孩之寶 (HAS) 2010 Q3 法說會逐字稿

Greetings, good morning and welcome to the Hasbro third-quarter 2010 earnings conference call.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

At this time I would like to turn the call over to Ms.

Debbie Hancock, Vice President of Investor Relations.

Please go ahead.

Thank you and good morning everyone.

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

Our third-quarter earnings release was issued earlier this morning and is available on our website.

The press release includes information regarding non-GAAP financial measures included in today's call.

Additionally, whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share.

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 management's 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, cost, financial goals and expectations for our future financial performance in achieving our objectives.

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

Some of those factors are set forth in our Annual Report on Form 10-K, 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.

Thank you, Debbie.

Good morning everyone and thank you for joining us today.

Our business grew in the third quarter, reflecting the continued execution of our long-term strategy, our steadfast focus on innovation and immersive consumer experiences backed by a strong performance from the Hasbro team globally.

Our growth was broad-based both geographically and across numerous world-class brands.

While Transformers and G.I.

Joe shipments presented a difficult challenge in 2010, we are overcoming this comparison through a number of global brand initiatives across categories.

This success is also translating to our bottom line.

Operating profit reached record third-quarter levels as we continue to unlock the profitability in our business and better leverage our investments globally.

Taking a closer look at our third-quarter performance, we experienced growth in the Preschool, Boys and Games and Puzzles category, while the Girls category declined slightly in the quarter.

Several of our mega brands contributed to growth this quarter, including Nerf, which continues to post strong revenue gains globally.

The new Nerf Stampede launched globally on 9/9 and was the single most successful product launch in the history of the Nerf brand.

The Stampede is on a number of the hot toy lists for this holiday season.

Magic The Gathering, again this quarter was a standout performer.

The team has done a great job reigniting this brand over the past few years.

PlaySkool also continues to post strong year-over-year performances with successful new initiatives including Alphie, Weebles and juvenile products, as well as growth in Mr.

and Mrs.

Potato Head.

As anticipated, Transformers and G.I.

Joe will continue to present difficult comparisons in 2010, although the revenue decline in the third quarter was not as great in absolute dollars as it was in the second quarter.

I spoke earlier to the broad-based brand strength and innovation driving our results.

Beyond our mega brands we have a number of brands contributing to growth this quarter, including Baby Alive, FurReal Friends, Play-Doh, Tonka, Iron Man and Beyblade.

Our board game business grew in the quarter with increases in a number of brands, including Operation, Scrabble, U-BUILD, Bop It and games based on Toy Story 3.

Must-have toy and award list for this holiday reflect the broad portfolio of Hasbro brands we are showcasing this season, including the Nerf Stampede, Tonka Chuck and Friends Chuck's Stunt Park, Weebles Musical Tree House, Play-Doh's Shape & Spin Elmo, Alphie and others, as well as games like Scrabble Flash, Monopoly Revolution, U-BUILD, SORRY!

Spin, Twister Hoopla and Cuponk, a new skill and action game in our line this year.

Through our ongoing efforts to deliver innovation at a great value brands like FurReal Friends have brought technology into affordable price points for the consumer, with products such as Go-Go My Walkin' Pup.

For consumers looking for premium products and gifts this holiday select higher price point items return to our line, including FurReal Friends Biscuit and Butterscotch Pony, Star Wars Millennium Falcon, Transformers Movie Ultimate Bumblebee, and the Scrabble Premium Wood Edition.

Our marketing campaigns begin in earnest in the fourth quarter, and we are well-positioned to meet demand with a good supply of high-quality, safe toys this holiday season, although some of the hotter items may run in short supply due to high consumer demand.

We spoke with you last quarter about our efforts to ensure product availability this holiday season, given the potential disruptions in the supply chain related to container availability.

We believe the steps we took to secure appropriate shipping capacity will maintain a smooth flow of goods and avoid any impact to our supply chain this holiday season.

We have worked closely with our retailers to ensure they have the products on the shelves consumers want for the holidays.

We started the fourth quarter with the highly anticipated launch on 10/10/10 of The Hub, our new children's and family television network with Discovery Communications.

We are very excited about the initial results, the look and feel of The Hub, and the strong programming lineup, which continues to roll out through the quarter.

Hasbro Studios has created a number of fantastic programs airing currently on The Hub, including Family Game Night, Pictureka, My Little Pony Friendship is Magic, Pound Puppies, and the Adventures of Chuck and Friends.

In addition, Margaret Loesch and The Hub team have put together a tremendous lineup of programs from the industry's best creative stewards, including R.L.

Stine's "The Haunting Hour - the Series"; Dan Vs.; Twisted Whiskers; In the Night Garden; The WotWots; and classic shows such as Happy Days, Doogie Howser, The Wonder Years and Family Ties.

The network will also be the exclusive home for a limited series of original musical specials featuring singing sensation, Taylor Swift, produced for the network by Hasbro Studios.

The Hub's launch marketing campaign is themed, Where Great Things Come Together, reinforcing The Hub as a destination for kids and their families, as well as showcasing an array of great brands.

The launch campaign will continue throughout the fourth quarter with substantial support for exciting programming and marketing events.

Hasbro continues to support The Hub's launch with marketing initiatives, including product stickers on at least 34 million retail packages promoting the network, and the placement of TV schedules in shipments of all orders placed on HasbroToyShop.com during the holidays.

If you haven't already tuned in, we encourage you to do so.

You can find the schedule and channel locator at HubWorld.com.

The site also hosts program descriptions, videos and games to play.

We know building a successful kid's network is a long-term endeavor, but we are proud of what the Hasbro Studios team and The Hub team have accomplished in such a short period of time.

Additionally, from a film perspective, Transformers 3, which is scheduled for July 1, 2011, and Battleship scheduled for May 18, 2012, are currently filming and we continue to develop a number of additional brands with Universal, Paramount and Sony.

We are -- also remain excited about the movie slate from key partners.

In 2011 Marvel will deliver Thor and Captain America, the First Avenger to theaters globally.

In addition, Lucasfilm and FOX recently announced the Star Wars Saga will be converted to 3D, with Star Wars Episode 1, the Phantom Menace, expected to be released theatrically in 2012.

For the full year 2010 we continue to 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 consumer spending, global economic conditions or foreign exchange.

As we look ahead to 2011 and beyond, our global teams are actively executing our long-term strategy by re-imagining, re-inventing and re-igniting our brands to develop innovative toys, games and immersive experiences consumers can enjoy anytime and anywhere.

We look forward to updating you further at our Investor Day here in Rhode Island on November 9.

I will now turn the call over to Deb.

Thank you, Brian, and good morning.

Our third-quarter performance highlights the strength of our brands and quality of execution from our global teams.

To date we have been able to offset the difficult revenue comparisons from Transformers and G.I.

Joe in 2009, while improving profitability, investing in our business and returning cash to our shareholders.

For the third quarter worldwide net revenues grew 3% to $1.31 billion compared to $1.28 billion last year.

Excluding the negative $16.2 million impact of foreign exchange, net revenues grew 4% in the quarter.

Operating profit in the quarter grew 3% to $237.8 million or 18.1% of revenue versus $230.7 million or 18% of revenue in 2009.

Looking at our third-quarter segment results, the US and Canada segment net revenues increased 4% to $825.5 million compared to $791.9 million last year.

The results reflect growth in the Preschool, Boys and Games and Puzzles category, while revenue in the Girls category declined.

US and Canada operating profit for the quarter increased 23% to $158.8 million or 19.2% of revenues compared to $129.1 million or 16.3% of revenues last year.

Operating margin increased primarily due to lower royalty and amortization expense.

Net revenues in the International segment increased 3% to $458.9 million compared to $444.1 million a year ago.

Revenues in the International segment grew 7%, excluding the negative $17.8 million impact from foreign exchange.

The results reflect growth in the Preschool and Games and Puzzles categories, as well as in the Girls category, which more than offset a decline in the Boys category.

Growth in the emerging market also contributed to the segment's revenue gain.

Operating profit in the International segment increased 10% to $70.8 million or 15.4% of revenues compared to $64.1 million last year or 14.4% of revenues.

The year-over-year increase was primarily the result of lower royalties due to the mix of products sold.

The Entertainment and Licensing segment net revenues decreased to $27.5 million compared to $41.6 million a year ago.

This is primarily due to a decrease in movie-related revenues for Transformers and G.I.

Joe.

The Entertainment and Licensing segment operating profit decreased to $5.9 million compared to $19.8 million last year, reflecting lower revenues and additional expenses associated with our television initiative, including $5 million of programming amortization costs.

Now let's look at earnings.

For the quarter we reported net earnings of $155.2 million or $1.09 per diluted share compared to $150.4 million or $0.99 per diluted share a year ago.

The third-quarter 2010 includes a negative $0.07 per share impact from our television-related activities versus a negative $0.03 per share impact in the third quarter 2009.

Cost of sales in the quarter was $596.6 million or 45.4% of revenues versus $550 million or 43% of revenues in 2009.

This includes the $5 million in programming amortization I mentioned previously.

In addition, the increase in cost of sales as a percentage of revenue in the quarter was the result of a change in revenue mix, which includes the decline in Entertainment and Licensing revenue, as well as changes in foreign currency as opposed to an increase in commodity prices.

Operating profit increased 3% and represented 18.1% of net revenues versus 18% last year.

Consistent with the second quarter 2010 royalties declined due to lower entertainment-based revenue, including the decline in Transformers and G.I.

Joe.

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

Hasbro's profitability enables us to continue investing in our business, including investments in product development to drive innovation in future years, television programming and the overall support of our television initiatives, and continued expansion and marketing of our business in emerging market.

Below the operating profit line interest expense increased by $4 million to $21.7 million, primarily due to the debt offering we completed in March 2010.

And other income net totaled $3 million compared to $4.8 million a year ago.

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

This quarter our share of the earnings in the joint venture was a loss of $874,000 as The Hub began spending to support its launch earlier this month.

The bulk of the spending is slated for the fourth quarter of 2010.

In the third quarter of 2009 our share of the earnings in The Hub was a positive $1.5 million.

In the third quarter 2010 our underlying tax rate was 28.8% compared to 29.7% last year.

Now let's turn to the balance sheet.

At quarter end cash totaled $497.9 million compared to $297.4 million a year ago.

Over the past 12 months we have generated over $480 million in cash from operations.

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

This includes approximately $31 million in television programming costs to date.

Our next $25 million royalty payment to The Hub is due later this quarter.

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 the debentures were converted into 11.6 million shares.

In the third quarter we repurchased 6.1 million shares of common stock at a total cost of $260.1 million and at an average price of $42.39 per share.

In the first three quarters of 2010 we repurchased 15.6 million shares of common stock at a total cost of $629.2 million at an average price of $40.32 per share.

At the end of the third quarter $157.5 million remains in our current share repurchase authorization.

The quality of our receivables portfolio remains good, and receivables at quarter end where $1.2 billion compared to $1.1 billion last year.

We did not utilize our securitization facility in the third quarter 2010 or 2009.

DSOs increased four days to the 83 days due to the timing of sales and collections, as well as lower royalty revenue in the quarter compared with a year ago.

Inventories of $468 million in the quarter compared to $399.9 million a year ago.

We managed through potential shipping disruptions in the quarter and we brought product into our warehouses early.

As a result, we are well-positioned with good quality inventory to meet demand this holiday season.

We are pleased with the growth in our business to date and our ability to not only increase revenues but earnings as well in a year with difficult comparisons and challenging economic conditions.

We are in a strong position fiscally, and have entered the important holiday season with a good supply of innovative toys, games and immersive experiences for our consumers.

For the full year 2010 we continue to 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 consumer spending, global economic conditions or foreign exchange.

As Brian said, we look forward to sharing more of our future plans with you during our Investor Day on November 9.

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

(Operator Instructions).

Robert Carroll, UBS.

Just a quick question on the year-over-year changes in terms of G.I.

Joe and Transformers.

Is there any inputs in terms of why that may have been different this quarter versus last quarter, like why the declines were not as severe?

I mean, is it just changes in trends in the marketplace or is there something you guys can point to?

Well, you first -- good morning -- you first have your year-on-year around the movie timing, and obviously a big shipment quarter in the second quarter as opposed to more of the third quarter.

As in the third and fourth quarter, we are beginning to sell the new initiatives for -- toward the holidays, especially for Transformers.

Then actually just one other quick one on the expense side.

Advertising revenue is about flat year-over-year.

Looking at that holistically with royalties we were expecting it to be up a little bit higher.

Is that still the right way to look at it in terms of advertising royalties on a combined basis?

Yes, the royalties are down, obviously.

And our advertising, we are still using to drive our products.

Over time, you might imagine, as the TV initiative gets up and running that you might have a bit of a change between the two.

But we are certainly continuing to advertise, and we are now getting into the fourth quarter as our advertising will go up, as will our investment in our television initiative.

Then one just other last one.

In terms of some of the commentary we heard from competitors recently, have you guys seen anything similar in terms of North American shipments, I mean, retailers positioning themselves more for a tighter selling season around the holidays?

Overall we feel very good about our position with retail.

Each retailer has some very strong plans for the holidays.

We have talked about -- certainly people have acknowledged more linear feet in the toys department.

We are seeing a lot of momentum around a lot of our innovative products across a number of brands.

I would say the only place where we are back a couple of weeks would be like a Family Game Night promotion initiative that starts two weeks later this year versus a year ago, but other than that, no, not really.

All right, thanks, guys.

Margaret Whitfield, Sterne Agee.

Following up on that, we heard from another competitor about lean inventories at retail.

I wonder if you could give us the status of your inventories here in the US as well as abroad?

This is David.

I think basically we are very happy with the level of inventories at the retailers at the moment.

We are looking for strong sell-through in the fourth quarter, and we think the levels of inventory support that.

With regard to our own inventories, we are up a little bit versus a year ago.

That primarily reflects the plans that we put in place to deal with potential supply chain issues, be that labor shortages or containers.

So I think we are very happy with our level of inventory, even though it is up a bit.

I think overseas, very similar to the US.

We are happy with the level of inventories that retailers have, and we think they will support a strong sell-through in the fourth quarter.

Brian, I wonder if you could elaborate more on your comments, which were positive on the initial read on The Hub, any comments on what program segments are particularly faring well?

Sure.

Overall I would say a couple of conclusions.

Clearly parents and kids are visiting The Hub and are spending time with the channel and also HubWorld.com.

Secondly, we are really seeing brands perform, whether it be Hasbro's brands like Family Game Night or My Little Pony, Pound Puppies or Pictureka, but also other great brand stewards, brands like Strawberry Shortcake and Batman Beyond.

So, again a great environment where great brands and great things come together.

So thus far we are very pleased with the results.

And we are looking forward to some of the major initiatives we have coming up, namely this weekend an amazing Taylor Swift special that starts on October 22 and runs for three nights; new episodes of Family Game Night; as well as Transformers launching later in fourth quarter.

Any update on Hasbro Studios in its efforts to sell the programming overseas?

The efforts are continuing, and we will probably announce something relatively shortly.

But again, the efforts are going on.

A lot of excitement around the world for branded content, especially Hasbro branded content, and making good progress.

Felicia Hendrix, Barclays Capital.

Brian, you said in your prepared remarks something about bringing back higher priced items like Butterscotch.

I was just wondering how that relates to what we are hearing about the price sensitive consumer right now?

Well, what we have done is we have brought back a handful of higher-priced items as an ultimate gift promotion with a retailer or two.

There is a demand among certain consumers for that ultimate under the tree gift, and we felt that was missing from our line a year ago, and that we would bring that back out and re-promote it in partnership with our retailers.

Got you.

Then just when we think about your movies going forward, movies like Battleship, are you participating in ticket and DVD sales?

We do.

We are -- we do participate in gross sales of the entertainment.

Then just getting back to the inventories, David, you just said that you're comfortable where the inventories are, and you have built some to just deal with shortages in containers and stuff.

So when we think about, and we look at inventories in the next quarter and going forward, can you help us think about how you are building in that cushion, just so that we can have an idea of when an inventory level is too high versus a cushion?

I think we're probably through most of the container issues at the moment -- as I said, abated, and some of the surcharges that were on a peak have now been taken off, so I think we are through that.

I think one of the things you're going to find going forward is that the old days with most of our suppliers' labor in Southern China being migrants, who just came down during a peak period from June to November, that has kind of gone away.

There is much more of -- you know, the workforce is people that live in the area and come to work from home on their bicycle, not migrants that come down and stay in dormitories.

So I think in order to attract and retain this labor force throughout the year, we are going to have to build a little bit more earlier than historically, so I wouldn't be surprised to see our inventories in the second and third quarter aims a little bit higher than we have experienced in recent years.

But not materially higher, but I think there has been a bit of a shift in the dynamic of China manufacturing.

It seems like there is a real balance you guys are going to have to overcome in terms of appeasing the factories versus the demand from retail, because it seems the spread could be getting wider.

Very early on we can identify key drivers in our line.

And certainly have done a lot with our teams to ensure we understand sales templates early on, what the rates of sales could look like.

So, again, we are placing our bets in good quality inventory, in our major initiatives, and those initiatives that have already demonstrated a good propensity for high sales.

Okay, that's helpful.

Then, Deb, on the gross margin you said that some of the things that was driving the gross margin, which was lower than we had expected in the quarter, was mix and FX.

I was wondering if you could just give us the FX impact to gross margin?

Well, the FX impact, while we won't specify what the exact number was, it was more significant when you look at the margin mix year-on-year.

Because in the prior year, if you recall, with the change in foreign exchange rates, we had some very, very favorable hedging that had flowed through our inventory.

So that was really driving the rate down a bit more in 2009.

So that is really the FX impact we are talking about between '09 and '10.

With respect to the cost, it wasn't so much a cost increase for us, it was more of this FX impact, as well as the mix in revenues.

So with a decline in Entertainment and Licensing revenue, which has very low cost of sales associated with it, along with the impact of the programming cost amortization that hit in the quarter, and this FX impact, it just made for a wider spread quarter-on-quarter than we normally see.

Okay, then should we assume that happens again in the fourth quarter?

We did have some favorable hedges flowing through our P&L going into the fourth quarter as well -- the fourth quarter of last year.

Okay, great.

Then just one final question, just on The Hub, wondering if you can comment on your ratings so far versus expectations, particularly on Family Game Night?

We feel very good about the ratings.

David Zaslav and I spent a good amount of time talking about this over the last couple of days.

The teams have done a tremendous job.

If you have seen The Hub, which I hope you have, the marketing campaign has been very impactful.

Lots of favorable comments back from folks, and the ratings are indicative of people coming out and sampling, both parents and kids.

Fantastic, great.

Thanks, guys, see you in November.

Thanks, see you November 9.

Michael Kelter, Goldman Sachs.

On the entertainment-driven property looking forward, obviously you have Transformers 3 next year -- you mentioned Battleship, I assume mainly because it was filming, but you didn't mention Stretch Armstrong.

Any reason to believe Stretch Armstrong is being pushed back?

And then how would you compare the two in terms of what you think could be most material for you in 2012, Battleship or Stretch Armstrong?

Well, if you look at our total lineup in 2012 it is now shaping up to be another stellar entertainment year, motion picture-led year because of the recent announcement from Lucas on the re-release in 3D of the first -- Episode One in Star Wars, which is new news, over the last few weeks.

Then you have two motion pictures from our partner at Marvel in The Avengers.

And then of course you have Spiderman from Sony and from Marvel coming.

And then, of course, our Battleship.

So there is an opportunity we see potentially to move Stretch out of '12 and into '13.

Obviously between all our motion picture initiatives and the TV initiatives there may be an opportunity to begin to populate the 2013 timeframe.

If you look at the difference, really for us Battleship is a wonderful opportunity.

It is a brand that is -- obviously it is up in the quarter.

And what we are seeing is a great array of online games and other digital games around Battleship.

If you go to HubWorld.com, for example, there is a great Battleship interactive game that is there that you can play that was developed by our partners at Electronic Arts.

So Battleship will be a completely immersive game addict experience across a number of different platforms in time for the movie.

Stretch Armstrong may be a little more traditional action figure business and Boys action business, albeit, kind of comedic and fun and slightly younger skewing.

Anything else on the horizon in terms of wholly-owned content in the way that Battleship and Stretch Armstrong are yours?

Anything else that you think is more in the near to medium term that we should have our eye on?

Well, we are obviously working on a sequel to G.I.

Joe, which was very successful as a motion picture and certainly drove toy sales in the year.

We are working on Ouija, Monopoly, Clue, a number of different brands in the motion picture arena, which are all wholly-owned -- Risk -- all wholly-owned by Hasbro, and working with some great partners in Universal and Paramount and Sony.

The other one I would mention is we are beginning to redevelop and will launch Micronauts as a motion picture in the next couple of years as well.

I don't want to give you specific dates on all that, but suffice to say that is all in the offing over the next three to five years.

Then on the international, 7% organic growth you mentioned that emerging markets contributed.

Can you possibly talk about what percentage of International is from emerging markets, and what the growth rate is there verses let's say the established Western European markets?

So emerging markets, and by that I mean emerging Asia, emerging Latin America and emerging Europe, are today still remains a relatively small part of our overall International business, but it is growing very rapidly.

So in some of those markets we are seeing 43%, 50% growth rates, but from a fairly small base.

But what it does mean that over the next few years we could be adding hundreds of millions of dollars to our revenues in markets like Brazil, China, Russia, etc.

Then on share repurchases and leveraging the balance sheet it looks like you will have offset the impact of the convertible dilution, which was your goal fairly shortly, if not already, depending on how you look at it, and you'll have a lot of cash to deploy going into next year.

Any reason to believe that that won't continue to go towards share repurchases?

Are you looking at any other use of cash beyond the normal running of the business?

Well, what we have consistently said that we do believe in investing in ourselves first, as David talked about some of the markets that we are entering in and expecting a lot of this revenue growth.

We know we will continue to put people there as needed and our efforts there as needed first.

And then we do still remain skeptical of acquisitions, although if something is compelling we will certainly consider it if it fits in well with our brand portfolio.

But beyond that our expectation is we would continue to return our cash to our shareholders through dividends or share repurchase.

At the end of the third quarter we had $157.5 million remaining under our current share repurchase authorization.

All right.

Then actually one last thing on gross margins, you know, obviously a little lower than probably most people were expecting on the quarter.

You explained some of it.

And since a lot of it is mix, should we assume that gross margin reverses itself next year with Transformers as a movie coming back?

Do gross margins come back to where they were before, is that a fair way to look at it?

I think there's a couple of things to think about.

The gross margin shift could just be a higher gross margin product that also is royalty bearing versus a slightly lower gross margin product that is not royalty bearing and obviously driving a higher operating return.

So you are seeing some of that in the quarter, and you may see some of that as we drive other of our owned-operated brands that are less royalty bearing over the next couple of years.

Obviously, Deb had mentioned that you also have programming that hits the cost of goods lines of our P&L.

Deb, you want to comment further?

Yes, I think that is going to end.

We are looking at as that programming amortization, or programming production amortization, cost becomes greater next year -- we are looking at breaking that out on the P&L to make that cost of goods measure easier to look at.

Greg Badishkanian, Citigroup.

Just two quick ones.

First, with POS you said it was up nicely.

I am just triangulating that with inventory levels at retail, so would you say that your shipment growth was pretty similar to POS this quarter?

Yes, it was.

In fact, we had -- in the quarter we had growth in POS and Preschool, in Girls.

Certainly as you look at Boys, the underlying Boys business very strong POS growth, albeit, we are comping up against Transformers.

So if you look at Transformers that would be down year-on-year.

here.

But the underlying brands, Nerf or Marvel, are certainly contributing.

Our games business year-to-date -- as POS is up, as I mentioned in a prior answer, we have moved back Family Game Night promotions by two weeks, so we are seeing POS pick up a bit later.

But, again, feel very strongly overall that our POS is right in line with our expectations, and certainly reflecting some good innovative products out on the market already.

Great.

Then just with respect to next year you have a pretty good lineup of movies.

Maybe just a little bit more color in terms of what you expect from those verses Booty lineup this year, which was pretty light.

Well, next year we have a number of movies that we are very excited about -- obviously, Transformers 3 expected to hit theaters around July 1, 2011.

Then, of course, there is Thor which comes.

We have Captain America, the First Avenger, and then we will have some games product around Cars 2.

So overall feel very good about our 2011 motion picture lineup, both from Hasbro-owned and operated brands as well as partner brands.

Gerrick Johnson, BMO Capital Markets.

Talking about The Hub -- or actually Hasbro Studios adding $5 million in programming amortization to cost of goods sold, can you tell us how much the studio has added to sales?

Well, what you are seeing now is really minimum level since we began to make deliveries to The Hub itself.

The revenues come in arrears.

Right.

You have to produce the product -- you produce the content.

You then provide it to your -- The Hub or your partners.

You then distribute the content.

And then you would have all the waterfalls, bit it digital, distribution or DVD distribution over time.

And David commented that you guys were happy with the level of inventory at retail, and you can support sell-through in the fourth quarter.

Should we interpret this as meaning the channel inventories are up?

Can you give us just a little bit more granularity on exactly where retail inventories are?

I think overall in the US we are maybe a little bit up versus last year.

I don't think that is true for every retailer.

I think within there, some are up, some are down a bit.

But overall we are certainly not less than last year.

And we're fine with that, because we are expecting some pretty good sell-through.

We've got a lot of promotions, a lot of advertising, a lot of good new product launching, so that is okay.

Deb commented -- I think she said there is no impact on margins from higher input costs.

Is that because they are offset by higher selling prices or are we not seeing cost increases?

And if so, when might we see this coming through?

I think you're seeing very minimal impact -- very minimal.

And that is really what I was trying to get across is that the bigger impact in our cost of sales line for the quarter was not from cost increases.

As we have talked about previously, we lock in our prices for new product for about a 12- to 18-month period.

So we do expect to see some cost increases next year, and we will price our products appropriately.

Then on to the product side, can you give us a break down -- Boys up, but a breakdown between say outdoor sports versus action figures, how those two categories are?

Well, some of the biggest drivers in and the Boys category this quarter are certainly Nerf, not only in the US, but as we are now rolling out that brand around the world.

Our Marvel business is certainly up significantly and that is what is driving that.

So it is a good balance in our portfolio, be it Boys or Girls, a good balanced portfolio, breadth of brands, Hasbro's own brands and long-term licensed partnered brands that are contributing to growth in the quarter.

Okay, and lastly, comment on Beyblade, the relaunch there, is that tracking according to your plans, or how is that doing?

It is doing very, very well.

We are feeling very good about Beyblade.

We are starting to get placement around the world domestically.

And in markets where the programming has been placed has been very successful.

It is certainly meeting our expectations.

We are very familiar with the sales template for this brand, having done it before.

And our partnership with Nelvana is quite good, and we feel very good about the prospects.

Drew Crum, Stifel Nicolaus.

With respect to your Games and Puzzles business, can you comment on the inventory levels entering the fourth quarter, and planned shelf space, in light of the timing for Family Game Night?

Well, overall we are seeing already good growth from a number of different games across the breadth of the portfolio, be it Trouble or Scrabble and Scrabble Flash or Battleship and Monopoly.

There is a lot of great brands being supported.

My only point was, as we look at the promotion year-on-year we had pushed it back by a couple of weeks and that does change the template.

But of course, as you know, games sell late in the fourth quarter very significantly, and so we felt that was warranted and would allow us to have a bigger impact.

We have a number of new brands within games or new lines within games.

Scrabble Flash is off to a tremendous start.

Cuponk is a new line within the games business, which is a lot of fun to play and is having great success.

So overall, again, games garnering great linear footage, great displays, great promotions.

Our Monopoly promotion with McDonald's is going on presently.

Maybe you have seen some of the advertising.

So again, feel very good about where we are with our games.

In fact, we are not only seeing Scrabble do well as our analog products, but on the Kindle, the Scrabble is the number one app overall, even including books or other downloads.

You can play Scrabble on your iPad.

You can play Scrabble and other brands in a number of different forms and formats.

So come, again, it is complementary, not cannibalistic to our analog business.

Good, thank you.

Then I want to return to the question around emerging markets.

I know it is not a big piece of your business today, but how much of a drag is this on profits?

Is it at breakeven yet?

What are the prospects for growing profitability for that piece of business over the near to intermediate term?

It is mixed.

I think the markets in Eastern Europe, Poland, Czech Republic, some are a little bit mature.

They actually make returns similar to a lot of the rest of our business.

But in the newer markets in some of the bigger markets, where we clearly do believe we are in investment spending the mode and they are not at breakeven yet.

I would say probably Brazil and China and Russia, we consider that we are investment spending to get growth.

We are in a very fortunate position, of course, that we can -- we both have the cash and the margin that allows us to do this at the moment.

I think clearly we don't expect this investment spending to continue too long.

I would say, over the next two to three years those markets should turn positive.

Okay, great.

Then two last housekeeping questions from me.

The amortization was a little higher than we modeled.

Is there any updated guidance you can give us for 2010 there, and the CapEx number in the quarter?

The amortization was -- I think it is tracking a line.

We had some little blips of things that went higher and had -- maybe had a little bit more amortization in the quarter because of the way they were tracking against particular revenues.

So I don't think there is anything significantly different than the guidance we had given back in November at last Analyst Day that you should be thinking of amortization.

It is more of just a timing issue.

And the CapEx in the quarter was $26 million.

Sean McGowan, Needham & Company.

I have a couple questions as well.

On the other income line can you give us some sense of what is in there and what is driving that outside of the network's activities?

Outside of the network -- well, as we talked about, we have an $874,000 loss from the network versus $1.5 million of income last year quarter-on-quarter.

But outside of what is in that is -- it is really just a mix of -- interest income goes into that line, and really just some FX that were small gains that became small losses this year.

So there is just things mixing back and forth, but there is really nothing significantly different in that line year-on-year.

But it was a source of income, right, this year -- of this quarter, rather.

Should we expect that to be a loss then in the fourth quarter, given the margin expenses for the launch?

Well, certainly with respect to The Hub, and we have talked about -- we still have reiterated we believe that we will have $0.25 to to $0.30 dilution on the full year from The Hub.

Our expectation is the greatest piece of that, the dilution, will be in the fourth quarter -- the bulk of the marketing expenditures are being expended.

But is there anything that you would think could offset that at that other income line?

If there is some foreign exchange contracts that move differently -- if currency moves differently we may have some gains, but our expectation is there won't be anything significant offsetting that in the quarter.

Thank you.

Can you comment -- I am not sure if it will be Brian or David or anybody -- on retail momentum in Europe, what you're seeing as we approach the holidays versus how things were earlier in the year?

Some of those markets were kind of troubled from a consumer standpoint, are they showing some improvement?

Yes, we are feeling pretty good about our business in Europe.

As Brian said, a lot of our new products, whether it is Beyblade or whether it is Cuponk or whether it is Scrabble Flash, all of these products are doing pretty well over there.

Certainly Nerf is doing really well.

The campaign for Stampede had a great launch over there.

So we have quite a bit of product momentum at the moment.

By market, last year Mexico was a difficult market and so was Eastern Europe.

Both of those have bounced back pretty well.

I think Spain has been a difficult market last year and I think that continues to be difficult.

I think our business in Germany is doing pretty good.

So overall a lot of new product momentum, and we're feeling good as we go into the holiday season.

The one thing I would add is that actually internationally our Girls businesses up pretty significantly.

It is really being driven by all the new initiatives around FurReal Friends and Baby Alive, Strawberry Shortcake and now the initial elements of our new segments within Littlest Pet Shop with Blythe Loves Littlest Pet Shop.

So, again, seeing some good results there as well.

Okay, thank you.

Then the final question would be given what seems to be the early success of Cuponk, would you expect to be monetizing in other ways the general drinking game category?

I am not sure how to comment on that.

I thought you're going to pitch me Cuponk the Movie or something.

Tim Conder, Wells Fargo.

Thank you and congrats on a continuing great execution.

Thank you.

Just a return back to the inventory question.

David, maybe -- I think you had an earlier question related to your channel inventories year-over-year domestically -- could you comment there on how those are international, were they up, down or sideways?

I don't get as good data internationally as we do in the US, so it is very difficult to make an overall informed comment.

I think basically as I talk to each of the general managers of each of our businesses in each of the countries around the world, they are pretty comfortable with the level of inventories out there.

As I said, supporting a fairly -- what we hope is going to be a fairly strong POS season around the holidays.

David and the team just came back from Italy last week, and spent some time with the Europeans, and I think overall we are feeling very good about our business across the international markets.

Just to wrap up the inventory question, so on the timing issue that again was mentioned by a competitor earlier, you are not really seeing any major timing issues.

And in particular the commentary that has been out there regarding Wal-Mart's planned flex in the month of December, just to flesh that out if you could a little more color.

I think every one of our retailers, domestic and international, have pretty exciting plans for the toy category this holiday season.

Certainly we are going to see more overall linear footage, given the value of the toy department to retailers, to parents and to kids, that it is being really reflected now in the decisions about where to put the emphasis, the promotions, the marketing.

So we feel good about the momentum thus far.

We are already seeing really good over-the-counter sales of our new initiatives.

We mentioned one segment, one promotion that we pressed back by a couple of weeks in Family Game Night, but certainly we expect a very robust holiday season.

Okay, so again, some are or are not taking inventory a little later or more similar to what you saw last year?

I would say that we work with our retailers really since early in the year to take inventory throughout, especially on the new initiatives.

We are not seeing major delays of inventories, nor are we seeing major shipments of inventory.

It has just been a good, smooth flow of goods to ensure that they have our innovative top items at retail for the holiday season, but no major delays.

David, do you want to comment further?

No, I think we have had a lot of -- we said at the beginning of the year that our business would be lots of singles and doubles, and it might come a bit later.

So we have had a lot of new initiatives during the third into the fourth quarter, and people already -- are always going to support good new initiatives.

I guess that is a good transition to my other question.

You had commented on how the early acceptance of Beyblade is good.

Should we see Beyblade more impactful here in the fourth quarter as far as your initial ship-in or do you pretty well feel comfortable what you've got in there to get -- as we've got it up and rolling here?

I think we will continue to -- you know Beyblade launched -- you always have -- you ramp up capacity, so I think we are still probably catching up with demand at the amount at the moment.

I think we will be shipping it in the fourth quarter.

And clearly we see Beyblade as going strongly into next year as well.

Okay, then one last housekeeping question.

Just an update on your thoughts for CapEx and overall depreciation for this year and looking into next year.

I think for the full year we still expect our CapEx to be around $120 million for the full year.

And depreciation, that one I don't have at the top of my head, so let me.

Yes, we will circle back, Deb, no problem.

Jeff Blaeser, Morgan Joseph.

Could you comment on the Transformer trends this year versus the last years post movie results?

We had mentioned in the second quarter that Transformers was performing more like a year after Boys action brand than it had from 2008 from 2007.

That was really owing to the fact that we have chosen to move back our animation, which we have had in 2008, we moved it back to timeout with the launch of The Hub.

So Transformers is performing more along the lines of a traditional decline year-on-year from the motion picture year to the year after.

Okay, and was Q4 or Q3 bigger for Transformers last year?

I don't have that at my fingertips.

I will have to come back to you.

I'm not sure.

Okay.

Then on the Boys side, I think you mentioned Nerf and Beyblade certainly additive.

Any other areas of strength there?

Oh, sure.

Across-the-board -- okay, so I have Q3 was -- in 2009 was a bit higher than Q4 last year on Transformers.

Okay, great.

Across Boys we've got a number of things that are really working.

Obviously, Nerf, we said a number of years ago that you could go out and garner consumer insights and believe that the Nerf is a global idea, not just a domestic idea.

And we have now demonstrated that by growing Nerf severalfold and also growing it internationally.

The opportunity to grow Nerf far beyond where it is today is still there and apparent new segments being introduced.

The Stampede is just one among many.

Marvel is continuing to perform very well this year and is up.

Star Wars, we are really seeing now with the new season really come into its own.

And we are very excited about the Star Wars plans not only for televisions, but as it comes back into movies.

Beyblade is getting started.

So overall, again, we talk about a broad portfolio of great brands, and Boys is no different.

Edward Woo, Wedbush.

You mentioned that PlaySkool and the Preschool is pretty strong this quarter.

Was there any specific categories of that or was it just pretty broad-based?

It was very broad-based.

PlaySkool core is up.

Our Play-Doh business, Tonka business, other businesses are all contributing.

So, yes, it is a broad-based strength and array of great Hasbro brands.

That's good to hear.

The other question I have is, it seems that FX, at least the dollar, has weakened significantly.

Do you see FX potentially being less of a headwind in the current quarter?

I think if rates continue the way they are today it is less of a headwind, certainly than we thought it would be a quarter or so ago.

John Taylor, Arcadia Investment.

Pet Shop has been a real driver on the Girls side for a long time.

And, Brian, I think you called out that Pet Shop internationally was pretty good, that Girl's overall was down.

And there is a lot of competition in that kind of small doll category this year with new stuff and whatnot.

I wonder if you could talk a little bit about that headwind and the way you might be responding to it?

Thanks.

Well, thanks.

Right now if you go out in retail you will start to see it.

It is a major new segment for us within Pet Shop called Blythe Loves Littlest Pet Shop.

And Blythe is a doll that was back in the day and then was very popular in Asia.

We have brought that into a line in a very inventive way.

The team has done a really terrific job of introducing our first pet sitter as Blythe.

And that will go forward as well, a number of new segment and initiatives for 2011.

So like we have always said, we need to constantly re-invent and re-imagine, re-igniting our brands.

And there are times in quarters where you'll hit an inflection point, but I do believe it is about timing more than anything.

It is -- similarly, with My Little Pony, we are just wanting the animation now domestically.

We will launch that in 2011 internationally.

And the My Little Pony line is reflective of this new Friendship is Magic TV animation which will rollout around the world.

Meanwhile we have an array of great Hasbro brands that are driving our business from FurReal Friends, Baby Alive, and also partnered brands with American Greetings, like Strawberry Shortcake, so a great, broad array of brands.

Is the Blythe segment being internationally shipped this year too or just US?

You will see a bit of it happening late this year around the world, and then it will hit more significantly in spring and into next year.

Then, obviously, for fall of 2011 already contemplating a number of new initiatives, really exciting initiatives within Littlest Pet Shop and My Little Pony, which we will share some of which with you November 9.

There are no further questions at this time.

I would now like to turn the floor back over to Debbie Hancock for closing comments.

Thank you, Rob.

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

The replay will be available on our website in approximately 2 hours.

Additionally, management's prepared remarks will be posted on our website immediately following the call.

Thank you, and have a good day.

This concludes today's teleconference.

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