Hasbro, Inc.
Q3 2014 Earnings Call Transcript

Published: 20 Oct 2014

[Operator:]

Good morning, and welcome to the Hasbro Third Quarter 2014 Earnings Conference Call. At this time, all parties will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I’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 this morning are Brian Goldner, Hasbro's President and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today we will begin with Brian and Deb providing commentary on the Company’s quarterly performance and then we’ll take your questions. Our third quarter earnings release was issued this morning and is available on our Web site. Additionally, presentation slides containing information covered in today’s earnings release and call are also available on our site. The press release and presentation include information regarding non-GAAP financial measures. Please note that whenever we discuss earnings per share, or EPS, we’re referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives and similar matters. These forward-looking statements may include comments concerning our product and entertainment plans; anticipated product performance; business opportunities, plans and strategies; costs and cost savings initiatives; financial goals and expectations for our future financial performance. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on Form 10-K, our most recent 10-Q, in today’s press release and in our other public disclosures. You should review such factors together with any forward-looking statements made on today’s call. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I’d now like to introduce Brian Goldner. Brian?

[Brian Goldner:]

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. In the third quarter, we continue to execute our brand blueprint globally, driving momentum in our franchise brands and key partner brands. We delivered growth in all regions, including the emerging markets where our investments are fueling continued double-digit growth and profitability gains. We took strategic steps to position us for long-term growth, including the addition of Disney Princess and Frozen to our gross portfolio beginning in 2016. Finally, we continue to evolve and improve our content led branded play strategy and I will speak to this effort shortly. Third quarter revenues increased 7%. We grew across all major operating segments of Hasbro including a return to growth in the U.S and Canada segment and continued growth in the international and our entertainment and licensing segments. Profitability increased as adjusted operating profit in the quarter increased 9% and our operating profit margin was 19.4% of revenues. Our focus on Hasbro franchise brands and key partner brands fueled these results. Franchise brand revenues increased 36% in the third quarter. All seven franchise brands grew double-digit in the quarter. Additionally, point of sale at our top five U.S retailers for Hasbro franchise brands was up more than 30% in the quarter and year-to-date. Let’s highlight a few of these brands. NERF continues to be the brand of choice. According to NPD, if we combine NERF and NERF REBELLE it would be the second largest property in the U.S year-to-date through August. NERF revenues grew in the Boys and Girls categories globally, including in both the U.S. and Canada and international segments and point of sale was strong growing double-digits in several markets. MAGIC

[Deb Thomas:]

Thank you, Brian, and good morning, everyone. As Brian said, we had a good third quarter as we grew revenues in all regions and across our franchise brands. Hasbro’s operating profit and operating profit margin increased. We’ve continued to invest in our business for long-term growth, added a key new license beginning in 2016 while remaining focused on improving profitability and returning cash to our shareholders through our stock buyback program and dividend. Before I review the quarter, I want to remind you of several items that impacted both this year’s and last year’s third quarters. In the third quarter of this year, we restructured our investment in the Hub Network joint venture, reducing our ownership to 40% of the network. In connection with this restructuring, we recorded a pre-tax charge of $11.6 million, or $0.06 per diluted share in the third quarter of 2014. This net charge is primarily related to the costs associated with recording the fair value of a put-call option exercisable at the end of 2021 that Hasbro and Discovery entered into related to this transaction. In last year's third quarter, there were a number of factors impacting our reported earnings. This included a pre-tax charge of $75.5 million or $0.50 per diluted share related to an adverse arbitration award. A pre-tax charge of $4.1 million or $0.03 per diluted share associated with restructuring and partial pension settlement charges and a $23.6 million or $0.18 per diluted share favorable tax adjustment. We have included a reconciliation to reported amounts in today's release. During the rest of my discussion of our business, I’ll exclude these items as they do not speak to the underlying performance of Hasbro. Looking at our segments, third quarter revenues in the U.S. and Canada segment increased 4%. Revenues in both the Boys and Games categories grew in the quarter, partially offset by declines in the Girls and Preschool categories. The Girls category decline was primarily the result of an expected decline in FURBY. The Preschool decline was primarily due to the challenging comparisons within Sesame Street, which included a difficult comparison with Big Hugs Elmo in last year's results. Overall in the U.S., we had positive point of sale trends at our top five retailers and our inventory at retail was down slightly at quarter end. At the same time, retailers are expanding inventory to support our growing brands. Point of sale was up in Canada as well. Segment operating profit in the U.S. and Canada increased 16% in the quarter, reflecting the higher revenue levels, favorable mix and improved expense leverage in the quarter, despite being partially offset by a challenging environment in Canada. We also continue to invest in our business, including support of key initiatives such as MAGIC

[Brian Goldner:]

Thank you, Deb. I want to take a moment and recognize David Hargreaves, Hasbro's Chief strategy Officer. Many of you know David personally. Last week he announced that after 32 years, he will be retiring from Hasbro in February. David’s stewardship, vision, and business acumen have been instrumental in our success today as a branded play company. There is no question Hasbro would not be where it is today without David’s leadership. His legacy will be defined by his tireless work ethic, his belief that Hasbro comes first, and his competitive drive to ensure Hasbro's success is sustainable for generations to come. For me personally he has been a trusted partner and advisor. Please join me in thanking David for his dedication and all the significant contributions to Hasbro and wishing him all the best as he begins this exciting new chapter in his life. Deb and I are now happy to take your questions.

[Operator:]

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from the line of Sean McGowan with Needham & Company. Please proceed with your question.

[Sean McGowan:]

Thank you and I will echo those sentiments on David. It’s been a pleasure to work with him over the years. A couple of things, if I could ask about, one, can you help us understand the strategy and the kind of bracket the exposure with you getting directly into film production? Why the change and how much money are we talking about being put up?

[Brian Goldner:]

Good morning, Sean.

[Sean McGowan:]

Good morning.

[Brian Goldner:]

Allspark Pictures is really just an evolutionary step in our content strategy as we think about ourselves as a branded play company. Recognize that over the last few years since we started the studio and began working as a joint venture partner on the Hub, we have already produced 1,250 half hours of kid’s animation and programming. We’ve also produced a few movies with the EQUESTRIA GIRLS. So we’ve already produced full length animated movies. The difference here is really the format of going out and ensuring that rather than getting just a few theaters like we do for EQUESTRIA GIRLS where we get 400, 500 theaters, we want to go out and get more theaters and we want to have a partner that will distribute our movies first in theatrical and then allow us to go through all the different other stages of distribution for that entertainment. So we don't really view in the short-term any kind of material expenses and the technology in animation has really changed so dramatically we’re on the forefront of developing animation and we see that movies can be produced very economically and as you can see we have not had material impact from the movies we produced thus far and while these budgets may be bigger, they’re certainly not as big as the big animated theatricals from other people.

[Sean McGowan:]

But didn't you say that the JEM was going to be a live action?

[Brian Goldner:]

Correct. You know JEM again very small budget movie relative to live action movies. It’s an opportunity to take a brand out of the vault, tell the new story and reinvent the brand and then put it out across all the elements of our brand blueprint. So again, we don’t see that budget as significantly material. In fact, the movie has been primarily shot already.

[Sean McGowan:]

Great. Okay if I could follow-on with one regarding MAGIC. Could you give us some sense of how much it was up in the quarter?

[Brian Goldner:]

MAGIC was up double-digits in the quarter.

[Sean McGowan:]

Well, that covers a pretty broad range, doesn’t it? So, I think it was pretty crucial to see how these new releases were going to go to date. Did they meet your expectation?

[Brian Goldner:]

Yes, Tarkir has been a great release. The fans have really enjoyed it thus far. Still early days, because you know it’s just been released. We talked about earlier in the year the fact that the releases really do matter. This is a storytelling brand first and foremost and engagement with characters is critical. So this is on track with our expectations and MAGIC continues to demonstrate both short and long-term great potential and we continue to invest in the brand both on the analog and digital side as we see great opportunities not only for this year, but for many years to come in MAGIC

[Sean McGowan:]

And are you still seeing an increase in the percentage of the total revenue that’s coming from digital?

[Brian Goldner:]

Yes, we continue to see digital continue to grow over time and we’d expect over time that it would continue to grow.

[Sean McGowan:]

Okay. Thank you.

[Operator:]

Your next question is from the line of Drew Crum with Stifel. Please proceed with your question.

[Drew Crum:]

Okay, thanks. Good morning, everyone. Brian, I wonder if you could comment on point of sales for the Games business in the quarter. If I missed that, I apologize. And then, you also mentioned that the Games business was down overseas and I just want to understand what the variance was there relative to the performance in the domestic market?

[Brian Goldner:]

Yes, so you have a couple of places where there are some differences by category depending on what the comp was a year-ago. And remember some of our international markets run games a little behind us just as they have more of the FURBY business for example right now, because FURBY boom is still running through those markets and you see that we’re up against the bigger comp in the U.S. on that brand and therefore against the category of Girls. So we don’t see that there was anything there except timing with games being down internationally as we continue to build some of the new releases. If you look at POS where we have POS data in several countries, overall POS in toys and games was up in the U.S and it was up for all the countries we measured, so Canada, Mexico, Australia, France, U.K. and Spain. The only place our POS overall as a company was down a little bit was in Germany. POS in games was down a bit in the third quarter in the U.S.

[Drew Crum:]

Got it. Okay. And then, if I could switch over to Disney Princess, I think you made some comments on the increased product development costs you are anticipating as a percentage of revenue next year. As you think about the royalties associated with this license, where should we expect that to trend once you get into 2016 relative to that five-year average? And then in addition to that, can you provide any commentary around minimum guarantees, anything that was paid out in the third quarter or anything that we should anticipate for the balance of the year or over the life of the licenses?

[Brian Goldner:]

Yes, happy to do that. First and foremost, the Disney pitch for Princess and Frozen business was a creative pitch. And as you know we’ve developed great consumer insights in innovation, in our Girls business, we’ve been driving our Girls business and growing it globally and that was the most important element of our presentation to the team. Second, while we don't disclose royalty rates for any of our agreements, I'll tell you that the development of dolls is very different than action figures and the markets for dolls and action figures are very different. And therefore the royalty rates for dolls are not as high as action figures, because of what goes into producing and the content that goes into the lines, the fashion that goes into the lines and other elements. And then in terms of the minimum guarantee, we certainly believe the minimum guarantee is at the level that we should be able to earn this out over a multi-year period. We didn't disclose the minimum guarantee because we didn't feel that it was material and for perspective I remind you that in 2013 we did disclose the minimum guarantee for our Marvel and Lucas agreements. And as you may remember, that totaled an additional 80 million for Marvel and up to 225 million for Star Wars. So we're trying to give you a perspective there that again we don’t believe that the minimum guarantees in the Disney Princess and Frozen lines is material in the same way.

[Drew Crum:]

Okay, very helpful. Thanks, Brian. Thanks, guys.

[Operator:]

The next question is from the line of Stephanie Wissink with Piper Jaffray. Please go ahead with your question.

[Stephanie Wissink:]

Hi. Good morning, everyone. I will echo the sentiments on David as well. Just a couple questions. First clarification, if you could, Brian. I think you mentioned franchise brands up 36%, total revenues up 7%. Can you talk a little bit about the non-franchise brands, which ones are a drag, either expected or otherwise? And then just a higher level question regarding the cost of introducing new brands into the Toy category. How do you see that playing out here over the next few years? How do you think about kind of the build versus buy strategy and how should we think about the cash prioritization here over the next couple of years? Thank you.

[Brian Goldner:]

Yes, that’s a good question. The thing to note for the most part, if you look at our brand the impact that a brand like FURBY has in the third quarter, that’s a -- it was a big drag or headwind relative to the growth that you’re seeing in our franchise brands, FURBY was down in the quarter by around 50% versus a year-ago. We told you in the last quarter’s call that 70% of the revenues would happen in the second half of the year. And again, order of magnitude, if you took Beyblade and FURBY together in Q3, up against a year-ago, we’re talking about an impact of $150-ish million relative to year-ago’s revenues. So that’s what you’re really seeing when you talk about some of the non-franchise headwinds and comping up against some very strong numbers a year-ago in both of those brands as a good perspective of why you see those differences. In terms of building brand, I think we built a brand blueprint. We built the assets and we continue to hone our capabilities to launch our new brands and vault brands into the toy space, into the branded play space beyond just toys. We're building a model that enables us to do that and we’re adding capability all the time to create that. Also growing our franchise brands is very cost effective. They tend to have higher operating margins, launching of vault brand has similar high operating margins over time. There are investments that we make in our business all the time to build our business whether its MAGIC

[Stephanie Wissink:]

Thank you. Best of luck guys.

[Operator:]

Our next question is from the line of James Hardiman of Longbow Research. Please proceed with your question.

[James Hardiman:]

Hi, good morning. Thanks for taking my call. Couple of questions on the hub, it seems like the financial impact of your lower stake is fairly in consequential. Can you maybe speak to whether or not the overall TV strategy is changing at all, I think once upon a time you gave us some guidepost with respect to TV related merchandise and incremental TV related merchandise. How are we doing there versus sort of your expectations and how should we think about just the overall strategy going forward?

[Brian Goldner:]

The impact for TV merchandise is fairly significant. As you can see whether you look at the MY LITTLE PONY business or the early days of building back our littlest touchup business, what we have done in TRANSFORMERS and certainly TRANSFORMERS RESCUE BOTS which has contributed to our pre-school business and that Preschool show that’s out around the world. The changes we’ve made to the relationship on now Discovery Family was the hub really allows a couple of things to happen. First and foremost we still have a significant number of hours each day to program on that network which give us the opportunity to put up both our library shows as well as select new productions on to the network, and as you know that’s been one of the keys to unlocking our international TV efforts to have a domestic outlet to put shows on the air is critical to international broadcasters as they make their decisions for placement and so we continue to have that as an asset for us. So we believe we will continue to grow our TV related merchandise as we have, we think the thesis there is incredibly strong. Discovery now having more of the ownership and consolidation will continue to build what we’ve seen as an early strength of the network that’s co-viewing in primetime and Discovery obviously has libraries worth of programming and ideas for shows that should help us to build that primetime audience that co-viewing audience. And then the final point is that, Hasbro has the flexibility now in this new relationship to put select new shows or original productions outside of Discovery Family. You’ll note that we just announced that our new transformers TV series, ROBOTS IN DISGUISE that will go on the air early next year, will go directly to Cartoon Network because we feel that’s a better environment, a very strong environment to drive Boys ratings and to generate merchandise sales. So it’s a -- overall this move helps us to reinforce what we’ve done thus far and to strengthen our position going forward in television.

[James Hardiman:]

That’s very helpful. And then just briefly on TRANSFORMERS. I think you mentioned that you’re running pretty comparable to where we were for the last movie. How should we think about that Domestic versus International? Is it fair to say that International is growing versus last time around and we continue to see some contraction domestically and I guess just bigger picture, how is the TRANSFORMERS sales going versus how you thought about them heading into the year given some meaningful tailwinds?

[Brian Goldner:]

Yes. So, if you look at TRANSFORMERS over the first three movies, two of the years right around $500 million and one year the middle year was closer to $600 million. We’ve said, the last movie year we’re tracking kind of comparable to that. Its very heartening for us with all the effort and the investments we’ve made in emerging markets not only to see the overall emerging market growth that we’ve experienced over the last several quarters and continued into this quarter, but to see transformers as a major calling card for our company into emerging markets to see audiences and consumers coming our and buying TRANSFORMERS and really enjoying the brand. And also to see the kind of success that we had in China. We know that’s a great long-term opportunity for our company to have TRANSFORMERS be such a ubiquitous and beloved property there, pertains very good things for our company as we continue to build in that region.

[James Hardiman:]

Thanks a lot. Thanks Brian.

[Brian Goldner:]

Thanks.

[Operator:]

Thank you. The next question comes from the line of Felicia Hendrix of Barclays. Please proceed with your question.

[Felicia Hendrix:]

Hi, good morning. Thank you. Just with staying on that Transformers theme for a second, Brian, can you just tell us the mix that you're seeing so far International versus US as it's compared to -- as it was compared to the last movie?

[Brian Goldner:]

Yes, it’s again -- in percentage terms slightly more developed internationally and particularly I think it’s important, that within international territories you also -- have to also look at emerging markets versus developed economies. It’s very much what we talked to you back as early as even February and the year ago, that the pyramid of growth has been kind of turned a bit on its head as we continue to see the growth in multiplexes and malls globally, markets like Russia, China, Korea, Colombia, Brazil play a bigger role in our entertainment box office. The movie industry is certainly seeing that and we also are seeing that growth and enabling us to introduce new kids and new consumers to our brands and we’re seeing the up tick in sales a result.

[Felicia Hendrix:]

Okay, great. And when you say sales like -- when you say comparable, I just want to be clear, are you talking about kind of sell-in or POS?

[Brian Goldner:]

Well, obviously the POS is strong behind sell-in and sort of running comparable to the sales, so we are seeing very strong global or international POS. We’re seeing some good POS building for TRANSFORMERS as we get into the third, into the fourth quarter. But again it’s definitely, if you look at -- look at the brand, TRANSFORMERS obviously is still up significantly versus a year ago and is contributing to the company this year. In the U.S. and internationally, and we continue to see TRANSFORMERS contributing significantly to our U.S. business versus the last movie. What we’re saying is that the sales are more diversified to the international markets. So we’re just giving you a perspective more longer term as it continue -- as Hasbro and the brand continue to be a more global company.

[Felicia Hendrix:]

Right, helpful. Thank you. And then just on the POS trends that you and Deb talked about in the prepared remarks, I was just wondering -- the momentum that you've seen since the second quarter in POS, has that increased -- have you seen an acceleration? Has it kind of stayed the same? So I just wanted to get some color on that.

[Deb Thomas:]

I think it’s really been consistent. As you head into the all important holiday season, our expectation is that we’ll see -- certainly from our standpoint we have had that consistent momentum, but we are heading into the all important holiday season. When I think all retailers are hoping that the POS picks up overall.

[Brian Goldner:]

And obviously you’ve seen the results in our franchise brands and the POS are on our franchise brands has been equally strong, we talked about that, that again I think what we’re seeing. If you look at the holiday season into the U.S. not surprisingly a very selective consumer that’s buying the brands that are incredibly meaningful to them, our franchise brands are thus far been incredibly meaningful and our desired and I think we’ll continue to drive that into the holiday. Obviously the bulk of our media spend starts right around now and in through the holiday period and so, we think we’re set up well for this holiday season recognizing that sales continue to happen later and that the consumer is selective and we’re happy to see that they’re selecting a raft at Hasbro’s brands.

[Felicia Hendrix:]

Thank you. Final question, just Deb, on royalties, the absolute number you reported was a bit different than what we were looking for. So, I was just wondering, can you just help us kind of bridge the year-over-year -- kind of the puts and takes year-over-year and sequentially in royalties -- for royalties?

[Deb Thomas:]

Well really the biggest impact on royalties this year was the mix and we did put a reconciliation in, because last year we had an impact on royalties from the settlement of an arbitration award and we had an impact this year. So, year-on-year it’s up a bit. Its mostly due to product mix, but for the full year we still expect to land about that five year average of I think 7.3% was the five year average and we were contracting along that rate earlier in the year as well.

[Felicia Hendrix:]

Okay, great. Thank you.

[Operator:]

The next question comes from the line of Jaime Katz of Morningstar. Please proceed with your question.

[Jaime Katz:]

Good morning, thanks for taking my questions. I'm curious if you guys are seeing any overarching trends in the Preschool category. It seems like both you and your closest competitor seem to be struggling the most in that category. So I didn't know if there was something else going on maybe at the retail level? And are there any new initiatives from Backflip that would be helpful for us to understand any of the digital business going forward?

[Brian Goldner:]

Sure. If we look at Preschool we have seen great global growth for one of our newest franchise brands and PLAY-DOH which continues to accelerate. It’s a play pattern that’s highly relevant to kids and did their parents globally. We are also seeing good strength where we have character base Preschool products like TRANSFORMERS RESCUE BOTS where we’re seeing growth. I will say the core playschool business a couple of years ago, we really needed to focus in on making that business sustainable for the long-term which meant building back some of the profitability in that brand and ensuring that we can make great innovative products that our customers and Hasbro could make money on and to build unique innovation. So we’re willing to really focus in on the profit side and get to the right revenue level. I think now we’ll start to turn on and drive more of the revenue side having rethought the way to go forward in that business. And I do think that it requires a level of innovation and differentiation that we can provide in playschool. I think it’s just going to take a bit longer in our core business. But having seen a lot of our future products and where the innovation is going I’m very heartened that that teams got their arms around it and that you’ll be seeing some great products from playschool core over the next several years.

[Jaime Katz:]

And then any new news on the Backflip front?

[Brian Goldner:]

Sure. Yes, so Backflip is our -- I won't say exactly what new initiatives they’re working on, obviously a highly competitive category. But they have a couple of at least one big franchise brand in DragonVale we’ll continue to work there. And then as we had always imagined that as we got through the early days we would start to focus in on Hasbro brands that would have great meaning to them, and they still have a very strong and continue to build on their network of daily active users and monthly active users and you’ll see Hasbro brands on the Backflip platform. If you’ve looked lately you may have seen a NERF Hoops App that’s really fun to play. That’s a little reminiscing of Paper Toss but now you get to play in a NERF environment which is quite fun and a network builder for us there and they will continue to launch a number of new games this year finishing this year ’14 and some pretty robust bus plans for 2015. So, again as we go long-term we’re very pleased with and excited to be in the mobile gaming space and a great team out at Backflip.

[Jaime Katz:]

Thank you.

[Operator:]

The next question is from the line of Mike Swartz, SunTrust Robinson. Please proceed with your questions.

[Michael Swartz:]

Hi, good morning everyone. Maybe you can provide us some more color just how you're thinking about kind of go-forward investing in terms of ad and marketing dollars. How do you look at that versus trade brick-and-mortar versus maybe the digital or e-commerce realm?

[Brian Goldner:]

Number of years ago we used to talked about and, I mean I think I remember talking to you guys about building a seven layer cake. And today it’s more like 70 layer cake. And I think the teams have gotten incredibly smart about how to build more of a digital presence and the social media and digital presence we built recognizing that digital cost less out of pocket than over the air media, but requires expertise that we brought onboard inside the company, and we continue to build in that space. Advertising still has a very powerful, an immediate impact to the sales of our products when done well and so you’ll continue to see us investing in television and off-screens, short form media and long form media, so webisodes and shorts and all kind of videos. If you go online I’m sure you’ll see the ubiquity we’re building around our brands online to give kids and family short form content. You also see that we built our digital asset delivery so that as we look at online retailing you now get a full immerse of experience. You can get a virtual product experience in so many different ways online and get to make a purchase decision right there online and we’re doing that with lots of our retail partners. So marketing is just become more complex, not necessarily more costly given the expertise we’ve brought onboard, but certainly we are working in every element that matters to consumers and fans of our brands and building those new capabilities. And I do think that over time that roughly 10% (indiscernible) recognizing that we also view royalties as somewhat of a marketing expense. I have talked to you before about looking at those two lines together as a way to see the impact of our brands and that would in fact be the case. And then of course our own programming efforts and animation efforts add to that and have enabled us to build hundreds of million of dollars worth of merchandising sales for our brands around the animated stories we’re telling.

[Michael Swartz:]

Great, that's extremely helpful. And then maybe for Deb, just how do we think about -- with the strengthening dollar here, how do we think about the impact of currency or maybe top line and earnings over the next let's call it 12 months? Is there a rule of thumb or …?

[Deb Thomas:]

That’s a good question Mike, because we saw the U.S. dollar really strengthen significantly in September. And while we do have significant hedges for our transaction exposure particularly product purchases and royalties we don’t hedge a 100%, so we did have a little bit of an impact in Q3. But we have significant hedges in place for ’14 and ’15 right now, so that’s on the product side but again not 100%. But based on our revenue mix the translation piece is the bigger piece. So if you think about and we disclosed this in our 10-K last year about 55% of our revenues are U.S. dollar based revenues is because of how we sell them into the market, but the euro is our next biggest exposure and that was about 18% of our 2013 revenues. So if the euro was to stay at levels that it’s at currently last years Q4 revenues would have been about $20 million lower than they actually were. So, if you kind of think about that about 18% of full year revenue our euro based and as the dollar strengthens and the euro declines against it that does have an impact. Our next biggest exposure was the pound but that’s only about 5%. So that doesn’t have as significant an impact. And when you think about that flowing through to the bottom line there’s a bit on our un-hedged portion of inventory and that’s what we saw in the quarter just because of the precipitous decline that happened in September. But we have hedged probably about 75% to 80% of our product purchases euro based right now. So that’s less of an impact but the translation impact could be significant and it tends to be about 10% to 15% of the top line impact on the bottom line.

[Michael Swartz:]

Okay, that's fantastic. So, I would assume then the impact in the third quarter was maybe a little more than that 10% to 15%?

[Deb Thomas:]

No, it was probably about that impact.

[Michael Swartz:]

Okay, that's great. Thank you so much.

[Operator:]

Thank you. (Operator Instructions) The next question comes from the line of Timothy Conder of Wells Fargo. Please go ahead with your question.

[Timothy Conder:]

Thank you and my congratulations to David on his career and best of wishes. A couple of things, and thank you also for the color on the Disney Princess, Brian, that’s much appreciated. A couple things relating to Canada. You commented that it was challenging. Was that due to FX there also or is it in demand I guess this is the first question? And then you were very excited at Toy Fair about DohVinci as it relates to the Girls category. Just any update on the early trends that you're seeing there? And related to Sesame Street within Preschool, granted you had very difficult comps, but in general how is that business trending versus your expectations at this point? Say from when you got into the business?

[Brian Goldner:]

Sorry, repeat the third part.

[Timothy Conder:]

The Sesame Street, Brian -- how is that trending overall versus your expectations?

[Brian Goldner:]

Thank you. Yes, so let’s start with Canada. As you know we’ve had some changes up there in retailers and retail strategies and obviously working through that with our partners. The demand profile in the market has been a bit different than the U.S. We’re now seeing some strong growth in POS in the third quarter, so double digit growth in POS in Canada in the third quarter. And so it’s lagging a little bit for us versus some of our shipments but we certainly have robust plans for the holiday season up there. But yes, as you know over the last year or two there has been some shaking out in changes within the retail landscape, and we’re just working through that. So, we don’t see there’s any long-term impact. In fact we continue to believe that Canada should perform fairly well this year. Second, in DohVinci we’re incredibly happy with the early results albeit early days. The consumer feedback has been fantastic its really a fun product line to play with and we believe we’re entering a really good -- with a really good new innovative product line in a great category and a great extension for DohVinci and we have seen good uptake not only here in the U.S. but in several markets around the world. And then finally Sesame Street I think that mostly in Sesame Street we had a very big Elmo last year, and that drives a lot of dollars as you know. So it can cloud or obfuscate that sort of results the underlying trends on that brand. And I think as we go forward we’re incredibly excited not only about Sesame Street in several countries but some very fun early results for Furchester in the U.K. and that TV series. And so I think that and some new leadership at Sesame Street. So all around I would say that long-term we can remain very excited about the Sesame Street business and we have some great product lineups coming up over both this year and in future years.

[Timothy Conder:]

Okay. And then -- thank you and two more quick questions here. One, do you anticipate China being profitable this year? And then secondly, Deb, you had mentioned that some things are now fully amortized. Any broad update to the change in your overall amortization expectations here for the balance of the year or looking out to ’15, ’16?

[Deb Thomas:]

No I think Tim, from an amortizations standpoint we remained comfortable with what we had in the 10-K because that included the Backflip which was the big update we had. So as we see things trending out we remain comfortable that that was a consistent expectation.

[Brian Goldner:]

Yes, in China, right now we’re probably about breakeven recognizing that we said we’ll continue to invest in that market for the longer term to build it over time. As you know, this is just one example among many that TRANSFORMERS had such ubiquity in the box office and yet we’re still building points of distribution so that the majority of Chinese consumers can enjoy the brand from a product standpoint and licensing standpoint so that requires additional investments and we’re building our joint venture relationship with Alpha (indiscernible) and it was also luckily the year of the PONY, so MY LITTLE PONY got a good shot in the arm, but we continue to build that brand in that market place as well. We again see China long-term as a great opportunity for us. But it’s not time to just start to look only at profitability as the key criteria for that market. We see many years of revenues, growth and we’ll get to profitability over a period. But first we want to build the ubiquity of our brands in line with the story telling that we’re putting into the market.

[Timothy Conder:]

Great. Thank you.

[Operator:]

Thank you. Our next question is from the line of Eric Handler with MKM. Please proceed with your question.

[Eric Handler:]

Yes, thanks for taking my question. Two questions for you actually. As you continue to build out your infrastructure internationally, can you maybe discuss how the Marvel products have evolved there in terms of the percentage of revenue coming from domestic versus international as the movies continue to succeed and do quite nicely? And then you've got Avengers 2 coming out next year and China is actually a big part of the success of a superhero genre, so I would be interested in your thoughts on that. And secondly, when you look at MAGIC

[Brian Goldner:]

Yes, let me start with Hearthstone. Our game is both in analog and digital game and the power of that brand is in the ability to have 100s of 1000s of face-to-face tournaments going on around the world every year and to have players engage in the analog business as well as the digital business, and we’ll continue to build upon both lines. The brand is related and releases do make a big difference to that brand, but that’s not a new phenomenon and it continues as we’ve said. It’s a brand that tends to go more release driven than more seasonally driven. And we’ve talked about that over a long period of time and so there are bigger and smaller releases of characteristic going on over time. There’s a curation that that team goes through to really work with their fans and understand how best to layout the story over time. And so that continues to be a story telling led brand that’s enjoyed both in analog that is completely unique to the market place and have nothing to do with some of the light digital games that are out there from competitors. We do in fact have a light game as well that can be played on the iPad that Duals with the Planeswalkers. And then a much more immersive game in MAGIC

[Eric Handler:]

Great. Thanks.

[Operator:]

Thank you. Our final question this morning comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead with your question.

[Gerrick Johnson:]

Hi, good morning. I would just like to revisit Magic once again now that the releases are out; third quarter offsetting sort of a weak first half. What was the nine months for Magic? I think that should be a good comparison at this point, both point of sale and shipments? Thank you.

[Brian Goldner:]

Yes, so year-to-date Magic is up mid single digits. In the quarter it was up double digits. So it’s the momentum is building but Magic year-to-date through the third quarter was up.

[Gerrick Johnson:]

Okay, great. And you gave us some good direction on the cost of the Princess license, you have any sort of guidance for the revenue that could generate from this? Mattel gave us a range on their call, but I was wondering if you could give us an idea of where you thought it might shake out in ’16 and beyond? Thank you.

[Brian Goldner:]

I think if you look at what we’ve done in our gross business, the team has done a phenomenal job and customers and consumers around the world are really enjoying the innovation. The consumer insight that we brought to those brands, the story telling and what we can do as an IP owner in building out the MY LITTLE PONY business, the EQUESTRIA GIRLS business and what we’re now doing with Littlest Pet Shop. And I think that was first and foremost recognized by the Walt Disney Company as great innovative company that’s growing significantly in the Girls space. So, we obviously think that Disney will have a significant positive impact in adding Princess and Frozen in 2016, we’re not going to size the business for you. But to say that, as we’ve said before we really feel like our girls business is in the early innings of what's possible. Our brands have just begun to grow over the last few years in a more significant way and we feel very good about the new relationship and we will begin shipping the line in 2016.

[Gerrick Johnson:]

Great. Thank you very much.

[Operator:]

Thank you. I’ll turn the floor back to management for closing comments.

[Debbie Hancock:]

Thank you Rob and thank you to 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 following this call. Our next scheduled earnings call will be our fourth quarter and full year earnings call and it’s tentatively scheduled for Monday, February 9, 2015. And we anticipate hosting our Annual Investor event at Toy Fair that following Friday morning, February 13th in New York. More details on these events will be available as we get closer to the dates. Thank you.

[Operator:]

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