孩之寶 (HAS) 2014 Q3 法說會逐字稿

Good morning and welcome to the Hasbro third-quarter 2014 earnings conference call.

(Operator Instructions).

Today's conference is being recorded.

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

At this time, I'd 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 this morning are Brian Goldner, Hasbro's President and Chief Executive Officer and Deb Thomas, Hasbro's Chief Financial Officer.

Today, we will begin with Brian and Deb providing commentary on the Company's quarterly performance and then we will take your questions.

Our third-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.

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

Before we begin, I would like to remind you 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 and 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.

I would now like to introduce Brian Goldner.

Brian?

Thank you, Debbie.

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

In the third quarter, we continued to execute our brand blueprint globally driving momentum in our franchise brands and key partner brands.

We delivered growth in all regions, including the emerging markets where our investments are fueling continued double-digit growth and profitability gains.

We took strategic steps to position us for long-term growth, including the addition of Disney Princess and Frozen to our Girls portfolio beginning in 2016.

Finally, we continued to evolve and improve our content-led branded play strategy and I will speak to this effort shortly.

Third-quarter revenues increased 7%.

We grew across all major operating segments of Hasbro, including our return to growth in the US and Canada segment and continued growth in the International and our Entertainment and Licensing segments.

Profitability increased as adjusted operating profit in the quarter increased 9% and our operating profit margin was 19.4% of revenues.

Our focus on Hasbro franchise brands and key partner brands fueled these results.

Franchise brand revenues increased 36% in the third quarter.

All seven franchise brands grew double digits in the quarter.

Additionally, point-of-sale at our top five US retailers for Hasbro franchise brands was up more than 30% in the quarter and year to date.

Let's highlight a few of these brands.

Nerf continues to be the brand of choice.

According to NPD, if we combined Nerf and Nerf Rebelle, it would be the second-largest property in the US year to date through August.

Nerf revenues grew in the Boys and Girls categories globally, including in both the US and Canada and International segments and point-of-sale was strong growing double digits in several markets.

Magic: The Gathering also grew globally increasing in both the US and Canada segment and International segment.

The response to the July release of the Magic 2015 core set and September release of Khans of Tarkir positions the brand well into 2015.

We believe there is tremendous future potential for Magic: The Gathering as it continues to grow around the world.

We are investing in the brand both in digital and analog play through technology and storytelling.

Transformers: Age of Extinction delivered over $1 billion at the global box office.

This result, coupled with an innovative new line, drove strong year-over-year revenue gains in Transformers.

Through the first nine months of the year, Transformers revenues are greater in International markets than in the US and Canada segment, reflecting the mix of box office results and the global expansion of Hasbro.

Overall, the brand is performing in line with the last movie year and we are well into the development for the next installments of Transformers content.

This includes new television programming, as well as collaborating with the filmmakers on our next ideas to reinvent and reimagine the Transformers brand in movies.

Moving to Girls, the reimagination of Littlest Pet Shop is at retail now.

While still early on, initial consumer reaction and takeaway is encouraging.

My Little Pony revenues continue to grow in toy and licensed merchandise for both core My Little Pony and My Little Pony Equestria Girls.

The second film, My Little Pony Equestria Girls Rainbow Rocks, launched in the US on September 27.

The first box office weekend exceeded last year's box office by 37% and on a per-theater basis ticket sales in the first three weeks grew an average of 19% in North America.

The film will be distributed globally on networks around the world and in support of our all-screen strategy.

Our key partner brands contributed to revenue growth this past quarter driven by our relationship with the Walt Disney Company.

Revenues continued to grow in Marvel properties this past quarter supported by both film and animation.

Products based on the Avengers and Spiderman franchises grew revenues in the quarter.

Additionally, Marvel's Guardians of the Galaxy contributed to the quarter's year-over-year results.

Building on our relationship with the Walt Disney Company for Marvel and Star Wars, during the third quarter, we established a new strategic merchandising relationship with Disney consumer products with the globally popular Disney Princess and Frozen properties.

Through this new agreement, Hasbro will develop small and fashion dolls based on Disney Princess stories and characters, as well as Frozen.

Hasbro's line will be at retailers beginning in 2016.

Our design, development and marketing teams are truly excited to bring their expertise in girls and consumer-driven innovation to the future of Disney Princess and Frozen.

This new relationship is a terrific complement to the prolific boys entertainment slate over the next several years, including film and television entertainment from Marvel and Lucasfilm, as well as the next theatrical installments of Hasbro's brands, GI Joe and Transformers.

As I mentioned to start, we continue to evolve and improve our content-led branded play strategy.

To accelerate the progress and success of our joint venture television network, Discovery took a majority ownership position in the network during the third quarter, increasing its stake to 60%.

On October 13, Discovery Family debuted.

Through our five-year partnership, the Hub Network has enjoyed solid ratings gains, subscriber and advertiser growth and is now profitable.

Discovery Family builds on the network's leadership in co-viewing where kids and families watch together and on the strengths of both Hasbro and Discovery to enhance the value of the network for the audience and for our shareholders.

Furthering our all-screen content strategy, we are building our storytelling and omniscreen capabilities globally reaching kids and families everywhere they are consuming content.

Hasbro will continue to develop new programming in addition to our already rich programming library for Discovery Family and for networks and screens globally as we continue to build brands through storytelling.

In the first quarter of 2015, we are launching the next installment of Transformers television programming, Transformers: Robots in Disguise.

The all-new show will debut on Cartoon Network in the US, the top-rated primetime network for boys ages 6 to 11 and 9 to 14.

Hasbro has developed tremendous expertise in producing animation.

We are working with the world's best studios and we know how to produce top-quality animation cost-effectively.

As our content strategy and all-screen strategy evolve, we are building upon our experience in animation and storytelling.

In addition to television, there are select films where we are taking greater control of the process.

We have two movies we are currently developing under our new film label, Allspark Pictures.

These films are My Little Pony and Jem and the Holograms.

Building on the global success of My Little Pony, we recently announced we are developing a My Little Pony animated feature.

We've hired a great writer with strong credentials in animated film.

In addition, we are producing a Jem and the Holograms live action feature directed by Jon Chu.

The Jem and the Holograms story was reimagined from a Hasbro vault brand and inspired by the social media-driven lives of girls today.

The film is scheduled for release on October 23, 2015 and will be distributed by Universal Worldwide with whom we co-financed the film.

We envision Allspark Pictures as a new way to make fresh and compelling movies based on new and existing Hasbro brands for audiences globally.

Given Halloween is upon us, on October 24 and in partnership with Universal, Ouija will be out in theaters.

This is an all-new spooky story that is true to the Ouija brand and rated PG-13.

In closing, we've entered the holiday season well-positioned, driving our brands through innovation and consumer insights supported by engaging marketing programs and strong retail execution around the world.

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

Deb?

Thank you, Brian and good morning, everyone.

As Brian said, we had a good third quarter as we grew revenues in all regions and across our franchise brands.

Hasbro's operating profit and operating profit margin increased.

We've continued to invest in our business for long-term growth, added a key new license beginning in 2016 while remaining focused on improving profitability and returning cash to our shareholders through our stock buyback program and dividend.

Before I review the quarter, I want to remind you of several items that impacted both this year's and last year's third quarter.

In the third quarter of this year, we restructured our investment in the Hub Network joint venture, reducing our ownership to 40% of the network.

In connection with this restructuring, we recorded a pretax charge of $11.6 million, or $0.06 per diluted share in the third quarter 2014.

This net charge is primarily related to the costs associated with recording the fair value of a put/call option exercisable at the end of 2021 that Hasbro and Discovery entered into related to this transaction.

In last year's third quarter, there were a number of factors impacting our reported earnings.

These included a pretax charge of $75.5 million or $0.50 per diluted share related to an adverse arbitration award, a pretax charge of $4.1 million, or $0.03 per diluted share associated with restructuring and partial pension settlement charges and a $23.6 million or $0.18 per diluted share favorable tax adjustment.

We've included a reconciliation to reported amounts in today's release.

During the rest of my discussion of our business, I'll exclude these items as they do not speak to the underlying performance of Hasbro.

Looking at our segments, third-quarter revenues in the US and Canada segment increased 4%.

Revenues in both the Boys and Games categories grew in the quarter, partially offset by declines in the Girls and Preschool categories.

The Girls category decline was primarily the result of an expected decline in Furby.

The Preschool decline was primarily due to the challenging comparisons within Sesame Street, which included a difficult comparison with Big Hugs Elmo in last year's results.

Overall, in the US, we had positive point-of-sale trends at our top five retailers and our inventory at retail was down slightly at quarter-end.

At the same time, retailers are expanding inventory to support our growing brands.

Point-of-sale was up in Canada as well.

Segment operating profit in the US and Canada increased 16% in the quarter reflecting the higher revenue levels, favorable mix and improved expense leverage in the quarter despite being partially offset by a challenging environment in Canada.

We also continue to invest in our business, including support of key initiatives such as Magic: The Gathering.

In the International segment, third-quarter revenues increased 11% with 7% growth in Europe, 24% growth in Latin America and 11% growth in Asia-Pacific.

Foreign exchange had a negative $9.7 million impact on revenue for the segment in the quarter.

Internationally, the Boys, Girls and Preschool categories all grew and more than offset a decline in the Games category.

Within the Girls category, Furby revenues declined, but not as significantly as in the US and Canada as non-English-speaking markets are in their first year of Furby boom.

Operating profit increased 10% in the International segment on higher revenues, which were slightly offset by higher expenses related to supporting our expanding International and emerging markets business.

Entertainment and Licensing segment revenues grew 10% fueled primarily by lifestyle licensing revenues for Hasbro franchise brands, including My Little Pony and Transformers.

The Entertainment and Licensing segment operating profit declined to $493,000 in the quarter.

The benefit of higher licensing revenue was offset by low television and digital streaming revenue, as well as the acceleration of programming costs associated with Kaijudo programming.

We decided to exit this brand and therefore have lower future revenues to amortize production costs against.

While Kaijudo's retailer and player community continue to grow into August, it did not meet our expectations and Kaijudo's Vortex card set, which released on August 29 was the game's final paper trading card game release.

Looking at our overall expenses and profitability, operating profit dollars and margin increased in the third quarter on higher revenue levels partially offset by continued investments in growing our business for the long term.

Cost of sales as a percentage of revenue in the quarter declined.

This decline continues to reflect growth in entertainment properties, including Transformers and Marvel properties, as well as higher Entertainment and Licensing revenues.

As Entertainment-backed revenues grew, royalty expense also increased.

In the third quarter, royalties increased to 6.6% of revenues versus 6.3% last year.

Through the first nine months, royalties as a percentage of revenues are equal to our five-year average of 7.3%.

We continue to believe the full year will be around this average.

Product development was 4% of revenues, a decrease of 2% year-over-year.

In the third quarter of last year, we had higher product development expenses due to the write-off of early film development for movies which had not yet moved to production.

Our investment in innovation remains paramount to driving the future growth of Hasbro.

In addition to our ongoing focus on innovation, in the fourth quarter 2014, we have begun investing in developing products for the Disney Princess and Frozen properties.

Our investment for this exciting new line will ramp up in 2015 ahead of revenues.

As the related revenues will not start to be recognized until 2016, we expect this investment to result in higher product development expense as a percent of revenues with our product development spending at the high end or slightly above our previously communicated target of product development spending of 4.5% to 5% of revenues.

In future years, as we begin to recognize revenues, we expect to return to this more normalized range.

In the third quarter, intangible amortization declined slightly year-over-year as some of our assets have become fully amortized.

Program production cost amortization increased $6 million in the quarter primarily due to the write-off of television programming I referenced earlier.

As Brian discussed, content development is fundamental to our strategy going forward and we will continue to invest in content supporting our brands.

SG&A declined slightly as a percent of quarterly revenues reflecting the impact of higher revenues.

These expenses reflect continued investments in our business, including International operations and Magic: The Gathering.

Turning to our results below operating profit for the quarter, excluding the impact of our restructured investment in the Hub Network we mentioned earlier, other expense was $4.2 million compared to $1.6 million in 2013.

This includes a $6.2 million loss from foreign exchange versus a slight gain in 2013.

We also recorded our 50% share in the Hub Network in this line.

In the third quarter, this improved to a profit of $1.9 million versus a loss of $91,000 last year.

In future periods, this line will reflect our 40% share of the Discovery Family Channel.

As I mentioned, we recorded a charge primarily associated with recording the fair value of a put/call option that the Company and Discovery entered into relating to this transaction, as well as certain other items, including our share of restructuring charges.

We anticipate there could be further expenses associated with restructuring the network in the fourth quarter of 2014 as Discovery Family Channel plans are finalized.

The third quarter underlying tax rate increased to 27.8% versus 26.5% in the third quarter 2013.

We expect our full-year underlying tax rate to be in the range of 27% to 28% reflecting higher anticipated earnings in the United States.

For the third quarter, average diluted shares were 128.7 million shares compared to 131.8 million last year.

The actual amount of shares outstanding at the end of the third quarter 2014 was 126.2 million.

Diluted earnings per share, absent charges in the third quarter 2014, were $1.46 versus $1.31 in 2013.

At quarter-end, cash totaled $452.2 million reflecting our higher levels of share repurchases.

In the third quarter, we returned $179.2 million to shareholders, $54.7 million in cash dividends and $124.5 million in share repurchases.

At quarter-end, $183.6 million remained available in our current share repurchase authorization.

In the first nine months of the year, we've repurchased 6.4 million shares returning $341.3 million to shareholders.

Receivables at quarter-end increased 8% versus 2013 and compared to a 7% increase in revenues.

DSOs were 80 days in both 2014 and 2013.

Inventories increased $52 million versus last year.

Inventory to support our emerging markets growth was the biggest component of this increase.

Year-over-year inventories were also up in developed economies to support anticipated higher revenue levels in 2014.

Versus the second quarter, inventory increased slightly by $6 million.

Additionally, our inventory at retail is well-positioned to support the fourth quarter across the major markets where we are able to track these levels.

As I mentioned, retail inventory declined slightly in the US, but increased in many of the brands with strong point-of-sale trends.

Outside the US, inventory is up in some markets, but also well-positioned to support the holiday season.

With three quarters behind us, the full success of our year will be determined by how consumers embrace our products this holiday season.

We are well-positioned with innovative brands, inventory in all of our key locations and strong marketing programs to capitalize on the holiday season.

Before we take your questions, I'd like to turn the call back over to Brian for a few additional remarks.

Brian?

Thank you, Deb.

I want to take a moment and recognize David Hargreaves, Hasbro's Chief Strategy Officer.

Many of you know David personally.

Last week, he announced that after 32 years he'll be retiring from Hasbro in February.

David's stewardship, vision and business acumen have been instrumental in our success today as a branded play company.

There is no question Hasbro would not be where it is today without David's leadership.

His legacy will be defined by his tireless work ethic, his belief that Hasbro comes first and his competitive drive to ensure Hasbro's success is sustainable for generations to come.

For me personally, he has been a trusted partner and advisor.

Please join me in thanking David for his dedication and all the significant contributions to Hasbro and wishing him all the best as he begins this exciting new chapter in his life.

Deb and I are now happy to take your questions.

(Operator Instructions).

Sean McGowan, Needham & Company.

Thank you and I will echo those sentiments on David.

It's been a pleasure to work with him over the years.

A couple of things if I could ask about, one, can you help us understand the strategy and bracket the exposure with you getting directly into film production?

Why the change and how much money are we talking about being put up?

Good morning, Sean.

Allspark Pictures is really just an evolutionary step in our content strategy as we think about ourselves as a branded play company.

Recognize that over the last few years since we started the studio and began working as a joint venture partner on the Hub, we've already produced 1250 half hours of kids animation and programming.

We've also produced a few movies with the Equestria Girls.

So we've already produced full-length animated movies.

The difference here is really the format of going out and ensuring that rather than getting just a few theaters like we do for Equestria Girls where we get 400 or 500 theaters, we want to go out and get more theaters and we want to have a partner that will distribute our movies first in theatrical and then allow us to go through all the different other stages of distribution for that entertainment.

So we don't really view in the short term any kind of material expenses and the technology in animation has really changed so dramatically, we are on the forefront of developing animation and we see that movies can be produced very economically.

And as you can see, we have not had a material impact from the movies we've produced thus far and while these budgets may be bigger, they are certainly not as big as the big animated theatricals from other people.

But didn't you say that the Jem was going to be a live-action?

Correct.

And Jem, again, very small budget movie relative to live-action movies.

It's an opportunity to take a brand out of the vault, tell the new story and reinvent the brand and then put it out across all the elements of our brand blueprint.

So again, we don't see that budget as significantly material.

In fact, the movie has been primarily shot already.

Great.

And if I could follow on with one regarding Magic.

Could you give us some sense of how much it was up in the quarter?

Magic was up double digits in the quarter.

Well, that covers a pretty broad range, doesn't it?

So I think it was pretty crucial to see how these new releases were going to go.

Did they meet your expectation?

Yes, Tarkir has been a great release.

The fans have really enjoyed it thus far.

It's still early days.

As you know, it's just been released.

We talked about earlier in the year the fact that the releases really do matter.

This is a storytelling brand first and foremost and engagement with characters is critical.

So this is on track with our expectations and Magic continues to demonstrate both short and long-term great potential and we continue to invest in the brand both on the analog and digital side as we see great opportunities not only for this year, but for many years to come in Magic: The Gathering and growing it as a true global brand as one of our major franchise brands.

And are you still seeing an increase in the percentage of the total revenue that's coming from digital?

Yes, we continue to see digital continue to grow over time and we would expect over time that it would continue to grow.

Okay, thank you.

Drew Crum, Stifel.

Okay, thanks.

Good morning, everyone.

Brian, I wonder if you could comment on point-of-sales for the Games business in the quarter.

If I missed that, I apologize.

And then you also mentioned that the Games business was down overseas and I just want to understand what the variance was there relative to the performance in the domestic market.

Yes, so you have a couple of places where there are some differences by category depending on what the comp was a year ago.

And remember, some of our international markets run games a little behind us just as they have more of the Furby business, for example, right now because Furby boom is still running through those markets and you see that we're up against a bigger comp in the US on that brand and therefore against the category of Girls.

So we don't see that there is anything there except timing with Games being down internationally as we continue to build some of the new releases.

If you look at POS, where we have the POS data in several countries, overall, POS in Toys and Games was up in the US and it was up for all the countries we measure.

So Canada, Mexico, Australia, France, UK and Spain.

The only place our POS overall as a company was down a little bit was in Germany.

POS in Games was down a bit in the third quarter in the US.

Got it, okay.

And then if I could switch over to Disney Princess, I think you made some comments on the increased product development costs you're anticipating as a percentage of revenue next year.

As you think about the royalties associated with this license, where should we expect that to trend once you get into 2016 relative to that five-year average?

And then in addition to that, can you provide any commentary around minimum guarantees, anything that was paid out in the third quarter or anything that we should anticipate for the balance of the year or over the life of the licenses?

Yes, happy to do that.

First and foremost, the Disney pitch for the Princess and Frozen business was a creative pitch and as you know, we've developed great consumer insights and innovation in our Girls business.

We've been driving our Girls business and growing it globally and that was the most important element of our presentation to the team.

Second, while we don't disclose royalty rates for any of our agreements, I will tell you that the development of dolls is very different than action figures and the markets for dolls and action figures are very different and therefore, the royalty rates for dolls are not as high as action figures because of what goes into producing and the content that goes into the lines, the fashion that goes into the lines and other elements.

And then in terms of the minimum guarantee, we certainly believe the minimum guarantee is at the level that we should be able to earn this out over a multiyear period.

We didn't disclose the minimum guarantee because we didn't feel that it was material and for perspective, I'd remind you that, in 2013, we did disclose the minimum guarantee for our Marvel and Lucas agreements and as you may remember, that totaled an additional $80 million for Marvel and up to $225 million for Star Wars.

So we're trying to give you a perspective there that again we don't believe that the minimum guarantees in the Disney Princess and Frozen lines is material in the same way.

Okay, very helpful.

Thanks, Brian.

Thanks, guys.

Stephanie Wissink, Piper Jaffray.

Hi, good morning, everyone.

I'll echo the sentiments on David as well.

Just a couple questions.

First, a clarification, if you could, Brian.

I think you mentioned franchise brands up 36%, total revenues up 7%.

Can you talk a little bit about the non-franchise brands, which ones are a drag, either expected or otherwise?

And then just a higher level question regarding the cost of introducing new brands into the Toy category.

How do you see that playing out here over the next few years?

How do you think about the build versus buy strategy and how should we think about the cash prioritization here over the next couple of years?

Thank you.

Yes, some good questions.

The thing to note -- for the most part, if you look at a brand, the impact that a brand like Furby has in the third quarter, it was a big drag or a headwind relative to the growth that you're seeing in our franchise brands.

Furby was down in the quarter by around 50% versus a year ago.

We told you in last quarter's call that 70% of the revenues would happen in the second half of the year.

And again, order of magnitude, if you took Beyblade and Furby together in Q3 up against a year ago, we're talking about an impact of $150 million-ish relative to year-ago's revenues.

So that's what you're really seeing when you talk about some of the non-franchise headwinds and comping up against some very strong numbers a year ago in both of those brands as a good perspective of why you see those differences.

In terms of building brand, I think we've built a brand blueprint, we built the assets and we continue to hone our capabilities to launch our new brands and vault brands into the toy space, into the branded play space beyond just toys.

We're building a model that enables us to do that and we're adding capability all the time to create that.

Also growing our franchise brands is very cost-effective.

They tend to have higher operating margins.

Launching a vault brand has similar high operating margins over time.

There are investments that we make in our business all the time to build our business, whether it's Magic: The Gathering or My Little Pony content or Transformers TV series or frankly working with Play-Doh in China with partners to make a Play-Doh TV series there.

That's all part of a modern branded play company going to market globally and enthralling audiences and consumers and our customers that we have the brands that have the momentum and are quite salient for the end users.

Thank you.

Best of luck, guys.

James Hardiman, Longbow Research.

Hi, good morning.

Thanks for taking my call.

A couple questions on the Hub.

It seems like the financial impact of your lower stake is fairly inconsequential.

Can you maybe speak to whether or not the overall TV strategy is changing at all?

I think once upon a time you gave us some guideposts with respect to TV-related merchandise and incremental TV-related merchandise.

How are we doing there versus your expectations and how should we think about just the overall strategy going forward?

The impact for TV merchandise is fairly significant.

As you can see, whether you look at the My Little Pony business or the early days of building back our Littlest Pet Shop business, what we've done in Transformers and certainly Transformers: Rescue Bots, which has contributed to our Preschool business and that preschool show that's out around the world, the changes we've made to the relationship on now Discovery Family, was the Hub, really allows a couple things to happen.

First and foremost, we still have a significant number of hours each day to program on that network, which give us the opportunity to put both our library shows, as well as select new productions onto the network and as you know, that's been one of the keys to unlocking our international TV efforts.

To have a domestic outlet to put shows on the air is critical to international broadcasters as they make their decisions for placement.

So we continue to have that as an asset for us.

So we believe we'll continue to grow our TV-related merchandise as we have.

We think the thesis there is incredibly strong.

Discovery now having more of the ownership and consolidation will continue to build what we've seen as an early strength of the network that's co-viewing in prime time and Discovery obviously has libraries worth of programming and ideas for shows that should help us to build that primetime audience, that co-viewing audience.

And then the final point is that Hasbro has the flexibility now in this new relationship to put select new shows or original productions outside of Discovery Family.

You'll note that we just announced that our new Transformers TV series, Robots in Disguise, that will go on the air early next year, will go directly to Cartoon Network because we feel that's a better environment, a very strong environment to drive boys ratings and to generate merchandise sales.

So we'd say overall this move helps us to reinforce what we've done thus far and to strengthen our position going forward in television.

That's very helpful.

And then just briefly on Star Wars -- I'm sorry -- Transformers.

I think you mentioned that you're running pretty comparable to where we were for the last movie.

How should we think about that domestic versus international?

Is it fair to say that international is growing versus last time around and we continue to see some contraction domestically?

And I guess just bigger picture, how are the Transformers sales going versus how you thought about them heading into the year given some meaningful tailwinds?

Yes, so if you look at Transformers over the first three movies, two of the years were right around $500 million and one year, the middle year, was closer to $600 million.

We've said the last movie year, we're tracking comparable to that.

It's very heartening for us, with all the effort and the investments we've made in emerging markets, not only to see the overall emerging market growth that we've experienced over the last several quarters and continued into this quarter, but to see Transformers as a major calling card for our Company into emerging markets to see audiences and consumers coming out and buying Transformers and really enjoying the brand and also to see the kind of success that we've had in China.

We know that's a great long-term opportunity for our Company to have Transformers be such a ubiquitous and beloved property there portends very good things for our Company as we continue to build in that region.

Excellent.

Thanks, Brian.

Felicia Hendrix, Barclays.

Hi, good morning.

Thank you.

Just with staying on that Transformers theme for a second, Brian, can you just tell us the mix that you're seeing so far International versus US as it's compared to -- as it was compared to the last movie?

It's, again in percentage terms, slightly more developed internationally.

And particularly, I think it's important that within international territories you have to also look at emerging markets versus developed economies.

It's very much what we talked to you back as early as even February a year ago, that the pyramid of growth has been kind of turned a bit on its head as we continue to see the growth in multiplexes and malls globally, markets like Russia, China, Korea, Colombia, Brazil, play a bigger role in our entertainment box office.

The movie industry is certainly seeing that, and we also are seeing that growth and enabling us to introduce new kids, new consumers to our brands, and we're seeing the uptake in sales as a result.

Okay, great.

And when you say sales like when you say comparable, I just want to be clear are you talking about sell-in or POS?

Well, obviously, the POS is strong behind sell-in and sort of running comparable to the sales, so we are seeing very strong global or international POS.

We're seeing some good POS building for Transformers as we get into the third and to the fourth quarter.

But again, it's definitely -- if you look at the brand, Transformers obviously is still up significantly versus a year ago, and is contributing to the Company this year in the US and internationally.

And we continue to see Transformers contributing significantly to our US business versus the last movie.

What we're saying is that the sales are more diversified to the international markets, so we're just giving you a perspective more longer term as Hasbro and the brand continue to be a more global Company.

Right, helpful.

Thank you.

And then just on the POS trends that you and Deb talked about in the prepared remarks, I was just wondering the momentum that you've seen since the second quarter in POS, has that -- have you seen an acceleration?

Has it kind of stayed the same?

So I just wanted to get some color on that.

I think it's really been consistent.

As you head into the all-important holiday season, our expectation is that we'll see -- certainly from our standpoint, we've had that consistent momentum, but we are heading into the all-important holiday season when I think all retailers are hoping that the POS picks up overall.

And obviously, you've seen the results in our franchise brands, and the POS around our franchise brands has been equally strong; we talked about that.

Again, I think what we're seeing if you look at the holiday season into the US, not surprisingly, a very selective consumer that's buying the brands that are incredibly meaningful to them.

Our franchise brands thus far have been incredibly meaningful and are desired and I think we will continue to drive that into the holiday.

Obviously the bulk of our media spend starts right around now and through the holiday period and so we think we're set up well for this holiday season recognizing that sales continue to happen later and that the consumer is selective and we're happy to see that they're selecting a raft of Hasbro's brands.

Thank you.

Final question, just, Deb, on royalties, the absolute number you reported was a bit different than what we were looking for.

So I was just wondering, can you just help us bridge the year-over-year -- the puts and takes year-over-year and sequentially for royalties?

Well, really the biggest impact on royalties this year was the mix and we did put a reconciliation in because last year we had an impact on royalties from the settlement of an arbitration award.

And we had an impact this year.

So year-on-year, it is up a bit.

It's mostly due to product mix, but for the full year we still expect to land about that five-year average of I think 7.3% was the five-year average and we were tracking along that rate earlier in the year as well.

Okay.

Great, thank you.

Jaime Katz, Morningstar.

Good morning, thanks for taking my questions.

I'm curious if you guys are seeing any overarching trends in the Preschool category.

It seems like both you and your closest competitor seem to be struggling the most in that category.

So I didn't know if there was something else going on maybe at the retail level.

And are there any new initiatives from Backflip that would be helpful for us to understand any of the digital business going forward?

Sure.

If we look at Preschool, we've seen great global growth for one of our newest franchise brands in Play-Doh.

It continues to accelerate.

It's a play pattern that's highly relevant to kids and to their parents globally.

We are also seeing good strength where we have character-based preschool products like Transformers: Rescue Bots where we're seeing growth there.

I will see the core Playskool business a couple of years ago, we really needed to focus in on making that business sustainable for the long term, which meant building back some of the profitability in that brand and ensuring that we could make great innovative products that our customers and Hasbro could make money on and to build unique innovation.

So we're willing to really focus in on the profit side and get to the right revenue level.

I think now we'll start to turn on and drive more of the revenue side having rethought the way to go forward in that business.

And I do think that it requires a level of innovation and differentiation that we can provide in Playskool.

I think it's just going to take a bit longer in our core business.

But having seen a lot of our future products and where the innovation is going, I'm very heartened that that team has got their arms around it and that you'll be seeing some great products from Playskool core over the next several years.

And then any new news on the Backflip front?

Sure.

So Backflip is -- I won't say exactly what new initiatives they're working on.

Obviously a highly competitive category, but they have a couple of -- at least one big franchise brand in DragonVale.

We'll continue to work there and then as we'd always imagined that as we got through the early days, we would start to focus in on Hasbro brands that would have great meaning to them and they still have very strong and continue to build on their network of daily active users and monthly active users and you'll see Hasbro brands on the Backflip platform.

If you've looked lately, you may have seen a Nerf hoops app that's really fun to play that's a little reminiscent of Paper Toss, but now you get to play in a Nerf environment, which is quite fun and a network builder for us there.

And they'll continue to launch a number of new games this year finishing this year 2014 and some pretty robust plans for 2015.

So again, as we go long term, we're very pleased with and excited to be in the mobile gaming space and a great team out at Backflip.

Thank you.

Mike Swartz, SunTrust Robinson.

Hey, good morning, everyone.

Maybe you can provide us some more color just how you're thinking about kind of go-forward investing in terms of ad and marketing dollars.

How do you look at that versus trade brick-and-mortar versus maybe the digital or e-commerce realm?

A number of years ago, we used to talk about, and I think I remember talking to you guys about building a seven-layer cake and today, it's more like a 70-layer cake and I think the teams have gotten incredibly smart about how to build more of a digital presence and the social media and digital presence we've built, recognizing that digital costs less out-of-pocket than over-the-air media, but requires expertise that we brought onboard inside the Company and we continue to build in that space.

Advertising still has a very powerful and immediate impact to the sales of our products when done well and so you'll continue to see us investing in television and all screens, short form media and long form media, so webisodes and shorts and all kinds of videos.

If you go online, I'm sure you'll see the ubiquity we're building around our brands online to give kids and families short form content.

You'll also see that we built our digital asset delivery so that as we look at online retailing, you now get a full immersive experience.

You can get a virtual product experience in so many different ways online and get to make a purchase decision right there online and we're doing that with lots of our retail partners.

So marketing has just become more complex, not necessarily more costly, given the expertise we've brought on board, but certainly we are working on every element that matters to consumers and fans of our brands and building those new capabilities and I do think that over time that roughly 10% (inaudible) recognizing that we also view royalties as somewhat of a marketing expense.

I've talked to you before about looking at those two lines together as a way to see the impact of our brands and that would, in fact, be the case and then of course our own programming efforts and animation efforts add to that and have enabled us to build hundreds of millions of dollars worth of merchandising sales for our brands around the animated stories we're telling.

Great, that's extremely helpful.

And then maybe for Deb, just how do we think about -- with the strengthening dollar here, how do we think about the impact of currency on maybe top line and earnings over the next let's call it 12 months?

Is there a rule of thumb or --?

That's a good question, Mike, because we saw the US dollar really strengthen significantly in September and while we do have significant hedges for our transaction exposure, particularly product purchases and royalties, we don't hedge 100%.

So we did have a little bit of an impact in Q3, but we have significant hedges in place for 2014 and 2015 right now.

So that's on the product side, but again not 100%.

But based on our revenue mix, the translation piece is the bigger piece.

So if you think about, and we disclosed this in our 10-K last year, about 55% of our revenues are US dollar-based revenues because of how we sell them into the market, but the euro is our next biggest exposure and that was about 18% of our 2013 revenues.

So if the euro was to stay at levels that it's at currently, last year's Q4 revenues would have been about $20 million lower than they actually were.

So if you think about that, about 18% of full-year revenue are euro-based and as the dollar strengthens and the euro declines against it, that does have an impact.

Our next biggest exposure was the pound, but that's only about 5%, so that doesn't have as significant an impact.

When you think about that flowing through to the bottom line, there is a bit on our unhedged portion of inventory and that's what we saw in the quarter just because of the precipitous decline that happened in September.

But we have hedged probably about 75% to 80% of our product purchase is euro-based right now.

So that's less of an impact, but the translation impact could be significant and it tends to be about 10% to 15% of the top-line impact on the bottom line.

Okay, that's fantastic.

So I would assume then the impact in the third quarter was maybe a little more than that 10% to 15%?

No, it was probably about that impact.

Okay, that's great.

Thank you so much.

(Operator Instructions).

Tim Conder, Wells Fargo.

Thank you and my congratulations to David on his career and best of wishes.

A couple things and thank you also for the color on the Disney Princess, Brian.

It was much appreciated.

A couple things relating to Canada.

You commented that it was challenging.

Was that due to FX there also or is it in demand I guess is the first question?

And then you were very excited at Toy Fair about DohVinci as it relates to the Girls category.

Just any update on the early trends that you're seeing there.

And related to Sesame Street within Preschool, granted you had very difficult comps, but in general how is that business trending versus your expectations at this point?

Say from when you got into the business?

Sorry, repeat the third part.

I was just --.

The Sesame Street, Brian, how is that trending overall versus your expectations?

Thank you.

So let's start with Canada.

As you know, we've had some changes up there in retailers and retail strategies and obviously working through that with our partners.

The demand profile in the market has been a bit different than the US.

We're now seeing some strong growth in POS in the third quarter, so double-digit growth in POS in Canada in the third quarter and so it's lagging a little bit for us versus some of our shipments, but we certainly have robust plans for the holiday season up there.

But as you know, over the last year or two, there's been some shaking out and changes within the retail landscape and we are just working through that.

So we don't see there's any long-term impact.

In fact, we continue to believe that Canada should perform fairly well this year.

Second, in DohVinci, we're incredibly happy with the early results, albeit early days.

The consumer feedback has been fantastic.

It's really a fun product line to play with and we believe we're entering a really good -- with a really good, new innovative product line and a great category and a great extension for DohVinci and we've seen good uptake not only here in the US, but in several markets around the world.

And then finally Sesame Street, I think that mostly in Sesame Street we had a very big Elmo last year and that drives a lot of dollars, as you know.

So it can cloud or obfuscate the results, the underlying trends on that brand and I think as we go forward, we are incredibly excited not only about Sesame Street in several countries, but some very fun early results for Furchester in the UK and that TV series.

And so I think that -- and some new leadership at Sesame Street.

So all around, I would say that long term we remain very excited about the Sesame Street business and we have some great product lineups coming up over both this year and future years.

Okay.

And then -- thank you and two more quick questions here.

One, do you anticipate China being profitable this year?

And then secondly, Deb, you had mentioned that some things are now fully amortized.

Any broad update to the change in your overall amortization expectations here for the balance of the year or looking out to 2015, 2016?

So I think, Tim, from an amortization standpoint, we remain comfortable with what we had in the 10-K because that included the Backflip, which was the big update we had.

So as we see things trending out, we remain comfortable that that was a consistent expectation.

On China, right now, we're probably about breakeven recognizing that we've said we'll continue to invest in that market for the longer term to build it over time.

As you know, here's just one example among many that Transformers had such ubiquity in the box office and yet we're still building points of distribution so that the majority of Chinese consumers can enjoy the brand from a product standpoint and a licensing standpoint.

So that requires additional investments and we're building our joint venture relationship with [Alpha Aldi] and it was also luckily the year of the pony, so My Little Pony got a good shot in the arm, but we continue to build that brand and that marketplace as well.

We, again, see China long term as a great opportunity for us, but it's not time to just start to look only as profitability as the key criteria for that market.

We see many years of revenues growth and we'll get to profitability over a period, but first we want to build the ubiquity of our brands in line with the storytelling that we're putting into the market.

Great, thank you.

Eric Handler, MKM.

Yes, thanks for taking my question.

I have two questions for you actually.

As you continue to build out your infrastructure internationally, can you maybe discuss how the Marvel products have evolved there in terms of the percentage of revenue coming from domestic versus international as the movies continue to succeed and do quite nicely?

And then you've got Avengers 2 coming out next year and China is actually a big part of the success of the superhero genre, so I'd be interested in your thoughts on that.

And secondly, when you look at Magic: The Gathering, are we -- do you think we're going to be at a point where we're seeing a lot more cyclicality or volatility in the revenue stream that's going to be a lot more dependent upon new card releases than ever before given the competition that we're seeing from Activision with its Hearthstone game?

Yes, let me start with Hearthstone.

Our game is both an analog and digital game and the power of that brand is in the ability to have hundreds of thousands of face-to-face tournaments going on around the world every year and to have players engaged in the analog business, as well as the digital business and we'll continue to build upon both lines.

The brand is related and releases do make a big difference to that brand, but that's not a new phenomenon and it continues.

As we've said, it's a brand that tends to go more release-driven than more seasonally driven and we've talked about that over a long period of time.

And so there are bigger and smaller releases of characters that go on over time.

There's a curation that that team goes through to really work with their fans and understand how best to lay out the story over time and so that continues to be a storytelling-led brand that's enjoyed both in analog that is completely unique to the marketplace and has nothing to do with some of the light digital games that are out there from competitors.

We do, in fact, have a light game as well that can be played on the iPad, the Duels of the Planeswalkers, and then a much more immersive game in Magic: The Gathering online, which our fans quite like and we will continue to drive and invest in both sides of that.

As it comes to the Marvel business, Marvel was a significant contributor to our business this quarter.

We expect that Marvel will continue to contribute over many years to come, as will Star Wars.

We have seen a great impact to the partnering, Marvel becoming part of the Walt Disney Company.

Walt Disney's global scope and scale has helped Marvel to become more of a global brand.

The box office results, as we see more and more audience members going out around the world and watching movies globally, the box office being more internationally focused relative to the US box office.

The proportion of international to US box office has been helpful in building that brand out around the world.

And our marketing partnership and putting great innovative products out around the world, for example, the Titan Heroes series, the 12-inch figures that sell at an SRP of about $9.99 have really helped us in emerging markets, allow young kids to get great product in their hands at a very value-oriented price point.

So it's the innovative productlines like Mashups and Titan Heroes series, Mashers, as well as what Marvel and Disney have done to build the global footprint of the label and movie successes, as well as where they're putting the animation out around the world all helps to contribute to make that brand a more global brand.

That's why we're so excited not only about 2014, but many years to come for both Marvel and Lucasfilm.

Great, thanks.

Gerrick Johnson, BMO Capital Markets.

Hi, good morning.

I'd just like to revisit Magic once again now that the releases are out, third quarter offsetting sort of a weak first half.

What was the nine months for Magic?

I think that should be a good comparison at this point, both point of sale and shipments?

Thank you.

Yes, so year-to-date, Magic is up mid-single digits.

In the quarter, it was up double digits.

So the momentum is building, but Magic year-to-date through the third quarter was up.

Okay, great.

And you gave us some good direction on the cost of the Princess license.

Do you have any sort of guidance for the revenue that could generate from this?

Mattel gave us a range on their call, but I was wondering if you could give us an idea of where you thought it might shake out in 2016 and beyond.

Thank you.

I think if you look at what we've done in our Girls business, the team has done a phenomenal job and customers and consumers around the world are really enjoying the innovation, the consumer insight that we've brought to those brands, the storytelling and what we can do as an IP owner in building out the My Little Pony business, the Equestria Girls business and what we're now doing with Littlest Pet Shop and I think that that was first and foremost recognized by the Walt Disney Company as a great innovative company that's growing significantly in the Girls space.

So we obviously think that Disney will have a significant positive impact in adding Princess and Frozen in 2016.

We're not going to size the business for you, but to say that, as we've said before, we really feel like our Girls business is in the early innings of what's possible.

Our brands have just begun to grow over the last few years in a more significant way and we feel very good about the new relationship and we will begin shipping the line in 2016.

Great, thank you very much.

Thank you.

I'll turn the floor back to management for closing comments.

Thank you, Rob and thank you to 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.

Our next scheduled earnings call will be our fourth-quarter and full-year earnings call and it's tentatively scheduled for Monday, February 9, 2015 and we anticipate hosting our annual investor event at Toy Fair that following Friday morning, February 13, in New York.

More details on these events will be available as we get closer to the dates.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.