孩之寶 (HAS) 2009 Q3 法說會逐字稿

Good morning and welcome to the Hasbro third quarter 2009 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.

Thank you, and good morning, everyone.

Joining me today are Brian Goldner, President and Chief Executive Officer; David Hargreaves, Chief Operating Officer; and Deb Thomas, Chief Financial Officer.

To better understand our 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 Deb will review the financials, we will then open the call to your questions.

Before we begin, let me note that during the 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 our future financial performance and 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.

Our Company has continued to perform well in this very challenging global environment, as we grew both earnings and earnings per share in quarter.

Net earnings for the quarter were $150.4 million compared to $138.2 million in 2008 or $0.99 per share compared with $0.89 a share a year ago, an increase of 11% in earnings per share.

The growth in earnings and earnings per share includes the dilution from the joint venture and investments we are making in Hasbro's virtual studio.

Revenues were down 2% or $22.7 million to $1.28 billion in the quarter; however in constant dollars, revenues grew 1% to $1.32 billion.

We experienced growth in a number of key brands including Transformers, GI Joe, Nerf, Littlest Pet Shop, Play-Doh and Tonka.

In anticipation of the holidays and as part of our ongoing engagement with consumers we recently commissioned a proprietary survey in the key US and international markets to better understand holiday spending trends and preferences.

The results of this survey revealed some key learning.

First, toys and games are well positioned garnering the highest percentage of the survey respondents planned holiday gift budget in each market survey.

Second, brand matters, with the specific brand name requested by a child ranking as the most important factor in purchasing a toy or game.

Lastly, confirming what has been reported in the media, the majority of consumers plan to spend at last years levels with about a quarter of consumers indicating they would spend less and approximately 10% saying they would spend more.

In addition, NPD data for the US year-to-date through August, highlighted that toys and games outperformed other consumer categories.

In this time period, NPD showed a decline in traditional toys and games of just 1.4%, considerably better than other major consumer categories such as apparel and consumer electronics.

Furthermore, Hasbro performed exceptionally well relative to the industry as NPD data on Hasbro sales of traditional toys and games in the same eight month time period increased 9.7% compared to a year ago.

The data also showed that for the latest three-month period, June to August, Hasbro grew more than 16% compared to a year ago, outpacing the overall US toy market which declined 2%.

POS data for Hasbro's top four domestic accounts further supports these trends and during the third quarter Hasbro's POS was up 1.8% from a year ago.

In recent weeks, Hasbro's POS trends have shown further signs of improvement.

While it is still very early in the fourth quarter, and the data points are limited, the trends are encouraging.

Now, let's take a look at how our major global product categories performed this quarter.

The boys business was up 12% with Transformers, GI Joe, and Nerf driving the growth in the category.

We had a great Summer with the theatrical releases of Transformers Revenge of the Fallen and GI Joe the Rise of the Cobra, which had a combined global box office receipts in excess of $1.1 billion.

With the planned DVD release of Transformers Revenge of the Fallen tomorrow, we expect our Transformers line to continue to do well in the upcoming holiday season.

With combined global box office sales of over 1.5 billion for Transformers One and Transformers Two, Paramount has announced plans to release the third Transformers film on July 1, 2011.

GI Joe, Rise of the Cobra also performed very well with $300 million in global box office receipts and slightly more revenue internationally than domestically.

In many cases this was the first introduction of the GI Joe brand outside the US and it went a long way toward building global brand awareness.

If you look at the performance of GI Joe compared to other first time movie back properties, it performed extraordinarily well.

In fact, this year we expect revenues in excess of $100 million for GI Joe, which is over three times bigger than it was last year.

Despite this performance, expectations for GI Joe were high at retail and going forward we need to do a better job of setting our expectations for future movie properties.

The films theatrical release is the first step.

This will be followed by the DVD release on November 3rd which is expected to broaden the GI Joe audience.

Additionally, we are moving forward with Paramount on a GI Joe sequel, all great news for the brand.

Also supporting growth in the boys category is Nerf, which turned in another strong performance this quarter growing 32% driven by continued strength the US and expansion into major markets around the world.

The Nerf Raider Rapid Fire Blaster launched on 9/9/09 and was the first global Nerf launch and the most successful blaster launch to date.

Continuing to benefit from television programming, Star Wars also contributed significantly to the quarter.

Performance in both the preschool and girls categories was impacted by a number of high priced items not being carried forward from last year.

This was in response to changes we saw in consumer spending patterns.

In preschool, both Kota and the Rose Petal Cottage are no longer in the line.

In the girls category last year we had a number of higher priced items in Fur Real Friends that are no longer in our line.

This years line is priced more appropriately for today's consumers but did contribute to a decline in 2009 revenue.

While the preschool category declined 2%, we did have a number of brands that performed well including Play-Doh which was up 27% and Tonka which grew by more than 50%.

Additionally, preschool domestic POS with our top four customers was up a strong 21% in the quarter due to increases in Play-Doh and Tonka as well as PlaySkool Infant and PlaySkool Playbox essentials.

The girls category declined 6% in the quarter primarily due to the decline in higher priced items in the Fur Real Friends line.

We had a strong performance from Littlest Pet Shop which grew 12% in the quarter and we had good initial shipments of Strawberry Shortcake.

In September, Hasbro and Electronic Arts launched the Littlest Pet Shop online in the US and Canada.

Girls can experience the social gaming world with the purchase of a plush pet with a secret code and through various subscription offerings, a global rollout is planned beginning in 2010.

In the games and puzzle category according to NPD, Hasbro is outperforming the industry.

We've gained 2.6 points of market share in the US.

However due to the fact that retailers started the year with carryover games inventory and had been working these down, Hasbro's year-to-date shipments are down 8% for the US and Canada and 16% internationally.

For the third quarter the games and puzzle category declined 10%.

Given the strength of retail support around the Family Game Night promotion we anticipate games revenues will be up in the fourth quarter.

In fact, early POS in the US on this program has been very encouraging.

Hasbro Family Game Night is a major global initiative expected to reach more than 50 markets through television, print and online promotional programs.

Our retailers around the globe are participating with significant marketing activities including exclusive promotional programs and high profile partnerships.

Retailers are embracing the fully immersive brand experience that the Hasbro Family Game Night campaign is bringing to consumers.

This immersive brand experience will include our partners at EA who have added a number of new Hasbro games to their line up this quarter including Scrabble, Battleship, Connect Four and the Game of Life.

In the fourth quarter, EA will launch new titles on the Nintendo Wii and DS including Littlest Pet Shop Friends, Nerf N-Strike Elite and Family Game Night two.

Activision's Transformer Revenge of the Fallen video game is on track to be this year's number one selling movie game.

Number one action game and the number three title on the Nintendo DS platform.

In the digital arena for the full year, we will have launched over 30 games across online mobile and console platforms.

Earlier this year we took another step for Hasbro in creating immersive brand experiences through our drive into television by our joint venture with Discovery Communications.

We are making great progress working closely with our talented leader David Zaslav and his tremendous team at Discovery.

There have been a number of new key executive hires including the appointment of Margaret Loesch to the position of President and CEO of the network as well as the hiring of Stephen Davis as President of Hasbro Studios where he's leading the creation for Hasbro content for both the network and for international distribution.

Both Margaret and Steve are assembling their teams and will provide further insight into our plans at Hasbro's upcoming Investor Day being held at our headquarters on November the 5th.

Looking to the remainder of the year, we continue to believe it will be a challenging global retail environment.

However, our line up for the upcoming holidays is strong with great brands like Transformers, the Littlest Pet Shop, Star Wars, PlaySkool, Nerf, Tonka and Strawberry Shortcake and we expect to drive board game sales with our Family Game Night promotion.

Looking beyond the holidays to 2010, we have a world class portfolio of classic brands that we will reinvent, reimagine and reignite.

From a movie perspective we are excited about our prospects for both Iron Man 2 from Marvel and Toy Story 3 from Disney.

Coming off the success of Iron Man last year, the brand is being brought back to the big screen in a bigger way with Iron Man 2 and Hasbro will be bringing to market a March expansive line of toys and games.

With the June release of Toy Story 3 we have a great new line of cobranded games and puzzles along with our line of movie related Mr.

and Mrs.

Potato Head.

With strong box office results this year, we expect the Transformers will continue to be a major contributor to our business next year.

We expect to have television support for GI Joe, My Little Pony, Transformers, a number of Marvel properties as well as new episodes of the Star Wars animated Clone Wars series.

We have much more planned in 2010 and we will share that with you at our Investor Day.

In the near term, and for the remainder of 2009 we will continue to invest in our business, partner with our retailers and closely manage our costs.

Over the last few years, we have put building blocks in place as part of our strategy to grow our business over the long term, whether it's our partnership with EA, Universal, Dreamworks, Paramount, Marvel, Lucas or our joint venture with Discovery Communications when you combine strong partners with the broad based global strength of our brand portfolio, we are well positioned to grow our business and to deliver value for our shareholders for the long term.

With that, let me now turn the call over to Deb Thomas.

Deb?

Thanks, Brian, and good morning, everyone.

I am pleased that we were able to grow earnings per share, improve operating margin in the quarter as well as to continue to invest in our business for the longer term, despite the continuing challenges of the global economy, and having revenues which were down due to the impact of foreign exchange.

We were able to achieve EPS growth despite a $0.03 dilution per share from our joint venture with Discovery, financing costs associated with the recent issuance of long term debt, and the initial investments we're making in Hasbro's virtual studio.

For the quarter we delivered worldwide net revenues of $1.28 billion compared to $1.3 billion last year, a decrease of 2%.

Excluding the impact of foreign exchange, revenues were up 1% or $13.2 million.

Operating profit improved for the quarter to $230.7 million or 18% of revenue.

This compares to $215.9 million or 16.6% of revenue last year.

Moving to our segments, the US and Canada segment net revenues at $791.9 million were down 4% compared with $821 million last year.

As Brian mentioned, we had a strong performance in the boys category offset by declines in girls, preschool, and the games and puzzle categories.

US and Canada operating profit for the quarter was $129.1 million compared to $131.9 million last year.

As a percent of revenue, operating profit was relatively flat at 16.3%.

Net revenues in the international segment were $444.1 million compared to $460.6 million a year ago.

Revenues grew 4% absent a negative foreign exchange impact of $34.3 million.

The results reflect growth in boys and the preschool categories offset by declines in girls and the game and puzzles categories.

The international segment reported operating profit of $64.1 million compared to $65.8 million last year.

As a percent of revenue, operating profit was relatively flat at 14.4%.

The entertainment and licensing segment net revenues were $41.6 million compared to $18.3 million a year ago.

This is primarily due to growth in Transformers and GI Joe as our brands continue to expand outside of traditional toys and games in new categories.

The entertainment and licensing segment reported operating profit of $19.8 million compared to $6.3 million last year.

The increase is primarily due to growth from licensing programs related to entertainment properties.

Now, let's take a look at earnings.

For the third quarter, we reported net earnings of $150.4 million or $0.99 per share.

This compares to $138.2 million or $0.89 per share a year ago.

As I mentioned earlier, this also includes a $0.03 per share impact from the television investments.

During the quarter, average diluted shares outstanding were 152.9 million compared to 156.2 million last year, with earnings before interest, taxes, depreciation and amortization were $286.9 million compared to $261.8 million a year ago.

Gross margin for the quarter was 57% compared to 55.9% a year ago.

The improvement is primarily due to a more favorable product mix with a greater amount of entertainment driven products sold in 2009.

These products typically have a better gross margin but also often incur higher royalties.

As we said previously for the full year, we expect our gross margin to return to our historical levels of approximately 58%.

Turning to expenses, operating margin improved due to lower spending in R&D, advertising, and SG&A.

The only expense line that increased was royalties which was a function of product mix.

As we manage the business in these challenging economic times, we believe it's important to continue to invest for the long term, such as in our virtual studio, the joint venture with Discovery, and our emerging market initiative.

That said, we are also managing our discretionary expenses carefully and will continue to do so going forward.

Below the operating profit line, interest expense increased by $5.9 million to $17.6 million primarily due to the new long term debt we issued related to our investment in the joint venture with Discovery.

Other income net totaled $4.8 million compared to an expense of $2.7 million a year ago.

Other income in 2009 includes $1.5 million in earnings representing our 50% share in the joint venture with Discovery.

Our underlying 2009 tax rate is 29.7% compared to our 2008 full year underlying tax rate of 32.8%.

Before moving on to the balance sheet I wanted to mention we anticipate dilution of $0.04 to $0.05 per diluted share in the fourth quarter related to the Company's investment in the joint venture with Discovery Communications and Hasbro's Virtual Studio.

Year-to-date there's been dilution of $0.09 per share.

As we've stated previously in 2010, our expected dilution is $0.25 to $0.30 per share.

Now let's turn to the balance sheet.

At quarter end, cash totaled $297.4 million compared to $356.5 million a year ago.

In the last 12 months, we generated significant cash from Operations and we raised $425 million through a debt offering; however in the last 12 months we have also invested $300 million for our 50% investment in the joint venture with Discovery, $95 million to extend our agreements with Marvel and Lucas, paid a $25 million royalty advance to the joint venture network, and reduced our securitization level.

We also resumed our share repurchases this quarter.

We repurchased 1.1 million shares at a total cost of $30 million.

As of quarter end, there was $222.2 million remaining in the current share repurchase authorization.

Our receivables at $1.1 billion were up $169 million compared to $946.9 million last year.

At the end of the third quarter, given our cash balances from our recent debt issuance, we did not securitize receivables.

In the prior year third quarter, we securitized $172.6 million in receivables.

Excluding securitization, DSOs were 79 days compared to 77 days last year.

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

Inventories decreased to $399.9 million compared to $461.6 million a year ago, as we continue to work to reduce our inventory levels.

In closing, we will continue to focus on managing our business efficiently while investing for the long term.

As we look to the remainder of the year, the environment is expected to remain challenging.

That said, we believe we can grow revenues in 2009 if our consumer retail take away continues to improve in line with recent fourth quarter trends.

We also continue to believe that the underlying strength of our brands and our committment to our strategy will enable us to grow earnings per share in 2009 even with the expected dilution from our television investments.

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

Thank you.

(Operator Instructions) Our first question we'll hear from Tony Gikas with Piper Jaffray.

Thanks, good morning guys.

A couple questions.

Could you review the entertainment slate for 2011 as preliminary as it might be, and you mentioned that Transformers looks like it's coming that year.

Any visibility on the actors in the movie?

Also, Brian, maybe you could just help us out with a little bit of what you're seeing at retail and how much channel fill is taking place right now in your opinion?

And then I have one follow-up.

Okay, good morning.

For the slate 2011 currently, the plan is stretch Armstrong April 15, of '11, Spiderman 4 May 6 of '11, Thor May 20 of '11, Transformers III the first of July in 11, the first Avenger Captain America the 22nd of July 2011 and then Battleship just following that.

And then of course that will be our first full year of television on the joint venture network.

Channel fill at retail, could you just characterize how much has taken place?

What we're really seeing at this point is as you know, we've managed the inventories down thus far this year.

We are starting to see the consumer and retail take away increasing versus the third quarter and so again, won't comment specifically on what we expect for fourth quarter revenues but if it continues as it is we feel good about the fourth quarter.

And then Deb, do you have the trailing 12 month cash flow number that you mentioned?

Yes, I do.

From a free cash flow percentage, we had a, give me one second, I'm going to find that.

Our free cash flow was $284 million use of cash in the last quarter and that will be in the last nine months and that will be in our 10-Q that comes out within the next couple weeks.

Okay, thank you.

Great job.

Great.

Thanks.

Next we'll move to Robert Carroll with UBS.

Hi, guys.

Looking at the spending for the JV, are you guys able to break out what specifically was spent and where that is on the P&L?

Well, the majority of it, Rob, is in the interest category, I think that if you look at the debt that we issued that's the biggest piece of that and from a dilution standpoint, and then we also from a year-to-date standpoint, we also had some acquisition costs and tax benefits so if you look at the interest that's the largest piece, and as we mentioned in other income, we had $1.5 million from the joint venture itself in net earnings.

Okay, so there's no material spending on the virtual studio showing up anywhere else?

That's correct.

There's no material spending in the studio impacting the quarter.

The team is beginning to be assembled and we'll give more updates to you as we come in for the November 5, Analyst day.

Great and will you have a preview of what the initial content will look like at the Analyst day?

We're going to certainly give you a sense really for all of that.

It's becoming a very good line up for us.

We'll give you an early sense for that.

Great.

And then just breaking out the other income line, would you mind just going into a little bit of detail about what's in there other than the JV?

Sure.

I think if you recall last year in the third quarter, we had an impact of some foreign exchange losses that we said that we would be mitigating so really what's in the, what the impact is from last year to this year is really, we don't have those losses again this year.

We've got the JV impact and we also have interest income that flows through that line and that is a bit lower this year than it was last year.

Thanks a lot, guys.

Thank you.

Next we'll move on to Margaret Whitfield with Sterne Agee Capital.

Good morning, everyone.

Wondered, you commented that GI Joe might do North of 100 million this year, Brian, if you could comment on your expectations for Transformers?

Well, Transformers has continued to perform exceedingly well.

As you know in 2007 we reported $484 million and then in '08 we said that it was the lowest decline of any boys property.

I won't comment specifically except to say certainly the movies performed exceedingly well.

The DVD drops tomorrow, and we expect Transformers to continue to sell well throughout the year.

So presumably it should exceed the '07 number?

I'm not going to give you specific guidance but certainly we're on the right trend.

And you said something earlier, I would like to to elaborate on GI Joe that expectations are high and we need to do a better job.

Where do you think you were off in terms of the Joe numbers?

It sounds like it was more international than US.

Well, actually what I'm really referring to is I don't think we can expect that every motion picture we put out to be Transformers and Transformers is a very rare property and yet you can have many successful motion pictures, GI Joe both for the studio as well as for Hasbro is a very successful launch and will lead us to and we're working on a sequel so we're just saying we want to manage the expectations, everything that we do is not going to deliver the kinds of revenues that Transformers delivered in the movie year and yet it can be exceedingly contributory to the Company as we go forward.

We just want to make sure we manage peoples expectations.

Yes, okay, and for Deb, I wondered if you could break down further the sources of the licensing segment operating profit?

I know it includes a lot of areas, lifestyle, digital licensing and so forth.

What were the leading contributors to that?

I would say as we talked about last year, we were just introducing or entering into the key revenue driving period of our relationship with Electronic Arts so if we look to the different components obviously our licensing programs on Transformers and GI Joe were very strong this period but in addition to that, we are also seeing a benefit from the digital relationship we have with Electronic Art.

So I would say from a key contributor standpoint the strength of Transformers and Joe and beyond that the leveraging of the relationship with Electronic Arts.

You're really seeing, Margaret, it's Brian, you're really seeing brands like Monopoly accelerate across that segment as well so it's not just related to the entertainment piece, but as you develop more immersive experiences I don't know if you saw over the weekend the number of commercials that were being broadcast for the Monopoly program at McDonald's, all of the different touch points for the ways you can play Monopoly now, and our gaming business in Monopoly all contributing to increases in the entertainment licensing segment.

Okay, just two small questions.

What was the currency impact on the bottom line in Q3 and what was the share count, diluted share count at the end of the quarter?

The currency impact on the bottom line wasn't significant, I think as we said in the past you can generally assume that it's 10% of the impact on revenue and the average amount of shares outstanding at the end of the quarter were 139.8 million.

Thank you.

Next we'll move to Jake Hindelong with Monness, Crespi, and Hardt.

Good morning.

I've got a few questions.

First on the gross margin, it came in pretty strong this quarter.

Can you talk about if there was much in there on the positive side besides the impact of oil and what that might have been?

Yes.

In terms of the gross margin, I think one of the things that we're seeing is some abatement in commodity counts from their peak last year.

Overall, we tend to be relatively isolated from the short-term ups and downs because the way we do our costing.

We don't manufacture, we primarily buy finished goods from third parties or actually buy the underlying commodities and once they give us a price, it's really kind of set in for the year.

So it really is reflecting where we stood at the beginning of the year when we had all of our product and those prices have held pretty well throughout the year.

Great.

And then rolling out forward to the fourth quarter is it fair to assume roughly the same type of impact?

Yes, you aren't going to see any short-term impact due to commodities.

We do have products, you could see variation in gross margin due to product mix.

We have some product lines such as games that make above the corporate average and we have some such as preschool that makes below the corporate average so I would say that any variation in gross margin during the fourth quarter is more likely to be attributed to product mix than it is to commodity cost.

Okay, great.

Thanks and then just on the share repurchase, obviously some in the third quarter and seems to be ongoing.

Can you tell us what's driving that decision and what the priorities are for capital allocation over the next couple of years?

Well, as we said, once we come through joint venture and acquisition with Discovery, we felt in conversations with our Board that going back into the market given the share price of Hasbro, going back in the market at a modest level was a good idea, good utilization of cash and a good return to shareholders so we'll continue that type of program.

We have an open authorization, several hundred million dollars, and our plan will be to continue to go forward based on our share price and at this modest level.

Okay, great.

Thank you.

And Gerrick Johnson with BMO Capital Markets will have our next question.

Hi, good morning.

Good morning.

First question on the status of where you are in opening your sales offices in emerging markets, the ones you talked about in the past and are there any new ones coming on board in the future?

Yes, and certainly last year, we talked about opening offices in Brazil which we did last year.

We talked about opening an office in Russia which we actually just opened about two months ago.

It takes a bit of time to get things done in Russia.

We opened in the Czech Republic and we -- and of course China, and for this year we have approved the opening of a new office in Romania which is happening at the moment and we approved the opening of a new office in Peru which will probably happen in the early part of next year.

Okay, great.

And can you just briefly describe the inventory situation in the channel, how does that look for both your core brands as well as your movie related properties?

Overall, we feel good about our inventory levels, the amount of promotion and marketing that's going against our brands both from Hasbro as well as partners as the DVDs come into the market in the Fall.

The Family Game Nights promotion, the things going on with Monopoly so overall we feel good.

Obviously our inventories year-to-date are down 7.5% versus 2008 and we've been managing those inventories and we feel very good about our prospects for the fourth quarter.

Okay, and finally one last question, more specific on product.

Are you implementing the annual games Riser program at Target this year?

I have yet to see that one.

Yes, we did that earlier in the year which is what we normally do.

It's usually a first half activity.

Okay, I thought it was usually an October event?

No, no, it's normally a first half piece and then gets executed as starting the middle of the year.

Okay, all right, thank you.

Thanks.

Next we'll move to Sean McGowan with Needham & Company.

Thank you.

Hi, guys.

I have a couple of questions, some of them are pretty quick here.

Could you, Deb, could you go over again why accounts receivable would be up given the drop in sales and thanks for adjusting for the securitization, but was this an issue of timing during the quarter?

That's exactly what it was, Sean.

It's really just timing of when the collections come due.

That's why we did say we're very comfortable with the quality of the receivables and the collect ability.

It's timing and then the fact that we didn't securitize it obviously had the biggest impact.

Right.

Okay, Brian?

You mentioned that Joe did more revenue outside the US.

Were you referring to the box office or referring to your own shipments?

No, the box office was about 51%, 49% international and the domestic, on our shipments, it's about 70/30.

Domestic.

70/30 US?

Yes, 70/30 US to international because we're just beginning to introduce many countries around the world to GI Joe.

Okay, thanks for clarifying that.

And when you said that Star Wars was a significant contributor, did you mean to imply that it was up in the quarter?

No, it's not up in the quarter but given the size of the business and the fact that we're seeing as we launched the new Star Wars episodes in October which is outside of the quarter that the way the product is selling and the way it's been selling throughout the year, although it's not up in the quarter we felt it was a major contributor and should be noted.

Now there was some talk a while ago about a live action TV series.

Has that been shelved?

No.

I understand that developments ongoing and that it should come in the future.

Okay.

A couple of other things.

Did you say in their comments how much the POS was up for games year-to-date?

Your actual measurable, your top four accounts or how much that is up for games?

Games, POS is up and if you look at family games, children's games, adult games, up overall, year-to-date had been flat and we're seeing acceleration now with Family Game Nights just beginning so that's really where you're starting to see the acceleration in POS, and it's up pretty strongly based on that.

Okay, a couple of others then.

Deb?

On the JV, is it fair to say then of the $0.03 dilution maybe $0.01 or rather actually it was $0.01 of profit from the JV's Operation itself and the rest of it is the interest and other expenses?

Yes.

I haven't done the math to make sure but I think that since that piece was profitable you can say that.

Okay.

Then the last question I have, I'm not trying to overanalyze your comments, Brian.

I'm just trying to relate back to about a year ago.

I think what you said around this time a year ago was if current trends continue or if current retail sales continue we should be able to grow sales and EPS and now what you're saying is if retail take away continues to improve, is that a subtle difference or are you essentially saying the right thing and I'm reading too much into it?

It sounds like you're saying things need to get better in order for you to have that result.

Is that not right?

Well, now we're sitting in the season versus kind of a year out and all we're trying to be clear about is clearly as we all know that the back-to-school season was not very good and so what we're now starting to see are the kinds of POS results we would expect in order to grow our business so we're just giving you a level of specificity around this quarter, our trends that we're seeing and our belief that we can grow our business.

Okay, thank you.

Next we'll move to Tim Conder with Wells Fargo.

Thank you.

Brian, just on that last note, are you saying the trends that are improving, are you seeing anything more than what you would anticipate on a seasonal basis or just picking up seasonally and again to what you need to grow your business as you said?

Yes, I think it's more of the latter.

I think what we were all not entirely surprised about but certainly had seen in the August/September period was really a lack of robust consumer response and we all know that and it's been across a number of consumer categories.

Toys certainly has performed better than other consumer products categories and we try to note that as well as the industry is down just a bit versus other major categories.

In our business again, we had seen some trends in third quarter where our POS was up 1.8% but we're now starting to see an improvement versus that and we're starting to get the kinds of trends that will tell us we could grow our business.

Okay, so again, in line with what you're thinking from a seasonal pick up and what you need from your, to hit your goal?

That's exactly right.

Great.

Okay, and then along that line I think you alluded to this in one of the earlier questions in response and some comments from a competitor on Friday.

The seasonal or the normal discounting that you see out there or co-of money however you want to term it, is that materially different on a normalized basis this year than what you've seen from a historical basis of maybe throughout last year that was kind of a different year but are you seeing anything different and again, in context of the what would appear to be on the surface greater promotional activity among some of the larger retailers?

No, our discounts and allowances is very in line with longer term historical trends, not like last year, and certainly most of those major discounts happened in the fourth quarter if you remember all of the news had come out mid September through the beginning of October and then we had seen the majority of markdowns or the allowances.

So for us, really we provide to the retailers a promotion discounts and then they use them as they wish to execute their strategies.

We're not seeing anything out of the ordinary.

Okay.

And another clarification on Star Wars.

Is it fair to say that's performing better than your expectations for this year given some of the responses to questions you've had so far, just to make sure I'm interpreting it correctly?

Yes, you are, and I'm glad I'm clear.

It is performing, it's held up really well this year.

It's performing very well this year although I can't say it was up in the quarter but overall it's a major contributor for us and we continue to see great vitality in the brand.

And then one for David and one for Deb.

David, the pricing you really didn't comment or nobody really commented too much on the pricing front.

In the second quarter you mentioned that as some of the input costs have come down you'd given back a little bit of the pricing that you had taken then.

Can you just sort of update us what happened in the third quarter and your expectations for the fourth?

Yes, as you know we took two price increases last year and another 3% roughly price increase in February of this year and the retailers were pushing back a bit on that particularly seeing that it's commodity cuts are starting to trend down and what we really did when we took the 3% price increase, we said that to the extent that we get significant reductions in commodity costs, we would pars those back to the retailers, and we didn't unwind the 3% price increase we took but selectively working with retailers on a very much rifled as opposed to shotgun approach to the extent we had broken a barrier at retail like $20 seemed to be a key barrier so to the extent we go from $19.99 to $21.99 and it was hurting sales and we could see that, we rolled back, so to the extent that we've got some reduction in commodity costs which was helpful to us, we worked with our retailers to selectively pull some prices back where we could see it was impacting the business.

Okay, and then -- so that continued through the third quarter?

Yes, well really we were done but by then, so it was nothing really new in the third quarter over and above that.

And then Deb, I apologize, your comment about the 58% gross margin goal, just could you state that again, go over that briefly?

We talked about the pricing of our products to achieve our costs and we expect that our gross margin to return to our historic 58% levels, approximate 58% and we tend to be on a full year basis 58% plus a little bit on a historical basis on gross margin so our expectation is for the full year that will be around that level.

Great.

We'll see you all on the 5th.

Thank you.

See you soon.

We'll move on to Drew Crum with Stifel Nicolaus.

Great.

Good morning everyone.

A couple of questions on the entertainment properties.

Brian, to the best you can quantify, the number of SKUs you have for Toy Story and then on Star Wars, is there any opportunity to put Lucas related content on the JV?

So, on Toy Story, we have really a full array of Toy Story games as well as our line of Mr.

and Mrs.

Potato Head, and you'll see that both as mostly co-branded games and there's a lot of really great innovations we'll share with you guys and what that line looks like.

I don't have the number of skews in front of me but I'll follow-up and make sure you have that but a nice broad array, and we're very excited about that property coming in June next year, and Star Wars, for Lucas, at the end of the day, it will be up to Lucas as they develop new series and properties given that Clone Wars is on television ongoing it's really contributing to our business.

We've talked about friends of the family coming on to the JV network and you'll see friends of the family come on to the network.

We don't have any specific decision on or any specific conversation on Lucas or Star Wars coming on to the network.

Okay, fair enough, and a question on the costs, the advertising down 11% in the quarter and the revenue guidance implies that you're going to be up high single digits in the fourth quarter.

Can you talk about plans for advertising as it relates to television?

We're seeing CPMs down.

There's greater reliance on the scatter market and just given those dynamics can you talk about how you're approaching advertising in the fourth quarter?

So one of the things to look at as you look at the P&L is if you were to look at royalties which obviously for us is both our own properties while we're paying royalties to a studio for making a motion picture and supporting our brand as well as others and you add that to advertising we're actually 18.4% of revenues this year up against 18% a year ago and if you look year-to-date it's actually pretty consistent so we look at entertainment properties as certainly investment and continuing to contribute to advertising and so that formula works for us and in an entertainment heavy year you might see that mix between the two change but that's in order to accomplish getting our entertainment out in the market.

Okay.

And one last question, Deb, can you talk about the driver behind the, I guess reduction and dilution from the JV?

I think you originally forecasting $0.15 to $0.20 and now it looks like $0.13 to $0.14.

I think it's largely driven by the timing as Brian mentioned we've now got the team in place and it's continuing to (inaudible) so it's really due to timing of the expenses and as we've gotten more into it seeing what this year would look like, we continue to keep our expectations the same for next year.

Okay.

Thanks guys.

Thanks.

And Greg Badishkanian with Citi will have our next question.

Just wondering, in terms of your customers as you speak to them, toy buyers at your biggest accounts, how are they approaching Christmas and holiday?

Are they planning to have higher or lower inventories than last year and has that mood changed over the last few months with the economy seeing signs of picking up?

So I think clearly, they're aiming to finish the year with lower inventories than they had at the end of last year and have taken a very cautious approach.

That said, I think whilst they're cautious overall they are looking to Hasbro to maybe out perform the market.

I think with the DVDs of Transformers and GI Joe coming, with the television programming Clone Wars Episode 2 starting during the fourth quarter, with things like the Family Game Night promotion, with things like the Monopoly promotions going on, I think the retail is to some extent looking to Hasbro to help drive their business during the fourth quarter and they're willing to sort of reach out and take a fair amount of our product in, but overall, we're clearly looking to finish the year with less inventory than they did last year so we're taking a cautious approach and I think things will come later rather than earlier during the quarter.

Right.

But last year, things were pretty dire, so in toy overall sales weren't a disaster, so I'd imagine they might be a little bit more optimistic than last year?

I think they're cautiously optimistic, so I think that ordered inventory and set their expectations expecting that things won't particularly get a lot better but if things -- if the consumer does show up more so than back-to-school I think that's probably yet more upside to downside given a cautious approach that the retailer is taking.

Right, and also maybe internationally if you can maybe some key differences in terms of retail sales trends versus what we're seeing here in the United States, and also just currency impacts, I don't know if I missed that one for the fourth quarter.

It's a mixed bag internationally.

The Mexico, Spain and the UK -- the UK partially impacted by the closing of Woolworth which was a big toy retailer, those three markets are down, have been down all year.

We've done better and the market has been better in places like France, Germany, Australia, and Canada have held up there fairly well and some of our emerging markets like Brazil and Chile we're still making significant growth year on year, so it's kind of a mixed bag.

I think by product line one of the areas we've talked about being down more significantly in Europe than in the US was games, thus far this year the markets down about 8% but we're outperforming the market, we've gained market share in the US, UK, France, Germany and Italy, so I think that's the main difference and then really the fourth quarter currency impact, Deb, do you want to answer that one?

Yes, as we said at our Analyst meeting in February, we expected currency to essentially be flat in the fourth quarter the impact but if we see current trends continuing, we may get a little bit of a benefit from it.

Great.

Thank you.

Okay, thanks.

Jeff Blazer with Morgan Joseph will have our next question.

And our final question will come from Hayley Wolff with Rochdale Securities.

Hi, guys.

Hi, good morning.

I got just two questions for you.

First, the aggressive pricing that's coming out of Wal-Mart and Target in the toy category, how do you think about that as it pertains to your business and the overall toy sales?

Do you think it drives toy sales or do you think it becomes a share battle?

I think it does drive toy sales and albeit it's at more of a value oriented price point which is consistent with what we're seeing in consumers desires this Fall.

And does that factor into your optimism coming into the fourth quarter?

We've seen across-the-board, we've started to see the kind of momentum that you need to see in a holiday season in order to achieve a fourth quarter result and it's come across very strong POS even in our preschool business, our games business, girls business, so broad POS increases that you'd like to see in the season.

Okay, and the second question is looking out to 2011 and given the movie slate that you have, how do you think retailers will manage having that many movies in the theatres and the associated product?

Do we think of it as purely incremental?

Do we think of it as somewhat of a zero sum game?

Well, having been in the boys toys business for a very long time, I would actually say boys toys among categories is very elastic based on great characters and great stories and great entertainment and the elasticity in the category can grow that category considerably and based on that plus great strategic plans we put together with retail partners around the world and the great efforts of all of these different studios and our own properties as well as other peoples IP, we feel very good about the year and our ability to execute.

We continue to hone all of the elements of our strategy from marketing to supply chain in order to achieve that but again, I think that there's great elasticity in that category and it should be a great year.

So you think that they have the capacity on the shelves to stock all of the different skews with five or six movies?

Sure.

I mean even this year if you look at all of the different brands that are supported at retailers, there's linear footage for a lot of different brands I think that these are going to be some of the headliners for 2011 and certainly the retailers can accomplish that and we'll partner with them to ensure that all of these different brands get great opportunities for launches and marketing throughout the years as well as during the DVD period.

All right, thank you.

Thanks.

At this time I will turn the conference back over to Karen Warren.

Thank you.

I'd like to thank everyone for joining the call today.

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

Thanks so much.

And that will conclude today's call.

We thank you for your participation.