孩之寶 (HAS) 2010 Q1 法說會逐字稿

Good morning, and welcome to Hasbro's first quarter 2010 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, and we'll then open the call to your questions.

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

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

The Hasbro team globally continued to execute our strategy well, and we delivered a strong first quarter performance.

Hasbro grew its business across all our major product categories including Boys, Games and Puzzles, Girls, and Preschool.

We grew revenues in the US and Canada segment and across all regions of the international segment, including Europe, Mexico, and Latin America, and Asia Pacific.

As we look at Hasbro's mega brand performance, Littlest Pet Shop, Monopoly, Magic The Gathering, Nerf and PlaySkool all grew in the quarter.

In addition, Baby Alive, Play-Doh, Tonka, Fur Real Friends and Super Soaker were all up versus a year ago.

The Iron Man brand also contributed to the growth in our global Boys business in the quarter.

We are excited for the opening of Iron Man 2 scheduled for May 7th.

In February, we shared with you that in order to grow our business in 2010, we needed to deliver growth across our portfolio of brands.

The first quarter is a good first step toward that end.

The comparison in the second quarter become more of a challenge, as we anniversary the movie ship-ins for both Transformers and GI Joe in 2009.

Foreign currency trends have also become less of a tailwind than we initially anticipated for the year.

Having said this, we continue to 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 further deterioration in the value of foreign currencies, consumer spending, or global economic conditions.

Next, we will execute our global strategy as we continue to transform Hasbro into a branded play Company.

Our entertainment initiatives remain on track.

Transformers 3 is scheduled for release on July 1, 2011.

Frances McDormand and John Malkovich have been added to the already great cast.

Stretch Armstrong is slated for Summer 2012, starring Taylor Lautner, and it's being filmed in 3D.

Battleship is planned for May 25, 2012 and will begin production shortly.

Taylor Kitch, who starred in the television series Friday Night Lights, as well as in Marvel's Wolverine, is our lead for Battleship.

In support of our television initiatives, Hasbro Studios continues to ramp up development and production in line with our plans.

The team currently has 317 half hours of programming in development and production, for distribution to the hub network and international markets.

We are delighted with the talent on board at the studio and all key roles are filled with the most recent addition being Finn Arnesen.

Finn joins Hasbro Studios from Cartoon Network in Europe, and will be Senior Vice President International Distribution and Development, charged with selling Hasbro Studios programming in all key markets around the world.

The Hub, our joint venture children's television network with Discovery Communications will be launching on 10-10-10.

Margaret Loesch and her team have been meeting with potential advertisers over the past several weeks and the reception has been very positive.

The Hub will feature a number of day parts targeting preschool and kids during the day, and in the evening, will offer families an opportunity to enjoy television together.

We will provide more details on Hasbro Studios productions and the launch of The Hub in the coming weeks.

In 2010, we are driving strong innovation, creating immersive experiences, and expanding internationally.

As in every year, we are focused on delivering growth across our business while unlocking the potential of our brands, geographically as well as across platforms.

You've heard me say this before but it stands repeating.

Not every brand should be supported by a motion picture, but every Hasbro brand must be regularly reimagined.

This concept is central to our success this year and every year, as we execute our strategy across our business.

We have the tools in place to accomplish our long term objectives of reimagining, reinventing and reigniting our brands, of creating immersive experiences and of growing our business in the emerging markets.

With these tools and strong execution from the Hasbro team globally, we believe we can grow our business in 2010 and in the years to come.

With that, I'll turn the call over to Deb.

Thank you, Brian, and good morning.

We are pleased with the strength of our first quarter results, which reflect the momentum we carried forward into 2010, and an improved consumer and retail environment versus the first quarter of 2009.

Our business grew in all major geographies and product categories.

For the first quarter 2010, worldwide net revenues of $672.4 million grew 8% compared to $621.3 million last year.

Excluding the $20.4 million positive impact to foreign exchange, revenues were up 5% from 2009.

Operating profit increased 68% to $69.3 million, versus $41.2 million a year ago.

Looking at our segments in the first quarter of 2010, the US and Canada segment net revenues were $424.7 million, an increase of 5% compared to $404.5 million last year.

The segment benefited from growth in the Preschool, Girls, and Games and Puzzles categories.

US and Canada operating profit for the quarter was $61.1 million or 14.4% of revenues compared to $41.6 million or 10.3% of revenues last year.

The year-over-year improvement is primarily due to increased volume, lower amortization and royalty expenses, as well as continued improved leverage and product development, advertising, and SG&A costs.

Net revenues in the international segment increased 17% to $221.7 million, compared to $189.2 million a year ago.

Absent a positive foreign exchange impact of $16.3 million, net revenues grew 9%.

The segment experienced growth in every major product category and grew in all regions.

The international segment reported an operating loss of $2.4 million compared to an operating loss of $14.5 million last year.

The year-over-year improvement was the result of the mix of products sold, lower amortization expense, and leverage in operating expenses.

The Entertainment and Licensing segment net revenues were $25.1 million compared to $27.2 million a year ago, a decrease of 8%.

This is primarily due to lower revenues in digital gaming and the Entertainment and Licensing segment reported operating profit of $9.4 million compared to $13.6 million last year, reflecting the reduction in revenues as well as costs for Hasbro Studios, which we did not have in the prior year.

Now, let's look at earnings.

For the quarter, we reported net earnings of $58.9 million or $0.40 per diluted share compared to $19.7 million or $0.14 per diluted share a year ago.

Net earnings for the first quarter 2010 include a favorable tax adjustment of $21.2 million or $0.14 per diluted share.

This relates to previously unrecognized tax benefits and other adjustments resulting from the completion of a tax audit.

Excluding this favorable adjustment, net earnings for the quarter were $37.7 million or $0.26 per diluted share.

Additionally, the first quarter 2010 includes a negative $0.04 per share impact from our television investments.

Earnings before interest, taxes, depreciation and amortization were $100.3 million compared to $73.4 million a year ago.

Cost of sales in the quarter was $262.7 million or 39.1% of revenues versus $244.8 million or 39.4% of revenues in 2009.

In today's earnings press release, we've changed the presentation of our statement of operations.

Hasbro's business continues to evolve as we move forward with revenues and expenses related to our entertainment efforts in both television and movies.

As a result, we will now publish our financials similar to many other companies, and no longer include a gross profit line on our P & L.

The remainder of the P & L is unchanged, and cost of sales will continue to be available to you for your calculations.

Moving to expenses, operating margin improved to 10.3% from 6.6% last year, primarily due to lower royalties and amortization as well as improved leverage in major expense areas including product development and SG&A.

In the quarter, we continued investing in our business, including our television initiatives, growing our presence in emerging markets, as well as marketing and advertising our products.

Below the operating profit line, interest expense increased by $7.1 million to $16.8 million due to the debt offering completed in 2009 related to our joint venture with Discovery as well as the offering we completed in the first quarter of 2010.

Other income net totaled $1.7 million compared to an expense of $2.9 million a year ago.

The first quarter of 2010 includes income of $500,000 representing our 50% share of the earnings in the joint venture with Discovery.

Excluding the favorable tax adjustment in the first quarter of 2010, our underlying tax rate was 29%, essentially flat with last year's underlying tax rate of 29.1%.

Now let's turn to the balance sheet.

At quarter end, cash totaled $1.3 billion compared to $590.4 million a year ago.

Operating cash flow in the first quarter was $265.1 million.

In the last 12 months, we raised $925 million through two debt offerings.

We also made significant investments in our business including spending $300 million for our 50% investment in the joint venture with Discovery, $45 million to extend our agreement with Lucas, and $25 million in royalty advances to the joint venture network.

Additionally, in the first quarter, we announced a 25% increase in our quarterly dividend to $0.25 per common share, an increase of $0.05 per share per quarter.

In the first quarter, we also repurchased 2.8 million shares of common stock at a total cost of $97.7 million at an average share price of $35.35 per share.

As we announced today, the Board has authorized an additional $625 million for use in our common stock buyback program.

On March 29, we called our outstanding 2.75% convertible debt.

As a result of calling this debt, we reclassified the convertible debt from long term to current.

During the first quarter, holders converted $111.2 million of the debentures into 5.1 million shares of stock and we anticipate the remaining $138.7 million of debentures will be converted into 6.4 million shares in the second quarter.

The proceeds of our first quarter $500 million debt offering are primarily going to repurchase or retire into treasury an equivalent number of shares resulting from the conversion of these debentures.

As a result of our decision to redeem these bonds, we're not able to be in the market repurchasing shares until after the redemption is complete.

Following the redemption and subject to market conditions, we plan to continue to repurchase and retire shares.

The quality of our receivables portfolio remains good, and receivables at quarter end were $526 million, up $161 million from $365 million last year.

In the first quarter of 2010, we did not utilize our securitization facility; however, in the first quarter of 2009, we securitized $100 million of receivables.

As we mentioned during our year-end earnings conference call, given the changing environment in government regulations impacting the securitization market, it's likely we will not securitize receivables as actively in the future.

Absent the impact of securitization in 2009, DSOs increased three days to 70 days, due primarily to higher sales in markets that have longer terms.

Inventories were $226.8 million in the quarter compared to $295.2 million a year ago.

In closing, we began 2010 in a strong financial position.

We will continue to closely manage our costs while making strategic investments in our business.

As we go forward in 2010, we believe currency will be less of a tail wind than we originally anticipated, but given the strength of our business as Brian stated, we continue to 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 further deterioration in the value of foreign currencies, consumer spending or global economic conditions.

That concludes our prepared remarks.

Brian, David, and I are happy to take your questions.

(Operator Instructions).

We'll take our first question from Sean McGowan of Needham & Company.

Hi guys.

Thanks.

A couple of questions here that are kind of a housekeeping nature.

So the royalties, why do you think the percentage was down versus last year so much?

Well, we have less entertainment related to motion pictures where we're paying a royalty on Transformers or GI Joe.

But you would have had Iron Man in the quarter, right?

Yes, but not the same there.

As well, you would pay a royalty on other licensed properties, Sean.

I think also, Sean, if you remember last year, we said in the first quarter Q that we had been settling some royalty audit issues that we had regarding the Lucas license which went back a number of years so I think we said there was a relatively small charge related to settling royalty orders at that time.

Right.

We expanded our rights with Lucas for two more years as well.

Just to clarify the guidance, looking for up EPS, that does not include the $0.14 tax adjustment; is that right?

That's correct.

Because you wouldn't have known that.

That's right.

Thank you, and just wanted to dig a little deeper on the accounts receivable and I got distracted for a second, so this is basically just because of lack of securitization?

That's a large portion of it, Sean.

Last year we had securitized $100 million and this year we did not secure eighties anything in the quarter.

Okay, and were there any other factors that contributed to the increase in relationship to sales?

Just the increased revenue as well, and in addition, from a DSO standpoint, as we were gaining higher revenues from our newer operations in geographies like Brazil, they have somewhat longer terms than other geographies.

Okay.

Is your expectation for the impact of all of the cable activities that you would still expect the full year to be like $0.25 negative impact for the year?

We had a range, there was a range of $0.25 to $0.30 in the year.

And that's unchanged?

That's unchanged.

Okay, thank you and I want to make sure I understand this.

So the half million dollar other income in the quarter, that suggested the Hub is profitable.

That's a little surprising to me just because the Hub itself is incurring a lot of expenses, but is that something we should expect each quarter?

No, I think, Sean, when we made the investment, we said that the channel itself, Discovery Kids was profitable.

It's profitable already as Discovery Kids today and it's still profitable.

I think what we've said this year is that as the biggest expenses, which will be incurred, relate to rebranding and relaunching.

There will be a lot of marketing expenditure going on, really probably during starting towards the end of the second and going through the third and fourth quarter so that will really ramp up and while Discovery Kids has always been profitable, is profitable in the first quarter, we anticipate it will be profitable going forward in the third and fourth quarter this year in particular, it may not be because of the relaunch and rebranding expenditure.

Right, okay.

I just thought maybe additional staff or something would have eaten up the profitability in the first quarter.

Great, and then my last question was if you could try to give us some color on just how tough a comparison in the second quarter is and what we should be looking for there.

Well a year ago, obviously we had two major motion pictures we were gearing up for in Transformers and GI Joe.

We are obviously gearing up for and have already begun shipping Iron Man in the first quarter, very excited about Iron Man, all of the indications are very positive and so again, we have a number of Hasbro's brands are owned and operated brands that are performing very well across the portfolio from Nerf to fur real and in our Girls business and Preschool business, so not dependent on entertainment as we said we were going to have and create immersive experiences across a number of our own brands and those are being borne out so we just want to make sure we remembered collectively that Second Quarter would be our toughest comps for the year.

Okay, thank you.

We'll go next to Greg Badishkanian of Citigroup.

Great, thanks.

Can you maybe give us a little bit of color on inventory levels and kind of maybe how the buyers are thinking about maybe increasing those over the next few quarters, do they go too low, or are they pretty okay with those levels right now?

Hi, good morning.

If you look at point-of-sale through the thirst quarter and year-to-date, our POS increases are in line with the increase we're seeing in our business, so again, I would say that we're continuing to drive innovative product, the consumer take away is positive, very positive, and our shipments are consistent with that.

Great, and also, maybe talk a little bit on the cost environment, particularly on kind of the gross margin line, and just with some of the headwinds in the second half of the year, kind of how you're managing through those, and how you think the impact will be and maybe also just if you expect to see some pricing passed on to the retailers.

This is David.

Clearly, when we spoke at our analyst meeting in November and again in February, we clearly said that we expect that most costs to be trending up.

At this stage, does it look like they could trend up a little bit more than we anticipated?

Certainly on paper and board at the moment, partly because of the Chilean capacity situation.

We have seen a pretty significant spike in paper board costs.

At this stage, I wouldn't say that resins or electric components or Chinese labor is materially different to what we expected.

I think we've said many times before that we are to some extent isolated from our rising commodity costs, because just about everything we buy out of the Orient comes from third party vendors.

We don't have our own facilities and the way we get our vendors to quote a price is very competitively bid among our people, but once there's one business or a product line, essentially they have to live with that price.

Now, clearly, in truly exceptional circumstances, like the fourth quarter of 2007 and into early 2008 when commodities went up very dramatically, we had to go back and revisit that but in general, the first increases in commodity costs in any given year will be absorbed by our vendors.

And indeed, we're working very hard to help them be more profitable, business is growing, we're giving them more work, we're level loading them, so they can absorb it without losing money on our business certainly.

Great, thanks and nice job in the quarter.

Thank you.

We'll move next to Tony Gikas of Piper Jaffrey.

Good morning.

Could you just talk a little bit about the inventory levels on an international basis, international revenues are very strong in your quarter, some of the competition has been talking about the same.

Are they taking more product than they are domestically, that's kind of a follow-up on the last question.

Second, could you just maybe talk a little bit about trends with ad revenues and what you're seeing in your thoughts for the Hub once that gets launched and then the third question here would be just on the digital gaming piece, the current video game cycle peaked back in 2008.

What are your thoughts on the trends for this year and has Electronic Arts changed the line up at all?

I know they have cut their SKU plan in half for this next year relative to two years ago so over a two year period they've cut their SKU plan in half.

Have you been affected by that at all?

Tony, this is David.

I'll take the first question, with regards to inventories internationally.

I think probably a lot of international retailers had actually more aggressive goals in cutting inventory last year than did the US, so I think they probably started with a bit less and there for, as economies start to recover, I do get a sense that international retailers in particular are willing to open the spigot a little bit and to take a bit more in and you know, that doesn't mean it's a material change, but it seems to be a bit of a change.

The other reason why our international revenues grew a bit more is we clearly did get a little bit of help from FX, and of course we had this pretty aggressive investment we will be making in emerging markets so we would expect to see higher growth rates international because of the investments we're making in countries like Brazil and Peru and Czech Republic and China.

Okay, Tony, on the question about advertising revenue.

The feedback thus far from consumers at large as well as advertising agencies and potential advertising clients to the Hub Network has all been very positive, and they see a great opportunity in the marketplace, a great gap in the marketplace for a network that focuses on kids and their families.

Margaret is out meeting with potential advertisers.

We will make more formal announcements about our line up and programming and schedule in the next four to five weeks and then we'll be able to come back to you with what our schedule looks like.

She's going to lead that process, but again the feedback has been very positive.

Overall I would sense both from our own plans as well as our sense in the market is that people do want to advertise and market their products that consumers are very brand centric and would like to purchase brands and innovative products and brands like Hasbro's brands are being met with great reception in the marketplace.

On the third question, on digital gaming, I think what you're seeing overall is kind of a shifting out year on year in our business and overall, where you may have a bit less in console gaming but you're getting more in online gaming, on mobile gaming, on iPhones and now the iPad, so the absolute dollars or the ticket is changing.

A console game is one price point and online game or an iPhone App is a different price point, so you're selling more items at different price points.

It's really heartening to see that brands like Family Game Night was named as the favorite game for families as number one game for families during the XBox live Arcade Awards so as you look at XBox Live Arcade, if you look at Scrabble on the iPad, it's one of the top Apps already on the iPad, so it's a matter of activating brands across a number of different Platte forms and providing those immersive experiences and I think you're seeing that overall shift in the marketplace where it's a combination of console game sales this year for our products like Transformers has a new product coming out called Transformers War for Cybertron, in June which is Activision and it's a great game and great expectations there but also a lot more in online and a lot more in mobile and iPhone and those games don't carry the same purchase price as do console games.

Has the SKU plan changed at all?

The SKU plan has been pretty aggressive.

In fact, we continue to see aggressive plans from EA.

Our brands perform exceedingly well in the casual gaming space and across platforms, so I would say their focus continues to be on Hasbro brands as a killer app in the casual gaming space.

Okay, great job.

Thanks guys.

We'll move next to Gerrick Johnson of BMO Capital Markets.

Hi, good morning.

Deb, perhaps you can discuss a little bit the components of gross margin.

We talked a little bit about inputs but also sales leverage, average price increases, mix, how all of those played out in the quarter?

Good morning, Gerrick.

I think David touched on the cost components a little bit so I think we've talked about this, but really as we look at that, we've continued to say that from a foreign currency standpoint, we hedge foreign currencies with respect to our inventory product purchases, so we continue to have the benefit of that program, and having laid that over multiple year strategy.

With respect to mix, we saw some very good growth in the quarter in our core brands, and in particular, those brands are profitable, and contributed a great deal in volume and much of that passed through.

The other thing that's not really in the cost category, but we benefited from in the quarter and we've told people was that our amortization expense is continuing to decline as our Wizards of the Coast amortization is starting to roll off in the quarter.

Okay, well with relatively flat gross margins year-over-year, what might have been holding you back on a gross margin side a little bit?

Well, from a mix standpoint, we've managed to continue to hold our costs, and it's as a percentage of revenue, we've had more revenue flowing through to the bottom line, so I guess I'm not quite sure which the question is.

We tend to see a little bit more of the impact on the royalty line and you can see that increase on lower royalties this year.

Okay, and then on your sales growth international, perhaps you can give us some information to say how much of that growth came from these new geographies that you've opened up in the last couple of years?

Yes, this is David.

I think clearly, we have higher rates of growth in these emerging geographies, but from a fairly low base so of our total growth, I'm not sure I have the number in front of me but I would think probably still most of it probably still came from the larger Western European, Australia and New Zealand mature markets.

And then my last question on Preschool, what's driving your growth there?

I guess you don't have the Rose Petal Cottage anymore so pretty good growth in Preschool.

What's driving that?

Well, it's in our PlaySkool business.

It's in our Play-Doh business, in the Tonka, Preschool business so across a number of different product categories.

Okay.

Thank you very much.

Thank you.

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

Hi, great.

Thanks, good morning everyone.

Good morning.

Two consecutive quarters of revenue growth for Games and Puzzles.

Can you talk about the retail inventories going into the quarter and how you're feeling about shelf space?

Well, we feel very good about innovation in the products and retail take away.

The promotion around Family Game Night has been extremely effective and that continues.

In fact now is a full year program for 2010.

A number of countries around the world executing a version of Family Game Night.

We see a lot of new innovations coming not only early in the year but throughout the year in our games business, both in our global core brands like Monopoly as well as a number of other challenger brands through the games business, so I feel very good about what we're seeing there.

Our retail support and the consumer take away.

Okay, and just shifting gears to the Discovery dilution, Deb, I think you said it was $0.04 in the quarter.

Can you talk about or break down what the components of that were and as you look out through the balance of the year, are we likely to see something similar as you trend towards the relaunch of the network?

Yes, Drew.

Actually, you're correct.

It was $0.04 in the quarter, and really the majority of it in this quarter is really arising from the interest expense and the debt we incurred in connection with it, but as we trend out to the latter part of the year, we also have some impact from the hires we've made, but as David mentioned earlier, we will, as we get closer to the launch, those costs will become the rebranding and relaunching of the network, those costs will become a much greater component of the dilution.

And remind me again, that's reported as cost of sales?

No.

To the extent that those costs are incurred by the network itself, that will be in other income and expense.

As an extent we incur them that will be throughout the P & L.

Okay, also wanted to ask about the performance of the international subsidiaries you guys opened back in 2008.

Are those contributing to profits yet, or is the expectation that they will be profitable by 2010?

Yes, I think it's a bit mixed that there's certainly some markets in Eastern Europe that we're making pretty good operating margins, on some of the bigger markets where we're having to invest and we're spending very high rates at the moment to try and build market share, certainly Brazil and China were much closer to breakeven at the moment, maybe losing a little bit in Brazil, but we do anticipate that certainly by 2012 these markets will start to become accretive to, well will start to show positive operating margin, although not at the corporatewide average.

Okay, and one last question.

What was the CapEx in the quarter?

$20 million.

Okay, thanks guys.

Drew, one more thing I should mention as I look at the array of games that are selling while I think the Wizards of the Coast folks certainly deserve a shout out for their effort and really Magic the Gathering is performing exceedingly well both as the analog paper base game as well as online.

Okay, great.

Thanks guys.

Mention that as well.

We'll take a question from Tim Conder of Wells Fargo.

Thank you.

Let me also offer my congratulations on a continued great execution.

Thanks, Tim.

A couple, Brian or Deb or Dave.

Can you give us a little more color on the level of Iron Man 2 shipments in the quarter and how much that went against the Transformers in the quarter a year ago and then obviously Iron Man is not as you've already alluded to is not going to offset the comparable Transformers and GI Joe comp in the second quarter but just maybe a little color on the comparables there.

Tim, it's Brian.

The Boys business grew 3% globally and really we're heartened to see certainly Iron Man contributed as we indicated but as you see brands like Nerf that are growing dramatically domestically as well as in international markets as we've done a lot of work around consumer insight as we understand the universal truths about Nerf, there is a brand really contributing to our Boys business, it's owned and operating brand, high operating profit margins and as we grow those businesses as we indicated, those are the kinds of businesses that allow us to amortize our expenses in R&D and Marketing and drive the kinds of operating returns we're seeing in quarter, so really, while Iron Man contributed in the quarter, we're also seeing our owned and owned and operated Nerf business, Tonka businesses and other Boys businesses contributing as well.

Yes, clearly the broad portfolio contribution was very notable, very notable here.

Right.

As it relates to your comments regarding the second quarter being a tough quarter which I think everybody realizes that, how would you put that in context and I think David, you even alluded on the fourth quarter call about or one of the Analyst presentations about the first half of the year especially may not be up or would be kind of challenging.

Do you expect the first half of the year to be up in general in revenues and EPS in the context of your full year's guidance?

Tim, I think that we performed very well in the first quarter and have certainly performed at the high end of our sense of range of what we wanted to achieve in the first quarter, we certainly came out with the momentum.

I'm not going to comment on first half performance overall but certainly with the POS games that we've had in the first quarter, with the revenue results, with the operating profit results you've seen in the first quarter, our reiterating our broad guidance for the year is easier to do, and I think that we again would reiterate our guidance for the year that we believe will grow revenues and EPS barring any further deteriorations in certain key indices, but overall, I think it's easier for us to say that today than it was 90 days ago.

Okay, and then more of a housekeeping, what would you anticipate the ongoing effective tax rate to be here and then any color on CapEx for the full year?

I think we would expect the underlying tax rate to be similar to what we talked about in February, it's 29% on the full year similar to last year and with respect to CapEx, I think we said at that time too, that we expect it to be around $100 million for the full year.

Okay, and then lastly, just as a follow on to a previous question, are you saying just to clarify the POS internationally, in the first quarter, was that, it was continuing to go well it sounded like but your shipments are growing a little bit faster than POS because of maybe they've taken their inventories down a little too excessively in 2009?

Well we're seeing different rates of increases, certainly in the emerging markets are the highest percentage games followed by a more Eastern European and mature markets, in terms of inventories.

No, I would say our POS during the first quarter and most international Markets exceeded the growth in shipping.

I think the comment about retail is being a bit less inventory adverse is more of a general comment which probably bodes quite well for the balance of the year.

They do seem, the economies, the perception is with the economic recovery is more real and I think retail and people that control the inventory are loosening up a bit, but I don't think, in fact I know certainly in most markets our POS growth exceeded our shipping growth.

I think the other trend that's out there given it's still coming out of this recessionary environment is that consumers have really continued to gravitate even more toward brands and as Hasbro has been able to offer innovation and its brands and continue to offer great products and innovative products at a value price point, we've been the beneficiary of consumers interest, given they have limited, or more limited discretion after it dollars over the last bit of time and coming out of that they certainly would prefer to be buying branded products, products they know, products that provide great play experiences and then the willingness to go with us across a number of platforms and pay for those immersive experiences, that's all part of what we are seeing at retail and from retailers.

And again, Brian, I think to what you're saying even versus other branded consumer staples, it appears yourselves and maybe some of your other competitors, your products aren't as fungible as some other peoples products.

I think, for young people and their families, they understand our games.

They understand our toy brands.

They are enjoying those.

They have shared those for generations.

We continue to put innovation in reimagining those products, so in this environment, we're offering consumers the opportunity to participate in immersive play, and we're providing those immersive play experiences, and the consumer is benefiting from the innovation, and at a value-oriented price.

Great.

Thank you, gentlemen, and thanks, Deb.

Tim, before we move on, I just wanted to correct one thing.

We looked at our estimates for CapEx this year, and I think we're going to be closer to $120 million than $100 million this year.

Okay, great.

Thank you.

We'll take Hayley Wolff of Rochdale Securities.

Hi, guys.

Good morning.

Hey.

A couple of questions.

First on the Boys toys.

How much of the reduction in royalties might be attributable to any kind of weakness in Star Wars?

Second, can you give us an update, maybe, on the Transformers, or your expectation for Transformers year two, vis-a-vis the 2007 and 2008 variance?

Yes, I think that David touched on earlier, Star Wars royalties were really down, mostly because of a payment we made a year ago to extend our rights for two more years.

We're seeing good sell-through on Star Wars, we continue to see good sell-through on Transformers.

Clearly, Transformers is coming off of a movie year, so it won't perform like it did a year ago.

But overall, as you can see, the combination of motion-picture-related properties later this fall, some of those properties are going to be beneficiaries of television support, certainly the Marvel properties.

Star Wars properties in the third quarter, the third season of Clone Wars kicks in.

Marvel properties, supported by television, as will Transformers be supported by television.

So it's a good combination, and then of course, brands like Nerf are performing very well, domestically and globally.

So, again, it's more related to the royalties paid a year ago, related to the extension of our rights in cleaning up an audit.

Based on what you're seeing now, is there any reason to think that you'll see a more precipitous drop than Transformers this year, versus what you saw 2008 versus 2007?

I think it's early, yet, to say.

The overall POS is very positive, so I can't really say for the full year.

I think we'll get into the second and third quarter plans.

The team has a lot of really significant marketing plans baked in for the second half of the year, they have a very focused effort, and a new promotional campaign around the Hunt for the Decepticons, which is our third and fourth quarter initiative, so we'll wait and see.

Okay, and then, switching gears to the Hub, can you give us any anecdotal information on how advertisers are responding to it, what kind of hurdles you're facing in having these discussions for ad dollars, is there reluctance because of its newness, or conversely, are they looking at it as a fresh new opportunity?

I would say it's more the later, Hayley, that it is a fresh a opportunity.

I think that people are beginning to understand what we've been saying all along, which is that we really are open for business, that Hasbro-branded content will only make up one of four inputs to the overall schedule, there's other third-party content providers that are creating content, there's new content that's being created, there's some Discovery library that's there, and then of course, Hasbro-branded content.

The fact is that we are very much open for business, and historically, being an advertiser, we understand what advertisers are looking for, in terms of promotional opportunities and marketing opportunities.

And, the Hub stands apart from a lot of the other kids networks because we really are going to celebrate what kids and what kids and families are looking for in terms of entertainment and both consumers as well as advertisers are seeing that as unique in the marketplace and certainly something we're supporting.

Is there any hesitance that you're seeing issues that you have to overcome?

No, you know, it's not unlike the conversations we've been having with analysts and shareholders.

At first, people were a bit confused, maybe as to why Hasbro went and did certain things and I think we've made that abundantly clear as to why we went forward in a joint venture with tremendous partners at Discovery and similarly, it takes a little while to explain to people how we're going to be launching the Hub and what the Hub will represent vis-a-vis other networks out there, but just as there are dozens of successful networks focused on the 18-49 year old adult demo or the 25-54 year old adult demo, advertisers and consumers are seeing an opportunity for another network to be successful in the marketplace for kids and for families.

Okay, and then one last question on the dilution.

Deb commented out of the $0.04 dilution was largely related to interest expense in the quarter, so if we, the $0.16 of the annual dilution is interest expense, the remaining say nine to $0.14, is that mostly third quarter?

What piece of that comes in the second quarter and then fourth quarter we would then expect, can it be profitable?

We've talked about overall the dilution coming in the third and fourth quarter and that being more significant as we relaunch and rebrand the channel to be the Hub Network.

I'm not going to go beyond that.

I think Margaret and the next several weeks will be outlining the schedule and more of our promotional plans, and then I think that will become clear.

We have said that the network launches on 10-10-10, so that should give you some sense for our plans, and for timing of our expenditures.

Okay, thank you.

We'll take a question from John Taylor of Arcadia.

Hi, I've got a couple of questions too.

I wonder if you could deconstruct the other asset line, the $290 million increases.

I guess I'm looking for capitalized program development costs and stuff and what might be moving on in that line.

Certainly.

The biggest movement in that line is really related to our investment in the joint venture with Discovery, so that hit after the first quarter of last year so while we start to ramp up with programming costs, it's not significant at this point, however we've said that expenditure could get up to $80 million over type as we develop it and it will start to get amortized as the programs begin to air.

Okay, great, but it doesn't feel material right now, yet?

No, it's not material.

Okay, and then I wonder if you could talk a little bit about the timing of royalty payments and so on, you had no doubt some people sort of sending checks in late and so on.

Was that any kind of an impact on the quarter?

No.

Not really?

No.

Okay, and then in terms of the revenue growth, 12 months ago it was Panic City and retailers were expecting double digit declines and amazing things, so how much of the revenue growth do you think you might characterize as sort of a reload as opposed to better than expected demand, due to momentum developed during last year if there's a way to do that?

John, I think the big point, the broad point I would make is that certainly through the quarter, our POS was closer to double digits growth because of a slightly earlier Easter so actually that one week Easter draws a lot of those POS increases.

If you look year-to-date, our POS is still mid single digits increased if you look at the the flip between the two, and our shipments are not inconsistent with that.

In fact fairly consistent, so probably POS leading slightly, especially in international markets to our ship-ins.

One other thing, John.

I think coming into this year, 2010, after a 2009 where we did $600 million in Transformers and another hundred plus million in Joe, our people were very concerned about the delta that we had to make up, and we actually I think surprised people when we said we thought we would grow revenues again this year.

At that time, we said there would be a lot of singles and doubles and a lot of things contributing to that.

Part of that was the strength of our brands, not just Transformers and Joe but a strength of our brands across a wide range and the newness we had.

Part of that was we were at that time anticipating a little bit of a tail wind from currency and we certainly got that in the first quarter, whether we'll get that for the full year we're not sure at this stage and part of that is we did see some overall improvement in the economy, so I think we do have a delta that we did on Transformers and Joe and part of how you overcome that and grow our business again this year is the strength of our product line but part of it is an improving economy.

Okay, great, thank you.

Thank you.

We'll move to Robert Carroll of UBS.

Hi guys, congrats on the quarter.

Just bigger picture, as the core brands continue to expand with the addition of Nerf into the mega brand category, do we potentially see the advertising and royalty expense on a combined basis grow to beyond that 18 to 19% of revenues?

Well I think over time, you probably see a mix out that would have it probably go down as a percent just slightly in terms of advertising as you probably grow via television and television programming a bit more, so overall, I would not say that those two numbers together would be going up appreciably but probably relatively constant in the in years and then down slightly in the out years.

And to leverage the Hub relationship?

Yes, the Hub is the domestic distribution outlet but as we take our programming and distribute it internationally, you would then see programming around our brands hitting markets around the world, as we've done historically for brands like Transformers, so that does enable you to get the leverage off of your R & D and marketing and that's not unlike years where we have movie years or where our partners like Lucas have new TV series.

You're able to use the marketing from the television and from the promotions to offset a bit of your own A to S ratio.

Thanks a lot.

We'll take our last question from Jeff Blaeser of Morgan Joseph.

Good morning.

Thanks for taking my question.

Could you talk a little bit about Nerf, domestic international splits and growth in the first quarter?

Well, in fact, Nerf, good morning, Jeff.

Nerf has grown appreciably, but both domestically as well as internationally.

We are seeing and have done a lot of work around Nerf to insure the insights around the product line, the permission to play and to have fun with Nerf has now been honed to be a global initiative and we are seeing uptake in Nerf globally, albeit the US business obviously is several times bigger than the international business, so as a proportion it doesn't match our historical splits of international to domestic.

It's more domestically oriented still today and the growth is from both sides.

Don't think we're going to break it out further.

Okay, any obviously long term view, any reason that you could see that split not potentially hitting these historical averages of the Company?

No, in fact I would say that it should.

I think it's just a matter of continuing to invent and innovate in the brand, which we're doing.

The major segments of the brand, the end strike as well as end force are performing very well in the first quarter.

We're seeing a lot of excitement.

This is a great example of a brand that's benefiting from a different kind of immersive experience we've created.

There are 45,000 videos being created by our users that are online today on YouTube.

They're creating their own virtual Nerf network online, and that's all part of the fun of playing Nerf, as people like to make videos around their exploits and the promotions are working as well as a lot of the new products.

The team has done a tremendous job.

We've elevated Nerf to be a mega brand over the past Fall and we're seeing uptake globally.

Okay, great.

And then finally going back to Transformers and GI Joe, I think in the past you've given general blueprints as to revenue streams first half second half, if you could remind us what that is, I think it was like a significant portion are still in the holiday period if that's correct?

Yes, a significant portion would be in the holiday period for both brands even though there were motion pictures in the second quarter.

The second quarter was really the movie ship-in timing but still third and fourth quarter are much bigger as a proportion of total sales.

Great.

Thank you very much.

Thanks very much.

At this time I'd like to turn the call back over to Ms.

Warren for any additional or 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.