孩之寶 (HAS) 2015 Q3 法說會逐字稿

Good morning.

Welcome to the Hasbro third-quarter 2015 earnings conference call.

At this time all participants will be in a listen-only mode.

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

(Operator Instructions).

Today's conference is being recorded.

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

At this time I would like to turn the call over to Miss 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 Chairman, 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 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.

Today's discussion will exclude from the third quarter 2015 a pretax gain of $9.9 million or $0.06 per share from the sale of manufacturing operations and from last year's third-quarter, a pretax charge of $11.6 million or $0.06 per diluted share related to the restructuring of the Company's investment in its television joint venture.

Both are being excluded as they do 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, costs, 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, in today's press release and in our other public disclosures.

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

We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call.

I would now like to introduce Brian Goldner.

Brian?

Thank you, Debbie.

Good morning everyone and thank you for joining us today.

The execution of our brand blueprint is delivering underlying growth across brands and geographies.

As evidenced by our gains in market share and consumer takeaway this year, our teams are successfully creating the world's best play experiences for consumers around the world despite the challenging currency environment.

Underlying revenues grew 9% but the growth was offset by a negative $132 million impact from foreign exchange.

The strength of consumer demand was evident across our segments.

The US and Canada segment increased 6%and the International segment grew 14%, both excluding the negative impact of foreign exchange.

The emerging markets continue to post double-digit growth absent FX.

While the economic environments in these markets are challenging, we continue to believe in the growth opportunity in these strategically important countries over both the short- and long-term.

Consumer demand for our brands has remained very strong throughout 2015 with many emerging and developed markets including the US, UK and Germany posting double-digit point-of-sale gains this quarter.

This demand was evident across categories.

In the US and UK, point-of-sale increased double digits in the boys, games, girls and preschool categories.

In several countries, point-of-sale also grew in all four categories.

Retail inventories are well-positioned to support demand for the holiday season with increases in inventory focused on new initiatives and growing brands.

We continued to see strong demand for Hasbro brands.

Absent foreign exchange, Hasbro franchise brands increased 4% in the third quarter with Nerf, Play-Doh and Monopoly posting the largest revenue increases.

Over the first nine months of the year, franchise brands were up 8% absent FX.

Transformers was down given the difficult comparison and Littlest Pet Shop was flat despite growth in the US.

The other five franchise brands each reported growth in constant currency in the nine-month period.

Nerf is having another outstanding year with strong innovation driving the core as well as new initiatives including Nerf Modulus and Rival, both off to a strong start.

Play-Doh's creative play continues to appeal to global consumers.

We celebrated the first-ever world Play-Doh Day on September 16 and we are supporting new fall initiatives including Crazy Cuts and Cupcake Celebration.

The growth in these brands helped offset the decline in Transformers.

Last year the brand benefited from the Transformers Age of Extinction film.

We continue to plan the future of Transformers franchise in all forms of entertainment including movies, television and digital expressions.

Transformers Robots in Disguise is airing on Cartoon Network in the US and many international markets and Transformers Rescue Bots is also airing on networks around the world.

Last quarter we spoke with you about the incredibly talented group of writers led by Akiva Goldsman, who were charged with plotting out the next 10 years and beyond of theatrical storytelling around Transformers.

While Paramount has yet to formally announce our next film, we are excited about the vast potential of the work which came out of the writers room.

My Little Pony demand remains strong around the world with positive point-of-sale trends from My Little Pony Friendship is Magic products and a new Playskool friends line for preschoolers.

The Equestria Girls Friendship Games Entertainment premiered last month on Discovery Family with good ratings that beat last year's Rainbow Rock special in several key demographics.

Magic Origins was released in the quarter and was the biggest summer set release in Magic: The Gathering's history.

In addition in September, the global pre-release for the Battle of Zendikar set previewed at thousands of core hobby stores around the globe and was the best attended pre-release in Magic's 22-year history.

Adjusted for the negative impact of foreign exchange, Magic: The Gathering revenues have increased over the first nine months of the year versus last year.

Demand and interest are at all-time highs and we continue to invest to unlock the full potential of the brand.

In addition to our franchise brands, 2015 is an impressive year for our partner brands with multiple global box office successes this year already and one major film yet to come.

Force Friday was held on September 4 and marked the global retail launch of Star Wars: The Force Awakens product.

Fans around the world turned out and Hasbro played a major role in this unprecedented event from the global unboxings of product to record-setting midnight madness events at retail.

The franchise is as vibrant as ever spanning demographics and bringing in new consumers.

Star Wars has the potential to become increasingly global much as Marvel has become as part of the Walt Disney Company.

Retailers and consumers have been very supportive of Hasbro's Star Wars: The Force Awakens line and consumer takeaway is off to a strong start.

Hasbro's Black Series action figures and multiple light sabers are on the top of consumers buying lists.

During Force Friday week according to NPD, action figures and role-play were 42% of the dollars spent in the US.

Hasbro's Black Series figures were the top-selling Star Wars item for that week in the US.

Total Hasbro Star Wars retail sales to date through September 26 have significantly outpaced the total Star Wars retail dollar growth in the US and the UK.

Of note, these are the only two markets where we have early data.

The December 18 premiere of the film is still two months away and new Star Wars items from Hasbro will continue to hit retail shelves for the remainder of the year and throughout 2016.

In addition to Star Wars, the Marvel brand is performing very well this year and in the quarter we benefited from initial shipments of Playmation Marvel's Avengers.

Jurassic World also continued to contribute to year-over-year growth.

The third quarter also marked the on shelf date for Disney's Descendents.

Descendents premiered July 31 on Disney channel in the US and Canada and will continue to roll out around the globe this fall.

Point-of-sale has been strong for the launch.

During the quarter, we completed the sale of our East Longmeadow, Massachusetts and Waterford, Ireland manufacturing operations to Cartamundi.

While this provided a small gain in the quarter, importantly it secured a valued manufacturing partner for our gaming efforts.

Going forward, our teams expertise will be focused on building global gaming brands.

We have a robust games program for the holiday including a number of new initiatives.

Monopoly Here and Now features all new properties voted on by fans this spring and Internet sensation Pie Face is launching globally and off to a strong start in all major markets.

We also have a number of entertainment led games including games based on Minions, Marvel's Avengers, Star Wars: The Force Awakens, and Disney's Frozen.

Games category revenues absent foreign exchange were essentially flat in the quarter and increased 3% year to date.

Consumer demand has been strong and point-of-sale trends are up double digits in several markets.

Our retail merchandising approach this holiday is more closely aligned with the timing of consumer demand.

As a result, shipments have shifted later in the year.

In 2015, we are operating in a challenging and competitive marketplace.

Succeeding in today's environment requires not only great brands but a stronger and more complex than ever connection with the consumer.

Our global teams are navigating a year with unprecedented currency challenges, a dynamic demand environment and one of the most diverse brand portfolios in entertainment slates we have ever supported.

As a result, this holiday season we delivering tremendous innovation, engaging with consumers across mediums and telling compelling stories around the world.

Later this week in partnership with Universal is the theatrical premiere of Jem and The Holograms.

Through this live-action film and a trend-right licensing program focused on fashion and beauty, a whole new generation of fans will be introduced to Jem.

We continue to incubate and develop new brands such as Jem in addition to the further development of our franchise and partner brands.

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

Deb?

Thank you, Brian, and good morning, everyone.

Over the first three quarters of the year, we drove growth in constant currency across brands in geographies, good profitability and strong cash generation despite the challenging economic environment in a number of our international markets.

Year-to-date, foreign exchange has negatively impacted revenues by $266 million and operating profit by $62 million and we expect it will continue to be a difficult comparison going forward.

In the third quarter alone, foreign exchange impacted revenues by a negative $132 million and operating profit by a negative $33 million.

Approximately 18% of the topline impact fell to net earnings in the quarter.

Pricing and hedging programs helped offset some of this negative impact.

Even with this challenge, we have generated $497 million in cash over the past 12 months and ended the quarter with $551 million of cash on the balance sheet.

While underlying profitability has grown, we continued to strategically invest in growing our brands and improving the efficiency of Hasbro while returning excess cash to shareholders.

Through the first nine months of the year, we returned $241 million through our dividend and share repurchase program.

Looking at our segments for the third quarter, revenues in the US and Canada segment increased 5%.

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 and Littlest Pet Shop along with shipments of Star Wars, Jurassic World and Disney's Descendents more than offset declines in Transformers, FurReal Friends and Furby.

Consumer demand in the US remained strong with point of sale increasing double digits across all product categories.

Given the departure of Target in the region, Canada point of sale was negative.

Additionally, foreign exchange had a 1% negative impact on the segment revenue for the quarter.

Operating profit in the US and Canada segment increased 10% to 23.3% of revenues.

Higher revenues more than offset higher expenses including our continuing investment in Magic: The Gathering online.

International segment reported revenues declined 6%.

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

Franchise brands Play-Doh, Nerf and Monopoly along with partner brands Star Wars, Jurassic World and Disney's Descendents were positive contributors to the quarter.

These gains were more than offset by declines in a number of brands including Transformers, Furby, My Little Pony and Littlest Pet Shop.

Absent a negative $126.7 million impact of foreign exchange, International segment revenues grew 14% and the emerging markets grew approximately 12%.

$74.4 million of the foreign exchange impact was in Europe, $44 million in Latin America, and $8 million in Asia-Pacific.

Absent FX, revenues in Europe grew 15%, Latin America increased 14%, and Asia-Pacific was up 9%.

Reported operating profit in the International segment declined 2% versus the 6% decline in revenues but increased to 18.6% of revenues.

Absent foreign exchange, operating profit increased 14%.

Finally, revenues in the entertainment and licensing segment were down 2% versus 2014.

The decline in revenue was primarily driven by lower Transformers revenues in the segment the year after the movie.

Operating profit increased to $16.2 million.

Intangible amortization was lower as certain digital gaming rights were fully amortized in the second quarter of 2015.

In addition, last year operating profit was negatively impacted by the acceleration of certain programming amortization costs.

Turning to overall expenses for Hasbro, as anticipated, cost of sales in the third quarter was favorably impacted by product mix.

In particular, higher-margin royalty bearing product revenues.

In total, cost of sales declined to 39.4% of revenues versus 41% in 2014.

Pricing in favorable hedges have helped us offset the impact of currency in the first nine months of the year.

Product mix also drove higher royalties which grew to 7.7% of revenues for the quarter and for the first nine months of the year.

On a combined basis, cost of sales and royalties were slightly more favorable than last year as the improvement in cost of sales was nearly entirely offset by higher royalties.

As we stated last quarter, we expect this trend of lower cost of sales and higher royalty expense to continue for the remainder of the year.

Product development increased from last year to 4.4% of revenues reflecting our investment in the Disney Princess and Frozen properties ahead of our 2016 launch.

We continue to expect full-year 2015 product development to be slightly above 5.5% of revenues.

Advertising declined to 9.7% of revenues reflecting the entertainment back mix of revenue in the quarter.

Intangible amortization declined $3.8 million.

In the second quarter 2015, we recorded the final quarter of amortization associated with digital gaming rights we reacquired in 2005 and 2007.

We anticipate full-year amortization will be approximately $44 million.

SD&A increased 3% in the quarter to 17% of revenues.

This increase continued to be the result of higher equity compensation, higher depreciation and continued investments in our business including new systems and the Magic: The Gathering digital platform.

These increases were partially offset by favorable foreign exchange.

We continue to believe that SD&A will be higher in 2015 versus last year.

Through the first nine months, SD&A on an adjusted basis has totaled 22.5% of revenues versus 21.6% in 2014.

Turning to results below operating profit on an adjusted basis, other expense for the quarter was $1.7 million compared to $4.2 million in 2014.

Increased profitability in our 40% share of the operating income from the Discovery Family Channel was the primary driver of the year-over-year improvement.

On a reported basis, $6.8 million of the gain from the sale of our manufacturing operations was recorded in this line during the third quarter whereas an expense of $12.9 million was recorded last third quarter associated with the restructuring of the investment in our joint venture television network.

The third quarter underlying tax rate was 27.2% versus 27.8% 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.

On an adjusted basis, diluted earnings per share for the quarter were $1.58 versus $1.46 in 2014.

We returned $83.5 million to shareholders in the quarter, $57.5 million in dividends and $26 million in share repurchases.

Receivables at quarter end were up 6% and DSOs were 85 days, up five days from last year.

In addition to a DSO increase from greater revenue and markets with longer terms, two days of the DSO increase were due to a delay in the timing of collections in our US direct import business.

Much of this has now been collected and we do not expect this to occur again in the fourth quarter.

Our accounts receivable are of good quality with 94% at the end of the quarter currently or not yet due for payments compared to 96% a year ago.

Inventory decreased $52 million versus last year.

Excluding the impact of the sale of our manufacturing operations and the impact of foreign exchange, inventories were up approximately $34 million.

With the inventory on hand at Hasbro and at retail, we are well-positioned to meet anticipated demand for the upcoming holiday season while managing our inventory risk.

The first nine months of the year have set us up well for the holiday season.

We have momentum in our brands, a robust entertainment slate and a number of new holiday initiatives to drive our business around the world.

We are also making the necessary investments to continue the execution of our strategy and to build the competencies we need as an organization to continue profitably growing our business over the long-term.

Brian and I are now happy to take your questions.

(Operator Instructions).

Taposh Bari, Goldman Sachs.

Good morning and congrats on a well executed quarter.

Brian, I wanted to ask you Brian, first about your view on the toy industry as we head into holiday.

It seems like the data industrywide has been very healthy this year against the pretty benign consumer backdrop.

So hoping to get your view on what you think is driving that outside of the slate, obviously that being a big driver.

How do you think retailers are positioned on the category, are they increasing shelf space?

Finally, what the role of e-commerce is playing and how that is evolving within your business?

So first of all, you are right, the trends that we see and the data that we have would indicate that the toy industry year to date is up high single digits and we see that as boding well as we get into the holiday season and continues our trends.

Our POS across the board is particularly strong, up double digits in most markets that we operate in, high single digits in a few places and in the US across categories is up significant double-digits in every category of our business.

What we are really seeing from a retailer standpoint is that space at retail is increasing, our space is increasing and they are very focused on the major brand initiatives that we have both franchise brands and partner brands for the holiday season.

While we see significant pace of growth at brick retailers and omnichannel retailing and online, we are seeing growth that is two to three times that rate in terms of growth.

So very significant growth rates in the online space, in the omnichannel space and all retailers are participating in that growth to some degree.

So I would say overall we continue to feel like the consumer is finding our products and our brands and that there is a lot of currency effects that are happening at this time and obviously different macroeconomic issues in some of the emerging markets but if you strip out what is going on there and take out FX, we are growing double digits in the emerging markets both in the quarter and year to date.

So we continue to believe that those markets play an essential role in our growth and we are seeing again underlying profitability increase in those markets as well.

So I would say overall, we feel that industry is seeing growth and that we are participating in that growth.

And finally, our market shares in 10 of our 11 markets have grown year to date with only one market being slightly on par with industry growth which is fairly robust so far year to date and that is Mexico.

But everywhere else where we get market share data, we are growing.

Good to see.

And just a quick follow-up on the girls segment, I guess there are two -- it seemed like there were 2 points of decline there, Furby which has been the case for a while now and My Little Pony.

So can you just elaborate on those two points?

Furby, how much longer are we going to see pressure out of that brand?

And My Little Pony, if you can just elaborate on the revenue decline there?

Thanks.

Yes, I will give you a perspective on Furby.

It was a very big brand for us last year.

In fact Q3 last year's sales in dollars was bigger than the first two quarters and represented about 37% of 2014's revenues.

Fourth quarter of 2014, Furby's revenues were 31% of the full year so we are going to see those headwinds through the end of the year so very significant dollars.

In Q3, we are happy to see that our girls POS is up double digits.

In My Little Pony, the core My Little Pony business, the ponies part of the business, Friendship is Magic, is up in the quarter and My Little Pony year to date is up a bit.

It is really in the timing of Equestria Girls.

The special went on the air in September, September 17 and the translation and placement of that special are happening throughout the fourth quarter in many markets around the world.

I think in many ways it sort of reinforces our belief that programming support that's over the full calendar year is essential as you look at content in storytelling and that it is a little more challenging to put out a one-time per year special although we do have lots of streaming short videos and other elements to support the Equestria Girls product line.

It does impact our timing on that part of the business certainly.

Good luck this holiday.

Sean McGowan, Oppenheimer & Company.

Thank you.

I have a couple if I can.

Can you quantify in greater detail how much of the negative impact of currency you were able to offset through the hedging and what is your outlook for that as a benefit going forward?

Good morning, Sean.

From a hedging standpoint, we did say we were able to -- between pricing and hedging of our product -- able to offset some of the foreign exchange impact which is why we only had about 18% kind of fall to the bottom line.

We do remain well hedged for the rest of this year as we had talked about.

We hedged to protect our pricing and we are hedged about the same level as we were at the end of last year.

So we expect to continue to have solid hedges to allow us to keep our pricing where it is where there is obviously good consumer demand for it out there in the marketplace.

Thank you.

I am curious about something that echoes what Mattel was talking up out last week and that is that a couple of properties and in your case perhaps more than a couple of properties, you are seeing very strong POS and yet declines in shipments.

What do think the retailers are thinking?

Are they putting off taking deliveries and does that increase the risk in the fourth quarter?

No, what we are really seeing are several of our brands have grown in the quarter.

A few of the brands are restaged to be a bit later in the year and also I think you are just seeing the impact of foreign exchange on some of the shipments.

And so for example, the games if you take absent FX, games are flat in the quarter and up low single digits year to date.

That is not what is indicative of the underlying or as reported results.

I think as we look brands like Nerf are up significantly, Play-Doh in the quarter up significantly, Monopoly and several of our games up.

So I think it is a matter of certain brands being staged starting in the third and going into the fourth quarter and other brands being staged closer to the fourth quarter.

Many of our games initiatives really come out into the fourth quarter, more consistent with the timing of consumption of games.

Several of our girls initiatives happen a little bit later because of the price points like StarLily within FurReal Friends which is a higher-priced item and more consistent with being a holiday item.

And as we continue to make improvements in the supply chain and work with our retailers, I do think that we are able to deliver more just-in-time inventory against greater growth in linear feet and it is partly our capability and partly their desire to have product that hits more closely aligned with the holiday season.

Okay, thank you.

Two quick ones to conclude.

Was Magic up in the third quarter?

And finally, Deb, can you give us the guidance on the full-year expectation for program cost amortization?

Is that still expected to be in line with last year's level?

So Magic year to date is up.

It was down a bit in the third quarter and I think one of the things we will continue to talk about with our analyst community and our own constituents is the fact that Magic is really focused around storytelling and so I think what we are going to see as I look out over the near and medium-term future is some up and down quarters that are more about the storytelling that is being done in any particular time rather than some of the seasonality.

Because as we know, Magic really doesn't abide by the same similar seasonality than the rest of our business.

So year to date up a bit.

In the quarter down a bit but again, we have seen very robust takeaway during the quarter, lots of pre-release activity, lots of interest in the brand, total number of gamers and players up.

And so I think it is just a matter of when the storytelling is hitting and then of course as you will remember, so much of that business is done outside our traditional channels of retail, more in the traditional hobby stores and the number of hobby stores that are carrying Magic: The Gathering has actually increased year on year as have our tournaments.

So I just think it is a matter of starting to frame that conversation more about the release schedule and the storytelling versus that expectation that we should see acceleration only based on seasonality.

Okay, thanks.

And as far as the program production amortization, we continue to expect it to be around like 1%-ish of revenue.

Okay, for the full year?

For the full year, yes.

All right, thank you very much.

Steph Wissink, Piper Jaffray.

Thank you.

Congratulations on a good quarter.

Our questions really relate specifically to Star Wars.

Brian, I'm curious if you can just talk a little bit about the quarter, how that performed relative to your plan and any initial insights from the sales mix?

Secondly, we are observing some rebalancing within the category post Force Friday.

It seems like action figures are actually gaining a bit more space on the shelf so I'm curious if that is also how you had planned the business or if that is maybe a bit of incremental surprise to the upside with respect to how the POS looked coming out of Force Friday?

Thank you.

Good morning.

If you look at the Star Wars business, clearly we performed quite well during Force Friday.

We talked about the numbers of both action figures and role-play being 42% of the business.

Up until September 28 where we have data, and we only have data for two markets which are early data which we worked with NPD to get and that was in the US and UK.

Our business is actually ahead of the retail sales increases we are seeing overall in Star Wars.

I would say overall Star Wars is at the high-end of our range of expectation for revenues this year.

So we had a range of expectation and Star Wars is performing at the high-end of that range, it is incredibly encouraging.

We are seeing great rates of sale.

But I would also add that contributing to our boys business and sometimes lost in the array of entertainment initiatives that are certainly supporting our business, Nerf is having an outstanding year and was up significant double digits in the quarter and year to date and we are seeing great growth there both in the core Nerf business as well a lot of our new initiatives like Modulus and Nerf Rival.

So it is a great balance between some of our partner brands like Star Wars, year to date Marvel is really contributing both year to date and in the quarter.

Jurassic world is contributing.

So again, it is strength to strength between our own franchise brand as well as our partner brands.

Thank you.

Then just one follow-up, Brian.

If you could talk a little bit about the Disney Princess business.

You receive that license early next year, how should we think about the flow of product into the channel over the course of the first 12 months of that license?

Well, there will be a transition period certainly in the first quarter of next year as other product sells out and through.

There is a period where that can occur.

And then we will be shipping in so I imagine in the first quarter we will have a transition period in working with our retailers to make that as streamlined as possible and as efficient as possible but I certainly believe there will be a transition period.

Then beyond that, the innovation that we have put into the product line, the partnership we have with the Walt Disney Company and our response from global retailers has been outstanding.

So I think longer-term the brand is well poised to perform exceedingly well and probably better than it has historically.

Thanks for the added color.

Best of luck.

Eric Handler, MKM Partners.

Thanks a lot.

So with Magic: The Gathering, it seems like there has been a lot of television advertising not just with Hearthstone but other card battling storyline type games at least on the videogame side.

Is that causing you to rethink any of your marketing promotions or how you roll out The Magic product?

Secondly, with Transformers, tell me if I am wrong but it just seems from an observation standpoint the shelf space for Transformers has been shrinking, we are seeing far fewer SKUs.

And I am just curious to think -- get your opinion on how that product's evolution will take place over the next couple of years and at least in non-movie years?

So first, let's talk about Transformers.

Year to date Transformers is actually bucking the trend of a typical boys action property the year following the movie.

In fact it is down by just over one-third which as you know is far better than one would expect in a non-movie year and that is because of the amount of entertainment.

We are also seeing in our preschool Transformers growth year to date in preschool Transformers, our Transformers Rescue Bots product line and being supported again by content.

Our licensing year to date for Transformers is up.

So I think maybe we would need to take a broader perspective on the performance of Transformers and look more globally because it is performing quite well in a non-movie year, certainly was down in the quarter and down more typical in the more typical range in the quarter.

But again I think the team has done a great job, great innovation, an expanded product line and again down below those trends one would expect.

In terms of Magic: The Gathering, we have launched a product that is an app-based product this year called Magic Origins.

It is a product that enables people to get into the brand and learn how to play Magic.

But remember while we are investing in Magic online and certainly believe over time our online business will be more robust, the play pattern of Magic is all about face-to-face connections and all about people getting together to play the brand in an analog space.

Having visited lots of gaming stores and hobby shops, having spent some time over the summer, there is really nothing that replaces that experience of people getting together, coming together, friends gathering together, getting off of their screens and playing face to face.

We are running more tournaments than ever, we have a more engaged gamer community and we are seeing great responses to the pre-releases and releases for our card sets.

So long term I think we are in very good shape with Magic and as I said a bit earlier, I think quarter to quarter it is a bit hard to read because again it is not based on any kind of seasonality that is typical in our industry.

It is more about the releases that are going on in any period and our users and players playing.

But we will continue to talk about it as we go forward.

Very helpful.

Thanks a lot, Brian.

Lee Giordano, Sterne, Agee.

Thanks.

Good morning, everyone.

So excluding Star Wars, I was hoping you could talk about any early reads on potential hot toys or must haves this holiday in your product lineup?

Thanks.

Wow, that is a big question.

So if I look where we are in the third quarter, what we are seeing is great double-digit growth in POS.

Let's just use the US for example.

Double-digit growth in our boys category, in our girls category, in our preschool business, in our games business and our franchise brands.

So we are really seeing an array of great product offerings that are being well received by customers thus far albeit we are now into the fourth quarter.

So the Nerf brand performing very well in the quarter and year to date.

Obviously Jurassic World has been a very strong contributor, My Little Pony has several new initiatives, both core My Little Pony as well as Equestria.

Littlest Pet Shop has performed very well in certain markets and we have been clearing out old inventory to perform better in other markets as we go forward.

We've got in FurReal Friends a great holiday product called StarLily so that has been quite good.

And then our Play-Doh brand has perform exceedingly well throughout the year and we have a number of new initiatives coming into the holiday.

Play-Doh is up and up double digits as well, both in the quarter and year to date.

So I would say that you are seeing great strength in our brands and our business across a number of brands and a number of new product initiatives.

Great.

Thank you very much.

Jaime Katz, Morningstar.

Good morning.

Thanks for taking my questions.

I am curious about the effectiveness of your advertising.

It looks like the last couple of quarters it has been down a little bit and I am wondering if some of the content creation has been able to substitute in the spend and how you guys think about that going forward?

If you recall, we have talked a lot about how we sort of view our own content creation, our advertising and then of course royalties paid is all points of marketing because we have big partners out there who are creating great content as well.

We are also seeing an overall trend toward more digital marketing, we are certainly spending more in digital particularly in developed economies and we are quickly increasing our digital marketing where available in more of the emerging market.

On average, digital marketing costs less out of pocket and is more targeted.

But again, I think that overall I would still use and guide you toward roughly 10% [A to S] ratio in advertising over time but certainly in a major entertainment year we have the opportunity to focus on our own entertainment and content as well as our partners' entertainment which helps to deliver our sales for the year.

Okay.

And then for girls, can you talk a little bit about your product pipeline as we lap those Furby sales where you think there might be some bright spots in the period ahead?

Sure.

If you look at the brands, our new Baby Alive offerings are performing quite well out of the gate.

Our FurReal Friends StarLily coming into the holiday should be quite successful.

We feel very good about it and the early reads are quite good.

In My Little Pony, several new initiatives coming both in the core My Little Pony as well as Equestria Girls.

Play-Doh DohVinci has performed well year to date is up year to date and coming into the holiday season.

We see that as a great new segment for the brand.

And then you will see several new items in Nerf Rebelle coming into holiday as well.

Then we should also talk about Disney Descendents.

Descendents is off to a great start.

The DCOM movie launched end of July and it is rolling out around the world into different markets but where we have launched Descendants it's performing exceedingly well.

So again, another addition to our girls portfolio and lineup that is really unique and differentiated and great storytelling.

And as you may have read, they have announced another Descendants television movie coming 2017.

So I think as we look forward into 2016 and 2017, lots of great new girls product both from our own franchise brands as well as great partners and we talked earlier about of course the introduction of Disney Princess and Frozen coming in 2016.

Great, thank you so much.

Drew Crum, Stifel.

Good morning, everyone.

Deb, I think on the last call you talked about investments being more prominent I think was the word you used in the second half versus the first half.

Is this in reference to capital spending or is this something that we should see flow through the income statement in the fourth quarter?

Because I look at your OpEx in the third quarter, it slowed less than a 2% whereas in the first half it was up 4%.

I just wanted to get some clarification around that.

Good morning, Drew.

I think you are seeing it really in both places if you look at our CapEx, it is running a bit higher than it has in the past and in there you can see the investment we are making in systems.

But there is also a pace that is flowing through our P&L.

We have a bit flowing through product development but the largest piece is through the SD&A line and really as we talk about our investment in Magic: The Gathering online, it is putting in the systems and the programming associated with getting that done as well as some of the investments we are making to drive the long-term efficiencies in our business and streamlining some of our processes as we go forward.

So you are seeing a bit of it in CapEx but you are also seeing it running primarily through the SD&A line.

Got it.

Okay.

And then there has been a lot of press coverage on Youkai Watch and your relationship there.

When do you guys begin shipping that product?

And Brian, just in terms of expectations, how does this compare to Beyblades?

Is this a franchise that could do Beyblade like numbers when you initially launched it back in 2011?

Thanks.

I think the place to look for Youkai Watch is to what has occurred in Japan it has been a very successful brand for some period of time in Japan.

The TV episodes have just begun airing and will begin shipping in the next little while I think.

Most of the impact occurs -- more of the impact would occur in the first quarter of 2016 but there will probably be a little bit happening in the fourth quarter this year.

But as you will recall, when we first launched Beyblade, it takes a number of months to inculcate the play pattern, to get the awareness up around the brand and we take a long view of a property like Youkai Watch.

It has been very successful, it really is very unique and differentiated in the marketplace and it is something that we are really looking forward to.

I don't want to try to size it for you but I would tell you that certainly it has been very successful on multiple years in Japan.

And just one last one, appreciating the lack of seasonality with Magic, can you just remind us what the card cadence looks like for the fourth quarter over the next couple of quarters?

We continue to have new releases coming in the fourth quarter and obviously into 2016.

I don't want to try to again size the card releases, that is part of the fun for the fans and the gamers is to hear from the brand as to what the card releases look like.

But I think the way to view the brand is on an annual basis versus quarter by quarter because of the way the storytelling is done and the way the card releases are set and the tournaments that are associated with the brand.

And over time we believe that Magic Online will play a greater role as our investments start to take hold and certainly as we look out to 2017 and beyond, we expect to have a more robust systems that enable more concurrent play online and to run even more robust online tournaments in 2017 and beyond.

So we will continue to build on the analog business, number of releases coming and again as you know this year we have gone to a different kind of a release schedule and you will continue to see the team evolve creatively into 2016.

Okay.

Thanks, guys.

Tim Conder, Wells Fargo.

Thank you.

Brian, given your comments on Star Wars and it is kind of tracking at the high-end of your retail expectations, you had said before that you see the sales balanced between 2015 and 2016.

I guess maybe an update on that and then did that statement just for clarification purposes, did that statement include only The Force Awakens or also factor in Rogue One?

Rogue One is for holiday next year, 2016.

So I am really talking about the overall Star Wars business that includes both Rebels as well as the Force Awakens product this year and into next year.

We don't really have an update relative to the split between 2015 and 2016.

What we are just seeing is that the brand is performing both in shipments and sellthrough at the high end of our range.

And we will have to wait and see as to that rate of sale as we get in through -- we certainly believe 2016 Q1 and Q2 as we go through and lots of young people get to see the movie.

Remember we are still two months out from the movie.

So that is going to have a major impact.

Then we get into the first quarter with lots of people now having enjoyed the movie and putting it in context with the other movies that have been out there.

And then at some point to be announced, there will be a home entertainment window as well that will continue to spur the brand along.

And so not ready to update any broad guidance around the split between 2015 and 2016.

Just wanted to report that we have seen very robust sales that are part of the business, is tracking ahead in terms of retail sales versus Star Wars overall and that overall shipments and retail sellthrough at the high end of our range.

You had also commented how your just in time ability has improved even with broadened distribution.

Any type of quantification of how much revenue that may be shifted from third to fourth quarter, a competitor gave some commentary from on that from what they thought from their business on Thursday.

But any quantification you can throw out here?

No, I don't think that trying to quantify that at this point would be prudent.

I do think that you are seeing a lot of new initiatives coming into the fourth quarter as you would expect.

I think what is heartening to see is that both in Q3 as well as year to date our categories of brands and products are selling very well and our POS has remained strong throughout the year and continues to be strong.

I would also tell you that in many instances our POS has strengthened in the third quarter versus the year to date numbers so again, we are seeing momentum build and again, I am not going to size Q3 versus Q4.

Okay.

And then two somewhat profitability related questions here.

How do you see -- this is a follow-on to a prior question related to the Princess business.

How do you see that profitability ramping in 2016 and 2017?

Also are you seeing any benefits do you expect this year from lower transportation costs and then other input cost benefits in 2016 given the typical delay that you have with vendors and contract pricing?

If you look at -- let's do some product input costs.

The single biggest cost input to our cost of goods is labor.

And we have continued to see labor inflation rates in the double-digit range.

We have seen a slight decrease in the cost of certain types of resins over the period since the end of 2014 but they tend to be more nominal and they run in arrears to whatever the petroleum or gasoline cost prices are out there as you know.

But I would say overall we haven't seen any significant surcharges in shifting and getting a bit of pickup there but I wouldn't say there is anything nominal.

Yes, we do tend to lock in our contracts on a one-year basis so kind of what you are seeing now is we have locked in -- certainly our shipping contracts, probably back in the springtime.

So whatever benefits you are seeing you are seeing then in that as well.

But with respect to Princess, that is a great question.

So if you think back and I know you've followed us for a while but for those that haven't, if you think kind of back to when we took on the Marvel license which is just a great partner brand of ours, you do tend to see as revenues begin to ramp, profitability also ramps.

We have invested a lot in product development.

Brian mentioned we have wonderful innovative product coming next year and you will see that.

But over time as we experience more revenue with the license and people become acquainted better with our product line, we will see profitability ramp much like we saw with the Marvel line.

Okay.

One last one, Furby, just can you remind us how big that was in 2014?

I don't think we ever told you to begin with so don't think I can remind you.

But what I would say to you it was a significant brand for us both in 2013.

It continued to be a very big brand for us in 2014.

I tried to size for you the percent of revenue that we experienced in each of the quarters and I said that Furby in the third quarter was 37% last year in 2014, 37% of the dollars were done in the third quarter, and 31% of the dollars were done in the fourth quarter.

So clearly the headwind will continue through the remainder of this year.

Okay.

Thank you both.

Gerrick Johnson, BMO Capital Markets.

Good morning.

I was hoping you could help us with the breakdown of Star Wars shipments between domestic and international either dollars or local currency, whatever you can provide.

The Star Wars brand is off to a very good start everywhere.

I am not going to right now give you the specific breakdowns domestic to international but we believe over time the brand becomes increasingly global.

I talked a little bit about that earlier and we have seen that over time with our Marvel business but as we continue to develop the brand and as the brand becomes even more familiar to new consumers in the international markets and emerging markets, we believe it gets even more global in scope.

But so far it is off to a very good start around the world.

Okay, and you said it was tracking toward the high-end of your plan.

Can you tell us what your plan was for shipments between the third and the fourth quarter?

No, we are not going to talk about shipments between third and fourth quarter but it is tracking at the high-end of the plan.

And I guess I would give you some broad guidance between international and domestic.

It is about 50-50 just so you know there is an uptake in both international as well as domestic markets.

Okay, okay.

That is all I was shooting for because there is just so much uncertainty it is helpful to get those kind of breakouts.

Thank you.

But I think what happens over time, you see it in our Transformers business, you've seen it in the Marvel business over time, it gets even more developed in international markets and you get to introduce the brand into emerging markets and places where it doesn't have as long a history or it is not as well-known.

So I think over time portends good things and I just don't feel that at this moment I would talk about the cadence of shipments between third and fourth quarter.

But I have tried to give you some sense in real-time that the brand is performing very well, that our part of the brand is ahead of overall retail for the brand and our products are on top of many retailers' hot toy list as well as consumers wanting to buy lists for the holiday.

And it is at the high-end of our range both in terms of shipments as well as retail sales relative to our expectation.

Great.

Thank you.

At this time for closing comments, I will turn the floor back over to Ms. Debbie Hancock.

Thank you, Rob, and thank you everyone for joining the call today.

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

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