transcript july 21, 2008 hsbro earnings conference call and business overview


for what its worth, some people might be interested in the spin...

Q2 2008 Hasbro, Inc. Earnings Conference Call - Final FD (Fair Disclosure) Wire July 21, 2008 Monday

Copyright 2008 Voxant, Inc.
All Rights Reserved.
Copyright 2008 CCBN, Inc.
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FD (Fair Disclosure) Wire
July 21, 2008 Monday
TRANSCRIPT: 072108a1887699.799

LENGTH: 7996 words

HEADLINE: Q2 2008 Hasbro, Inc. Earnings Conference Call - Final


Corporate Participants

* Karen Warren Hasbro, Inc. - SVP, IR * Brian Goldner Hasbro, Inc. - COO * David Hargreaves Hasbro, Inc. - CFO * Deb Thomas Slater Hasbro, Inc. - SVP, Corporate Finance

Conference Call Participants

* Tony Gikas Piper Jaffray - Analyst * Felicia Hendrix Lehman Brothers - Analyst * Greg Badishkanian Citigroup - Analyst * Sean McGowan Wedbush Morgan Securities - Analyst * Tim Conder Wachovia Capital Markets - Analyst * Drew Crum Stifel Nicolaus - Analyst * David Leibowitz Burnham Securities - Analyst * Gerrick Johnson BMO Capital Markets - Analyst * John Taylor Arcadia Investment Corp. - Analyst * Gulpal Formuri Carst Capital - Analyst


OPERATOR: Good morning and welcome to Hasbro's second quarter earnings conference call. At this time, all parties will be in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

With us today from the Company is Senior Vice President of Investor Relations, Karen Warren.

KAREN WARREN, SVP, IR, HASBRO, INC. : Thank you, Shirley and good morning, everyone. Joining me today are Brian Goldner, President and Chief Executive Officer, David Hargreaves, Chief Operating Officer and Chief Financial Officer, and Deb Thomas Slater, Senior Vice President and Head of Corporate Finance.

To better understand our second quarter results, it would be helpful to have the press release and financial tables available we issued earlier today. The press release includes information regarding non-GAAP financial measures discussed in today's call, and is available on our website at Hasbro.Com.

We would also like to point out that on this call, whenever we discuss earnings per share or EPS we are referring to earnings per diluted share. During the call this morning Brian will discuss key factors impacting our results and David will review the financials. We will then open the call to your questions.

Before we begin, let me note that during this call and the question and answer session that follows, members of Hasbro Management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. These forward-looking statements may include comments concerning our product plans, anticipated product performance, business opportunities and strategies, financial goals, and expectations for achieving our objectives.

There are many factors that could cause actual results and experience 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, 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?

BRIAN GOLDNER, COO, HASBRO, INC. : Thank you, Karen. Good morning everyone, and thank you for joining us. Before David takes you through a detailed review of the financials, let me take a moment to comment on our results. Our Company continues to perform well, and we are very pleased with our results in the second quarter and year-to-date. Hasbro delivered double-digit revenue growth with revenues up 13% to $784.3 million for the quarter, compared to 691.4 million last year.

Absent the favorable impact of foreign exchange, revenues were up 10%. Operating profit was 65.5 million, or 8.4% of revenue, which is consistent with the comparable period last year as a percentage of revenue. Net earnings for the quarter were $37.5 million compared to $4.8 million in 2007, with earnings per share of $0.25, compared to $0.03 in 2007. Excluding the final Lucas mark-to-market expense last year, 2007 earnings for the quarter would have been 41.3 million, or $0.24 per diluted share.

As part of our longer term strategy to grow Hasbro, we continue to make investments in many areas of the business, including emerging markets, entertainment, and digital gaming. With the current strength of our product line we are able to make investments that will provide value to our shareholders over the long term, while continuing to deliver strong earnings.

Now let's review the global quarterly performance of our major product categories. The Boy's business was up 13% with Star Wars, Marvel and Indiana Jones driving the growth. Transformers continue to represent a significant part of our Boy's business, as expected revenues declined in the quarter; however year-to-date Transformers was up 31% in the Boy's category. The Transformers animated series launched on Cartoon Network in January, and is performing very well.

Iron Man and Hulk, both part of our Marvel line did well in quarter. Iron Man was particularly strong at the box office, and our toys performed extremely well at retail. In a number of instances, we were in short supply during the quarter. We recently began shipping new Iron Man product, and we will be well stocked for the DVD release this Fall. We expect Iron Man to exceed our original expectations for the year.

Star Wars continues to do very well. It was up 82% for the quarter in the Boy's category, with the upcoming theatrical release of the Clone Wars animation, along with the television debut in the Fall, we expect Star Wars to have another very good year, and to grow compared to last year. As we have been saying, we believe that our six major Boy's initiatives in 2008 could quite possibly equal the three major Boy's initiatives in 2007. Based on where we are today, we are on track to deliver on this objective.

Another strong business for Hasbro continues to be our Girl's category with revenues up 24% in the quarter, driven by the success of Littlest Pet Shop, FurReal Friends, and My Little Pony. Our Tweens category was up 5% in the quarter, driven by Nerf which was up 29%. The preschool category was up 11%, with PlaySkool up 24%, contributing to the growth was the continued success of In The Night Garden. Our games and puzzle business was up 12% for the quarter, with our top performer Monopoly up 26%, primarily due to the continued strength of Monopoly Electronic Banking.

We are looking forward to launching the first ever global Monopoly Here & Now The World Edition in August. In addition to Monopoly, a number of our games performed well in the quarter, including Trivial Pursuit, Twister, Operation, and the Game of Life. Our Wizards of the Coast trading card game Duel Masters is doing very well in Japan.

Hasbro's Family Game Night will be returning this Fall, with a promotional program for a number of our board games targeted to Today's families. Family game night will also gain a foothold in the digital arena this Fall, when Electronic Arts launches it's Family Game Night offering, featuring reimagined versions of some of Hasbro's classics, like Connect Four, Battleship, Yahtzee , Boggle, and Sorry.

This new title from EA showcases the power and versatility of our games brands, and the Family Game Night platform. In addition, we are working with EA on a number of integrated promotional programs for the Fall, that will support the launch of both our toys and their digital games, including efforts for three of Hasbro's most popular brands, Littlest Pet Shop, Nerf, and Monopoly.

As we have said, we believe there are significant growth opportunities in emerging Markets. As a result we have been increasing our investments in a number of new markets this year. At our new office in Brazil, we added Sales and Marketing support, as we transition away from a distributer model. We are also in the process of opening offices in Russia, China, and the Czech Republic. Our brands have proven worldwide appeal, and as we increase our presence around the globe, we expect to grow our emerging market business significantly over the next few years.

For 2008, I don't want to forecast what is going to happen with the economy. Clearly the current economic situation, both in the U.S. and around the globe, make it a much more challenging environment than we would like. Having said that, as we shared with you in February, Hasbro has performed well in the most recent economic downturns. While we cannot guarantee what will happen in the future, we believe we are well-positioned to have a strong 2008.

In closing, we have had a great year thus far. Our business is strong, and we remain committed to investing in the future, to insure we deliver value to our shareholders for the long term. Now let me turn the call over to David to talk more about our second quarter results.

DAVID HARGREAVES, CFO, HASBRO, INC. : Thanks Brian, and good morning everyone. I too am very pleased with the results we reported today. For the quarter, we delivered worldwide net revenues of $784.3 million, compared to 691.4 million last year, an increase of 13%, or $92.9 million. Excluding the favorable impact of foreign exchange, revenues were up 10%, or $67.9 million. And I am particularly pleased with our revenue growth recognizing that we had an extremely strong second is quarter in 2007, when revenue was up 31%.

Operating profit for the quarter was $65.5 million, or 8.4% of revenue, compared to $55.8 million, or 8.1% of revenue last year. During the quarter, we continued to invest in our digital strategy, including the Wizards of the Coast initiative, and building our business with Electronic Arts. And as Brian mentioned, we are also building infrastructure in emerging market locations. We are committed to investing in the future growth of our business, and our operating profit during the quarter reflects this investment. Some of these investments will continue throughout the year, however they have always been contemplated in our statement that we should be able to grow earnings per share in 2008.

Another area I would like to comment on is the impact of input cost inflation on our business. When we came into the year, we didn't envision oil costing $130 a barrel. Clearly this is impacting resin costs, ocean freight charges, and the cost of transportation to our customers. However, through a combination of cost saving initiatives and pricing actions, thus far we have been able to mitigate most of these increases, and they are not having a material impact on our results.

Moving on to our segment results, beginning with the U.S. and Canada segment, net revenues were $467.7 million, compared to 421.9 million last year, an increase of $45.8 million, or 11%. U.S. and Canada operating profit for the quarter was $43.7 million, or 9.3% of revenue compared to 35.5 million, or 8.4% of revenue last year. The 2007 results include a 10.4 million charge related to the Easy Bake oven recall. As I mentioned, there have been some expenses this year associated with the investments we have been making to grow our business.

Net revenues in the international segment were $293.7 million, compared to 255.2 million a year ago. This segment was up 15% in U.S. dollars, and 6% excluding the impact of foreign exchange. The international segment reported operating profit of $14 million, compared to 15.3 million last year, the decrease in operating profit is primarily due to the investments we are making in the emerging markets.

Now let's take a look at earnings. For the second quarter, we reported net earnings of $37.5 million, or $0.25 per share. This compares to $4.8 million, or $0.03 per share in 2007. The 2007 results included a $36.5 million charge related to the repurchase of the Lucas warrants.

During the quarter, average diluted shares outstanding were $155.1 million, compared to 164.6 million last year. Earnings before interest, taxes, Depreciation & Amortization were $109.3 million, compared to $68 million a year ago. Gross margin for the quarter was 60.7%, compared to 60.5% a year ago. As I mentioned thus far we have been able to mitigate most of the impact of input cost inflation, through cost saving initiatives and pricing actions.

Now let's take a look at expenses. Royalty expense for the quarter was $68.2 million, or 8.7% of revenue, compared to $62.5 million, or 9% a year ago. As we have discussed, entertainment based product lines continue to play a major role in our growth. Research and Product Development expense while increasing 6.6 million to $45.4 million, was relatively flat on a percentage basis. The increase in dollars spent reflects our continued investment in new product development.

Advertising expense at 11% of revenue was consistent with last year as a percent of revenue, however it did increase to $86.2 million, compared to 79 million last year, primarily due to the impact of foreign exchange. SG&A expenses at $190.1 million, or 24.2% of revenue increased $25.5 million compared to last year. The increase in dollars is due to a number of factors. Firstly much of the investment spending we have already talked about is classified as SG&A. Secondly there is the impact of foreign exchange and lastly, there are higher shipping and distribution costs associated with increased shipments, and generally higher transportation costs.

Interest expense increased by $6.3 million to $13 million, primarily due to the 350 million of long term debt we issued in the third quarter of last year. Other income net totaled $2.7 million, compared to an expense of 27.2 million a year ago. The 2007 results included a $36.5 million unfavorable mark-to-market adjustment to the Lucas warrants. There is no adjustment in 2008 since we repurchased the warrants in the second quarter of last year. Our underlying 2008 tax rate was 31.3%, compared to our 2007 full year underlying tax rate of 30.5%.

Now let's turn to the balance sheet. At quarter end, cash totaled $594.6 million, compared to 525.6 million a year ago. We have generated significant cash from operations during the last 12 months, and we raised 346 million in cash through a debt offering last September. We have used this cash productively over the course of the last year in a number of ways, including the purchase of Cranium, and the acquisition of the rights to Trivial Pursuit, as well as our share buyback program and paying dividends to our shareholders. Although it didn't impact our Second Quarter, I want to mention that on July 15, we paid off 135 million of notes that became due.

Our Receivables at $562.5 million were up $144.8 million, compared to 417.7 million last year. The increase is primarily due to higher sales volume, a significant reduction in the use of our securitization facility, and the impact of foreign exchange. Absent the impact of securitization, DSOs was 74 days compared to 72 days last year. Inventories increased to 375 million, compared to 352.5 million a year ago, primarily due to the impact of foreign exchange, and to support the growth in our business.

In summary, we are very pleased with the results we reported today. We were able to significantly grow revenues against an extremely strong second quarter in 2007. We increased earnings and profitability in a difficult economic environment, while also making key investments for future growth. Finally, we continue to return cash to our shareholders, with our quarterly dividend and open market repurchases of our Common Stock.

I believe we remain on track to achieve our full year goals. And with that, Brian, Deb, and I would be happy to take your questions.

Questions and Answers

OPERATOR: Thank you. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). Our first question comes from Tony Gikas. You may ask your question. Please state your company name.

TONY GIKAS, ANALYST, PIPER JAFFRAY: Piper Jaffray. Good morning guys, and great job on the quarter. A few questions. Could you talk a little bit about the pricing improvement that you expect to experience in the second half of this year relative to the second half of last year? Do you see, second question, consumer spending challenges in your international markets, as significant the as the consumer spending challenge that you are seeing here in the US? Third question, maybe just a little bit on Transformers, the next property coming.

Could you give us a little idea of the growth that you might expect to see with your product line, as that movie rolls out, and the fourth question, could you just give us a little update on your ad spending, how that is trending on your Marvel intellectual property related products, has it been trending above or below your expectations, and if you could give us a percent of sales that would be great?

DAVID HARGREAVES: Okay, Tony, it is David. I am going to take the first one in terms of pricing. Actually, no. We talked about this at our February Analyst meeting. We were expecting a significant increase, cost increases out of the China in particular, and we said at that time that firstly, we were going to try and offset the cost saving initiatives and product improvement initiatives, process improvement initiatives, but to the extent that we couldn't do that, we would take some selective pricing, and we did that certainly on new items when we came into the year, we priced them to be consistent with the latest commodity costs, and we had some increases on carryover products.

Since that time, oil has continued to go up, as you know it is over $130 a barrel, and what we anticipated in February was a 14 to 15% increase out of the Orient, and it ended up being closer to the 17 to 18% range, and in addition, obviously the cost of transportation out to the customers has gone up.

So we actually are going in, and we are taking a second round of pricing, which we really hadn't envisioned in February, and basically, that will be effective September 1. We have already announced it to our customers. They obviously don't like it, but they recognize that their own cost is going up, their own label product and they have accepted it, so there will be sort of a mid-single digit price increase effective September 1st, in order to help us maintain our margins in light of rising costs.

BRIAN GOLDNER: Okay. Tony, it is Brian. In terms of consumer spending, we haven't seen anything that is significantly different between some of the major mature markets. Clearly, growing faster in our emerging markets throughout Asia, as well as in Eastern Europe and Latin America.

Transformers, talk a little bit about next year, the movie is in production right now. It is scheduled for late June next year. We also have GI Joe as a motion picture for early August next year, and our plans are under way.

DAVID HARGREAVES: And in terms of ad spending, I mean on the entertainment products, historically ad spending against entertainment is a bit lower than the average, because obviously it is the movie that is driving the business.

TONY GIKAS: So has the ad spend on those Marvel properties been above or below your expectation, or right where you were expecting? Is it a single digit number as well?

DAVID HARGREAVES: Well we aren't going to give you a lot of detail, but basically it is at expectation. We have been spending advertising money against these product lines but as I have said, when there is the whole awareness of a product line which is driven by the movie, we don't spend as much as we do against non-movie driven properties.

TONY GIKAS: Okay, and then could product sales on Transformers next year, guys, could that be up 20% over the '07 levels?

BRIAN GOLDNER: Clearly, we are very focused on making a great product line, including licensed products and video game products, and we are very excited about the movie that is in production, clearly a great story, and great characters that we are telling, but again, we will wait and see.

TONY GIKAS: Okay, and then last question and I'll let the next caller get on.

GI Joe, maybe just an update on the movie and timing, is that primarily a domestic opportunity? How do you view that?

BRIAN GOLDNER: GI Joe is really a global opportunity. If you go back to the '80s, this movie is based on the 1980s Marvel comic series. The movie will launch globally. The movie's title is 'GI Joe, The Rise of Cobra.' It is an origin story about the GI Joe is up against the cobra forces. It is very much a comic book movie as a genre would go, and a great action/adventure movie with Steve Sommers for The Mummy movies as director. So again, lots of excitement, and certainly a full product line, including video game.

TONY GIKAS: Okay, good luck, thanks, guys.

OPERATOR: Thank you. Next question comes from Felicia Hendrix. You may ask your question. Please state your company name.


BRIAN GOLDNER: Good morning.

FELICIA HENDRIX: On cost of goods sold, if you were just with the Easy Bake recall last year were calculating that gross margin for about 62%, if you just look on an adjusted basis year-over-year there was a decline. I know costs are higher. David, you said you mitigated those, I was wondering if there was also mix in the quarter that drove the margins down year-over-year?

DAVID HARGREAVES: I think there is a little bit of mix, but I think if you go back and you look our gross margins, for the second quarter over the last five years, in terms of reported basis this is the highest since 2002, so our gross margins are exactly where they kind of need to be.

FELICIA HENDRIX: Okay. And then just with Star Wars, wondering about the strength in the quarter with the August release, did you just ship a little bit earlier than you normally would, or is it also just regular underlying strength of Star Wars?

BRIAN GOLDNER: Yes Felicia, it is both. The business has remained strong in the year, as well as some initial shipments. But the underlying business based on the innovation and the efforts from Lucas and our team here at Hasbro, it has been great.

FELICIA HENDRIX: In the preamble you didn't really touch on the performance of Hulk, could you just fill us in there?

BRIAN GOLDNER: Yes, Hulk is about where we wanted it to be for our plan.

FELICIA HENDRIX: Brian, you are answering the questions so shortly. Do you want to give us a little more?

BRIAN GOLDNER: Sure. What we like about where Hulk has ended, it has done well at the box office. It clearly has reset the franchise for the future. Certainly the movie performed well, in terms of being an appealing movie for people. Our product have been in-line with what our expectations have been around the world.

FELICIA HENDRIX: Okay. And then just finally, can you give us a specific DVD release date for Hulk, Iron Man, and Indiana Jones?

BRIAN GOLDNER: I don't know that everything has been released just yet, but what we can tell you is that Iron Man is at the end of September, and that Hulk is toward end of October.

FELICIA HENDRIX: Okay. Finally, David, on the Receivables, I am assuming that going forward we should see a reduction in securitizations? So we might see tougher, not apples to apples comps on Receivables going forward?

DAVID HARGREAVES: Yes. You are probably going to see receivables higher because we will utilize our securitization facility less go forward. We clearly have cash on hand, and a bank revolver facility, so we really don't need to dig into the securitization as much.

FELICIA HENDRIX: All right, thank you very much.



OPERATOR: Thank you. Our next question comes from Greg Badishkanian. You may ask your question. Please state your company name.

GREG BADISHKANIAN, ANALYST, CITIGROUP : Citigroup. A few quick questions here. You mentioned, I think, Iron Man a little bit low on inventory. How about overall? What were your inventories at the retail level finishing out the quarter versus last year?


DAVID HARGREAVES: Yes. I think retail inventories certainly in the U.S. are probably a little bit higher than they were this time last year. I think this time last year we were very much chasing Transformers, and we were sort of short supply on some of those. I think we have shipped in product to support the Star Wars Clone Wars, which is really starting to ship now. So during the second quarter, or a little bit of shipment associated with that. But certainly whilst they may be a little bit higher at retail, it is not something that we are too concerned, as we sit down and look out the year with our major retailers, and look at what their forecasts are for the year, we are very comfortable with the level of retail inventories we have out there.

GREG BADISHKANIAN: Right, good. Looking out internationally, are there a few markets that did particularly well, or below kind of the average that brought it down?

BRIAN GOLDNER: Well, as we look out over the markets, we are seeing great success in some of the emerging markets, certainly through Asia. We are seeing our business continue to grow. In our emerging markets, we are just up and running in Brazil, so we are doing ow first shipments, transitioning away from the distributor model.

In eastern Europe, Poland, Czech Republic, quite good. The numbers in the U.S. and Canada were quite good as well, clearly double-digit growth. So again, around the world, some good numbers. Some markets slightly ahead of others, but nothing out of the ordinary.

GREG BADISHKANIAN: Great. Thank you.

OPERATOR: Thank you. Our next question comes from Sean McGowan. You may ask your question. Please state your company name. Sean McGowan, your line is open.

SEAN MCGOWAN, ANALYST, WEDBUSH MORGAN SECURITIES: Had it on mute, sorry. Couple quick questions. Some for David, some for Brian. David, tax rate, expectation for the full year?

DAVID HARGREAVES: I am actually going to let Deb answer that one.


DEB THOMAS SLATER, SVP, CORPORATE FINANCE, HASBRO, INC. : Hi, Sean. The tax rate for the quarter was 31.3%. As David said, that kind of compares to, a rate absent the impact of Lucas last year of 30.5%. I think for the full year we would expect to be around that 31.3%, as we plan to incur some tax expense on repatriating some of our international earnings.

SEAN MCGOWAN: Okay. Thank you. Looking at the balance sheet, I think I know the answer, but you have some short-term debt, and you are cash positive. Is that just locating debt in different parts of the world?

DEB THOMAS SLATER: That is exactly right. Most of our cash is outside the U.S. right now.

SEAN MCGOWAN: Two others. I don't know if this is David or Deb. What drove that decision to decrease the securitization? You had a lot of cash last year as well. Is that more of a cost issue, or availability or credit markets?

DAVID HARGREAVES: No, I think we have always had more cash overseas, so I think last year, in order to fund receivables without repatriating a lot, we actually dipped into securitizations. Obviously, last year I think operating cash flow was about 602 million, so we do have more cash, but at our working capital peak, we had a choice between dipping into our revolver, bank revolver, or dipping into the securitization. And we will do whichever is the lowest cost at the time, in light of the moment that has been the bank revolver, as opposed to securitization.

SEAN MCGOWAN: That makes sense. Final question. Brian is there anything going on in Hollywood that would make you concerned about the opening of Joe? Have there any delays in that production?

BRIAN GOLDNER: So we were out in L.A. over the last couple days we got to see a lot of GI Joe footage. They are in editorial now, so we are done with the principal photography, now it is special effects and editorial. There we are not concerned at all, it is well on it's way. Transformers is in the midst of production. Again, out seeing production earlier, again no concerns.

OPERATOR: Our next question comes from Tim Condor. You may ask your question. Please state your company name.

TIM CONDER, ANALYST, WACHOVIA CAPITAL MARKETS: Thank you. Tim Condor, Wachovia. Congratulations again on good execution.


TIM CONDER: Couple of items here, everyone. And I apologize if some of this is repetitive. Brian, I had some troubles getting on. Just got in at the end of your comments. But the royalty, I don't know if this is better for you, Brian, or David, but the royalty expense is a little bit more than we anticipated. Was that driven by the early ship of the Star Wars product, or was there something else going on there?

BRIAN GOLDNER: David, you want to take that?

DAVID HARGREAVES: I a lot of our growth has been driven by entertainment. Whereas last year you had a high royalty because it was Transformers and Spider-Man. This year some of our core products there are certainly growing, but there has been a lot of Star Wars. There continues to be a lot of Transformer movie related product, which does have a small royalty to studio. And of course, there has been Marvel product in terms are Iron Man and Hulk, also of course Indiana Jones. So all of those items have royalties that go with them. So I think the thought that royalties would be a lot lower in potential terms than last year, is probably sort of unfounded.

TIM CONDER: Okay, okay. And relating to Star Wars, as you see it at this point, granted, it is still a little early here, would it be inconceivable that the revenue from Star Wars this year may match what you saw in 2006, or even '05?

BRIAN GOLDNER: So Tim I won't comment specifically on the revenue comparisons by year. What we will say is that our retailers around the world have good plans, very strong plans for Star Wars. The animation is terrific. The theatrical launch, followed by the TV play will be very good for the business, both from an impact standpoint, [eventizing] and driving through the holidays, and the innovation from our teams across the product line have been great. And of course, we have said that we saw Star Wars growing this year as compared to last year.

TIM CONDER: Okay. Okay. And then two more, if I may. Electronic Arts. Again, Brian, I apologize if you made any commentary related to that, but if you could give us any update on how that is progressing, ahead of plan, on plan, behind plan? And then David, in your comments regarding the September coming price increase, do you anticipate seeing any forward buying by retailers ahead of that?

BRIAN GOLDNER: So on EA, I will tell you the relationship is really terrific. The EA development is well under way. We will probably have around 30 different titles, recognizing that we are activating these titles on a number of platforms, from iPod to iPhone, on-line, console, Wii, Nintendo DS. So again, across all of the major different platforms, and of course, associated with each of the different brands. They are also launching a Family Game Night compendium, which will tie to our team's Family Game Night efforts for the fall. So the development is underway. In terms of revenue recognition and when we will see that we are really getting more of that in 2009, '10 and beyond.

TIM CONDER: Brian, do you anticipate some slight accretiveness in 2009?

BRIAN GOLDNER: In 2009, yes, we believe that you will start to really see some of the revenues from the relationship. It is certainly up, and as well as we expected, and the teams are working quite well together and making really great reimagined versions of Hasbro brands. These around just our board games or toys done in two dimensions, but really brought to life. I would encourage you to go to, whether it's iTunes, or somewhere else and see some of the products on line, they are great.

DAVID HARGREAVES: In terms of price increase, effectively September 1st. Arguably, people could pull forward a bit of September into August, but that certainly wouldn't impact the quarter. I don't think it's going to impact the end of September quarter end. I dont think it will affect the quarter, even if there is a slight bit of pull-forward. And I think we are talking about mid single-digits, and I think retail is very focused on inventory control. I doubt as if they will be persuaded to pull a lot forward in order to avoid that . As I said, it won't impact the, even if it moves a bit from one month to the next, it won't impact the

BRIAN GOLDNER: If you want to see some of the on-line games, go to, and you will see the EA site there, and our games are up and prominent on that site.

OPERATOR: Next question comes from Drew Crum. You may ask your question, please state your company name.

DREW CRUM, ANALYST, STIFEL NICOLAUS: Good morning. It is Stifel Nicolaus. I want to revisit the question on the film properties. It sounds like you are comfortable with production on Transformers and GI Joe. At what point does the Screen Actors Guild disruption impact the release date for that film?

Secondly, along those lines, the Paramount financing with Deutsche Bank fell through last week. Just curious as to how that impacts GI Joe. As you look to the Universal film slate, any issues with funding there?

BRIAN GOLDNER: On Transformers, we are well underway in production. We have our product lines and video games and licensed products under development. Michael Bay and the team from DreamWorks and Paramount have done a great job in organizing the production. Thus far we haven't seen related to the Screen Actors Guild that would represent a change in their working on the film. GI Joe as I said was already shot, so now it is a matter of editorial and special effects and things. Give me the second, on the financing piece.

DREW CRUM: Yes, financing for the Universal slate.

BRIAN GOLDNER: Yes. We don't see any issues related to financing as it goes to Transformers, or GI Joe, or the Universal slate. There are no concerns that we have out there.

DREW CRUM: Okay. Very good. And then, guys, can you provide an update on the integration of Cranium? Was it dilutive or accretive in the quarter? Just your outlook for the balance of the year with that property?

DAVID HARGREAVES: Obviously the amortization costs, there are some costs of the people we have on board, that we brought over from Cranium when we acquired it. So we have got some costs in the quarter. And really, we are integrating the line, cleaning up retail, and significant shipments really don't start until the third or fourth quarter. So I think you would have to say that during the second quarter on a stand-alone basis it was probably dilutive, for the full year, we are certainly anticipating it should be accretive.

DREW CRUM: Okay. On last question to housekeeping item, CapEx in the quarter?

DAVID HARGREAVES: Yes, it was about 30 million, which has been higher than historic second quarters. That is really down to three things. Firstly, we are upgrading our SAP system. So we have got some significant development costs already starting with that. We have had SAP for 10 years. We are just moving to a newer version and doing some upgrades.

Secondly, you may recall that during January, we announced that we had worked with our unions, at our leased Long Meadow factory, and we got agreement to drive in new work practices, and take some staff reductions, in order to make that plant more efficient. Part of the quid pro quo for that was that the company would invest in some additional capital equipment. So you are seeing some of that come through.

OPERATOR: Next question, David Leibowitz. You may ask your question, please state your company name.

DAVID LEIBOWITZ, ANALYST, BURNHAM SECURITIES: Burnham Securities. Very Briefly, we are very upbeat on much of the line. Somewhere in there there has to be some disappointments. Can you identify them for us?


DAVID LEIBOWITZ: It is not like Lake Wobegon, where everybody is above average.

DAVID HARGREAVES: It is a struggle, David. If you look at every category that we're in, boys, girls, tweens, games, and puzzles, when you look at our Q, you are going to find that we are up in every category.

BRIAN GOLDNER: The one comment I would make, in our tweens we noted the business was up 5% in that category, yet Nerf was up significantly higher. I would say that year-over-year, iDog is down, and that is what has driven that difference. There is a product that's not performing as did it in the second quarter last year.

DAVID LEIBOWITZ: Okay. Second of all, there are an awful lot of products and brands that you folks own that have not seen the light of day for some time. Can you tell us which ones might be coming back, either late this year or next year, that have not yet been spoken about?

BRIAN GOLDNER: David, no, we wouldn't comment on that right now. Suffice it to say that the teams are busily working on '09 and 2010, and we have got a great group of marketers and product developers and designers, and their plans are well underway.

DAVID LEIBOWITZ: Okay. And the last question, if I may, what percentage of the pretax earnings came from licensing income?

DAVID HARGREAVES: Yes, I think we have had that question several times in the past, and I think we have always said that we don't disclose it.

DAVID LEIBOWITZ: Well, I will keep trying. Thank you very much.

BRIAN GOLDNER: (laughter) Thanks, David.

DAVID HARGREAVES: We will keep giving you the same answer.

OPERATOR: The next question comes from Gerrick Johnson. You may ask your question. Please state your company name.

GERRICK JOHNSON, ANALYST, BMO CAPITAL MARKETS: Good morning. BMO Capital Markets. I want to ask you a little about your theatrical based licenses and what percent of sales do those currently make up, and how does that compare historically? Then I have a few follow-ups. Thanks.

BRIAN GOLDNER: Gerrick, as we said is, on our boys business, which is primarily the theatrical licenses, we said that six initiatives this year could quite possibly equal the three from last year. We are on track to achieve that objective. In terms of what percent our license theatrical properties make of the total we don't report that. And clearly within that, of course, we have good core brand performance from brands like GI Joe in the quarter and transformers. Along with Star Wars, Indiana Jones, and the Marvel properties. So again, won't report specifics.

GERRICK JOHNSON: Would you say that it's probably higher than it has been in the past, as a percent of sales?

DAVID HARGREAVES: Gerrick, one of the things you can look at, there is very little in our boys business which isn't driven by theatrical. So again, we will publish in our Q, and we do disclose what our boys number is. And equally, there is not a lot in our girls, or in our preschool, or in our games, which is driven. So without giving you specific details, hopefully that helps. Just look to see how our boys category is doing overall, and most of that is theatrically driven.

BRIAN GOLDNER: Boys was up 12.9% in the quarter.

GERRICK JOHNSON: Great, thanks. Now, the adult collector, that is a market you have been paying more attention to than some of your competitors. How much a part of your boys business is that, and how is the health of that market?

BRIAN GOLDNER: We continue to develop product really for many different audiences simultaneously for product lines like, and brands like Star Wars, GI Joe, Transformers. We have the great benefit of having sort of bimodal fans. We have brought new fans into Transformers over time, similarly with Star Wars. So we invest in R&D in both categories, and for many different audiences.

GERRICK JOHNSON: Okay. Any idea of the health of the adult collector?

BRIAN GOLDNER: Well, we will be out at Comicon later this week, certainly a significant presence there. We will continue to service our collectors. We really believe strongly in providing them great products and working with them to deliver the kinds of experiences they would want from our brands. It goes to our goal overall of delivering immersive brand experience for the audiences in the way that they would want it.

GERRICK JOHNSON: Shifting over to girls for a second, Littlest Pet Shop you haven't spoken much of. How is that performing, particularly versus plan or expectations? Did you see growth in that one in the quarter? How are you looking at that one for the rest of the year?

BRIAN GOLDNER: Littlest Pet Shop did contribute to growth in the second quarter. It is across a number of different categories. It was up double-digits in the quarter by itself, and it is a combination of the traditional products, the collector characters as well as play sets, VIPs, we have had almost 2 million registered adoptions of VIPs on-line globally.

Our VIP website has been done in 12 different languages across 20 countries already, just since early this year. So again, well on track. This fall we are very excited because EA will come out with three Nintendo DS titles, as well as a Wii title for Littlest Pet Shop, and that will all be integrated with our marketing efforts through the holidays.

GERRICK JOHNSON: Great. Thanks a lot.

OPERATOR: Next question comes from John Taylor. You may ask your question. Please state your company name.


BRIAN GOLDNER: Good morning.

JOHN TAYLOR: Hi. Brian, could you talk a little bit about the Star Wars merchandising strategy in the sense of is there going to be a street date, and what kind of splash are we going to see when the movie comes out? Anything you might call out about the fall in terms of retailer promotional stuff?

BRIAN GOLDNER: Yes. Hi, John. It is late July, July 26th is the date you will start to see product more formally out there. But again, sort of shipping at this point. There are significant product line and promotion associated from Hasbro and from Lucas, as well as from their film and television partners. Retailers are very excited about it, and they are excited globally. We have been out in markets in Asia, I mean, in Europe, and they are very excited. So the launch on shelf is July 26.

JOHN TAYLOR: Is that a global street date?

BRIAN GOLDNER: Yes, it should be a global street date.

JOHN TAYLOR: Okay, good. And then, David, on the mix of licensed product, so you know, some things obviously did better than others. Do you guys have the opportunity to do any stock balancing to switch a stronger property out with another one? Any of that likely to go on this fall?

DAVID HARGREAVES: Well, I think we are confident that everything we shipped into the quarter movies will sell out over the summer, some of it faster than others maybe . When we come back in the fourth quarter to support the DVD releases, we will have obviously remixed to reflect the relative strength of the movies in the

JOHN TAYLOR: Good. In terms of margin, you have been able to protect gross margin pretty well. Could you call out any difference in margin increases or price increase by segment. I guess what I am looking for, did pretty much all major segments rise, or were there some that were sort of where the increase is kind of subsidized lesser increases in other segments?

DAVID HARGREAVES: No, I mean, we are taking not in every product, but basically across most of our lines, and we are taking it on games which we make domestically, as well as on toys, which come from the Orient. So to some extent we have tried to take pricing where we don't disrupt the market or break price points, and so we have taken it across a whole range, where we think we cannot create any reduction in demand as a result of it.

JOHN TAYLOR: I can imagine that is a pretty complicated thing. I guess what I am looking for is there a segment that is sort of helping prop up any of the others, where maybe there might be a price point, glass ceiling kind of thing?

DAVID HARGREAVES: No, I don't think there is any particular segment I could point to. As I said, more of the price increases have been on our toy side of the business than on the game side, but we have selected and taken some pricing on games as well.

JOHN TAYLOR: Good. And was there any P&L impact of the step-away from securitization of your receivables?

DAVID HARGREAVES: There probably was a very small impact, because the cost of discounting receivables on securitization gets in as an admin expense, where as the interest expense on the revolver gets into non-operating. But that is very small.

JOHN TAYLOR: Okay. All right. Okay. Last question, what is going on with the mix of your Transformer movie related product versus nonmovie this year versus last year, if you could talk about that a little bit?

BRIAN GOLDNER: Thus far in the year, it has been a lot of Transformers movie product. We will begin on having the second quarter, begun shipping the Transformers animated product. The series has been on the air since beginning January this year, and is performing very well, so we are looking forward to the animated product hitting the shelves here in the U.S. It has already begun hitting shelves in several markets around the world.

JOHN TAYLOR: Okay, great. Let me sneak one more in if I can. Were there any stock buybacks in the quarter?

DEB THOMAS SLATER: Yes, there were. We bought back 1.6 million shares in the quarter.

JOHN TAYLOR: Okay. And what did you spend on that?

DEB THOMAS SLATER: We spent about $51 million.



JOHN TAYLOR: Okay, great. Thank you.

OPERATOR: Our final question comes from [Gulpal Fomuri] you may ask your question.

GULPAL FORMURI, ANALYST, CARST CAPITAL: [Carst] Capital. Quick question on Marvel. Just a check. Was that up sequentially on an aggregate basis? Hello?

DAVID HARGREAVES: Hello. I am not sure if you're talking about second quarter versus first quarter, or are you talking about the second quarter this year versus second quarter last year. If you are talking about the second quarter of this year versus last year, it was up, yes.

GULPAL FORMURI: Okay. Was it up double digit?

DAVID HARGREAVES: Yes, Marvel has been strong, up double digit second quarter this year versus the second quarter last year, right.

GULPAL FORMURI: Okay. Thank you.

OPERATOR: I will now turn the call back over to the speakers for final closing.

KAREN WARREN: Thank you Shirley. Thank you everyone for joining the call today. A replay of our call will be available on our website after 2:00 p.m. Have a good day.

OPERATOR: And this does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.

[Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.

In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.


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Erik Mona

Wow. An oblique reference to the online initiative and a mention that DuelMasters is selling well in Japan.

I think internet conspiracy buffs who think that Hasbro is behind every little decision at WotC can put the bong down, now.



to respond to my own post, i thought it was interesting that they only mentioned wotc in passing. this is 2 months after 4e released. this was a huge meeting with all the big wall street firms. this is where you toot your own horn loudly. if 4e really did well they would have been talking about it here.

also, they mentioned a february conference call. the last meeting of this type. i went back and looked at that one. i will copy and paste the references to wotc from that february meeting below:

ARGARET WHITFIELD: In your comments, I think David, you were referring a lot to the full year numbers. Could you give me some color on why the operating profit in North America was down 22% but it was up 40% overseas?

DAVID HARGREAVES: Yes. I think in the U.S. in particular, A, we were trying to anniversary a very strong fourth quarter last year. I think what happened last year is that we ended up exceptionally clean in terms of obsolescence in terms of markdowns. In the fourth quarter of last year, we reversed some reserves. That said, this year also included a number of items of investment spending. We are spending against a start-up in Brazil, a start-up of our own company. We have certainly been -- kept the advertising going throughout the full quarter in order to make sure we drove very clean retail position and we have also been investment spending in the Wizards of the Coast online initiative. So I think those were factors that meant the operating profit in North America were low in the fourth quarter.


AL VERRECCHIA: Good morning.

THOMAS RUSSO: Good morning. Al, actually, on the comments relating to the investment spending at the moment of Wizards, with their online offering, I'm curious as to how you will go about developing that product and whether it falls into the EA online relationship? And then speaking as well about your online activities in particular as it relates to the virtual world that others in the toy industry have created for their children audience with abundant chance for the kids to spend lots of ongoing money. What's your role in the virtual gaming area and then also what's your plan for spending the money on developing wizards?

AL VERRECCHIA: In terms of Wizards, let me start by -- I think you know that Magic:Online has been up and running for a number of years now. Some of the money we're spending is to improve that, the technology that supports that offering. And then we're also investing in something we called Gleemax which was an online gaming site for people who not only play Magic but are really involved in gaming in general. It's a site that will have -- it's more of a building a community of game players. There will be the opportunity to play games. There will be the opportunity to communicate with other game players. It's a place where people can go, who are really interested in what we would call hobby or niche games. We're spending a fair amount of money in that regard and that site's probably, while it's up now, will be continuing to add games and new features to it throughout the year. In terms of the virtual world for children, I'll let David talk about the VIPs, which were recently launched and we're starting to go nationwide with that.


so it looks like the gleemax thing was pretty huge for them, much bigger than dnd insider. and it failed. that puts the gleemax thing in perspective a little bit better i think. dnd insider does not seem to be anywhere near as important as gleemax was, based on the fact that it wasn't even mentioned in the context of this section of the Q&A. that would have been the place to say something good about it.



some interesting stuff from the feb call in 2006. interesting to see the market two years ago and how hasbro reacted to it.


Which brings us to question two. Hasbro's board game business has been its crown jewel, making operating returns in the high teens. For 2005, the U.S. games segment reported a less than 10% operating return. What are the reasons for this? The U.S. game segment comprises three parts; the traditional board game and puzzle business, the electronic games, which includes plug-and-play and video disc games such as Shout, and finally, trading card and role-playing games from Wizards of the Coast. Although we did not have a great year in our traditional board game and puzzle business domestically, it remained highly profitable and continued to make operating margins in the high teens.

The two parts of the game segment that pulled down overall profitability were trading card games and electronic games. As we stated in our conference call, trading card games were down due to declines in both Dual Masters and Magic The Gathering, although Magic performed better in the second half of the year, with the release of the ninth edition and the launch of Ravnica. We also indicated in our conference call that we had significant costs associated with our electronic games, in particular, the plug-and-play business.

In 2004, this had been a high-growth segment in which we were minor players. We made a significant push into this segment in 2005 with a number of new entries. Unfortunately for plug-and-play, it was not a strong category in 2005 and there were too many competing products. As a result, we over-inventoried at retail, in our warehouse and in terms of our commitment to long-lead components. This required significant charges resulting in our overall electronic games category losing $23 million.



Hasbro has a partnership with EA and yet they've got a bunch of amateurs working on Gleemax and DDI?

Seriously, wtf?

I hope someone puts 2 + 2 together and comes up with 4 = EA. Maybe then DDI won't completely suck.


even more interesting, i have access to about 20 of these quarterly meeting transcripts going back to 2002. there is not a single mention of dungeons and dragons or anything related to dnd in any of them. i guess that shows us how dnd is viewed. 3.5 didnt even get a mention in the year it came out, according to the transcripts i have access to.

again, these meetings are where you toot your horn and make small achievements seem bigger than they are to impress financial analysts at the big wall street firms.

i guess in the eyes of hasbro DnD (to quote an old high school teacher) is just a pee hole in the snow.



even more interesting, i have access to about 20 of these quarterly meeting transcripts going back to 2002. there is not a single mention of dungeons and dragons or anything related to dnd in any of them. i guess that shows us how dnd is viewed. 3.5 didnt even get a mention in the year it came out, according to the transcripts i have access to.

again, these meetings are where you toot your horn and make small achievements seem bigger than they are to impress financial analysts at the big wall street firms.

i guess in the eyes of hasbro DnD (to quote an old high school teacher) is just a pee hole in the snow.


And, let's face it, it's true. Gaming is a TINY hobby. I know we like to think that we're popular and out there, but, really, it's tiny. Look at the total sales for most RPG books. WOTC sells what, 50 000 copies (I'm talking pre-4e here) of any given book? 3pp sell maybe 10 000 copies? That's practically vanity press sizes.


I would expect that D&D is a tiny blip on the radar screen compared with some of the licensed properties these power brokers were asking about. And I see that as a good thing.


You know, its one thing that D&D is, in the eyes of major financial institutions, a non-issue.

Its another that 'Littlest Pet Shop' apparently *is* an issue. That sorta stings a bit. ;)


Hasbro has a partnership with EA and yet they've got a bunch of amateurs working on Gleemax and DDI?

Seriously, wtf?.

even more interesting, i have access to about 20 of these quarterly meeting transcripts going back to 2002. there is not a single mention of dungeons and dragons or anything related to dnd in any of them. i guess that shows us how dnd is viewed. 3.5 didnt even get a mention in the year it came out, according to the transcripts i have access to.
I think this answers the original point. D&D is barely on Hasbro's radar (regardless that some think Hasbro is constantly meddling in the brand). It's certainly well below EA's radar.


First Post
I imagine that DDI is just too small for EA to even want to touch.

That's not a bad thing looking at EA's online efforts. I was a big Battlefield 2 player a couple of years back and EA's management and delivery of the brand was nothing short of incompetent.

I think this answers the original point. D&D is barely on Hasbro's radar (regardless that some think Hasbro is constantly meddling in the brand). It's certainly well below EA's radar.

Here, I'm not so sure. D&D, regardless of "nicheness" has a huge brand recognition. Imagine what Blizzard's development team could do with the property given the chance. Granted Blizzard isn't interested in anything aside from their own IP, but just imagine. Neverwinter Nights did very well, the Aurora toolset being quite amazing and the package bought a lot of people who'd otherwise not play D&D into the brand. People built persistent worlds with it and did some quite amazing things. D&D in an electronic format has massive potential and NWN has been the closest thing so far to realising that potential. I suppose it's just fortunate that EA is generally focused on the hugely profitable sports sim market to invest time and money into screwing up a D&D franchise.


Here, I'm not so sure. D&D, regardless of "nicheness" has a huge brand recognition.
Which is why I said barely. Remember, Hasbro got back the electronics rights to many of their core games (Monopoly, etc.) by giving the company longer exclusive rights to interactive D&D games a few years ago to Atari 10 years, see here)

The Little Raven

First Post
I hope someone puts 2 + 2 together and comes up with 4 = EA. Maybe then DDI won't completely suck.

Electronic Arts has come to embody the concept of putting out iterative game franchises merely for the sake of a sure-thing product to sell each year, rather than focusing on actual quality or innovation. There's a reason that Mythic EA changed their name back to Mythic Entertainment, and it's got a whole lot to do with EA's reputation. Believing that they would have a positive impact on an electronic product outside their realm of "expertise" is a bit naive, given their history on products within that realm.


All their annual reports never really reported much on anything other than WotC as a whole.

I did a back of the envelope calculation once and I put D&D as contributing about $30 million in sales in 2007 (give or take about $5 million). When I looked at the year 3E came out, I got about $40 million. These are purely guesses, but with Hasbro's total annual sales of $4 billion, D&D represents less than 1% of the company revenue and WotC is less than 5%.


All their annual reports never really reported much on anything other than WotC as a whole.

I did a back of the envelope calculation once and I put D&D as contributing about $30 million in sales in 2007 (give or take about $5 million). When I looked at the year 3E came out, I got about $40 million. These are purely guesses, but with Hasbro's total annual sales of $4 billion, D&D represents less than 1% of the company revenue and WotC is less than 5%.

So I wonder if Hasbro believes the RoI is worth it.


Keep in mind Magic: The Gathering (which still is a top seller) didn't warrant a mention either.

Fine by me; less Hasbro people mucking with D&D and M:TG, the better.

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