Hasbro, Inc.
Q4 2010 Earnings Call Transcript

Published: 7 Feb 2011

[Operator:]

Good morning, and welcome to the Hasbro Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead.

[Debbie Hancock:]

Thank you, and good morning, everyone. Joining me today are Brian Goldner, President and Chief Executive Officer; David Hargreaves, Chief Operating Officer; and Deb Thomas, Chief Financial Officer. Our fourth quarter and full year 2010 earnings release was issued earlier this morning and is available on our website. The press release includes information regarding non-GAAP financial measures included in today's call. Additionally, whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. This morning, Brian will discuss key factors impacting our results, and Deb 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 and entertainment plans, anticipated product performance, business opportunities and strategies, costs, financial goals and expectations for our future financial performance and achieving our objectives. There are many factors that could cause actual results in 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. Now I would like to introduce Brian Goldner. Brian?

[Brian Goldner:]

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. As we entered 2010, we shared with you our vision to continue reinventing, reimagining and reigniting the industry's broadest portfolio of world-class brands. At the time, we characterized 2010 as a year of singles and doubles, meaning we were relying on growth from brands across our portfolio to drive our business, following our very strong performance in 2009. In 2010, we accomplished many elements of our strategy

[Deborah Thomas:]

Thank you, Brian, and good morning. As Brian highlighted, in 2010, we had a number of strong performances despite the difficult comparison with 2009 and a softening of U.S. consumer demand in games late in the fourth quarter. Our revenue was down slightly in the year, but we achieved record net earnings, improved our operating profit margin to its highest level in 25 years and grew earnings per share for the 10th consecutive year. We accomplished this while also expanding the reach of our business by entering new countries, investing in Hasbro Studios and launching The Hub. Importantly, we continue to generate cash, which we deployed back into our business and returned to shareholders. We talk a lot about the investments we are able to make in our business because they are so critical to our long-term success. These investments have roots throughout our company

[Operator:]

[Operator Instructions] Our first question is coming from Sean McGowan of Needham & Company.

[Sean McGowan:]

Deb, on the tax rate, so your commentary on it being affected by the mix, is that to say that if you had a more normal mix of where the profits were sourced you would be back at a kind of a 29% rate? Is that a decent rate to use in a normal scenario?

[Deborah Thomas:]

I think, Sean, we always worked through on a quarterly basis, what we think the rate is going to be for the full year. Based on the success of the International business and the decline of the U.S. business, we did have a fairly steep decline in the fourth quarter in the tax rate, which impacted the full year. We had expected it to be on a normalized basis, which this year, we were anticipating around 29%. And next year, we expect it to return again to a more normalized basis, albeit a little bit lower. And we'll talk more about that on Friday.

[Sean McGowan:]

On Games, can you drill down a little bit and give us a sense of where there was strength in Games and where there was weakness, and how much of that do you think will carry forward into the new year?

[Brian Goldner:]

Yes. Sean, it's Brian. In the Games business, if we look at the fourth quarter, particularly after Thanksgiving and just before Christmas, the consumer demand had really fallen off. And we learned some valuable lessons as we sort of pulled apart the business and did some analytics. The first had to do with the change in the way the games were promoted this year, particularly in the U.S. versus prior years. And it's something we're immediately addressing as we go in to 2011. The second thing had to do with the number of messages. As you know, we have this great, big, broad portfolio of games and yet, our message is we're probably too defuse, too numerous and didn't have the impact, the breakthrough impact that fewer campaigns might have, focused around some of the bigger brands. And again, something that we're changing immediately as we go forward.

[Sean McGowan:]

In other words, you feel like you need to do the Games what you did to the broader portfolio, focus on them, on the key games?

[Brian Goldner:]

That's right. I mean, if you think about our broadest portfolio of games, we have so many games out there and there are naturally an inclination to want to go out and tell consumers about all of them. The interesting piece is as the number of messages out there around any product have increased, we need to ensure that our games products are breaking through. And we're probably too diffuse there. Certainly, we're too diffuse, and we're going to tear that back and focus in on the most innovative and biggest game-changers, if you will. The third fact that we've really look at is that within our games portfolio, we also have Puzzles. And Puzzles actually were the biggest percentage decliners, both in terms of sales as well as POS. In fact, dragged down the Games business, and it goes back to the way that, that category was promoted and the fact that Games have -- that Puzzles have the least amount of probably, new innovations, or break frame innovations from a consumer standpoint, and are more about the themes that you pick and things along those lines. And then the final piece is we're continuously dissatisfied with our business. And we look at some of the brands where we should have had new innovations. Some of the biggest games that we had out there, where we're celebrating the 50th anniversary of THE GAME OF LIFE and yet we didn't have a major new innovation in THE GAME OF LIFE. So we're particularly hard on ourselves to say we should be doing those things going forward. But if you look at those four factors, that's really what drove the decline in the Games business late in the year.

[Sean McGowan:]

For Deb, this amortization level, not the program amortization but below the gross profit, is that a level of amortization we should expect to see going forward now?

[Deborah Thomas:]

Yes, I think we'll have some level of fluctuation. We've get some product rights in there that fluctuate with revenue, particularly in connection with our Lucas line. So as we sell more Star Wars products, that will fluctuate. But most of it is straight line, and we will have those lower levels. And again, I'll give a lot more detail on that Friday.

[Operator:]

Our next question comes from Rob Caroll of UBS.

[Robert Carroll:]

On the inventory breakdown, would you guys just be able to talk about what's on your balance sheet if you are comfortable with the levels? I guess going forward, if some of its stock up going into 2011? Or any more detail?

[Brian Goldner:]

Yes, our plan was to increase inventory levels going into the year versus a year ago, if you look at our business plan. And we're probably slightly north of what we had planned for having to do with the carryover, particularly in Games inventory. But we feel very comfortable with the quality of inventory, and had planned for a bigger 2011 as we came into the year. Clearly, we're chasing several products where we don't have enough inventory, like BEYBLADES and a few others. And again, feel very comfortable with inventory. Dave, you want to comment?

[David Hargreaves:]

No, I mean clearly, when our sales fell away a bit in the fourth quarter, what we hoped to ship ended up in inventory at the end of the year. As Brian said, some of that's Games. We've already put claims in place to bring the people back in our games factory in East Longmeadow, Massachusetts a bit later than we otherwise would have planned to. So I think yes, we are a bit higher in inventory than we would've liked to be. But I think it's something that we can work through very much in the first quarter. And with all our new initiatives, we are really going to start to see our momentum building in the second.

[Robert Carroll:]

I guess a housekeeping question, given the strength in the International business, are there any sort of cash usages in terms of repatriating to fuel further share repurchases?

[Brian Goldner:]

Well, we have authorizations still open on our share repurchases of about $150 million.

[Deborah Thomas:]

We, like many other businesses right now, have a significant, and we've always talked about a significant amount of cash that we do have outside the U.S. And with the growth in our International business -- we're at fairly consistent levels this year compared with last year as a percentage outside the U.S. But we do continue to look at ways to potentially repatriate our cash at the most tax, and cost effective, cash cost effective ways possible. That being said, that would obviously, if we did choose to do that going forward, impact our tax rate, our base tax rate.

[Robert Carroll:]

While it obviously gets increasingly difficult to break out the impact from The Hub, given the changing dynamics, is that -- I guess the prior guidance of accretive for 2011, is that still a good way to think about it?

[Brian Goldner:]

Yes. I think what we should think about is that in 2010, we had $0.30 of dilution. Our plan has The Hub at slightly accretive to neutral, depending on exactly how much marketing support we put in. But the $0.30 of dilution would go away.

[Operator:]

Our next question is coming from Greg Badishkanian of Citigroup.

[Gregory Badishkanian:]

Great, thanks. Just a kind of follow-up on the inventories. The inventory level at the retail level, how would you categorize that, and how long do you think it will take to kind of clear through that if it's still kind of Q1?

[Brian Goldner:]

We feel, as we look out in Q2 and beyond, between a lot of our spring initiatives that are already selling quite well, we will work through the inventories we have in Q1, as I mentioned. That's where we mentioned that the comparison to a year ago may be more challenging. As we get into Q2, as we look at the new initiatives that we have that are shipping early in the year, including some of our entertainment initiatives, in NERF already, some hot sellers in there with our new Barricade product as well is BEYBLADES, as well as some new Girls' product in LITTLEST PET SHOP, we feel very good about our overall prospects in Q2 and through the rest of the year.

[Gregory Badishkanian:]

And Just kind of thinking about Q1 as well, to get -- to kind of go through the inventory, the retailers probably need to discount. You need to do some more promotion. Do you typically take on that sort of help to the retailers? Would that impact margins? Or would the increase in sales kind of offset the discounting?

[David Hargreaves:]

To the extent that we have excess inventory at retail but we needed to take promotional actions to move through, any costs for that would've been provided in 2010, and will not be a 2011 cost.

[Gregory Badishkanian:]

In POS, what was that roughly in kind of 4Q, and how did that compare to the industry based on kind of your estimates?

[Brian Goldner:]

Well, obviously, if you look at Transformers and G.I. JOE, their POS was down. And if you look at our total business without Transformers and G.I. JOE, our total business was up. In fact, the toy business was up a very healthy amount. The Games business was down, particularly as we focused in on the late Q4.

[Operator:]

Our next question is coming from Michael Kelter, Goldman Sachs.

[Michael Kelter:]

I was curious about -- at Transformers and G.I. Joe, you said were $700 million in '09 and that you'd need $300 million to $400 million to offset the decline in '10. So that implies that those properties are down about 50%. And I guess I just wanted, for one, to get confirmation from you, Transformers, are we talking about $300 million in 2010? And is it reasonable to expect that you'd be able to get back to the same level, that $600 million in 2011?

[Brian Goldner:]

So two parts to that. Typically, year after a movie, we do see ranges about 50% decline. In 2008, coming off of the 2007, it was less than that because we had television programming in supporting the brand throughout the year. This year, we chose to delay the television programming, to line it up with the launch of The Hub. And our show goes on the year in a regular pattern starting February 11. So that's Transformers Prime. As we look at the results for Transformers and the movie, I'd ask you look at two numbers. One would be in 2007, we did $484 million, and in 2009, $592 million inclusive of licensed revenues and toys and games, digital gaming, what have you. So we're not going to forecast out, but I think those are two guideposts for you.

[Michael Kelter:]

And when you think about incremental sales, wherever the sales do come in for Transformers, I mean should we be thinking about a 30% contribution margin, which is something, a number, you've thrown out in the past? Or is there anything that's changed?

[Brian Goldner:]

Transformers is a profitable brand. What's interesting about our product lines is actually, as they're getting more global, be it NERF or our Preschool products, our Girls products, they're rivaling that operating profit that we only used to enjoy in our Games business. And now in fact, many of our toys brands are similarly profitable. So again, Transformers does bear a royalty in a motion picture year for entertainment. But still, a very profitable brand for us.

[Michael Kelter:]

And then the other entertainment properties in the year, I mean is there any reason to think that Thor and a Captain America combined would be bigger than Iron Man? Or should it be below for any reason? How do you think about the impact of the Marvel relationship year-on-year?

[Brian Goldner:]

We feel very, very good about the Marvel relationship. In 2011, with these two new initiatives -- and we've seen a lot of the creative, they're really spectacular. And hopefully, yesterday, you've got to see some of the trailers on the Super Bowl. We feel very good about those. I'm not going to do that kind of math, two equals one, what have you. But I will tell you that the product lineup for Thor and Captain America is very good, and retailers are looking forward to those two movies. Obviously, Thor is in early May, and Captain America is in later July. In between those two of course, is Transformers on the 1st of July. So the lineup going into Q2 and through into the summer is very strong for us.

[Michael Kelter:]

Your primary toy competitor announced high single-digit price increases, and you guys haven't talked about that at all, I guess the last time you had mentioned mid-single digits. Any reason you wouldn't also increase your prices around the high single digits or is it something you just don't see a need for at this point?

[David Hargreaves:]

Well, in terms of our spring line, we've already priced it in terms of carryover items in the U.S., I think with pricing that would be the first. So if you look across our carryover items and new items on a like to like basis, so this year, it might be that Bumblebee Role Play Mask whereas last year, it's the Iron Man Role Play Mask. So if you look at those like to like items, we're probably coming out at about a 6%, 6% to 7% price increase in the U.S. We might be a bit higher oversees. So I think it's safe to say that our average is probably mid-single digits. Now we clearly have the opportunity if we see costs increasing by more than we've anticipated, when we price and start to ship our spring line, we can always go back and take some additional pricing later in the year if we think that's necessary.

[Michael Kelter:]

And actually lastly, I do want to ask you about the economics of the distribution agreement for programming. You've got several shows, three or four shows that you've got distribution in quite a few countries. How do we think about the impact? I know you're not breaking out the TV venture separately at this point, so as part of your underlying business, maybe you could help us with how to model for that and how to think about it.

[Brian Goldner:]

Yes. The way it works is as we put a show into a new geography, there would be licensing fees that would be paid for that episodic programming. Then that programming in turn, over some period of time, would begin to generate additional sales of our Toys and Games products and the opportunity to license in consumer products. Outside the U.S., we do not owe royalties to The Hub. So the properties, we would pay a royalty to Hasbro Studios, a nominal royalty to Hasbro Studios. But again, the idea is that the cost of programming is offset by the license fees, plus the incremental merchandise sales that would happen globally.

[David Hargreaves:]

Michael, I think it was November '09 analyst meeting, we laid out a reasonability model for how the economics of this will work. At this stage, I don't think there is any material change in how we feel about the economics of that reasonability model which is still reasonable.

[Operator:]

Our next question is coming from Margaret Whitfield of Sterne Agee.

[Margaret Whitfield:]

In terms of incremental toy sales, Brian, when do you think we might see the benefits both here in the US and overseas from these ventures?

[Brian Goldner:]

Well, we're already seeing some signs. The reason Deb talks about, going forward, how we're going to break up The Hub is, for example, Chuck and FRIENDS is a show on The Hub. Obviously, we talked about how TONKA is a successful line for us in 2010, and Chuck and FRIENDS is a TV series on The Hub, and is being distributed internationally. We saw our great sales from Chuck and Friends. We're beginning to see really good signs on My Little Pony as we've begin to shipped the new product that's associated with a new TV series. So I would say that throughout 2011 as we have a full year of The Hub with new shows on the air, domestically, and shows beginning to air internationally first in Canada and then you'll see in Europe later this year and several other geographies, later this year, third and fourth quarter, you will start to see incremental merchandise sales and licensing programs associated with those shows.

[Margaret Whitfield:]

Any changes in the entertainment lineup for '12? And any comment on '13 in terms of what we might expect?

[Brian Goldner:]

Well, in 2012, we have quite a good line up. Obviously, we're very excited about Star Wars and the restaging and reinvention of Star Wars in 2012 in 3D coming sometime early in the year. And then obviously, we have The Avengers movie. We have a Battleship movie. We have a Spiderman movie. In 2013 and beyond, I'm not going to start to date those but certainly, Stretch Armstrong is one of a number of initiatives that we're working on. Micronauts is another brand that we're working on for 2013 and beyond.

[Margaret Whitfield:]

And the emerging markets, what size is it now, and where do you think it could get to?

[David Hargreaves:]

Yes, we said in our November call that our emerging market business in the aggregate, including emerging markets in Europe, Asia and Latin America, is sort of in a range of $300 million to $400 million now. That was up from $100 million back in the sort of '05, '06 period. Some of the growth rates that we've had in our emerging market territories, obviously starting from a small base have been quite extraordinary, I think we were up 68% in Russia last year and 58% in Brazil. So it started from a small base. It's become a significant part of our business now, $300 million to $400 million, and it's growing rapidly.

[Margaret Whitfield:]

Any new markets that you're targeting?

[Brian Goldner:]

We opened Colombia just this January. We're opening a few additional markets.

[Operator:]

Our next question is coming from Tim Conder of Wells Fargo.

[Timothy Conder:]

Just a couple. Circling back on the inventories and just to be clear, you said by the end of the first quarter or by the end of the second quarter on the current inventories that you have, you'd kind of get those normalized?

[David Hargreaves:]

I think we said that both our inventories are a bit higher than we would like. And retailers' inventories would be higher than we would like. That means that there will be some clearing of those inventories during the first quarter, that I think between the programs that we've put together -- and as I said, any costs associated the lowest would be taken in 2010, and the fact that we've sort of slowed production down a bit, I talked about not putting the people back in the Games factory as quickly. Between the actions we're taking, we're pretty confident that we would work this issue out during the first quarter. And we'll be very much back on track on a lot of momentum in the second quarter. Now that doesn't mean that our first quarter will be void of shipments. Clearly, we have a lot of new items like BEYBLADE, which we're short of. And at the moment, we can sell everything that we can make and ship. So I think we've got a balance, but we do have some excess inventories to work through in certain categories. But we also have newness coming on tap as well.

[Brian Goldner:]

And in our Games business, by Friday, when you're out to see us, in the Games business for the second half of the year, there's a number of new initiatives. And I mentioned that the combination of some of the digital and analog, you'll see our new live, it's called Live Branded Gaming Platform, which you haven't seen yet. You'll see a number of other new initiatives for the company that we haven't talked about yet. We're very excited about what we have coming in store for second quarter, as well as the back half of this year.

[Timothy Conder:]

Brian, along that line, how much was new competitor entering the market? How much of a factor was that to the Games problems that you had in the fourth quarter? And I guess these new initiatives to a degree you are already planning there and -- as you talked about in response to another question. You're addressing some of the things but can you -- how much of a factor was that competitor versus just issues in the Games category as a whole?

[Brian Goldner:]

The competitor really wasn't a factor in what happened to us in the Thanksgiving to Christmas period. And in fact, the products that we have in that arena performed very well this past year. Our U-BUILD product line was a successful introduction, sold significant volume. It was really, in some ways, as we look out now or as we look back with 20-20 hindsight, there were some decisions that were made and ways that our games were promoted. The number of campaigns that we tried to accomplish over a tight period of time, the consumers coming in later in the year, the fact that games relies on significant over-the-counter sales at that time of the year, and the fact that a category like Puzzles had a significant impact on our overall sales, probably a disproportional impact on overall sales during that time of year, and then the fact that -- there were a few places where, in hindsight, again, we would probably need some additional innovations. So the good news about this is we've already started to pick up on that. And for 2011 and beyond, you will see a reenergized, reignited, reimagined Games portfolio. And that's not just in Flash, or BOP IT, that's across a number of initiatives.

[Timothy Conder:]

And then David, what other category besides Games do you feel you're a little bit heavy on? And then I guess, two other things related to inventories here also. The China supply chain, was that lengthening a little bit? When do you think that will anniversary? Because I think that's probably part of the year-over-year inventory build? And then finally, in relation to those questions, what were your growth sales, just to come up with your growth and net adjustment in the fourth quarter of this year versus last year?

[David Leibowitz:]

So if you go to the first question, again we've said that our inventory issue is -- don't get it out of proportion. We said we've got a bit of an issue. We haven't got a huge issue by any means. And I think it is primarily restricted to the Games area. As I said, we've got a lot of items that we will be shipping in the first quarter. Obviously, BEYBLADE, we said it's really hot. Clearly, NERF is very strong at the moment, we've got lots of other new initiatives. So I think we've got a bit higher than we'd like both at retail and in our own inventory, but it's not something that is too much of a problem or we won't be able to work through in the first quarter and still have a reasonable first quarter. I think with regard to gross to net, we never give that detail out. There's a lot of different things that go into that. It would overcomplicate things a bit, I think.

[Timothy Conder:]

And then the China supply chain lengthening a little bit? Just a more level loading of factories in general?

[David Hargreaves:]

No. We did say last year, certainly at our third quarter or November analyst meeting, we talked about the fact that in order to offset some of the cost increases coming in commodities and Chinese labor, we need to work smarter in order to offset those costs. And one of the things we are trying to do is more level load our Orient vendors. So that is sort of ongoing way to try and keep our costs down and ensure labor supply.

[Operator:]

Our next question is coming from Eric Handler of MKM Partners.

[Eric Handler:]

Two quick things. First of all, can you talk about the strength of the state of the international syndication market for kids' programming? I know you haven't been there in the past but just relative to historical trends, in terms of pricing, is it stronger or weaker than what's been there in prior years? Is demand stronger or weaker than in prior years? And then secondly, in terms of Transformers, can you maybe talk about the number of licensees, or marketing support that you're going to get for this movie versus what we saw for the second film?

[Brian Goldner:]

Yes, Eric, it's Brian. The syndication market are certainly -- our sense of the market thus far is there's been a lot of excitement around Hasbro's properties and Hasbro's entrance into this business. We've put a lot in high-quality programming with great creative stewards like Bob Orci and Alex Kurtzman in Transformers with Jeff Kline. In My Little Pony, wonderful creative steward in Lauren Faust. So the quality of animation, the quality of programming, the quality of formats was we look at the Fox LOOK deal for our unscripted and game shows, lots of excitement, and that's why you're seeing a lot of deals close. In terms of pricing, I can't speak particularly the history, but it's consistent with our plan of what we expected to get out of many of these different markets. And as we look at Transformers, we have hundreds of licensees as we did in the past motion picture. So similar numbers of licensees, lots of support from our retailers globally. Lots of new ways to bring retail payment to life. We have a great relationship with our partners at Paramount. And together, around the world, we're really making this the kind of launch that you would expect from Transformers. And Transformers, of course, helps us significantly in many of our emerging markets. It's one of our headliner brands particularly as we look at China, and retailers in China going and making significant feature shops across a number of different categories, in fact in some ways, some of the most contemporary interpretations of retail payment being done out of Asia and Latin America.

[Operator:]

Our next question is coming from Drew Crum of Stifel, Nicolaus.

[Andrew Crum:]

A couple more questions on Transformers 3. When will you start shipping product? And could you talk about the economics on the gross participations you get from the film?

[Brian Goldner:]

Drew, if you think about shipments, it really begins in earnest in early May for Transformers. We'll ship some other entertainment initiatives a bit earlier as Thor is early May. And so we have different dates and windows as we build those displays. In participation, as you may recall, we talked about how Transformers has many benefits -- its deal has many benefits to us. Certainly, the fact that we are not paying for the motion picture, certainly the fact that we own all the merchandising rights. But our gross participation is not the same and not at the same level as some of our more recent deals on some of the other motion pictures since Transformers. And so I think what we've said thus far is that our participation, while a nice participation, is not material. So we don't really talk about how much it is. It's a contribution, but not a material contribution to our P&L.

[Andrew Crum:]

Shifting gears, 14.7% EBIT margin for the year was the highest in 25 years. And as you guys noted, you're approaching that intermediate term objectives. Do you have any update on that, or any thoughts around exceeding that over the near-term? And I have one follow-up.

[Brian Goldner:]

Sure. We feel very good about our medium term objectives we outlined for you, which had to do with the CAGR of revenue growth of 5% or better over time, the achievement of 15% operating profit margins over time, and the ability to generate significant cash flows on average of $500 million per year or per annum. We continue to reiterate that guidance. We've also guided you broadly to our belief that we'll grow both revenues and EPS this year. We learned some valuable lessons from December of last year, which we are using to address into our business right now. Our business, like many businesses, is a business that is constantly challenging to reinvent and reimagine. And we chose a certain path at Christmastime, in partnership with our retailers, and we are addressing and adjusting accordingly so that those results will not be repeated. We don't see -- what happened in December as emblematic of the strength of our business.

[Andrew Crum:]

Brian, you said NERF was the biggest brand for Hasbro in 2010. How much of that was international? And for Deb, what was CapEx during the period in the year?

[Brian Goldner:]

I don't think we'd break out international to domestic by brand or on a brand-by-brand basis. But what I will tell you is the significant growth was international but we also grew domestically. But it's probably 2

[Deborah Thomas:]

And Drew, our CapEx for 2010 was $112.6 million. And I will tell you that we'll give you a little bit more detail on this, this Friday. We know that that's the number that you all are interested. However, given our recent success and need for growth, we are kind of running out of space in some of our facilities. So we do expect that to be higher next year.

[Operator:]

Our next question is coming from John Taylor of Arcadia investment Corp.

[John Taylor:]

Deb, could you give us a quick summary of the repurchases in Q4 and for the full year again?

[Deborah Thomas:]

Certainly. For the fourth quarter -- well, for the full year, we repurchased 15.8 million shares. And that was at an average price of $40.37 for the full year, and that was $636 million.

[John Taylor:]

And I forget what it was year-to-date, was there much activity in Q4?

[Deborah Thomas:]

Our activity was a bit lower in Q4 as our share prices were trending up. But we did repurchase 166.6 [ph] million shares.

[John Taylor:]

I wonder if you could talk a little bit more about the margin erosion in Q4 and see if you could maybe scale for us or rank the things like the mix change, the royalty, the change in royalties received in Q4, the impact of The Hub, markdowns, discounting? Is there any way you can kind of prioritize those for us?

[Brian Goldner:]

Well, The Hub in the fourth quarter was $0.14 in dilution.

[Deborah Thomas:]

Right, and there was $22 million of that -- of the impact was in the fourth quarter. So our $22 million in the full year. So that is really the biggest piece that you want to breakout. Beyond that, we did -- as we talked about earlier in the year, while it did trail off as we moved into the fourth quarter, we did have some favorable hedging that gave us some favorable material price variances in 2009 that we didn't repeat in 2010. And we also had, I would say probably, about 10% of the change. And if you look at the overall revenue mix in our segments, you can see that it's really due to the licensing revenue declining. So that's a very high margin business. So that has a bit of an impact as well.

[John Taylor:]

And then Brian, you called out NERF as a key driver of international growth. Were there any other ones that were particular stars?

[Brian Goldner:]

Yes. If you look at FURREAL FRIENDS, FURREAL FRIENDS was a significant international growth business for us. PLAY-DOH and PLAYSKOOL grew significantly internationally. In fact, if you look at the International business, all the key segments were up for the year. So while we talked about domestically, Games being down, Games was up, Girls was up, Preschool was up and Boys was up. Obviously, we had -- at the end of 2010, BEYBLADES appearing in 22 countries. And we will be in over 40 countries this year as we are placing the shows in partnership with Nelvana. We all know that television drives toy sales, and so very excited about that. As we go into this year, into 2011, we're already seeing great results from product that we are shipping in the spring called the BARRICADE, which is appropriately priced for a spring price point. But it is a battery-operated, automatic firing blaster, which is performing quite well. We have a number of new initiatives in Girls as we are shipping the MY LITTLE PONY line, which has always had a high proportion of its sales internationally. In LITTLEST PET SHOP, the BLYTHE initiative that just launched in the fourth quarter of 2010 is really beginning to take and get some traction. And we will really see a lot of new initiatives for our LITTLEST PET SHOP in the second half of this year. So overall, if you look by category, International had a very good year. As David mentioned, the emerging markets leading the growth. But even in mature markets, very strong growth across the entire portfolio. And it's another one of those proof points we have when we look at the vitality of our Games business and things that we did to ourselves in the U.S. as we went into market versus what we saw internationally.

[John Taylor:]

And then let's see, you mentioned briefly the Transformers MMO. Can you talk about how you're doing that? Who your partners are, or whatever?

[Brian Goldner:]

Sure. We're partnering with a company called Net Dragon in China, and we're in the midst of developing the MMOG which will launch later this year. It is based on a combination of what we call, the first generation, G1 Transformers, but also heavily informed by the Transformers Prime series. So it's got a great look to it. The team has really been working on the whole experience around it. Obviously, a lot of excitement. Transformers is one of our most popular brands in China. A lot of ubiquity in Transformers because the animation in the '80s ran in China on Chinese television. So we're feeling very good about our business. And certainly, the movie helps to kick all that off. We'll be in China later this year. Again, we were there in January, but we'll be there later this year again to introduce the Transformers movie to China again, as the third movie comes into China.

[John Taylor:]

And have you given any thought to the Transformers MMO over here in Western markets and so on, and what the scheduling on that might be?

[Brian Goldner:]

Yes, we're in some conversations about that. Obviously, similar excitement about what that could be. And there's some great potential partners out there for us. So we would anticipate doing something in Western markets in the near-term.

[Operator:]

Our next question is coming from Gerrick Johnson of BMO Capital Markets.

[Gerrick Johnson:]

First question on BEYBLADES. That got off to a nice start. Do you think that can track in 2011 the same way it did in 2003?

[Brian Goldner:]

Well, you know the numbers as well as we do. I will tell you right now, we are, as David mentioned, short on inventory. We would hope to catch up. We're certainly trying to catch up with demand. As the show is going onto more networks around the world, it does really resonate with kids. It's a great play pattern. And we all know what it did historically. I'm not going to make any commitments as to revenue levels as compared to that. But suffice it to say, it's hot as a lick.

[Gerrick Johnson:]

On The Hub network, the ad rates that you're getting on Hub, are they consistent with what you expected them to be?

[Brian Goldner:]

Yes, the ad rates are good, and the ad rates are good and competitive. And also, the number of advertisers are up significantly in 2011 versus even at our launch in 2010. We have about 80 advertisers on The Hub, most of whom did not advertise on Discovery Kids. We had about 50 at launch. And I think the team -- as we said from the very beginning, because we're a major advertiser in the kids space, we understand what other advertisers are looking for. And our team has been very flexible to be open for business, go-to spot. We recognize we have ratings that are building over time, but still a great forum and a great audience given the co-viewership and the kinds of shows that we're putting out, the quality of the shows, and the kinds of shows like Family Game Night and Transformers Prime that are different than some of our competitors.

[Gerrick Johnson:]

And lastly, I was hoping for a little bit of specificity around some of the earlier topics in the Q&A, particularly in Games. How do you feel your market share was in the fourth quarter? Did you gain, lose or stay even?

[Brian Goldner:]

Our market share in several categories grew through the year. In Games, it was probably off a bit in the fourth quarter but not a significant amount. But it was off a bit.

[David Hargreaves:]

If you look at NPD for the fourth quarter, the games as a category was down, sort of a significant percentage similar to the percentage that we're down. So clearly, it wasn't a Hasbro-only experience in the fourth quarter for games, except for NPD.

[Gerrick Johnson:]

And then POS, I know you excluded G.I. JOE and Transformers, but can you tell us what the POS would've been inclusive of those just so we can kind of compare that to your shipment?

[Brian Goldner:]

Yes. If you look at the POS overall, it was flattish, including Transformers and G.I. JOE, and then up significantly in toys ex them. Obviously, the fourth quarter a year ago for G.I. JOE and Transformers, particularly in the U.S., was very strong and International markets to a lesser extent.

[Gerrick Johnson:]

And the channel inventory, how did that stand on a year-over-year percent change basis?

[David Hargreaves:]

So as I said, it's up a little bit. We are probably about at our top four accounts in the U.S., which is where we get the best data. We're probably up about 6%. Around the world, if you look at customers, it's probably some markets a little bit higher than others. But on average, I would say, it's not too different around the world.

[Operator:]

And our final question is coming from Jim Chartier of Monness, Crespi and Hardt.

[James Chartier:]

I was hoping you'd give us a little more color on inventory. If you just tell us how much of the increase was due to anniversary-ing a 30% decline last year, getting back to normal inventories, changes in the supply chain and then the lower than expected sales in the fourth quarter?

[Brian Goldner:]

Yes. Jim, if you look at our plan, we plan to have inventories up. If you look at our budget or plan, our plan was to have inventories up. If you remember a year ago, that was historically low levels of inventory. And as David noted, we're up a bit more than that and on average, about 5%, 6% in U.S. retail on the top four accounts. It's good inventory. We had already taken into account the products that we needed to discount or promote. It's a greater proportion of Games than any of our toy business. And again, the teams have plans to work through that inventory. We don't see that as a material drag on our full-year. We've already said we believe we can grow revenues and EPS for the full-year. But through the first quarter, we will work through those inventories and promote those products. I'm not sure if I get everything you asked?

[James Chartier:]

And then finally on Star Wars, can you give us any color on what happened with toy sales when the original three Star Wars movies were re-released in the late '90s?

[Brian Goldner:]

I have the specifics in the back of my mind. Obviously, they accelerated fairly dramatically. We are certainly very excited about Star Wars, not just for 2012 and beyond. But even in 2011, we have a number of new initiatives in Star Wars, particularly an amazing new lightsaber, which is the granddaddy of all role play. And for second half of this year as well, the continuation of the animation. But in 2012, a 3D movie will return in earnest. And I think the current plan may be to go beyond just that movie. But again, you'll have to ask Lucas about that.

[Operator:]

Thank you. I'd like to hand the floor back over to management for any closing comments.

[Debbie Hancock:]

Thank you. We'd like to thank everyone for joining the call today. The replay will be available on our website in approximately two hours. Additionally, the management's prepared remarks will be posted on our website immediately following this call. Thank you, and have a good day.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.