孩之寶 (HAS) 2010 Q2 法說會逐字稿

Good morning and welcome to the Hasbro second 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.

At this time I'd like to turn the call over to Ms Debbie Hancock, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you and good morning everyone.

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

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

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

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

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

We will then open the call to your questions.

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

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

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

Some of those factors are set forth in our annual report on Form 10-K, in today's press release and in our other public disclosures.

We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call.

Now I would like to introduce Brian Goldner.

Brian?

Thank you, Debbie.

Good morning everyone and thank you for joining us today.

Our global teams continued to execute our long term strategy through the second quarter.

Heading into Q2 we knew it would be a challenging quarter as we faced difficult comparisons with the initial movie ship-ins last year for both Transformers and GI Joe.

In fact the revenue decline from these two brands combined was $174 million in the quarter.

This decline was partially offset by gains of $120 million across the remainder of our brand portfolio and backed by strong execution of our team globally.

Overall, revenue declined 7% in the quarter as several of our brands and product categories grew.

I will provide more insight on this performance in a moment.

Despite lower year-over-year revenues, we increased operating profit 9% from the second quarter last year.

Our ability to improve operating profit clearly illustrates the operating leverage we are unlocking in our business.

We continue to expect our revenue to be more heavily weighted to the back half of the year as our major initiatives are beginning to launch.

For the full year 2010, we still believe we should be able to grow revenues and earnings per share, including the dilution from our television investments and barring a further decline in foreign exchange, consumer spending or global economic conditions.

Reviewing our second quarter performance, the games and puzzle category up 22% and preschool up 32% both posted strong growth as did several of our mega brands, including Magic The Gathering which continues to perform extremely well, Monopoly, celebrating its 75th anniversary this year, Nerf showing strong growth both in the US and through International expansion and PlaySkool which is seeing growth across a number of initiatives including infant, learning and Mr And Mrs Potato Head who are leading characters in Toy Story 3.

Other brands contributing to growth include FurReal Friends, Play-Doh, Operation, Baby Alive, Strawberry Shortcake, Tonka and Iron Man.

We have said this year would be about singles and doubles, meaning would be a year when we are driving growth across the breadth of our portfolio.

Year-to-date, revenue is down just $3 million versus year ago.

Over the coming months, we have a number of initiatives launching.

In the boys category, Beyblade is off to a promising early start in Canada and is just starting to hit shelves in the US.

Programming is on air in both markets.

Programming and products are also scheduled for major European markets, Mexico, Australia and New Zealand this year.

Nerf and the newly rebranded Nerf Super Soaker have been strong contributors to growth in the first half of the year and in the second half we have major new products launches slated.

In girls, Littlest Pet Shop is adding an exciting new play pattern inspired by our consumer insight work with Blythe Loves Littlest Pet Shop.

Also Furry Frenzies within our FurReal Friends line will be hitting retail this Fall.

In preschool our entrance into the electronic learning aid category with Alphie is off to a good start.

Play-Doh is adding Sesame Street to its line and Chuck My Talking Truck will get additional support from new programming on The Hub.

Finally in games and puzzles, we continue to innovate our Evergreen brands with creative play, while introducing exciting new brands.

Cuponk, our new theme ball and cup game, is off to a good start.

Scrabble Flash, Monopoly Revolution and our new line of construction games under the You Build brand are just a few additional highlights for the second half of the year.

We will support these initiatives with the continuation of our successful global family game night initiative, including a new marketing campaign this Fall.

We also feel very positive about our new network.

This Fall, The Hub, our children's television network with Discovery, is on schedule to launch on 10-10-10.

At this point, Margaret Loesch and her team have announced much of the programming, completed all of the acquisition deals for the Fall launch and continue to finalize the schedule.

As part of these announcements, Hasbro Studios has seven shows announced to be on The Hub.

These include Transformers Prime, GI Joe Renegades, My Little Pony Friendship is Magic, the Adventures of Chuck and Friends, Pound Puppies, Pictureka, and Family Game Night.

Additionally, several of our partners have programs slated for the network including Strawberry Shortcake from American Greetings, In The Night Garden from the BBC, and the WotWots from Weta Workshop.

More programming announcements are expected from The Hub in early August during the TCAs, a major press event for the Television Critics Association.

From a product standpoint, in addition to product already available in the market, we have a number of new product initiatives which tie to our new programming on The Hub.

The majority of new product tied to programming is scheduled to launch in Fall 2011.

My Little Pony is undergoing a reinvention along with the new animation.

A sneak peak of the new look will hit retail shelves this Fall to coincide with The Hub launch, with the whole new look for My Little Pony coming in 2011.

From an advertising perspective, Margaret and The Hub's ad sales teams have had many one on one meetings with potential advertisers.

As a result, blue chip advertisers are getting on board with The Hub and its programming for kids and their families.

They are enthusiastic about the mission of the network and it provides them with an opportunity to reach a wide cross-section of viewers, including adults, moms, families and kids.

Prior to the launch of the network, The Hub will kick off a concentrated high impact marketing campaign.

This campaign will have additional support in the late November, early December time period, as well as in early 2011.

Turning to our movie pipeline, production is under way for Transformers 3, which is scheduled for release on July 1, 2011.

This year, Transformers shipments are showing a more typical post-movie decline than the smaller decline we saw in 2008 when we had television to support the brand throughout the year.

In 2011, we will have the support of both a major theatrical release and television behind the brand.

I started today's call reiterating that Hasbro's global teams are executing our long term strategy, a strategy built on a number of core elements designed to guide our business for years to come.

Our brands, including Hasbro's core brands and our vast portfolio of active and bulk brands, remain at the center of this strategy and guide the direction and decisions we are making globally in toys and games and immersive brand experiences.

We add to our efforts through alliances with marquise partners who are also reimagining their brands, including Marvel and its expanded universe of characters, Star Wars from Lucas Film, and our newest partner, Sesame Workshop.

Finally, we are working with the industries best creative stewards at Paramount, DreamWorks, Universal, Sony, Discovery, The Hub, Electronic Arts and Activision who are actively developing Hasbro brands into an immersive experience through movies, television and digital gaming.

Our global Hasbro teams are activating the elements of our strategy each and every day as we reimagine, reinvent and reignite our brands today and for years to come.

I will now turn the call over to Deb.

Deb?

Thank you, Brian, and good morning.

The continued execution of our strategy and our attention to cost has enabled us to deliver improved profitability and maintain our strong balance sheet despite the revenue challenges in the quarter.

For the second quarter, worldwide net revenues were $737.8 million compared to $792.2 million last year, a decline of 7%.

Foreign exchange had a positive impact of $1.6 million to revenue in the quarter.

While revenue was down from last year as expected, operating profit of $79.7 million or 10.8% of revenue increased 9% or $6.6 million, compared to $73.1 million or 9.2% of revenue last year.

Looking at our second quarter segment results, the US and Canada segment net revenues were $444.5 million, a decrease of 9%, compared to $490.9 million last year.

The results reflect growth in the games and puzzles, girls, and preschool categories offset by a decline in the boys category primarily due to lower Transformers and GI Joe shipments.

US and Canada operating profit for the quarter increased 4% to $58.7 million or 13.2% of revenues, compared to $56.3 million or 11.5% of revenues.

Net revenues in the International segment decreased 5% to $261.4 million, compared to $276.2 million a year ago.

Foreign exchange had a negative $800,000 impact on revenue in the quarter.

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

The International segment reported an operating profit of $11.6 million, compared to an operating profit of $16.5 million last year.

The year-over-year decrease was primarily the result of lower revenues.

The Entertainment and Licensing segment net revenues increased 26% to $30.5 million, compared to $24.2 million a year ago.

This is primarily due to an increase in movie related revenues.

The Entertainment and Licensing segment operating profit increased to $13 million compared to $2.9 million last year, reflecting higher revenue, as well as the fact that the second quarter 2009 included $7.2 million in one-time advisory fees and deal costs associated with our investment in the joint venture television network.

While we continue to have costs associated with our television initiatives, our current run rate of expenses is lower than last years one-time fees and costs.

Now, let's look at earnings.

For the quarter, we reported net earnings of $43.6 million or $0.29 per diluted share, compared to $39.3 million or $0.26 per diluted share a year ago.

The second quarter 2010 includes a negative $0.05 per share impact from our television related activities, while our second quarter 2009 included a negative $0.06 per diluted share impact.

Cost of sales in the quarter was $300.3 million or 40.7% of revenues, versus $319.5 million or 40.3% of revenues in 2009.

During the past quarter, there's been a great deal of discussion around input cost trends and I want to just take a moment to discuss how these impact Hasbro.

Hasbro outsources between 80% and 85% of its manufacturing to vendors in China.

We purchase this product in Hong Kong dollars, a currency which is pegged to the US dollar.

The costs we agreed to with our vendors are based on the estimated market level of input costs, which includes commodities and labor during the delivery stage of the product.

As a general rule, once we agree on a cost with the vendor, we expect that cost to remain in place for the next 12 to 15 months.

As a result, the impact we experience from input cost increases and decreases would be primarily reflected in 2011 and beyond.

For these products, we take into account the current cost environment as we design, engineer and price our product with an objective to maintain our desired level of profitability on the product sale.

There have been instances and we've accepted higher prices from our vendors despite having agreements in place, but this is during periods of extraordinary inflationary pressure and is not our general practice.

While costs had been rising in the first quarter, currently several input costs appear to have peaked and are now coming down in select areas including resins and paper boards.

Overall, our operating margin increased to 10.8% from 9.2% last year.

Operating profit improved despite lower revenue, primarily due to lower royalties and amortization.

Royalties declined due to lower entertainment based revenue including the decline in Transformers and GI Joe.

Amortization is down as the intangible assets associated with the Wizards of the Coast and Larami acquisitions have been fully amortized.

We continue to invest in our business including our television initiatives, our emerging markets business as well as product development which has grown this year in support of major product initiatives we have planned for 2011.

Our investment in television programming is reflected in our balance sheet within other current assets.

As we begin to generate revenue associated with our programs, programming costs will be expensed over the revenue curve of the program.

No programming costs have been expensed on our P&L to date and we do not anticipate these costs to be significant in 2010.

Below the operating profit line, interest expense increased by $4.4 million to $21.9 million, primarily due to the debt offering we completed in March 2010.

Other income net totaled $3.2 million, compared to $1.3 million a year ago.

Our 50% share of our joint venture results is included in this line on the P&L.

This quarter our share of the earnings in the joint venture, inclusive of the amortization expense, was a loss of $76,000 and the second quarter 2009 our share of the earnings in the joint venture was a positive $1 million.

In the second quarter 2010, our underlying tax rate was 28.5% compared to 29.5% last year.

Now, let's turn to the balance sheet.

At quarter end, cash totaled $872.3 million compared to $392 million a year ago.

Over the past 12 months we've generated over $600 million in cash from operations.

Our cash generation is healthy and we continue investing in our business.

This includes approximately $19 million in television programming costs and a $25 million royalty advance to The Hub.

Our next $25 million royalty advance payment to the network is due in the fourth quarter 2010.

In March 2010, we raised $500 million through a debt offering and on March 29, we called our outstanding 2.75% convertible debt.

Prior to the end of the call period, substantially all of the debentures were converted into 11.6 million shares.

In the second quarter, we repurchased 6.7 million shares of common stock at a total cost of $271.4 million and an average price of $40.49 per share.

In the first two quarters of 2010, we repurchased 9.5 million shares of common stock at a total cost of $369.1 million and an average price of $38.99 per share.

At the end of the second quarter, there was $417.5 million remaining in our current share repurchase authorization.

The quality of our receivables portfolio remains good and receivables at quarter end were $663.5 million, up $10.9 million from $652.6 million last year.

In the second quarter of 2010, we did not utilize our securitization facility.

However, in the second quarter 2009, we securitized $85.1 million of receivables.

As we've previously mentioned, given the changing environment and government regulations impacting the securitization market, it's likely we will not securitize receivables as actively in the future and we have not securitized receivables since the second quarter 2009.

Absent the impact of securitization in 2009, DSOs decreased three days to 81 days due to the timing of sales and collections in the quarter compared with a year ago.

Inventories at 342.1 million in the quarter compared to 346.8 million a year ago.

In closing there are a number of factors we're watching over the remainder of the year, namely foreign exchange, consumer spending and global economic conditions.

In particular, foreign exchange rates continue to be very volatile and difficult to predict and they do affect our reported revenue.

Our largest currency impact is the Euro followed by the British pound, the Canadian Dollar, the Mexican Peso, and the Australian dollar.

What we are certain about is the breadth of our brand portfolio.

Brian outlined a number of exciting initiatives launching in the coming months that will help drive our business for the rest of the year.

In 2010 and beyond, the global Hasbro teams will remain committed to the execution of our strategy and the investment in our business for the long term.

We look forward to keeping you updated.

That concludes our prepared remarks.

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

Certainly, ma'am.

(Operator Instructions).

We'll take our first question from Robert Carroll at UBS.

Hi, everyone.

Is there any way you guys could break down the strength in some of the games in preschool, in terms of what is from some of the Toy Story 3 related product, just kind of what the core brands are doing?

Sure, good morning.

It's Brian.

If you look at Toy Story, we have co-branded games, so a brand like Operation is benefiting from that, as well as Mr and Mrs Potato Head, but not a significant amount of revenues in the second quarter.

A good number, but not a significant number of revenues.

The key within games really are our own brands in driving the business, so Magic The Gathering, Monopoly, the Game of Life, certainly Operation in benefiting from Toy Story, but those are the big drivers of the growth in games in the quarter.

If we look in PlaySkool, really a number of initiatives driving that growth.

Certainly in the learning arena, we've just launched Alphie, that's a great category for us, we're already seeing some good numbers there.

A major category in explore and grow, is growing for us, Wheel Pals is growing, our Tonka preschool business is growing.

So those are all some areas in preschool overall outside of PlaySkool that is growing.

You're also seeing growth in Play-Doh, both domestically and Internationally.

Great, thanks.

And then just for kind of the up tick year-over-year in R&D, is that likely to continue given the commentary around some of the new product launches that we're likely to see later on this year?

Well, our R&D has been in that range, about 4.5% to 5% revenues.

Certainly in the second quarter it's a bit about timing, but also a bit about investing in our business.

If you look across the business, making a bit of investments in R&D, we do expect, of course, growth in years to come, and we're planning for that growth in our core brands and reinventing our brands.

You see investments in television.

You see investments in our emerging market business.

So very consistent with our long term strategy.

That's where we're investing, and then we're managing our costs on other sides with royalties and a bit of advertising coming down.

Great.

Thanks, guys.

Great job.

(Operator Instructions).

We'll take our next question from Felicia Hendrix at Barclays.

Good morning, guys.

So Brian, just now that The Hub is well on the way towards launching and you guys have crossed a lot of hurdles there, I'm just wondering if you have revisited your view in terms of it generating $300 million in incremental toy sales.

I'm wondering, now that you guys have gotten deeper and deeper into this, do you think that's conservative, continues to be in line, or have you revisited it?

So we're very excited.

I think the first thing I should say is that Margaret and the team, Steve Davis, Hasbro Studio and the team have done a tremendous job, under way in producing those seven TV series over 300 half-hours of television in time for the 10-10-10 launch.

Those numbers that we cited, the $300 million over time, and contributing an additional toys and games sales is consistent with what we believe today because it's not only what we're going to do domestically on The Hub, but as we distribute those shows Internationally, we believe we'll get those increases in International markets as those shows go globally.

So we, again, would reiterate our broad and long term guidance, $300 million feels good to us.

When you see the shows, and I've seen a lot of the early story boarding and some of the early animation, it's really exciting and the feedback from the experts, as well as us novices, is quite good.

We're feeling very good about what we're seeing coming out of the studio.

Fantastic.

And then Deb, just getting to FX, is there a way that you could give us just some kind of sensitivity so we could gauge that, as it relates to your revenues, particularly given the caveat to your outlook that barring any kind of change in FX.

Can you give us some kind of sensitivity so that we can have a sense of where your growth is coming?

Well, I think if we look at our revenues, we tend to be consistently about 40% International, 60% domestic, and within that, we just try to give some color as to what some of the larger currency impacts were with the euro, Canadian dollar, Mexican peso.

We tend to have -- those are the currencies that impact us the most, especially since the Hong Kong dollar, which we purchased a lot of our product in, is pegged to the US.

So really barring a further decline in foreign exchange, we continue to reiterate our guidance, but it's just very volatile right now, and I think if we think about revenues being 60/40 and looking at the movement in some of the currencies particularly the euro, hopefully that's a little bit more helpful for you.

To be honest, it's not.

I mean, like every 1% change in the euro is X to revenues is really helpful.

Yes, I think that we don't give that kind of guidance, and right now at current levels, we just reiterate the guidance that we've given.

Okay.

Felicia, the one thing I would say to you is, clearly what we're saying today is that barring a further decline, so if you look at what the current rates are in the euro, you can look at where the business is currently.

We're not going to provide guidance beyond that point, but I think we've tried to be very clear about where we are today, and should be helpful to say that barring a further decline, that we could grow revenues including FX.

Okay.

Just moving on to royalties, can we just -- I know you have your more back half loaded, but if we look at the royalties for the full year, can we just kind of run rate the first half and make some minor adjustments, but is there going to be any kind of big swings second half?

I wouldn't give you a lot of guidance there specifically, but suffice it to say, the major initiatives for the Company this year, the things that you have in the second half that you've had in the first half are certainly are Marvel business, you have the Star Wars business, we're looking forward to the third season of Star Wars launching in the Fall on television.

And you have the beginning of Sesame Street in the Play-Doh business, but for the most part beyond that is a lot of our own toys and games selling in the second half.

Okay, thanks.

Great, thanks.

We'll take our next question from Margaret Whitfield at Sterne Agee.

Good morning, congratulations.

Brian, I wonder if you could give us more color on the boy's segment excluding Transformers, GI Joe, how did Iron Man perform, how did Star Wars perform, et cetera?

Good morning.

Well, first to start with, the big drivers in the boy's arena, certainly the Marvel business we continue to be impressed by the performance of Iron Man.

It's certainly significantly up versus the first movie.

We feel very good about it as we go into the Fall.

It's really meeting with our expectations, were certainly increased from the first movie.

I think everybody feels good about that.

The other major contributors, our own brand in Nerf.

Nerf is a super star, both domestically and internationally, growing at significant rates.

We rebranded the Super Soaker segment to be Nerf Super Soaker and reinvented that brand, and that's also contributing significantly as we're getting great weather around the country and around the world, and Super Soaker is certainly performing.

Beyblade is just beginning, so we feel good again about Beyblade, have placement of the show through Nelvana around several territories which we mentioned.

Feel good about that, and Star Wars, the third season hits in the Fall of the Clone Wars.

Feel very good about the Star Wars business, and we still have initiatives for Transformers in the Fall with the Hunt for the Decepticons.

Our first episodes for Transformers will begin airing on The Hub late this year, and we chose to focus on that timing in time for The Hub launch, or just following The Hub launch, but really allowing us to have full year 2011 animation for Transformers alongside of the motion picture release.

And could you comment on your retail inventories both in the US and overseas, and that versus point-of-sale and expectations on the part of retailers for your product line in the back half?

Margaret, this is David.

I think we're very comfortable with our retailer inventories at the moment.

I think in the US, clearly our shipments into retail have been down versus a year ago, but certainly in the US, our POS through the first half of the year is up, which would tend to indicate there's been some reduction compared to a year ago during the first quarter of inventory.

As we go into the rest of the year, I think there is one area of concern, which is shipping capacity and containers, and we are working with our -- we've put sort of additional container capacity in place and shipping capacity in place.

And I think we're encouraging our retailers to take the product earlier rather than later to avoid any problems.

So I think we're doing everything to avoid the problems, but I think it is something that you're going to read about in the papers in terms of container shortages and shipping capacity.

I think retailers, as Brian said, we've got a lot of newness in our line in the second half of the year, and I think retailers appreciate that, they're supporting the line, and I think they will take in the appropriate level of inventories for us to have a good year.

And any thoughts on how you're doing overseas with inventory levels versus point-of-sale?

Yes, a similar situation as in the US.

And finally for Brian, I know you told us about the Transformer for next year.

Any other changes in the entertainment schedule or line up for 2011 or 2012?

2011, we have the seven TV series launching this Fall at varying times during the Fall in time for The Hub launch, and Transformers is under way in production right now.

They are shooting in Chicago, and we expect that to happen on July 1 of 2011.

Everything is a green light there.

We go into production on Battleship in the next five, six weeks, and you see that reflected in our numbers in Q2 as we start to get in some revenues in the E&L segment around motion pictures, and overall on schedule.

Okay, so Battleship is 2012, right?

Correct.

So you'll have a number of movies in 2012.

You have the Avengers in May 2012, as they've announced thus far, Spiderman, Battleship and then Stretch Armstrong.

Those are all 2012, and 2011 you have Transformers 3, you have Thor, you have Captain America the First Avenger, and so between Hasbro, Paramount and Marvel Paramount, you've got at least those three movies in support of Hasbro's brands.

Anything in 2013 you can discuss?

Nothing we'll talk about now.

We'll probably talk about that in the fall.

Thank you.

Thank you.

(Operator Instructions).

We'll take our next question from Michael Kelter at Goldman Sachs.

Hi.

guys.

I wanted to ask you about The Hub a little bit more, since having seven shows on, it seems like it's somewhat unprecedented, you should get a pretty good bump next year on toy sales around it.

But I guess where the rubber meets the road is whether people actually tune in and watch the channel.

So can you be very specific at this point, now that we're pretty close, what do you intend to do to drive people to watch the channel?

Okay, it's Brian.

First, if you look at the plan, and we've talked about the dilution this year as kind of a financial metric, that dilution is primarily around the multi-million dollar marketing campaign we have lined up for The Hub.

In addition to the campaign that the team is putting together to launch The Hub, which will be in all kinds of forms of advertising, marketing and promotions, certainly the two parents are also using their skill sets to help bring viewership to The Hub.

We have a great partner in Discovery that has a number of domestic networks.

We're working on promotions on air cross a number of their different channels where our audiences line up, you will see things for The Hub across a number of different platforms, and those plans will be announced and outlined a little bit later.

I'll let Margaret and the team do that.

But suffice it to say, between being on our packaging, being on their Discovery's channels, our multi-million dollar campaign, and then having said that, we won't get there all at once, but we are planning this growth over time.

If you look at the growth of major networks, it happens over some period of time, and yet we feel very comfortable that this network can contribute to increases in our toys and games sales as we've outlined over the next several years.

And do you have specific targets and goals you could talk about with The Hub that, what kind of ratings you think you might be able to achieve and when, or how we should think about what success looks like for you?

We're not going to provide ratings guidelines, suffice it to say our teams have worked on the modeling and we feel very comfortable, both in the early years as well as in the later years as to what's achievable.

And we'll continue to update you guys on our progress, but at this point we're not going to provide any kind of ratings guidelines.

All right, and then the other thing I wanted to ask about was your cash balance, which even after share repurchases was pretty large.

Outside of share repurchases, and what you need to run the business and service the dividend, are there any major uses of cash that maybe you are thinking about, whether it's acquisition or anything else that we should be aware of?

Hi, Michael, it's Deb.

Our cash position is very healthy and it's consistent with our strategy.

We do generate quite a bit of cash, and we continue to plan to invest that cash in our future growth.

So as David has said in the past, that those investments are growing in marketing areas and adding new people in our emerging markets and developing our TV program that we've talked about some of the levels of that, but those investments are in the tens of millions of dollars.

So we remain very skeptical of acquisitions.

Obviously if there was something compelling out there that would benefit the Company and complement our strategy and benefit our shareholders we would look at it, but we do remain skeptical of it.

So our plan with our cash is to continue investing in our business and returning whatever is excess to our shareholders.

And then one last thing.

On International, which sales were pretty good, especially considering you're up against Transformers last year, can you talk about the composition, emerging markets versus Western Europe, and where you were strong and where it wasn't as strong?

Well, I think clearly we've invested pretty heavily getting into Brazil and China, we've opened offices in Peru, Chile, and some of the other Eastern European markets, we opened an office in Romania this year.

So clearly we're getting higher growth rates in these markets, but they're still relatively small compared to Western Europe.

So clearly some of our growth is, absent the Transformers and Joe, is still coming in the Western Europe as well, it's still pretty strong.

In particular, this year, Spain had a very bad year last year.

The economy was probably one of the worst in the world, and it bounced back pretty well.

Mexico was also one of the worst places last year because of the economy, because of bird flu and a number of other reasons, and Mexico has bounced back pretty well.

So pretty good everywhere, but Mexico and Spain good bounce back, and the emerging markets show more growth, which is to be expected.

Thank you very much, guys.

Thanks.

We'll take our next question from Gerrick Johnson at BMO Capital Markets.

Good morning.

Getting back to the POS, I don't think you guys threw out a number.

I was hoping perhaps we can get a number for the first half, or at least the second quarter, and specifically on board games.

And then second question I had for you is, that improvement in PlaySkool definitely seeing that at retail, but Wal-Mart is making some changes to its preschool category.

Does that have much impact on your business, and how are you looking at PlaySkool for the back half considering what Wal-Mart is doing?

So if you look at our POS year-to-date, POS is up both toys and games.

The POS was stronger through Easter, but has been still up recently.

Obviously you have to account a bit for Transformers, but overall, if you look at our overall POS year-to-date, it is up.

The consumer sentiment is in line with kind of consumer take-away more recently, a little bit choppy but as we look at our new initiatives, we're seeing good take-away from those new initiatives, because as I said, year-to-date POS is up for the Company.

And PlaySkool, really getting a lot of support from retailers overall for PlaySkool.

A lot of new innovation, change in leadership, lots of focus in new R&D, and new initiatives.

So both domestically and Internationally, retailers are very supportive of PlaySkool.

It is a brand with great resonance with consumers, and we are delivering innovation at great price points to match that.

Okay, now at Wal-Mart, are you anticipating that business being up in PlaySkool in the back half?

I'm not going to comment specifically retailer by retailer, but I will say that our retailers inclusive of Wal-Mart, Target, Toys R Us, domestic retailers, KMart, have been very supportive of PlaySkool.

And so I don't see anything in your question that would be a watch out or a warning.

Okay, and then on the games, what was the point-of-sale on the games in the second quarter?

Games year-to-date is up.

Year-to-date is up.

Okay, thank you.

We'll take our next question from Greg Badishkanian at Citi.

Thanks, this is Jeff Hans actually on behalf of Greg.

Very solid growth in the games business this quarter, and it looks like you're going to start to lapse on tougher comps sequentially over the next two quarters.

With new competitors coming into the space, just want to get a sense of how you're thinking about that business over the remainder of the year.

Thank you.

Thanks.

Well first, if you look at our core games brands like Magic and Monopoly, they are major contributors to our growth, you're also seeing growth across brands like Operation, the Game of Life, Scrabble, a lot of new initiatives like Cuponk we talked about.

It's a great new game that's already off to a great start.

So whether it's our core mega brands, our challenger brands or some new brands, growth there.

In the area of buildable games, we have five skus that we're launching now including Monopoly, Connect Four, Battleship, Mouse Trap and Sorry, all in the You Build category, and they are just getting off to a start now and we feel very good about those as well.

The consumer feedback has been extremely positive, as you can imagine with brands like that, and great playability.

So overall, we continue to reinvent and reimagine that business, both domestically and Internationally.

Great.

Thank you.

We'll take our next question from Sean McGowan at Needham & Company.

Good morning.

I also have a couple.

I wanted to focus a little bit more on royalties.

One general question I have is, are the royalty rates that you'll be paying to The Hub, aside from the advance, but on an ongoing basis, are they comparable to the royalty rates that you pay to the studios on GI Joe and Transformers?

They are roughly market rates, slightly below what you might pay on motion picture.

But certainly remember that the way the royalties are split, there's some royalties that go back to the studio for producing, and then some royalties that go to The Hub as well, so really equally, kind of equally divided.

Well, when you say market rates, do you mean what you would be paying for someone else's IP?

No, no, I'm just saying if you look at, they're below market rates is what I was saying.

So if you look at what we pay on motion pictures, it's below that, Sean.

Okay, but in comparing what you will be -- for sales of products related to programming on The Hub, is that comparable to what you were paying the studios?

Well, it's a bit different because what we're doing in effect is Hasbro Studios is producing those shows and then through the related sales we're paying a royalty back to the studio in essence for producing that programming.

Right, okay, but isn't The Hub itself separate from the studio also getting a royalty?

Yes, The Hub gets a royalty as well in support of the brands, obviously with associated merchandising they would participate in that, but overall the levels are lower than that of a motion picture deal or an outside studios deal.

Okay, and if we were to combine the royalty going to the studio plus The Hub, is that comparable to what was going to Paramount and Universal on the movies last year?

No, if you look at the total royalty liability, the total royalty cost on a motion picture like Transformers, the payments to the studio and to The Hub are below those levels.

Okay, great.

That's helpful.

Yes, I mean clearly, the payments to the studio are all within Hasbro, and payments to The Hub is a 50% joint venture, so half of it sort of comes back to us anyway.

That's understood, but if you are looking at the -- in this quarter you had a drop, obviously a big drop in some big ticket items in Transformers and Joe, where one would assume those royalty rates are below market rate, and the increase in Iron Man would have been above market rate.

So I'm just a little surprised that royalties went down as much as they did.

Is there anything else driving that drop?

Well actually, if you look at Transformers motion picture, the motion picture rates are a bit higher than an average television royalty, recognizing we're not producing the films.

And whatever the Transformers and Paramount deal, I think we've said a couple of times, that the Transformers Paramount deal was our first deal in Hollywood with motion pictures, and our subsequent deals have been better which we've described to you qualitatively and quantitatively.

So it's probably our most expensive deal is on something like a Transformers, and so I wouldn't look at Iron Man versus Transformers as being, in terms of total royalty liability as being altogether that different.

Also, if you look at our business, Sean, our boys was down in the quarter and within that Nerf was really good, but the real growth was driven by games and driven by Magic, which is a Hasbro brand, PlaySkool, preschool products which are mainly Hasbro brands.

Even in the girls, FurReal Friends did very well.

So a lot of our growth has been driven, during the quarter versus a year ago, has been driven by Hasbro brands, which just don't have royalties on them.

Okay.

To the entertainment line, what is the timing of payments that you get from the studios?

Brian, I thought you said something about already seeing some impact on Battleship in that line in the second quarter?

Yes, so I think Deb mentioned in her piece that she talked about how Entertainment and Licensing revenues were up, and we're trying to describe that to you guys because you might not have expected that in a second quarter, but the net of it is twofold.

One, payments in arrears that come from the licensing revenues associated with our motion pictures, and secondly we begin to get some payments as we go into production on movies like Battleship.

Okay, so the Battleship stuff is not just off the box office, you get payments in advance?

Well, so you think about it as just you have, there's box office, rights fees, there's different things associated with a movie.

Okay, got it.

So as we said, that deal is -- and that's what we're trying to describe, our deals with Universal is still a very good deal for both parties, and certainly we're engaged in Battleship, but it kind of runs differently than a Transformers deal.

Okay, then two other quickies.

Brian, you said the decline in Transformers is kind of a more normal one, without the television in the first half.

Can you quantify what that, broadly speaking, what that percentage decline was?

I think if you go back, my broad guidance to you, if you go back and look at year after motion pictures in the boy's arena over the last several years, and we've all done that, you can sort of see what the typical drop off rate is.

What I'm saying is, Transformers is more along those normalized levels, whereas when we had the motion picture last time followed immediately by television, we were able to sustain higher levels.

We chose to move the new animation onto the channel, which obviously had a timing impact, but it's really a timing impact so that we can support The Hub, we can get great animation out there with an amazing team in creative stewards.

And so because of that in 2010, we don't have the benefit of the television.

So a more normalized year after motion picture drop off.

But would you expect in the fourth quarter a fairly quick response to the fact that new animation is on TV in the holiday season?

Yes, I think the way I'd look at that would be, some television this fourth quarter, but the bulk of, obviously the bulk of the episodes and the bulk of the scheduling really comes in 2011.

Okay, and then last question, inventory obviously down a little, but not as much as sales, so is that a reflection of expectations on upcoming shipments or is that just you didn't ship as much as you thought?

No, I think we feel very good about the third and fourth quarter this year.

As we've said, we still believe we can grow revenues and EPS this year.

We have a lot of new initiatives that are just beginning to ship, both here and around the world, and so I just think again, I would look at a number that says year-to-date, our revenues are down just $3 million versus a year ago.

So if you think about it that way, we've done a $1.410 billion year-to-date up against $1.413 billion a year ago, and to us that says now, just like in the toy industry, we're mid year and we're at the starting line.

All right, thank you very much.

We'll take our next question from Thomas Russo at Gardner, Russo, Gardner.

Hi, good morning, Brian, Dave and Debbie.

Hello.

You have done, Brian, a great job some years ago informing investors of the magnitude of your investment spend, and you gave a ballpark number and you said it was directed towards entertainment, International and the development of the games business, and the games business has sort of fallen off the radar.

I'm just curious about what the prospects are for your investment spend behind interactive gaming through your brand portfolio.

Well, the interactive gaming, Tom, we do and have done through strategic alliance with EA and with Activision.

June 22 of this year, just a couple weeks ago, we launched a big new game with Activision called War for Cybertron, which is a big Transformers game, got very high metacritic scores and is off to a very strong start.

EA has a raft of games across a number of different platforms, whether it be the iPhone, the iPad, online console games.

So we feel very good about the digital gaming effort that's going on across our brands and across the Company.

In terms of total investment, I think we tried to outline it.

Deb, do you want to just talk a bit about some of the categories of investment?

Certainly, Tom.

As we continue to make some of the investments in our emerging markets, those are tens of millions of dollars, and to date we've spent about $19 million on programming costs in the TV investment.

We've said given the programming being successful, we could ramp up to $80 million to $100 million a year in programming spend and then that will get amortized through the P&L over the curve.

But from an investment standpoint, they are not in, as Brian talked about, the interactive gaming is really with EA.

Yes.

Really at those lower levels now.

And the EA investment, one of the things investors read about is sort of the sagging fortunes of EA, and I'm wondering how does that affect the committment that they have to both support the joint venture and then also the effectiveness with which they go to market with your products, if we read the headlines that EA may itself be flagging?

What's really happening in the industry if you think about it, you're trading out a lot of console games which were being sold at roughly $50, with a lot of online games and iPhone games and apps and things that are sold at $3, $4, $5.

So I think what you're really see are the number of units that you need to sell in order to make up those kind of revenues are pretty significant.

It's not unlike where we were back in 2000, 2001 where we were starting to focus on our core brands and the big initiatives while some of our license business was falling away, and it took us a couple of years to get our top line revenues to grow, and I think that that's in essence where EA is as they make this major secular shift.

Thank you.

And then, Debbie, just a quick question for you.

The decision to stop selling receivables forward, what exactly did that trigger from, and is that a practice that you'll abide with going forward long term do you think?

Yes, I think some of the regulations around it and the accounting rules and the increasing costs that some of the banks have to capitalize at now has just made it not as advantageous as it was to us in the past.

So we haven't securitized receivables since the second quarter of last year, and our expectation is that we would not use that as much in the future go forward.

We go through 2011 with our current agreement.

So we have the ability to tap into that, but we've not needed to.

No.

Thank you very much, and welcome to your spot, Debbie.

Thank you.

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

Thank you, and congratulations also on continued great execution.

Good morning, Tim.

Good morning.

Just a few here, several of them clarifications.

Number one, on the royalty advance, Deb, it sounds like you're going to have two royalty advances of $25 million here in the year, did I catch that correctly?

We had already paid one, and the next one is due in the fourth quarter of 2010.

Okay, because I thought those were -- it was like $25 million in the year in each of the first five years.

We actually paid our first $25 million at the end of last year.

Okay, but -- .

Yes, it's $25 million a year for five years, and then it gets amortized over a spread over 10 years of sales.

Okay, so again, you only have one $25 million this year in the fourth quarter?

That's correct.

Okay, I misinterpreted something, okay, thank you.

And then on the studios, you mentioned that year-to-date you have $19 million of expenditures for the studio.

How much in 2010 do you expect to capitalize and then amortize over the terms of the related programming?

Well, we actually have $19 million of cash payments that we've made so far.

So that's all up on the balance sheet right now, and we do not expect a significant amount of costs to roll through in 2010 as we launch 10-10, we only have the last quarter where we start to air the programming.

But what we'll do is we'll expense what's up on the balance sheet as we go, as the programs air.

But in total, you have $19 million now by the balance of the year, we are looking $25 million, $30-ish million, and then as you all said many times, that's probably ramping at most up to $80 million to $100 million depending on what's justifiable.

But for this year, what would be a ballpark range that we should target that would be capitalized in 2010 and then amortized going forward?

Yes, Tim, we've said that there are seven TV series, we've also said we have about 300 episodes in production, and we probably won't give you a specific number, it's obviously going to be a bit of timing about where we are, but thus far certainly we can tell you that $19 million has been put up on the balance sheet.

Okay, fair.

And then I apologize if I missed it, but did you update us or reiterate your guidance on The Hub for this year?

Is it the $0.25 to $0.30 loss per share?

We did, and if I didn't I apologize for not doing that, but we do continue to expect that to be the level of dilution impact in this year.

Okay, and then regarding your revenue and EPS guidance, maybe to revisit an earlier question, back in February at the analyst meeting you said, if conditions at that point in time with the consumer and everything, and currencies hold, you expect it to be up.

And then in April on your last call you said the same thing, you said the same thing again today, but sequentially, the currencies and especially the largest one, the euro, has been down, and granted the euro has rebounded somewhat of late here, but can you kind of help us how you're sustaining that guidance?

Is it some of the other areas, parts of that equation better than expected or maybe just give us a little more color.

Well, I think that one of the things that we benefit from and we tried to give some color on the different currencies and put a little bit of more context in the major currencies that impact us.

Well, we're significantly impacted by the euro, and the euro has gone down, and then recently it's gone back up again, so it's been very volatile.

Currencies like the Mexican peso and Canadian dollar have strengthened.

So, we've got currencies really going in multiple directions.

So, currency isn't going to be the tailwind we thought it was going to be.

It's really more of a headwind, and we'll watch it, but at current levels we continue to believe given the mix of where our revenues lie and the fact that some go up and some go down, that we can reiterate our guidance.

And then finally if I may, Brian or David, you commented on the concern being the container shortage and a competitor commented on that on Friday.

How concerned are you?

Do you feel you can fairly well manage through that or is this a really significant issue you're starting to maybe lose a little sleep over, and I guess same question obviously for your competitor.

Yes, I mean, you're reading about it in a newspaper, which is why I brought it up, but I think given what we've done thus far to secure additional containers and shipping capacity, and we're clearly working with retailers to say, you need to not leave it all until the last minute.

You need to sort of come in during the third quarter and maybe pull a little bit ahead, than you otherwise would have.

I think they understand the situation, they import a lot themselves in terms of their own label and non-toy product, and I think given what we've done and given working together with the retailers, we do not anticipate that this is a material issue.

Okay, great.

Thank you all again.

Thank you.

We'll take our next question from Tony Gikas at Piper Jaffray.

Hi, good morning, guys.

A couple questions here as well.

David and Deb, you've given us some good data points in the past as far as how accretive you expect The Hub to be next year.

Have any of those data points changed?

Are you still expecting similar levels of accretion in calendar 2011, and do you have any update for us on the changes to the subs?

I don't know what the carriage is going to be when there is a transfer, when The Hub goes live, I don't know if you can help us there.

Also, any price increases that you're expecting to implement here in the Fall?

And then my last question would be, actually two follow-ups.

Toy Story product sales so far this Summer, maybe just a quick comment there.

And then on the Transformers, you may have said this before, for the movie that's coming out in 2011, is it the same cast or is there any changes to the key cast members?

So I'll start with the last one first, which is there's been one change and we have one new lead, and Megan Fox is no longer in the movie, and Rosie Huntington-Whiteley is in the movie as Sam's love interest.

That may be the easy question.

The question about The Hub and distribution, we've made a couple moves.

We still are -- will be launching around 60 million homes.

We've added to that an effort into insure that we have an HD channel that launches as well, which will be within the HD universe.

Deb, do you want to talk about -- .

And we do still expect, I'll take the one financial question, we do continue to expect that the venture will be accretive in 2011.

So we're not really anticipating any price increases in the back half of this year.

I think as Deb said on the call, commodity costs aid the way we look at our prices.

We're not subject to short-term movements in commodity costs with our vendors.

But in addition, some of the increases which we saw in the first quarter and were suddenly ahead of what we had expected, have started to abate.

And in fact, a number of resins and paper board are actually sequentially down in the second quarter versus the first quarter.

And the last part of the question I think you asked was about Toy Story 3.

Correct.

Our sales have been very good.

I mean it was a great movie and our sales have been good.

Obviously we don't have the bulk of the license rights.

We have Mr And Mrs Potato Head, as well as co-branded games like Operation and our Space Shooters game, but the products that we do have been selling very well, and there's a lot of innovation on our line and we feel very good about Toy Story.

Okay, thanks, guys, good luck.

Thanks.

We'll take our next question from Jim Cartier at Monness, Crespi and Hardt.

Good morning.

Two questions.

First, Transformers, are you seeing a bigger decline now than you'd originally expected at the beginning of the year?

Transformers is not uncharacteristically down.

What I've talked about is that an expectation for a non-movie year coming off of a movie year, we have certain benchmarks around that.

Obviously without the TV series in support of the brand, we're seeing that typical type of decline, and we believe once we have the TV on the air for the most part in late 2010 and 2011, we'll get the support of television because we know that television does drive toys and games sales, and it does so around the world.

Okay, and then the second question on advertising.

In the past you've kind of indicated that as royalties decline as a percentage of sales, given that the movies are the advertising itself, advertising and promotions for you typically would then kind of tick up, and the sum of royalties and advertising as a percent of sales kind of remain relatively constant over time.

So in the second quarter we saw those two things have about a 300 basis point decline.

So is there a shifting in marketing dollars towards the second half of the year?

Or anything going on that would drive that?

I think for this year, you'll see a pretty normalized rate on advertising because again, the channel doesn't launch until 10-10-10, and so you're not really getting the benefit of the additional television except late in the fourth quarter this year a bit.

So for the most part, we're going to be spending in advertising.

The royalties are down as we drive more of our business with our own core brands, and do so globally.

We have less licenses, I believe we have in the top 10 brands, two licenses within the top 10 brands of the Company this year.

And so as we've said, it's going to be that breadth of our portfolio that we feel very strongly about, really an amazing array of world class brands being driven by a great team that will deliver growth in revenues and EPS this year.

Great, thanks.

The final question today will come from John Taylor at Arcadia Investment Corporation.

Good morning.

Good morning.

Hi, I've got a couple of product questions I guess.

I wonder if you could talk a little bit about the growth you're seeing in Magic, what's driving that.

You are calling that out as kind of one of the key drivers.

So is there a change in channels, are you going International with it, maybe talk a little bit about that trend.

And I wonder if you could also expand a little bit on the growth in PlaySkool, thanks.

David will talk about the sales in Magic in a second, but just to talk about the core brand reinvention.

A couple of years ago we changed management team, we have great leadership out on the West Coast.

The team had really rethought that business entirely, really went back out after trial mechanism in getting young people and people who may have lapsed as users to get back into the brand.

They really reinvented the entire play pattern in many ways, but kept the things that were always important to the core player and to the fan.

And the fruits of that effort are starting to come to be born out, both in the analog card business as well as the digital business.

So I really compliment the team for their efforts, and this is a true case of brand reinvention, reimagination, all yet keeping the core mythology very consistent for that core fan.

Dave, do you want to talk about sales?

Before Dave goes, I wonder if I could get you to expand on the digital versus analog thing there.

Are you using the digital as much of a revenue generator, if so is that a key growth driver or is that mostly more a marketing type thing?

No, no, it's for sales product.

You can build your hand, your deck, online.

You can buy and you are buying, people are buying digital objects, which are the cards.

You have the opportunity if you want to turn those digital objects into analog cards and have your deck delivered to you, but it's really both, in terms of growth and usage.

The differences tend to be more, well certainly quantitative, there's still more business in the analog card business although digital has grown as has analog.

And it's a bit of a difference, you're seeing more new users using the analog or paper based cards, whereas you tend to see more lapsed users who have moved away from their friends, they've set up their own lives and they are now reengaging with other lapsed Magic players online because it, of course, digital helps you to span those distances between friends.

Okay.

I've not much to add other than Magic is very successful on X-box Live Arcade, which is clearly the number one online video game platform at the moment.

And I think Magic is like number three in terms of their downloadable games, they have over 300 different downloadable games, and I think Magic is currently ranked number three.

So that's introducing new people to the Magic brand who have been going out and buying the cards as well.

And sales by region.

Yes, and sales by region.

Magic actually is doing well globally, having a resurgence globally.

Okay, good, and any comments on what's really driving the preschool business by product or region or whatever?

The PlaySkool business and overall preschool are both up significantly.

It really has to do with a lot of new initiatives in the Play-Doh business, in the Tonka preschool business in PlaySkool, it is both domestic as well as Internationally growing, it's in emerging markets as well as mature markets.

It's a concerted effort on behalf of the team that is doing a very good job, and we're just in the early stages of unlocking the potential of that brand.

Okay, great.

Thank you.

Thank you.

And there are no further questions at this time.

Ms Hancock, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, Alan.

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

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

Additionally, to insure that you heard all of the remarks from management today, those management remarks will be posted on our website as well, immediately following this call.

Thank you.

That does conclude today's conference.

We thank everyone for their participation.