Hasbro, Inc.
Q1 2011 Earnings Call Transcript

Published: 15 Apr 2011

[Operator:]

Good morning, and welcome to the Hasbro First Quarter 2011 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 first quarter 2011 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. Please note that beginning in the first quarter 2011, Hasbro has reclassified certain of its products from the Boys category to the Preschool category. A table restating net revenues by category for 2010 and 2009 to reflect the 2011 category classification is included in today's press release. 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 planned, anticipated product performance, business opportunities and strategies, costs, financial goals and expectations for our future financial performance and achieving our objective. 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. Now, I would like to introduce Brian Goldner. Brian?

[Brian Goldner:]

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. In February, we indicated that Q1 would be challenging given the higher retail inventories entering the year as well as the timing of several of our new initiatives. Having said this, we are pleased with our first quarter performance, which is on track with our plan for the full year. The International segment posted another quarter of strong growth, increasing 15% year-over-year, with positive gains in every major geographic region. This growth helped offset the decline in the U.S. and Canada segment, which was down as expected in the quarter. Our global portfolio approach continued to deliver growth in brands across categories. During the first quarter, a number of brands grew, including TRANSFORMERS, BEYBLADE and Super Soaker. Additionally, FURREAL FRIENDS in the Girls category and Magic

[Deborah Thomas:]

Thank you, Brian, and good morning. As Brian stated, the first quarter was consistent with our plan for the year. We delivered revenues just below last year, while we continued investment spending in select strategic areas to support the future growth of our business. For the first quarter, worldwide net revenues were $672 million versus $672.4 million last year. Foreign exchange had a positive $4.8 million impact on net revenues for the quarter. Operating profit for the quarter was $48.9 million versus $69.3 million in 2010. Looking at our segment results for the first quarter 2011, the U.S. and Canada segment net revenues were $391.2 million versus $424.7 million last year. We had anticipated declines in the segment for the first quarter, given the higher retail inventory at the beginning of the year. Within the segment, the Boys product category grew in the quarter but was offset by declines in the Games and Puzzles, Girls and Preschool category. The U.S. and Canada segment reported an operating profit of $41 million or 10.5% of revenue. This compared to $61.1 million or 14.4% of revenues in 2010. The decline in operating profit reflects higher product development and SG&A cost, as we fund our business for future growth and new initiatives, both this year and in coming years, as well as an increase in royalties from the mix of revenues to more royalty-bearing products in the Boys category, including BEYBLADE. Net revenues in the International segment increased 15% to $254.3 million versus $221.7 million in 2010. Absent a positive foreign exchange impact of $3.1 million, net revenues in the International segment grew 13%. The results in this segment reflect growth in all major geographic regions, as well as growth in the Boys product category. Declines in the Games and Puzzles, Girls and Preschool product categories partially offset this growth. The International segment reported an operating loss of $1.7 million compared to an operating loss of $2.4 million last year. The segment’s results reflect our continued investment in emerging market. The Entertainment & Licensing segment net revenues declined 2% to $24.6 million compared to $25.1 million in 2010. These results reflect declines in licensing revenue, primarily associated with the timing of revenues from the 2009 movie, Transformers

[Operator:]

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

[Sean McGowan:]

Just wondering if you could help us better understand how much of the increase in Boys sales are from TRANSFORMERS and Marvel, as opposed to BEYBLADEs?

[Brian Goldner:]

Overall, Sean, we shipped a limited amount of TRANSFORMERS for the movie in the first quarter, and we began some shipments for Thor. Captain America and TRANSFORMERS will really ship in earnest in the second quarter. And in the first quarter, we did have good-size shipments of BEYBLADE, although we were and continue to run short of global demand. So we'll continue to catch up through second quarter. So said differently, if you look at second quarter, you're really looking at a number of Boys initiatives all shipping TRANSFORMERS in time for the May shelf date for the movie. BEYBLADE, Thor and Captain America, all in Q2.

[Sean McGowan:]

I know it's easy to get overly excited about percentage changes on a relatively low quarter, but would you say BEYBLADEs was the major contributor to the -- to it?

[Brian Goldner:]

Yes, that's right. If you look at the ranking of contribution in the Boys category, BEYBLADE would be the top, followed by TRANSFORMERS.

[Sean McGowan:]

Okay. And then another question. On the investment spending in emerging markets and things that we've heard about for some time now, how long do you expect that to be kind of a drag on operating margins? Are we getting near the end of that being a negative influence?

[Brian Goldner:]

Let me say one thing and David will comment as well. We opened our Colombian office just in the first quarter, and obviously, we're putting inventories into our new owned and operated markets. And obviously, the progress we're making in International is really quite strong. So you're sort of seeing that in costs, but you're also seeing that in inventory. And David, you want to talk about it?

[David Hargreaves:]

Yes. So I think our investment in emerging markets will be ongoing, but it won't necessarily be the same market, as Brian said. Right now, it's Colombia that we're opening and it's new, and we incurred some expenses ahead of the sales. A couple of years ago, we were investing in Brazil, and we built infrastructure and overhead there before we really got the sales. And next year or the year after, it's very highly likely that it will be some other market that we're entering in. I think, also, in the major markets such as Brazil and China, that we will continue to probably overspend compared to more mature markets on advertising as we start to build the brands in those markets that have the potential to be several hundred million in a few years out. So we’re committed to growth in the emerging markets, and I think you're going to continue to see investment spending against that.

[Brian Goldner:]

Having said that, Sean, I think -- go ahead.

[David Hargreaves:]

One of the things is we have said and we're still on track to some of the markets today, the major markets, which are dilutive and not at breakeven, we've said that they would be breakeven or better by 2013. But that's not the case for all of the markets. I mean, some of them, like Eastern Europe, are already making pretty good returns today.

[Sean McGowan:]

But even the ones that are making pretty good returns, is it fair to say that they're probably a little bit more seasonal than even the U.S. like with sales more loaded and, therefore, profits more loaded in the second half?

[David Hargreaves:]

I think so. So I mean, clearly, the first quarter, when you put in investment spending, you increase your fixed costs. Obviously, that happens on a fairly linear basis, so 25% a quarter. But our sales, we might have 15% in the first quarter and 33%, 35% in the fourth quarter. So the impact of this incremental overhead that you're putting on in emerging markets in SAP and other areas, is much more noticeable in the first than it is in, obviously, the second, third or fourth.

[Sean McGowan:]

All right. Okay. Last question, any comment on The Hub ratings progress?

[Brian Goldner:]

We continue to make good progress on the ratings over the period since launch. We continue to see that Hasbro shows are driving a lot of those ratings. You will see -- not to take anything from Margaret, but you will see a richer mix of Hasbro-related shows coming on to the channel as part of a summer lineup that she is going to be moving toward. And we continue to make progress with advertisers. We had a great upfront, and advertisers are very enthusiastic. We have more advertisers again in these next quarters than we've had since the beginning of The Hub's launch. And so again, we are on our long-term plan for The Hub.

[Operator:]

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

[Michael Kelter:]

Can you maybe talk about, at this point, as you get closer, what retailer acceptance has been for TRANSFORMERS as the third movie, both in the U.S., and whether you think you might be able to grow, even off of where you were in '09 as you did off of '07, and then also abroad, and where there might be incremental opportunities versus your prior two movies?

[Brian Goldner:]

Sure, Michael. The movie is really tremendous. I look forward to everybody getting to see it. And of course, this time around, it is in 3D, so it will play in both 2D and 3D. The acceptance has been as well very, very strong globally. It is a brand that has tended to be very split between international and domestic market. It's certainly a brand that has a long history and heritage in markets like China. We have a very strong product lineup. Additionally, we have a very strong product lineup, and the launch of Thor is already underway. We're starting to see some great uptake off the shelf for Thor, and Captain America begins shipping very shortly here for a later date of a July window and release. And then of course, BEYBLADE's continuing globally. We're in 40-plus markets around the world. So if you look at our Boys business overall, very strong, and certainly, TRANSFORMERS, I'm not going to give you a specific guidance, but certainly, TRANSFORMERS is a very robust line and is widely accepted and very enthusiastically being accepted around the world.

[Michael Kelter:]

And then I wanted to ask a bit about board games. Of course, it's been a hot button of late. Can you maybe talk about the sell-through at retail for the first quarter and what kind of trends you're seeing? And then also, what the state of inventory both on your own books and at retail might be for that particular segment?

[Brian Goldner:]

Yes, I think there's a couple of trends out there that I'll talk about, and I know David will talk as well about it. In the holiday period, when you didn't get the merchandising that we described to you guys, there's a carryover effect early on. So therefore, you don't have the merchandising out in the beginning of the year. Having said that, we've begun some of the marketing around some of our Games brands, and we are seeing some good growth on the brands we've begun to market in the first quarter. And overall, Games inventory has come down, so we, again, feel good about our efforts and sell-through in brands like BOP IT and CUPONK and SCRABBLE and some kids games, as well as Magic

[David Hargreaves:]

I mean, I think when we came out of the fourth quarter where Games wasn't as robust, there's a bit of a concern that as you come into the next year, would retailers still value Games as a category as much as they had in the past and pursue it as aggressively? Certainly, as we've gone into this year and we start to sit with major retailers and work out our plans for the year and promotions for the year, this year, they are as enthusiastic about the Games category as they ever had been. I think we did talk about some changes in strategy at the Wal-Mart stores last year, which -- a couple of big promotional programs such as the game Highlander, which they didn't do last year. I think, clearly, there's been a lot of talk about going back to Mr. Sam's principles at Wal-Mart and going back to where they had been previous years. So I think we're going to see some of those promotional programs come back this year, which should clearly be beneficial.

[Michael Kelter:]

And then one other question. I wanted to tone in a bit on inventory, the $400 million level. You explained the two things that are driving that around the coming movies and the shift away from transitory workers in China. I was hoping you could be a little more specific to help us get comfortable. What -- in some ways, maybe contextualize the composition of the inventory, how much of it specifically is for movies, what the actual change is from the change in production strategy and how that will play out through the year? A little more detail would be helpful.

[Brian Goldner:]

So let me start again, and then David will pick up on it. One of the things that's been very heartening is the progress we've made in international markets. So that alone can drive a good proportion of increased inventories as we gear up for major initiatives that are no longer, as we had been several years ago, more domestic initiatives with a few countries going after them to be more global initiatives. So there's a good proportion of that inventory that is identified for and going to our international markets, including new emerging market businesses that we now own and operate, and we're going after that. We feel very comfortable about the quality of the inventory because, as you've indicated, we have a number of initiatives in the second quarter, not just the Boys -- in the Boys category, but to continue to fuel the growth of brands like our second half LITTLEST PET SHOP efforts, as well as FURREAL FRIENDS, as well as some new games initiatives and, of course, KRE-O that begins late summer, all products that we'll be shipping in the second quarter. So David, if you want to comment further.

[David Hargreaves:]

Yes. Well, as everyone is aware, there's clearly a combination of inventories. There's new stuff coming in and supporting the second quarter and then some carryover from the year-end. As Deb said in the script, we've worked down certainly some of the carryover from year-end, but not all of it. Games, for example, I think you know, basically 45% of all board games sell in the last at retail the last six weeks of the year, so it's very skewed towards the end. And it will take a little while to work through all of the games. But to the extent that the inventory carryover inventory is things like PLAY-DOH or Games or some LITTLEST PET SHOP, those items are always going to sell. PLAY-DOH will sell. If we're a bit heavy on PLAY-DOH at the moment, there's no risk or exposure that we're going to have to write it off or throw it away. PLAY-DOH will sell, as will our board games that have been in our line for 30, 40 years. So would we like to work the carryover down a bit quicker? Maybe, but are we worried about the quality of the inventory or that it's going to have some negative impact? The answer is no.

[Operator:]

Our next question is coming from Felicia Hendrix of Barclays Capital.

[Michael Tang:]

This is actually Michael Tang on behalf of Felicia. Just looking at your Preschool business, this was the first time that it's declined in a year. Was there anything in particular that drove the decline? And how are you thinking about that category for the rest of the year? I think if I heard you correctly earlier, it sounds like Sesame Street might have an impact as early as the second quarter?

[Brian Goldner:]

Yes. We have a number of new initiatives in the business. I think it was a bit of an inflection point in the business in the first quarter, but a number of new initiatives for -- but second half of the year, we feel very good about. The innovation in that business has continued. As you indicated, we have grown our Preschool business, and we'll continue to intend to grow the Preschool business. This year, Sesame Street does begin. Second half of the year, we begin shipping that as well, and a number of brands within Preschool that have worked exceptionally well globally, including PLAY-DOH and our PLAYSKOOL brand. So as we look at the full year, we feel very good about our progress and new initiatives that we have.

[Michael Tang:]

Great. And then for program production cost amortization, that was just $3.1 million in the quarter. It seems like this could be a relatively volatile line going forward given where it was in the last two quarters. Are you still on track for your guidance of $35 million to $45 million for the year? And if so, how should we think about the progression over the next three quarters?

[Deborah Thomas:]

Hi, Michael, I think that we are actually on track. And you're right, it is a volatile line on a quarterly basis. It depends on the programming that's delivered. But we're certainly on track for our expectations. And so we think the levels that we gave you in February are consistent with our guidance.

[Michael Tang:]

Great. And so in line with that also, your expectations for neutral or slightly accretive for all your television efforts, that's still on track as well?

[Deborah Thomas:]

Yes. I think we've stated that our television initiatives continue to perform in line with our expectations.

[Michael Tang:]

Okay. And last question, just on your movies, I think -- whether you have any updates there? I think I heard G.I. Joe 2 is now in 2012. And I've also heard some discussions about a Hasbro Factory movie? I don't know if there's any new comments you have.

[Brian Goldner:]

In 2012, what we would currently confirm for you is our Star Wars

[Operator:]

Our next question is coming from Robert Carroll of UBS.

[Robert Carroll:]

Just a quick question on pricing. I know -- now there's been a couple of months since, I guess, the February price increase was put in place, just want to see how receptive retailers have been to that, and if there's been any change lately? We've been hearing some interesting comments from some of the larger retailers about -- I think the expression is we're sharing some of the pain around input costs. I just wanted to see if -- how things were holding up on the pricing front.

[David Hargreaves:]

Yes, I mean, I'm sort of surprised by the question but it is not something that I've heard anything. We took our price increases as planned, both in the U.S. and around the world. We generally took a little bit less than some of our competitors, I believe, and we haven't had pushback from the retailers. I think they understand that commodity costs are going up, and though they buy from a lot of other people, they do a lot of own label and toys, they do other categories, they understand that, and I think they accepted that prices need to go up a bit to cover these costs.

[Robert Carroll:]

And then a quick follow-up on an earlier question. Around Transformers III, based on where the order book is now for product, if you were to overlay that versus 2009, I mean, based on your commentaries, is it safe to say that the trajectory is looking as though it's a little bit higher than what it was in '09?

[Brian Goldner:]

I don't want to -- I'm enthusiastic, but I don't want to guide you. I will tell you I am very enthusiastic about the brand. I am very enthusiastic about our plans. The innovation in the product line is clear and apparent. And we are going on all cylinders with our retailers globally as well as with a number of licensed partners around the world to make great retail statements. And we certainly believe this movie will resonate with a full -- the full array of audience that you would expect for a big TRANSFORMERS movie. It's a really fun movie and filled with great characters and, certainly, great TRANSFORMERS. So I think that's about as far as I would go. But suffice it to say, it's a very exciting year for TRANSFORMERS.

[Operator:]

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

[Margaret Whitfield:]

A few questions on inventory. I wondered if you could quantify the dollar amount of carryover inventory at the Q1 level. Also, give us some commentary on what you might expect for ending inventory in Q2. And I know you mentioned your retail inventories were down, if you could give us some comment by major segment. And also, what the sell-throughs are? And if you could quantify the Easter shift on your business, that would be helpful as well.

[David Hargreaves:]

So I don't think we're going to get into a deep analysis about exactly what was left in inventory. Again, we've reiterated, that a lot of it is to support growth in the business. A lot of it's in the newer markets that we're in, where you have to have some local language inventory. Some of it's due to the fact that we're trying to level load our vendors and ensure that we've got labor. So I don't want to over dwell on inventory. I think it will improve as the year goes on, but I'm not going to give a precise number for where we think it's going to be at the second quarter. In terms of our POS, it's down a bit during the first quarter. Clearly, part of that is due to the fact that Easter did come -- comes later this year, so you would have had more both shipping in and POS performance related to an earlier Easter in the first quarter last year. But to say exactly whether that's $5 million, $10 million, $6 million, $20 million, I don't think we really can be that smart.

[Margaret Whitfield:]

And are your inventories in retail down in each segment? And if you can give us some more color on why the Girls segment was down?

[David Hargreaves:]

So in terms of retail inventories, obviously, we don't get as good information around the world as we do in the U.S., particularly from our top four retailers. From our top four retailers in the U.S., in terms of the current line, it's certainly down a little bit versus a year ago, which is good news. I think when you talk about the Girls business, I mean I think this first quarter, there was a retailer inventory issue not just with Hasbro but across the board. And I think there's very few analysts or observers of the toy industry who didn't expect that the first quarter of 2011 was going to be a fairly tough year for manufacturers to get growth, given the retailer hangover. And I think that's being reflected in all categories, with the exception of Boys, where we did have BEYBLADE, and we did have some TRANSFORMERS, and we did have some early shipments of Thor, which were sort of able to break through that. But as you look at the other categories, I don't think it's a problem with any of our lines. I think it's just part of the state of the industry.

[Brian Goldner:]

Yes, Margaret, just to add to that, if you look, one of the major contributors in the first quarter in terms of growth year-on-year has been FURREAL FRIENDS. We just recently launched the new MY LITTLE PONY line that's associated with the new animation. That line is also now available in Canada as we've put MY LITTLE PONY on the air on Treehouse, a network up in Canada, and we're already starting to see some positive indication there. LITTLEST PET SHOP has a whole new line, as you saw in February, that's launching in the next couple of months. So our Girls business over several quarters, if you take that perspective, is on track for our plan. And again, as David indicated, I don't think the early months are indicative of where we see that business going longer-term.

[Operator:]

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

[Gerrick Johnson:]

Your distribution agreement with TOMY, that I think is a 15-year agreement. When does that expire?

[Brian Goldner:]

I'd have to check the date, Gerrick. I don't recall right away, but we can certainly check, and we'll get back to you.

[Gerrick Johnson:]

Okay. And on your TV...

[Brian Goldner:]

Just to be clear, though, the distribution agreement on -- we're talking about for Japan, right?

[Gerrick Johnson:]

TOMY's products that you distribute in the United States.

[Brian Goldner:]

No. That's why I just wanted to ask some follow-up. No, we don't -- I mean, we don't really have any specific distribution agreement that goes the other direction. I thought you were talking about the Japanese agreement with TOMY for our products and with Tomy Takara in Japan.

[Gerrick Johnson:]

No, I was talking about things like Zoids, BEYBLADEs, stuff like that, that are TOMY's IP that you distribute in the United States and elsewhere.

[Brian Goldner:]

Yes, we have specific contracts on products like that, that are related to each and every one of those different -- each and every one of those different initiatives.

[Gerrick Johnson:]

Okay. So each product line is its own agreement?

[Brian Goldner:]

That's right. I mean, in many cases, you have other people, other great partners involved, like Nelvana in the case of BEYBLADE. There are other people involved in those confederacies of groups of companies in other brand initiatives. So it's not typically -- it's not an overarching deal, it's by property.

[Gerrick Johnson:]

Okay. That makes things a little bit more clear. As far as Hasbro Studios goes, what shows are returning to The Hub? And which ones are not returning in the next upcoming season?

[Brian Goldner:]

So we have five -- there are five seasons of shows that are returning

[Gerrick Johnson:]

Okay. Great. And Deb, in explaining the higher inventory, you mentioned that your factories overseas are level loading. Just help me explain how that works? You buy finished goods, so shouldn't the inventory be on their books, not yours? And if you are taking it from them early to help them out, are you getting a discount on that product?

[Deborah Thomas:]

We're actually -- in order to maintain the factories that we have and the labor rates that the factories provide, we are helping work with them and taking the inventory a little bit earlier on our book. So as David mentioned, where we might see more domestic inventory are in some of our international locations, they’re taking the inventory a bit earlier. And we kind of talked about this all throughout last year at each quarter, that we were having higher inventory levels because of this. We found that, really, to ensure supply and the quality of supply, we're working with our vendors in taking that inventory in a little bit earlier. So that's why you're seeing it on our book.

[Gerrick Johnson:]

Okay. I understand. And no commentary on NERF? Is NERF up, down, sideways in the quarter?

[Brian Goldner:]

NERF's fairly – it’s maybe down a bit, but basically, as you would say, sideways in the quarter in that we're gearing up for a big launch in Q3 around VORTEX. And I know you don't have yet a lot of visibility there, but it's a major launch for us, as well as a lot of new -- other new NERF products that come in the second half. Having said that, the BARRICADE, which was our automatic firing blaster, has done exceedingly well globally, and we have a lot of products along those lines that have done well around the world. In more and more countries, we're seeing great progress with NERF. It's part of the growth of our International market.

[Gerrick Johnson:]

Okay. And related to NERF, the Super Soaker stuff is co-branded NERF. Do you still put that under the Super Soaker brand, or is that considered NERF now when you report these segments?

[Brian Goldner:]

No. We have -- Super Soaker is broken out. And in fact, you're right, it's up significantly year-over-year. It does carry the NERF umbrella name, as well it now has a lot of the design elements as well as the innovation that we've been putting in the NERF business. The team has been working on the Super Soaker business. And it gives us a great seasonal play, but that's separate than NERF and again, as we said, year-over-year, significant gains.

[Gerrick Johnson:]

All right. Great. That's clear. And I'm going to sneak one more in. Games' softness, is that the category being down, or how has your share been trending in that segment of business, particularly board games?

[Brian Goldner:]

We're really not seeing big shift in the category in the first quarter. Obviously, we're re-staging that business and reinventing that business as we speak. There are some bright spots within the first quarter but not going to go through lists. Having said that, again, we really feel very strongly that our brands are resonating. If you look at our digital Games business, it's actually up pretty significantly in the quarter. So brands like MONOPOLY being played digitally and Scrabble being played digitally, we have a number of off-the-board games that have continued to perform well. And the board game business, we'll launch a number of new initiatives in the fall, including the LIVE platform. So it's not a single quarter solution, but a long-term plan to reinvent and reimagine that brand.

[Operator:]

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

[Eric Handler:]

I know it's still early for The Hub, but I'm just curious what type of uplift you're seeing for your brands on the retail side where you have product on the TV?

[Brian Goldner:]

Well, we would only have one or two brands where we had had product out in early stage at the time that the shows went on the air. In fact, MY LITTLE PONY was the only one that was out for any period of time and only briefly. What we're really seeing is MY LITTLE PONY show in Canada where it's been on the air and the product was out in time for the show, we are seeing acceleration of our business. But again, it's still early days. In the case of TRANSFORMERS and several other brands, we really did not have product out. We've let the brand launch as entertainment, and we'll follow with products in the subsequent quarters.

[Operator:]

Our next question is coming from Greg Badishkanian of Citigroup.

[Gregory Badishkanian:]

Just kind of looking at the retail inventory levels, I mean those are -- are those pretty normal? And then are the retailers expecting to do any above average discounting or promotions to clear inventories? Or is it kind of just going to be kind of at a normalized level there?

[David Hargreaves:]

I think as we just said, we clearly recognized at year end, coming into this year, retailers were over inventoried. They had a mid-single digit increase in their inventory of Hasbro products. Now coming out of the first quarter, we are saying that they're back in line with prior years.

[Gregory Badishkanian:]

Right. Good. And then just from a buying perspective, because there was all the -- how they kind of softened a little bit at the end, how are the retailers and the buyers kind of approaching this year? Are they a little bit more conservative? Or are they doing anything different than maybe you've seen in last year or the year before?

[David Hargreaves:]

I think I heard a little bit of that earlier. I mean, clearly, the first quarter, I think they've been cautious. They've been trying to work down the inventory. As you look out to the balance of the year, I don't think they're going to be unduly cautious. I think each retailer, the toy department, they want to be a growth department, they want to do well. There's a huge amount of -- this should be a good year for the toy industry. There's a lot of entertainment out there. There's a lot of product. So I think retailers and, in particular, the buyers and the people in the toy department are looking for toys to be -- toys and games to be a strong category and help drive their growth.

[Gregory Badishkanian:]

Right. And then just on costs, obviously, you got good price increases, and we heard, too, as well that prices were kind of across the industry, across other manufacturers passing those on. Does that cover all of the increases, especially recent rise in oil prices, so it's kind of a net neutral to margins?

[Brian Goldner:]

Well, the resin prices tend to rise in arrears of the oil prices.

[David Hargreaves:]

Well, one of the main points is that the way we buy is that once our vendor gives us a price, it's basically good for a year. So to a large extent, we are insulated from short-term commodity movements. Now not so much on our shipping, but certainly in our product purchases.

[Brian Goldner:]

But again, we had said we intend to maintain our high-50s gross margin for the year, and we've priced accordingly.

[Operator:]

Our next question is coming from Per Ostlund of Jefferies & Company.

[Per Ostlund:]

Question on the selling, distribution and administration line. I know you kind of alluded to it in prepared remarks, and I can certainly appreciate that it has more of an impact on a seasonally smaller revenue quarter, but wondering if you might be able to kind of parse through some of the moving parts that led to the rise year-over-year in absolute dollars? If we look back at the fourth quarter, it was down $20-plus million and then now here in the first, it's up a bit. So just want to see if there's anything first quarter and then how that projects out.

[Deborah Thomas:]

I think, Per, what you're really seeing is, again -- and we talked about from a percentage standpoint, what we're really seeing is the impact of a lower revenue base in the first quarter versus the fourth quarter. But from a dollar standpoint, it's really just a bunch of small things. We talked about our investment in installing our new SAP and shared service in Europe, which will lead to long-term efficiencies. And that's probably a couple of million dollars there. There's a few million dollars that we invested in Asia and in growing heads in Asia, and Latin America and our studio. So it's a few -- it's really just a few small things. The other thing about the fourth quarter as well is that typically, that line has a lot of incentive pay in it, and that was down in the fourth quarter as our revenues were down on the full year. So you're probably seeing a little bit of a lower amount in the fourth quarter from a pure dollar standpoint because of that.

[Operator:]

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

[Andrew Crum:]

A couple of questions on the Boys business. Brian, could you comment on BEYBLADEs, how it's tracking year-to-date against the $300 million you did back in 2003? What are your expectations for Marvel relative to 2008? You had two films in 2008, you've got three films this year. And then Star Wars, it's going to be re-released in early February. I know we're looking out a couple of quarters here, but will you be shipping product in the fourth quarter of '11?

[Brian Goldner:]

Just to clarify, we have two great movies from Marvel this year, and then we have Spider-Man next year along with the Avengers. So there's two great Marvel movies this year in Thor and in Captain America, not three. But...

[Andrew Crum:]

And The X-Men, right?

[Brian Goldner:]

Yes. Well, X-Men from Fox. Right? Less product related to X-Men, certainly more related to Thor and Captain America. And we feel very good so far about what we've seen. We're very excited about the early offtake of the Thor shipments at retail. We've seen elements of all the movies that they have and feel very good about what we're doing there. I think long term, we really like this, the Marvel business, and we're building plans together for greater success for 2012 and '13. And TRANSFORMERS, obviously, we've talked about the brand and feel very strongly that it's going to be a great TRANSFORMERS year for the brand. And obviously, we now have animation that's running on The Hub that will be in support of the brand after the movie, which we didn't have the last time around. I'm not sure what was the other part of the question?

[Andrew Crum:]

The other part of the question was BEYBLADE, how it's tracking against the $300 million you did back in 2003 with that property? And then Star Wars, it's an early 2012 film release. Will you be shipping product in 2011 to support that?

[Brian Goldner:]

Yes. So BEYBLADE, it's really is -- the rate of sale is very, very strong. And obviously, we are trying to catch up. We have more markets now as owned and operated markets than we had back the last time. So we have a great opportunity to take advantage of that success of and the re-invention of BEYBLADE. I can't comment specifically on the number, but suffice it to say, it's activated around the world. We don't have the rights in certain Asian markets, but we have the rights everywhere else around the world. And as we look at Star Wars for next year, I don't know whether it will -- the shipments at this point will fall in late '11, some of the shipments, or come into 2012, but certainly gearing up for a first quarter 2012 launch of Star Wars product related to the motion picture. So I think it's a little early to guide as to whether those shipments fall in '11 or '12.

[Andrew Crum:]

Okay. And you made the comment earlier about the advertising expense being down given the amount of entertainment properties you have in the year. If you segregate that, are you starting to get any benefit from leveraging The Hub and exploiting the properties on the network and move into any alternative sources of marketing? I just wanted to get your comments on that, and if you're seeing any benefit there? Or when you would expect to see some benefit on that line?

[Brian Goldner:]

Yes. I think what you'd start to see it as we start to ship more product related to the brands, to the animation that's on the air and the programming that's on the air would happen in the third and fourth quarter. Not only domestically on The Hub but around the world. We have 20-plus markets around the world that will have Hasbro programming on the air. We are already starting to see where we had programming and product launch early and simultaneously in Canada. We're already starting to see some indication of great progress on MY LITTLE PONY. And as we've talked about before, I think if you take the advertising line and royalty line, together, that's a pretty good guidepost for us. Years where we have our royalty line go up a bit, we tend to have the advertising line go a little bit lower and more towards the lower end of our historical range. And I think that, that's fairly consistent with what we're doing here in 2011.

[Andrew Crum:]

Okay. Last question for Deb. Could you give us the cash balance overseas?

[Deborah Thomas:]

I don't actually have that in front of me, but I will say that we're in a high collection period in the U.S. right now, so it's probably a bit less than it typically is.

[Operator:]

And our last question is coming from Tim Conder of Wells Fargo.

[Timothy Conder:]

Most of the questions have been answered but a couple here on NERF. You mentioned at the end of last quarter that you were in a backlog situation with NERF and then with BEYBLADE. But NERF, your shipments were down a little bit. Just -- does that mean that you've satisfied the near-term demand and then you continue to anticipate decent growth with all the new initiatives for NERF in 2011?

[Brian Goldner:]

Yes. It's really just about timing. We have a lot of -- we have some lower-priced products that had shipped for the spring this year, products like the BARRICADE in springtime and going to more markets. And we're gearing up for some major launches around the NERF brand core, as well as VORTEX as part of the NERF brand that will happen in the second half of the year. So I think in the brand, it's just timing, and it is really a brand that has done particularly well, not only in the U.S. but around the world this has grown. So no concerns there. Actually very confident about the NERF brand go forward.

[Timothy Conder:]

And then, Brian, when you were listing the movies in the earlier part of the call related to 2012, I'm assuming it was just slipped over, but BATTLESHIP is still slated for 2012, correct?

[Brian Goldner:]

Yes, I think I may have mentioned it, maybe I said it quickly. So yes, in '12 it’s Star Wars

[Timothy Conder:]

Okay. Great. And then, again not to beat the proverbial dead horse here, but on the inventories, David, would you anticipate -- I think you had alluded to that maybe in round number terms as a framework, you had about $65 million or so of excess at year end on the company books. Would you anticipate that being normalized by year end here given that you'll anniversary the China level loading, you have shipped a lot of the new products here. But again that was not in the excess, but working down the gains and the China level loading sort of anniversary-ing, would you anticipate that sort of normalizing, and would in that $300 million area be a good guesstimate target?

[David Hargreaves:]

Well certainly, I don't think we gave the number of $65 million as a carryover. I don't think we've ever been that specific in terms of numbers. But clearly, it is our objective to get down to a normalized level by year end, and I don't see there’s any reason why we couldn't. I think somewhere maybe a little bit above where it was at the end of '09, recognizing that we've got a growing business and that we're in more markets than we ever used to be. So I think if we ended the year north of $300 million but not a lot far -- not a lot above, that would be a pretty good position to be in.

[Brian Goldner:]

Yes, I think if you follow up on what David's saying, if you look at the first quarter 2009, our inventory was about $300 million, and we didn't have the same number of international markets activated, nor did we have as much International momentum. And we didn't have quite as many new initiatives planned for second and third quarter as we did in '09 as we do in 2011. So I think those are good guideposts.

[Timothy Conder:]

Okay. And then last question here, Deb, as it relates to share repo, two pieces here. What were the basic shares at the end of the quarter here, the basic share count at 3/31? And then on the cash, do you anticipate any need to repatriate and therefore any tax implications this year to repurchase what you guys sort of have in mind to repurchase for the year?

[Deborah Thomas:]

Tim, our outstanding shares at the end of the quarter were 136,804,470. I was prepared for you to ask that question. And certainly, we've continued to say that to the extent we have excess cash here in the U.S., it remains our plan to return it to our shareholders, either through dividends, which our board just increased the dividend, and that's going forward for first payment in the second quarter, when the normal payment schedule is. And beyond that, we'd continue to return it to our shareholders through share buyback.

[Timothy Conder:]

Okay. So at this point, you don't really see any change in your tax outlook as far as the need to repatriate cash for any of those corporate-related returns of capital?

[Deborah Thomas:]

That's correct.

[Operator:]

Thank you. At this time, 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, management's prepared remarks will be posted on our website immediately following this call. Have a great day.

[Operator:]

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