孩之寶 (HAS) 2013 Q2 法說會逐字稿

Welcome to the Hasbro second-quarter 2013 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'd like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations.

Please, go ahead.

Thank you.

Good morning, everyone.

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

Additionally, presentation slides containing information covered in today's earnings release and call are also available on our site.

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

Please note that whenever we discuss Earnings Per Share, or EPS, we are referring to earnings per diluted share.

This morning, Brian Goldner, Hasbro's President and Chief Executive Officer, and Deb Thomas, Hasbro's Chief Financial Officer, will review our financial results and discuss important factors impacting our performance.

Following their prepared remarks, Brian and Deb will be happy to field your questions.

Before we begin, please 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, plans and strategies, costs and cost savings initiatives, financial goals and expectations for our future financial performance.

There are many factors that could cause actual results or events 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, our most recent 10-Q, in today's press release, and in our other public disclosures.

You should review such factors together with any forward-looking statements made on today's call.

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.

Thank you for joining us today.

We are driving our global brand-building efforts across our brand blueprint through toy and game innovation, digital media, licensing and entertainment to deliver long-term profitable growth for Hasbro and our shareholders.

While we're up against challenging comparisons in the Boys arena this year, we have seen growth in our other categories, and believe that these efforts position Hasbro to successfully execute our strategy, and leverage our brands and our strategic investments in both the near term and in the years to come.

Our second-quarter performance reflected the difficult comparisons in the Boys category, while at the same time highlighted areas of growth and opportunity for Hasbro.

Second-quarter revenues of $766 million declined 6%, while year-to-date revenues declined 2%.

Second-quarter operating profit, excluding charges, declined 11%, reflecting the lower level of revenues in the quarter.

However, year-to-date operating profit was up 3%, absent charges.

We are focusing on our most important initiatives, while right-sizing our cost base and Organization.

This focus is having positive results.

Five of our seven franchise brands grew, and three of our four product categories were up, both in the second quarter and year to date.

We have extraordinary people doing outstanding brand-building globally around these high priority initiatives.

Geographically, our emerging-market investments continue to pay off.

In the second quarter, these markets grew 24%, behind gains in many countries including Russia, China and Brazil.

Supported by our investment in innovation and a focus on our top initiatives, revenues in our Girls and Games categories grew 43% and 19%, respectively, this quarter.

Preschool revenues gained 4% in the quarter.

Content is clearly driving our brands.

Our investment in Hasbro Studios is powering our franchise brands, including MY LITTLE PONY, TRANSFORMERS and TRANSFORMERS - RESCUE BOTS, and most recently, LITTLEST PET SHOP.

Our partner brands, MARVEL, STAR WARS and SESAME STREET, are also leveraging global entertainment to build franchises now and into the future.

Supporting future growth in Games, and the convergence of digital and analog play, we invested in our Mobile Gaming innovation portfolio, with the recent acquisition of 70% of Backflip Studios.

With established brands including DragonVale and Paper Toss, Backflip has a track record of sustained performance, including profitability, strong development capabilities, and games which address an end consumer similar to that of Hasbro brands.

We are really excited to begin working with Julian Farrior, Dale Thoms and the great team in Boulder, and look forward to developing great games on their brands and Hasbro brands.

Additionally, we also recently signed a new multi-year agreement with EA that focuses on eight core Hasbro Game brands for Mobile Gaming.

Both of these steps ensure consumers can experience our brands anytime and anywhere.

Importantly, over the next several years, we are headed into a period of significant Boys entertainment.

We are developing comprehensive and innovative lines behind both film and television, including TRANSFORMERS 4 in 2014, and several Disney entertainment initiatives for MARVEL and STAR WARS in 2014, 2015 and beyond.

For the 2013 holiday season, we are well-positioned with new initiatives across product categories and geographies.

Retailers have shared their excitement with us for Hasbro's holiday offerings, and we continue to partner closely to manage inventory and ensure the right amount of product is at retail at the right time.

At the end of the second quarter, inventory at our top four US retailers was of good quality, and down versus last year.

As I mentioned, revenue in three of our four product categories -- Girls, Games and Preschool -- grew in the second quarter, marking three straight quarters of growth for both Girls and Games.

Innovative and immersive brand experiences contribute to the continued strong growth in MY LITTLE PONY, MAGIC - THE GATHERING and PLAY-DOH, as well as in a number of other brands including FURBY, TWISTER, JENGA and TRANSFORMERS - RESCUE BOTS.

For the holidays, we are launching major new initiatives in each of these categories to continue their momentum.

While I can't touch on all of the initiatives across our brands, we hope you will join us in Providence on September 10 for our Investor Day, where we will talk in more detail about our brand initiatives.

Today, I will highlight a few important Fall initiatives and launches, which should help continue the momentum in these categories.

For Girls, NERF - REBELLE will be on-shelf in the third quarter.

We have been cultivating the NERF - REBELLE brand for more than two years, and have talked to thousands of girls about what they would expect from a Sports/Action line.

Retailers and Girls alike are excited about this all-new offering.

Additionally for Girls, we continue to leverage the globally popular MY LITTLE PONY - FRIENDSHIP IS MAGIC television program, with new products launching in markets around the world.

We are also building on the momentum of MY LITTLE PONY with the launch of MY LITTLE PONY - EQUESTRIA GIRLS, a new full-length feature film, introducing a whole new dimension into the world of MY LITTLE PONY.

The film launched at the LA Film Festival on June 16.

It then rolled out to over 250 theaters in the US and Canada.

Based on positive audience reaction, Screenvision added more showings.

In mid-August, the MY LITTLE PONY - EQUESTRIA GIRLS movie is planned to roll out in over 20 different countries, and will be available on DVD.

Additionally, it will air on the Hub Network on September 1. Products supporting the film will be on-shelf beginning in August, and is highlighted by a line of fashion dolls based on the characters in the film.

Also for Girls, following a tremendous launch in 2012, FURBY is rolling out in 12 languages, and across all regions globally in 2013.

This Fall, we are unveiling FURBY - BOOM in english-speaking markets.

Featuring all the magic and personality of its predecessor, plus twice the content, the new FURBY - BOOM creature combines physical and digital play.

Within Preschool, we have several new launches for our franchise and partner brands, including BIG HUGS ELMO in SESAME STREET, innovative new technology in TRANSFORMERS - RESCUE BOTS BEAM BOX, and new playsets featuring our all-new PLAY-DOH PLUS compound.

Our Games launches will showcase new innovation in game play this Fall - MONOPOLY EMPIRE; TWISTER - DANCE RAVE; BOP IT - TETRIS; and a new Preschool Game, CHEEKY MONKEY; as well as the launch of our value game initiative which offers classic games at lower price points, are all delivering on compelling on- and off-the-board game play.

Moving to Boys, as I mentioned, the category had difficult comparisons with 2012, which included two very strong MARVEL entertainment initiatives, THE AVENGERS and THE AMAZING SPIDER-MAN, and higher sales of BEYBLADE.

As we look ahead to the next several years, we are developing and supporting significant Boys entertainment in both television and film, distributed across all screens, based on Hasbro and partner brands.

In 2014, the fourth film in the TRANSFORMERS franchise is scheduled to be in theaters, and for future years we continue to develop new Hasbro brands including STRETCH ARMSTRONG and MICRONAUTS with our studio partners.

MARVEL has several films planned for 2014, including -- CAPTAIN AMERICA, THE WINTER SOLDIER; THE AMAZING SPIDER-MAN 2; and an all-new franchise, GUARDIANS OF THE GALAXY.

And in 2015, the second AVENGERS film is anticipated.

Importantly, LucasFilm is unveiling all-new STAR WARS television programming in 2014, and is scheduled to release STAR WARS - EPISODE VII in 2015.

In the near term, for the 2013 holiday season, we have new Boys initiatives inspired by our extensive global consumer research, including -- TRANSFORMERS -CONSTRUCT-A-BOTS; an all new KRE-O initiative, KRE-O - CITYVILLE INVASION, featuring our new Sonic Motion technology; and new NERF - ELITE products, including the NERF - N-STRIKE ELITE MEGA series.

Over the past several years, we've invested in developing Hasbro brands holistically, across consumer groups, geographies and immersive experiences.

Our efforts are enabling us to build a more robust and diverse portfolio around our brands.

Instrumental in accomplishing this has been the development of all elements of our brand blueprint -- toy and game innovation, digital media, lifestyle licensing and immersive entertainment experience.

Innovation and new technology development is central to this strategy, and increasingly, the integration of digital and analog play is an essential element of these efforts.

FURBY, MAGIC - THE GATHERING, and even MONOPOLY are effectively delivering against the promise of integrated play.

Last week, we elevated our efforts in this space with the unveiling of TELEPODS, an all new Mobile Gaming platform.

TELEPODS uses innovative new technology to allow kids to play in two ways -- in the physical space, and through full and unprecedented integration into top tier mobile apps.

The TELEPODS play experience will first be available in a line released this August based on, and fully integrated into, the highly anticipated new game app ANGRY BIRDS - STAR WARS II from Rovio Entertainment and LucasFilm.

We are very excited by the potential of this platform in the Mobile space, and will expand the TELEPODS experience to other Hasbro categories and brands.

We have also continued developing our brand blueprint by expanding our Digital Gaming capabilities through a majority investment in Backflip Studios.

The addition of in-house Digital Gaming capabilities allows us to more fully participate in the value being created by our brands digitally.

Our expectation is that the addition of Backflip will be neutral to slightly accretive to our financial results in 2013.

We also continue to have tremendous partnerships in the broader Digital Gaming space with EA, Activision, Gameloft, [DNA] and others.

Through the combination of in-house and partner resources, Hasbro brands are being developed across all Gaming platforms for markets around the world, so that consumers can play our brands anytime and anywhere.

Moving to immersive entertainment experiences within our brand blueprint, our television strategy is enabling us to reach audiences across all screens globally.

Hasbro Studios has received seven daytime Emmy Awards for its programming, which can be experienced in over 170 markets around the world on television, on all major digital platforms, and on DVD.

Recent developments include TRANSFORMERS - PRIME now airing on national television in China, after an almost 30-year absence, and we have begun to roll out our LITTLEST PET SHOP internationally, where it is now airing in the US, Canada, UK and France, with distribution planned in all regions by year end.

MY LITTLE PONY - FRIENDSHIP IS MAGIC, TRANSFORMERS - PRIME BEAST HUNTERS, RESCUE BOTS and POUND PUPPIES remain highly rated shows globally.

Another element of our global television strategy is our joint ownership of the Hub Network in the US, which continues to make significant year-to-year strides with kids and adults.

The second quarter represented the seventh consecutive quarter of growth among its key demographics.

In June, the Hub Network received seven daytime Emmy Awards, tying for the most awards among kids networks.

The Hub Network is well-positioned for success, with distribution now in over 72 million homes, quality award-winning programming, and a recent decision to further connect its advertising efforts with the reach and expertise of Discovery Communications.

The Network now has a plan to achieve pretax profitability in 2014.

When you combine our Hasbro branded entertainment with that of our partners for both television and film, we have a tremendous entertainment slate planned for several years to come.

In closing, while we are slightly more than halfway through the calendar year, most of our selling year is still to come.

We are entering the important second half of the year and holiday season in a good position, with new innovation across categories, which is supported by global integrated marketing campaigns, and a strong presence and partnership with our retailers.

Over the longer term, we remain strategically committed to executing against our brand blueprint, as we work to unlock the full potential of our brands globally, and drive the long-term profitable growth of Hasbro.

Now, I'd like to turn the call over to Deb.

Deb?

Good morning, everyone.

While our investments in innovation are reflected in the second-quarter growth of our Girls, Games and Preschool categories, this growth was not sufficient to offset the difficult comparison in the Boys category that Brian spoke to.

We are, however, in a strong financial position, and have innovative brand initiatives across categories and geographies as we enter the important second half of the year.

We remain focused on profitably growing our Business over the longer term through the successful execution of our brand blueprint.

This focus is evident in our performance so far this year, specifically, operating profit is up 3% year to date, excluding restructuring charges, despite a 2% decline in revenues over the same period.

Our cost savings initiative and savings targets remain on track.

Our cash flow and balance sheet are strong.

We generated $632 million of operating cash flow over the past 12 months, and we ended the quarter with more cash and lower inventories than a year ago.

We continue to strategically invest in our Business.

Early in the third quarter, we acquired a majority interest in the successful, innovative and profitable Backflip Studios, thereby expanding our capabilities and participation in Digital Gaming, one of the key elements of our global brand blueprint.

In both the US and Canada, and international segments, the Games, Girls and Preschool categories grew in the quarter.

Globally, this growth was 43%, 19% and 4%, respectively.

This growth, however, did not offset the decline in Boys revenues globally or in either segment.

Additionally, in the second quarter of last year, we entered into a multi-year streaming distribution deal for Hasbro Studios television programming.

As we said at that time, this revenue and related operating profit will continue to be part of our programming sales mix, but it's lumpy and inconsistent by quarter.

This made for difficult comparisons in the entertainment and licensing segment on both the top and bottom line in the second quarter.

As a result of both items, second-quarter revenues declined 6%, and operating profit, excluding $2.5 million of pretax partial pension settlement charges, declined 11%.

The $2.5 million of pretax partial pension settlement charges are associated with our restructuring activities.

Consistent with the potential $10 million pension settlement charge we discussed in the first quarter, we may have up to an incremental $8 million in additional pension settlement charges in the remainder of the year.

The ultimate amount depends solely on whether or not participants request a lump-sum payout.

We did not have any other restructuring charges in the second quarter, but continue to expect full-year charges of $30 million to $35 million.

We recorded $28.9 million of those charges in the first quarter.

Our full-year savings target remains to generate growth savings in the range of $45 million to $48 million for the year, and net savings of $13 million to $15 million for the full year before the pension charges.

We continue to target $100 million of cost reductions by 2015.

The following review of the quarter excludes pension and restructuring charges.

A full breakdown of these charges by segment and by line item on the income statement was included in today's earnings release and slide presentation.

Now, looking at our segment results for the quarter, the US and Canada segment net revenues decreased 4%.

As I mentioned, growth in the Games, Girls and Preschool categories was more than offset by a decline in the Boys category.

The US and Canada segment reported a 3% decline in operating profit, but an increase in operating profit margin to 15.2% from 15% last year.

The margin improvement is primarily due to a favorable mix of revenues, including continued growth in MAGIC - THE GATHERING.

In the international segment, revenues declined 6%.

Foreign exchange had a favorable $1.2 million or 0.3% impact on the quarter.

Emerging markets continue to post good gains, growing 24% in the quarter.

However, economic conditions and difficult comparisons, particularly in the Boys category in developed economies, more than offset growth in emerging markets.

As in the US and Canada segment, the Games, Girls and Preschool categories all increased internationally, but did not offset the decline in the Boys category.

International segment operating profit margin declined to 4.3% in 2013, compared to 8.3% in 2012.

The margin decline reflected the lower revenue level and the timing of certain expenses in the quarter.

The margin impact of the revenue decline in the international segment is greater in the first half of the year, as overheads are generally incurred ratably throughout the year, while the majority of segment revenues and profits occur in the second half of the year.

The entertainment and licensing segment net revenues declined 18%, primarily on lower television programming revenues as we anniversary the multi-year streaming agreement signed in the second quarter of 2012.

As a result, operating profit in the segment declined 55% on the lower revenues.

Looking at our overall expenses, cost of sales as a percentage of revenue increased in the quarter.

This increase reflected lower sales of entertainment-based products such as MARVEL and BEYBLADE, which generally carry a higher gross margin.

This increase was more than offset by a decline in royalties in the quarter.

Lower product development and advertising expense were partially offset by higher SG&A, which included higher compensation and depreciation.

Excluding restructuring, SG&A is down slightly over the first six months from a year ago.

Before I move on in the quarter review, I want to speak briefly about the impact of the acquisition of Backflip on our financials.

As Brian mentioned for 2013, we anticipate it to be neutral to adding at most a few cents to EPS.

Beginning in the third quarter, we'll be consolidating the results of Backflip into our P&L.

From a segment standpoint, 100% of Backflip's revenue and expenses will be in the entertainment and licensing segment.

In respect to product categories, we anticipate Backflip revenues will be classified in Games, similar to our other Digital Gaming revenues.

On our P&L, there will be an adjustment made after net income to reflect net income and earnings per share attributable to Hasbro, Inc, and net income attributable to the 30% non-controlling interest share in Backflip.

Overall, the impact to our individual expense line items is expected to be immaterial, however, intangible amortization will increase.

We're performing a more thorough evaluation with respect to intangibles and their amortization, and will be in a better position to discuss this impact prior to our third-quarter earnings announcement.

Turning back to our quarterly results, below operating profit for the second quarter, total non-operating expense decreased $3.6 million.

For the second-quarter 2013, our 50% share in the Hub Network was a gain of $131,000, compared to a loss of $2.4 million a year ago.

As we stated previously, we expect the contribution from the Hub Network in 2013 to be similar to 2012.

And as Brian stated, the Hub Network has a plan to achieve pretax profitability in 2014.

Our underlying tax rate for the second-quarter 2013 was 27.4%, compared to an underlying tax rate of 26.8% in the second-quarter 2012, and 27% for the full-year 2012.

The slightly higher rate reflects a higher mix of profits from the US and Canada segment.

We expect our underlying rate for the full-year 2013 to be approximately 26.5% to 27%.

For the quarter, average diluted shares were 132 million, compared to 132.1 million shares last year.

Diluted earnings per share, absent pension charges, were $0.29 versus $0.33 in 2012.

Now, let's turn to the balance sheet.

Our Business continues to generate strong cash flows from operations.

During the quarter, we generated $298.1 million of operating cash flow.

For the trailing 12 months, operating cash flow was $632.2 million.

At quarter end, cash totaled $1 billion, up $242.4 million from 2012.

After strategic investments in our Business, we've continued to return cash to our shareholders through our dividend and buyback programs.

Our next dividend payment is scheduled for August 15.

During the second-quarter 2013, we repurchased approximately 771,000 shares of common stock at a total cost of $35.4 million, and at an average price of $45.84 per share.

At quarter end, the Company had repurchased a total of 1.29 million shares of common stock year to date, and $71.8 million remained available in the current share repurchase authorization.

Early in the third quarter, we paid $112 million for the acquisition of 70% of Backflip Studios.

This acquisition was funded through short-term borrowings.

Receivables at quarter end were down 2% or $11 million, and DSOs were 75 days versus 72 days last year.

The increase in DSO was primarily due to the growth in our markets with longer payment terms, such as Brazil, as well as receivables arising from the placement of our television programming outside of the Hub Network.

The quality of our receivables remains strong.

Inventories declined $56.9 million versus last year.

Inventories declined in the US, Canada and Europe, but increased, albeit to a lesser extent, in emerging markets and at our Wizards of the Coast subsidiary, supporting growth in those businesses.

Overall at Hasbro and at retail, our inventory remains of good quality.

The focus of our team remains on delivering profitable, long-term growth while driving innovation across our key brand initiatives, and successfully executing our multi-year cost savings initiative.

In the second half of 2013, we're supporting our innovative product offerings with strong integrated marketing campaigns globally, while executing our global brand blueprint for long-term growth in the Business.

I would now like to turn the call back to Brian.

Brian?

Thank you, Deb.

Before we open the call to questions, I want to take a minute, and highlight another announcement we made this morning.

After years of successful partnership with Disney, MARVEL and LucasFilm, we are pleased to have expanded our relationship with Disney for these great brand franchises.

Now, through 2020, we have the rights to develop Toys and Games for both the MARVEL and STAR WARS franchises, including all television and film content during that period.

We are very excited about entering the next stage of our relationship with Disney, as we collaborate on amazing play experiences for kids and fans around the world.

Now, Deb and I are happy to take your questions.

(Operator Instructions)

Sean McGowan, Needham & Company.

A couple quick questions -- a couple questions, one of them is very quick.

Why is Backflip being accounted for in entertainment and licensing and not like all the other Games would be?

Well, it's part of our Digital Gaming business, and so it will align there.

Okay.

Just to match it up with the others?

That's correct.

Okay.

Can you comment -- I know you're not going to give us the rate, but can you comment on these extensions for STAR WARS and MARVEL?

Whether the royalty rates underlying these extensions are comparable to what's already in place?

Yes.

The royalty rates are comparable to what's already in place.

The deal, as an amendment, was structured very similarly the way we had done a deal more recently on the MARVEL business.

This expands our rights and begins to align our advances and guarantees with additional entertainment that's now contemplated by the Walt Disney Company for both the STAR WARS and MARVEL brands.

Great, thanks.

That's what I had assumed.

Any comment, Brian, on point of sale movement for the Hasbro brands?

Year-to-date, we feel good about where we are, particularly growth in our Games and Girls business, Preschool's just below flat.

The Boys business is really where the decline is, in POS.

That's true both domestically and internationally.

Again, as we indicate, we're really cycling through some very big numbers in comparatives versus a year ago.

As we go forward with the raft of entertainment that we have and our partners have in the Boys arena plus the growth in the other three product categories as well as five of our seven franchise brands, we feel very comfortable with the current position we have.

Regard to Boys, can you comment on the point of sale movement versus the sell-in year-to-date?

Well, if we look at Boys -- they're pretty similar.

Okay.

In terms of sell-in versus POS, very similar.

Then final question, you've given us some help in recent quarters on the magnitude of the increase in MAGIC.

Any help there at this time?

The great news about our Games business is certainly that MAGIC has continued to grow at double-digits.

But the rest of our Games business, excluding MAGIC, has also grown at double-digits.

In fact, if you'll recall those charts that we talked about back at our February analyst meeting, we're seeing growth across a lot of those components.

In fact, mostly all through the quarter and year-to-date, all those different components are growing.

So, again, I think the team is doing a great job of bringing innovation back to our business in the Games business.

That's true in the US, where we have a more technologically savvy consumer, as well as internationally.

Great.

That must be pretty gratifying for them.

Thanks.

Steph Wissink, Piper Jaffray.

Two really quick ones for us.

The first, Deb, if you could just talk about the international business in particular.

Any signs of improvement or inflection in either Asia or Europe as you look into the back half?

Then secondly, just looking at the Boys business, I think a follow-up to Sean's question.

How should we think about the comparisons over the next two quarters?

Is there any of the 2014 product that will actually fall into the 2013 year as you prepare for some of those movie events?

Thank you.

Well, for the second half, we have a number of new Boys initiatives that hit across a number of our brands, whether it's in -- NERF with the MEGA ELITE; across the MARVEL business with a number of new additions.

In TRANSFORMERS, a brand-new major segment called CONSTRUCT-A-BOTS.

We're seeing in Preschool -- in Preschool Boys with TRANSFORMERS - RESCUE BOTS.

So we see both entertainment support in television in the fall, as well as a number of our innovative platforms launching.

So we feel, again, like obviously second quarter was our most considerable comparison versus 2012, but it will remain a more challenging year as we go forward in 2014.

Obviously we line up, strength on strength, both Hasbro's Boys brands, as well as our partner brands in 2014, 2015 and beyond.

Again, if you look at the regions, you see that really the POS is comparable to the POS I just cited, with Boys really being the strongest negative comparison to year-ago.

We feel, again, good longer term about our Boys business given the raft of entertainment, both television as well as film coming in the both near and long-term.

We also feel good about the growth of our business in Girls and Games and Preschool.

We're also seeing great growth in the emerging markets, up double-digits, 24% in the emerging markets.

We are gaining share in markets like Brazil.

If you look at our POS internationally where we do get POS, we're up in about half the countries where we get POS in the second quarter.

So we get POS data outside the US in six countries, we're up in half of those.

All right.

Thank you, guys.

Have a great holiday.

Thanks, you too.

Michael Kelter, Goldman Sachs.

I wanted to ask about SD&A for the quarter, which came in at $195 million.

It's essentially in line with each of the last two years' second quarters.

Why are we not seeing lower SD&A at this point, given all the layoffs this past spring?

Good morning, Michael.

Well, I think as you look at -- we tried to point out in the release, SD&A was impacted this quarter by the pension charge.

So when you back that out in the second quarter, we -- is the time that we tend to incur any stock-based compensation expense because that's when it's granted by our Board.

So, what you're really seeing with your comparisons for the second quarter is an increase in compensation expense, as well as depreciation from our capital assets.

Now, they're not big numbers in their total, but they just happen to impact the second quarter.

If you actually look at SD&A on a year-to-date basis and back out the restructuring charges year-on-year, you'll see that SD&A is down as a percent of revenue.

Then maybe more broadly, when all of the changes are implemented in restructuring the organization -- when you talk about $100 million of savings, how much of that's actually going to flow through to the bottom line versus being offset by investments?

Meaning what might SD&A look like in absolute dollars, let's say two years from now, when you've implemented everything and this I mean, all goes to plan?

Michael, for the full year 2013, we've already identified nearly half of that $100 million run rate.

We've identified, going into 2014 and 2015, the additional savings that we would anticipate and are targeting by 2015, $100 million in reduction.

Deb, you want to talk about the underlying?

Yes, we've always said that there will be some element of inflation in the costs, but we will take out $100 million in savings.

Not all of it will be in SD&A.

We highlighted in February, the line items that we expected it would come out from.

But we remain on target for $100 million of cost savings by 2015.

Then -- could you just -- a follow-up on the question earlier -- make sure that we understand.

The renegotiated MARVEL deal -- just maybe if you oversimplify it for us, why did you have to given them another $225 million?

Well, that would be the maximum we would provide over the contract.

That has to do with the fact that Disney is, of course, lining up far more entertainment than was originally contemplated as part of our relationship.

So as you've seen -- the Walt Disney Company gear up around STAR WARS; begin to talk about the major entertainment initiatives in movies as well as television; the MARVEL extensions, which goes for another two years; and the additional entertainment that MARVEL is now planning.

All of those things line up well for us.

Again, the way it gets paid is, as those entertainment initiatives are launched, then we would have advances paid around each of those new movies.

Again, the $225 million is a minimum payment based on the amount of entertainment that is anticipated.

Then one last quick one.

Any progress on unlocking any of your overseas cash?

Well, we continue to look at the best ways for investing in the business.

As we pointed out, our investments in emerging markets have been paying off.

We saw that with the growth this quarter, again.

So we believe that we're providing the most effective use of our cash.

We continue to look at the most cost effective ways to use that cash to grow the business.

Thank you very much.

Michael Swartz, SunTrust Robinson Humphrey.

Just a quick question on the Boys business.

Is there anything fundamentally that you're seeing, hearing from retailers?

Just on maybe their appetite for this whole entertainment-driven phenomenon?

Then maybe getting away from that?

No.

In fact, the Boys business and the Boys industry or category historically has been one of the most demand elastic categories that exist in the toy industry.

So in fact, when you have entertainment and major initiatives in entertainment, be it television, online, all screens or theatrical across all screens, in fact you can drive significant business.

It just so happens that in second quarter 2013 up against 2012, we have three major Boys areas that are down versus a year-ago, which makes for a challenging comparison.

But again, if you think about the ability of entertainment to build brand affinity, to build retail purchases across the shopping basket and the fact that many of these entertainment initiatives come during the second and third quarter -- so prior to holiday season, that's all very important to retailers globally.

Then if you add to that the fact that one of the biggest areas of growth for the motion picture business are the emerging markets and the number of multiplexes that are being built there and the amount of consumers and audiences going to movies there.

In fact it portends good things for the Boys entertainment business globally.

It's certainly something that we look forward to both as we place our television and our partners place television, as well as movies around the world.

Am I right in saying that, for last year the AVENGERS franchise -- was most of that ship-in, in second quarter?

Well, most of our Boys brands -- I won't speak specifically about AVENGERS, but in general, there's a significant proportion of ship-in.

Then as sell-through occurs, we continue to ship product through the third and fourth quarters of the year and that -- because we also add new items and initiatives for the holiday season and new price points.

So I would say proportionately, there's a proportion -- certainly a significant proportion that happens in second quarter.

But then, you continue to ship product throughout the remainder of the year.

Right, okay.

Great.

Thank you.

Gerrick Johnson, BMO Capital.

Emerging markets, can you tell us what that revenue base is?

At the end of 2012, we said it was $461 million.

Okay.

Great.

Were there any gross savings in the quarter from restructuring?

And in the six months of the year?

We said that we remain on track for the full year for the gross savings of $45 million to $48 million.

I don't think we've gone through and disclosed how much we have by quarter.

Okay.

On the minimum guarantees -- what are the unamortized amounts you still have on the books for each of those properties, MARVEL and Lucas?

Zero.

Zero?

Okay.

Does that include or exclude the $50 million that will be paid this month?

That's correct.

Yes.

Okay.

Then on Games -- can you give us a breakdown between trading card games, traditional board games and Boys action gaming?

Well, what I will do, because, again, if you look across the business, Games, excluding Wizards of the Coast, was up.

Wizards Of the Coast was up.

Across the major segments of our business, we talked about MONOPOLY growing.

Our Gaming mega brands grew.

Our core 20 grew.

So I'd say most of the major segments, in fact almost all the major segments grew in the second quarter.

Year-to-date every major segment of our Games business has grown.

Okay.

Maybe one easy one here.

What are the expected release dates of some of the Hasbro related movie events -- CANDY LAND; OUIJA; I haven't heard much on those; STRETCH ARMSTRONG; and anything else that may be coming in the next couple years?

I know they continue to be in development.

We have scripts in the works, as well as directors in some cases attached.

We feel that over the next couple of years, we will have the opportunity to launch Boys -- new Boys brands.

Some of those will be launched in movies, some of those will be launched via television, some of those will be launched in new and innovative -- additional new and innovative ways across platforms.

Our intention is to selectively and strategically launch new Boys properties over time.

We're also equally happy about and looking forward to launching some of the new initiatives from some of our partners.

We've seen the beginnings of GUARDIANS OF THE GALAXY and very excited about what that portends for MARVEL as a new brand for them.

Right.

So other than TRANSFORMERS 4, which is next June I guess, STRETCH ARMSTRONG is that the only one we have a hard date for?

Yes.

We do.

The others are in development.

We continue to work with Bad Robot and Paramount on MICRONAUTS and we're working on a script right now.

The other project's in a sort of similar state.

So that's just the nature of making movies.

If you remember, we started -- well, you may not know this, but it took us almost five years to get the first TRANSFORMERS into theaters from the time we began working on it.

That's just the nature of making sure you have great characters and great story telling first and foremost.

Okay.

Great.

Thanks a lot, Brian.

Felicia Hendrix, Barclays.

Brian, on BEYBLADE, when do you see the declines anniversarying?

Well, the biggest -- recall, this has to do with some of our results in the quarter relative to Europe versus rest of the world.

BEYBLADE was more developed in Europe as it was back the first time it was launched.

It was this time as well.

We launch a brand-new initiative around BEYBLADE called BEYWARRIORS this fall, as all new television.

So we are exploiting some new television entertainment support and new innovation in the toy line that we didn't have the first time around.

We would believe that should mitigate some of the comparisons as we go forward into the third and fourth quarter.

But BEYBLADE throughout this year will continue to be a negative comparative throughout the rest of the year.

Okay, you got to my second point -- just if you're seeing any traction from other spinoffs?

How's BEYWHEELZ doing?

BEYWHEELZ has done well, again, as it's launching.

Most of the new initiatives though for BEYBLADE do come in the third and fourth quarter.

The major initiative this year is this BEYWARRIORS product lineup.

We're very excited about that.

It has all new entertainment attached and we're getting placement around the world for that programming with our partners.

The products look great.

Okay.

Thanks.

Deb, on the gross margin side.

They were lower than expected, but I'm assuming that was driven by probably the decline in Boys.

But I would have thought it would have been somewhat offset by the increase in Games and puzzles.

So, I was just wondering if you could talk to us a little bit about what drove the gross margins lower year-over-year and relative to expectations?

I think you actually hit it, Felicia.

What we're seeing is, if we look at from a percentage of revenue standpoint, you typically get a higher -- a lower cost of sales as a percent of revenue when you have a lot of entertainment -- Boys entertainment property.

So when you have the MARVEL and BEYBLADE, it was a lower cost of sales percent of revenue but a higher royalty percent.

So if you look at the two of those together, our -- the decline in our royalties as a percent of revenue is actually greater than the increase in cost of sales as a percent of revenue.

Okay.

Great.

Did I hear you say that SD&A was going to be up in the next two years?

No.

No, okay.

Then just Brian, maybe you could discuss just the view of Mobile Gaming and the magnitude that could have on your P&L going forward as you're seeming to kind of get involved with more initiatives?

Well, clearly as we've done extensive consumer insight work -- anybody who has a young person in their house can tell you, particularly in developed economies, kids are increasingly and rapidly gravitating toward Mobile Gaming.

So we really feel that we're lining up for it -- to go after the engine of this train and the engine is in Mobile Gaming and out-of-home Gaming.

So, the combination of the 70% acquisition of Backflip Studios, our partnership with Backflip in executing Games -- I'll tell you that Backflip has millions of monthly active users already playing their games.

So therefore, we see this as a great avenue not only for their current raft of games but the development of new games.

Then the connection between Mobile Gaming and integrated play opportunities between our brands.

We're doing this on MAGIC - THE GATHERING.

We're doing this today on MONOPOLY.

We're doing this today on FURBY and other brands you'll see as we go forward.

Then the addition of new platforms like TELEPODS, which is an all-new Mobile Gaming platform, which has both an analog play element as well as a Mobile Gaming play element.

It's really break frame and we're very pleased to hear the early responses from media, as well as from consumer research that we've done.

That will launch in August and roll out in line with some of the new apps that are coming out from our partners at Rovio and LucasFilm.

Then lastly, but equally importantly, we have some great partnerships with Mobile Gaming companies, which will continue.

With EA, we're partnered on our eight core brands around their initiatives.

Then we have DNA on certain brands.

Gameloft on our MY LITTLE PONY and LITTLEST PET SHOP brands.

So we really feel that the sweet spot for Gaming particularly for young people is Mobile Gaming.

We see a great opportunity to continue to build revenues and earnings around this and of course, gross margins that are accretive to our underlying toy and Game gross margins.

Okay.

Great.

Thank you.

Greg Badishkanian, Citigroup.

Just two questions related to Boys.

You mentioned that this quarter you had tough compares.

I think last year sales for Boys in the second quarter was down about 15.5%.

I think you had some pretty decent movies, so I do understand tough comparisons.

But can you just kind of walk us through the components?

Then as kind of a second question to that -- you may have mentioned it already, I may have missed it.

But if you exclude movie related toy sales from the second quarter of 2013 and the second quarter of 2012, what would overall Company sales have been versus the reported negative 6%?

Would that difference have pushed you into the positive category or not?

Well, let me try to answer the second part of your question a different way from numbers that we have reported because, again, that breakdown is something that we've not reported and probably not the right way to think about things.

But clearly if you look in the quarter, you see the growth in three of the other of our four product segments.

You see significant growth in Girls, double-digit growth in Games and then growth in our Preschool business.

You also see growth of five of our seven franchise brands.

In fact, franchise brand growth was up double-digits in the quarter and double-digits year-to-date.

So what we said as our objective is in fact happening.

The two brands that didn't grow in the quarter, TRANSFORMERS was just down a bit and then LITTLEST PET SHOP as you know is in the process of a reinvention around entertainment that's rolling out throughout the year, particularly in the third and fourth quarter and all new innovation in the product line.

So long-term, our focus on franchise brands and growth there is particularly heartening.

We're on track for our objectives in that area.

If you look at Games, we go from strength to strength.

Our teams have done a great job in bringing innovation back to the Games business across a number of different segments.

In fact, as we said, year-to-date all of the Gaming segments as we've broken it out for you in our recent analyst meetings are up.

And we would continue to drive in Gaming across those segments and add to that our efforts in Mobile Gaming.

I think you're seeing us really activate our brand blueprint around our franchise brands, around Gaming and Girls.

Then as Preschool, we've got a number of sweet spots there, where we've really developed a unique positioning and added product innovation with PLAY-DOH this year with a whole new compound in PLAY-DOH PLUS.

TRANSFORMERS - RESCUE BOTS, bringing character play to that younger consumer in a way that moms can really buy in has been quite fantastic for us and we're seeing that roll out around the world.

So again, it really comes down to comparisons versus year-ago.

There were three major initiatives a year ago that were driving our Boys business, BEYBLADE and then movie related entertainment initiatives.

As we go forward, I think we've highlighted for you a superior level of entertainment that will come both from Hasbro brands, as well as partner brands in 2013, fall and certainly into 2014, 2015 and beyond.

Right.

No, I understand the movie related properties are going to drive strength in 2014, 2015, I think everyone knows that.

I'm just trying to understand your core business, if you excluded movie related events, which can be very volatile year-to-year -- in the quarter, would you have seen growth if you excluded that or not?

I know you walked through some other things.

But I didn't --

Yes, I would -- I'd reassure you that if you look at our core business, excluding Boys or the movie related Boys brands, we would have been up.

Okay.

All right.

Thanks.

Eric Handler, MKM Partners.

Quick question on the Mobile side.

I thought it was interesting that the same week you made your investment in Backflip, you also renewed your contract with EA.

I'm just curious what's going into your decision in terms of making with Backflip versus licensing out with EA?

I would imagine the cost benefit analysis of sort of taking in the license that you have from EA?

Why not just make those games on your own?

If you think about it, it's much more of a long-term strategy that we have around Gaming, particularly around Mobile Gaming.

As we said to you a number of years ago, we wanted to build the expertise in-house, we've now done that.

Mark Blecher and his team have done a fantastic job in Mobile Gaming, in embedding our teams with the best in the business across a number of partnerships, be it the EA in Mobile or Activision, DNA, Gameloft and other companies.

And really understanding the trends that are out there in the industry the way that industry players understand the trends.

As we began a conversation with Backflip -- they have a tremendous Management team and have built new brands within this -- new brands within this industry and have millions of monthly active users.

We really saw a joint opportunity to not only work on known Hasbro brands but introduce new brands together using this Mobile Gaming to integrated play model.

So we had an original deal with EA that went out.

It was a six plus four year deal, so this is the renewal for the four additional years.

We felt very good that EA would continue to handle those eight core brands.

That's really where their focus is.

That enables us to work on all the other brands of the Company.

Okay.

Great.

Thank you.

Jaime Katz, Morningstar.

Can you guys talk a little about developed markets?

Overseas, you made it sound like they were pretty weak.

Have you thought about marketing any differently to them?

Or how are you positioning the brands I guess for the holiday season this year?

If you look at the markets -- there's differences by market.

Within Europe, you have Eastern Europe, including Russia and Poland and other countries that are particularly strong.

Clearly, if you look at France and UK a little bit, weaker.

We would expect that as the economic environment changes as well as we add our third and fourth quarter initiatives, we would see changes there.

As I said, where we have POS data in the six international markets, we're up in three of those.

That includes two European countries, where we're up in Germany and Spain.

So we're beginning to see the turnaround in Spain that we had hoped for and also planned for.

We're seeing good strength in a number of markets in Latin America with Brazil's growth and growth in market share, POS growth in Mexico.

So again, I think that you have a couple of the Continental European markets there that are more challenging.

Australia, within Asia, has been more challenging.

The economic environment there has been more challenging.

Again, as we get beyond some of these comparisons in Boys, the categories like Girls, Games and Preschool are up there consistent with our overall results.

So as we add new Boys initiatives in the third and fourth quarter of this year and then longer term, new Boys entertainment in the form of TV and film, as well as online content, we expect that along with economic turnarounds in those economies we should see better things.

Okay.

Then do you -- are you guys perceiving the commitment from retailers for the holiday season as better, worse, equal than last year?

Or is it still kind of like the visibility is difficult to interpret because they're ordering closer to the holiday season?

Well, we have executed our plan to bring in inventory closer to consumer demand.

We see that with our inventory being down and enables us to get new initiatives out and new inventories in the market in a timely fashion, in time for the holidays.

We're actually seeing great gains in our Girls business with retailer support with FURBY, NERF - REBELLE, MY LITTLE PONY - EQUESTRIA GIRLS, PLAY-DOH, FURREAL FRIENDS, BABY ALIVE.

In Preschool we're seeing Games and also strong response from retailers in SESAME STREET, as well coming back and was up for the quarter and is coming back.

In Games, we're seeing increases there in terms of retailer commitments.

So we have a pretty good sense of retailers and their commitments for the holidays.

They've been very happy with a lot of the new innovation and initiatives we're bringing to the market.

We're bring some new platforms to the market that are quite literally -- forgive the pun -- game-changers like TELEPODS, with a whole new gaming platform that's around Mobile Gaming.

Again, very excited retailers and partnerships that we're building globally.

Okay.

Thank you.

Drew Crum, Stifel.

Deb, you guys have $432 million of debt coming due within the next 12 months.

Can you comment on your plans with that outstanding balance?

Sure.

Well, we're currently evaluating our alternatives for settling that debt.

But I would say, given the current interest rate environment, we currently would anticipate that we'd refinance a portion if not all of it.

But as we move closer to the due date, our plans will firm up.

We will certainly let you know at that time.

Okay.

Brian, I didn't hear you talk about LITTLEST PET SHOP for the quarter.

The ratings on the Hub have been quite strong.

What is the timing on or do you have product in the market today to support that?

Or can you talk about the timing of new initiatives for LITTLEST PET SHOP?

Yes.

In fact, I mentioned it in our prepared remarks and talked about it briefly.

But let me sort of summarize.

LITTLEST PET SHOP has performed very well on the Hub.

It's among the most highly rated program on the Hub.

It's also among the most highly rated program that we're having.

We are in about four or five countries.

It's beginning in English speaking territories and rolling our way through the rest of the markets in third and fourth quarter.

Brand-new innovative product line for this year, as well all new innovation for 2014.

The team is really getting some traction here.

I think we'll have an opportunity to show you in September some of the new product for holiday season.

Then by next February I think you'll really see what we've done and modeled on MY LITTLE PONY is what we would intend to do on LITTLEST PET SHOP.

That effort is beginning to roll out around the world.

Okay.

Great.

Thanks, guys.

Tim Conder, Wells Fargo Securities.

Just a couple of clarifications.

Deb, on the royalties, were there any payments or advances or true-ups done in the second quarter related to the new Disney agreement?

No, there was nothing done in the second quarter.

Because it was just signed.

Okay.

Then just to clarify on the cost savings -- the $100 million, you're saying you're going to be at that run rate entering 2015?

Or that will occur or during the early part of 2015?

We said in 2015.

So, hopefully, earlier in the year.

But by the end of 2015, we'll have identified for you our $100 million of cost reductions.

Okay.

Okay.

Then Brian, just a follow-up on an earlier --

Tim, let me just clarify.

So, what we said is, if you looked at 2015, we're saying at that point.

But just as this year, we've identified for you $48 million -- $45 million to $48 million worth of cost savings in 2013.

Then a run rate toward $100 million.

So by 2015, we're targeting the $100 million.

Okay.

Okay.

Thank you.

Okay.

As relates to Hasbro related additional properties and movies and that -- are you maybe -- does it have to be on the big screen?

Or could you run it through Hasbro Studios coupled with online vignettes and other types of things for some of the properties instead of maybe just -- shift tact a little bit?

Has there been any discussion internally about doing that?

I actually appreciate the question, because, in fact, our brands -- if you go online, our brands are everywhere online in terms of digital shorts.

Once you're producing television episodes that are 20 minutes long, you're able to have any number of shorts and music videos and all kinds of online entertainment.

We're seeing kids enjoying that entertainment online.

We've produced now -- on our way to producing over 800 half hours of programming.

So that gives us an inordinate amount of online content.

In addition, it gives us the opportunity to stream our content in partnerships around the world.

So, no, we're not wedded to having to be in the movie business with additional properties.

We look at movies as great, if we can get the right story, highlighting the right characters.

You saw us with a new, innovative approach, launching EQUESTRIA GIRLS this year with a limited run of an animated film in about 300 theaters, followed by home entertainment, followed by broadcast on the Hub and other broadcasters around the world, which will be followed by streaming.

So that's a whole new innovative way to platform the launch of a property.

So we really do adhere to the concept of an all-screen strategy and to the fact that brands can be invented in any form and format and then driven across all of the different elements, all the different touch points that are important to consumers and audiences to build brand affinity.

So we are agnostic about where we begin and where we end.

We just have built the capabilities to create those experiences including Digital Gaming as an opportunity to create experiences around these brands.

And then to take that concept of integrated play and playing with our brands into entertainment and content.

So, I do appreciate the question and certainly we're not wedded to only being in the movie business.

Great.

Okay.

Thank you both.

Thank you.

I'd like to now turn the floor back over to Management for any further or closing comments.

I'd 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 the call.

I'd also like to mention that as Brian referenced in his call, we'll be hosting our Investor Day on September 10 in Providence.

Registration details will be sent out this week, so we hope you can join us.

Thank you, everyone and have a great day.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.

We thank you for your participation today.