孩之寶 (HAS) 2011 Q3 法說會逐字稿

Good morning and welcome to the Hasbro third-quarter 2011 earnings conference call.

At this time all parties will be in 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 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 2011 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 calls 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.

Brian?

Thank you, Debbie.

Good morning, everyone, and thank you for joining us today.

The third quarter highlights the global execution of our branded play strategy and keeps us on the path to deliver meaningful growth in revenues and earnings per share in 2011.

Not only was this a record third quarter in respect to revenues, operating profit, and net earnings, there are a number of important positive trends which give us the confidence to maintain our outlook for the whole year.

Three weeks into the fourth quarter our shipments in the USA and Canada segment are off to a strong start, tracking ahead of last year and reaffirming our belief that the decline in the third quarter was substantially related to the timing of orders.

We are all well aware that the retail landscape today requires more just-in-time inventory than before, as well as our new initiatives are only recently hitting retail shelves.

As you know, last year's holiday performance was affected by softer US consumer demand, in particular in Games.

In the US, we believe we are in a stronger position than last year as we entered the fourth quarter with less inventory at retail as well as positive trends in point-of-sale during the third quarter.

Point-of-sale in our top four US accounts was up 8% year-over-year in the quarter versus being up slightly in the second quarter and down in the first quarter.

This quarter's growth was driven by mid-teen percentage gains in our toy point of sale as well as improvement in our Games point of sale.

Most importantly for our consumers globally, we have a great, innovative product line that delivers the value and brands consumers are seeking given the challenging economic environment this holiday season.

Across all categories we have new, highly innovative, exciting products.

Let's Rock Elmo, the EleFun Busy Ball Popper, and the Nerf Vortex are each on a number of hot toy lists for the holiday season, along with other great Hasbro toys and games including Transformers, FurReal Friends Cookie My Playful Pup, Simon Flash, Beyblade, and Star Wars.

Many of these initiatives have just begun hitting store shelves in recent weeks.

In total, more than 20 Hasbro toys and games are on the hot toy lists and third-party export award lists in the US and International markets this holiday season.

Internationally, our business continues to post strong results delivering 23% revenue growth in the third quarter, 15% growth absent foreign exchange, including growth in all major geographic regions.

Year-to-date the International segment revenues have grown 27% or 19% absent foreign exchange.

While the economies in Europe are facing challenges of their own, our toy and game business and the overall market have held up well.

Additionally, as you are aware, we have been investing in establishing and growing our brands globally, including a focus on the emerging markets.

We are gaining market share in both mature international markets as well as emerging markets.

Based on our momentum in these markets, the strength of our line, and our current expectations, we remain optimistic about our International business for the full year.

Taking a closer look at our overall third-quarter results, we had several Hasbro brands perform well and contribute to our overall growth.

Baby Alive, My Little Pony, Magic the Gathering, and Transformers, including the new KRE-O branded products, all continued their growth trends in the quarter.

Additionally, shipments of the new Easy-Bake Oven grew the brand year-over-year.

Simon and Yahtzee brands grew with the new Flash games on shelf now, and the launch of our Game of Life adventures helped extend the brand globally, particularly in Europe, and contributed to growth in the quarter.

From our licensed partner Beyblade has continued to be a significant contributor to our growth globally.

The third quarter also includes more significant shipments of Sesame Street products, including early shipments of one of the holiday's hot items, Let's Rock Elmo.

With respect to Transformers, we currently believe full-year revenue for the brand will be between the levels reported during the past two movie years, specifically between the $482 million we reported in 2007 and $592 million reported in 2009.

This is in line with our original 2011 plans.

And despite beginning the year with carryforward inventory, Transformers has been a major contributor to our revenue growth during the year, posting strong shipments and point-of-sale gains versus last year with year-over-year point-of-sale trends improving since the movie launch.

Given this was the third movie that focused on the same core cast of characters, we did not have the same collector pounce at product launch that we have had in past years.

However, the broad global consumer base has responded to the movie and trends have improved.

Several markets, including several mature markets, Transformer shipments year-to-date are up in the triple digits year-over-year and point-of-sale in many countries during the third quarter was also up greater than 100%.

On September 30 the Blu-ray DVD was released, which helps to continue the momentum in the brand and serves as another opportunity to engage with our Transformers consumers.

A number of our branded television shows have started to air in certain international markets, including Transformers Prime, which has already become one of the top-rated shows for Boys on Cartoon Network in the UK and Spain.

My Little Pony is consistently ranked in the top five shows airing on a number of networks around the world including Cartoon Network's Boomerang channel in the UK and on Treehouse in Canada.

Hasbro and its broadcast partners are equally pleased with the strong ratings performance of Hasbro Studios other shows, including G.I.

Joe Renegades, The Adventures of Chuck and Friends, and Pound Puppies.

Importantly, early results indicate that our shows are having a positive impact on point-of-sale trends.

My Little Pony has returned to growth in 2011 with point-of-sale up in the USA and Canada, as well as recently in the UK following the first airing of programming.

In the UK, Transformers point-of-sale has also increased in the weeks following the recent launch of programming.

These are very encouraging signs which speak to the importance of television to drive our brands in the international markets.

I am pleased to report that currently we have closed deals which will enable Hasbro Studios shows to air in substantially all of our markets and every major sales territory, including across Europe, Latin America, and Asia Pacific.

This represents the airing of our TV shows in 142 countries globally.

These include a majority of the primary and secondary international markets including Canada, UK, Germany, Italy, France, Spain, Scandinavia, Singapore, Hong Kong, Korea, China, Mexico, and Brazil.

Three-quarters of the major markets have signed up for three or more of our first season shows including My Little Pony, Transformers Prime, Pound Puppies, and The Adventures of Chuck and Friends.

Hasbro Studios anticipates closing further deals in the coming months.

The studio also completed production on its first international game show format based on our hit series Family Game Night, which was produced for the Boing TV network in Spain.

This show began airing in early October.

In this third quarter, The Hub delivered its best-ever quarterly performance in kids total day among all key target demographics.

The Hub's third quarter 24% ratings growth from the prior quarter among kids two to 11 was the largest of any kid cable network.

In fact, the momentum has continued.

On Saturday, October 8, the network posted its best-ever Saturday night out-delivering several competitive networks against several demos in key time slots.

Hasbro Studios branded programming continues to play a key role in garnering ratings growth for the network with Pound Puppies, Family Game Night, My Little Pony Friendship is Magic, and Transformers Prime among the top five shows on The Hub.

In motion pictures, 2011 boasts a record year for Transformers Dark of the Moon with over $1.1 billion at the box office, making it the fourth highest grossing film of all time, and two great films from Marvel -- Thor and Captain America the First Avenger.

2012 is another strong year for movies backed by Hasbro's toys, games, and licensed merchandise.

Battleship will be a major initiative for Universal in 2012 premiering internationally in April and in the US on May 18.

Additionally, the second film in the G.I.

Joe franchise from Paramount will be in theaters on June 29.

Our partners also have a tremendous slate of films for 2012 including in February Star Wars Episode I in 3-D from Lucasfilm, in May the Avengers from Marvel and Disney, and in July The Amazing Spiderman from Marvel and Sony.

As we build our core brands and new brand franchises beyond 2012, we continue to actively develop a number of additional Hasbro films with great writers and partners including Micronauts, Ouija, Candyland, Risk, Stretch Armstrong, Clue, and Monopoly.

In the second quarter we announced the creation of our Center of Excellence for Hasbro Games in Rhode Island to help accelerate our growth in this important category.

We had a small amount of expense related to establishing this center during the third quarter, which Deb will speak to, but more importantly we are well underway in reimagining and reigniting our Games business.

You may recall several areas of focus we discussed with you last quarter.

First, we are driving integrated, innovative gaming experiences for traditional face-to-face gaming for both on and off the board formats.

We are also driving new experiences in video, digital, and online gaming.

We have had success with a number of brands over the last few years, but we are seeking to accelerate these efforts in future years.

Second, throughout 2011 we have worked closely with our retail partners on the merchandising and promotion of games following the softer holiday season in 2010.

We believe retailer plans for 2011 will have a better impact than last year and are encouraged by the efforts and early results behind our gaming brands in the category.

In addition, we told you our promotional and advertising execution in 2010 fell short.

This year we made a number of media focused changes designed to make games fun and relevant for kids again.

Hopefully by now you have seen some of our television ads for brands like monopoly electronic banking.

These ads are more focused on our consumer target as well as more insightful and culturally relevant for this audience.

Early indications are they are having a positive impact at retail.

The fourth quarter is extremely important in the Games category in the US, as more than 50% of the consumer purchases for Hasbro Games traditionally occur in the final six weeks of the year.

Where we stand today heading into the holiday season is as follows.

Our Games and Puzzles category shipments have improved from the first two quarters.

At the end of the third quarter, US retailers have reduced games inventories in the mid-teens as a percent and we have a great line of new and re-imagined games on shelf which are reacting positively to new advertising and promotional activities.

We have grown our overall Hasbro net revenues this year despite lower shipments in the Games and Puzzles category to date, and we feel better about our execution and retailer merchandising planned for games this holiday season versus 2010.

We plan to provide more details about our gaming effort, as well as an update on our business and strategy, at our annual investor day we are hosting on November 9 here in Rhode Island.

In summary, we feel that we have the right elements in place to deliver meaningful growth in revenues and EPS this year, including great brand initiatives, encouraging point-of-sale trends, appropriate levels of inventory, strength internationally, an improving trend in the US, and the team to execute our plan globally.

These investments we have undertaken, which are focused around the globalization of our business, are driving growth and unlocking leverage in our business for the long term, setting the stage for a strong 2011 and growth in future years.

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

Deb?

Thank you, Brian, and good morning.

In the third quarter, Hasbro delivered growth in revenues and earnings driven by strong international performance, incremental leverage from our investments, and solid execution.

As evidenced by our third-quarter stock repurchases, we remained confident in our business over the long term and are committed to returning cash to shareholders.

Net revenues in the quarter were $1.38 billion, up 5% from last year.

Foreign exchange had a positive $37.1 million impact on net revenues for the quarter.

Excluding the impact of foreign exchange, net revenues grew 2%.

Operating profit grew 4% for the quarter to $248.1 million, or 18% of revenue, versus $237.8 million, or 18.1% in 2010.

As outlined in our second-quarter earnings call, we incurred additional expense in the third quarter related to establishing our Center of Excellence for Hasbro Games here in Rhode Island.

In total, during the third quarter there was an incremental $1.8 million of pretax expense which equates to $0.01 per diluted share.

Excluding this cost, EPS in the quarter was $1.28 per share.

Year-to-date we have recorded $15 million of pretax expense or $0.07 per share related to severance, relocation, and related costs.

Looking at our segment results for the third quarter 2011, the US and Canada segment net revenues were $764.6 million, down 7% versus $825.5 million last year.

Growth in the Preschool category was offset by declines in Boys, Girls, and Games and Puzzles.

The US and Canada segment reported an operating profit of $128.8 million or 16.8% of revenues.

This compares to $158.8 million or 19.2% of revenues in 2010.

The decline in operating profit is primarily the result of lower revenues in the quarter.

As we look at the International segment, we have made important investments in people, facilities, marketing, and systems over the past several years.

We are beginning to see the benefits of these investments in our results through strong revenue growth and operating margin improvement.

Net revenues in the International segment increased 23% to $563.3 million versus $458.9 million in 2010.

Absent a positive foreign exchange impact of $35.2 million, net revenues in the International segment grew 15%.

The results in this segment reflect growth in all major geographic regions including the emerging markets as well as growth in the Boys category, which more than offset slight declines in the Games and Puzzles, Girls, and Preschool categories.

Operating profit in the International segment grew 42% to $100.7 million or 17.9% of revenue, compared to $70.8 million or 15.4% of revenues in 2010.

Again this quarter we reported strong operating profit improvement in the International segment which was driven by higher volume in the quarter and greater leverage of the ongoing investments I spoke to earlier.

The Entertainment and Licensing segment net revenues increased 69% to $46.3 million compared to $27.5 million in 2010.

Revenue in the Entertainment and Licensing segment increased based on sales of licensed product associated with Transformers Dark of the Moon.

Additionally, entertainment-based revenues increased from both television distribution and movies, including a one-time payment of $5 million from Universal Studios.

For the third quarter, the Entertainment and Licensing segment reported an operating profit of $15.3 million compared to $5.9 million in 2010.

Higher revenue in the quarter more than offset the incremental year-over-year investments in global licensing talent and our online initiatives.

As we mentioned during our second-quarter earnings call, our quarterly run rate of fixed expenses in this segment is approximately $16 million.

Despite the improvement in operating profit in the quarter, we are still in the early stages of reaching the full earnings potential of this segment.

Now let's look at earnings.

For the third quarter 2011 we reported net earnings of $171 million or $1.27 per diluted share, compared to $155.2 million or $1.09 per diluted share a year ago.

Excluding the costs outlined earlier associated with our Center of Excellence for Hasbro Games, earnings per share were $1.28.

For the quarter, average diluted shares were 134.9 million compared to 141.7 million last year.

Cost of sales in the quarter was $599.5 million or 43.6% of revenues versus $591.6 million or 45% of revenues in 2010.

This improvement resulted primarily from favorable product mix, including higher sales of royalty-bearing products and Entertainment and Licensing segment revenues.

Year-to-date cost of sales is 42.1% versus 42.4% in 2010.

We continue to target cost of sales in the 42% range for the full-year 2011, which positions us to achieve our traditional gross margin in the 58% range.

Operating profit margin in the quarter was 18% of revenue compared to 18.1% of revenues in the third quarter 2010.

2011 includes a higher level of spending related to our investments in key growth areas including International expansion, Entertainment and Licensing, as well as product innovation.

These investments are driving growth in our business and afford us the opportunity to further grow revenues and improve returns in our business over the long-term.

With a typical pattern of higher revenue late in the year, we are beginning to see the leverage from these investments which we did not see in the lower revenue first and second quarters.

In the quarter, advertising of 9.5% of revenue declined from 10.2% in 2010, consistent with our expectation that given the strong entertainment slate in 2011 full-year advertising would be at the lower end of the 10% to 11% of revenue range.

Royalties grew in the quarter and represented 7.9% of revenues as brands such as Beyblade and Transformers continue posting strong growth.

Program production cost amortization in the quarter was $7.8 million versus $5 million last year.

Year-to-date it is $18.1 million and we continue to expect full-year program amortization to be in the range of $35 million to $45 million.

SG&A in the quarter included $1.2 million of costs associated with our Games action.

For the full year we expect SG&A to be at or below 20% of revenues, including the costs associated with our Games group.

Absent the incremental expense associated with establishing Hasbro's Center of Excellence for Games, we continue to expect SG&A to be below 20% for the full year.

Moving below operating profit, other expense net for the quarter totaled $4.1 million compared to other income net of $3 million a year ago.

The year-over-year change was primarily the result of a gain of $4.9 million recognized in 2010 from the sale of intellectual property.

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

For the third quarter our share of the earnings in The Hub was a loss of $1.5 million compared to a loss of $874,000 in the third quarter 2010.

Our underlying tax rate in 2011 was 25.1% compared to an underlying tax rate of 28.8% through the third quarter of 2010.

This lower rate reflects a greater percentage of earnings coming from our International business and is consistent with our current expectation for our full-year tax rate.

Now let's turn to the balance sheet.

At quarter end cash totaled $187 million compared to $497.9 million a year ago.

Operating cash flow for the past 12 months was $366.9 million and includes $81.6 million in television programming costs over the period.

During the third quarter 2011 we repurchased a total of 5.6 million shares of common stock at a total cost of $211 million and at an average price of $37.74 per share.

In the first three quarters of 2011 the Company repurchased 9.4 million shares at a total cost of $386.7 million and at an average price of $40.97.

At quarter end $263.5 million remained available under our current share repurchase authorization.

The quality of our receivables portfolio remains good and receivables at quarter end where $1.26 billion, up 4% compared to $1.21 billion last year.

This reflects the 5% growth in revenues and an impact from foreign exchange.

DSOs were 82 days, down one day versus last year.

Inventories at $518.9 million compared to $468 million a year ago and $426.9 million at the end of the second quarter.

This reflects the growth in our business globally and our incremental initiatives this holiday season.

Nearly 70% of the year-over-year increase is related to inventory supporting our International segment revenues.

Depreciation and capital expenditures in the quarter were $36.4 million and $20.6 million, respectively.

We continue to be confident in our ability to deliver meaningful growth in revenues and earnings per share in 2011.

The investments we have made are driving growth in our business, not only this year, but in future years as well when we anticipate generating greater returns on these investments.

Today Hasbro's financial position is healthy and we are delivering against our long-term strategy.

As Brian mentioned, we look forward to speaking with you in more detail about our business and our plans on November 9 when we host our annual investor day.

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

(Operator Instructions) Eric Handler, MKM Partners.

Thanks for taking my question.

Just doing some math in terms of your shipments, you said -- looks like you are shipping a little bit later with some of your product.

And when you look at consensus revenues to where you came in, looks like you were about $74 million below expectations.

Can you quantify how much the value of the shipments was that got pushed into the fourth quarter versus the third quarter?

Yes, if you look at the revenues year-to-date as a company, we are up 9% year-to-date in revenues.

The US was down 2% year-to-date in revenues; International up 27%.

Thus far in the fourth quarter we have made up those revenues and shipments for the first three weeks in our fourth quarter, and so again we would be even in the US to year ago in shipments.

Okay.

And then quickly just an FX question.

We saw FX had a big impact; Mattel in their reported earnings on Friday that it was actually a headwind.

For you guys it was a bit of a tailwind.

Just hoping you can reconcile that a little bit.

Certainly.

Good morning, Eric.

From a foreign exchange standpoint, we did see a drop in the euro and pound and the Australian dollar and Mexican peso late at the end of the third quarter; however, it was still positive over where we sat in 2010.

We did not have a significant impact at all on our gross margins from foreign exchange.

As a matter of fact, we had a slightly positive impact because of favorable hedges that we had put in place last year.

So for us, foreign exchange, while it did have a positive impact which we highlighted on the top line, it did not have a significant or meaningful impact on -- overall to the P&L for the quarter.

Okay, thank you.

Sean McGowan, Needham & Co.

Good morning, thank you.

Question about tax rate.

Was there anything in the quarter that you would characterize as unusual or not repeatable?

Sean, we did have a small amount of discrete charges, kind of like we have every quarter, less than a few million dollars.

But really what we are seeing is -- and we talked about with the greater leverage we are getting from our International business and, as a matter of fact, the leverage coming through being better than we had originally expected based on the unit or the segment's performance, we actually are finding that the underlying tax rate is coming in lower because we are earning more internationally than we had originally expected.

So really that is what is driving the change in the rate in the quarter, the strength of the International business.

Okay, thank you.

And the second question, what is your overall outlook on the impact of all the TV activities relative to your commentary earlier in the year?

Still expecting it to be around neutral?

Yes, exactly.

A year ago we had the $0.30 dilution and this year we will have nothing like that.

And so, again, on track that shows are being placed around the world, 142 markets around the world; most networks are buying three or more shows, more than 75%.

So the TV is on track and we are seeing some great ratings growth more recently on The Hub.

So, again, those long-term plans are in place.

Okay, thank you.

Felicia Hendrix, Barclays Capital.

Good morning, guys.

So Brian, you sounded upbeat on Games, sounds like it's improving.

It also, obviously, faces easy comps.

I was just wondering is it fair to say that you might see growth in the Games business in the fourth quarter.

We won't typically provide guidance like that, but suffice it to say we do have a lot of new initiatives as well as new marketing energy behind the Games business, as well as great new merchandising plans that are a major improvement to 2010.

So we feel good about where we are going in the fourth quarter for the Games business and then into 2012.

Okay, great.

Then just moving on to the Boys.

I am not really looking for guidance per se, just more directional.

We talked about the timing differences.

Just wondering is that -- should we expect growth in the domestic Boys business as well?

Was it more timing than anything else?

Yes, I think that for the most part, if you look at the quarter and then for it the full year, I don't have the specific forecast for the Boys business, but overall the Boys business has performed well.

Year-to-date the Transformers business has continued to perform very well.

So, again, I think that, as we have said, our indications, given the strong POS that we are seeing in the US and the momentum that we are seeing in POS into the fourth quarter, we feel good about that business for the full year.

And how has T3 been tracking versus two and one?

So we had mentioned on the call and the formal notes that the Transformers business right now is tracking very strongly.

In fact, the POS that we are seeing now is very strong.

It's very strong in mature markets around the world; in some markets up over 100% as are shipments in several mature markets around the world and emerging markets.

We said that we believe now we will come in between the $482 million we reported in 2007 and $594 million that we reported in 2009.

A lot of new initiatives there, things that are performing very well including KRE-O as well as our Rescue Bots, the Preschool segments of that business, and so we are seeing great, broad consumer take away.

Sorry, I must have missed that.

Then just on the Preschool business.

If you pull -- I just was trying to get a feel for how Sesame Street was driving that.

So can you just give us a view, ex Sesame Street, how the underlying business was looking?

We have got a lot of areas in our underlying business that are performing quite well.

New EleFun Busy Ball Popper, particularly in the preschool heroes line, Playskool Heroes line, particularly focused on the Transformers Rescue Bots, on the Marvel preschool, as well as Star Wars.

So, again, overall clearly we intend for Sesame Street to be one of the major contributors to our Preschool business so it's kind of collectively showing some good momentum, both in US and around the world.

Great.

And then just final housekeeping.

Deb, on The Hub do you still expect program production costs amortization of $35 million to $45 million in the year?

We do.

On TV, we expect Hasbro's program production amortization for the year to be between $35 million and $45 million.

Okay.

And so is there -- as we forecast going forward, so it seems like it's very seasonal for this year in terms of how it -- is it a seasonal thing or is it a ramping thing?

It was really a ramping thing on how the revenue is coming through.

On The Hub itself, I know we said in the second quarter we had expected this quarter to be more like the first quarter.

For The Hub in our non-op expense we would expect the fourth quarter to be similar to this quarter, not to go back to the profit that we saw last quarter but it's along the similar lines of this quarter.

Okay, great.

Thank you.

Michael Kelter, Goldman Sachs.

Great, thanks.

This is actually Chris Cerrone for Michael.

Quick one on the Boys division.

Could you give a little bit of detail on how some of the core underlying toy properties are doing, excluding Transformers and Beyblades?

Sure.

This year a number of new initiatives in the KRE-O business, which this year of course is focused on our Transformers brand, is off to a great start in eight countries around the world.

And we will roll that out to the rest of the territories in 2012.

Our Supersoaker business was up significantly year-on-year and the team has really rethought that business.

Our Nerf business continues to perform exceedingly well in international markets and we are seeing great growth across geographies.

The Vortex line is just hitting retail now and already seeing some great take-away there.

Our Marvel business and Star Wars business this year are down versus year ago.

Great, that is really helpful.

And then just shifting quickly to board games.

For the holiday season approaching here, how does retail support look like versus what you were looking at this time last year?

Well, I think what had happened a year ago was a different, a change in plans that really was never executed a year ago.

This year the plans are very significant.

We feel very good about the plans and the execution of those plans happening earlier in the holiday season, albeit still late because our board game business sell-through is particularly late with 50% of our sales happening in the last six weeks.

But we feel very good about marketing around games, the focus again on the kids.

The take-away we are seeing on products like Monopoly Electronic Banking as we are focusing on kids advertising, Connect 4 and the new Launchers product, Bop It XT, Simon Flash, as well as Yahtzee Flash and Scrabble Flash.

So across the board we are seeing some great initiatives from us, the marketing, and then the merchandising plans I think have significantly improved this holiday season versus a year ago.

Great.

Thank you very much, guys.

Timothy Conder, Wells Fargo.

Thank you, just a couple.

You touched on in your preamble, but on the balance sheet inventories; if you look at the inventories back in the second quarter, they were -- as a percent of sales, they were within a range that we have seen over the last five or six years.

And then here in the third quarter again we have moved above that range.

I know again you were kind of stacked on inventories last year on the balance sheet, as well as was the industry.

Can you kind of talk to -- touch on that again in a little bit more detail?

Sure.

First thing to note, I think it's important to note that, particularly if you look at a US, inventories at the end of the third quarter were down 9.4%.

So retail inventory was down.

We are doing business in more markets around the world than ever before.

Over the last few years we have opened 11 new major marketing and sales offices around the world and converted those businesses from distributor markets to our own marketing and selling operations, so therefore we are taking in the inventories.

Our business year-to-date internationally is up 27%, so again I think there is every reason to have some additional inventories going into the holiday selling season.

David, do you want to add anything to that?

I would agree with you, a lot of the inventory increase versus a year ago is to support our International business.

We are in more markets and we are growing rapidly, so that is fine.

Okay, okay.

And thanks for the additional color, Brian, on the US channel inventories.

Would you say that the US channel inventories are now where you want them to feel comfortable?

Yes, I think that if you look at the combination of the US business year-to-date being down 2% in shipments, the inventories being down 9.4%, third-quarter POS being up 8%, toy POS being up double-digits, Games POS improving, the number of new initiatives we have for the holidays, and a refocus on our Games business in merchandising and advertising, I think the empirical evidence indicates and certainly supports our belief that we can deliver meaningful growth in revenues and EPS this year.

Okay.

So again you feel comfortable with the US channel inventories and US inventories -- excuse me, international channel inventories collectively?

Yes, if you look at the growth in inventories year-on-year that we have, nearly 70% of those inventories are focused on international markets.

The remaining roughly third is focused on the US business, which is consistent with the growth rates we have seen both domestically and internationally, and again would point us in the direction of meaningful revenues and EPS growth for the year.

Okay.

And then on the business with Universal, clearly a lot of the concern in that area with Universal sort of backing off or not wanting to do a couple of the movies.

But just recap for us, when you initially signed the agreement I think they had their choice to pick between multiple properties to do the agreed upon number of movies.

Then as they said okay we want this, we don't want this, then those were released from under that umbrella.

Recap how many movies they are now firmly committed to doing and what is left in that bucket.

And then I guess thirdly, for the movies that they are not involved with and you are looking for other partners, would you ever consider producing movies on your own?

Appreciate the question.

Actually we read with great interest and sort of seeing the similarities, if you look most recently at the Walt Disney Company having recently worked with filmmakers to bring down the budget of the Lone Ranger movie and they greenlit the movie at a lower budget level for 2013 -- have just slated it for 2013.

That is the same process we have been going through on the Ouija movie and brand, albeit not at that type of budget level.

We are reworking that budget but script is in good shape.

We are polishing the script right now and have a producer on board.

We would expect that that movie would be back with a studio very shortly as part of the process.

In addition, the deal with Universal does continue to include Stretch Armstrong and does continue to include Candyland as some of the properties that they are going to look at for production.

Obviously, as you know, Battleship for 2012 goes into theaters April of 2012 around the world and in May domestically.

And that is one of the major initiatives between Hasbro and Universal and we will have a full product line around that, which I look forward to showing you when everyone comes into Rhode Island in early November.

In addition to that we have a Micronauts movie in development now and script being written with our producing partner J.J.

Abrams, and that deal has been done over at Paramount.

We are developing and writing a script right now for Monopoly, for Risk, for Clue, and we have a couple other projects that are yet to be named that we haven't yet talked about.

So again our business continues in earnest.

The process of honing a budget for a script is part of the process as the economics of the movie business change, and we are actively developing all of these movies right now.

Okay.

But would you at any point, as you see the world right, now consider doing the production from Hasbro's only perspective without a production partner?

No, we would not employ, I will call it a Marvel strategy.

Okay.

And one last piece, a clarification from an earlier question.

How is Preschool doing, ex Sesame Street, I guess on a year-over-year basis?

Preschool, ex Sesame Street, year-to-date is down -- I don't have it overall broken out quite like that, but overall the rest of the business is down a bit.

Okay, great.

Thank you.

Margaret Whitfield, Sterne Agee.

Good morning.

First question is you mentioned a high level of investment spending in the current year.

I wondered if you could quantify that and discuss the trends in that investment spending in 2012 and beyond.

Sure, Margaret, I will start off and then maybe Deb will pick up as well.

Over the last couple years we talked about becoming globally capable -- the ability to take our brands out, re-imagine, and reinvent those brands around the world -- and over the last couple of years we have opened offices, Hasbro sales and marketing offices in our subsidiaries in 11 new territories.

In order to do that this year, we needed a step-up, both in marketing and sales personnel globally as well as license personnel, and that is the significant investment we made in SD&A.

It's really a step-up that -- this was a one-time step-up where we would see some nominal increases in SD&A go-forward consistent with running the business, providing raises and salaries, and increases in leases or cost of space, but nothing like this year.

So as Deb mentioned, we begin to get significant leverage out of those increases as we go forward.

Can you quantify it, Deb?

Well, I think as we have looked at the prior quarters we have seen about a $25 million impact per quarter.

So as we sit and look through to the full year, if we just roll that step change amount through to the full year while keeping SD&A at 20% or below of revenue that is really how we would quantify it.

So SD&A next year could fall below 20%?

We will be talking more about that in November, but it could.

Okay.

And Transformer 4, any news on when that might occur given the strong box office for the third movie?

And any other comments on what might be out in 2013, apart from I guess the Marvel announcements?

We do have a couple of movies from Marvel that have already been announced in Iron Man 3 and Thor 2.

As you imagine, with the success of a franchise like Transformers, we are in active discussions with our great partners at Paramount, with Michael Bay, with Steven Spielberg, and our writer to talk about what is next on Transformers.

Hopefully, I will have some more news to share with you in the next quarter.

And on The Hub do you think it could be breakeven or slightly accretive next year after the small amount of losses likely this year?

Well, we are not going to comment at this point, but again we are making great progress overall.

As you know, the ratings on The Hub as well as our domestic -- our international placement of TV shows now being in 142 countries, which was ahead of the news we had given you earlier in the year.

So again the team is making great progress internationally.

As well as the early signs as we put those shows on air with both the ratings that we are garnering as well as the POS increases we are seeing on brands, it's all pointing in a positive direction and it's consistent with our long-range plan in the TV arena.

Thank you.

James Hardiman, Longbow Research.

Good morning, thanks for taking my call.

A couple of questions on the hub, some of the general metrics that you guys talked about when you took that over in terms of subscribers, sub fees and sort of the sub to add revenue mix.

Given the ratings improvement that you have seen so far this year, how much have those metrics if at all improved?

And based on the conversations you have had with some of the cable networks, is there any reason to believe that they are going to be improving here during the foreseeable future?

Yes, good morning.

Our distribution has increased organically to about 61 million homes over the period.

Our conversations with MSOs around additional roll downs or additional distribution gains are going quite well although we are not going to report any news at this point but are going quite well.

The ratings momentum that we are seeing more recently certainly has a good bearing on the number of new advertisers we are garnering.

We are now over 120 new advertisers to the channel versus where we were with Discovery Kids.

Our advertising year on year, as you would imagine, is up significantly, our affiliate fees increase more organically in line with the long-term contracts we have with MSOs.

So again, long-term plan for The Hub is consistent with what our strategic plan was over the long term.

Internationally, we are ahead of plan with 142 countries taking our programming now at this point.

Several major kids networks are already reporting some great ratings having just begun airing our shows.

And three-quarters of those deals are for three or more serious, recognizing that we will have a second wave of news series that will go out to the international markets over the next year or so.

Perfect.

And then I realize it's -- I am sure it's way too early to give any sort of guidance for 2012 on Transformers.

But just given the success it sounds like you guys have had with The Hub and Hasbro Studios in terms of Transformers Prime is there any evidence that as we look forward to 2012 that we can expect maybe less of a drop off than we saw last year in sort of an off year from a movie perspective?

It's a great point and, clearly, when we do have television following a movie year the brand does perform considerably better.

If we look at 2010 versus 2008 for example, there was a significant difference in the drop off.

We would expect the drop off to a non-movie year to be more consistent with a year where we had television.

We had foregone that a year ago in order to line up our television launch with the launch of The Hub.

Great.

And just one last quickie, in terms of your share repurchases in the quarter, your cash balance coming out of the quarter is a lot lower than it typically is coming out of the third quarter.

How should I think about where we are going to finish the year in terms of cash?

Are you looking to stay aggressive in terms of buybacks in the fourth quarter?

And given where the stock is trading, would you ever consider even borrowing money to continue those buybacks?

Thanks.

Well, I think where -- certainly where we saw our stock price get to in the quarter we thought it was a very opportunistic time to buy back the shares in line with our plan.

We do have remaining amount under our authorization at the end of the third quarter of $263.5 million, and we will certainly look to the market and be opportunistic in our repurchases there.

Great.

Thanks, guys.

Greg Badishkanian, Citigroup.

Great, thanks.

Two questions.

First, just maybe a little bit of color kind of POS retail inventory levels internationally, kind of similar to what you talked about domestically.

Sure.

If you look at POS overall, we have tried to look at some of the measures where we have them.

In a lot of the major markets around the world, our POS is up strong double digits so we have good data from Mexico, France, UK, Germany, and Spain.

In all those markets our POS is indicated as significantly stronger.

In retail inventory as well?

Yes.

We kind of don't get as good retail inventory information overseas as we do in the US.

But I think overall our retail inventories are in good shape and aren't excessive but could support the growth of our business, which we are anticipating.

It has just been fairly significant all year and we are not seeing that necessarily changing.

Great.

And then finally, you mentioned some new initiatives haven't hit store shelves yet so that could help growth during the holiday.

Is the level of kind of those initiatives that you are going to roll out different than last year this time, or did you hold some back this year that you didn't last year, or is it about the same?

We have planned more significant initiatives this year.

If you think about the number of brands and products that are on those top toy lists, having about 20 this year was certainly more than a year ago.

As well the merchandising plans and promotional plans of our retail partners is indicative of having some greater success with those initiatives.

So whether it's in the Nerf business, whether it's in The Littlest Pet Shop business, the My Little Pony business, our KRE-O brand which is brand-new, and FurReal Friends, across the board we have some major new initiatives and innovation at a number of different price points which offer both great value and are brands that consumers want.

Okay, thanks.

Per Ostlund, Jefferies & Co.

Thanks, good morning, everybody.

Really just a couple of follow-ups here if I could.

We have talked about some of the elevated SD&A spending, mostly related to the International buildup.

I think in past quarters we have had conversations about spending behind SAP and bolstering the team at Hasbro Studios.

How are those investments tracking, and are we kind of toward the end of that up cycle on those costs?

It's Brian; good morning.

If you look overall, what Deb was talking about, if you take the roughly $25 million a quarter in additional SD&A step up this year, it's inclusive of our personnel at Hasbro Studios which had to lead the actual initiatives and revenues in Hasbro Studios.

It was in licensing personnel, which we needed prior to getting the additional revenues in licensing.

It was in marketing and sales personnel as we opened new subsidiaries.

So that step up is now going to be concluded at the end of the fourth quarter of 2011.

Go forward, any additional increases in SD&A are more, I will call them, organic, consistent with payroll increase or a lease cost or something along those lines to run the business.

But nothing like the 2011 period.

We are really hitting a peak of incremental spending with our intention to be, to deliver additional leverage and earnings power as we become a more globally capable competitor.

Recognize our brands have been in markets for decades but were handled by distributors.

So many of our brands had been in the market for 20, 30 years but were handled at a much lower level, a much more modest level because they were handled by distributors in Latin America and Asia Pacific and in Europe.

So in taking those brands on and having our own marketing and sales personnel, we have this great opportunity for significant revenues growth and earnings growth, as you are beginning to see in this quarter and as we go forward with not a significant step up in expenditure from 2011 to 2012.

Excellent.

That is very, very helpful, thank you.

Talking about the international programming roll out behind the Hasbro Studios programming, can you just give us an update as far as how extensively the toy product itself is out there in these markets?

My suspicion is it's probably very, very early in most cases, but maybe just a little clarity.

Sure.

For the most part, with the exception of My Little Pony and some Chuck and Friends, the toy product is not out in markets yet, just really beginning to roll out in the markets.

Transformers Prime in particular and the rest of My Little Pony as we roll out that television will begin in earnest in 2012 consistent with our plans.

And so that is -- for us that is really where you will start to see the integration of extensive programming placement along with the availability of toys and licensed products associated with these brands.

It's heartening to see, while we have made investments in our licensed personnel, that year-to-date our licensing revenue in each category is up versus a year ago.

So in Boys, Girls, Games, as well as across each category.

So that has been helpful as we create these placements in toys, or excuse me in TV, to be able to see that the license revenues are increasing.

Great.

Maybe one last quick one if I could, just hearkening to an earlier question on the inventory levels.

It sounds like most of that inventory increase is pretty explainable with the inventory build internationally which makes a lot of sense, but just curious as to whether or not FX and/or higher inputs attached to inventory, how much of an impact those might have been having as well?

If you look at our month-end rate or quarter-end rate this year compared to the quarter ended last year, it's not having a material impact on the inventory.

Okay, thank you very much.

Gerrick Johnson, BMO Capital Markets.

Good morning, guys.

I was hoping we could get some comments on how your retail partners are feeling going into the holiday season.

Yes, I think of our retail partners as sort of planning for a fairly robust season.

Certainly as we talk to them at a moment they all plan that their business with us will be up this year and are starting with low inventory, which is good.

I think there is a degree of caution around there.

As we all know, the economy is not in great shape.

We still got high unemployment so I think they are certain level of cautious, but they certainly are planning the business to be up.

Okay, thank you.

You mentioned more just-in-time delivery.

I am wondering if there is any sort of change in the way these retailers are looking to be fulfilled.

More domestic fulfillment versus FOB perhaps?

I think thus far we have actually seen a bit of a shift to FOB later in the year, but I think as traditionally when you get into the very last part of the year it is predominately domestic.

And I think that will clearly continue or be more so.

Okay, so no real change in historical trends.

Right.

And last one on your retail partners.

You have had a lot of chance to meet with them over the last couple weeks I guess to show 2012 lines and you do have a lot of movie initiatives in 2012.

How are the retails appetite for movie-related toys in 2012?

The performance of our Transformers business outside the US has been phenomenal.

And Transformers box office, if you think about international box office -- take 2007's movie for a moment.

The box office of the 2007 Transformers movie is not as big as the international box office performance of the 2011 movie.

So as they are building more multiplexes in Russia, in China, in Brazil, as the movie box office increases dramatically there, as people move into the middle class as there is more disposable income in those emerging territories, motion picture business for both Hasbro, as well as our great partners in Lucasfilm and Marvel, play a key role in building our overall business.

And so, again, feel very good about the ability to be part of that part of the business.

Having said that brands like Nerf, FurReal Friends, Play-Doh are brands that are showing exceptional growth globally.

And so again, it's not just about our movie business or the TV business, but it is that branded play, that balance between all those different categories where we can drive growth.

All right.

Thank you very much.

Rob Carroll, UBS.

Two quick ones; they are mostly follow-ups.

Just in terms of where inventory is year over year and reconciling that with the comments from a fairly robust season expected by retailers, does that -- I mean if the season does come in as robust as I guess the retailer sentiment seems to be, I mean are you guys well-positioned in terms of where inventory levels are in terms of meeting that?

And then just a second one around the 2012 lineup.

So I think everyone recognizes that we came into the year with too much inventory at the retailers, and I think the fact that it is down to more appropriate levels is okay.

There is still enough there to support our fourth-quarter growth objectives.

In terms of those overall growth objectives for meaningful revenue and EPS, has the definition of meaningful in house changed at all since it was originally issued, I guess given the macro changes in the industry?

Not at all.

And then secondly, just around 2012 as you guys -- as someone asked about earlier, the movie slate is pretty heavy.

While you guys are fleshing out the SKU counts and the product lines from 2012 do you know what percentage of the 2012 SKUs are royalty-bearing items, and I guess how that compares historically?

No, I don't think we have that in here.

We have to follow up on that note.

I think it's important to note, and maybe to provide some additional color to the idea of motion pictures, and now I understand a bit about maybe the question was.

We are not just launching the same types of product lines for each of the major motion picture initiatives for 2012.

So there is some great significant differences between what we can do with Star Wars that kicks off the year and lots of role-play and other great initiatives there, and the Avengers.

Battleship is a totally different kind of complementary product line.

Not action figures per se, but in the gaming arena as well as some other new categories for us.

G.I.

Joe different still, so -- and, of course, Spiderman is both great role-play as action figures.

So there is some great complementary new product initiatives within those brands, and so it's not just all in the same category but across the departments in the store.

Thanks.

John Taylor, Arcadia Investment Management.

Good morning.

I have got a couple of questions.

Two of them can -- Brian, for you I guess, I think heard you say that in the US Preschool was up offsetting Boys, Girls, and Puzzles.

In International, Boys was up offsetting Preschool, Girls, Puzzles.

So there is a lot of variation between what is going on here and elsewhere.

So would you attribute most of those differences to timing or are there some differing brand dynamics that are going on that might account for those changes?

If you look at the International business, the other categories are down just by a tad year-to-date as well as in the quarter, so our feeling is with the fourth-quarter initiatives in International and the fact that the International businesses tends to be more significantly later, we feel good about the categories across the board.

In the US I think it just has to do a lot with some of the timing, particularly as we look at Games and Girls.

We have had some great growth in several of our Girls brands both domestically and internationally, including FurReal Friends.

My Little Pony picked up first domestically behind the television and the new toys here.

We are just beginning that process internationally, so that is where you might see some differences.

On Nerf, we are growing that brand very significantly globally through new geographies, whereas the US we are staging the Vortex launch just now.

So, again, a bit of a timing difference between international territories and domestic.

Okay.

So there is not real -- there used to be a time where there was international lag to a domestic launch.

That is pretty much behind us now?

Yes, I think the difference is where we don't have full capacity, like a brand like KRE-O, where we can't roll out every market out once.

We are seeing great success in the seven, eight territories where we have launched, but we need to get into 2012 to get to the rest of the geographies for the Transformers line.

That is the case where you would see more particularly a lag.

Okay.

And then other question on Games I guess.

So last year Q4 the year-to-year decline started to show up a little bit, and I am wondering if with your new merchandising and promotional plans and whatnot, what your expectations are related to price at retail.

Do you think that the Games category is going to be subject to the same kind of discounting and whatnot this year as you have seen in the last year or two?

I think at the end of the day the price will be dependent on what our retailers chose to set in at.

I do think that games are a tremendous traffic builder.

They are a very good Christmas item, so I am sure we will see games discounted in order to bring people into the store area.

Whether that is -- I would expect on average that probably the level of discounting is lower than last year given that their level of inventories of games [are down].

Okay, great.

Thank you.

I would now like to turn the floor back over to management for 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 following this call.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.