孩之寶 (HAS) 2008 Q3 法說會逐字稿

Ladies and gentlemen, we are about to begin.

Good morning, and welcome to Hasbro's third quarter earnings conference call.

At this time, all parties will be in a listen-only mode.

(OPERATOR INSTRUCTIONS) Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

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

Please go ahead.

Thank you, and good morning everyone.

Joining me today are Brian Goldner, President and Chief Executive Officer; David Hargreaves, Chief Operating Officer and Chief Financial Officer; And Deb Thomas Slater, Senior Vice President and head of Corporate Finance.

To better understand our third quarter results, it would be helpful to have the press release and financial tables available that we issued earlier today.

The press release includes information regarding non-GAAP financial measures discussed on today's call and is available on our website at Hasbro.com.

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

During the call this morning, Brian will discuss key factors impacting our results and David will review the financials.

We will then open the call to your questions.

Before we begin, let me note that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters.

These forward-looking statements may include comments concerning our product plans, anticipated product performance, business opportunities and strategies, financial goals and expectations for achieving our objectives.

There are many factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements.

Some of those factors are set 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 Brian Goldner.

Brian?

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.

Our Company continues to perform well and we're very pleased with our results in the third quarter and year-to-date.

In a challenging economic environment, Hasbro delivered revenue growth with revenues up 6% to $1.3 billion for the quarter, compared to $1.2 billion last year.

Absent the favorable impact of foreign exchange, revenues were up 5%.

Net earnings for the quarter were $138.2 million, compared to $132 million in 2007 with earnings per share of $0.89, compared to $0.78 per share excluding the impact of a one-time favorable tax adjustment of $29.6 million or $0.17 per share in 2007.

As part of our longer term strategy to grow Hasbro, we continue to make investments in many areas of the business.

Including emerging markets, entertainment and digital gaming.

With the current strength of our product line, we're able to make investments that will provide value for our shareholders over the long term, while continuing to deliver earnings growth in the quarter.

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

Boy's, girl's, preschool and games were all up, which speaks to the strength of our brand portfolio.

The boy's business was up 7% with many brands performing well.

Star Wars continues to be strong, with the Clone Wars animated product line doing very well.

The CG animated television series debuted on Cartoon Network on October 3, and basement the channel's most viewed series premier, ranking number one among all major kids networks in its time slot.

The series will be rolling out around the globe over the next 12 months.

As we've said since February, we expect Star Wars to have another very good year and to grow compared to last year.

Transformers continues to represent a significant brand in our boy's portfolio, and it is having a great year.

Particularly given that it's a non-movie year.

As we expected, revenues are down for the quarter, however, the momentum remains strong and with the addition of the Transformers animated product line, we've seen significant growth since the second quarter.

As we look to 2009, Transformers, Revenge of the Fallen, our second film in partnership with Dreamworks and Paramount is expected to be released on June 26, 2009.

We've seen some early film footage and we are really excited about it.

We're also booking forward to GI Joe, the Rise of Cobra, which is expected to be released on August 7, 2009.

The filming is completed and we believe this movie is a tremendous way to reinvent and reimagine the brand.

The Iron Man DVD was released on September 30, and DVD sales have been very strong over the last few weeks.

We have found that DVDs are an important driver of sales as they bring new consumers into the franchise, which bodes well for the upcoming holiday season.

Iron Man whim exceed our original expectations for the year.

Marvel has already announced that Iron Man two will be released in 2010.

We continue to believe that our six major boy's initiatives in 2008 can equal the three major boy's initiatives in 2007.

The girl's category continues to do well, with revenues up 11% in the quarter driven by the success of FurReal Friends, Baby Alive, Easy-Bake Oven and the Littlest Pet Shop.

Our tween category was down 5% in the quarter, although Nerf was up a strong 30%.

It was not enough to offset the decline from last year's Power Tour Guitar which is no longer in our line.

The preschool category was up 15% with core PlaySkool segments performing well, and In The Night Garden also contributing to the growth in the category.

Our games and puzzle business was up 4% for the quarter.

During the quarter, we had successful global game launches with Monopoly Here & Now world edition and the Trivial Pursuit 25th anniversary edition.

We also launched the Trivial Pursuit game show in late September which placement in over 90% of the US, it's off to a good start with solid ratings.

Traditional board games were up 7% with a number of games performing well in the quarter including Scrabble, Trivial Pursuit, Twister and Guess Who.

In our Wizards of the Coast trading card business both Magic: The Gathering and Duel Masters were up significantly.

As more people are choosing to stay home and spend time together, our games are even more relevant today.

That's why earlier this year we developed plans to relaunch Hasbro's Family Game Night.

Based on consumer insights, the new Family Game Night promotion emphasizes the tremendous economic value of our games and creates a way for families to get together.

Complementing our program is the Electronic Arts launch of Family Game Night on the Wii and PlayStation 2 featuring reimagined versions of some Hasbro's classics like Connect Four, Battleship, Yahtzee, Boggle and Sorry.

This new title from EA showcases the power and versatility of our games brand and the Family Game Night platform.

We are also working with EA on a number of integrated promotional programs for the fourth quarter that will support the lawn of of both our toys and their digital games, including efforts for three of Hasbro's most popular brands, Littlest Pet Shop, Nerf and Monopoly.

We couldn't be more pleased with the success of the partnership with EA and by the end of 2008 EA and Hasbro will have launched over 30 games with great Hasbro plans appearing on every major platform from PlayStation 3 to the Wii to Xbox 360 to the iPod and iPhone.

Next year we'll launch even more games based on a broader range of brands.

As we have said, revenues from our EA strategic alliance in 2008 will not be material.

Since product launches tied to major platforms are occurring later in the year.

However, as EA's portfolio of Hasbro brands increases over the next few years our revenues will increase as well.

Shifting to another investment area, our emerging market strategy, as we have said, we believe that there are significant growth opportunities in emerging markets.

To facilitate our growth plans, we have been increasing our investments in a number of new markets this year including opening offices in Brazil, Russia, China and the Czech Republic.

Our brands have proven worldwide appeal and as we increase our presence around the globe, we expect to grow our emerging market business significantly over the next few years.

The strength of our product portfolio and the diversity of our world class brands not only benefits Hasbro in emerging markets, it also serves us well in a challenging economic environment.

With the breadth and depth of our portfolio we have something to reach every consumer from infants to seniors whether it's PlaySkool, Littlest Pet Shop, Transformers or our wide array of games, Hasbro has it.

Consumers have come to expect from Hasbro a product line that delivers great innovation and value for their money.

That's why we have done well in good and not so good economic times.

We've consistently delivered innovation across all our major product categories around the globe, and with the majority of our products selling for $20 or less at retail, we have historically been recession resistant.

In closing, as we've said at the beginning of the year, we believe we will grow revenue and earnings per share in 2008.

While the current environment is challenging, we have not changed this expectation.

We believe that over time, we can grow revenues 3 to 5%, this has not changed.

Our medium to longer term operating margin objective is 15% and this has not changed.

We continue to develop the management team, marketing programs and innovation that will serve Hasbro, its customers, its consumers and its shareholders well for today and the future.

Now let me turn the call over to David and talk more about our third quarter results.

David?

Thanks, Brian and good morning everyone.

I too am very pleased with the results we reported today.

For the quarter, we delivered worldwide net revenues of $1.3 billion, compared to $1.2 billion last year.

An increase of 6% or $79 million.

Excluding the favorable impact of foreign exchange, revenues were up 5% or $60 million.

Operating profit for the quarter was $215.9 million or 16.6% of revenue.

This compares to $209.7 million or 17.1% of revenue last year.

Before looking at our results in more detail, I would like to take a moment to address one of the questions people are asking us.

How is the current credit situation impacting Hasbro's liquidity?

The answer is that the current credit situation is not impacting Hasbro's liquidity.

We ended the quarter with $356.5 million in cash, and we had available capacity if needed on both our securitization program and bank revolver.

In addition, we are clearly through our working capital peak for this year and we will be substantially cash flow positive for the next two quarters.

Now let's get back to our quarterly results, starting with our segments.

US and Canada segment net revenues were $821 million, compared to $773.5 million last year.

An increase of $47.5 million or 6%.

US and Canada operating profit for the quarter was $131.9 million, compared to $122.8 million last year.

As a percent of revenue, it was flat year-over-year at approximately 16%.

Net revenues in the international segment were $460.6 million, compared to $423.2 million a year ago.

The segment was up 9% in US dollars, and 4% excluding the impact of foreign exchange.

The international segment reported operating profit of $65.8 million, compared to $68.8 million last year.

The decrease is primarily due to the investments we are making in the emerging markets.

Now let's take a look at earnings.

For the third quarter, we reported net earnings of $138.2 million, or $0.89 per share.

This compares to $132 million or $0.78 per share excluding a favorable tax adjustment of $29.6 million or $0.17 per share in 2007.

During the quarter, average diluted shares outstanding were $156.2 million, compared to $170.8 million last year.

Earnings before interest, taxes, depreciation and amortization were $261.8 million, compared to $259.3 million a year ago.

Gross margin for the quarter was 55.9%, compared to 57.4% a year ago.

As we previously announced, we took pricing actions in September to offset the cost increases that we have experienced thus far this year.

While the cost increases impacted all three months of the quarter, the price increases were reflective of only one month of the quarter.

This resulted in a decline in gross margin for the quarter.

However, for the full year, through cost saving initiatives and pricing actions we have taken, we expect to be able to mitigate most of these increases and they should not have a material impact on our full year results.

Now let's take a look at expenses.

Royalty expense for the quarter was $83.7 million or 6.4% of revenue, compared to $93 million or 7.6% a year ago.

As we have discussed, entertainment based product lines continue to represent a significant part of our business, although less so than a year ago.

Research and product development expense, while increasing $6.5 million to $50 million, was relatively flat on a percentage basis.

The increased spending reflects the significant investment we are making in product development to grow our business in 2009 and beyond.

Advertising expense at 11.6% of revenue was consistent with last year as a percent of revenue.

However, it did increase by $12.6 million to $151.2 million.

The increased spending reflects our commitment to building our brands and driving our business through the balance of the year.

SD&A expense of $207.5 million was relatively flat on a percentage basis, although it did increase by $8.4 million compared to last year primarily due to foreign exchange.

As I shared with you at the beginning of my remarks, operating profit declined marginally from a year ago.

In part, this reflects the net impact of cost and price increases during the quarter, but more significant are the investments we are making in the future growth of the business including higher R&D spending, investments in emerging markets, and the promotion of our brands through higher advertising.

Interest expense increased by $2.5 million to $11.7 million, primarily due to the $350 million of long-term debt we issued in the third quarter of last year.

Offset somewhat by the repayment of $135 million of notes that matured in July this year.

Other expense net totaled $2.7 million compared to a income of $3.5 million a year ago, partially due to lower interest income on invested cash.

Our underlying 2008 tax rate was 31.7%, compared to our 2007 full year underlying tax rate of 30.5%.

Now let's turn to the balance sheet.

At quarter-end, cash totaled $356.5 million, compared to $410.9 million a year ago.

Although we have generated $579 million in operating cash flow in the last 12 months, we have spent a significant amount of cash on our share buyback program and the acquisition of Cranium and the Trivial Pursuit brands.

As I already mentioned, we are beyond our working capital peak and will be cash flow positive for the remainder of this year and into next.

Our receivables at $946.9 million were up $54.2 million compared to $892.7 million last year.

Primarily due to higher sales volume.

DSOs were 65 days compared to 66 days last year.

We are very comfortable with the overall quality of our receivables.

Inventories increased to $461.6 million, compared to $395.5 million a year ago.

In summary, we are very pleased with the results we reported today.

We grew revenues and earnings in a difficult economic environment, whilst also continuing to make investments in our future.

As we look to the remainder of the year, clearly it will continue to be a very challenging environment.

We have said in the past that based on history, we believe we are relatively recession resistant.

However, given the severity of what is now happening in the global economies we do not believe we will be uneffected and we are adjusting our expectations and spending plans accordingly.

That said, we do believe that the underlying strength of our brands and balance sheet will enable us to do well, even during the stormy times.

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

Thank you very much.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment.

Our first question is from Robert Carol of UBS.

Please go ahead, sir.

Hi, guys.

I was actually just wondering if you could comment on some of the retail sell-through that you've seen during the quarter, just any progression through if things had trailed off a little bit in September and October as the overall economy has gotten a little worse?

Good morning, Robert, it's Brian.

Hey, Brian.

First of all, we still believe that Christmas will come for consumers and retailers this year and our retailers have agreed that toys and games are more recession resistant than other discretionary spending categories.

We agree with this conclusion.

David, you want to talk about some of the specifics?

In terms of the POS, we're clearly in a -- in our toy business we're clearly up year-to-date and our game business is fairly flat.

In terms of most recent months, clearly retail was down in September and the first two months of October have shown retail to be down overall.

We haven't escaped that slight downturn in POS.

Whether that continues throughout the end of the year or whether that was a particular blip that appeared in time, due to what was going on in the economy, we'll find out.

But as Brian said, we're relatively confident.

We know that Christmas will come and we have a very strong product line and a lot of good demand for our products.

Robert, as I look across our business and as I talk to retailers, retailers have still seen good sales over the past few weeks on some of the popular brands.

Our brands and others that have had momentum with our new, innovative holiday items and highly promoted products and brands.

That's kind of where we are.

That's helpful.

Thanks you, guys.

Our next question is from John Taylor of Arcadia.

Please go ahead.

I've got a couple of questions, if I can.

Everybody gets nervous this time of year, even without the stuff that's going on in a macro sense and I'm wondering what you guys are or how you would characterize the sort of game of chicken regarding inventory and who's going to hold what, whether you guys are going to build it and wait for orders or whether retailers are going to bring it in, because it seems like people still believe there's going to be a Christmas.

It might just come later than it usually does.

It may not ultimately reach the level that it typically does, given whatever multiplier you might use from here.

But I wonder if you could kind of talk about the timing of shopping patterns and whether people are going to be in stock with inventory and whether you're going to have enough to sort of supply in case there is in fact a decent Christmas and people try to shield their kids from the stuff that's going on?

Long question but could you get at some of that.

Sure, John.

Good morning, it's Brian.

So where we are and what we've seen overall, we have forecasting and tracking teams that have partnered with retailers throughout the year to create the plans and this continues day by day in the fourth quarter.

Our brands have had a lot of momentum.

You've just heard about the third quarter, through the third quarter.

We still have significant plans in the fourth quarter for these brands FurReal, Littlest Pet Shop, Nerf, just to name a few.

So again, we feel, again, with our retailers and partnering, that we're on the right track.

We recognize that it's going to come down to the consumer.

The consumer is projected to spend less by many people than prior years this holiday but we want to be in a position where consumers spend more as a percentage on Hasbro brands and our great, innovative products.

We think we can do that and that's why we continue to invest in marketing and marketing programs, in our Family Game Night promotions and ensuring that our products are out there, available.

In terms of specific inventory, even our higher ticket items, we've forecasted an appropriate level of sales for these items.

We've thought about how many quotas and how many biscuits we think we can sell.

We feel very comfortable, we're seeing some really good early results.

If I could get at what David -- how David was discussing it, though, saying it clearly is going to have an impact on Hasbro to some degree, is that most likely going to show up in an ad to sales ratio, is that most likely going to show up in a missed sales number?

Are there any line items in particular you feel are most exposed or categories or any way to narrow this down a little bit for us?

I think as we look across the fourth quarter, you know, clearly as we've said, we expect to be up both in revenue and earnings per share this year.

The consumer may not spend as much.

They may spend more on Hasbro toys.

It may have some impact on what we have as an internal estimate for fourth quarter.

But again, we still believe we can deliver overall.

Okay.

Great.

Thank you.

Margaret Whitfield of Sterne, Agee.

I was wondering if you could further elaborate on your comments at the end that you will be adjusting your expectations and your spending levels?

Sounds like some of the high ticket items are going well.

Or are you shifting more of your shipments to more value based products?

Thank you.

Margaret, as we've said, we had a lot of momentum this year thus far.

We were up 13% in the first two quarters many we were up again this quarter.

We have a lot of momentum and clearly we see a lot of that continuing into the fourth quarter.

However, when you look what's going on in the global economy, it's tough to think that we've potentially higher unemployment, potentially slowdown on consumer spending as they tend to pay down their credit card debt, some retailers around the globe are going to find some difficulties.

It is tough to think that our momentum won't be somewhat impacted by what's going on in the macroeconomic environment.

So I don't think we're saying that we think we're going to have a bad year in any sense.

I think it's just maybe perhaps not as good as we thought it would be two months ago.

Okay.

Will there be a shift in more value toys, do you believe this holiday, versus the $2.99, $1 item.

One of the things you'll see is that advertising in the third quarter was up significantly year on year and we're going to keep the advertising going to drive sales during the fourth quarter.

And how about currency, to the bottom line, what was the effect in this quarter and year-to-date?

Well, I think revenues were favorable year-over-year during the third quarter by about $19 million.

I think as we get into the fourth quarter, again, that's another area where we won't be unimpacted because for a number of years we have had favorable sort of tail winds in terms of currency.

In terms of fourth quarter this year, it will probably be the first year for a substantial period of time where year-over-year currency and the translation of foreign revenues and earnings back to US dollars is actually going against us.

Okay.

Would you say the situation in your overseas markets is worse than the US in terms of retailers' concern about the holiday season?

No, I think certainly we're being an extraordinary blip of time at the moment.

Whether things settle down as we get in through the rest of the fourth quarter, we'll find out.

But certainly over the last couple of weeks with everything that's been going on, retailers are expressing more caution and consumers, as you can see from consumer sales numbers, have been shopping less than a year ago.

Again, that said, we keep coming back to the fact that we've got very strong brands.

We've got a lot of momentum and we think we're positioned to do well, even in this sort of stormy times.

Margaret, the consumer can spend somewhat less money in Q4 and Hasbro can still grow if we get our fair share or better.

So again, our goal is to have the plans in place to continue to drive our business with our teams, with great brands and an array of brands, a diversity of brands that have great momentum.

Okay.

Thank you and best of luck.

(OPERATOR INSTRUCTIONS) Our next question will come from Drew Crum of Stifel Nicolaus.

Please go ahead.

Good morning, everyone.

It's Stifel Nicolaus.

I wonder if you guys could comment on when the business benefits from the significant pullback we've seen in oil prices, specifically raw material costs and then also if you could elaborate on your comment about sustaining operating profit margins, gross margins, rather, and pricing and what you see for 2009 as far as pricing products?

Thanks.

Yes, so while oil has swung dramatically from around $70 a barrel in the fourth quarter of last year, up to 147 and then back down to 70, there's not a direct correlation with plastics.

Resins such as AVS and polypro did not increase as significantly.

And although they're starting to fall back a little bit during the last quarter, they're still above where they were a year ago.

In addition to resins, we're still contending with higher China labor costs, up about 30% since a year ago.

We've got some incremental quality and safety testing costs and we've got the appreciation of the Chinese currency.

So there's still reasonable amount of cost pressure out there.

In terms of pricing, what we said when commodity costs were going up is that we would take the appropriate pricing actions in order to protect our margin.

I think as prices, commodity costs start to come down, we will re-evaluate the need or the magnitude of any price increases go forward.

But clearly, this is not a time to be taking price increases that aren't warranted by cost increases.

So I think we'll be looking to protect our margins and we'll take the appropriate pricing actions to do that.

Certainly, in Europe, we probably will see more pricing because if you look at the sterling, for example, it's already fallen 15% against the US dollar.

So I think whereas in Europe we've taken less pricing over the last couple of years because the exchange has been going forward and offsetting cost increases, over the next period of time we will have to take more pricing in the euro as the exchange rates go against us.

Or against them.

One last one.

Dave, is there a CapEx figure you can provide for the quarter?

We do have that.

I think it's $29 million but I'll just check that and -- one minute.

29.7.

Okay.

Very good.

Thank you, guys.

Thank you.

Our next question is from Tony Gikas of Piper Jaffray.

Please go ahead, sir.

Good morning, guys and congratulations on good execution in the quarter.

Couple questions.

You guys have been growing operating income really well in a tough environment and you've been spending significantly on investment in international markets.

How significantly is that investment specifically I think you've been talking about Brazil, Russia, China, just want to get a feel for the dollar amount, if possible.

And where are those sales at today in some of those markets?

What do you think the opportunity is?

How quickly do these new markets ramp?

Second question, you didn't really talk about the movie Wolverine in 2009.

Maybe just what are you hearing on the movie, how important is that to your entertainment business next year?

Okay.

Good morning.

We'll let David take the first part.

I'll talk about the second.

So I think, we said in the first and second quarters that our operating profit growth wasn't fully consistent with our revenue growth, because of expenditures, investment spending we were doing in digital and entertainment and in emerging markets.

I think in the aggregate, if you sort of did some math, you would probably get a sense that it was about $20 million a quarter during those early quarters.

Some of our investment spending against our Wizards of the Coast initiative has started to tail off so it's not as significant during the latter part of the year and also our revenues are higher so it becomes less percentage-wise.

However, for the full year, it will be a fairly significant amount of investment spending.

When you talk about the emerging markets, we certainly in places like Latin America, Mexico, underperform against our major competitor and I think if you go back to the turn of the century, 2000, 2001, we were losing money and we had a lot of debt and at that time we scaled back some of our emerging market investments and we probably lost a little bit of ground by doing that.

Given that we're now making last year 13.5% operating margin and throughout last year $602 million in operating cash flow, we're in a position now where clearly we can investment spend and play catch-up in some of these markets which is clearly what we're doing and we believe that given the fact that we probably underperformed thus far but our opportunity in the emerging markets, particularly behind big global events such as the Transformers movie, the GI Joe movie or with Spider-Man, that we've got an opportunity to play catch-up very quickly and we have substantial growth opportunity in these markets.

And on the second point, on Wolverine, it's for next May and it will be part of our boy's portfolio, the teams are working on it now and certainly will help lead into a tremendous summer because after that of course is Transformers and GI Joe.

Star Wars will continue.

So again, 2009 should be a very good year for our boy's business.

Could the revenues from the Wolverine brand be similar to GI Joe in size, perhaps?

It's too early to say exactly where it will be.

It was more of a late-breaking addition to the year as things started to form.

We're just now starting to see some of the materials for the film and we're putting together our product lines.

We're very excited about GI Joe and we're out over the past several months in Europe, in Prague, we had a summer tour with GI Joe and bringing our European retailers in.

They're very excited about GI Joe.

We just had a program in Shanghai.

We'll be down in Brazil in the next couple of weeks with our retailers.

Our retailers have been here.

So not just US retailers but global retailers are very excited about GI Joe because of the direction we've taken the brand which is, again, more along the lines of the '80s comic book heros and the raft of characters in GI Joe Versus Cobra so it would be hard to compare our own to Wolverine at this point.

Okay.

Thank you, guys, and good luck.

Gerrick Johnson of BMO Capital Markets, please go ahead.

Hi, good morning.

I may have missed it but did you give a retail take-away number for the third quarter?

No.

I think I did say that our POS for toys was a little bit up for the third quarter and games, if you take out something like Net Jet specifically last year, certainly on our board games we're about flat to a little bit up.

Year-to-date our board games, our Classic games are up for the year.

Okay.

And can you comment on inventory, I think it was up about almost 17% year-over-year, how's that inventory, is there any concern there or is that a build for something that you're launching later on in the fourth quarter?

And how is the inventory in the channel looking?

In terms of our inventories, there's a couple of reasons why it was up versus a year ago.

Firstly, a year ago Transformers was in really hard, struggling to keep anything in inventory on Transformers.

So we actually had no Transformers inventory at this time last year.

The second thing that is impacting it a bit is the fact that there's a major customer in Mexico who takes a lot of inventory in through the Christmas, the annex as they they do down there.

Last year they took that inventory in the last couple of weeks in September.

This year, they're taking it in the first couple of weeks of October.

That said, our inventory, given the challenging retail environment in the fourth quarter, if anything it's probably a little bit higher than we'd like it to be but we're happy with the overall quality and to the extent that we've got any slower moving items in there, we've already established programs to move them out and we're pretty confident that we'll have the right level of inventory by year-end.

Okay.

And the channel?

I think in the channel, I think basically their inventories are in good shape.

Balanced as John Taylor asked the question, we would certainly hope to have enough there to satisfy the demand on what are some very strong brands.

Okay.

Great.

Thank you very much.

Thank you.

Our next question is from Sean McGowan of Needham.

Please go ahead, sir.

Hi, good morning.

Couple of questions here as well.

I just wanted to ask for a clarification.

I think it was David or maybe Brian was saying that you are only now getting some images from the movie.

Did you mean for Wolverine or GI Joe?

I meant for Wolverine.

Does that mean the product that you would be developing is not quite as tailored to the movie as it would be if you had images, a longer lead time?

I'm sorry, let me clarify.

Thanks, Sean.

Thanks for pointing it out.

What I was talking about was we haven't seen a lot of the movie yet so I can't really comment on the strength of the film.

What we've gotten, our designers for many months have had the images to work on for the product line.

So no issue there?

Yes.

So they've had the images to work on the product line.

The product will be tailored to the film.

Th point is, of course, we're very involved with, intimately familiar with GI Joe and less familiar with the film in total of Wolverine.

Thanks for clarifying that.

The other two questions I have is number one, given the fact that when you launched Transformers you hadn't yet really ramped up a lot of these investments in Brazil, Russia, China and Czech Republic, how much more do you feel like you could have done with Transformers one had you had in place the investments that you will now have for Transformers two?

And second, and I don't want to hang you on Al Verrechchia's comment, but about this time last year he said something about it really being a great time to be in New England, something about the Patriots and their team?

We plan to execute the fourth quarter better than they executed last night.

How about that.

Fair enough.

In terms of Transformers, I think what we're very excited about, clearly we don't know exactly how much we left on the table because it was our first time with a major motion picture in Transformers.

Certainly we left retail light.

We had many opportunities to build more of an immersive experience around Transformers than we might have liked.

Obviously the first time out retailers were very excited but are much more excited as we go into the second film because now of course we have a template, we understand what we have.

We're also seeing in many emerging markets, especially in China, Transformers really resonates.

You have generations of people who grew up with the animation and the opportunity to build Transformers into a much bigger brand both in terms of the products we manufacture as well as our license business, as well as our video game business and other immersive experiences for consumers.

It is really a poster child for the kinds of reinvention and reimagination we intend to do across our core brands over time.

Any idea if that's an eight figure opportunity or a nine figure opportunity?

I wouldn't try speculate.

I would just say that clearly, as we talk to retail, as we build our plans, as we look at promotional partners, some who will return and some who are new, and we look at the markets where Transformers resonates, we're very excited about the opportunity and the one thing we have said or will reiterate is certainly would expect to grow that brand again in 2009.

Okay.

Thank you.

We will now hear from Tim Conder of Wachovia.

Thank you.

Let me also offer congratulations on good execution.

Thanks, Tim.

Couple of things, gentlemen.

To circle back to the investment dollars that you spent, would it be fair to say that maybe the pace of spending really has not come off that much year-over-year, David, if I heard you right.

Is that a fair interpretation?

And then how would you characterize that going forward?

In '09?

Okay.

I mean, I think this year, we've been investing in a number of different areas.

We've been investing in emerging markets.

As Brian said we opened companies in Brazil and a number of places around the globe.

Next year we probably won't open as many offices but having opened one in Brazil this year, maybe we will do Argentina next year or Chile expansion next year.

So we'll continue to invest in emerging markets.

We're certainly, although we opened the office in China this year, we're certainly going to be starting, putting more people on the ground.

We are expecting Transformers to do very well in China.

So we'll continue to invest in the emerging markets.

In terms of the Wizards digital initiative, a lot of that terms of Dungeons and Dragons insider is behind us at this stage.

In terms of investments we've been making in entertainment area, this year we brought on Lisa Licht and Bennett (inaudible).

We have a small office out on the Universal lot, where started a company registered with the Screen Actors Guild to write scripts to present to Universal and they also come up with ideas for movies under the Universal deal.

So we're still hoping we'll get the first movie under that deal in 2010.

And we're working towards that.

So I think investment in entertainment and the Universal deal will continue.

So overall, year-over-year, '09 versus '08 investment spending might be down a bit but we're certainly not going to stop investing for our future in entertainment in emerging markets.

We do expect that we will grow revenues in 2009 so we're going to invest behind or business to continue to grow our core business with our commitment to continue to execute around the world.

Not only are we invested this year, is we're only just starting to get revenues coming in from Electronic Arts and major product launches where were all targeted for their consoles during the fourth quarter.

However, since we signed the deal with them, we've ramped up quite a bit internal team that work with them and who have been sort of preparing for these product launches.

So the good news is that next year we will get revenues to offset the expense that we've had in terms of our digital entertainment team.

And collectively, gentlemen, would you anticipate the total absolute revenue or excuse me the expenses you said, David, would probably be down a little bit year-over-year.

Would you anticipate the revenues related to all that spending being somewhat self funding those expenditures?

I think in terms of the Wizards of the Coast digital initiative we should have revenue coming on tap.

I think we're going up against a subscription based site there.

And with regard to Electronic Arts, we certainly have revenues against that spending.

With regard to new entertainment, particularly the Universal deal, no, we're not going to see revenues from that during '09.

Hopefully, 2010, certainly by '11.

In terms of the emerging markets, clearly we'll be getting a good return in Brazil and some of the markets we've invested in this year and we'll have revenues.

But if we're doing a start-up in Argentina or in other markets then obviously the revenues will lag a little bit.

Okay.

And another clarification regarding your ad spending.

On a full year basis as a percent of revenues, would you anticipate that being flattish to up somewhat, given the comments you made earlier?

Yes, it's not going to be down because we're going to keep driving during the fourth quarter here.

Okay.

And then lastly, any comment at this point, Brian, as to the timing maybe of a Spidey four release?

I won't comment before the studio, but suffice it to say -- hang on.

So I'll get back to you on that one.

But I'll let the studio sort of talk about that and as they solidify their plans.

Clearly, Spidey four is something that we would plan for.

Okay.

Great.

Thank you.

Our last question today is from John Taylor of Arcadia.

Please go ahead, sir.

I wonder, I want to go up to 30,000 feet if we can and talk about the global economic situation and implications for next year.

So if you go back six months as you were starting to think about '09 and '10 plans in terms of product planning and price points and all that stuff, you walk in with one set of assumptions.

Now we've got this amazing uncertainty, et cetera.

What things are on the table now, maybe, that weren't there before in terms of planning, what things have been taken off maybe in terms of new brand building or the impetus to expand your office space internationally.

Just wondered kind of in a general sense how you're thinking -- okay, so last year or this year retailers didn't push back on price increase -- I mean, they pushed back nominally, but they all had them so they couldn't deal with them.

Next year maybe the environment is different.

I wonder if you could sort of talk us through how the conversation has changed as you're approaching '09 and maybe '010?

There's a number of points to that, JT.

The first thing we've done is obviously at this kind of time, you've spent a lot of time with conversations internally and with your Board.

We have reiterated our position on liquidity and that we have a strong balance sheet and have generated great cash and that's something that we want to continue to have as part of our capital structure.

We continue to expect that revenues for 2009 and EPS will grow.

But we've also tempered those expectations with the current consumer environment.

We have great plans in place across our boy's business, as you know, two motion pictures.

In our birl's business, a number of brands and reinventions and our games business, similarly.

So again, as we work around the world, I think what we've tried to do is say we're going to stay focused on our core strategy.

We're going to continue to execute that core strategy and reinventing and reimagining those brands but we're going to have to temper our overall expectations as far as the consumer goes.

We still want to put ourselves in a position where consumers spend more as a percentage on our brands and believe we can do that through great innovation.

It's not to say we've abandoned some aspect of our plan.

We want to build an emerging market business.

We have built some offices and we're starting to see those get some traction.

We may open a few others but again, we're going to look at the environment to ensure that they can be successful.

And we're going to build on an entertainment business with the goal of getting a motion picture in as part of our deal with Universal.

We're going to build the digital gaming business with EA and EA is going to have more launches in 2009 than they had in 2008 and of course our revenues will go up as a result.

And we're building and rebuilding our licensing business because as we offer more brand experiences to consumer for our brand, and we've reorganized the Company around some core brand activities we think we can then grow our licensing and publishing business in a way we hadn't in the past.

So again, it's that core strategy.

A lot more focus being brought to bear on that, ensuring that we have the tools in our toolbox to activate those brands around the world and that we do have those offices open but overall tempering our expectations against a consumer who is clearly struggling at this moment.

It sounds like it's kind of full steam ahead from an investment standpoint, continuing on these initiatives you put in place for a while.

But maybe tempering top line, tempering margin, is that fair?

No, I think that -- yes, well there's some element of that but we're also -- we will temper some of our spending.

I think David had indicated, we'll probably have a little bit less investment in 2009 than 2008.

We will also probably have more revenues given the EA ramp-up against some of those places we've invested in 2009 versus 2008.

So you will see more non-toy, non-game revenues increasing in other categories.

Our licensed revenue should increase in 2009 based on Transformers and GI Joe, more significantly, more like where it was in '07.

So again, we're going to just look very carefully.

We're just, again, we don't want to say in fact we will say that we expect to grow revenues and EPS in 2009 but we need to be very carefully focused on the market and look at consumers and understand the consumer insights, both in terms of what we do in our products and marketing but also the consumer insights around shopping and shopping patterns and the size of baskets and working with our retailers and planning and forecasting that.

If you anticipate what some of those results are going to be, it's going to be a focus more on value, lower price points, that sort of thing.

You're anticipating maybe a shift in that direction that maybe you wouldn't have six months ago?

Well, I think one of the things that we should also note it Koda and Biscuit, you're familiar on the Triceratops and our FurReal dog are really great examples today of innovation and value for the money at any price point.

We are seeing even today strong early results.

Having said this, it's important to note, we're not trying to sell as many Kodas or Biscuits or higher priced items as we sell in action figures in the holiday.

I think it's finding that right balance in our portfolio and continuing to do great, innovative items, but recognizing, we've already said the bulk of our line, the majority of our product line does sell for $20 or under at retail.

Thank you.

Thomas Russo, please go ahead.

The question -- my questions were on the investment spend in emerging markets which I'm impressed that you continue to do even as the world seems to slow down, so -- but the other question, the other question was, that's just an observation.

The other question was as you continue to grow your advertising spending in total, how has the mix changed within that total?

Has there been any particularly effective new areas where you're directing portions of the ad spend to that may not have been as effective previously?

Hi, Tom.

Hello, Brian.

We are focused in our advertising in really looking at how consumers experience our brands.

So the long answer to your question is for each audience, for Littlest Pet Shop is very different than Transformers, is very different than PlaySkool.

Each one of those audiences and the folks that enjoy those brands, experience those brands and competitive brands in very different ways.

Littlest Pet Shop, the height of entertainment for a little girl is a Nintendo DS game and we're launching those presently with EA and that would represent the kind of products we're putting out and therefore, the marketing would be more focused around where those young girls would find messaging for those kinds of products and for our VIPs, the virtual interactive pets that are online.

So again, that's -- we have to be sensitive to where the consumer is, where PlaySkool about moms and about grandparents and focused on where they take in and understand information about buying great products, innovative products to help children achieve the developmental milestones that they're out to help them achieve.

So I think the mix continues to get let's call it more sophisticated and more varied as we go forward.

The opportunity to talk to consumers anywhere they are and everywhere they are is out there for us and it's very consistent with the kinds of experiences we're trying to provide for our brands.

Thank you.

If there are no other questions at this time, I'll turn the conference back over to our speakers for any closing comments.

Thank you.

I would like to thank everyone for joining the call today.

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

at Hasbro.com.

Thank you very much.

Ladies and gentlemen, that concludes today's Hasbro, Inc.

conference call.

Thank you for joining us and have a wonderful day.