孩之寶 (HAS) 2010 Q4 法說會逐字稿

Good morning.

Welcome to the Hasbro fourth-quarter 2010 earnings conference call.

At this time, all parties will be on a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

Today's conference is being recorded.

If you have any objection, 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 fourth-quarter and full-year 2010 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 overview 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, 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.

As we enter 2010, we shared with you our vision to continue reinventing, reimagining, and reigniting the industry's broadest portfolio of world-class brands.

At the time, we characterized 2010 as a year of singles and doubles, meaning we were relying on growth from brands across our portfolio to drive our business following our very strong performance in 2009.

In 2010, we accomplished many elements of our strategy, growing market share across five of the 11 NPD super categories in the US and six of the 11 NPD super categories in Europe, delivering significant growth in several reimagined brands, and growing EPS for the 10th consecutive year.

A number of strong performances drove these accomplishments.

Our international segment turned in a tremendous year posting 7% revenue growth.

Product revenues grew in every category, boys, games and puzzles, girls, and preschool.

The emerging markets contributed strong growth and with continuously improving profitability helped support the international segment's 29% overall growth in operating profit, which increased both in dollars, up $47.5 million, and as a percentage of revenues to 13.4% versus 11.1% in 2009.

Globally, our preschool category grew 13%, driven by continued strong growth in Playskool, Play-Doh, and Tonka.

The girls category increased 5% on strong performances from Furreal Friends, which more than doubled its revenues in 2010, as well as growth in Baby Alive and Strawberry Shortcake.

In our boys category, Nerf extended its recent performance of strong year-over-year gains increasing 51% to reach $414 million in revenue, making it our largest brand of the year.

Beyblade was relaunched and is off to a very strong start in the US and international markets.

Tonka grew in 2010, helping us gain share in the vehicles category and our Marvel business was up on the strength of Iron Man.

Finally, several reimagined games brands turned in strong performances including Magic; the Gathering, Scrabble, Cuponk, Bop It, and Toy Story-related games.

Having said this, we did not grow revenues in 2010.

We believe the revenue shortfall was due to a convergence of a few negative factors late in the final quarter of the year and is not emblematic of our long-term business which remains on track for growth in 2011 and beyond.

As you will recall in 2009, revenue for Transformers and G.I.

Joe topped $700 million through the immersive experiences we provided consumers for two very successful motion pictures.

We knew that in order to grow our business in 2010 we would need to achieve growth of $300 million to $400 million across Hasbro's brand portfolio to compensate for the traditional level of decline one might expect for movie-backed properties the year after a film.

Our brands came very close to achieving this level of growth.

In the games category, our US business softened late in the holiday period when we rely on consumer take away to fuel reorders from our retailers.

In addition, we had shipped more products earlier in the year to avoid potential container shipment shortages and with slower consumer take away late in the fourth quarter than anticipated, retailers had sufficient inventory on hand and placed fewer reorders.

On average, over a third of the annual games business is typically purchased in the final six weeks of the year.

Retailers entered the Christmas holiday season with inventory to support this trend, yet consumer demand did not fully develop across our broad games portfolio.

As we reimagine and reignite our games business, it is important to note that more people are enjoying Hasbro's games than ever before, just in new and different ways.

In fact, in 2010, our brands experienced a greater than 50% increase in mobile downloads.

The growth is indicative of the resonance and ubiquity of our brands, which consumers will pay to experience across casual gaming platforms.

Through our relationships with electronic arts, Activision, and others, we are growing our gaming audience and creating immersive experiences for consumers across several platforms.

Our team at Wizards of the Coast is already successfully bringing the digital and analog worlds together, enabling consumers to enjoy Magic; the Gathering across multiple platforms.

The combination of the traditional Magic; the Gathering trading card game with Magic; the Gathering online and Duels of the Planeswalkers on Xbox Live Arcade, PlayStation 3, and on the PC produced strong growth in Magic; the Gathering players and a more than 30% increase in the brand's revenue in 2010.

In 2011, we are further leveraging what people enjoy in our games digitally with innovative new gaming experiences.

In 2010, we introduced the innovative flash technology, which drove a very successful year for Scrabble and Bobble Flash.

In 2011, we are bringing this technology to a reinvention of Simon with Simon Flash.

We will also unveil a new branded gaming platform, an interactive and immersive experience that brings your favorite board games to life in unexpected and unique ways.

Finally, creative new off the board play experiences such as Cuponk and Bop It are engaging our games consumers.

2011 will also include a first in the digital arena for Hasbro as we bring to market a Transformers MMOG in China.

Our television initiatives took an important step in 2010.

On October 10, 2010, Hasbro and Discovery Communications launched The Hub under the leadership of Margaret Loesch and her team.

We continue to be encouraged with the initial results we are seeing at the Hub.

Of all kid cable networks, The Hub is leading co-viewed network in kids two to 11 and adults 18 to 49, meaning the network boasts the highest percentage of kids and their parents watching together.

We are pleased with the ratings progress since the launch and we believe the marketing investments in the network are working.

The Hub currently has more than 80 advertisers, up from the 50 at the launch, most of which had never advertised on Discovery kids.

Hasbro Studios is currently producing 335 half hours of programming for season one of The Hub and the international markets.

The studio has entered into programming agreements with Corus in Canada, where its shows are currently airing on YTV, Teletoon and Treehouse; with Mediaset in Italy on their Italia 1 channel; with Turner Broadcasting's Cartoon Network in the UK, Spain, Sweden, Norway, Denmark, and the Middle East; and with Fox LOOK for international game show and unscripted television content.

We expect to see Hasbro Studios programming in additional regions throughout the world by fall 2011.

Our team has done a great job bringing Hasbro brands to life for The Hub and for international markets.

We are proud of the quality of programming being produced at Hasbro Studios and the integral role it plays in the development of immersive brand experiences globally.

2011 is the first year in a multiyear strategic plan in which we will have significant initiatives across all elements of our brand blueprint.

In television, in movies, in digital gaming, and licensing and of course most importantly, across our portfolio of toys and games.

We have had years with successful initiatives in each of these areas before.

But 2011 will allow us to truly activate and execute across our brand blueprint in the most comprehensive manner to date.

Key initiatives in 2011 include Transformers.

In partnership with global retailers, we have Transformers toys and games, licensed consumer products, and digital games across all platforms, supporting the release of Transformers -- Dark of the Moon in theaters July 1.

Within our strategic license relationships, we are committed to being the best, most innovative partner with the best, most innovative brand owners such as Marvel and Lucasfilm.

To that end, in 2011, a great new partner joins with us as Sesame Street comes to our preschool line featuring a number of beloved characters such as Cookie Monster in addition to tremendous Elmo initiatives you will learn about at Toy Fair.

As we go forward, Sesame Street will be a focus for us year round.

The brand will also be global as we launch product in more than 25 countries in fall 2011.

Also within our strategic relationships, we have a great line of toys and games supporting two new Marvel films, Thor in May and Captain America; the First Avenger in July.

In television, we have a full year of The Hub and the initial launch of Hasbro Studios programs outside the US.

Finally, we have additional initiatives we will preview at Toy fair, which you will see for the first time later this week.

As we begin 2011, our inventory at retail is of good quality.

We expect the first quarter of 2011 to present a difficult comparison to year ago.

We anticipate building momentum during the year on the strength of our initiatives.

As a result, we believe we should be able to grow both revenues and earnings per share in 2011 on the strength of our business globally and initiatives in all major product categories.

We have the strength of Hasbro's global team behind us and our honor to be named to Fortune's 2011 100 Best Companies to Work For list.

We know that the Hasbro team has the drive, passion, and commitment to win and our continued investment in growing our talent globally is essential to our long-term success.

We look forward to seeing you on Friday at our Toy Fair investor event where we will further outline our 2011 initiatives.

Now I would like to turn the call over to Deb.

Deb?

Thank you, Brian, and good morning.

As Brian highlighted, in 2010, we had a number of strong performances despite the difficult comparison with 2009 and a softening of US consumer demand in games late in the fourth quarter.

Our revenue was down slightly in the year, but we achieved record net earnings, improved our operating profit margin to its highest level in 25 years, and grew earnings per share for the 10th consecutive year.

We accomplished this while also expanding the reach of our business by entering new countries, investing in Hasbro Studios, and launching The Hub.

Importantly, we continue to generate cash, which we deployed back into our business and returned to shareholders.

We talk a lot about the investments we are able to make in our business because they are so critical to our long-term success.

These investments have roots throughout our Company, in product development, to ensure we have the most innovative products for years to come; in advertising and marketing, to build and support our brands around the world; for television programming in support of our global entertainment strategy; to establish and expand our business in emerging markets, where we are driving growth; in our systems and global processes, including improving efficiencies through the upgrade of our SAP system to one global system, which is now deployed in the US and Europe and underway in the rest of our international markets; and perhaps most importantly in attracting, retaining, and developing our people, where our investments will foster the creativity and innovation that will take Hasbro into the future.

For the full year 2010, worldwide net revenues were $4 billion compared to $4.07 billion a year ago, a decline of $66 million.

Foreign exchange had a negative $17.7 million impact on net revenues for the year.

Operating profit for the year was $587.9 million.

As a percentage of revenue, operating profit margin improved to 14.7% versus 14.5% in 2009.

Looking at our full year 2010 segment results, US and Canada segment net revenues were $2.3 billion compared to $2.45 billion last year.

The segment experienced growth in the preschool category offset by declines in the boys, girls, and the games and puzzles category.

The US and Canada segment reported an operating profit of $349.6 million compared to $380.6 million in 2009.

Operating profit margin was 15.2% of revenues versus 15.5% in 2009.

The decline in operating profit reflects lower revenue which offsets lower royalty and amortization expense in the year.

Net revenues in the international segment increased 7% to $1.56 billion versus $1.46 billion in 2009.

Absent a negative foreign exchange impact of $27.6 million, net revenues grew 9%.

The results reflect growth in every major product category and region including continued growth in our emerging markets.

The international segment reported operating profit of $209.7 million, up 29% from $162.2 million last year.

As a percent of revenue, operating profit increased to 13.4% versus 11.1% in 2009.

Operating profit margin improved in 2010 as we continue to gain efficiencies in our business, including the emerging markets in addition to lower royalty and amortization costs in the year.

The entertainment and licensing segment net revenues declined to $136.5 million versus $155 million a year ago.

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

Joe entertainment properties in 2009.

The entertainment and licensing segment reported operating profit of $43.2 million compared to $65.6 million last year.

These results reflect lower revenues and additional expenses associated with our television initiative including $22.1 million of program production amortization costs.

These were $5 million in the third quarter and $17.1 million in the fourth quarter.

The higher amortization in the fourth quarter reflects the mix of programs we have delivered to The Hub, including game shows and entertainment-style programs, which have a shorter amortization period than animated programs.

Now let's look at earnings.

For the full year 2010, we reported net earnings of $397.8 million or $2.74 per diluted share compared to $374.9 million or $2.48 a year ago.

2010 net earnings include a favorable tax adjustment of $21.2 million recorded in the first quarter 2010 or $0.15 per diluted share.

Excluding this impact, earnings per diluted share were $2.59 per share.

The full-year impact of the tax adjustment is $0.01 higher than reported in the first quarter, given the impact of our share repurchases on share count for the full year.

Our television investments remain on track with our long-term plan and had a negative $0.30 per share impact on the full-year 2010 versus a negative $0.12 per share impact in 2009.

Given the launch of The Hub on October 10, 2010, $0.14 of this year's impact was in the fourth quarter 2010.

As we told you previously, going forward, we will continue to highlight our share of The Hub's earnings as well as program production amortization costs.

However, now that the launch phase of The Hub is behind us, the rest of our television activities are part of our ongoing operations and will be reported as such.

In 2011, we will begin to benefit from the great work our Hasbro Studios team has done securing international distribution for our programs, which are already on television in Canada.

In fact, My Little Pony, Friendship is Magic premiered on Treehouse in Canada in early January 2011 and is already the number one animated show on the network.

We will begin to see our programs in the other international markets in the third quarter 2011.

For 2010, average diluted shares outstanding were $145.7 million compared to $152.8 million last year.

Cost of sales for the year was $1.71 billion or 42.8% of revenues versus $1.68 billion or 41.2% of revenues in 2009.

The increase in cost of sales as a percentage of revenue in the year is primarily the result of the $22.1 million in program production amortization I mentioned previously along with changes in foreign currency and a change in revenue mix, which includes the decline in entertainment and licensing revenue and growth in our core non-royalty bearing brands.

Historically as we outlined in November at our Investor Day, the combination of cost of sales and royalty costs equate to 49% to 50% of revenue.

In 2010, these two expense items combined declined from $2 billion to $1.96 billion or 49% of revenues versus 49.3% in 2009.

Operating profit increased to 14.7% of net revenues versus 14.5% last year despite slightly lower revenues.

Several years ago we shared with you our strategic plan to drive operating profit improvements in our business by building a cadre of global Hasbro brands across all product categories.

We select our brands that have the greatest global potential, brands that can be reimagined, reinvented, and reignited and deployed in many markets worldwide.

By building larger, more global brands, we are able to capitalize on economies of scale and efficiencies and continue to grow our operating profit margins even when we have a decline in certain traditionally higher margin categories such as games.

For the full year 2010, royalties declined due to lower entertainment-based revenue including the decline in Transformers and G.I.

Joe.

Amortization was down as the intangible assets associated with the Wizards of the Coast and Laramie acquisitions have been fully amortized and advertising and product development increased in dollars and as a percentage of revenues as we continue to support and develop our brands globally.

Moving below the operating profit line, interest expense increased by $20.5 million to $82.1 million primarily due to debt offering we completed in March 2010.

Other income net totaled $2 million compared to $2.7 million a year ago.

Our 50% share of The Hub is included in this line on the P&L.

This year, our share of the earnings in The Hub was a loss of $9.3 million.

$8.9 million was recorded in the fourth quarter, reflecting the investment in launching the network in that time period.

Our 50% share of earnings in 2009 was $3.9 million.

Higher interest and investment income helped partially offset the full-year impact of the 2010 The Hub loss.

As we stated earlier, the fourth quarter bore the greatest expense for the network, reflecting the timing of expenses supporting the network's launch on 10/10/10.

As Brian indicated, The Hub's marketing investments are producing good results and we anticipate the network will continue to invest in marketing and promotional activities to increase awareness for The Hub in 2011.

For the full year 2010, our underlying tax rate was 25.4% compared to 29% in 2009.

This rate reflects the mix of our business, most notably the decline in profitability in the US and increase in profits in international markets.

Now let's turn to the balance sheet.

At year-end, cash totaled $727.8 million compared to $636 million a year ago.

Over the past 12 months, we generated $368 million in cash from operations.

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

This includes approximately $52 million in television programming costs to date.

Additionally during the fourth quarter, we paid a $25 million royalty payment to The Hub.

We have three remaining $25 million royalty payments due in the fourth quarters of 2011, 2012, and 2013.

In December, we entered into a new $500 million credit facility which extends through December of 2014.

Additionally, we recently established a commercial paper program to allow us to issue commercial paper as a source of short-term liquidity if needed.

The new bank facility, which will support the commercial paper program, replaces our securitization program, which we did not renew and have not used since the second quarter 2009.

Given our BBB/BAA credit rating, the use of a commercial paper program provides a cost-effective alternative to other financing options.

As you will recall, in March 2010, we raised $500 million through debt offering.

On March 29, we called our outstanding 2 3/4% convertible debt.

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

And for the full year 2010, we repurchased a total of 15.8 million shares of common stock at a total cost of $636.7 million and at an average price of $40.37 per share.

At year-end, $150.1 million remained available in the current share repurchase authorization.

Last week, our Board voted to increase our dividend 20% to $0.30 per share from the previous quarterly dividend of $0.25 per share.

As you can see, we remain firmly committed to returning cash to our shareholders.

Over the past five years, our quarterly dividend has more than tripled from $0.09 per share in 2005 to $0.30 per share today.

We've also been actively repurchasing shares buying back 76.6 million shares from 2005 to year-end 2010 at a total cost of $2.2 billion.

The quality of our receivables portfolio remains good and receivables at year-end were $961.3 million compared to $1 billion last year.

As I previously mentioned, we have not utilized our securitization facility since the second quarter of 2009.

DSOs were 68 days, flat with last year.

Inventories at $364.2 million at year-end compared to $207.9 million a year ago, which was exceptionally low.

While higher than a year ago, the quality of our inventory is good.

In 2010, Hasbro continued to execute our long-term strategy toward becoming a branded play company.

We made important investments and delivered successful initiatives across geographies and categories during the year.

For 2011, we have compelling offerings across our global business in addition to strong entertainment.

We continue to believe we should be able to grow both revenues and earnings per share in 2011.

We look forward to seeing many of you on Friday, February 11, as we host our annual investor meeting at Toy Fair.

It's a great opportunity to not only hear from us as we speak further about our business and our vision for our future, but to also see our 2011 line first hand including several exciting new offerings we will be unveiling for the first time.

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

(Operator Instructions).

Sean McGowan, Needham & Co.

Good morning.

Thank you.

A couple of questions, if I can.

Deb, on the tax rate, so your commentary on it being affected by the mix, is that to say that if you had a more normal mix of where the profits were sourced you would be back at a kind of a 29% rate?

Is that a decent rate to use in the model scenario?

I think, Sean, we always work through on a quarterly basis what we think the rate is going to be for the full year.

Based on the success of the international business and the decline in the US business, we did have a fairly steep decline in the fourth quarter in the tax rate, which impacted the full year.

We had expected it to be on a normalized basis which this year we were anticipating around 29% and next year we expect it to return again to a more normalized basis albeit a little bit lower.

And we will talk more about that on Friday.

Thanks.

On games, can you drill down a little bit and give us a sense of where there was strength in games and where there was weakness and how much of that that you think will carry forward into the new year?

Sean, it's Brian.

In the games business, if we look at the fourth quarter particularly after Thanksgiving and just before Christmas, the consumer demand has really fallen off and we learned some valuable lessons as we pulled apart the business and did some analytics.

The first had to do with a change in the way the games were promoted this year particularly in the US versus prior years and it's something we are immediately addressing as we go into 2011.

The second thing had to do with the number of messages.

As you know, we have this great big broad portfolio of games and yet our messages were probably too diffuse, too numerous, and didn't have the impact, the breakthrough impact that fewer campaigns might have focused around some of the bigger brands and again, something that we are changing immediately as we go forward.

In other words, you feel like you need to do to games what you did to the broader portfolio and focus on the key games?

That's right.

I mean if you think about our broadest portfolio of games, we have so many games out there and there are naturally an inclination to want to go out and tell consumers about all of them.

The interesting piece is as the number of messages out there around any product have increased, we need to ensure that our games products are breaking through and we are probably too diffuse there.

Certainly we are too diffuse and we are going to pare that back and focus in on the most innovative and biggest game changers, if you will.

The third fact that we really looked at is that within our games portfolio we also have puzzles and puzzles actually were the biggest percentage decliners both in terms of sales as well as POS.

In fact, dragged down the games business and it goes back to the way that that category was promoted and the fact that games have -- that puzzles have the least amount of probably new innovations or break frame innovations from a consumer standpoint and are more about the themes that you pick and things along those lines.

And then the final piece is we are continuously dissatisfied with our business and we look at some of the brands where we should have had new innovations.

Some of the biggest games that we have out there where we were celebrating the 50th anniversary of the Game of Life and yet we didn't have a major new innovation in the Game of Life.

So we are particularly hard on ourselves to say we should be doing those things go forward.

If you look at those four factors, that's really what drove the decline in the games business late in the year.

Okay, thank you.

Last quick question for Deb.

This amortization level here, not the program amortization, but below the gross profit, is that a level of amortization we should expect to see going forward now?

Yes, I think we'll have some level of fluctuation.

We've got some product rights in there that fluctuate with revenue particularly in connection with our Lucas line.

So as we sell more Star Wars products, that will fluctuate.

But most of it is straight line and we will have those lower levels.

Again, I will give a lot more detail on that Friday.

Thank you very much.

Rob Carroll, UBS.

On the inventory breakdown, would you guys just be able to talk about what's on your balance sheet if you are comfortable with the levels?

I guess going forward, did some of stock up going into 2011 or any more detail?

Yes, our plan was to increase inventory levels going into the year versus a year ago if you look at our business plan.

And we are probably slightly north of what we had planned for having to do with the carryover, particularly in games inventory.

But we feel very comfortable with the quality of inventory and had planned for a bigger 2011 as we came into the year.

Clearly we're chasing several products where we don't have enough inventory like Beyblade and a few others and again feel very comfortable with inventory.

Dave, do you want to comment?

No, I mean clearly when our sales fell away a bit in the fourth quarter, what we hoped to ship ended up in inventory at the end of the year.

As Brian said, some of that is games.

We have already put plans in place to bring the people back in our games factory in East Longmeadow, Massachusetts a bit later than we otherwise would have planned to.

So I think yes, we are a bit higher in inventory than we would have liked to be but I think it's something that we can work through very much in the first quarter.

And with all our new initiatives, we are really going to start to see our momentum building in the second.

Okay, also just I guess a housekeeping question.

Given the strength in the international business, are there any sort of cash usage in terms of repatriating to fuel further share repurchases?

Well, we have an authorization still open on our share repurchases of about $150 million.

Rob, we like many other businesses right now, have significant -- we've always talked about the significant amount cash that we do have outside the US and with the growth in our international business, that it's fairly consistent levels this year compared with last year as the percentage outside the US.

But we do continue to look at ways to potentially repatriate our cash at the most tax and cost-effective, cash cost effective ways possible.

That being said, that would obviously -- if we did choose to do that go forward impact our tax rate -- our base tax rate.

Okay, last question.

While it obviously gets increasingly difficult to break out impact from The Hub, given the changing dynamics, is that -- I guess the prior guidance of accretive for 2011, is that still a good way to think about it or --?

Rob, I think what you should think about is that, in 2010, we had $0.30 of dilution.

Our plan has The Hub at slightly accretive to neutral depending on exactly how much marketing support we put in.

But the $0.30 of dilution would go away.

Greg Badishkanian, Citigroup.

Great, thanks.

I just had a follow-up on the inventories.

Inventory level at the retail level, how would you categorize that and how long do you think it will take to kind of clear through that?

Is it still kind of Q1?

We feel, as we look out in Q2 and beyond between a lot of our spring initiatives that are already selling quite well, we will work through the inventories we have in Q1 as I mentioned.

That's where we mentioned that the comparison to year ago may be more challenging.

As we get into Q2, as we look at the new initiatives that we have that are shipping early in the year, including some of our entertainment initiatives in Nerf already, some hot sellers in there with our new Barricade product, as well as Beyblade, as well as some new girls product in Littlest Pet Shop, we feel very good about our overall prospects in Q2 and through the rest of the year.

Just kind of thinking about Q1 as well, to get -- to kind of go through the inventory, the retailers probably need to discount, you need to do some more promotion.

Do you typically take on that sort of help to the retailers?

Would that impact margins or would the increase in sales kind of offset the discount?

To the extent that we have excess inventory of retail, but we needed to take promotional actions to move through, any costs for that would have been provided in 2010 and will not be a 2011 cost.

Great.

And POS, what was that roughly in kind of 4Q and how did that compare to the industry based on kind of your estimates?

Well, obviously, if you look at Transformers and G.I.

Joe, their POS was down.

If you look at our total business without Transformers and G.I.

Joe, our total business was up.

In fact, the toy business was up a very healthy amount.

The games business was down, particularly as we focused in on the late Q4.

Great, thank you.

Michael Kelter, Goldman Sachs.

Hi, guys.

I was curious about -- at Transformers and G.I.

Joe, you said were $700 million in '09 and that you'd need $300 million to $400 million to offset the decline in '10.

So that implies that those properties are down by 50%.

And I guess I just wanted, for one, confirmation from you, Transformers, are we talking about $300 million in 2010 and is it reasonable to expect that you get back to the same level, that $600 million in 2011?

So two parts to that.

Typically a year after a movie we do see ranges about 50%.

In 2008 coming off of 2007, it was less than that because we had television programming supporting the brand throughout the year.

This year we chose to delay the television programming to line it up with the launch of The Hub and our show goes on the year in a regular pattern starting February 11.

That is Transformers Prime.

As we look at the results for Transformers in a movie, I would ask you look at two numbers.

One would be in 2007 we did $484 million and in 2009, $592 million inclusive of licensed revenues and toys and games, digital gaming, what have you.

So we are not going to forecast out but I think those are two good guideposts for you.

And when you think about incremental sales, wherever those sales do come in -- you know, for Transformers, should we be thinking about a 30% contribution margin, which is something -- a number you've thrown out in the past, or is there anything that's changed?

Transformers is a profitable brand.

What is interesting about our product lines is actually as they are getting more global, be it Nerf or our preschool products, our girls products, they are rivaling that operating profit that we only used to enjoy in our games business.

And now in fact, many of our toys brands are similarly profitable.

So again, Transformers does bear a royalty in a motion picture year for entertainment, but still a very profitable brand for us

And then the other entertainment properties in the year, is there any reason to think that a Thor and a Captain America combined would be bigger than Iron Man or should it be below for any reason?

How do you think about the impact of the Marvel relationship year-on-year?

We feel very, very good about the Marvel relationship in 2011 with these two new initiatives and we've seen a lot of the creative and it is really spectacular.

Hopefully yesterday you got to see some of the trailers on the Super Bowl.

We feel very good about those.

I'm not going to do that kind of math -- you know, two equals one, what have you.

But I will tell you that the product line up for Thor and Captain America is very good and retailers are looking forward to those two movies.

Obviously Thor is in early May and Captain America is in later July.

In between those two of course is Transformers on July 1.

So the lineup going into Q2 and through into the summer is very strong for us.

And then one other question.

Your primary toy competitor announced high single-digit price increases and you guys haven't talked about that at all.

I guess the last time you had mentioned mid-single digits.

Is there any reason you wouldn't also increase your prices around the high single digits or is it something you just don't see a need for at this point?

In terms of our spring line, we've already priced it in terms of carryover items in the US I think [with] your pricing, that would be the first.

So if you look across our carryover items and new items on a like-to-like basis, so this year it might be the Bumblebee role-play mask, whereas last year it was the Iron Man role-play mask.

So if you look at those like-to-like items, we are probably coming out at about a 6%, 6% to 7% price increase in the US.

We might be a bit higher overseas.

So I think it's safe to say that our average is probably mid-single digits.

Now we clearly have the opportunity if we see costs increasing by more than we've anticipated when we price and start to ship our spring line, we can always go back and take some additional pricing later in the year if we think that is necessary.

And actually lastly, I do want to ask you about the economics of the distribution agreement for programming.

You've got several shows, three or four shows that you've got distribution in quite a few countries.

How do we think about the impact?

I know you're not breaking out the TV venture separately at this point, so as part of your underlying business, maybe you could help us with how to model for that and how to think about it.

Yes, the way it works is as we put a show into a new geography, there would be licensing fees that would be paid for that episodic programming.

Then that programming in turn over some period of time would begin to generate additional sales of our toys and games products and the opportunity to license in consumer products.

Outside the US, we do not owe royalties to The Hub, so the properties we would pay a royalty to Hasbro Studios, a nominal royalty to Hasbro Studios.

But again, the idea is that the cost of programming is offset by the license fees plus the incremental merchandise sales that would happen globally.

Mike, and I think it was November 9 analyst meeting we laid out a reasonableness model for how the economics of this work.

At this stage, I don't think there's any material change in how we feel about the economics and that reasonableness model is still reasonable.

Great.

Thank you very much, guys.

Margaret Whitfield, Sterne, Agee.

In terms of incremental toy sales, Brian, when do you think we might see the benefits both here in the US and overseas from these ventures?

Well, we are already seeing some signs.

The reason Deb talks about go forward how we are going to break out The Hub is for example, Chuck and Friends is a show on The Hub.

Obviously we talked about how Tonka is a successful line for us in 2010 and Chuck and Friends is a TV series on The Hub and is being distributed internationally.

We saw great sales from Chuck and Friends.

We are beginning to see really good signs on My Little Pony as we begin to ship the new product that's associated with the new TV series.

So I would say that throughout 2011 as we have a full year of The Hub with new shows on the air domestically and shows beginning to air internationally first in Canada and then you will see in Europe later this year and several other geographies later this year, third and fourth quarter.

You will start to see incremental merchandise sales and licensing programs associated with those shows.

Okay, any changes in the entertainment lineup for '12 and any comment on '13 in terms of what we might expect?

Well, in 2012, we have quite a good lineup.

Obviously we are very excited about Star Wars and the restaging and reinvention of Star Wars in 2012 in 3-D, coming sometime early in the year.

And then obviously we have the Avengers movie.

We have a Battleship movie.

We have our Spiderman movie.

In 2013 and beyond, I'm not going to start to date those but certainly Stretch Armstrong is one of the number of initiatives that we are working on.

Micronauts is another brand that we're working on for 2013 and beyond.

And the emerging markets, what size is it now and where do you think it could get to?

Yes, we said in our November call that our emerging market business in the aggregate including emerging markets in Europe, Asia, and Latin America is sort of in a range of $300 million to $400 million now.

That was up from $100 million back in the sort of '05, '06 period.

Some of the growth rates that we've had in our emerging market territories obviously starting from a small base have been quite extraordinary.

I think we were up 68% in Russia last year and 58% in Brazil.

So it has started from a small base.

It's become a significant part of our business now, $300 million to $400 million, and is growing rapidly.

Any new markets that you're targeting?

Yes, we opened Colombia just this January.

We're opening a few additional new markets.

Thank you.

Tim Conder, Wells Fargo.

Thank you.

Just a couple.

Circling back on the inventories and to be clear, you said by the end of the first quarter or by the end of the second quarter on the current inventories that you have?

You kind of get those normalized?

I think we said that both our inventories are a bit higher than we would like and our retailers' inventories are a bit higher than we would like.

That means that there will be some clearing of those inventories during the first quarter.

But I think between the programs that we've put together and as I said any costs associated for those would've been taken in 2010.

And the fact that we've sort of slowed production down a bit, I talked about not putting people back in the games factory is quickly.

Between the actions we are taking, we are pretty confident that we would work this issue out in the first quarter and we will be very much back on track on order momentum in the second quarter.

Now that doesn't mean that our first-quarter will be void of shipments.

Clearly we have a lot of new items like Beyblade which we are short of and at the moment we can sell everything that we can make and ship.

So I think we've got to balance what we do have some excess inventories to work through in certain categories but we also have newness coming on tap as well.

And in our games business by Friday when you are out to see us, in the games business for the second half of the year there's a number of new initiatives and I mentioned that the combination of some of the digital and analog, you'll see our new live -- it's called live branded gaming platform, which you haven't seen yet.

You will see a number of other new initiatives for the Company that we haven't talked about yet.

We are very excited about what we have coming in store for second quarter as well as the back half of this year.

Okay.

Brian, along that line, how much was new competitor entering the market?

How much of a factor was that to the games problems that you had in the fourth quarter?

And I guess these new initiatives to a degree you are already planning there and -- as you talked about in response to another question.

You're addressing some of those things but how much of a factor was that competitor versus just issues in the games category as a whole?

The competitor really wasn't a factor in what happened to us in the Thanksgiving to Christmas period.

And in fact, products that we have in that arena performed very well this past year.

Our U-Build product line was a successful introduction sold significant volume.

It was really in some ways as we look out now or as we look back with 2020 hindsight, there were some decisions that were made and ways that our games were promoted, the number of campaigns that we tried to accomplish over a tight period of time, the consumers coming in later in the year and the fact that games relies on significant over-the-counter sales at that time of the year, the fact that a category like puzzles had a significant impact on our overall sales, probably a disproportional impact on overall sales during that time of year.

And then the fact that there were a few places where in hindsight again, we probably need some additional innovation.

So the good news about this is we have already started to pick up on that and for 2011 and beyond, you will see a reenergized, reignited, reimagined games portfolio and that is not just in Flash or Bop It, that's across a number of initiatives.

Okay.

And then, David, what other categories besides games do you feel you are a little heavy on?

And then I guess two other things related to inventories here also the China supply chain, was that lengthening a little bit?

When do you think that will anniversary?

Because I think that's probably part of the year-over-year inventory build.

And then finally in relation to this question, what were your gross sales just to come up with your gross and net adjustment in the fourth quarter this year versus last year?

So if you go to the first question, again, we have said that our inventory issue is -- don't get it out of proportion.

We said we've got a bit of an issue.

We haven't got a huge issue by any means.

I think it is primarily restricted to the games area.

As I said, we've got a lot of items that we will be shipping in the first quarter.

Obviously Beyblade we said is really hot.

Clearly Nerf is very strong at the moment.

We've got lots of other new initiatives.

So I think we've got a bit higher than we'd like both retail and in own inventory, but it's not something that's too much of a problem that we won't be able to work through in the first quarter and still have a reasonable first quarter.

I think with regard to gross to net, we never give that detail out.

There's a lot of different things that go into there that would overcomplicate things a bit I think.

Okay, and then the China supply chain lengthening a little bit, just a more level loading of factories in general?

No, we did say last year certainly at our third-quarter or November analyst meeting we talked about the fact that in order to offset some of the cost increases that are coming in commodities and Chinese labor, we need to work smarter in order to offset those costs.

And one of the things we are trying to do is more level load our Orient vendors, so that is sort of an ongoing way to try and keep our costs down and ensure labor supply.

Okay.

Eric Handler, MKM Partners.

Thanks for taking my question.

Two quick things.

First of all, can you talk about the strength of the state of the international syndication market for kids programming?

I know you haven't been there in the past but just relative to historical trends in terms of pricing, is it stronger or weaker than what's been there in prior years?

Is demand stronger or weaker than in prior years?

And then secondly in terms of Transformers, can you maybe talk about the number of licensees or marketing support that you're going to get for this movie versus what we saw for the second film?

Yes, our kids, Brian, the syndication market, certainly our sense of the market thus far is there's been a lot of excitement around Hasbro's properties and Hasbro's entrance into this business.

We've put a lot in high-quality programming with great creative stewards like Bob Orci and Alex Kurtzman in transformers with Jeff Kline in My Little Pony, wonderful creative steward in Lauren Faust.

So the quality of animation, the quality of programming, the quality of formats was we look at the Fox LOOK deal for our unscripted and game shows, lots of excitement, and that's why you're seeing a lot of deals close.

In terms of pricing, I can't speak particularly to history, but it's consistent with our plan of what we expected to get out of many of these different markets.

And as we look at Transformers, we have hundreds of licensees as we did in the past motion picture, so similar numbers of licensees.

Lots of support from our retailers globally, lots of new ways to bring retail tainment to life.

We have a great relationship with our partners at Paramount and together around the world, we are really making this the kind of launch that you would expect from Transformers.

And Transformers of course helps us significantly in many of our emerging markets.

It is one of our headliner brands particularly as we look at China and retailers in China going and making significant feature shops across a number of different categories.

In fact in some ways, some of the most contemporary interpretations of retail tainment being done out of Asia and Latin America.

Okay, thank you.

Drew Crum, Stifel Nicolaus.

Thanks.

Good morning, everyone.

A couple of more questions on Transformers 3.

When will you start shipping product and could you talk about the economics on the gross participations you get from the film?

Drew, if you think about shipments, it really begins in earnest in early May for Transformers.

We will ship some other entertainment initiatives a bit earlier as Thor is early May.

So we have different dates and windows as we build those displays.

In participation, as you may recall, we talked about how Transformers has many benefits, its deal has many benefits to us.

Certainly the fact that we are not paying for the motion picture, certainly the fact that we own all the merchandising rights, but our gross participation is not the same and not at the same level as some of our more recent deals on some of the other motion pictures since Transformers.

And so I think what we have said thus far is that our participation, while a nice participation, is not material.

So we don't really talk about how much it is.

It's a contribution, but not a material contribution to our P&L.

Okay, fair enough.

Shifting gears, a 14.7% EBIT margin for the year was the highest in 25 years, as you guys noted.

You are approaching that intermediate term objective.

Do you have any update on that or any thoughts around exceeding that over the near term?

And I have one follow-up.

Sure, we feel very good about our medium-term objectives we outlined for you, which had to do with a CAGR of revenue growth of 5% or better over time, the achievement of 15% operating profit margins over time, and the ability to generate significant cash flows on average of $500 million per year or per annum.

We continue to reiterate that guidance.

We have also guided you broadly to our belief that we will grow both revenues and EPS this year.

We learned some valuable lessons from December of last year which we are using to address into our business right now.

Our business, like many businesses, is a business that is constantly challenging to reinvent and reimagine.

And we chose a certain path at Christmas time in partnership with our retailers and we are addressing and adjusting accordingly so that those results will not be repeated.

We don't see what happened in December as emblematic of the strength of our business.

Two last quick ones for me.

Brian, what -- you said Nerf was the biggest brand for Hasbro in 2010.

How much of that was international?

And for Deb, what was CapEx during the period in the year?

I don't we break out international to domestic by brand or on a brand by brand basis, but what I will tell you is the significant growth was international.

But we also grew domestically.

But it's probably 2 to 1 international growth to domestic growth for the year.

But this brand continues to perform very well.

This spring we are launching a new initiative in the Barricade, which is performing quite well.

And this fall while we haven't talked about it, we have a number of new initiatives already reinventing ourselves for the future in the Nerf business with retailers very excited about what we are bringing forth in Nerf for the third and fourth quarter this year.

Drew, our CapEx for 2010 was $112.6 million and I will tell you that we will give you a little bit more detail on this Friday.

We know that that's a number that you all are interested in.

However, given our recent success and need for growth, we are kind of running out of space in some of our facilities, so we do expect that to be a bit higher next year.

Okay.

Thanks, guys.

John Taylor, Arcadia Investment Corp.

Good morning.

I've got a couple of questions, too, if I could.

Deb, could you give us a quick summary of the repurchases in Q4 and for the full year again?

Certainly.

For the fourth quarter, well, for the full year, we repurchased 15.8 million shares, so -- and that was at an average price of $40.37 for the full year and that was $636 million.

Okay.

I forget what it was year to date.

Was there much activity in Q4?

Our activity was a bit lower in Q4 as our share price was trending up.

But we did repurchase 166,000 -- 166.6 (multiple speakers)

Okay, good.

I was confusing those two.

And then -- yeah, that's why.

Let's see, I wonder if you could talk a little bit more about the margin erosion in Q4 and see if you could maybe scale for us or rank the things like the mix change, our royalty -- the change in royalties received in Q4, the impact of The Hub, markdowns, discounting?

Is there any way you can kind of prioritize those for us?

Well, The Hub in fourth quarter was $0.14 in dilution.

Right, and there was $22 million of that -- of the impact was in the fourth quarter.

So -- or $22 million in the full year, so that is really the biggest piece that you want to break out.

Beyond that, we did as we talked about earlier in the year while it did trail off as we moved into the fourth quarter, we did have some favorable hedging that gave us some favorable material price variances in 2009 that we didn't repeat in 2010.

And we also had I would say probably about 10% of the change and if you look at the overall revenue mix in our segment, you can see that is really due to the licensing revenue declining.

So that's a very high margin business, so that has a bit of an impact as well.

Okay, great.

Then Brian, you called out Nerf as a key driver of international growth.

Were there any other ones that were particular stars?

Yes, if you look at Furreal Friends, Furreal Friends was a significant international growth business for us.

Play-Doh and Playskool grew significantly internationally.

In fact if you look at the international business, all the key segments were up for the year.

So while we talked about in domestically games being down, games was up.

Girls was up.

Preschool was up, and boys was up.

Obviously we had at the end of 2010, Beyblade's appearing in 22 countries and we will be in over 40 countries this year as we are placing the shows in partnership with Nelvana.

We all know that television drives toy sales and so we're very excited about that.

As we go into this year into 2011, we are already seeing great results from a product that we are shipping in the spring called The Barricade, which is appropriately priced for a spring price point.

But it is a battery-operated automatic firing blaster, which is performing quite well.

We have a number of new initiatives in girls as we are shipping the My Little Pony line, which is -- has always had a high proportion of its sales internationally.

In Littlest Pet Shop, the Blythe initiatives that just launched in the fourth quarter of 2010 is really beginning to take and get some traction and we will really see a lot of new initiatives for Littlest Pet Shop in the second half of this year.

So overall if you look by category, international had a very good year.

As David mentioned, the emerging markets leading the growth but even in mature markets very strong growth across the entire portfolio.

And it's another one of those proof points we have when we look at the vitality of our games business and things that we did to ourselves in the US as we went into market versus what we saw internationally.

Okay, and then let's see, you mentioned briefly the Transformers MMO.

Can you talk about how you are doing that, who your partners are, or whatever?

Sure, we are partnering with a company called NetDragon in China and we are in the midst of developing the MMOG, which will launch later this year.

It is based on a combination of what we call the first generation G1 Transformers, but also heavily informed by the Transformers Prime series, so it's a great look to it.

The team has really been working on the whole experience around it.

Obviously a lot of excitement.

Transformers is one of our most popular brands in China, a lot of ubiquity Transformers because the animation in the '80s ran in China on Chinese television.

So we are feeling very good about our business and certainly the movie helps to kick all of that off.

We will be in China later this year.

Again, we were there in January, but we will be there later this year again to introduce the Transformers movie to China again as the third movie comes into China.

And are you giving any thought to the Transformers MMO over here in Western markets and so on and what the scheduling of that might be?

Yes, we are in some conversations about that.

Obviously similar excitement about what that could be and there are some great potential partners out there for us.

So we would anticipate doing something in Western markets in the near term.

Okay, great.

Thank you.

Gerrick Johnson, BMO Capital Markets.

Good morning, first question on Beyblade.

That got off to a nice start.

Do you think that can track in 2011 the same way it did in 2003?

Well, you know the numbers as well as we do.

I will tell you right now we are, as David mentioned, short on inventory.

We would hope to catch up.

We are certainly trying to catch up with demand.

As the show has gone on to more networks around the world, it does really resonate with kids.

It's a great play pattern.

And we all know what it did historically.

I'm not going to make any commitments as to revenue levels as compared to that, but suffice it to say it's hot as a lick.

Okay, on The Hub Network, the ad rates that you're getting on The Hub, are they consistent with what you expected them to be?

Yes, the ad rates are good and the ad rates are good and competitive and also the number of advertisers are up significantly in 2011 versus even at our launch in 2010 we have about 80 advertisers on The Hub, most of whom did not advertise on Discovery Kids.

We had about 50 at launch.

And I think the team, as we said from the very beginning, because we are a major advertiser in the kid space, we understand what other advertisers are looking for, and our team has been very flexible to be an open-for-business go to spot.

We recognize we have ratings that are building over time, but still a great forum and a great audience given the co-viewership and the kinds of shows that we are putting out, the quality of the shows and the kind of shows like Family Game Night, Transformers Prime that are different than some of our competitors.

Okay, and lastly I was hoping for a little bit of specificity around some of the earlier topics in the Q&A particularly in games.

How do you feel your market share was in the fourth quarter?

Did you gain, lose, or stay even?

Our market share in several categories grew through the year.

In games, it was probably off a bit in the fourth quarter but not a significant amount.

It was off a bit and (multiple speakers)

If you look at MPD for the fourth quarter with games as a category, it was down sort of a significant percentage similar to the percentage that we're down.

So clearly it wasn't a Hasbro-only experience in the fourth quarter games, if you look at MPD.

Okay, and then POS, I know you excluded G.I.

Joe and Transformers, but can you tell us what the POS would have been inclusive of those just so we can kind of compare that to your shipment?

Yes, if you look at the POS overall, it was flattish including Transformers and G.I.

Joe and then up significantly in toys ex them.

Obviously the fourth quarter a year ago for G.I.

Joe and Transformers particularly in the US was very strong and international markets to a lesser extent.

All right.

Thank you.

And channel inventory, how did that stand on a year-over-year percent change basis?

So, as I said, it's up a little bit.

We are probably about at our top four accounts in the US, which is where we get the best starter, we are probably up about 6%.

Around the world, if you look at customers, it's probably some markets a little bit higher than others, but on average I would say that it's not too different around the world.

All right, great.

Thank you very much, guys.

Jim Chartier, Monnes Crespi Hardt.

Good morning.

I was hoping you could give us a little more color on inventory, if you could just tell us how much of the increase was due to anniversarying a 30% decline last year, getting back to normal inventories, changes in the supply chain and then the lower-than-expected sales in fourth quarter?

Jim, if you look at our plan, we planned to have inventories up.

If you look at our budget or plan, our plan was to have inventories up.

If you remember a year ago that was historically low levels of inventory.

And as David noted, we are up a bit more than that and on average about 5%, 6% in US retail on the top four accounts.

It's good inventory.

We had already taken into account products that we needed to discount or promote.

It does -- it's a greater proportion of games than any of our toy business.

And again, the teams have plans to work through that inventory.

We don't see that as a material drag on our full year.

We have already said we believe we can grow revenues in EPS for the full year.

But through the first quarter, we will work through those inventories and promote those products.

I'm not sure -- did I get everything you asked for?

Thanks, then finally on Star Wars, could you give us any color on what happened with toy sales when the original three Star Wars movies were re-released in the late '90s?

I have the specifics back of my mind.

Obviously they accelerated fairly dramatically.

We are certainly very excited about Star Wars not just for 2012 and beyond.

But even in 2011, we have a number of new initiatives in Star Wars particularly an amazing new light saber, which is the granddaddy of all role-play.

And for a second half this year as well, the continuation of the animation.

But in 2012, a 3-D movie will return in earnest and I think the current plan may be to go beyond just that movie but again, you will have to ask Lucas about that.

Okay, thanks a lot.

Thank you.

I would like to hand the floor back over to management for any closing comments.

Thank you.

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

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

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

Thank you and have a good day.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.