孩之寶 (HAS) 2009 Q4 法說會逐字稿

Good morning and welcome to this Hasbro's fourth-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.

Please go ahead.

Thank you, and good morning, everyone.

Joining me today are Brian Goldner, President and Chief Executive Officer, David Hargreaves, Chief Operating Officer, and 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 for your questions.

Before we begin, let me note that during this call 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 in 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 and 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.

We're extremely pleased with our 2009 performance that demonstrates Hasbro's strategy is working.

Across our business, Hasbro employees came together to deliver our fifth consecutive year of revenue growth and our ninth consecutive year of EPS growth.

These results include the dilution from our television investments in our joint venture with Discovery Communications and the launch of Hasbro Studios.

These investments are part of our strategy to invest in our business for the long term while returning cash to shareholders.

We achieved these results despite challenging global economic trends.

Overall in 2009, the global economic environment did not improve significantly, but it also did not deteriorate further.

There was a continued lower level of consumer spending and poor market conditions in countries like the UK, Spain, and Mexico.

Because we stayed committed to our strategy, adapting it to best meet changing consumer spending habits, we were well positioned for when the consumer came out to shop, and the consumer did come out to shop, albeit late in the fourth quarter.

At the same time, 2009 was an extremely important year in the evolution of Hasbro as we endeavor to become a branded-play company.

Over the past 12 months, we further assembled the tools we need to be successful in the execution of our strategy over the long term.

First and foremost, we delivered and remain committed to delivering innovative, compelling branded products at appropriate price points, coupled with strong marketing programs.

We extended key strategic licenses with our partners Marvel and Lucas, who continue to be important contributors to our business.

We announced a 10-year global strategic alliance with Sesame Workshop, an extremely valuable new partner.

We believe there is opportunity to grow our businesses together.

We further expanded Hasbro's presence in emerging markets through share gains in our key markets such as Brazil and China; growing our existing businesses in emerging Eastern European, Asian, and Latin American countries; and establishing new offices in important geographies, including Russia and Romania.

As a result, we grew revenues in our emerging markets in Asia-Pacific, Latin America and Europe, where key brands like Transformers, Nerf, Littlest Pet Shop and Play-Doh, as well as games, contributed to the increase in revenues.

We continued the activation of our brands across platforms, growing revenues in lifestyle licensing and digital gaming and making key strides in entertainment, including movies, TV and online.

In the entertainment arena, we partnered with Discovery Communications to form a new children's television network, The Hub, launching in the fall of this year.

Simultaneously, we established Hasbro Studios to develop compelling programming based on Hasbro brands.

In Motion Pictures, with more than $1.1 billion in box office revenue between Transformers and GI Joe, and strong product sales in 2009, we are working with Paramount on Transformers 3 and G.I.

Joe 2.

In addition, we are pleased to add Sony as a studio partner as we reached an agreement to develop Risk, a major motion picture.

For the full year, we grew key brands, including Transformers, G.I.

Joe, Nerf, Littlest Pest Shop, Play-Doh, Tonka and Magic -- The Gathering.

And we gained share in our major markets.

This quarter, we included the performance of our major product categories in the press release.

I will review high-level points behind this performance from a total brand perspective.

The total brand performance of Transformers, G.I.

Joe and Nerf delivered double-digit growth in 2009 across multiple product categories.

Transformers had a record year, posting $592 million in revenues, a 23% increase from our last movie year in 2007.

G.I.

Joe recorded revenue in excess of $125 million.

And Nerf continued its growth, increasing 25%, driven by continued growth in the US and the expansion of the brand internationally.

Play-Doh and Tonka also turned in double digit-growth, both growing approximately 25% in 2009.

Littlest Pet Shop, our largest girls' brand, also grew in 2009.

However, as we discussed last quarter, several areas of our business were impacted by a number of high-priced products not being carried forward from 2008.

Both Kota and the Dream Town Rose Petal Cottage were not carried forward into the 2009 preschool line, and we decided not to produce several products in the FurReal Friends line, which created difficult year-over-year comparisons.

Finally, Hasbro's Family Game Night campaign was embraced by our retailers and consumers around the world and drove an outstanding fourth quarter in games and puzzles.

For the full year, total games and puzzles increased slightly, overcoming the revenue decline in the category reported through the first nine months of the year.

In addition to Family Game Night, we grew our games business by reimagining brands like Connect 4, Operation, and Bop It and through the creation of our new card game product line.

Our digital games business grew with partners EA, Activision and Glu Mobile.

We also delivered a strong result with Magic -- The Gathering trading card games.

As we look back over the past 12 months, we focused on our strategy while continuing to invest in our business and developing the tools we need to be successful in the years to come.

It required every member of the Hasbro team to perform at a high level, and they did.

As we go forward into 2010 and beyond, the strength of our brands; the growth of our business globally, including emerging markets; and a commitment to our strategy of creating fully immersive brand experiences will continue unlocking the potential of our brands while creating long-term value for our shareholders.

At Hasbro, we are building this value each year and over time.

So before I turn the call over to Deb, let me highlight some major initiatives we're particularly excited about in 2010 and beyond.

First, we will continue to build on our core brand momentum globally with brands like Nerf and Littlest Pet Shop.

In 2010, we'll continue to reinvent and drive our preschool business.

We are very pleased Jerry Perez has joined us to lead these efforts as we take our PlaySkool business to the next level and begin to develop Sesame Street product for launch in 2011.

In 2010, from partners Marvel and Disney/Pixar, we have two major theatrical releases, Iron Man 2 and Toy Story 3.

For Toy Story 3, we are rolling out a wonderful line of Mr.

And Mrs.

Potato Head products, as well as co-branded games and puzzles.

In addition, our partners at Lucasfilm will introduce Star Wars -- The Clone Wars for a third season this fall.

For 2011, I'd expect to see Star Wars continue on television.

Also for 2011, Michael Bay and Paramount are working with us on Transformers 3, expected to be released on July 1, 2011, and we're excited about two new Marvel features, Thor, and Captain America -- The First Avenger.

You may have already seen Universal Studios' announcement on Battleship.

We are so pleased Universal sees the same major potential in our brands as we do, and Universal is investing in Battleship to make it a global summer tentpole release in 2012.

Finally, as I mentioned earlier, together with Paramount we are developing the sequel to G.I.

Joe.

These are only a few highlights from our ongoing initiatives.

We will provide more detail during our investor presentation and showroom tours on Friday of this week at Toy Fair.

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

Thank you, Brian, and good morning.

I want to take a moment to tell you how pleased we are to be reporting, as we expected, higher revenue and earnings per share than we did in 2008.

Our focus on core global brands, coupled with product and marketing innovation, enabled us to grow revenues in the year.

As Brian said, the consumer did come out, and the economy, while not fully rebounding, did not significantly deteriorate in 2009.

Foreign exchange was also less of a negative impact than expected.

Throughout 2009, the Hasbro team pulled together to decrease costs in our underlying business.

At the same time, we continued investing in the future, including our joint venture with Discovery, establishing Hasbro Studios, and making strategic investments in our business, including emerging markets.

We were also able to return just under $200 million to shareholders through our dividend and share buyback programs.

For the full year 2009, worldwide net revenues of $4.07 billion grew 1% compared to $4.02 billion last year.

Excluding the $65.2 million negative impact of foreign exchange, revenues were up 3% from 2008.

Operating profit improved for the year to a record $588.6 million.

Operating profit as a percentage of revenue was 14.5%, a level Hasbro has not achieved since the mid-'80s.

This compares to $494.3 million or 12.3% of revenue last year.

Moving on to our segments, US and Canada segment net revenues at $2.45 billion increased 2% compared with $2.41 billion last year.

There was strong performance in the boys' category and growth in our preschool category, partially offset by declines in girls' and the games and puzzles categories.

US and Canada operating profit for the year was $380.6 million compared to $283.2 million last year.

Operating profit increased to 15.5% from 11.8% in 2008.

Net revenues in the international segment were $1.46 billion compared to $1.5 billion a year ago, a decrease of 3%.

Absent a negative foreign exchange impact of $64.5 million, net revenues grew 2%.

The results reflect growth in the boys' category, offset by declines in preschool, girls', and the games and puzzle categories.

Within the segment, several countries experienced challenging market conditions, while emerging markets in Latin America, Asia-Pacific and Europe grew, although off smaller bases.

The international segment reported operating profit of $162.2 million compared to $165.2 million last year.

As a percent of revenue, operating profit was essentially flat at 11.1% versus 11% as we continue to invest in emerging markets.

The entertainment and licensing segment net revenues were $155 million compared to $107.9 million a year ago, an increase of 44%.

This is primarily due to growth in Transformers and G.I.

Joe, as our brands continue to expand outside of traditional toys and games in new categories, including lifestyle licensing and digital gaming.

The entertainment and licensing segment reported operating profit of $65.6 million compared to $51 million last year.

Now let's look at earnings.

For the year, we reported net earnings of $374.9 million or $2.48 per diluted share compared to $306.8 million or $2 per diluted share a year ago.

2009 includes a $0.12 per share impact from our television investment.

For 2009, average diluted shares outstanding were 152.8 million compared to 155.2 million last year.

Earnings before interest, taxes, depreciation and amortization were $772.3 million compared to $654.3 million a year ago.

Gross margin for the year was 58.8% compared to 57.9% a year ago.

2009 gross margin benefited from lower obsolescence and growth in our higher-margin entertainment and licensing segment.

In addition, we did not have the same level of markdowns as we did in the fourth quarter of 2008.

Moving to expenses, operating margin improved to 14.5% from 12.3% due to lower spending in research and development, advertising and SG&A.

Based on the mix of revenue, royalties increased in both dollars and as a percent of revenue.

At the beginning of the year, we outlined cost saving initiatives, including freezing salaries, hiring only in critical positions, and reducing travel expenses.

These efforts, combined with a focus on prudent spending, resulted in an overall reduction in costs within our underlying business, which is the baseline we will begin from in 2010.

Below the operating profit line, interest expense increased by $14.5 million to $61.6 million, primarily due to the new long-term debt we issued related to our investment in a joint venture with Discovery.

Other income net totaled $2.7 million compared to an expense of $6.1 million a year ago.

2009 includes income of $3.9 million, representing our 50% share of earnings in the joint venture with Discovery.

Our underlying 2009 tax rate is 29% compared to our 2008 full-year underlying tax rate of 32.8%.

Now let's turn to the balance sheet.

At year-end, cash totaled $636 million compared to $630.4 million a year ago.

In the last 12 months, we raised $425 million through debt offerings.

We also made significant investments in our business, including spending $300 million for our 50% investment in the joint venture with Discovery, $95 million to extend our agreements with Marvel and Lucas, and $25 million in royalty advances to the joint venture network.

Additionally, we returned cash to shareholders.

During 2009, we spent $111.5 million through our dividend program and last week announced an increase in our quarterly dividend to $0.25 per common share, an increase of $0.05 per share or 25%.

We also repurchased 3.2 million shares of common stock at a total cost of $91 million and an average price of $28.67 per share.

At year-end, $161.4 million remained available in the current share repurchase authorization.

Since restarting our buyback program in June 2005, the Company has repurchased 60.9 million shares at a total cost of $1.5 billion and an average price of $25.28 per share.

Overall, the quality of our receivables portfolio remains good.

Receivables were $1 billion compared to $611.8 million last year.

The increase is due to a number of reasons, including the timing of revenues in the fourth quarter and foreign exchange.

This is reflected in our DSOs, which, excluding securitizations, were 68 days compared to 63 days last year.

In addition, we did not utilize our securitization facility in the fourth quarter of 2009.

This resulted in $250 million of the increase in receivables.

Given the changing environment and government regulations impacting the securitization market, it's likely we will not securitize receivables as actively in the future.

Finally, I'd like to reiterate, the quality of our receivables portfolio remains good, and we do not have any significant customer concerns.

Inventories decreased to $207.9 million compared to $300.5 million a year ago.

Throughout 2009, both Hasbro and our retailers closely managed inventory levels.

After lowering inventories during the year, retailers required additional product to meet demand in the fourth quarter.

We are comfortable with our inventory on hand and at retail.

In closing, we're very pleased with our 2009 performance, which demonstrates our ability to grow our brands globally and invest in our business for future years.

After reducing our underlying costs in 2009, we will continue to closely manage our expenses in 2010.

Although we believe the economy is entering into a sustainable recovery, improvement will likely be at a cautious pace.

As we continue to execute our strategy to re-imagine, re-invent and re-ignite our global brands, we believe we should be able to grow revenues and earnings per share for the full year 2010, including the dilution from our television investments and absent a deterioration in consumer spending, global economic conditions or the value of foreign currencies.

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

(Operator Instructions) We'll hear first from Sean McGowan with Needham & Company.

Hi, thank you.

A couple of questions just on the JV and The Hub and the studio and that whole area, could you clarify what the dilution was in the quarter?

Deb, did you say it was $0.12 for the year?

And I think we can do the math, but if you could just clarify what the dilution was in the quarter?

Certainly, Sean.

It was $0.12 during the year and it was $0.04 in the quarter.

Okay, but I think you said in the other income line is actually income from -- that's because it's just -- that's what shows up in there, is just the JV?

Was it in fact profitable in the fourth quarter?

That's correct.

The JV was profitable in the fourth quarter.

Okay, a couple of other questions on that, then.

Is there any change in your outlook as to what you expect in terms of dilution?

I think you were saying like $0.25 a share for 2010.

Any change in that outlook?

And along those lines, what more needs to be done for the studios and Hub and everything in terms of increased spending?

Good morning, Sean, yes.

Our guidance for '10 is $0.25 to $0.30 for 2010 for the --

That's consistent with what you've been saying?

Correct, no change.

The major expense is clearly the re-launching and the re-branding, all the marketing that goes around the re-launching and re-branding of the network later this year.

Okay.

Deb, you said you were satisfied with the board games, I mean with the inventory at retail.

Could you comment specifically on board games?

Since that was the biggest area of increase and a lot of that seemed to be late, it's the category that does seem to be very concentrated in the fourth quarter.

Are you satisfied with the level of inventories that you have at retail?

Yes, we're very satisfied.

I think it is a category that has got momentum at the moment for us, and we actually see that -- sales continuing throughout the year.

We're going to be running the Family Game Night marketing programming for the full year in 2010.

It really didn't start until later in the year in 2009.

And as I said, at the moment, people, consumers seem to see this as a real value, the board game business.

And we're very happy with our inventories, and we hopefully will see retail sales running ahead of a year ago for the first and second quarters.

Okay, thanks.

Last question and then I'll hand it off is, when would you expect us to begin to see real operating leverage in that licensing segment?

In other words, operating income growing faster than revenue?

Actually, I think in 2010, you will probably see us going backwards in the licensing segment revenues because there was so much revenue associated with licensing programs around Transformers and to a lesser extent GI Joe.

I think the real leverage will start to come as all these incremental movies that Brian has talked about, Hasbro-based movies, particularly in 2012, and then also in the entertainment and licensing segment we have the television, so as we've said before, that will go from dilutive to accretive in 2011.

So I think it's '11, but certainly '12 you're really going to start to see the benefits.

Okay, but it sounds like if your revenue is going to be down and your expenses are certainly not going to be down in 2010, then that area could be a bit of a drain, which is incorporated in your dilution estimates for 2010?

That's right.

Exactly right.

Okay, well, thank you very much.

Thank you.

Next we'll hear from Felicia Hendrix with Barclays Capital.

Hi, good morning.

Good morning.

Deb, can you just walk me through the amortization Wizards of the Coast burned off?

I'm assuming there was some amortization from the JV in the fourth quarter.

Can you just walk us through what was in the $25 million?

Certainly, Felicia.

Good morning.

What we have in the amortization for the quarter is just our amortization on our normal product line.

There isn't actually any amortization from the TV programming in there, and we do have the tail end of Wizards of the Coast, which is coming off of our P&L in 2009.

In addition to that, we had just some small adjustments to product lives of some of the assets we have on the books, so beyond that, it's just our normal amortization.

Okay, so how should we think about that for 2010?

Well, I think as we've said before, the Wizards of the Coast amortization will be coming down and we wouldn't see any significant difference from what we had published in our 10-K of what we expected our amortization expense to be.

Okay, so just my timing of Wizards is off a little bit, I guess?

Maybe just a bit.

Okay, and then just in terms of the pipeline that you have for this year, I was just wondering, how are you thinking about Iron Man 2?

Because as we all recall with Iron Man 1, it was downplayed and then the movie exceeded expectation.

So I was just wondering, what's the retailer appetite for Iron Man 2, and what's your expectations?

I think the year is going to be a great year for Iron Man 2.

Clearly the movie's highly anticipated.

All the materials everyone has seen on the movie are very exciting.

A lot of retailer support around the world.

We continue to want to build our business with Marvel.

In addition, Marvel has a number of properties that are on television.

So it should be a very good Marvel year.

We're really excited about where the movie is going.

That's great, and then just in terms of your expectation for earnings growth in 2010, just wondering if you could walk us through a little bit some of your cost assumptions, particularly in the gross margin line, what kind of cost pressures might you be seeing, and then also kind of your thoughts around SG&A?

David, do you want to talk about that?

Sorry, I didn't hear the question.

You didn't hear the question?

Just in terms of earnings, your expectation for earnings growth next year, wondering if you could help us think through your expectations for gross margin, maybe discuss some of your assumptions on the cost side, where costs are going, and then also on SG&A.

Well, I think the key thing is that we've said that we will grow both revenues and earnings next year.

I think if you get the revenues, given the leverage in our business, you tend to get the higher earnings.

The reason we think we'll grow revenues is because, whilst we recognize that there will be a delta on Joe and Transformers, given that we've got Iron Man, given that we've got a lot of product around Toy Story in terms of co-branded games in Mr.

and Mrs.

Potato Head, and given that between Joe and Transformers, we did about $700 million worth of business this year, that means there's about $3.5 billion worth of business which has nothing to do with movies.

And that's brands like Nerf, Littlest Pet Shop, My Little Pony, Play-Doh, PlaySkool.

And those are the brands that have been growing consistently and globally over the last 10 years and accounted for a majority of our growth.

And we've got a lot of newness across all categories in all those brands, and we believe that we will be able to grow most of those brands again in 2010.

As you get the revenue growth, as I said, you clearly should get growth in earnings per share.

And obviously, a little bit of that will be offset by the increased dilution, but also we'll continue to manage our expenses fairly tightly.

I think the other thing as well is that we've been saying since early '01 that we were going to build our core brands to bigger global brands, and that would give us a lot more leverage in our cost structure, and that would make us more profitable as a company.

I think that's happened.

One of the reasons we're posting the kind of operating margins that we are now, which we haven't seen in Hasbro since the early '80s, is because we have grown our core brands globally and we're starting to get a lot of leverage out of our cost structures as a result of that.

Okay, I just, that (inaudible), one of your competitors was just talking about concerns about rising input costs, and yes, you certainly have the leverage, but I was just wondering if you were going to experience similar impacts?

No, we do anticipate that most costs will increase, so freight, resins, paperboard and print, Chinese labor and Chinese currency.

The rate of increase I don't think is anything like it was at the end of '07 through '08.

And as we have designed and costed and priced all our new products for 2010, we've clearly taken that into consideration.

So we don't think that rising input costs will have a material impact on our margin or our overall profitability.

Okay, that's great, and then on the SG&A side it looks like 2010 is lined up for a good year, or maybe things are feeling a little bit better at the retail level.

Are you going to -- are these wage freezes going to stay or should we assume some increase from compensation?

No.

As all your employees are listening on the call.

No, we would expect -- we did something at the end of the year for our employees, and we also would expect to have increases this year, although we're being very conscientious about all the other inputs and really partnering with our employees around the world in looking at our cost-effectiveness models and looking at the way we develop and design and ship product.

So we're all together on this as we pare down costs wherever we can.

Great, and then just finally, on Sesame Street, any thoughts on the ability to move that over to The Hub?

Well, overall, we're very excited that we've begun work on the product line, which does -- which would ship for second half 2011.

We're very excited about Sesame Street's performance thus far season to date and their 40th anniversary.

In fact, their ratings November to November, '09 versus '08, were up 15% versus year ago.

In fact, it's one of the more powerful starts to the Sesame Street series on PBS than they've had in recent years.

So overall we're very pleased with the current plan for their television.

Okay, all right, thanks.

See you soon.

We'll take our next question from Drew Crum with Stifel Nicolaus.

Hi, great, good morning, everyone.

Brian, could you spend a minute on the Universal film slate?

We know Battleship has moved out of 2011, as has Stretch Armstrong.

Just give us an update as to what that film slate looks like and remind us again how the terms work.

I believe it was four or six films over four years?

Yes, good morning, Drew.

Good morning.

A couple things to lay this out for you.

One of the things we've been working on with Universal is ensuring that we provide enough time to develop the motion pictures to be as big as we all believe them to be and to provide us an opportunity to put out a number of new initiatives over a number of years to take full advantage of those versus having so many initiatives in any one year.

So for 2011, given that there's Transformers as well as two Marvel theatrical releases in Thor and Captain America -- The First Avenger, and also the first year of Sesame Street plus Marvel TV and, we would expect, Star Wars TV, our feeling was to take the time to make Battleship more of a global tentpole for 2012.

We've also, late Friday night, announced we've signed Taylor Lautner as our lead in Stretch Armstrong, and we will produce that movie in 3D.

So as we go out now, we have a number of pictures that are in the Universal relationship, Battleship and Stretch, which would be 2012.

As well, we're working on scripts for Ouija and Candy Land and Monopoly.

And the relationship does go out now -- we've extended it to go out through 2015.

Okay.

And in addition, I don't know if you saw that announcement, but in addition we did take Risk and are now developing it over at Sony, a new studio partner for us, for that title.

And Brian, is that a 2012 release as well?

No date yet.

We're just in the beginnings and working with writers and our producing partner.

Okay, very good.

Another question.

What are you hearing from retailers in terms of their expectations as to how they will manage inventories in 2010, and maybe compare that to what you were hearing a year ago?

Well, I think overall, retailers certainly took down their inventories throughout 2009, and I think we will see retailers continue to operate more just in time and carefully around inventory.

There are a number of initiatives that have clearly performed, and certainly whether we talk about Iron Man or Toy Story, our Nerf business, Littlest Pet Shop, our games business, there's a number of initiatives where retailers are very excited because of the momentum we've had both domestically and internationally and particularly in emerging markets.

So I think it's going to continue to be that partnered responsibility and collaborative forecasting on inventory levels, recognizing that you can operate a business very effectively at overall lower inventory levels.

Okay, last question.

You provided some detail on the performance of the subs in the emerging markets.

Can you give us an update on plans for expansion there?

And just as far as profitability or loss is concerned for those subs, where are we in terms of ramp to breakeven?

Are those contributing to profits, or is there an expectation as to when those will contribute to profits?

Overall, we still are investing in many of our emerging market businesses.

In fact, we are entering the second year in Brazil, China as well.

We will continue to invest and probably begin to see breakevens over the next couple of years, opening some new offices as well in Russia and Romania.

There will be some new offices we'll open this year in Peru.

And I don't know, David, is there anything else you want to add?

Yes, Columbia and we're expanding in Korea, and in a lot of the markets we will be adding staffing.

The whole question about breakeven, some of the markets we've gone into in terms of European, Eastern European markets, where we distributed and then converted over to our own Company, some of those actually were better than breakeven from day one and actually contribute quite good margins.

I think in terms of the major new markets where we're starting up, Brazil and China, they take a while to breakeven.

I think we're thinking Brazil gets to a breakeven in 2012.

Okay, thanks.

Thank you.

Up next we'll hear from Gerrick Johnson with BMO Capital Markets.

Hi, good morning.

Good morning.

Wanted to ask about Beyblades.

That was a big product about, what, six or seven years ago.

2003.

And I was wondering how much Beyblades are incorporated into your guidance, and if Beyblades hits this year, how much do you think you can ship of that product this year?

Our plan for Beyblade would begin in the second half of the year.

We're still working out all of the television placement.

It recently was announced that Beyblade will be appearing on Nicktoons in the UK, for example.

We're finalizing some other television deals with our partners in Nelvana and certainly expect some revenues from Beyblades this year.

But again, we've seen such great results coming out of Japan, this whole new generation of Beyblades called Metal Fusion, and I'm not going to really forecast what it could be, but certainly we know what it was last time and we can develop product and ship product for the demand.

Right, that was north of $300 million that time?

In 2003 full year was around $330 million, I believe.

Okay, great, and then I wanted to ask about Spiderman, no mention of that when you were talking of the movies.

That seems like it's been pushed back, but do we have any guidance as to when we should be seeing the next Spiderman movie come out?

My understanding in conversations with Marvel and Sony is that it would be for summer 2012, and they have a new director and very excited about the direction they are taking it, as are we, and I think they're going to reboot that franchise.

Great, and G.I.

Joe 2, is that supposed to be 2012 as well?

That potentially could be 2012, working with the new team of writers right now, and a very exciting take on G.I.

Joe.

Okay, and lastly, I just wanted to clarify exactly what movies we have in '11 and '12 here.

Sure.

'11, Transformers 3, Thor, Captain America?

Correct, plus Marvel Television and Star Wars Television and our first half-year of Sesame Street, and our first full year in 2011 of The Hub network.

Right, of course, and then 2012 confirmed right now, Battleship and Stretch Armstrong, and anything else in 2012 at this point?

Sure.

A couple -- so it's Battleship and Stretch Armstrong is Hasbro properties, and then The Avengers and Spiderman is Marvel properties and Sony properties.

Okay, great.

Thank you very much.

Great, thanks.

Next from Sterne, Agee, we'll hear from Margaret Whitfield.

Good morning, congratulations.

I wondered if you could comment on your ending level of inventories at retail, both in the US and the major European markets, and any market share data you could provide?

Sure, Margaret, good morning.

And also, could you comment on the programming for The Hub?

Sure.

In terms of inventory, obviously we don't get as good a data in some of the overseas markets that we do in the US, but I think it's safe to say that most of our customers around the globe certainly had lower inventory at the end of '09 as compared to the end of '08, and certainly we're very happy with the quality of inventory at retail.

If you take the end of '08, there was a lot of obviously higher-priced stuff and just some product lines that didn't carry over.

As we go into '09, we feel we've got a very good quality of inventory, as well as the appropriate levels of inventory at retail.

Okay, and Margaret?

Market share.

Market share, our sense where we have market share is that Hasbro has gained market share both domestically and in several markets internationally.

And programming for The Hub?

What we've announced thus far is a My Little Pony show, as well as a Transformers show from the writers of the first two Transformers movies, and on Friday we'll probably give you some more complexion on The Hub and the direction that we're taking.

And in terms of revenue growth for 2010, what key categories do you anticipate might show growth?

I assume games and puzzles is one, but can you grow preschool girls and boys?

Sure.

I think that, first of all, we're very excited that Jerry Perez has joined us to run our preschool business, and Jerry is certainly a very accomplished executive with a lot of experience in the preschool business.

We have continued to have long-term momentum in many of our categories, and the CAGR for our core brands over the last several years is around 27% in those top core brands.

And even a brand that is celebrating its 75th anniversary like Monopoly is a 12% CAGR over the last five years.

So we're going to continue to grow our games business, continue to re-invent, re-imagine and introduce a number of new games this year.

Our preschool business, Tonka and Play-Doh in particular, have shown lots of momentum.

We believe PlaySkool will have that as well with some new initiatives.

Our girls' business, Littlest Pet Shop grew last year.

We certainly had year-on-year tough comparisons because of FurReal Friends taking a lot of the high price points out and we'll have some of those back in, certainly not quite as high as they were a few years ago, but certainly more of a range of price points for FurReal Friends.

Our boys' business should be very robust, both from Iron Man and Toy Story, as well as the continuation of Transformers.

If you'll recall, in 2008, Transformers was one of our lowest declines in the boys' arena off of a movie year that we had had in the last decade.

So again, we feel good about our overall product line.

We feel good about our growth opportunities in established markets, but even more importantly, in the emerging markets, where we see some high growth rates.

And you mentioned the absence of high-ticket items in '09.

Can you quantify the effect that that had on volume?

And I take it that obviously will not be a factor in '10; in fact, there could be some higher-ticket items, as you just said?

We saw the biggest impact in the high-ticket items was in PlaySkool and in FurReal Friends.

If you remember, products like Kota and the Dream Town Cottage, as well as Biscuit the Dog and a few others, certainly had an impact on our business.

We were more value-oriented and still providing great, innovative products at every price point.

The consumer certainly responded to that, and you saw that both in the full-year as well as fourth-quarter numbers.

There is an opportunity we believe from some of our insight work to provide some higher price points, albeit in more of a limited quantity, go forward in 2010, because people still see Christmas time as a special time of year, and gifting is a very important element.

Now you've reached an operating margin not seen since the mid-'80s at 14.5% in 2009.

Where do you think we go from here?

How many of your brands now have reached that level that you were talking about, the $300 million-plus?

So we've certainly set as a medium-term objective 15% or better in operating returns, and we've also said that our joint venture activities would become accretive in 2011 and beyond.

So obviously, that will become more helpful to us.

Clearly, our brands, we said from the very beginning that our brands, if we focused on our brands and grew our brands and leveraged the R&D, marketing and advertising across a greater geography, that our brands will become much more profitable, and they are.

I'm not going to comment on specific profitability by brand, but certainly, our brands and core brands tend to be much more profitable.

And even where we have royalties associated with entertainment, they tend to be more modest royalty rates than a strategic license.

Okay, thank you, best of luck.

Thanks.

Our next question comes from Tony Gikas with Piper Jaffrey.

Good morning.

A couple questions as well.

What brands -- I think, Brian, you mentioned a couple earlier, Nerf and Littlest Pet Shop, but what other brands are you really focusing on for 2010 as a big push?

Also, how big can Toy Story 3 be, and is that just board games or is there other puzzles, and what other parts of that license do you have?

Well, overall, we've seen great growth.

If you remember, when we launched our global brand leadership strategy, kind of core brand focus back in 2001, we said that we were going to grow the top brands of the house.

Back at that time, the top eight brands of the Company were about 17% of our revenues, and today those are nearly half our revenues.

We have a next cadre of brands that are challenger brands where we're pressure-testing those and applying resources and innovation and marketing to those, and we believe several of those brands can reach that core brand, global brand status.

David, do you want to take some of that?

Yes, I think when we talk about next year, what we're trying to do is leverage some of our brands to get into new categories where we haven't been so strong in the past.

So in vehicles, for the younger kid we've got Chuck My Talking Truck and then we've got Tonka Garage for the sort of five to seven year old, and then we've got this thing called Hasbro Speed Stars, which really takes Star Wars and Transformers into the vehicles aisle.

So I think we're looking to do something there.

Clearly in FurReal, we've got a lot of newness in addition to bringing back some of the higher-priced items.

We've got a line called Snuggimals, which is a small, lower-priced collectible FurReal Friend, and we've got some animatronic pets called Furry Frenzies, which we have high hopes for.

I think with Strawberry Shortcake, we introduced this year, it will be the first full year of Strawberry Shortcake.

And we continue to expect to grow in PlaySkool, Play-Doh.

Play-Doh gets the Sesame Street license a year before the rest of the business.

So I think it's not home runs in 2010.

It's lots of singles and doubles, and I think that's across all brands and all categories.

And Toy Story 3 product?

In Toy Story 3, there's an extensive line of co-branded games and puzzles.

Some of the headliners, for example, is a great Operation game, but there's several others, and space shooters, and a very exciting product line that really matches with the Toy Story 3 story arc, and then, of course, Mr.

and Mrs.

Potato Head, a whole line of products around the movie as well.

And then last question, could you just characterize the growth in Transformers this year over 2007?

Transformers was $592 million all-in in 2009.

It was $484 million back in 2007.

It's about a 22%, 21% growth rate.

Thank you, great job.

Thanks.

Our next question comes from Greg Badishkanian with Citigroup.

Great, thanks.

Just a few quick ones.

First on just your POS, domestic and international in the fourth quarter, how did that perform, and were there any regions internationally that did better or worse?

POS certainly in the US was very strong right at the end of the year.

I think in the week before Christmas and the week after Christmas we were like 28% and 20% up, respectively.

And in fact, the good news is that at not a bad level, but our POS has been up so far this year in early 2010.

I think one of our -- I think our POS was up in most markets around the world [when we were] growing our business.

One of the areas we struggled for a lot of the year last year was the UK.

It started very slow, and I think the loss of Woolworths didn't help.

The UK, we were very pleased; again, at the end of the year, it came back pretty strongly.

France was strong all year.

The places we said before, Mexico, Spain, Italy, and Eastern Europe were the most challenging.

Obviously, POS was strong.

You mentioned inventory levels were low at the end of the year.

Do you feel like you left more money on the table than usual because inventory levels were low during Christmas and holiday?

I think overall, the team did a very strong job of executing.

Given the environment, I believe we did just about all we could do in that environment and, coming off of 2008, clearly performed at a much higher level.

It would be hard, maybe a few brands, but really hard to say overall that we missed opportunities in 2009.

Yes, I'm just thinking because inventory levels were low and you probably have some out-of-stocks.

Yes.

But again, I think that if you think about building, rebuilding confidence in the toys and games business to perform and all the things we've said about toys and games being relatively recession-resistant, Hasbro products being innovative and things consumers want, you have to rebuild that over time.

And clearly, I think our teams around the world did a great job of demonstrating just that.

Great.

Good, and then just finally, internationally, if you assume currency stayed constant for the remainder of 2010 versus where we're at today, how much would they impact your 2010 earnings or sales, however you want to think about that?

Well, as you look at currencies as they sit today, our expectation and the expectation of all of the banks and advisors that we work with is that there will be improvement, and we've built that into our forecast for 2010.

Okay.

Great, thank you.

Thank you.

We'll go to Robert Carroll with UBS.

Hi, everyone.

Most of the questions have been touched on, but just was there any material spending for the Hasbro Studio in the quarter and any expectations around what that could be for 2010?

I think that -- let me take that, Rob, if you don't mind.

I think from a spending standpoint, as we begin to ramp up, that's factored into the dilution that we've talked about with the studio.

And I just want to correct something I said to Sean earlier.

We actually had dilution of $0.03 in the quarter and $0.12 for the full year, not the $0.04 that I mentioned earlier.

But we expect the spending levels to be included in the dilution factors that we've put forth for next year in the $0.25 to $0.30.

But as David said, the majority of that change from this year, although we've not been operating for full year and we will be next year, is really due to the re-branding and re-launching of the network.

Because of that more back end loaded?

That's correct.

That's correct.

Great.

Thanks.

I think as we've also mentioned before, a lot of the cash that we'll be spending on developing -- producing programs this year does go on the balance sheet.

We essentially capitalize that and then obviously match expenses with revenues, so amortize it as we start to get revenues from the programming.

We'll take our next question from Tim Conder with Wells Fargo.

Thank you and congratulations again on great execution.

Good morning, Tim.

Hi, Tim.

A couple of the items.

Any timing -- Brian, I think you were alluding to somewhat of Transformers TV, but any timing of when Transformers 2 or G.I.

Joe animation will be available?

We are working on Transformers animation, and we would certainly see some Transformers, both the opportunity for the classic Transformers as well as some new Transformers episodes, to get out sometime this year.

I will tell you we're also working on G.I.

Joe, the second movie, and looking at animation.

Whether that's for late '10 or '11, we'll make some decisions on that.

And Transformers 3, as a motion picture, we're well underway in working on a script, working with Michael Bay and Paramount.

Okay, and then if I interpreted your response to a question earlier, we may see the whole programming lineup for The Hub at the meeting on Friday, or would that be a few weeks beyond that?

We'll probably on Friday give you some more complexion.

I think people had also asked about the positioning of The Hub, how we see it being launched, what's our opportunity there, how do we see it all coming together, and give you some complexion on some of the programming.

We're not going to do the full programming lineup quite yet.

Margaret and her team are preparing for a lot of the up-fronts, and she and her team will lead the announcements across programming slates, beginning that process with advertisers, key partners and others.

And that will happen over the next several weeks and months.

Okay, and then Deb or David, on pricing, and again, in response to an earlier question, it sounded like you're pretty comfortable holding gross margin or close to that for this year, but how do you see the pricing front for 2010?

Well, I think a lot of our product is new every year.

So Iron Man this year, and as I talked about, a lot of new product and new categories.

So as we develop this new product, we've known what the potential cost increases are, or at least we've got a good estimate of what we think they are going to be.

And as we have designed and engineered and as we've costed and as we've priced the new product, we've clearly done so in order to protect our margin.

Now, on the carryover product, in general, once a vendor gives us a cost, it's good for the life cycle of that product.

Obviously if we refresh it, may change and everything, but -- so to some extent, we are a bit, on carryover product, we're a bit insulated from prices going up.

In the same way, we don't actually get the benefit quite as much if they turn around and go down a bit.

So we probably didn't get quite as much benefit in '09 as a result of that, but we've been insulated in '10.

Okay, and then can you give us a little bit of breakout?

I know -- and again, this appears to be included in your entertainment section, but licensing just in general, and how much was that collectively for the Company, and obviously driven by Transformers this year, but collectively how much was licensing '09 versus '08?

Well, the total entertainment and licensing segment was $155 million in revenue, up from $105 million a year ago, and that's as reported as a reportable segment.

We're not going to break that out specifically, but would tell you and tried to provide this, the digital gaming business certainly had increased, as we saw Activision bring lines of Transformers-related video games, also EA, a number of new initiatives there.

That area certainly grew within entertainment licensing.

We also saw our overall licensing business grow with Transformers and G.I.

Joe, as well as Littlest Pet Shop and some other brands.

But again, I can't give you the numbers underneath that.

Okay, Brian.

And maybe a housekeeping item.

What are your expectations for CapEx, looking into '10 and '11?

We believe capital expenditures will be slightly above the '09 levels, more normalized to 2008 levels.

Okay, and then lastly, if I may, clearly you feel very confident with the healthy dividend increase that you had, and then your guidance.

Looking going forward, how do you think about share repo?

You've repurchased some during the year, you've got a little bit left on your authorization.

How should we think about the balance going forward as cash flow accelerates here?

Well, I think that as we've consistently said that we'll make the best use of cash and investment in our business, but then we'll return it to shareholders.

This year we did repurchase 3 million shares and spent about $90 million doing that at a value of $28.69.

So we think that's good value.

We've got $161 million left under our share repurchase.

And I think that we would continue to have our expectation that if first we invest in the business for the long term for our shareholders, and absent any other use of cash, we return that to our shareholders.

Last year we hit the pause button on increase, and then this year our Board approved the increase in dividend.

Okay, well, thank you all again.

Appreciate it.

Thanks, Tim.

We'll hear now from Jim Chartier with Monness, Crespi, Hardt.

Good morning.

Just can you talk about the re-launch of the Littlest Pet Shop online world and how that impacted your business in fourth quarter and what that should contribute to next year?

Littlest Pet Shop online is for that audience and that very analogous to a major motion picture for another audience.

In other words, the ability to go online, have an immersive experience and play with your friends and play with some of your favorite characters is clearly a critical element.

It was really a joint partnership with Electronic Arts that was developed.

There's analog product that goes along with it, but also the opportunity for subscription and microtransactions.

It's off to a very good start.

The great part about the digital arena is you can continue to upgrade and advance the experience over time.

So, unlike an analog product, where you ship it and it is what it is, we get to continue to upgrade and evolve the experience for the users.

And that's our intention there, to continue to invest and evolve that experience.

And again, off to a very good start, which is certainly contributing to Littlest Pet Shop, but also, Littlest Pet Shop has had great success in not only domestically, but around the world, particularly in several European countries as well as Latin American countries and countries like France, where it's really the biggest girls' brand.

Great.

Thank you.

We'll take our next question from Jeff Blaeser with Morgan Joseph.

Good morning.

Thanks for taking my question.

If I remember, you expected costs to be down this year and gave a little bit of that back to your customers, and you expect to get some in return in 2010.

Is that correct, and if so, what kind of minimization does that do to potential cost increases?

Yes, what I said was that, clearly, I said that in 2009, on average, commodity costs, input costs were down versus 2008.

And we certainly got some benefit from that and we did share it with our customers, because in '07 and '08, we had had three price increases in a period of about 18 months.

So we did selectively where we'd started to cross price points and it started to hurt volume, or where we crossed price points and it was starting to make it that the retailer no longer wanted to carry it because he couldn't get a margin.

So on those selective items, much more a rifle than a shotgun approach; we did go back and reduce some pricing in '09.

As I said a few minutes ago, as we come into '10, all our new product has been costed to reflect the current commodity levels, and there's no price increase as such on those.

And then on the carryover products, we're not really taking price increases because we are insulated against some of the commodity cost increases by our suppliers.

Okay, great.

If I could jump over to The Hub, you've talked in the past about the reasonability model generating hundreds of millions of dollars in potential add-on revenues.

How long do you think that would take to ramp up?

Is it a first-year type of thing or is it a multiyear?

I was very clear when I talked about that at the November analyst meeting that it was a reasonableness economic model, and it talked about a few years out, being sort of '13, '14, without being that specific.

So you'd see that part of our business from a financial standpoint be accretive in '11.

But as you look at building a destination, as you look at putting branded programming on and attracting an audience, it's certainly going to take a few years to do that.

And that's part of our modeling and yet still a significant contributor to the Company over the next several years.

Great.

Thank you very much.

Thanks.

We'll move on to John Taylor of Arcadia Investment Corp.

Hi, I've got a couple of questions as well, if I could.

Deb, was there anything in the fourth quarter related to the tax rate that depressed it, or was that basically a catch-up?

No, there was really nothing significant in the fourth quarter that impacted.

It was really just the mix of revenues.

As they came through, we finalized the balance of the rate for the year.

Okay, and then I wonder -- David, you'd touched on this.

What was the balance sheet impact of the programming investment over the course of the year and maybe what do you expect the high-water mark to look like?

Yes, so we only started spending on programming production very late in '09.

Most of the programming production money that we spend in '10 will go on to the balance sheet, and we will start to amortize them as we start to add programming late in '10, in the fall of 2010, but most of that will have three- to four-year amortization life cycles.

So you'll only get a bit of it.

In terms of how much that is, we haven't been too specific, but we have said that as we get down the road and we start to add those hundreds of millions to revenue, we would also expect to be spending maybe $80 million-plus a year in production costs.

Okay, great.

And then, let's see, in terms of gross margin in the fourth quarter, a lot of things going on with the price increases and the reduction of discounts and obsolescence and all the year-end sort of freak-out last year.

I wonder if you could kind of break down some of that into baskets, give us a sense of what the eliminations were of the negatives from last year that were kind of unexpected and kind of what the benefits were of moves you made in the course of the year to adjust for that?

Overall, JT, we had said that we were going to get back to more normalized 58%-plus gross margins.

So that's, again, what we accomplished.

Deb, do you want to talk on any specifics?

Right.

We didn't have the issues we had at the end of the fourth quarter last year.

And as we talked about, as we refilled some of the channels that were -- as the retailers were cautious during the year and we moved some of the product, that really just resulted in lower need for obsolescence provisions than what we had last year.

We did have a little bit of a pickup from FX, but it wasn't significant.

But what we did have, as we've talked about, we do hedge our product purchases go forward, so we did have some favorable hedging that flowed through.

So really what you're seeing in the margins is the impact of the benefit, the additional benefit we got from our higher revenue in the fourth quarter and moving that inventory out.

That's really the primary reason for that change.

Okay, and was some of that influenced by the mix of puzzles and games being higher?

Did that have any meaningful impact?

Yes.

It did, okay.

All right, thank you.

Thank you.

We have time for one more question.

We'll hear next from Hayley Wolff with Rochdale Securities.

Hi.

Hi.

A couple questions.

First, can you give us the split of international versus US for Transformers and G.I.

Joe and, with Transformers, how it compared to '07?

I don't know that I have those splits in front of me, but typically, our product lines are about 60/40 domestic to international, and Transformers is probably right along those lines.

G.I.

Joe, a little more weighted toward the US, probably 70/30, although the box office was more even.

Okay.

Follow-on appetite for G.I.

Joe in the international markets, given the success of the box office?

Yes, I think one of the big mistakes we made on G.I.

Joe was really just in the price points.

It wasn't -- really had less to do with the enjoyment of the property.

In fact, if you look at the DVD sales, they were quite strong, and the property performed really well.

At the lower price points, G.I.

Joe has performed very well.

In fact, we shipped G.I.

Joe product in the fourth quarter and feel very good about -- we did some research with consumers and see a great consumer appetite for the brand.

And we've begun work on the second film, as well as looking at television.

So for us, it was just more a matter of probably ignoring some of the price point challenges that they're out there from a consumer spending standpoint as we develop the line 18 months ahead of the movie launch.

Okay, next question, I didn't hear what you said about FX assumptions for 2010.

Well, I think what we've said is that clearly a lot of overseas currencies have weakened just last week, but in general we think that on average, overseas currencies -- and the ones we use particularly are euro, sterling and Canadian -- on average, they're going to be higher in 2010 than they were in 2009, and certainly through the first half.

So we'll get a bit of a tailwind from FX during the first half of the year, assuming that last week's situation and the concerns about debt in Greece and Spain and Portugal, that doesn't get a lot worse.

Okay, and then can you go through just the EA and how your business did with EA vis-a-vis the overall video game market, which had some challenges?

Our business with EA, as well as overall digital gaming business, was up year on year.

Our brands are performing very well in the casual gaming space.

So whether that's the iPhone apps, where brands like Monopoly and Scrabble performed quite well in online.

We've also performed well on the Nintendo DS, particularly brands like Littlest Pet Shop, and on the Wii, brands like Nerf, Family Game Night titles have performed very well.

So in the casual gaming space, we do have brands that really resonate with those audiences, and people have really responded as we've developed games that play differently than our board games, but that are complementary to the board game brands.

So we grew year on year with EA, and of course also had great contribution from Activision and their efforts on Transformers, as well as Glu Mobile on the mobile apps for Transformers.

So for 2010, as you continue to expand your product offering, do you expect to continue to grow that segment or get caught up in sort of the bigger issues in the video game market?

I think over time, certainly we see digital game growing over the long term.

In the short term, clearly, console games as a proportion of revenue would contribute more because of the price points on the royalties, if you think about it.

And so as console games might come down a bit off of a movie year, we're also excited this year about launching a Transformers game with Activision that is not linked to the motion picture.

It's called War for Cybertron, which launches this year, which is more of a brand video game than a motion picture video game.

So as we develop more of those, as we develop more immersive experiences, as we have more of the apps and online participation, we'll see it grow over time.

Clearly, you're dealing in smaller dollars, so you would need to sell more units, if you will.

Okay, great.

Thanks a lot.

Thank you.

I'd like to turn the conference back over to Ms.

Karen Warren for closing remarks.

Thank you.

I'd 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.

Once again, ladies and gentlemen, that concludes our conference.

Thank you all for your participation.