孩之寶 (HAS) 2015 Q2 法說會逐字稿

Good morning and welcome to Hasbro's second-quarter 2015 earnings conference call.

(Operator Instructions).

Today's conference is being recorded.

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

At this time I would like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations.

Please go ahead.

Thank you and good morning everyone.

Joining me 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 performance and then we will take your questions.

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.

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

Today's discussion of net earnings and EPS will exclude from last year's second-quarter results an unfavorable tax adjustment of $13.8 million or $0.10 per share as it does not speak to the underlying performance of Hasbro.

A reconciliation to reported amounts is included in the earnings release and presentation accompanying this call.

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; the potential impact of foreign exchange translation; cost; our 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.

The positive momentum in our business continued in the second quarter and throughout the first half of 2015 with strong underlying demand in our franchise and partner brands across geographies.

While foreign exchange clearly had a negative impact on our reported results, absent foreign exchange, second-quarter revenues increased 5% and the international segment grew 9%.

We spoke with you in April about several challenges we faced in the second quarter including the anniversary of Transformers: Age of Extinction movie shipments, the shift of the release scheduled for Magic: The Gathering, and the timing of Easter.

Despite these negative influences, our revenues grew absent FX and it is clear there is momentum in our brands around the world.

Although Hasbro franchised brands declined in the quarter they increased 3% in the first six months of the year and 11% on a constant currency basis for the six-month period.

Partner brands, Marvel, Jurassic World, and Star Wars, all contributed to growth in the quarter and the first half of the year.

Importantly, consumer takeaway, as measured by point of sale trends, was positive in nearly every major market we track in the second quarter and was positive in all these markets year to date with several countries posting double-digit gains.

On a recent trip to Latin America, I was reminded of how far we have come in just a few years in this region.

Today we are becoming a leading player in the Latin American market.

The team is implementing our brand blueprint with tremendous retail execution, supported by engaging storytelling.

Even though the economic and currency environment is a challenge, it is clear in everything we do that our teams in Latin America are creating the world's best play experiences.

Looking at overall Hasbro second-quarter performance, Hasbro franchise brands were led by growth in Play-Doh, Nerf, Monopoly and Littlest Pet Shop.

The My Little Pony brand continues to be as popular as ever and point-of-sale increased meaningfully in nearly every country we track.

On an as reported basis, My Little Pony revenues declined in the quarter and the first half of the year but grew in both periods absent the impact of foreign exchange.

Our new fall theme, Cutie Mark Magic is off to a great start at retail and our all-new My Little Pony Equestria Girls: Friendship Games movie and associated product will be out in September.

As we discussed in April, Magic: The Gathering faced a difficult comparison.

Last year's major set release for the first half of the year occurred in the second quarter and this year it was in the first quarter.

Magic: The Gathering revenues increased for the first half of 2015.

Finally, Transformers revenues declined as expected following a movie year.

Transformers: Robots in Disguise television programming and product are both performing well.

Transformers point of sale was positive in all major markets we track through the first six months of this year and up in many markets for the second quarter as we began to anniversary the mid-May on-shelf date for movie product.

For our partner brands, compelling storytelling is clearly driving consumer engagement and interest.

Jurassic World has been a tremendous success at the box office and coupled with the strength of our line and strong global retail execution is performing better than expected.

Hasbro's portfolio of Marvel lines also had a strong second quarter as retailers focus their merchandising activities around the global theatrical launch of Marvel's Avengers: Age of Ultron.

In addition, products supporting Marvel's Ant-Man are now hitting store shelves in time for the July 17 release.

We also recently expanded our relationship with Disney consumer products with the announcement of Playmation, a groundbreaking system of connected toys that use smart technology to inspire kids to run around and use their imaginations as they become the hero or heroine of stories from across the Walt Disney Company.

Our teams collaborated with Disney Consumer Products on the development of Playmation and we are manufacturing and distributing the systems.

Playmation Marvel Avengers preorders began July 7 and product will be available in October.

We are excited about working together on this truly groundbreaking play experience and supporting future systems including Star Wars in 2016.

Star Wars shipments and point-of-sale in the second quarter were up.

Star Wars Rebels product is driving demand and we are seeing anticipation building ahead of the theatrical release of Star Wars: The Force Awakens.

Hasbro's Star Wars line based on the film will be at retail on September 4 and we unveiled our first Star Wars: The Force Awakens Black Series action figures a few weeks ago at San Diego Comic-Con.

It is clear from our discussions with you that Star Wars continues to be a major area of interest.

Our expectations around timing have not changed and the first significant shipments commence this quarter.

We will continue to wave in new product throughout 2015 and in 2016 as the film will continue to be in theaters next year and we will further support the Home Entertainment release.

As a result of the timing of the movie, we continue to anticipate revenues being somewhat equally split between the two years.

In addition to Star Wars, we have a tremendous fall and holiday lineup for the remainder of 2015 across our franchise, Challenger and partner brands.

Content development for Hasbro brands remains a priority for our teams.

In partnership with Paramount, in June we brought together a group of tremendously talented writers to begin the creative development on the theatrical future of the Transformers Universe.

At San Diego Comic-Con, we announced a new relationship with Machinima on an all-new digital series targeting the teen and adult Transformers fans.

Finally, earlier this month we announced that we will be collaborating with Lionsgate to bring Monopoly to the big screen.

We have a tremendous writer, Andrew Niccol, who wrote the Truman Show.

The film will be produced by Lionsgate and Hasbro's Allspark Pictures with Lionsgate financing the movie.

Our games business remains critically important to our brand portfolio and we continue investing in gaming across our brands.

Games revenues were flat over the first six months of the year.

Our underlying trends are good and we have many new innovations for the second half of the year.

These include an all new fan-driven Monopoly Here & Now and the addition of the Internet phenomenon, Pie Face to our portfolio.

We are also driving several entertainment back lines supporting both The Minions movie and Star Wars.

In addition, we've recently launched the Magic: The Gathering Arena of the Planeswalkers game which gives us a new footprint in the strategy board gaming category.

As we further invest in global brand building, we announced last week that we signed a letter of intent to sell our games factories in East Longmeadow, Massachusetts and Waterford, Ireland to Cartamundi.

It was critical for us to find the right owners for these operations.

We know Cartamundi well as we have worked together for years.

We believe that within Cartamundi, we have found owners with a strong heritage of manufacturing, a passion for communities and for their people.

They will employ all regular manufacturing and distribution employees at both sites and continue to manufacture much of Hasbro's traditional games business.

Our agreement includes a five-year commitment to these facilities.

The financial impact from this transaction is minimal and strategically it is the right move for Hasbro and for our people across these operations.

As we enter the second half of the year, we know there is a tremendous amount of work to be done to successfully deliver 2015 and to drive our Company into 2016 and beyond through strategic investments and global execution of the brand blueprint.

We are in a position of strength in the global marketplace with good momentum in our brands and tremendous innovation in our lines.

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

Deb?

Thank you, Brian, and good morning, everyone.

In both the second quarter and throughout the first six months of the year we experienced good momentum in our brands, improvement in our underlying profitability and a strong balance sheet.

Over the past 12 months, we have generated $581 million of operating cash flow and we ended the quarter with $858 million in cash.

We continue to make important investments back into our business in particular into strategic brands and new systems while also returning excess cash to shareholders.

Through the first six months of the year, we returned $158 million through our dividend and share repurchase program.

As evidence by our reported results, the foreign exchange environment remains challenging but growth in our brands and strong consumer demand supported by the pricing and hedging actions we have taken to help offset the negative currency impact is enabling us to effectively manage the challenge.

Our international teams have done a great job in understanding their markets and its needs during this time.

Looking at our segments for the second quarter, revenues in the US and Canada segment increased 1%.

Growth in the boys and preschool categories more than offset a decline in the games and girls categories.

Growth in franchise brands Nerf, Play-Doh, My Little Pony and Littlest Pet Shop along with shipments of Jurassic World, Star Wars and Disney Descendents, contributed to the year-over-year growth.

Growth in the US was partially offset by declines in Canada following Target's decision to exit the country.

Consumer demand remains strong with point of sale in the US increasing in the quarter and growing in both the US and Canada over the first six months of the year.

Point of sale for franchise brands increased in both markets for the quarter and year to date.

Operating profit in the US and Canada segment was essentially flat year-over-year at 12.2% of revenues.

International segment revenues declined 9%, Europe was down 14%, and Asia-Pacific was down 6% while Latin America posted growth of 1%.

Emerging market revenues were also down, declining 11% in reported revenues.

Growth in the preschool category was more than offset by declines in the boys, games and girls categories.

Franchise brands Play-Doh, Monopoly and Nerf along with partner brands, Marvel and Jurassic World, were positive contributors to the quarter.

Absent the negative $69.5 million impact of foreign exchange, international segment revenues grew 9% and emerging markets grew approximately 9%.

$43 million of the foreign exchange impact was in Europe with most of the remaining impact in Latin America.

Absent FX, Europe grew 6%, Latin America increased 23%, and Asia-Pacific was up 1%.

Operating profit in the international segment declined 13% reflecting the negative impact of foreign exchange.

Absent this impact, operating profit increased versus 2014.

Finally, revenues in the entertainment and licensing segment were flat with 2014.

The segment's performance is being driven by entertainment backed licensing revenues.

Operating profit declined $7.2 million as a result of a less favorable revenue mix, higher amortization expense and the timing of expenses in the quarter versus last year.

Turning to overall expenses for Hasbro, cost of sales in the quarter was favorably impacted by product mix including higher margins, royalty bearing product revenues as well as the benefit of foreign currency hedges and the impact of pricing actions we have taken to help offset the negative impact of foreign currency.

In total, cost of sales declined to 37% of revenues versus 38.6% in 2014.

As a result of the revenue decline from Transformers: Age of Extinction movie product, royalties declined year-over-year to 7.2% of revenue.

For the first six months, royalties are 7.7% of revenue.

Given the strength of our partner brands year-to-date, cost of sales has trended lower than our previous expectations and royalties have trended higher.

We expect both of these trends to continue for the remainder of the year.

Product development increased from last year to 7.2% of revenues.

As was the case in the first quarter, this reflects the investment we are making in a number of brand initiatives, in particular, in the development of the Disney Princess and Frozen properties ahead of the 2016 launch.

We continue to invest in innovation and the future of our business including investments in new brands.

As the majority of these expenses are US dollar-based, we expect product development to be slightly above the high-end of our previously stated range which was 5% to 5.5% of revenue.

Advertising was flat year-over-year as a percent of revenue as we continue to drive efficiency in our global advertising model.

Intangible amortization increased in the quarter as we recorded the final quarter of amortization associated with digital gaming rights we reacquired in 2005 and 2007.

For the full-year, intangible amortization is anticipated to be approximately $44 million, $26 million of which has been recorded over the first six months.

SD&A increased 5% in the quarter to 26.7% of revenues.

This increase was driven by similar factors to the first quarter including higher equity compensation, higher depreciation and continued investment in our business including Magic: The Gathering's digital platform.

These increases were partially offset by favorable foreign exchange.

As we've said before, we believe these trends will continue and that SD&A will be higher versus 2014's level of 20.8%.

Turning to results below operating profit, other income from the quarter was $2.3 million compared to $4.8 million in 2014.

Profitability improvements and our 40% share of the operating income from the Discovery Family Channel were offset by higher losses from foreign exchange.

The second-quarter underlying tax rate was 27.1% versus 26.8% in 2014.

We expect our full-year underlying tax rate to be in the range of 26.5% to 27.5%, reflecting continued higher anticipated earnings in the US.

Diluted earnings per share for the quarter were $0.33 versus the adjusted earnings per share of $0.36 in 2014.

We returned $79 million to shareholders in the quarter, $57.4 million in dividends and $21.6 million in share repurchases.

Receivables at quarter end were down 4% but increased 10% absent the impact of foreign exchange.

DSOs were 80 days, consistent with last year.

Inventory decreased $89 million versus last year.

$20 million of this decline represents the assets we are selling to Cartamundi and are now presented in current assets.

Excluding both the pending sale of the factories and the impact of foreign exchange, inventory is essentially flat year-over-year.

As Brian stated earlier, the pending sale of our factories to Cartamundi is not expected to have a significant impact on our income statement.

In addition to the inventory reclassifications, $26 million of property, plant and equipment have been transferred to other assets because they are now held for sale.

As we begin the second half of the year, we have good momentum in our business and remain in a strong financial position.

We are making necessary investments to position Hasbro for long-term growth while executing across brands and geographies in the near-term.

Brian and I would now be happy to take your questions.

(Operator Instructions).

Steph Wissink, Piper Jaffray.

Thank you.

Good morning, everyone, and congratulations on a great quarter.

I have two bigger picture questions if I could.

Brian, you have been running this business now for close to almost 10 years.

I want you just to talk about the sight lines you have or the visibility over a multiyear period into the business today maybe versus when you took the CEO role several years ago.

Deb, just a question for you on cash flow priorities.

We are looking at a nice cash flow cycle now.

Can you talk a little bit about prioritization of cash maybe even looking at some of the brand partnerships you have or some acquisitions that you might be interested in?

Thank you.

Not to get too philosophical this early in the morning, I would say for me there has always been a quote or to kind of paraphrase from Bill Gates who said people overestimate what they can do in two years and underestimate what they can do in 10.

I think what you are really seeing is a byproduct of our teams around the world having worked together over the last decade and building the brand blueprint, recognizing how important consumer insights are and investing in those consumer insights, investing in product innovation and storytelling and storytelling of all kinds of formats.

As I look out to answer your specific question about sight lines, we believe now we have fully assembled the brand blueprint and we will continue to invest in aspects of our business.

Right now we are investing in Magic: The Gathering online.

We want to continue to improve people's participation in our brands at every turn.

We will continue to invest in product development; you see some of that this year with investments in Disney Princess and over trend investments in R&D.

But over the long-term, we feel that the blueprint has been assembled, we will continue to add parts to it and pieces to it and we will continue to execute across global geography.

So we feel very good as a team that we have the right skill sets and we continue to onboard new leadership and new employees all the time who are helping us to deliver what you are seeing now.

And that really ties in nicely too actually to the cash prioritization question because as we said consistently first and foremost, we want to invest in our business.

And while we are always open to acquisitions, we are skeptical.

Because we have seen that as we continue to invest and just invest in skills we need around the blueprint, our brands and the new brands that we are investing and creating we believe will give the greatest return to our shareholders.

So from a cash prioritization standpoint first and foremost, we will continue to invest in our business and then return excess to shareholders through our dividends and our share repurchase program.

Thank you.

Eric Handler, MKM Partners.

Deb, I think in the press release or in the PowerPoint presentation you talked about increased investment in the back half of the year.

Can you talk about specifically what those are?

Are there any P&L impacts above and beyond what you guys have already provided in your cost and expense trends?

And then also when you look at your gross margin you talked about you expect to -- it sounds like you expect it to be above what you originally projected for the start of the year.

In the back half of the year, can you talk about some of the puts and takes for gross margin?

Sure, absolutely.

Good morning, Eric.

You are right, as we look at the investments they are not really new investments we are making in the business, it is a continuation of what we have talked about previously, investing in systems.

Brian spoke earlier about our continued investments in Magic: The Gathering online.

We continue to invest obviously ahead of revenues on the Disney Princess and Frozen lines.

In doing that, because most of those investments are in US dollars, it is just driving those rates a bit higher than we thought as we have seen foreign currency kind of settle out on the revenue line.

So really for us it is nothing new from an investment standpoint, it is just we are seeing more the impact of the continued foreign exchange trends on the percentages and driving that up.

From a gross margin standpoint, our partner brands continue to exceed our expectations and we believe that that trend will -- the trend we see today will continue.

What that does is to remind everyone when we have entertainment backed properties, they tend to command a higher price point and with that they also carry higher royalties.

So really what we were trying to say is we had called that gross margin would be around the same level it was and that we would be able to sustain the level of what it was for the full-year 2014.

We think it may be a bit higher but in line with that, we think our royalty expense will be a bit higher as well.

So really what we are saying is if you look at the two together, we are not expecting anything significantly different than what we told you at year-end, we are just acknowledging that that mix is a bit different and that is really what you are seeing in that gross margin line is mix.

Great.

Thank you very much.

Felicia Hendrix, Barclays.

Good morning.

Thanks for taking my question.

I know it is early days and the Descendants movie isn't coming out until the end of the month but wondering if you could just touch upon the retail takeaway there?

And then also Brian, a little further looking in the girls category in general.

You guys have a lot of exciting things in your pipeline to come and I'm sure everybody's really looking forward to seeing.

But the girls space looks like it could be pretty crowded next year including the reintroduction of Bratz and Mattel has talked about some relationship that they have with DC Comics and girl action figures.

So just wondering how you are thinking about the girls space next year as well?

Thanks.

Good morning.

In the quarter we shipped only a very little bit of Descendants, most of it is shipping now.

We haven't yet seen retail takeaway to speak of, maybe a day or two so I wouldn't really want to comment on retail takeaway quite yet.

But the movie does come at the very end of the month and we are very excited about the Descendants movie and the associated marketing around it.

I think it will really resonate with the audience and we are very excited to get our first product line out there.

We are incredibly enthused by our efforts on all the R&D and innovation we are putting into the Princess line.

The feedback we have had from retailers is that our Princess line is fantastic.

Our marketing plans will be very robust and our partnership with Disney will enable us to launch in a very strong manner.

We actually believe over time we may be able to do better than the Princess line has done historically because of the innovation we are bringing to that line, global scope and scale of our two companies together, our partnership in commitment to grow Princess and Frozen business.

So that is our focus and we believe that we have standout brands there.

My Little Pony, we have just begun to launch Cutie Mark Magic for the fall.

It is already seeing very good takeaway in the fall as well, this fall.

September, we have been all new Equestria Girls movie breaking, the Friendship Games.

And so whether it is short-term, medium-term or even longer-term, we believe we have very compelling brands in the girls space.

We have built this business over time and we intend to continue to be incredibly innovative and bring very fun experiences to girls all around the world.

Great, that is helpful.

Deb, can you just tell us what you are seeing on the sales adjustment side?

Are you just for your business are you seeing any changes year-over-year?

No, not really.

I mean our brands continue to do well.

As you know we report our sales net because we believe that that is actually the cash we will collect and we think that is the best representation for our shareholders.

But it's really -- we see nothing unusual.

As Brian mentioned, POS is strong and retail takeaway has been good.

Our retailers are excited about what we are heading into the fall with.

So nothing unusual.

Okay, great.

If you just take franchise brand, we can talk about POS but franchise brand's POS in the quarter was up double digits, up 17%.

So we are seeing great takeaway of our brands and they are resonating around the world.

Since you just offered it, let's talk a little more about POS.

Okay.

POS is up nearly everywhere in the world.

It was down a drop in Canada in the quarter but that is owing to something Deb mentioned which was the exit of a retailer out of that region.

But if you go around the world where we get the POS data, it is up double digits in several countries, in Mexico, in Australia, the UK, Spain.

We are seeing good, strong single-digit growth in France, Germany, and the US.

So again across the business we are seeing great takeaway and we are seeing good market share gains in most of the countries where market share is measured albeit I would take those numbers directionally.

But certainly we believe that that is indicative of the strength of the brands.

Okay, great.

Thank you.

Taposh Bari, Goldman Sachs.

Good morning.

Nice quarter as well.

Brian, I wanted to ask about the boys segment.

It seems like it outperformed expectations in light of the fact that you are anniversarying the Transformers theatrical release last year.

So I guess the question is are you seeing a difference in the cadence of the fall off post movie in that property specifically?

The reason I ask is that the entertainment and licensings have also seem to have outperformed our expectations and wondering if there is something going on there related to that property as well?

I think it is a great insight on your part because in fact Transformers year to date I would say is outperforming the trend you might see otherwise.

Year-to-date the brand is down about half of what you would expect from the fall off of a movie although in the quarter it is off about what you would expect up against the movie and that just relates to the shipments we would have had this time last year in movie shipments.

In the US for example, the POS through the end of the quarter in Transformers was only down single digits so you really are seeing both in terms of year-to-date shipments being down half as much as what you would have expected and the POS, associated POS.

The movie related product is certainly a major headwind versus year ago but the TV related product is performing quite well around the world and very innovative product line and it is working quite well as well.

The licensing business inside of entertainment and licensing has performed quite well, it has continued to perform well in the quarter and year to date.

Great.

And then Deb, for you, just going back to the cash question, you have got about $850 million at the midpoint of this year which is materially above where it was last year yet the pace of buyback is well below from where it was last year.

So I guess as a question, can you remind us how you think about buyback and why you are buying back less this year versus last?

Sure.

Well first and foremost, we want to invest in our business.

So much of that buyback is flexible depending on our level of investments.

Beyond that investment in the business, we always prioritize our dividend, it is a promise we have made to our shareholders.

We want to make sure we can maintain and our directors had increased our dividend again this year I think for 10 out of the last 11 years.

So that is our prioritization and then we use our excess cash to go to the buyback.

In 2014, we had mentioned we were able to cost-effectively bring some excess cash back to the US and we returned that to shareholders through buyback.

This year we continue to believe that will be more in line with the 2013 levels than 2014.

Thanks a lot, best of luck into holiday.

Gerrick Johnson, BMO Capital Markets.

Good morning.

When you guys talk about Star Wars being evenly split, are you talking only about Episode VII product or does that include also Rogue One?

No, we are really focused on the Episode VII product.

We've had a lot of questions are around what do we see as the tempo of Episode VII and so we are just trying to give people the sense that we see it roughly equally split at this point albeit we will update you as we get closer to movie timing and to our retail set date of September 4.

But at this point as we look at the business, lots of anticipation around the launch of the movie.

The feedback we got for our first product at Comic-Con was phenomenal in The Black Series action figure and we are seeing the tempo of Episode VII be roughly half.

Remembering that after December 18, the movie will continue in theaters for some time and roll into 2016 and then, of course, you have the home entertainment window.

Okay.

If we add in Rogue One I guess 2016 would be bigger.

Moving on to royalties, I was kind of expecting royalties to be down with Avengers, Jurassic World and so forth versus Transformers, which I thought would have a lower royalty than the others.

So can you just explain a little bit more clearly I guess why royalties were the way they were in the quarter?

Well, we mentioned the impact on royalties of Transformers year on year.

So that is actually if you look at the revenue mix, it really is just how our royalty expense flows.

If you remember in the quarter in addition to some entertainment properties that performed quite well, Nerf performed incredibly well, continues to grow and so that is a lower royalty bearing item.

Obviously it is our own brand, it has higher operating margin and so that has really helped the mix of royalties in the quarter.

Then of course Transformers shipments, movie shipments, were down and as you know we don't pay to the movie production but we do provide a royalty to Paramount on movie-related sales.

Okay.

And one last one if I may.

Mattel mentioned that the majority of this year's FX hit to gross margin would be in the back half because it would be locked up in cost of goods sold, locked up in inventory, and then flows through in the back half.

Should we expect a similar dynamic for you guys?

We think on a full-year basis, we mentioned our gross margin should be a bit higher but our royalties will also be a bit higher.

We have a fair amount hedged of product cost through the rest of the year.

I think last year we had about 78% hedged of our product purchases and we probably have just a little bit less than that this year.

So we have kind of built that protection into our gross margin for the year for us but the change is really going to be about product mix.

All right, great.

Thank you.

(Operator Instructions).

Drew Crum, Stifel.

Okay, thanks.

Good morning everyone.

Brian, could you remind us what the release schedule looks like for Magic in the third quarter this year versus last year?

And in the second quarter, what did games do ex-Magic?

In the second quarter, our traditional game business was up a bit.

So that would be let's call it board games business was up a bit in the quarter.

In Wizards of the Coast in the quarter, we also had production of Duel Masters which they are restaging in Japan.

So that was a bit of the impact in the games business.

As we go forward for Magic, there are a number of initiatives that are going on across the brand.

As we have talked about, we are investing to continue to improve and seek more players in Magic online.

We have Magic Duels; hopefully you have downloaded it by now onto your iPhone.

It is a great digital game, it really introduces people to the play.

And as we look at the holiday period, we will have a couple of releases for Magic for the remainder of the year.

Okay.

Is there any update on Jem and The Holograms from a theatrical release perspective, any product initiative launches you have?

And how would you characterize the pipeline of content from Allspark as you look ahead?

The date is October 23 for the movie.

We have already gotten some very positive feedback from audiences as you know early you get feedback and make sure you are on the right track.

We are feeling very excited about the movie and we will have a range of licensed product and some collector oriented toys during the launch of the film, a great program from Sephora and several other licensees.

But it is really our first step in reintroducing Jem and The Holograms to audiences around the world and we will build momentum around product, particularly toy product, as we move beyond the film.

So not for this year but into the next couple of years.

As you look at Allspark, the next major production is My Little Pony animated film which will come out in 2017.

We will announce a distributor shortly for that film.

And again, we are able to make that movie for more of a nominal cost than the traditional animated film given all of our experience and expertise in animated television production.

Although this certainly will be on scale with all of the other animated films you have seen in terms of quality and the look in the feel of the movie, the music as well as the cast is quite good.

But I won't steal the team's thunder.

They will announce some of that shortly.

That will be the next project from Allspark.

Okay, great.

And then just one last question, Brian, we are hearing that retailers are going to dedicate a lot of shelf space to Star Wars in the second half.

Does that potentially cannibalize against other boys properties that you have or do you anticipate retailers flexing space up in order to accommodate all your properties and brands?

I think it is more the latter of what you said.

I think they are flexing space up, they are going to use a lot of space that wouldn't otherwise be dedicated to the modular or to end caps.

I think you are going to find distinct locations for Star Wars product in addition to more traditional locations.

Remember, year-to-date Marvel is performing incredibly well and so I think retailers will continue to want to support the Marvel lines.

In the quarter and year-to-date, Marvel has performed incredibly strongly.

In the quarter Star Wars, has performed well.

The POS for both of those are very strong double-digit so I would imagine retailers would want to support both.

And then of course brands like Nerf that continue to perform within the boys arena.

I would say retailers are supporting more brands and more initiatives.

I don't see cannibalization.

Okay.

Thanks, guys.

Tim Conder, Wells Fargo Advisors.

Thank you.

Just a couple here.

One, on Disney Princess, Brian, you talked about how the retailers on the early showing of the line very receptive.

Can you give us any framework of how you anticipate, will there be any initial sell down of what is in the channel in the early part of 2016 and then how we should think about the cadence of that coming in and maybe scale of what you expect to do relative to what maybe Mattel is going to exit the year with just directionally I guess?

And then, Deb, a clarification on your comments on an earlier question.

So gross margins are better, royalties are higher and it sounds like those two alone offset but then you also talked about some other expenses being a little bit higher.

So I know you don't give EPS guidance but when you net all of that down, if you gave EPS guidance, would that net all the way through a little bit lower or sort of in line?

So, Tim, if you look what is going on right now in the market, I would say there is discounting going on now at retail.

In fact you will see that going on.

I can't really comment on what the size of inventories will look like in January but I will tell you we will launch a full line of product in January and add to that as we go throughout the year.

Certainly 2016 is a year where we work to get to scale, we have been investing this year ahead of revenues so that we can have a very strong launch for the line and then continue to grow it over the next several years.

We do believe that there is upside in that business versus historical trends.

As far as our expenses, Tim, we were saying that while you might see different items in the mix and I think I got asked the question about overall expenses earlier as well, our plan for the year really hasn't changed but what we see is the mix in our line items have changed.

And with the continued impact of Forex, as a matter of fact, if you look at our quarter end rate, our 2014 revenues would have been $286 million less than they actually were.

With the impact, the continued impact, of Forex and just the timing of some of those expenses, some of the percentages will look a bit different as you go through the full-year.

Okay.

And then [marginally] on Star Wars, Brian, thank you for the color also about retailers flexing up space and you were not anticipating cannibalization.

How are you and Disney approaching I guess sort of a big rush in early saturation?

It sounded like you talked about multiple things being scaled down this year and even into next year.

Is there any additional color you could provide on that?

It would be appreciated.

Thank you.

Sure.

So on September 4, we will have a full product lineup of Star Wars product but as you know, we are experts at waving in new characters within those SKUs.

And so you will see us using our wave management techniques to bring new characters in constantly and new play patterns in as well.

So what you see on September 4 will then be refreshed with new characters as we get closer to the film, as we introduce people or the film introduces people to new characters.

We will then have characters that will follow that in time for Christmas and into new year.

Then you will have new waves of product and characters that will come in the first quarter, second quarter and throughout 2016.

We are just trying to say that we are going to constantly refresh and update that product line as we have been known to do.

It will give us an opportunity to continue to bring new innovation in everything from role-play to vehicles to action figures.

And I think you are going to be really impressed with and we will hopefully be able to share with you shortly what the product line looks like.

Retailers have been very happy with the product lineup and are very excited.

Great.

Thank you and congrats on the good start to the year.

Jim Chartier, Monness, Crespi.

Thanks for taking my questions.

I have two questions.

First, could you just go into a little more detail on what drove the strength in Nerf?

Was it primarily Modulus?

And do you have any shipments for Revival in the quarter?

Second, can you just talk about what is going on with Duel Masters?

When do you plan to restage that business in Japan?

Thanks.

The restage of Duel Masters is going on as we speak and the team has been working on several new initiatives around Duel Masters over the time.

In Nerf, it is a combination of really strong carryover items from holiday that have continued to perform quite well and then we have a number of new spring items that is not related to Modulus.

Modulus really comes mostly in the second half of this year and that will be more of the holiday offering but the performance has continued to be quite strong item for item and the user generated content continues to grow.

Great.

Thanks and best of luck.

At this time I will turn the floor back to Ms. Debbie Hancock for additional 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 third-quarter earnings call is tentatively scheduled for Monday, October 19.

Additionally, on November 16, we are planning an Investor Day at our headquarters here in the Pawtucket, Rhode Island.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time and thank you for your participation.