an adjustment for that?

[David Hargreaves:]

The actual payment on the warrants was actually in thesecond quarter.

[Sean P. McGowan -Needham & Company:]

So why was the expense then taken in the third?

[David Hargreaves:]

It wasn’t. The only reference to a Lucas mark-to-market wasreferencing the third quarter of ’06.

[Sean P. McGowan -Needham & Company:]

Oh, I’m sorry. I misread the press release. Okay, thanks.

[Operator:]

Thank you. Our next question comes from Tim Conder. You mayask your question and please state your company name. TimothyA. Conder - Wachovia Thank you. First of all, congrats again on a great quarter.A couple of items; give us maybe a little bit more color, gentlemen -- a coupleof your competitors out there, both public and not, have had problems in thegirl category. Just a little bit more color on your successes there. And then, input costs -- not too -- you didn’t make too manycomments regarding that. Just give us an update on that. How do you look atbeing locked in as far as shipping? How far out you’re shipping contractualagreements? And then I have two more after that.

[Alfred J. Verrecchia:]

David will take you through the input costs. I’ll talk alittle bit about the girl category. Our business has been very strong. When wetalk about girls, we’re talking about My Little Pony, Littlest Pet Shop, BabyAlive, Furreal Friends. Certainly the small dolls category, which is the MyLittle Pony Pet Shop has been very strong for us. As I said, our businessoverall in the girls category is up 33%. Baby Alive continues to do very well,as does Furreal Friends. I think some of the softness in the girl category, you know,as opposed to a specific brand, has probably been more in the larger -- thelarge doll, fashion doll category as opposed to the small doll category. Butagain, you’ll have to talk to competitors as to what they mean by that. We have not seen any softness certainly in the girlsproducts that we’ll involved with. David, the input costs?

[David Hargreaves:]

In terms of input costs, certainly they are trending up. Acouple of things, which I pointed out before, that resin costs don’t move in ahigh correlation with the price of oil. It depends on a lot of other factors,including the amount of capacity in the industry at the time, so the price ofoil has certainly been trending up in recent months. Resin hasn’t been trendingup nearly as significantly. In addition, I think we have to remember that of every 100units of revenue we get, our cost of goods sold is only about 42% of that andthe cost of resins is only about 4.5 percentage points of that, so we have toput it in perspective because there’s a lot of other components and a lot ofother costs that we have, other than just resins. In terms of how far do we look in, we basically once we costand fit a new product into our line, our suppliers, our vendors give us theirprice, which is good for the practical life of that product. Now certainly, weturn over a lot of products every year, so each year when they give us newquotes for the new line for the coming year, they factor in the latestcommodity, exchange rates, and labor costs. So we are kind of updating andfactoring those cost assumptions in on an ongoing basis.

[Timothy A. Conder:]

Okay, and again, David, your commentary on percentages wererelated to resins. How does that look again -- and I guess you are talkingabout the shipping factored all into that when your contracts will costcollectively, your latter comment -- is that correct?

[David Hargreaves:]

Yes, what I’m saying is we look at our costs for thepractical life of a product, so for carryover products, we’re not expecting anycost increases and for new products, we don’t specifically have to take priceincreases as such, because the new products are costed using the most recentcommodity, labor, shipping, cost factors and exchange rate cost factors, socertainly as we price our new line, we are looking to maintain our margins. So year over year, will a like-to-like item be priced a bithigher to reflect commodity costs? Yes, it will.

[Timothy A. Conder:]

And at the Dallas show, were there some -- did you addressthose looking into the ’08 period, or will those be addressed as we look moreinto the first quarter for Christmas holiday ’08?

[Alfred J. Verrecchia:]

We don’t participate in the Dallas show. We have our ownprivate showing here in Rhode Island. In fact, we are in the midst of thatright now and we’ve been doing that for about the last 20 years. Certainly thisis the time of year, not necessarily at this show, when everyone is talkingabout pricing and things of that nature.

[Timothy A. Conder:]

Okay, and I guess the last question I had to follow-up on aprevious one, can you give us any dollar amounts, as you’ve done in the past,related to Star Wars in the quarter or year-to-date? And the same thing forSpider-man and Transformers?

[Alfred J. Verrecchia:]

Well, we are not going to give individual lines in thequarter. Whatever we do have to do will come out when we issue the 10-Q. Thereis no question that Transformers had significant volume in the quarter versus ayear ago, as did Marvel. Star Wars, while it was down in the quarter, it wasn’tdown by a lot compared to the third quarter of last year, and that’s sort ofwhere it is right now. We are not going to give individual numbers, other thanwhat we would put into the 10-Q.

[Timothy A. Conder:]

Okay. Thank you, gentlemen.

[Operator:]

Thank you. Our next question comes from John Taylor. You mayask your question and please state your company name.

[John Taylor:]

Congratulations. So I want to follow up on the line ofquestion about cost as well. The authorities in China have tightened updramatically the export license requirements and I’m wondering whether you guysare anticipating any sort of industry-wide reduction in capacity in China thatmight have an unusual impact on cost negotiations this year. Let me approach itfrom that side.

[Alfred J. Verrecchia:]

No, we have not had any indication that there is going to bea reduction in the capacity because individual vendors are not able to getexport licenses. Now, I suspect that could happen with C-level vendors, butcertainly the people that we have been using have not indicated any difficulty,nor have we experienced any difficulty thus far I getting our product tomarket, so we are not looking at any capacity issues as it relates to theimport licensing and factors not being able to operate.

[John Taylor:]

And consequently no unusual pressure on costs, such thatfactories might be able to catch up on some repressed inflation from previousyears, anything like that?

[Alfred J. Verrecchia:]

No, I think as David said, the costing will be based uponcurrent commodity costs, current labor costs, and certainly there are pressuresthere that we have every year and have been growing and as David said, weincorporate that into our pricing.

[John Taylor:]

Okay, great and then last question, on electronics; with theEA agreement, does this change the priority of your trying to develop the kidselectronics business? In other words, do they take over a greater burden ofthat? I wonder if you could talk about how that affects your approach to theelectronics category.

[Alfred J. Verrecchia:]

No, you mean products like -- that we did before, such as aniDog and VideoNow and some of the other electronics products we’ll continue todo. In fact, I think there is a strong possibility that the relationship withEA would really enhance our ability to do some of those products as we would bepartnering with them on some of those things, and we have a few things that weare working on now with them where we’ll partner with them on electronic toys,so I don’t see us moving away from that because of the EA agreement -- not atall.

[John Taylor:]

Great. Thank you.

[Operator:]

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

[Gerrick L. Johnson -BMO Capital Markets:]

Following up on one of Tim’s questions, without breaking outsales in each particular category, per se, or each particular line per se, canyou give us an idea of what sales growth would have been like in the quarterexcluding the movie properties, Transformers and the Marvel movies?

[Alfred J. Verrecchia:]

No, we wouldn’t go into that level of detail. I can tell youcertainly that as I said earlier in the conference call, we’ve seen growth inthe girls category of about 33%. We had growth in the category on the overallpreschool business of about 3%. Our board game business was up 14%. The totalgames business was down 2% and that’s because of the decline in both theinteractive and some of the trading card game businesses. Now obviously within those categories you have individualproducts that go up and down, but that’s -- we’ve had growth across a number ofcategories, although I’m not going to give you individual dollar amounts.

[Gerrick L. Johnson -BMO Capital Markets:]

Outside of those specific categories that you mentioned havedone well, what was probably the biggest surprise for you on the upside,outside of Transformers, Spider-man, those things?

[Alfred J. Verrecchia:]

The biggest surprise on the upside, I think probably, in allhonesty, it’s the broad-based growth we’ve had. We certainly expected LittlestPet Shop to be strong. It did stronger than I think we thought it was going tobe, but you are always sort of forecasting how good can something be, and youcan be pleasantly surprised there. But outside of the boys category, I thinkthe overall strength in the girls category, while we knew we had it, I don’tthink we would have forecasted 33% for the quarter. I think the fact that our board game business is up 14% is apleasant surprise for us and the strength of the electronic version ofMonopoly, as well as the Are You Smarter Than a Fifth Grader, are certainlypleasant surprises for us.

[David Hargreaves:]

I think also we were pleasantly surprised by the strength ofour international business, up 33% overall. And we if look at outside ofEurope, if we look at our emerging markets, we are probably up 40%year-on-year, so I think we are very, very pleased with how well international,particularly the emerging markets, are doing.

[Gerrick L. Johnson -BMO Capital Markets:]

Great, and last question, you did mention you are beginningto show 2008 lines to buyers. I was just wondering how you think they areapproaching 2008, given the relative softness we’re seeing just in general inthe current toy market. Any changes to their outlook for next year or anything thatyou’ve noticed there?

[Alfred J. Verrecchia:]

No, and I think it would be early in the sense that theyneed to get through this holiday season to see what kind of a season they have.They have the jitters at this time of year, like they do every year. Looking atour line, they are very excited about what they see in our line and they’vebeen very positive in that regard, but I think as an overall comment, I thinkit’s a bit early in terms of their expectations for ’08, because we are justentering the holiday season.

[David Hargreaves:]

I think going into the year with toy buyers and the toypeople that run the toy departments, we’ll be looking to anniversary thestrength that we had this year from the movie related properties, and I thinkwe’re looking forward to trying to do that.

[Gerrick L. Johnson -BMO Capital Markets:]

Thanks a lot.

[Operator:]

Thank you. Our next question comes from Thomas Russo. Youmay ask your question and please state your company name.

[Thomas Russo -Gardner:]

First, congratulations. Let’s see, continuing John Taylor’squestion about the involvement with Electronic Arts and your own activities inelectronic toys, to what extent do you think Electronic Arts will help you withyour developing a platform for social networking, much like we read aboutBarbiesgirls.com and other social network sites? Will the products that gothrough EA have that capacity to generate multiple layers of revenues? And ifso, will you participate in those?

[Alfred J. Verrecchia:]

I’ll let David talk about the financial side of it but interms of where they can help us, I mean, clearly they know that space and soanything that we do in that area with our brands we’ll do with them. I thinkthat their knowledge of the space, coupled with our knowledge of kids, is goingto be very beneficial to us and clearly there are things that we’re doingbefore that we used to do individually that we will now do with them. Some of those things will actually impact the economics ofthe deal but a lot of it will just be being able to understand the marketplacebetter by talking with them, just as they will understand the kids market andsome of the opportunities that we would have with their brands that they’ll getfrom us. But they won’t necessarily all be reflected in economics.David, do you want to --

[David Hargreaves:]

I think there’s a huge opportunity. Clearly the growth inthe digital gaming business isn’t coming so much with the hardcore, 14 to [34-year]old gamer. There’s a lot of growth in the -- an increasing rate of growth inthe casual gamer, families and children. And with our brands and EA'scapabilities and their commitment to growing in this area, we think we can dowell across all platforms -- and by all platforms, certainly [inaudible], thatdivision, we will be doing a lot in the cell phone gaming. Certainly [by their]Pogo subscription-based site, we’ll be doing a lot in terms of Internet gaming. We’ll certainly be doing console-based games, particularlyfor -- as they become more family-oriented, like the Nintendo Wii has openedthat up to a much bigger demographic, a lot more families and kids playing. I think the [Dream Screen] and the handheld devices, we’relooking for a lot of product in those areas. And finally, when you talk aboutsocial networking, you are talking about things like light persistent stateworlds, like Webkins, like Club Penguin, like Second Life, and we will bedeveloping over time entries into that area. And in terms of the revenues, yes, we would be looking forrevenues from microtransactions, from subscriptions, as well as normalroyalties on the basis of sales. So we are looking over multiple platforms andmultiple revenue formats in this rapidly growing area over the next few years.

[Thomas Russo:]

Thank you so much. And then, David, on the share repurchase,can you just bring us up to date as to how much you’ve retired, but averageprice, over the past say couple of years, two or three years? And then talkabout the future plans for share repurchase and what that might have on sharperreduction in shares outstanding now that there’s no more overhang, Lucas andother dilutions?

[David Hargreaves:]

I think, as we said, we’ve not spent over $1 billion toretire 41 million shares, and if you add in the Lucas payment and the warrants,then it’s $1.2 billion and we’ve retired 57 million shares and warrants. Clearly, although we have great cash flow generation, about$450 million in the last 12 months, we can’t continue the level of sharerepurchase that we are doing over recent, over the last couple of years. We had more cash on our balance sheet than we needed a whileago and I think we’ve been purchasing aggressively, so will we be as aggressivego forward? Probably not. I’m not sure we generate enough cash to keep that up.But we certainly have $240 million left on our current authorization and wecertainly expect to generate a lot of cash over the next two to three years andwe will be in the market, as you can imagine, and continue to buy stock back.

[Thomas Russo -Gardner:]

Thank you.

[Operator:]

Thank you. And our final question comes from Dean Gianoukos.You may ask your question and please state your company name.

[Dean M. Gianoukos -J.P. Morgan:]

Hi, this is actually Gopal in for Dean at J.P. Morgan. Acouple of quick questions, I’m not sure if you addressed them already, butTransformers, was it up sequentially for the quarter?

[Alfred J. Verrecchia:]

Hold on a second.

[Dean M. Gianoukos -J.P. Morgan:]

And the same question for Spider-man 2, actually.

[Alfred J. Verrecchia:]

Spider-man 2 I don’t believe is up sequentially for thequarter. Transformers --

[David Hargreaves:]

I don’t thinkTransformers is either. Remember, during the second quarter we shipped in --

[Alfred J. Verrecchia:]

We shipped a lot for the movie.

[David Hargreaves:]

A lot of Transformers in for the launch of the movie.

[Dean M. Gianoukos -J.P. Morgan:]

I didn’t mean Spider-man 2, I meant Spider-man --

[David Hargreaves:]

Three.

[Dean M. Gianoukos -J.P. Morgan:]

Yeah, right.

[David Hargreaves:]

No, sequentially quarter to quarter, our shipments of Marvelproducts, including Spider-man, would have been probably marginally down.

[Alfred J. Verrecchia:]

Yes, but just marginally. I would almost say that they areprobably flat, but -- flat to marginally down.

[Dean M. Gianoukos -J.P. Morgan:]

Okay, and Transformers was marginally down, too?

[Alfred J. Verrecchia:]

Transformers was probably flat with the second quarter,maybe up a tad. But flat -- for all intents and purposes, flat.

[Dean M. Gianoukos -J.P. Morgan:]

Okay. Thanks a lot.

[Operator:]

Thank you. At this time, I’ll the call back over to KarenWarren for closing remarks.

[Karen Warren:]

Thank you, Shirley. I would like to thank everyone forjoining us on the call today. The replay will be available on our website after2

[Operator:]

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