孩之寶 (HAS) 2008 Q4 法說會逐字稿

Good morning, and welcome to the Hasbro fourth 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 Karen Warren, Senior Vice President of Investor Relations.

Ms.

Warren, please go ahead.

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, Senior Vice President and Head of Corporate Finance.

To better understand our fourth quarter and full year 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 it is available on our website at Hasbro.com.

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

During the call this morning, 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 and good morning everyone.

Let me begin by saying that in 2008, we achieved our stated goal of growing revenue and earnings per share in what could be described as one of the worst retail holiday seasons in decades.

Revenue grew 5% to $4 billion, compared to $3.8 billion a year ago.

The strength in our portfolio was broad-based with key drivers in each major product category contributing to our growth.

We delivered earnings per share of $2, compared to $1.97 in 2007.

Our results in 2008 reaffirm that we should be able to grow both revenue and earnings per share in 2009, assuming we do not see further deterioration in the global economy or foreign exchange.

After a very strong performance in the first nine months of the year, the fourth quarter clearly had significant headwinds.

Between the impact of foreign exchange and the broad-based economic downturn, fourth quarter net revenues declined 5% to $1.2 billion.

However, net revenues increased 1%, absent the $80 million negative impact of foreign exchange.

We reported an operating margin of 12.3%, or $151.6 million, compared to 15.4% or $200.1 million a year ago and earnings per share of $0.62 compared to $0.84 in 2007.

If you go back to four months ago on our third quarter conference call, we spoke with you about the changes in consumer demand we had seen since September and we described weakness in October retail POS.

At that time, we indicated that we had reduced our previous expectations for the fourth quarter 2008, and for 2009.

We further stated at our analyst event in November, if the weakness we experienced in October continued into November and December, there was the potential that retailers could pull back materially from previous indicated levels of purchase and there would be more uncertainty about how we would finish the year.

Following the November meeting, we did not see the improvement in retail sales that we had hoped for.

As consumers pulled back on their purchasing, this resulted in higher levels of inventory at retail.

To address this issue, we began to look at new ways to drive incremental business at retail and to finish the year in as strong a position as possible.

Prior to Thanksgiving, our discussion with our key retail partners around the globe shifted to developing additional programs to ensure the best possible sell-through for the remaining weeks of the holiday season.

Together with our retail partners, we put promotional programs in place.

The programs provided incremental markdowns as well as discounts to drive store traffic and to get product moving through retail in these very critical selling weeks.

The goal was to keep our core brands strong and to finish 2008 in a much better inventory position than we would have otherwise.

In this regard, the programs were successful.

That said, these actions resulted in a decline in operating margins in the fourth quarter.

Given the environment, we viewed these decisions as necessary and the impact on our financials as short-term.

Looking at the full year, while we took proactive steps in the fourth quarter to address the shortfall in consumer spending, it was our commitment to our longer-term strategy that enabled us to grow our business in 2008.

We continued to focus on four key areas as part of our ongoing strategy.

First, to reinvent Hasbro's core brands.

Second, to expand and drive Hasbro brands into digital gaming.

Third, to continue to make our brands meaningful by bringing them to life via lifestyle licensing and publishing.

Finally, to expand and contemporize our brands by delivering the right entertainment, an immersive experience for every consumer and audience.

In addition to these key strategies, we continued to execute our plans to grow globally, including our emerging market business.

Our focus on core brands, including continued investments in marketing and product development, drove solid growth for the years in our boys, preschool, girls and tweens categories.

Board games were also up for the year.

The boy's category was up 6%.

In the beginning of 2008, we said we believed that our top six boy's entertainment properties could quite possibly equal the top three boys' entertainment properties in 2007.

In fact, we exceeded our goal.

Star Wars was up significantly for the year.

The Marvel brands performed very well, with Iron Man exceeding expectations.

The Transformers brand was remarkably strong.

It did not show the type of decline we typically see after a movie year.

In fact, it was the lowest percent decline in the year after a movie of any of our boys' entertainment properties we have launched in the last ten years.

This summer we'll continue to deliver entertainment and immersive experiences with the live action theatrical releases of GI Joe: The Rise of Cobra, Transformers, The Revenge of the Fallen, and Wolverine, one of our Marvel properties.

Our preschool and girls' businesses was up double digits.

Preschool was up 11% with continued strength from our PlaySkool brand and in The Night Garden.

The girls' category grew 13%, led by Littlest Pet Shop, which was up a strong 26%.

The teen/tween category grew 7%.

Nerf continues to be strong and was up 51%, with the NERF Endstrike Vulcan and the NERF Endstrike Recon performing very well.

iDog also continued to contribute significantly to the category.

Board games were up 2%.

While the total games and puzzle category was flat compared to a year ago.

We did have tough comparisons due to shipments of Are You Smarter Than a Fifth Grader?

in 2007.

There were a number of successes in the games category, primarily from brands we targeted for reinvention, with products like Twister Hopscotch, Guess Who Extra, Sorry Sliders, Monopoly Here & Now the World Edition, and the 60th Anniversary Edition of Scrabble.

In addition, Picture Reader was launched globally and performed very well.

With all the strength in our core brands, it's clear that our strategy to grow and reinvent Hasbro brands is working.

In our digital business, our brands were reimagined through our partnership with EA, where we saw great success with Hasbro branded games, including strong selling titles from Nerf for the Wii, and Littlest Pet Shop for the Wii and Nintendo DS.

Monopoly also had a great year and launched on a number of platforms including mobile, iPod, the Wii and XBox 360.

In 2009, EA is launching several new video games and over two dozen games from mobile and online, including Scrabble, Cranium and Trivial Pursuit.

Additionally, Activision will launch a full slate of games in conjunction with the Transformers theatrical release this summer.

In 2009, we expect to continue growing our digital gaming revenue.

The investments we made in the emerging markets also contributed to our growth.

In the key markets we targeted for expansion, Russia, the Czech Republic, Brazil, Korea, and China, growth exceeded our expectations and many of our core brands performed well including Transformers, NERF, PlaySkool, Monopoly and Littlest Pet Shop.

Our continued investment in these markets will contribute to our growth over the next several years.

In 2008, many retailers experienced difficulty due to reduced consumer spending and the global financial crisis.

At the end of last year, two customers went out of business, in the Woolworth's in the UK and KB Toys in the US.

These events have not had a material impact on our business.

As we look to 2009, given the severity of the downturn in global economies, we are focused on keeping costs down, managing our operating cash flow, and continuing to invest in our business for the long-term.

Without question, we expect it to be another challenging year with the first quarter probably being the most difficult.

As the year progresses, we would expect to see more momentum around our major movie initiatives and as we roll out our many new brand initiatives this fall.

In closing, we remain committed to our long-term strategy, a strategy that has been successful and the one that we believe will drive growth, differentiate and create sustainable competitive advantages for Hasbro and deliver value to our shareholders for the long term.

With that, let me turn the call over to David Hargreaves.

David?

Thanks, Brian, and good morning everyone.

Before we review the full year numbers in detail, I would like to spend a few minutes talking about the fourth quarter.

As Brian indicated, the fourth quarter was extremely challenging, with consumer spending on toys down from a year earlier in most of our major markets.

In almost all cases, Hasbro outperformed the industry.

And we are reporting fourth quarter revenues which, absent the adverse impact of exchange rates, grew 1%.

This growth didn't just happen.

It took some major tactical initiatives.

You may recall that at our November investor event, we indicated October POS as being down significantly, and we potentially had some business at risk.

We decided to proactively work with our retail partners, undertaking additional promotions and giving them incremental markdown money to enable them to reduce the retail price of higher priced and slow-moving product lines.

This proved to be successful.

It enabled us to meet our revenue goal and to finish the year with a reasonable level of inventory.

However, these actions clearly hurt our operating margins during the fourth quarter, and were the major factor in the reduction to 12.3% from 15.4% last year.

Now let's take a more detailed look at our full year results.

In a very difficult environment, we delivered our fourth consecutive year of revenue growth and our eighth consecutive year of growth in earnings per share.

Worldwide net revenues were $4 billion, compared to $3.8 billion last year, an increase of 5%, or $184 million.

For the full year, there was a negative impact of foreign exchange of $10 million.

US and Canada segment net revenues were $2.4 billion, compared with $2.3 billion last year, an increase of $113 million or 5%.

US and Canada operating profit for the year was $283.2 million, or 11.8% of revenues, compared to $287.8 million, or 12.5% of revenues in 2007.

Net revenues in the international segment were $1.5 billion, compared to $1.4 billion a year ago, the segment was up 3.8% in US dollars and 4.3% in local currencies.

The international segment reported operating profit of $165.2 million or 11%, compared to $189.8 million or 13.1% of revenue last year.

Operating profit in both the US and Canada segment and international declined as a percent of revenue.

This reflects the costs associated with the incremental programs we implemented at retail in the fourth quarter.

In the US and Canada segment, we also had increases in product development and marketing expenses, related to the investments we're making in our core brands as well as our Wizards of the Coast digital initiative.

In the international segment, we had expenses related to the investments we are making in our emerging market strategy.

Now let's take a look at earnings.

For the full year, we reported net earnings of $306.8 million, or $2 per share.

This compares to $333 million or $1.97 per share in 2007.

For 2008, average diluted shares outstanding were $155.2 million, compared to $171.2 million last year.

Earnings before interest, taxes, depreciation and amortization were $654.3 million, compared to $653.5 million a year ago.

Gross margin for the year was 57.9%, compared to 58.9% a year ago.

The decline in gross margin is primarily due to the actions we took in the fourth quarter.

As previously discussed in our quarterly conference calls, throughout the year, we have been making significant investments in the emerging markets, in digital gaming, and our entertainment strategy.

This investment spending not only impacted our gross margin, it also impacted development, advertising, and SG&A expenses as well.

Now, let's take a look at expenses.

Royalty expense for the year was $313 million, or 7.8% of revenue, compared to $316.8 million, or 8.2% of revenue a year ago.

Due primarily to a lower mix of movie-based product lines.

Research and product development expense for the year was $191.4 million, or 4.8% of revenue, compared to $167.2 million, or 4.4% of revenue a year ago.

Advertising expense, while increasing $19.9 million to $454.6 million, was consistent with last year at 11.3% of revenue.

SG&A expense, at $797.2 million, was relatively flat on a percentage basis, although it did increase $42.1 million compared to last year.

Interest expense increased by $12.5 million to $47.1 million, primarily due to the $350 million of long-term debt we issued in the third quarter of 2007, offset somewhat by the repayment of $135 million of notes that matured in July 2008.

Other expense net totaled $6.1 million, compared to $22.4 million a year ago.

2007 included a $44.4 million mark-to-market expense on the Lucas warrants.

Our 2008 tax rate was 30.4%.

Excluding certain discrete items, our underlying tax rate for 2008 was 32.8%.

This compares to our 2007 full year underlying tax rate of 30.5%.

Now let's turn to the balance sheet.

At year-end, cash totaled $630.4 million, compared to $774.5 million a year ago.

We generated $593.2 million in operating cash flow in the last 12 months.

However, we spent $146 million to acquire Cranium and the Trivial Pursuit brand.

$135 million to pay down maturing debt, and we returned $467.3 million to shareholders via our increased dividend and stock buyback program.

Our receivables at $611.8 million declined by $43 million compared to $654.8 million last year.

This is in line with the lower fourth quarter sales.

Our DSOs of 45 days were consistent with last year.

Inventories increased to $300.5 million compared to $259.1 million a year ago.

Although inventories are up year-over-year, we are satisfied with the overall quality of our inventories.

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

We grew revenues and earnings per share in a difficult economic environment.

And at the same time, we were able to continue to make investments in our future.

As we look to the year ahead, we believe it will continue to be very challenging.

Given this, we are focused on keeping costs down and maximizing operating cash flow, while continuing to invest in our business for the long-term.

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

We look forward to talking to you again on Friday from our investor meeting in New York, where we will be providing more detail on our 2008 results and our outlook for 2009.

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

Thank you.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

We'll pause for just a moment to assemble the queue.

Our first question will come from Felicia Hendrix with Barclays Capital.

Hi, good morning, guys.

Good morning.

Hey, David, you gave a very detailed overview of the expenses you for the year but I have some questions through the quarter, if I may.

First is can you just walk us through the promotional impact on your margins in the fourth quarter?

What I think I said, most of our deterioration in operating profit and indeed gross margin was as a result of the additional promotional activities and markdowns monies that we gave.

So for example, coming into the last couple of months of the year, we realized that some of our higher priced products like Colter, for example, Colter the Dinosaur, just wasn't going to move at $249 retail.

People weren't really buying too much at that level.

So we took some fairly aggressive actions, working with our retailers, to get the price of these higher priced items down.

And in fact, Colter, we brought all the way basically at retail to $99, and it was very successful.

It sort of cleared out at that level.

So we took a lot of actions like that to make sure that any slow-moving product or product that really wasn't going to carry forward so much to this year, maybe things related to movies like Indiana Jones or the Hulk, we took fairly aggressive actions to make sure that we cleared all of that out during the fourth quarter.

And, that's the main reason why our margin was lower.

So it might be hard to back this out but if you backed out the promotions that you did and again, maybe it's difficult because you wouldn't have been able to get the revenue growth, but what I'm trying to figure out is underlying the promotions, how did your margins look?

Our underlying margins were basically at a normal level.

If you go back over the years, typically for the year had about a 58 point something margin and that's been fairly consistent, go back over the last 10 years.

If you look at the year, we came in at 57.9.

In fact, the only reason we were down was really due to the actions we took in the fourth quarter.

So I think the underlying margins in our business are as robust as they've been.

I think a lot of people were concerned earlier in the year, as commodity cost increases were hurting our margins, we took some pricing as you know at the beginning of September and I think absent the actions that we took, we would have posted normal fourth quarter margins.

Okay.

That's great.

And then regarding the inventories, I know when you were finishing your prepared remarks, you were saying you were comfortable although, again, at the year-end they were higher, just if you could reconcile being comfortable with the level.

So I think when people talk about our inventories and they talk about retail of inventories as well and I think on the retail as it's a mixed bag, we deal with several major multi-national retailers around the globe, and I don't think there's a one answer which is accurate for all of our retailers.

So really I'm mainly talking in the aggregate.

I think in the aggregate, both our inventory and our retailer's inventory is a bit higher than we would like to see in a normal year.

We had to recognize that this is not a normal year, and in fact, that retailers are probably going to rebalance their inventories lower in the first quarter, recognizing that we're in a recession.

Now, that will be a challenge we had to face, and we're already starting to face that challenge.

We had an extended Christmas break at our factories in both Waterford Island in East Long Meadow, Massachusetts.

We instigated a short working week in Ireland, and we held off bringing a number of people back at our East Long Meadow factory.

In addition, we're selectively slowing down some of our purchases from the Orient.

So it is a challenge and we're already addressing it.

But that said, I think there's a lot of positives as well.

Firstly, we did clear through most of the slower moving and higher priced inventory.

That went.

So most of what we have and our retailers have at year end is in strong brands that have momentum around it will sell through.

Secondly, even in times when retailers are adjusting inventory, they will still buy in really good, innovative product, or product associated with much-anticipated movie releases.

So we are in a fortunate position that we will be shipping inventory associated with Wolverine and with Transformers 2 during the first quarter.

So I think in summary, our inventories are probably a bit higher than we would like.

We recognize this challenge.

We're taking actions to address it.

And I think overall, because of the strength of our product line, we're in pretty good shape to emerge from this fairly quickly.

Then, just finally, the other expense line, was that related to foreign exchange, the $12 million?

The other expense certainly had some foreign exchange, that was a good part of it, yeah.

Was that the majority of it?

I think it was, yes.

All right.

Great.

Thanks, guys.

Thank you.

Our next question will come from John Taylor with Arcadia.

Hi.

Hi, John.

Hi.

I've got a couple of questions.

So the -- on the movie front, yeah, looks like there's some excellent catalysts coming on.

How do you think retailers are going to approach sort of average quantities of movie-based items this year, given all the skittishness out there?

I don't expect sort of any specific number but is this -- do you think they would bring in maybe 10, 15% less on average than they would for a similar movie in a better year or -- I mean, is there any way to try to gauge that at the front end?

John, it's Brian.

As we look at the movie initiatives, Wolverine is in May and so as David mentioned, we will be shipping that product later in the first quarter.

Transformers is a lot of excitement around the world and Transformers comes at the end of June.

Our products will come in the end of May.

As we've gone around the world, as we've looked at the film and I'm sure you saw in the Super Bowl, the first Transformers commercial, we are very excited.

Our retailers are very excited.

They saw what they did last time.

We recognize we left the market a bit short in 2007.

The brand had a really strong year last year with a lower decline than we've seen in prior non-movie years after a movie and so people feel very good about that.

GI Joe, we've been all around the world, seeing retailers and feel very good about that, albeit later in the summer.

So we don't have a specific -- I wouldn't say that there's been some wholesale decision upon retailers to take inventories one way or the other prior to movies.

I think they want to be in a good position prior to these movies, because of all the excitement and the marketing that comes, all the promotional partnerships that comes and all Hasbro's marketing that comes during those times.

And then on the girls side, I don't want to steal any thunder from Friday, but the boys' outlook seems pretty solid.

Seems like a lot of key girls categories started to slow down at retail last -- during the holidays and so on.

You've got some surprises up your sleeve or is there anything you can talk about on the girls side in terms of brand focus this year.

Yes.

In fact, we're going to talk on Friday about a brand-new initiative for Littlest Pet Shop that's very exciting.

And Littlest Pet Shop performed very well in the fourth quarter around the world.

As we go forward, you'll also see new initiatives, some of the key drivers in the showroom, we'll have some of those going on.

But again, there's a recognition that we are going to get more into the insights of our girls and you're going to see more interesting digital initiatives that tie together with our analog business as we go forward.

We'll talk about that on Friday.

So we feel good about our girls' business as we go forward.

The opportunity to expand those businesses globally and in emerging markets has been really evident for us in 2008 and we expect that kind of momentum to continue in '09.

Okay.

Good.

Last question.

Dave, David, where did you guys bring in the EA royalty from the digital partnership?

Which line?

It comes in in our net revenue line and then it will get recorded in our other segment and on our product line reporting in the K, it will be spread between the various categories.

John, let me just go back on one thing also.

I forgot to mention and should, Strawberry Shortcake will launch this year in 2009 so we'll talk about that as well.

Thank you.

Our next question will come from Margaret Whitfield with Sterne Agee.

Good morning, everyone.

I was wondering, the rebalancing that you talked about in Q1, apart from the entertainment properties, given the ending inventory, do you imagine you may have to provide added promotions to clear out what exists in your pipeline in Q1?

Margaret, we don't.

As I said, we took aggressive action in the fourth quarter.

Anything that was slow-moving or high priced.

And as I said, we are very happy with the quality of our inventory.

It may be a little bit high, but we're very happy with the quality of the inventory that is there.

And we think that this will be a fairly quick adjustment, sharp and short adjustment by retailers and then we've got quite a lot of new and exciting product which we know we are planning to buy into and obviously we do have the advantage of shipping in for the major movies.

Margaret, it's Brian.

If we look at PlaySkool, they performed well in 2008, we had a lot more carry-over items into 2009 than we had had in previous years.

A couple of new initiatives in the spring including whole card gaming initiatives, headlined by a Monopoly product including a NERF initiative around our swords and so we've got a lot of right price point new initiatives in the first half of the year.

You mentioned the spending on emerging markets, digital, et cetera.

Can you quantify the spending in Q4 and for the year?

I'm not sure we've added it all up exactly like that but we certainly indicated in the earlier quarters it was running at about $20 million a year -- $20 million a quarter and it would start to tail off toward the end of the year.

So I would say in the aggregate, it's somewhere between 60 and $70 million of investment spending behind these various strategies which include the emerging markets, includes ramming up our in house force to support our EA initiatives where revenues only start in the fourth quarter but we had people on board all year.

It included our Wizards of the Coast digital initiatives, which is Dungeons and Dragons Insider which can go on the Internet and see now.

So there's a whole bunch of initiatives that were included in there and the aggregate spending over the year was probably about $7 million.

You would add to that the opening the offices in Brazil and starting a company in China, the Czech Republic.

So again, investments in personnel, marketing and sales personnel to help us build our business globally including the emerging markets.

In our entertainment strategy we brought on our executive to help with the Universal Studio relationship, Bennett Schneider and Lisa Likt were announced and we have started our own Company registered with the Screen Writers Guild in order to write scripts and we've been funding some script development.

So a lot of investment spending went on during 2008.

Will the incremental spend in '09 therefore might be more limited year-over-year?

Yes, we would expect it to be more limited.

The Wizards of the Coast digital initiative is now up and running.

We've opened many of these offices.

We'd have the ongoing cost of personnel in those offices, some of those offices will now begin marketing programs, but again, more nominal spending overall.

And you have a major gap between Mattel and yourselves in the emerging markets.

Could you comment on whether or not you've seen a big up tick in the sales to emerging markets in '08?

I think this year we only started our Company in Brazil and shipped our -- issued our first invoice in June, so clearly, Brazil is good for us but it was still in the early days.

And I think as you look at the next few years, we certainly think we're behind and we need to close that gap and we'll do it fairly rapidly.

I don't think the incremental revenue to Hasbro overall in 2008 was that material.

I think it becomes more material in '09 and '10.

Finally, competitors announced a price increase, took effect Jan 1.

What are your thoughts on price increases this year?

Yeah, we will be taking a price increase February 1.

We're really only taking that to cover our cost increases from our Orient vendors and while a lot of people look at resins, ABS and high impact styrene and say they're going down, resins are only about 6% of our overall revenue.

So if you look at our cost of goods sold, the highest commodity usage for us is paperboard and print and certainly these costs are higher at the end of '08 than they were at the end of '07.

Our largest single component in cost of goods sold is labor and Chinese minimum labor rates are certainly higher at the end of '08 than they were at the end of '07.

In addition, you have vendors having to deal with additional social costs, additional safety testing that has been imposed by the Chinese authorities.

The Chinese currency was higher at the end of '08 than it was at the end of '07 and like everyone else in the world, our vendors do have to finance their working capital.

And as you know, as everyone knows, the cost of financing working capital has gone up.

So I think the overall, there was a lot of pressures on vendors, our prices -- our costs have gone up and we are going to take a sort of mid single digit price increase in order to offset those costs.

Thank you.

Our next question will come from Robert Carroll with UBS.

Hi, guys, thanks for the detail on the commodity cost breakdown.

As you kind of go towards the contract negotiations going forward on the acquiring costs, what are you guys seeing right now?

Is there any leeway or -- ?

I mean, clearly, things like resins have come down very dramatically and clearly the cost of oil used in transport has come down quite significantly.

So we are going back to our vendors and are saying to them, you need to pass that on to us.

So we are hopeful that we will be able to get some reductions in our costs, particularly on items that have a high plastic content and we're hopeful that we should see a year on year reduction in terms of our ocean freight, which also gets into our cost of goods sold.

So this should help us to mitigate some of the early cost increases we've seen and we've taken costs now but wouldn't expect to have to do that again throughout the year.

Okay.

And then have you guys -- I know this is still a ways out but in terms of the Marvel agreement, have you guys even started to look at extending that, adjustments to the term, increasing the scope?

Have have there been any changes from either side?

We're very pleased with the Marvel relationship and we've seen the kind of development that they're putting forth during our current term in the contract.

Very excited about properties coming in 2010 in Iron Man and Thor in 2011, so we still have a number of years there to work together and we'll see how it goes.

We'll see how it goes.

And then just finally, on the share repurchase, obviously there were none in the quarter.

Has there been a change going forward, given the current environment, about how you guys will be addressing share repurchases.

I think in the fourth quarter, credit markets virtually seized up.

People were worrying if there would be any credit available at one time and would people be able to make payroll, and would people be able to draw down on their revolver, and would people be able to go into the bond market toward, even if you were an A rated credit.

So in that kind of environment, we clearly hit the pause button on our stock repurchase program.

But obviously, as credit markets ease over time, we'll continue to consider whether we've got open authorization, we'll continue to consider whether we buy back.

Certainly, we do believe at the moment cash is king.

All right.

Thanks.

We'll go next to Tony Gikas with Piper Jaffray.

I have a few questions for you as well.

Just a little bit on the investment in international and digital, a couple questions.

You made a lot of of investments over the past few years.

Could you just quantify when the full benefit of that kicks in.

Sounds like more so in '09 and '10.

But when do we see the full benefit and what's next in terms of international investments, what sort of countries will be coming next?

And then on the digital side with EA, those revenues last year I would expect were relatively minimal.

Just maybe talk a little bit about the growth, does that go from $7 million to kind of $15 million in '09?

And do you expect that the spending, the investment in that, should be rather limited this year, relative to last year?

Okay.

So first, in international, we have now opened a number of offices in the emerging markets and now we will have some additional spending as we look at marketing plans and promotional plans, sales plans for those countries.

But not really increases, per se, in personnel overall.

Maybe a few countries in China will continue to grow and a few Asian countries but more nominally in terms of cost of salaries and more into marketing and some advertising.

And in terms of additional countries, we are looking at a number of countries.

We haven't made any decisions yet on opening additional offices this year, although there are a few plans that we're looking at preliminarily.

In digital gaming, you're right, you will begin to see more of those revenues and earnings come to the Company this year as we go full-on a full year of EA's initiatives.

We have our team in place, so again, in terms of additional costs from Hasbro, against that, probably more nominal with revenues increasing not only from Electronics Arts, but of course, Activision coming in with an array of games for the Transformers movie.

So again, growth in digital gaming revenues, although I'm not going to quantify it for you year on year.

But suffice it to say, the number of new initiatives and the size of those initiatives have grown dramatically.

Okay.

Was the -- and I was just referring to kind of the EA digital part of that.

Was that a relatively breakeven type event for you guys in 2008?

Yeah.

I think from a the get-go, we always said that our revenues from the EA deal would not be that material during '08.

We did have or they did have some cell phone and some online games up earlier in the year but in fact, the big console and handheld DS games really didn't start to ship until November, December.

So we really only had a couple of months on the higher performing platforms.

And if you notice, Littlest Pet Shop in the fourth quarter didn't launch until the fourth quarter.

Littlest Pet Shop, the Nintendo DS games, EA reported they sold around 3 million units.

It made it a top ten SKU for the holiday season, leading about out through very well-known titles.

We'll talk more about that on Friday, that clearly our girl and that audience is responding quite well to the digital gaming platform and I think it's caused us all to look at great opportunities, additional opportunities across our business with EA.

Okay.

How about any material changes to floorplans or shelf space during the first or the next nine months, kind of the non-holiday period of the year, have you seen any meaningful shifts at retail.

Then two housekeeping.

The first Universal movie will that be 2011?

And then the last one.

Transformers I believe in 2007 you indicated revenues were in the $480 million range.

What was the comp in 2008?

Lets start with Transformers.

What we said was that the Transformers decline was more nominal than we had seen on any boys' entertainment properties in the last 10 years.

We didn't report the number.

Typically we report the number if it's more than 10% of our revenue.

But it was quite good, quite strong and gives us great opportunity for this year which segues to your second question.

The one thing we're seeing obviously is with the new movie initiatives happening earlier in the year, and a number of sizable initiatives, obviously our retailers are gearing up for that.

We're gearing up for that around the world.

A lot of great excitement.

You would expect Transformers to be a top program at many of these retailers and it is, the kinds of square footage that we would get earlier in the year is consistent with that kind of excitement.

So you have the three major movie initiatives, continued strength in some of our other core businesses, so again, we should see some business earlier in the year.

First universal movie?

2010 or 2011.

We're very excited about the kind of development we've done.

You've probably seen some of the announcements out there about writers and potential directors and we'll talk more about that on Friday but again, Bennett and the team, the Universal team are doing a tremendous job in getting an incredible array of creative stewards who are all very excited about our properties, who've grown up with these properties and believe in the potential of these brands and so we'll talk more about that but again, 2010 or '11.

Thanks, guys, good luck.

We'll go next to Tim Conder with Wells Fargo.

Thank you.

On the EA relationship, gentlemen, given what's happened in the overall global environment and yet Brian what you said regarding the Littlest Pet Shop success, do you anticipate if you rewind to a year ago, do you anticipate that ramp rate in revenue with EA to be more similar or less than what you thought it would be a year ago?

What we're really seeing, and I think you're seeing it across the video game industry, is casual gaming really coming to the fore.

Whether it's the Wii or whether it's online games or Nintendo DS's handheld games and as we said all along we believe our brands were the sweet spot for those kind of games, given the generational appeal, given the global appeal of those brands and brand names and the opportunity for those audiences to participate now in more casual games.

EA obviously recognized that in doing the deal with us but we're seeing the early successes there and so we'll continue to build that business.

I know EA still has committed plans across our business and a number of new titles across a number of platforms.

So we feel very encouraged by the progress that we're making and it's as good as we hoped it would be.

Okay.

I think about a year ago you said that EA's looking to grow that business $600 million you anticipate it being about half of that business over a three-year period so you're saying that's basically intact?

I believe as you look at the mix of the business, if you look at the mix of the business overall in the industry, as well as what we are doing and you see how well our titles are performing, we will continue to move business plans in that direction.

We were quoting at that time, we were actually quoting back Kathy Ryback at what EA said at their analyst meeting, that they expected to grow family and casual gaming from about $400 million to $1 billion over the next few years and that Hasbro titles would be a key driver.

So that was them speaking as opposed to us.

Okay.

Okay.

David, on the inventory side, what geographic markets performed the best or the worst and then I know you had said it kind of varies by individual retailer but looking at from a more country or geographic area perspective and then maybe what categories do you feel either at the Company level or in the channel that you're in the best shape or a little heaviest on?

I think first of all, that the industries were down in a lot of markets.

I suspect that when TI announced the industry here that it was down particularly in the fourth quarter, Canada was down in the fourth quarter, certainly the UK was down in the fourth quarter, France was down in the fourth quarter.

So there was a lot of major markets that were actually at an industry level were down in the fourth quarter and we believed we outperformed the industry in most cases.

Now, that said, when the industry is down that much, things are moving slower and you end up with being a bit heavier on inventory.

And I was kind of repeating myself but I think most of the problem areas we took care of.

I think the markets which were most hit by the economic downturn were probably the US and the UK was hit pretty badly.

Fortunately, we don't do any business in Iceland.

I think the German market actually finished relatively strong and while the business was down, the industry was down in France, we finished very, very strongly in France with Littlest Pet Shop and other brands.

So France, for example, I would say our retailer inventories are in much better shape and our own inventories are in much better shape.

Again, in the US, some retailers tend to be more inventory-adverse and shut down earlier and probably ended up being out of stock in some items, missing sales.

Other retailers said we're kind of going to go for it, didn't miss any sales but probably a little bit heavier on inventory.

So it's a kind of mixed bag out there.

Okay.

Then overall, as you're saying you outperformed and relative to the industry overall, so what you're saying is you believe that your inventories in the channel are in better shape than the overall industry?

That's what you're saying?

I'm not going to answer that one because it's almost like I'm commenting on other Company's inventories which I'm not going to do.

Okay.

But I do think that clearly the market, the industries were down in the fourth quarter, and absent the exchange rate our shipments were up and our POS was good.

So I feel comfortable about where we are and when you talk about the quality of inventories, we have a lot of inventory in things like Littlest Pet Shop, in Star Wars, in Transformers.

All of those things are continuing to do well, have a lost momentum.

So we're not worried about them at all.

At the end of the year we take a hard look at the inventories.

Anything we see as a liability we take account for.

The things that we're carrying over in addition to the great strong product lines like PlaySkool and some of the ones that David mentioned, we do have some new initiatives for the spring that we were clearly putting into inventory and getting out into the market.

We're seeing some great early results at the right price points for a lot of brands, things in NERF and our card games business, along those lines.

And lastly, just a housekeeping item, David, you mentioned the overall operating cash flow.

Could you talk about D&A and CapEx for the year and the expectations for '09?

Depreciation -- let me see.

For the year, depreciation is coming in at about $87 million and our amortization is about $78 million.

So it's $87 million plus $78 million.

I think as we go into next year, our capital spending in '08 was a bit higher than usual at about $117 million because we're doing an SAP systems upgrade and we drove some new work practices in and staff reductions in our factories and we committed to spend a little bit more in the factories so capital spending at $117 million was up a little bit in '08.

That will lead to depreciation being a bit higher in '09 than it was in '08.

And I think amortization, we'll get the first full year of Trivial Pursuit and Cranium.

But come the fourth quarter, Wizards of the Coast amortization sort of drops off.

So I think on balance, I think on balance, amortization might be about even.

Okay.

And then the CapEx plans?

And capital expenditure in '09 will probably be back down to 90 to $100 million.

It won't be $117 million again.

Great.

Thank you, gentlemen.

We'll go next to Greg Badishkanian with Citi.

Great.

Thank you.

Two questions.

Just looking at the currencies, let's assume that currencies stayed constant for the remainder of the quarter.

How much of an impact would that have on your first quarter?

I believe you said $80 million in your -- $80 million impact in the fourth quarter?

Yes, it was $80 million against revenue in the fourth quarter.

And --

So it will be fairly significant.

Let's remember that over the last two months, last summer, Sterling was at $2.

Right now it's closer to $1.40, hovering a little bit above or a little bit below.

The Euro was up at above $1.50 last summer and that's been around $1.30, a little bit above, a little bit below.

So we've had a fairly dramatic weakening of overseas currencies and certainly over the full year, that's probably reduced our full year's expectation by about 5%.

In the first quarter it's probably a little bit more than that.

That said, as Brian said on the conference call, if the economies don't deteriorate any further, and exchange rates stay round about where they are today, then we actually do think we'll be able to post revenue growth in '09.

But there's clearly a significant headwind in terms of foreign currencies and the overall economy.

And speaking about revenue growth in 2009, you've got a number of interesting movies coming out or toys related to those movies.

Wolverine, GI Joe, Transformers 2.

How do you think that compares with the lineup that we saw in 2008?

Well, as you remember, we created some new math about a year ago and we thought six could equal three in 2008 and in fact, it did.

It exceeded the three.

I would say, so next round of new math is four may equal six as we go forward.

Good.

Thank you very much.

We'll go next to Drew Crum with Stifel Nicolaus.

Thanks, good morning everyone, it's Stifel Nicolaus.

Good morning.

Just wanted to ask you about the Star Wars property.

You mentioned significant growth in 2008.

What you saw in terms of sell-through during the period and what remains in the pipeline as far as programming is concerned in 2009 and '10?

Well, we did see great growth in Star Wars and the innovation in the product line contributing to that.

We believe that both animation in 2009 will continue and then further on, 2010 or '11 would be more live action.

And again, I don't think there's been a specific announcement on the date.

But Star Wars having some entertainment support go forward will certainly be there.

And again, we believe Star Wars, the performance from last year just indicates with great innovation and story telling, the brand is very strong.

As far as the EA initiative is concerned, you guys had a lot of commentary around that.

I wanted to know the number of console and handheld games that are planned for 2009?

I think you mentioned a half a dozen or I'm sorry two dozen games for mobile and cell phones.

I believe that we will be able to get into that more fully on Friday, Drew.

And I believe that between now and Friday, EA is planning its own set of announcements around its lineup for this year.

So you'll get a lot of specificity there from them.

But we did talk about a number of new products on all the different formats for 2009, and that is true, Trivial Pursuit and Cranium and more Monopoly titles and more Littlest Pet Shop titles.

Again, they're going to do their announcement and we'll be able to talk more about it on Friday.

Can you say what the games and puzzles business did in the fourth quarter in terms of year to year growth or decline?

The games and puzzles year for the full year were down -- was down slightly while board games was up a few percent.

And Brian, how about in the fourth quarter?

In the fourth quarter, games and puzzles were down a bit more significantly, as were board games.

Okay.

And then last question.

The tax rate was a little lighter in the quarter.

What drove that and your expectations for the effective tax rate in 2009?

Hi, Drew, it's Deb.

I'll take that one.

Our tax rate was down in the quarter due to some benefits that we got from repatriating some cash from overseas that we had previously yet to take some benefits on.

We previously recorded some provisions on that.

As far as our expectations for 2009, we'll talk a little bit more about that on Friday.

We expect that our 2009 tax rate will be more in line with the underlying rate for 2008.

Okay.

Thanks, guys.

Thank you.

We'll go next to Sean McGowan with Needham & Company.

A question regarding the promotion or advertising expense in the quarter as a percentage of sales because it's something that I'm not clear on.

When you take these promotional programs to discounting and markdown money, that typically has the effect of reducing what your reported net sales are and often that shows up especially if they're negatively surprised as an increase in the advertising in the fourth quarter as a percentage of sales and yet it was down.

So I'm wondering, how did these promotions work if it didn't result in at least a stable or increased rate of advertising as a percentage of sales?

It actually is from growth to net revenues, is where it's reflected.

So your net revenue would be down.

So if you're looking at the numbers that we're looking at the advertising dollars as a percentage of net revenue would tend to increase and yet I think in the fourth quarter relative to last year it was actually down.

Yeah, so I think one of the things that we did, Shawn, is we clearly had a rebalancing towards more specific customer-directed promotions and the markdown money, which clearly goes up into the reduction in net sales.

So I think there was some advertising that was uncommitted and we do it sort of on an accrual basis which we call back on some TV in order to do much more targeted, much more specific against slower moving or --

The total marketing was up but the mix changed late in the fourth quarter.

Sounds like the recognition that the consumer was looking for a deal and you can whistle all you want on TV but if you're not doing something at point of sale it's not working.

I think it's important to note that it wasn't an across the board thing.

There's a lot of our core brands that we supported throughout, with television throughout the season, that were selling well.

And then there was some slower moving items where we felt that we could get more impact with additional retailer programs and dialing back on the TV for those specific items.

Thanks.

Brian, when you went through the performance of the major categories, I think you were -- all those numbers you gave were full year numbers.

Could you go through those, all those categories for the fourth quarter?

So if you look in the fourth quarter, our preschool business was up 8%.

Up 8%?

Up 8%.

Our girls' business was up 7%.

Our tweens business was up 43%, driven by our NERF business.

Wow.

And our boys' business was down low double digits, 13% and I noted already games and puzzles and board games.

So that's where we ended.

So again, a number of initiatives that were really working for us in the quarter so you can look at that as the differentiation where we had items like Coda, where we were pulling back on advertising and putting it into retailer programs.

Thank you.

And did you say that Iron Man 2 and Thor are both expected in 2010 or is that 2011?

No, 2010.

Iron Man is expected May '10 and Thor is expected July 10.

Okay.

And Spider-Man is still expected '11?

I believe so, yes.

Okay.

Thank you.

Great.

We'll go next to Gerrick Johnson with BMO Capital Markets.

Good morning.

I was wondering if you could give us of the $60 million to $70 million of investments you talked about earlier from 2008, how much of that has been expensed already and how much is still to come?

All expensed.

It's all expensed.

It all went through the -- we've used that as a -- by way of explanation of why operating margins have been down and that's because it essentially all went through the P&L.

Through the P&L.

Exactly.

Okay.

Very good.

And on the pension, how have your assumptions changed and what does that do to your funding level?

Well, our assumptions really haven't changed.

We haven't had a remix of our assets.

But I will say that we were in a very down market, we were relatively pleased with investment losses on our pensions, only around 12%.

And we don't expect that we have any contribution requirement outside of some of the smaller, international contributions that we're required to make for statutory purposes in 2009.

Okay.

And finally, the exact street dates for the three movies for this year?

Sure.

It's -- the expected dates are May 1st for Wolverine, Transformers is June 26th.

Is that the street date for the toys?

Oh, no, sorry, I thought you were asking about the movies.

No, no, the street date for the toys.

Back up five to six weeks from these dates.

And GI Joe is August 7th is the movie and I think I mentioned that Transformers we were talking about something around the end of May.

All right.

Great.

And that's when we see the stuff on the shelves, not necessarily when it would ship though; right?

Correct.

Yes, exactly, that's on the shelves ready for retail.

Thank you.

We'll go next to David Leibowitz with Horizon.

Good morning.

Good morning.

A few things.

What was said about Star Wars until the Q&A, are we take that to mean that Star Wars is not quite as important in your outlook for '09 as it might have been in '08 and '07?

No, not at all.

I just can't cover everything in our scripting.

So we're happy to have had a question about it and clearly we can talk more about it.

Star Wars performed exceedingly well last year.

We feel very good about that brand going forward, the kind of entertainment that Lucas is doing in television has certainly be beneficial to the business.

Our teams have done a tremendous job in innovation which is evident in the market and consumers are really enjoying the products that we're putting out.

Both in the core as well as the Clone Wars related products.

So that would go forward, David.

Are we saying, I don't mean to put you on the spot, although I know I am, which is that Star Wars might have a better year in '09 than it did in '08?

I don't think I'm going to be able to answer that.

I thought I gave you some good intelligence when we said that we thought four would equal six.

Okay.

Second of all, David, you made a comment near the end of your presentation that you expect that you are positioning '09 to be a good year.

Now, I believe the November meeting the term was an up year.

And am I to take good year to mean a step back from an up year?

Let me just comment on that first.

Obviously, barring any further deterioration in the global economies, or as we talked about foreign exchange, we would expect to be able to grow both revenues and earnings per share again in 2009 as we did in 2008.

And we talked about the levels, current levels in foreign exchange.

So again, we would expect, we have the initiatives to be successful, although we also said back in our third quarter conference call and at our analyst meeting that we were tempering our expectations to reflect the realities of the market.

We still feel very good about our business, barring these major exogenous factors.

Okay.

That explains the choice of words.

I say thank you.

And the last question, if I may, a follow-up on Sean's observation.

If I look at your total markdown money in '08 versus the total markdown money expended in '07, the differential between the two equals how many cents per share of the earnings shortfall for the year?

I think we have given you about all the guidance we're going to give you there, David.

Suffice it to say, we said that the decline in our earnings in the fourth quarter was mostly attributable to the additional markdowns and promotions that we had done.

So we're not going to quantify that year on year.

But again, I think the important thing to leave you with is that both our gross margin going forward as well as our earnings in the quarter would be more normalized go forward, gross margins in particular, because we again said we dealt with a lot of these inventory issues that were out there in 2008.

We took a decision to be more significant earlier, feeling that we could drive both consumer demand and lower inventories.

Okay.

Then if we look at '09 you've already made your basic assumptions about markdown money which you accrue each quarter.

Is there number for '09 higher or lower than the amount that you accrued for '08?

It's actually -- it would be in line with more traditional -- our more traditional sales expectations.

Clearly be lower.

I mean, we -- the fourth quarter came upon us fairly quickly and as we go into this year, while we're expecting it to be a difficult year, we're going to plan it a bit differently.

We're going to have less higher priced items out there as we go through this year.

And we'll have more lower priced items.

In addition, our retailers will be ordering in line with the market expectations and that will be -- they have their inventories accordingly.

So they're not suddenly going to get caught by going into a very severe recession going into the fourth quarter like we did this year.

David, if you can look at the situation, if we all can remember September 15th last year, we were in the throes of shipping a lot of inventory for the fourth quarter.

We're in a very different position now having the opportunity to look out on the horizon to make a different type of plan for 2009 which we indicated some months ago that we would be tempering our expectations although, again, believing that we could grow both EPS and revenues this year, barring any further declines in global economies or exchange rate.

Okay.

Thank you very much.

There are no other questions at this time.

I would like to turn it back to our presenters for closing remarks.

Thank you, Augusta.

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

The replay of our call will be available on our website in approximately two hours.

Thank you.

This you does conclude our call.

We would like to thank everyone for their participation.

Have a great day.