孩之寶 (HAS) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Hasbro Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) Today's conference is being recorded.

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

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

Please go ahead.

Thank you, and good morning, everyone.

Joining me this morning are Brian Goldner, Hasbro's Chairman 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 earnings release was issued this morning, and is available on our investor website.

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

The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures.

Our call today will discuss certain adjusted measures, which include these non-GAAP adjustments.

A reconciliation of GAAP to non-GAAP measures is included in the release and presentation.

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

Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters.

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.

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.

2018 is unfolding as expected, as our teams manage the liquidation of Toys"R"Us in many markets and address the rapidly evolving European retail landscape.

As anticipated, revenues were down in the quarter, reflecting both lower Toys"R"Us revenues and the impact of its liquidation on the marketplace.

Importantly, consumer takeaway remains positive, and retailer inventories declined.

We were ranked #1 in the G11 markets every month in 2018 through May according to NPD, and we are investing to deliver break-frame innovation, compelling entertainment and a modern commercial organization.

We've also maintained good operating margins despite expense deleverage resulting from lower revenues.

In addition to investing back in our business, we've returned excess cash to our shareholders this year with an 11% increase in our quarterly dividend and a repurchase of approximately $113 million of Hasbro shares through the first 2 quarters.

We anticipate repurchasing additional shares opportunistically throughout the second half of the year, which will take our total purchases beyond the $150 million target we previously communicated.

With Toys"R"Us out of the U.S. market, retailers are executing meaningful plans to capitalize on the opportunity.

This includes expansion at existing retailers, significant online programs as well as new retailers delivering on unique consumer offerings.

As we said before, we don't expect to recapture all of the loss revenue in 2018.

But by 2019, we should have moved beyond Toys"R"Us.

In Europe, our team is effectively addressing the evolving retail environment, which is characterized by a rapid growth in online purchases and the changing dynamic of brick-and-mortar retailing.

The closing of Toys"R"Us in most markets, coupled with additional retailer bankruptcies and ongoing retail challenges, is impacting our European business and the industry in Europe this year.

In fact, according to NPD, toys and games sales in Europe were down through May.

We also began 2018 with too much inventory at retail in a number of brands.

These factors created a near-term situation, which we anticipate will take through the remainder of 2018, to resolve.

We accelerated our investment to create a modern commercial organization in Europe with the right cost base for this new omni-channel marketplace.

Our Brand Blueprint enables us to capitalize on this converged retail consumer behavior by delivering content to commerce, digital marketing and innovative product offerings across all channels of retail.

Online point of sale for Hasbro products continues to grow at a rate several times faster than overall retail.

We've established a global online team to ensure that we are investing in the analytics, supply chain and consumer programs, which drive profitable growth.

We are investing in digital media and marketing to develop direct-to-consumer engagement around the world.

We're also creating online exclusive products and programs to support many of our retailers, including Walmart and Target, and retail events such as JD.com's JD Day, Amazon's Prime Day and the 11/11 Alibaba Singles' Day.

We established a global channels team focused on the opportunity beyond mass retail, toy specialty and online.

Activating across new channels begins with product development to create the right brands, products and price points for each channel and retailer, supported by the best retail partnerships and executions.

We've made significant progress in the U.S. over the past few years, and this is the road map our regions are following and executing locally.

In 2018, consumer takeaway is up for Hasbro Franchise Brands, Hasbro Gaming and Partner Brands.

During the quarter, we acquired Power Rangers, further enhancing our story-led Brand Portfolio.

We see tremendous opportunity to expand this iconic property with a broader, more innovative line, which we will further develop both geographically and more deeply across retailers, while executing around Hasbro's Brand Blueprint, including consumer products, digital gaming and multiscreen content.

Our line will be in the North American market in spring 2019, and will then roll out around the world.

2019 will be a transition year as retailers sell through the prior product.

By 2020, the team will be well on its way to fully activating Power Rangers across the entire blueprint.

Hasbro's gaming portfolio is one of our biggest long-term opportunities.

In the second quarter, our total gaming category revenues, including MAGIC: THE GATHERING and MONOPOLY, grew 14%, with growth in both of these Franchise Brands as well as growth in DUNGEONS & DRAGONS, DUEL MASTERS, JENGA and Don't Step In It.

Point of sale increased in the quarter and through the first 6 months.

Hasbro is uniquely positioned to grow in face-to-face gaming with our Wizards of the Coast portfolio and in digital gaming.

MAGIC: THE GATHERING had a strong second quarter, driven by growth in Dominaria released earlier this quarter, as well as double digit increase in new players year-over-year.

DUNGEONS & DRAGONS continues to deliver revenue growth, as fans reengage with this brand, and it attracts new players.

MONOPOLY grew behind consumer insight-driven innovation, including the all-new Cheaters Edition.

In the second half of this year, we will further support the property with several new launches.

In 2018, there are several new games based on social insights, including Don't Lose Your Cool, Chow Crown and Connect 4 Shots.

This quarter, we've taken the social listening and fast to market approach beyond games with the successful launch of LOST KITTIES and Lock Stars within our Emerging Brands portfolio.

In our Franchise Brand portfolio, in addition to our Games brands, BABY ALIVE revenues increased in the quarter.

Our second annual NERF Fest is starting now.

After a successful debut last year, we made this a global marketing and retail event taking place in 37 different markets, featuring 7 new innovative blasters.

In addition, we recently announced the highly anticipated NERF Laser Ops Pro.

We continue to execute our multiscreen content strategy for TRANSFORMERS, with new product innovation supporting each of our unique stories.

In addition to our feature film, Transformers: Bumblebee, coming in December, we have a new kid-targeted animated series, Transformers Cyberverse, this fall airing on Cartoon Network.

We also continue with our fan-targeted Power of the Prime series and preschool-targeted Rescue Bots series with all new content and product innovation.

Our animation studio is producing both the Transformers Cyberverse and Rescue Bots series.

Paramount and Hasbro's Allspark Pictures are exploring dates for future films in support of the TRANSFORMERS franchise.

The shift from 2019 to a later date was driven by the final timing of the Bumblebee film's theatrical release this December and the home entertainment window, which takes place in 2019.

Our Partner Brands also benefited from multiscreen entertainment, with both BEYBLADE and the MARVEL portfolio delivering revenue growth and strong point of sale gains.

Hasbro's MARVEL toy line saw extremely positive results behind Avengers: Infinity War as well as continued robust sales for Black Panther merchandise.

In addition, Deadpool, Ant-Man and the Wasp, Venom and Spider-Man: Into the Spider-Verse are being supported by robust product lines and strong retail and marketing programs.

STAR WARS revenue grew slightly in the quarter.

In the U.S., point of sale was positive.

Our product line for Solo: A Star Wars Story was well received by consumers, as was our fan-focused Black Series and new vintage collection.

Outside the U.S., we're successfully selling through carryforward inventory.

In closing, our teams are working to develop multiyear growth plans with our retailers, and we affirm our objective of delivering long-term profitable growth.

Our brands have good momentum, and are supported with meaningful innovation, storytelling and marketing programs slated for the remainder of the year.

As we look beyond 2018, we expect to return to growth.

2019 is setting up to be a great year, with engaging storytelling and multiscreen content, along with new brand innovation and robust entertainment slate, including the launch of Power Rangers.

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

Deb?

Thank you, Brian, and good morning, everyone.

Overall, the Hasbro teams delivered a good quarter despite challenges in the market.

Revenues and profits continue to be negatively impacted by the liquidation of Toys"R"Us, both in terms of lower revenues and the carry-on effect of steep discounts on the market.

While the biggest revenue impact is in the U.S., Toys"R"Us affected many markets around the world.

The retailer closed in major markets, such as the U.K. and Australia, and created ongoing uncertainty in other countries, as potential acquirers have been or in process of being secured.

These countries include Canada, Germany, Austria and Switzerland and in Asia, where the sale process is ongoing.

Hasbro's diverse product portfolio helped offset the margin impact of lower revenues.

Growth in gaming brands such as MAGIC: THE GATHERING, MONOPOLY, DUNGEONS & DRAGONS and DUEL MASTERS, combined with higher revenues in the Entertainment and Licensing segment, positively impacted margins and helped to partially offset the deleverage we had on fixed expenses in the quarter.

Throughout this short-term disruption, our strong balance sheet has allowed us to continue investing for future long-term growth, while also returning cash to shareholders.

We ended the quarter with $1.2 billion in cash.

This reflects cash payments of approximately $155 million for POWER RANGERS and the return of approximately $260 million to our shareholders through our dividend and share purchases this year.

Within our segments, the U.S. and Canada segment revenues declined several percent, with lower revenues in all Brand Portfolio categories.

Retail inventory is down, and point of sale increased, both with and without the impact of Toys"R"Us.

U.S. and Canada segment operating profit declined in line with the revenue decline to $76.2 million or 16.6% of revenues.

This was a 10 basis point improvement versus second quarter last year in operating profit margin.

Favorable product mix offset the deleveraging of expenses from lower revenues.

International segment revenues declined 11%, including a favorable $2.6 million impact from foreign exchange.

Revenue declined in each region during the quarter.

In Europe, in addition to the loss of Toys"R"Us in most markets, our teams are clearing through carryforward retail inventory.

Changing retail dynamics in developed and emerging markets are also impacting our decisions around extending credit.

Both factors negatively impacted revenue this quarter, and we expect that they will have a continued impact for the remainder of 2018.

Retail inventories are down meaningfully since the start of the year, but there is more work to be done.

Currency had a favorable $6.2 million impact on European revenues.

In Latin America, the political and economic environment disrupted the quarter.

Currency devaluation had a negative $5.5 million impact, notably in Mexico and Argentina.

And Brazil dealt with the trucking strike, which made the delivery of goods difficult.

We're still catching up.

Despite these challenges, revenues grew 2%, absent foreign exchange, and point of sale was up in the quarter.

In Asia Pacific, we were cautious with how we ship to Toys"R"Us Asia, but we continue working with them.

In Australia, the retailer shut down in June.

This region also faced difficult comparisons with last year's TRANSFORMERS movie, as this franchise has a very strong heritage in Asia.

Currency had a favorable $2 million revenue impact in the region.

The International segment reported operating profit of $173,000.

The lower operating profit was primarily the result of lower revenues, which were unable to absorb fixed costs.

We continue to look to rightsize our cost structure in line with the changing retail landscape.

Entertainment and Licensing segment revenues increased 26%.

As was the case last quarter, the adoption of the new revenue recognition standard impacts when we record revenues from our licensees.

In addition to the ongoing success in our licensing and entertainment businesses, the adoption of this standard contributed to the segment's higher revenues.

The segment's operating profit increased 64%.

Overall, Hasbro operating profit margin declined 60 basis points.

As we enter the most important half of our year, absent charges associated with Toys"R"Us and organizational changes, full year operating profit margin could approach last year's levels.

Most importantly, we continue to see profit improvement opportunity in 2019 and beyond.

Cost of sales declined 50 basis points.

Favorable product mix from higher revenues and gaming brands, such as MAGIC: THE GATHERING, as well as Entertainment and Licensing revenues, partially offset the impact of lower overall revenue.

We expect the loss of Toys"R"Us, combined with continued pressure of higher retail inventories, primarily in Europe, to have a short-term impact on our gross margin for the full year 2018.

However, we believe that, over the next few years, there is nothing prohibiting us from returning to a 62% gross margin.

Royalty expense declined in dollars and as a percentage of revenue on lower Partner Brand revenues.

Intangible amortization was down year-over-year and included approximately $1 million associated with the acquisition of POWER RANGERS.

We anticipate approximately $10 million in incremental amortization expense in the second half of 2018 due to the acquisition and approximately $21 million in 2019.

As Brian indicated, in 2019, we'll begin to record revenue associated with our line for this brand.

Program production amortization increased, as we're amortizing MY LITTLE PONY: THE MOVIE production expense, in addition to television programming.

During the second quarter, we began contributing to financing films under our arrangement with Paramount, funding part of the production costs for Bumblebee.

We will not begin amortizing any production costs in relation to this contribution until 2019.

SD&A increased as a percentage of revenue, primarily due to higher freight and warehousing expenses.

The higher freight costs are mainly caused by new trucking regulations and drivers shortages in the U.S., and the warehousing expense is the result of higher inventories at our warehouses.

Below operating profit, other income declined in the quarter, largely due to a greater loss on foreign exchange this year versus last.

Our underlying tax rate, absent discrete events, was 17.4% compared to an underlying rate of 24.7% last year and 19.9% for the full year 2017.

The lower rate reflects the benefit of U.S. tax reform.

We believe our full year underlying tax rate will be at the high end of our previously communicated range of 15% to 17%.

There were no tax reform updates this quarter, although we continue to expect additional guidance on tax reform that will require consideration and interpretation going forward.

For the second quarter, earnings per share was $0.48.

In mid-June, we closed on our acquisition of POWER RANGERS and other entertainment assets from Saban Properties.

At closing, we paid approximately $155 million in cash, and issued approximately 3.1 million shares of common stock to Saban.

We have remaining cash payments of $100 million due in 2019.

Due to the timing of when the shares were issued, they had very little impact on our share count for earnings per share in the quarter, but will impact shares outstanding going forward.

During the second quarter, we repurchased $74.1 million in common stock, bringing our year-to-date repurchases to $112.9 million.

We expect to continue opportunistically repurchasing shares in the open market, and now expect to exceed our previously communicated target of $150 million for the year.

Our full year repurchases could offset the shares issued in connection with the POWER RANGERS acquisition depending on market conditions.

Actual shares outstanding at quarter-end were 127.5 million, and $565.1 million remained available in our current share repurchase authorization.

Hasbro's balance sheet remains strong.

Both our debt to EBITDA and EBITDA-to-interest ratios at 2.0 and 9.1, respectively, are favorable to our targets.

Receivables decreased 13%, and days sales outstanding decreased to 74 days.

Excluding the impact of foreign exchange, receivables declined 10%.

While Hasbro revenues were down, point of sale increased, and retail inventory of Hasbro product declined during the quarter.

Our owned inventory increased primarily in the U.S. to support greater retailer activation in the second half of the year.

Foreign exchange decreased the inventory value by $12.5 million.

In Europe, inventory is down at retail and at Hasbro.

We are through the first half of the year, which is the period when we anticipated the greatest disruption to our business.

Now the real work begins.

Our teams around the world are executing the biggest quarters of our year, including the holiday season.

We're collaborating with retailers to activate our joint plans in the important toy and game categories, not just for a successful 2018, but for many years to come.

Our teams will be focused on managing costs in a year we've lost a significant customer and faced geographic challenges.

At the same time, we're strategically investing to ensure we have the brands, entertainment and skill sets to be successful for years to come.

We will now open the call up for questions.

(Operator Instructions) First question is from the line of Michael Ng with Goldman Sachs.

I have one for Brian and one for Deb.

First for Brian, it looks like the Wizards of the Coast and MONOPOLY revenue increased by $40 million combined.

That's a pretty meaningful acceleration, especially Q-on-Q.

I was just wondering if you could help size the outperformance, whether that was from Dominaria versus Amonkhet or D&D.

And then I have a follow-up for Deb.

Sure.

Well, clearly, we have seen great growth in both in MAGIC: THE GATHERING and MONOPOLY in the quarter.

For MONOPOLY, there are a couple of different initiatives that are going on there.

We saw the Gamer Edition that began earlier this year has continued to perform at a very high level.

And then we launched the Cheaters Edition just recently, and it's off to a great start.

That will roll out nationally in the next couple of weeks.

For MAGIC: THE GATHERING, storytelling has always been the focus of the brand.

And in fact, in the second quarter, Dominaria performed at a very high level.

The reception to Dominaria was very strong.

And we've continued to see great uptake in gamers and increase in new gamers coming onboard, which is fantastic.

For the rest of the year, you'll see some new launches in Q3, and then again in Q4.

We're returning to some of the favorite territories for our games fans.

We continue to listen to our gamers and hear their feedback.

And we're also seeing, in addition, the great increase in interest and positive feedback for Magic Arena.

We've now had more than 1 million people sign up for the closed beta, and we are making great progress there.

And we continue to get great feedback, and the KPIs look quite good.

So both brands are certainly contributing, and we're going to support those brands with additional initiatives for the remainder of the year.

Great.

And Deb, sorry if I missed this, but could you comment on how much the -- with Toys"R"Us and ex Toys"R"Us, POS was up in global U.S. and International?

And sorry, just, Brian, a follow-up.

Could you comment on what the margin differential looks like for MTG Arena versus the traditional card set?

Are we talking hundreds of basis points or thousands of basis points better?

So from a POS standpoint, we did say that global POS was up in the quarter and year-to-date with Toys"R"Us.

And without Toys"R"Us, it was down a smidge in the quarter, but up year-to-date.

And Brian?

Yes.

So if you look at business, obviously, MAGIC is a very profitable business for us, and we haven't communicated the difference.

But clearly, we're investing in Arena right now.

So you have the software investments, and we want to continue to build and launch the brand successfully.

But over time, clearly, the software is accretive margin to the analog game.

The next question is from the line of Steph Wissink with Jefferies.

I just want to follow up on Michael's question regarding the gaming business and Magic Arena.

Brian, could you talk a little bit about that platform and that software investment?

Is it possible you could leverage some of that for other properties in the future?

We're certainly investing and continue to iterate for Arena.

It's very exciting to see as we're bringing on more capability, the number of people signing up in the closed beta, and that our intention is to we'll launch Magic Arena this year.

But then we'll add to that a suite of other games around our MAGIC: THE GATHERING business as well as DUNGEONS & DRAGONS, which is also up in the quarter, continues to see new gamers come onboard at double digit levels.

And I think we're building the capability at the company across a number of different dimensions in face-to-face gaming, in our analog games business and role-playing games, and then, of course, in the digital gaming arena, both in MAGIC: THE GATHERING, Wizards of the Coast, but also in mobile games.

And we've said that, over time, as we have doubled the size of MAGIC: THE GATHERING over years, we felt that there was an opportunity to continue to grow that brand and, over time, to double it again.

And it's going to come from the suite of games that Chris and his team are leading, both the analog side with growth as well as these additional new digital games.

Deb, if I could just ask one follow-up on your operating margin commentary.

I think on the first quarter call, you said you would expect to achieve operating profit margins in line with 2017's level of 15.6%.

On this call today, you said you thought you could approach last year's level.

So it might just be a small tweak in the wording, but could you maybe help us think about how you're thinking about the operating margin target level for the year?

Sure, Steph.

There was a slight change, and what we're seeing is just some pressures on some of our gross margin items as we go forward.

So while we say that and we look forward, we think the teams executed very well this quarter.

Our inventory at retail is down in virtually every region.

Our held inventory is up, and it's up to meet primarily in the U.S. to meet the expected demand for the rest of the year.

However, we think that there could be just a bit of pressure on that.

But most -- but we could see the levels of last year.

But most importantly, we still firmly believe that we're set up for growth in operating profit after this disruption from Toys"R"Us kind of gets worked fully out of our system.

The next question is from the line of Arpine Kocharyan with UBS.

In terms of the order book for the backup, would it be possible to quantify how much competitors are absorbing currently in terms of what you actually have on the order book?

And then I have a quick follow-up question on operating margins.

Sorry, Arpine.

Are you asking what our retailers are taking?

Or did you say competitors?

Right.

It seems to me that initial interest was given by end of August in terms of big retailers, in terms of what you're looking at linear feet today with this committed in terms of absorption from Toys"R"Us, what they're adding in linear feet?

Any color for the back half would be helpful.

Sure, yes.

Well, we are making significant and meaningful plans to capitalize on the opportunity with our retailers.

Clearly, our major partners that we've been working with for years are stepping up in a number of different ways.

And we're very excited about the plans that the team has put together in order for them to execute a share recapture plan, recognizing that in U.S. alone, there's a $3.5 billion retail opportunity across the industry.

And we have seen good industry growth year-to-date.

So we expect that we -- our retailers are excited about the opportunity and our teams executing.

I would say that between our major retailers that are making plans and are stepping up, and the additional online opportunity as well as converged retail omni-channel opportunities, and then some new retailers, who are, in many cases, focused on specific audiences, whether that be gamers or fans or in the sporting goods area, that you could see promotions and linear footages similar to a year ago.

Now we've said we expect to make significant progress this year, but we're not suggesting that we are going to make up all the difference Toys"R"Us this year.

Because, of course, we want to partner with all of our retailers to ensure that we not only get this great growth in their business, but that, that growth is sustainable over time, so that we can be successful together as we continue to grow our business and the industry.

Right, right.

No, that's helpful.

And then just going back to the operating profit margin.

First half is obviously down.

That would imply -- for you to come in flat year-over-year, that would have to imply that back half has to be up something like 200 basis points.

Is it that your Toys"R"Us disruption -- your expectation from Toys"R"Us disruption is less?

Or is it that there's some mix that's happening in the back half that gives you confidence you can make up that operating profit margin differential for the back half?

Well, let me comment, and I know Deb would comment as well, that we have a lot of new initiatives coming in the second half of the year.

We have a lot of new products.

And we talked about our NERF business and NERF Fest.

We commented on a lot of new product innovations, 7 new blasters supporting 37 different markets across all the segments of NERF.

So a lot of innovative product coming into the marketplace.

Obviously, NERF enjoys a strong operating margin, given that's a Franchise Brand.

We've seen great growth in BABY ALIVE.

We've seen growth in our gaming portfolio.

We continue to believe our games business will perform at a high level.

So the mix certainly is beneficial as we continue to grow in these areas.

And then as some of our issues continue to dissipate, we work through the retail inventories, and we work with our retailers again to build programs.

All of that has a benefit, and gives us leverage and operating margin.

We are seeing some continued retail disruption, particularly outside the U.S. And that's been impacting some of our credit decisions and in some of the emerging markets as well, where we've not been extending the credit.

So we still believe and we still strive for that profitable growth that Hasbro has been about for the past several years.

You hear us talk about it all the time.

This year, there's just disruption because of Toys"R"Us, and we continue to watch the retail environment.

But fundamentally, we still believe and are very focused on operating profit growth after we work through this disruption.

The next question is from the line of Greg Badishkanian with Citi.

Just 2 questions on Europe, which was a little bit soft.

Is it basically in line with your expectations?

And how much of the impact was from Toys"R"Us versus the retail dynamic there?

Then also, I think you mentioned NPD for the industry was down in the first half.

How does the industry compare to Hasbro's POS?

Yes -- no.

On the industry side, the industry was up year-to-date, about 6%.

And if you take our business, we were up similarly year-to-date when you take out the impact between Easter-to-Easter.

So in Europe, our sales decline was greater than the industry, and it was really driven -- there are a couple of markets where the industry was down, particularly in the U.K. and in France, as was our business.

And we continue to work through that.

I think what's heartening, if you look at the lineup, is our retail inventories are down, and our shipments are down far more than our sell-through.

So where we've been able to get to a better place where we have cleaner retail channels and now new initiatives coming in for the second half of the year.

And so I see the team making great progress, partnering with retailers, and set up well for a good second half.

And so that's basically this is going to be according to expectations?

And did you mention the Toys"R"Us impact?

Yes.

The Toys"R"Us -- remember that Toys"R"Us liquidated in the U.K. And then in Germany, Austria and Switzerland, there's a new owner.

And then in France, Spain and Poland, we have almost no activity, but no new owners.

So our expectation is that, that business goes away.

And that's what's going on in Europe.

So there's impact across a number of different markets.

Then Deb mentioned there some credit terms that we had to work out in some of the markets.

And particularly in our emerging market business, we want to ensure that where we're working with new retailers that they can now only take product, but pay us for that product.

And that's been part of the process as we go through growth in the changing retail landscape, where you have the acceleration of online retail and omni-channel retail.

And you do have certain retailers who are landlocked and unable to compete multinationally across Europe.

And so they're at a disadvantage versus online retailers, who have access to the entire EU.

And so those are the dynamics that we're seeing shift and change, and that's how we're partnering with different retailers to ensure that we have a good mix and the right programs through the holiday.

The next question is from the line of Felicia Hendrix with Barclays.

So you guys have given us some color as to where you are now and how to think a bit about the rest of the year.

But admittedly, it's still a bit difficult to model.

So I'm just wondering, do you think the second quarter revenue declines will be the worst of the year?

Deb, I know you said the worst is now behind, but I did want some help thinking through that.

Clearly, with the Toys"R"Us liquidation complete in the U.S., the worst is behind.

It seems like Europe, that you're going to have some lingering.

And also, I don't want to take the U.S., too, for granted because, how much inventory do you think is currently being stocked in consumers' pantries as they take advantage of the Toys"R"Us liquidation, which could affect the holiday period?

Let me comment on the Toys"R"Us, the discussion about pantry.

And I would say that -- remember that when Toys"R"Us was liquidating, they didn't have access to any of the new initiatives that were coming for the second half of the year.

We also have 2 big entertainment initiatives that come in the Spider-Man Movie as well as our Transformers: Bumblebee movie.

The home entertainment windows come with new product around Avengers.

We have additional product that comes in the second half for Black Panther.

So there's a lot of new product initiatives.

I noted the new product initiatives for NERF and BABY ALIVE and really across the board.

So that's not all -- that wasn't all at Toys"R"Us.

And certainly, now, we're working with our retailers on new product and new initiatives.

And we've said from the beginning, Felicia, you're right, that we felt the biggest disruption would be in the early part of the year from Toys"R"Us.

So I'm not going to comment on whether we expect Q3 or Q4 to be up, but we think the biggest percentage impact, certainly from the decline, is behind us because we're going into the bigger quarters of the year.

Everything gets kind of magnified in the first and second quarter.

So we think, after this year, the disruption in total should be behind us, which is really what we're focusing on.

Okay, helpful.

And then, Brian, as you talk about your new retailer initiatives, I was just wondering if you could call out for us how much of that will be online versus bricks-and-mortar.

And then also, how much of the Toys"R"Us business do you think transitions to other retailers?

And how much do you think is lost permanently?

I really don't think long term that the business is lost as a result of Toys"R"Us going from the marketplace.

The reason in part is that Toys"R"Us for us wasn't our most profitable retailer.

(PAUSE) (corrected by company after the call) There have been some discussion out there that it was a more profitable retailer.

That's not the case.

In fact, we can work with all of our other retailers and are incentivized to do that.

We're agnostic about how we grow.

I think you're going to see linear footage to expand this holiday, as it has in past holidays, because people are very excited about giving fans and families the opportunity to shop and have that wonderful Christmas holiday experience, and give kids and families the opportunity to see product on display and immersive entertainment experiences at retail.

Certainly, there will be increased online programs and omni-channel programs.

Our team's working on a number of content-to-commerce initiatives and other ways of connecting.

And clearly, every retail visit has been informed by -- at least 3 quarters of them are being informed by some online shopping as well, where people are trying to determine what it is they're interested in.

They may have looked at a short video or some piece of content or searched for the product.

So I think what we're really talking about, and what we've tried to mention a lot, is that this idea of converged retail is really taking hold, not only in the U.S., but around the world.

And so what we're providing and the teams are working on is that digital engagement and the in-store engagement that marries up, that connects consumers to our experiences, where consumer insights, innovations and those story-led initiatives, whether it be some bespoke content or user-generated content, because our fans are so engaged, all contributes to the process of selling.

Okay, helpful.

And then a final on POWER RANGERS.

As we begin to model that into the future, should we expect that to be a higher-margin property versus your total operating margin?

It should, POWER RANGERS over time, and we've said that the team will have the full array of Brand Blueprint initiatives by 2020.

And by 2020 and beyond, it should look more like a Franchise Brand.

Obviously, it's a Franchise Brand in the making because it's new to us, and we need a little time to work through a 2019 transition year.

But yes, in fact, one of the points of rationale to acquire the brand is that it is a brand that should operate like a Franchise Brand in operating profit terms, which, as we know, Franchise Brands enjoy higher than company average operating margin, and also a significant opportunity for growth, given where the brand had been most recently.

Next question is from the line of Drew Crum with Stifel.

Brian, I wonder if you could comment on the potential for a tariff, and any update on what Hasbro's doing in anticipation of that?

And I think this is very topical a little over a year ago, and you made the decision to move PLAY-DOH manufacturing to the U.S. And I think at the time, you said you hope to have more than 30% of your manufacturing outside of China.

So I just want to get an update there.

And then I have a follow-up.

Yes.

Thanks.

So we do have 30% of our manufacturing today outside of China, and we'll head toward 40% over just the next few years.

We're manufacturing in a number of territories.

For the U.S., we source 25% of U.S. revenues in the United States and manufacturing locally across 5 different states.

We'll add to that the PLAY-DOH manufacturing that will come this fall.

It's -- we're gearing up for that now.

And so that should add to our revenues garnered from U.S. manufacturing for the U.S. And so, again, the U.S. business overall still receives 35% of its product outside of China, but 65% from Chinese manufacturing.

And again, we're moving more production outside of China.

We found some great new partners and territories that provide very high-quality product that can meet with our specification.

And in terms of the tariffs, we've been working with and talking to the administration and our congressional delegations to ensure we're communicating just how terrible an impact the ongoing tariff or trade war would be.

Thus far, we've only seen nonmaterial changes to the tariff schemes of other countries that don't really impact our business.

Our toy business has not been part of the 303 designation that is currently being put in place.

But we continue to monitor the situation, and we continue to talk and firmly believe in a free trade environment as the best course for our company and for the industry.

Got it.

Okay.

Very helpful.

And then going back to POWER RANGERS.

Aside from your margin commentary and the guidance on the amortization, any detail you can provide in terms of revenue run rate you're expecting?

And I guess, separate from that, what are your plans in terms of content development, whether it's television programming or feature films?

Yes.

So we're really excited about the new series that's just in early development.

Obviously, we're working with the team now on the creative, but it was already underway by the time we have made the transaction.

And as the Beast Wars for TV series that will launch next spring, we have an arrangement with Nickelodeon through 2021 for the U.S., and then the TV show is distributed more than 150 territories globally.

We then are working in earnest on the next TV series and how you reinvent the brand for 2020 and beyond.

We do expect to also have motion pictures over the medium term.

So we'll add and have a new movie development as well.

We really do feel this brand is very right for our creative development, for engaging with our fans, kids and family audience.

And I think you're going to see some really exciting product from the team already.

Just the 2019 lineup is very robust.

We were developing that as a licensee at first, and we've shown that to retailers.

They're very excited.

And you have to recognize that a lot of the prior product and business was being done with few retailers, and certainly not in a global footprint.

So both from the depth and breadth of retail as well as the breadth of geographic territories, where the product will now exist, both gives us an opportunity for growth.

And Brian, would you guys do the film in-house?

Or is that something that you would outsource or partner with a larger studio?

Yes.

Again, we have a great production team that's come onboard as part of the acquisition.

We brought over the team that's been working on the creative.

We're so excited that they're onboard.

We're also excited that Haim has continued as a creative consultant.

And if you'll recall, the movie that was done in 2017 was done in partnership with a studio.

So our expectation is we would do that in partnership with a studio and distribute it similarly, recognizing that we'll pick the optimal budget and the optimal creative to ensure that it's a profitable endeavor for both us and our studio partner, and that we make those investments prudently around content, recognizing we understand what the return looks like.

We did it successfully with the MY LITTLE PONY movie in animation.

And this one, we, of course, would share with a studio partner.

Our next question is from the line of Jaime Katz with MorningStar.

I'm curious, given that some of the working capital metrics that you guys report have improved, are you guys still sticking with the $600 million to $700 million in operating cash flow expectations for the year?

Or do you maybe think you can come in at the high end or potentially even exceed that number?

No, we still believe that our cash flow will be between $600 million to $700 million.

And just given the pressures of the year, we would probably be closer to the bottom end of that range than the top end.

Okay.

And then can you remind me where the Paramount Bumblebee asset would be?

Does that go into the other asset category, and then you amortize it over time?

I can't exactly recall the accounting process of that asset.

Yes.

It's in our other long-term assets.

And you'll see that we had the payment go out.

And the cash flow this quarter, our contribution, our cash flow is up for program production cash flow this quarter, and then it will be amortized over time.

There won't be any amortization associated with that until 2019 though.

The next question is from the line of Tim Conder with Wells Fargo.

Just a couple of questions.

You've touched a little bit on STAR WARS, but maybe what you're doing or potentially DISNEY is doing is STAR WARS appears to have kind maybe hit a little bit of a wall of late.

And then any comments on DISNEY PRINCESS?

And then maybe, Brian, shifting to TRANSFORMERS.

You've commented somewhat on that, obviously, the difficult of year-over-year comp.

But then the shift-out of some of the properties is -- or are you looking, leaning more towards a reboot?

Or maybe just a little more color that you can give to us looking out over the next year or 2 here with the franchise?

Sure.

STAR WARS, in revenue terms, was up a bit in the quarter.

And we're seeing POS up in the high single digits in the U.S. even ex Toys"R"Us, and up higher if you include Toys"R"Us.

We're also engaging across a number of dimensions, not only the kid-oriented product, but the fan-oriented products performing quite strongly in Black Series.

We had a very successful launch of our HasLab product, which was a sale barge, if you recall, where we crowd-founded that, and we ended up with nearly twice as many subscribers, as we had required, in order to move forward with that product.

And then, of course, Episode 9 comes December 20, 2019.

What I've said all along, we still believe, which is that, with STAR WARS having more regular entertainment and visibility to that entertainment that the brand would contribute at a more sustained higher level.

And that's what we're seeing, is that, in fact, STAR WARS will probably look similar to a year ago.

And the days of surging in a movie year and shrinking in a non-movie year are probably behind us.

Instead, it just becomes a really strong contributor year-for-year and quite good for us.

In terms of TRANSFORMERS, really, given the timing of Bumblebee, and the fact that we were able to put this new movie together that came directly out of all the work that we had done in the writer's room with all of these great creative stewards that have contributed to the thought process of future TRANSFORMERS, we were then able to get Bumblebee out for Christmas this year.

And as you know, the home entertainment window will then follow by a number of months.

So really, we'd end up in 2019, certainly in the first half of 2019.

So to put another movie right on top of the home entertainment window for the Bumblebee movie really didn't make sense.

And then you combine that with the fact that we have a new partnership with some great new leadership at Paramount in Jim Gianopulos and with Godfrey and the team there are fantastic, and Andrew Gumpert, who's running that business for them.

And we felt that we have an opportunity to bring in new creative to think about the brand, both including the current chronology and outside the chronology, recognize that Bumblebee is back in the '80s.

That's a very important time period for both the brand as well as for fans, and we wanted to tell some new stories.

And so it gives us the opportunity to tell really new stories around the brand.

And we have more than 30 years worth of cannon.

And we continue to invest in new comics and new animated series to ensure that we're making those equity investments in new mythology and cannon for the brand, and lots of opportunities, lots of different direction we can go in for the creative.

And we're looking at a number of different ways we may go into the future.

Okay, okay.

Helpful there.

In the DISNEY PRINCESS, and then maybe one for Deb or Brian, whoever wants to take this last one.

The company inventory, I just wanted to revisit that.

Deb, you said it was primarily tilted towards and planned for the U.S. Is that to maybe offset some potential tariff risk bringing that in earlier, smoothing out maybe the seasonal surge in freightenings, given the challenges on freight for everybody?

Or is there something else going on, especially, I guess, given that POS continues to shift closer to consumer takeaway in Q4?

Yes.

So let me comment on PRINCESS, and I'll comment on inventory.

And certainly, Deb can also give you great detail.

The PRINCESS business is down year-on-year.

Obviously, we're up against some very strong comps from a year ago, where we had great entertainment for Beauty and The Beast and Moana and other television-oriented properties.

And again, we're innovating in the product line.

You're going to see some great new product innovation for the holiday period this year, and we'll continue to see the promotion around airings of FROZEN and Olaf's Frozen Adventure.

And then we go into 2019.

We're very excited, of course, that the next FROZEN movie comes next holiday, and we'll build the business around that.

And obviously, incredibly excited for that as a key driver of that property.

In terms of inventory, we've talked about the fact that we've gotten beyond some of the Toys"R"Us liquidation, and we have gotten completely beyond the Toys"R"Us liquidation in the U.S. And now the team is working on bringing in new product for these third and fourth quarter.

We've said that we'll probably hold a little bit more inventory because, again, we want to have the inventory on hand domestically to deploy closer to the time of sell-through.

Also, we're working through with our retailers.

Because as you move from brick-and-mortar retail, where you have longer weeks' supply; to online retailers, where you have about half as many weeks' supply.

When you do omni-channel, it's sort of a hybrid of the 2. So it's sort of in between, and we want to make sure we have product on hand.

So that's part of the move that you're seeing here.

And if you look at our DI inventory or the product that's being direct ship versus domestic, you're seeing a bit of a shift in percentage terms, moving a little bit more to domestic versus the direct import business.

And that's really all you're seeing there.

So predominantly, that inventory is all in the U.S. There is a bit of growth in inventory internationally as we've opened up the Indian market as well as Japan.

And so we need to service those markets, and a couple of other places in the world where we're seeing great growth.

But it's almost all in the U.S.

The next question is from the line of Linda Bolton-Weiser with D.A. Davidson.

I was wondering if you could comment on MY LITTLE PONY and how that's doing, and if you are still seeing some benefits today at brand franchise following the movie.

And then just in general, could you comment on your Girls portfolio just in terms of really not having a lot of owned brands in that area.

Of course, you have the licensed DISNEY PRINCESS, but do you feel that you have what you want in terms of owned brands in the Girls area?

Yes.

So the MY LITTLE PONY brand has certainly benefited from the movie home entertainment windows.

And now the movie has moved from home entertainment into a lot of the streaming services.

It's performing quite well, and we continue to see in markets around the world where the streaming is taking place.

The brand continues to hold up quite well, and the POS is good.

Revenues were down a little bit in the quarter.

But again, POS is quite strong as we move through the disruption and the liquidation at Toys"R"Us.

Interestingly, as we've now gotten our TV series on the air on CCTV, which is Chinese television, we're seeing some great growth of MY LITTLE PONY in the China market behind that.

And you should expect to continue to see momentum in our brand, as we've just launched season 8 in television, and that will roll out around the world.

And then, again, in the future, we would expect to do another MY LITTLE PONY animated feature film because, again, it contributed quite nicely, and it's also a great way to tell story around that brand.

We do have a great lineup in our Girls portfolio.

We continue to partner with the Walt Disney Company on Descendants, PRINCESS and FROZEN, and we're very excited about what's to come there.

Obviously, we've also launched some fun new properties that appeal to both girls and boys in LOST KITTIES and Lock Stars, which are off to great starts.

This is an area where we're using social listening and consumer insights to move quickly into the market.

And again, over time, FURREAL FRIENDS has been a contributor.

So we, again, feel like we have a good lineup in our Girls business.

And then remember, of course, that BABY ALIVE is a new Franchise Brand, is growing quite substantially.

Lots of new innovation coming for the brand and performing at a very high level, with a crazy amount of user-generated content supporting that brand.

In fact, the statistics are there's been more than 7 billion views of user-generated content for the BABY ALIVE franchise.

And so we're really engaging with our fans online in a modern story-led way for that brand.

So we feel good about our portfolio.

Can I also ask about -- just following on the questions about the tariffs?

If there were to be tariffs, I mean, you've outlined how -- what your exposure is manufacturing-wise.

But is there flexibility around pricing for the holiday toys?

Or are those pricing decisions already kind of locked in with retailers in terms of the major programs?

Would you have flexibility to take pricing if there were tariffs imposed in the second half?

We do have -- we have met with most of our retailers to look at the new line that's coming in for the second half of the year.

We could always take pricing late in the game, but it is more challenging at this time of the year.

As we said before, over the long term, we can always reengineer product to take some of the costs out, to keep the price points optimal for the consumer.

But on the short term, it would have some level of impact to the consumer if tariffs were imposed.

The next question is from the line of Eric Handler with MKM Partners.

Two questions for you.

First, Brian, in terms of DISNEY PRINCESS, I'm just curious, how big a lift did you get from Beauty and The Beast, the live action film?

And as we look to 2019, not only do we have Aladdin as a live action film next year, but there's also Dumbo and Lion King.

And is there a way for you guys to get involved with either of those 2 films with any type of product?

Yes.

So the team's working on something on a few of those live action films.

I won't comment yet on what those are.

But in terms of the PRINCESS and FROZEN business, clearly, Beauty and The Beast had a major contribution.

Obviously, we know how important storytelling is to fans and families across all brands, how it connects with character and story, and certainly then enables us to use the insights around the story and innovation to build great product lines.

So Beauty and The Beast contributed, as did Moana, as does Tangled and other properties, as did Descendants.

DISNEY DESCENDANTS on the DISNEY Channel original movie also contributed.

And we've seen great continued sell-through of that product line, the Descendants product line.

And so story is clearly important.

Obviously, in this period, we're up against the fact that, a year ago, there were a lot of those entertainment initiatives.

And so we are very excited about '19 for Aladdin as well certainly for FROZEN that comes near holiday 2019.

Great.

And just a follow-up question on POWER RANGERS.

Wondered if you could sort of -- as we think about modeling this business, what sort of -- is there a baseline revenue for POWER RANGERS and the additional brands acquired from Saban?

And then when do certain licenses for a toy product come back to you?

Is that all next year?

How do we think that?

And what about renegotiating other consumer product licenses?

Yes.

So I would have you think about POWER RANGERS over time in terms of the proportionality of our toy and game business to consumer products licensing to look similar to what we do for TRANSFORMERS or MY LITTLE PONY.

So you would have a very robust toy and game line from us, and then very robust consumer products coming from a number of different partners.

I would imagine over time to develop a similar size number of partners to what we have for TRANSFORMERS or MY LITTLE PONY by 2020 and beyond.

And in 2019, you're absolutely right.

There's a transition period.

The prior company's product is in market through March.

And then our product launch is either in March or April, depending on where you are in the world.

And so we get about 9 months in market next year.

But recognize there'll be some amount of prior product that has to get moved through and sold through in the early to mid-part of 2019.

So again, I think the best benchmark for our first full year effort would be 2020, where we're also able to activate entertainment, and also work with our licensing partners.

Many of the licensing partners that work with Saban are partners that we've worked with before on PONY and on TRANSFORMERS.

And so we think that the transition will be relatively seamless.

And we're also bringing on some key personnel from the POWER RANGER brand to ensure that that's the case.

Our next question is from the line of Gerrick Johnson with BMO Capital Markets.

I have 3 questions.

The first one, I think you know it's coming.

It's a clarification of POS.

As you know, we look at POS in terms of retail dollars.

And I know you and Mattel always comment on POS in wholesale terms.

So can you just talk about U.S. POS -- or U.S. and global POS at retail in dollars, excluding Toys"R"Us?

Yes.

If you take -- if you look at -- take the data that we get, recognize that the data that we have in POS and for the business is based on wholesale, because that's what we get paid for that product, and then the up-and-down pricing that a retailer may exercise at any given period is really up to them using the discounts and allowances that we provide within the P&L of that property or that brand.

So if you take global POS without Toys"R"Us, in North America, we're up both year-to-date, which remember, takes out the -- we're up high single digits.

That takes out the impact of the fact that Easter came in the first quarter of this year versus the second quarter of last year.

And that's an important distinction.

And then even if you look in the calendar, so within the quarter, which means you have both -- you take out both the benefit of the Toys"R"Us POS as well as the Easter, we're still up in North America, but by less.

Okay.

Now, again, just to be clear, is that wholesale dollars or retail dollars you're talking about?

Because retail dollars, we look at that because we can see if things have been discounted.

We can't tell that in wholesale dollars.

So that -- POS at high single digits in the first half, is that in retail dollars or wholesale dollars?

That's our wholesale.

The way we can measure it is through what we sold that product for and what we're getting paid for, and how much of that product's dollars at our price went through the register because that's what we get transmitted from our retailers.

The fact that they may have discounted that product, we've still gotten paid whatever that price is.

If they've discounted it below that price, that's been because they used some allowance or something else that we've provided, which is the calculation from our gross sales, which we don't report, to our net revenues, which we do report.

So we've already taken out the dollars when we report net revenue, the dollars that we provide to retailers in discounts and allowances.

So it's a very fair way to look at the sell-through of our products based on the fact that that's how we get paid.

And Brian, I would just add to that.

That's why we look at it with and without Toys"R"Us because we know, certainly, in the U.S., Toys"R"Us had an impact because of the liquidation they were doing.

However, we provided no further discount dollars for that liquidation.

Exactly.

So as I said, take out Toys"R"Us and eliminate the comparisons.

So in other words, compare yourself to a quarter a year ago, where there was Easter, to this year, where there was no Easter, and our North American business in the quarter was still up.

Okay.

I'll move on to the next one here.

You talked a little bit about the MY LITTLE PONY movie, and it contributed quite nicely.

Can you talk more specifically about the economics from that movie, the financing and the participation?

Did that hit your targets?

Yes.

The way the movie worked was we've produced this movie with a third-party studio.

We had it distributed by Lionsgate.

They took a distribution fee.

We then created a toy and game line, and we participated in the toys and games sales and earnings from the toys and games, the Consumer Products, where we had hundreds of licensees and the royalty income that came from that as well as from the movie after the -- paying the distribution fee and allowing for recoupment of the marketing.

So that the total economic value was positive for our company, and continues to be positive as the content continues to run through home entertainment, which actually performed even better than our expectations, and now is streaming on a number of different platforms, and will continue to be a story asset that will run through different territories.

And of course, this really raised the halo for the brand.

And then, of course, we're using -- beyond that, using the television series now that's airing around the world, including with CCTV in China, based on the growing relationship with them across TRANSFORMERS and MY LITTLE PONY.

And that's also beneficial.

So the content is driving profitable growth for that brand.

And again, the disruption from Toys"R"Us certainly has interrupted the appearance of what the sales look like.

It's down a bit because of all the changes in the market.

But over the period, we've seen the POS grow.

Okay.

Brian, we understand all that, the merchandising and the toy line.

You're going to get that revenue anyway no matter who does the movie.

So my question was specific, specific on the economics of the movie itself.

It is worthwhile for you to be doing this?

Are you generating more economic profit doing it this way than other third party?

That's what I'm trying to get at.

I understand all the merchandising aspect already.

Sure.

So in fact, doing the movie is beneficial to us economically.

First of all, we get to not only pick the price point for the movie and produce it ourselves, but we receive producer fees for having produced the film.

Then we get to calendarize the movie and to work with our retail partners to ensure that they're able to help us make that property an A-level property at their retail destination.

If we weren't able to do that, if we were in a third-party arrangement, we have less control around the creative and around the price point.

And so, in fact, contributing to and participating in the franchise economics for film is accretive to the company.

All right.

Great.

That's a great answer.

And then lastly, I just want to ask about Franchise and Partner Brands.

They're both down.

Could you talk about the brands within those categories that were, let's say, challenged and, to put differently, an opportunity for improvement?

So what was down in those 2 categories?

Yes, sure.

Obviously, the -- in franchise, TRANSFORMERS was down, as it was up against year-ago movie timing.

It -- given your familiarity with that action category, it wasn't down as much as you would have expected in a year after movie.

In fact, it's performed quite nicely and above those normative levels of being down by 50% or something like that.

So it's done quite well, given that it has other entertainment.

In the quarter, I talked about that MY LITTLE PONY was down a bit.

But again, you're dealing with the retail disruption from Toys"R"Us and loss of that retailer, and not shipping new initiatives until the second half of the year.

And NERF was down a bit in shipments again because that brand was very developed, not only at all retail, but certainly at Toys"R"Us.

And so, again, you work through the disruption.

That's temporary.

But the POS was quite strong, and now we're lining up the second half of the year to be incredibly strong around NERF Fest, which, as you recall, Gerrick, last year was only in the U.S. and now is rolling out to 37 different countries, given how successful it was a year ago.

And we literally have new innovation in every category.

We have a new N-Strike Elite.

We have a new Mega Thunderhawk.

We have new Rival product.

We have new Zombie Strike products and new Modulus product as well as the launch of our Laser Ops product in the second half.

So bringing innovation back into that brand, following the liquidation at Toys"R"Us, is perfectly timed for longer-term growth.

In Partner Brands, we've talked about the brands that were down.

Obviously, TROLLS was down following the movie years.

And we've said that MARVEL contributed, and that DISNEY PRINCESS was down.

Obviously, BEYBLADE is up and continues to perform at a high level.

Okay.

And You forgot about Overwatch Nerf by the way.

Yes.

Well, Overwatch comes later this year.

Our next question is from the line of Susan Anderson with B. Riley FBR.

I was wondering, when you look at shelf space either in your existing retailers, and then also new retailers that may be carrying toys now, I guess, with the Toys"R"Us disruption, do you think that you're gaining any space versus your competitors?

In other words, I guess, once Toys"R"Us is gone, do you feel like you'll have more shelf space out there, the same or less versus with Toys"R"Us?

Yes.

I'd said that given the work we're doing with our major partners that we've been in business with for years and the new opportunities for online and omni-channel, combined with some retailers that will focus on some specific audiences, I actually expect that the amount of promotion and linear footage available to the toy industry for the holiday could be very similar to last year's holiday.

Now given that we have one of the broadest portfolios of brands, where we focus on incredible innovation across the gaming portfolio, in Franchise Brands and Partner Brands, with incredible entertainment coming for the second half of the year in home entertainment as well as theatrical films from TRANSFORMERS and also from Spider-Man, the fact is our strong portfolio, with our commitment to innovation and storytelling from us and our partners, puts us in a very good position, not only for holiday 2018, but as we return to growth in 2019 and beyond.

And we absolutely believe we will return to growth in 2019 and beyond with expanding operating profit margins over time.

And we can see how the business is developing along those lines.

Great.

That's helpful.

And just one follow-up on the inventory.

I know you guys have talked about holding back inventory, so you want to compete with Toys"R"Us.

Just curious, have you guys started to ship any of that?

And should we expect inventory to be more in line with sales by third quarter?

Or is it really more fourth quarter?

And then, I guess, on Europe, too, excluding the Toys"R"Us pressure, how should we think about that cleaning up in terms of the timing?

Yes.

So in Europe inventories, our inventories are down, and retail inventories are down.

And I would expect that we'll continue to manage our inventories relative to the demand in the third and fourth quarter in Europe, but recognize that we have a lot of markets where Toys"R"Us existed, and we do have the business of working through with our brick-and-mortar retailers, their plans relative to the acceleration of online and omni-channel retailers in the region.

In the U.S., I'm not going to comment on whether inventory is going to be up or down in third or fourth quarter.

The goal, of course, is to ensure that our vast portfolio gets supported across all of these new initiatives that we have.

And certainly, we will hold more of our own inventory and deploy it closer to those sale surges.

We've described that before why that's important, so that we can deploy the inventory to the retailers and to the partners that have the greatest levels of sell-through, so that we can match inventory to demand even better than we have in the past.

And I think that's something we've learned as the market continues to rapidly develop and evolve.

We're continuing to onboard that capability and to have that personnel.

And you've seen us take some changes to the composition of our personnel, and add capabilities to modernize those aspects of our business.

We've reached the end of the question-and-answer session.

I would like to turn the call back to Debbie Hancock for closing remarks.

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

The replay will be available on our investor website in approximately 2 hours.

Additionally, management's prepared remarks will be posted on our investor website following this call.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.