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Hasbro, Inc (NASDAQ:HAS)

Fall 2008 Analyst Event Call

November 12, 2008 10:00 am ET

Executives

Karen Warren - Senior Vice President of Investor Relations

Brian Goldner - President and Chief Executive Officer

David Hargreaves - Chief Financial & Operating Officer

Deborah Thomas Slater - Senior Vice President, Corporate Finance

John Frascotti - Chief Marketing Officer

Analysts

JT

David

Karen Warren

Good morning, my name is Karen Warren; I am Senior Vice President of Investor Relations of Hasbro. I would like to welcome you to the webcast of Hasbro’s Investor day.

Before we begin our program I would like to remind everyone that certain statements contained in this presentation or made during this meeting may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include expectations concerning the company’s future strategies, products, and entertainment support as well as the company’s future financial performance and ability to achieve its goals and may be identified by using forward-looking words or phrases such as anticipates, believes, expect, intend, look forward, may, planned, potential, should, will, and would.

The company’s actual actions or results may differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, the company’s ability to manufacture, source and ship new and continuing products on a timely basis and the acceptance of those products by customers and consumers at prices that will be sufficient to profitably recover development, manufacturing, marketing, royalty and other costs of products; economic and public health conditions in various markets in which the company and its customers and suppliers operate through out the world, including factors which impact the retail and credit markets, the financial health of the company’s customers and the level of spending by retail consumers on the purchase of the company’s products including employment levels, consumer disposable income and consumer confidence; factors which impact the company’s ability to manufacture and deliver products in an efficient and cost effective manner, including higher fuel and commodity prices, higher transportation costs and potential transportation delays, higher labor costs and currency fluctuations, political or economic instability and government regulation and other actions in various markets which the company operates through out the world; the concentration of the company’s customers; the inventory policy of retailers including the concentration of the company’s revenues in the second half and fourth quarter of the year.

Together with increased reliance by retailers on quick response inventory management techniques which increase the risk of under production and popular items, over production of less popular items, and failure to achieve tight and compressed shipping schedules, work stoppages, slowdowns or strikes which may impact the company’s ability to manufacture or deliver products, the concentration of manufacturing of many of the company’s products in the Peoples Republic of China and the associated impact to the company of any conditions which increase the cost of manufacturing in China or affect the movement of goods into and out of China; the cost of complying with product safety regulations, as well as the risk that not withstanding all of its efforts to ensure the safety of its products that the company may face product recalls, or product liability suits. The bankruptcy or lack of success of one of the company’s significant retailers which could negatively impact the company’s revenues or bad debt exposure; the impact of competition of revenues, margin, and other aspects of the company’s business including the ability to secure, maintain, and renew popular licenses; market conditions; third party actions or approval or other risks and uncertainties as may be detailed from time to time in the company’s public announcements and filings with the SEC including filings on Form 8-K, 10-Q and 10-K.

Any forward-looking statements made today reflect the company’s current plans, expectations, and beliefs and the company undertakes no obligation to make any revisions to these forward-looking statements contained in this presentation or made during this meeting, or to update them to reflect events or circumstances occurring after the date of this meeting.

If you will please stand by our meeting will begin shortly with Brian Goldner, Hasbro’s Chief Executive Officer, as our first speaker.

If you have any questions myself or Debbie Hancock, who is right over here to my left, who is the director of Investor Relations, we are both here; please let us know if we can be of any assistance.

Now let me introduce our CEO and President Brain Goldner.

Brian Goldner

Thank you Karen and let me add my welcome to all of you. We appreciate your being here at our home. We have a great day planned and look forward to sharing with you Hasbro’s strategic blueprint for growth. And of course to show you a number of brands and products we are excited about for 2009.

After my remarks John Frascotti, our Global Chief Marketing Officer, will outline some of the programs we are doing around the world. Then David Hargreaves, our Chief Operating Officer and CFO, and Deb Thomas Slater our Senior Vice President of Corporate Finance will be reviewing our long-term financial objectives with you, and of course we will take you through David’s, now famous, top question segment. Following that we will open the meeting up to your questions and that will end the formal webcast portion of the day.

We have one mantra at Hasbro, reinvent, reignite, and re-imagine our world-class portfolio of brands. Our creative and innovative team of employees is making Hasbro brands even more meaningful to consumers around the globe, as we inspire the human need for play.

This idea sits at the foundation of everything we do, especially with respect to our brand products and marketing. We began our core brand strategy that is the basis of our strategic blueprint in late 2000. Over the past few years we’ve created the brand building tools to reignite our brands like Way to Play and have started the CL brands grow globally; Littlest Pet Shop, Transformers, Playskool, Baby Alive, to name a few. We have developed the relationships, alliances, and capabilities to re-imagine and reignite our brands like efforts with EA and others in digital gaming and DreamWorks, Paramount, and Universal for Hasbro branded motion pictures.

We are developing the management team who has embraced our core strategy, has interpreted it for our global brands, and is teaching it to the next generation of leadership around the world. Today we will have you meet these leaders and hear our brand plans for 2009.

Certainly it is the strength and diversity of our world-class brand portfolio that has served us well even in challenging economic times. Our strategy is working, it is sound, and we are going to continue to focus on delivering solid returns.

We performed well in the first nine months of the year and we still believe that we will grow revenues and can grow earnings per share in 2008, and we are going to show you today why we believe we will grow revenues and earnings per share in 2009 as well.

Contrary to what you may have heard there will be a Christmas this year and next year and the following year. Parents and grandparents will still buy toys. Great brands, strong innovation, and excellent value will continue to serve the consumer well and Hasbro delivers that globally; having said that, this expansive economic downturn is more significant than any of us have experienced before.

In this environment the breadth and depth of Hasbro’s portfolio gives us the ability to reach every consumer, from infants to seniors, whether it’s Playskool, Littlest Pet Shop, Transformers, or our wide array of games, Hasbro has it.

We want to make sure that Hasbro gets its fair share of dollars from the consumers who are shopping. While we usually don’t talk about PLS data with you in the middle of a quarter, given the economic environment we wanted to give you some insight into what we are seeing at retail in the US. Let me put these numbers into perspective for you.

Through the first nine months of 2008 Hasbro’s PLS in the US was up single digits. In the third quarter our PLS continues to improve. In October and through the recent election, we and the rest of the industry saw PLS slow. People were just not shopping. However, I am happy to report that over the past weekend, PLS showed the consumers were back in stores shopping. We believe, with our very innovative and competitive product lines, that we will get our fair share of the dollars that people are spending.

As we all know the most important weeks are coming up and we decided to hold the majority of our marketing and retail spending until after the election. Those ads and programs are just kicking in and that coupled with Walmart, Target, and Toys R Us dropping their holiday catalogues during this past week, we are hopeful this will continue to drive consumers to the stores. However, as we said in our third quarter conference call, we have adjusted our expectations for the remainder of the year.

Now let’s get back to discussing our long-term vision for the business and how we are going to continue to grow by focusing on inspiring the human need for play.

Children and families have a need and a desire to play and our vision is all about inspiring and fulfilling that need with compelling and entertaining brands and products; by taking those brands and coupling them with sound creative, impactful, consumer centric marketing as populations grow and markets develop around the world our audiences and opportunities will grow along with them. That sits well with our longer-term strategy to grow Hasbro with investments in a number of areas including emerging markets, entertainment, and digital gaming. The reinventing, re-imagining, and reigniting of our core brand globally is the fuel that will help us remain the best toy and games company in the world.

Our mission is to deliver immersive brand experiences to consumers of all ages in all forms and formats wherever and whenever they want them. We are doing that by being focused on being a brand driven, consumer oriented, global company.

While products are an essential focus of Hasbro’s efforts, there are several additional elements beyond the products themselves that create these immersive brand experiences that consumers desire and pursue today.

Our blueprint for long-term growth includes product innovation along side of telling re-imagined brand stories through motion pictures, online, television, licensing, publishing, digital gaming and then taking these efforts around the world. This includes our push into new emerging markets as well as television programs like the new Trivial Pursuit game show that are catalysts for future growth.

We are also adding to the transformers experience that we created with Dream Works and Paramount, with the newly signed deal to unveil a Transformers attraction at Universal Theme Parks in both Singapore and Los Angeles, this is truly story telling re-imagined.

Our consumer base is purposely broad, ranging from infants and preschoolers and their mom’s, to young boys and girls, to tweens and teens and to families and adults. These consumers stand at the focal point of our thinking when we design our products and marketing strategies.

Over the years we have developed a world-class portfolio of compelling brands to serve our consumers needs. These brands have strong emotional resonance with your consumers often crossing multiple generations and they represent both our heritage and our future.

Innovation has been one of the constants of our success. It permeates every part of the company and is something we actually celebrate every year at Hasbro’s annual Inny Awards. Last year more than 1,200 of our global employees came to the Providence Performing Arts Center to celebrate our Academy Awards of innovation, the Inny Awards. These awards cover a broad spectrum from new product innovations, to product marketing campaigns, as well as creative solutions to tough business problems and business efficiencies. Inny’s were given in 18 categories and the winners were selected from some 300 nominations. One special award we gave out that afternoon was for extraordinary service and that award was presented to a very deserving person. Al Verrecchia.

As you know, Al stepped down as CEO in May. During his tenure he provided unwavering steadfast leadership and as one small token of our appreciation, as you can see from this picture, he was presented a special award and then saluted by many of Hasbro’s classic characters.

Al, we appreciate all you have done for us at Hasbro during your 41 years of service and I can assure you we are committed to building on the success we have enjoyed together. And as we further develop our strong senior management team to ensure that we continue to deliver positive results, let me give you an update on three of our key executives.

John Frascotti, Hasbro’s Global Chief Marketing Officer is responsible for leading global marketing for the toy and game business as well as all of our licensing and entertainment efforts to ensure that we have developed the holistic brand initiatives that will propel our strong portfolio of brands in the global market place. He is helping to inculcate our proprietary Way to Play process through out the organization. The Way to Play is the shared brand management blueprint that enhances our creative endeavors and is importantly efficient, flexible, and relentlessly repeatable on a global basis. He is working closely with our senior marketers to see that they are able to use all the tools available globally to drive the core brand strategy we put in place a number of years ago. You are going to hear from a number of those excellent marketers later today.

John is also working in lock step with Duncan Billing our Global Development Officer who heads all of our product development. Duncan’s team is focused on ensuring that we are developing globally relevant, trend-like, world-class playing game products and that innovation in our product offerings is pervasive across our entire brand portfolio. Working with Hasbro Operations in global marketing, Duncan’s team is also leading our efforts to address the significant challenges and opportunities we see from input cost inflation to new and emerging technologies. In this economic environment it is even more important to remain creative, competitive, and innovative and we are doing just that.

Finally, let me take a moment with this audience to formally congratulate David Hargreaves on his promotion in May to Chief Operating Officer. While I recognize that David has been a part of Hasbro for more than 25 years and that Al and David have had a long and successful history,

what has been incredible for me over these past few years is how David has become my business partner. David and I have worked closely on many of the strategic decisions we have made during these past years, including moving us into the entertainment field with our movie deals with Dream Works and Paramount and most recently with Universal, entering the digital space with our partnership with Electronic Arts as well as the Cranium acquisition. We also work closely on securing the global Trivial Pursuit rights. He and I have developed a strong working relationship and I can tell you we are hard at work on many other initiatives, so stay tuned.

As COO, David is now responsible for day-to-day and market execution of our sales and marketing strategies in all markets around the world. In addition, he remains responsible for our manufacturing and sourcing operations and continues as our Chief Financial Officer.

Now, before I call John Frascotti up to take you through our long-term global marketing plans, let me leave you with these last thoughts.

Hasbro is still in the early stages of unlocking the potential of our brands. Our best years are still ahead of us. We have the depth of brands and we are building the capability to profitably grow these brands over the long term. Our team is very optimistic about our ability to compete and win recognizing the challenge is greater today than in the recent past. We are well positioned, but this senior team in front of you today, along with the rest of the Hasbro team around the world, remains perpetually driven to perform better and create even more value for our shareholders.

Thank you very much and now John Frascotti, our Global Chief Marketing Officer, will take the stage.

John Frascotti

Good morning. As Brian mentioned just a few moments ago, our vision at Hasbro is to inspire the human need for play. People of all ages and ethnicities around the world love to play and our purpose is to provide them with the products and the experiences that truly fulfill this need. Especially during times when the economy is major concern to people, the need to find comfort and enjoyment through play is magnified. By delivering products that meet these needs, especially at a great value, we believe our business will continue to grow.

Our clear focus, however, is not simply delivering products, but it’s delivering immersive brand experiences to our consumers. We believe that by delivering these experiences we will continue to strengthen our brands emotional attachment to our consumers around the world. We market to a very broad range of consumers and we spend a tremendous amount of our time as a marketing team making sure we understand our consumers, what motivates them, and how they’re changing in today’s world and we make our decisions every day based on a deep and complete understanding of our consumers and what’s truly important to them.

As you all know our brand portfolio consists of brands that have really deep emotional connections to consumers across all generations. Our growth strategy is firmly based upon focusing on and growing our highest potential brands.

Let’s take a closer look at our brand portfolio.

For preschool children and their moms we have brands like Playskool, Play-Doh, Mr. Potato Head, and Care Bears, a new brand for us in 2006. The size of this opportunity toys and games used by children under five years of age and their moms is quite large. The infant, preschool, super category is actually the largest super category tracked by NPD. In this super category we have strong brands that give us the opportunity to move into each category that comprises this super category and by focusing on the development and extension of our existing brands we believe that we can grow significantly simply by taking our fair share of the infant/preschool category and achieving a market share roughly equivalent to our market share in the overall toy and game business.

For young girls we have several high potential brands: My Little Pony for our littlest girls ages three to five, Littlest Pet Shop for our third and fourth grade girls, FurReal Friends and Baby Alive which provide nurturing play, but in completely different forms and Strawberry Shortcake, which also is new for us, in 2009.

Our success in the girls business has been built by really understanding how girls play, by knowing that nurturing and role-play and fantasy play are what little girls want and by giving them brands that deliver on these.

Now, our growth in the girls’ category has been systematic and steady and each of our brands in this portfolio has been built from the bottom up to complement and not compete with each other.

The chart you see on this screen clearly shows our dramatic growth in the girls’ category over the past eight years.

For boys we have several of the most powerful brands in the segment, Transformers, G.I. Joe, Star Wars, and Spider-Man. In fact, we have a leadership share in the boys action figure category in both the US and Europe.

Now earlier this year we told you that we expected our sixth major boys’ initiatives of 2008 to equal our three major boys’ initiatives in 2007 and I am happy to report to you today that that is still the case. In addition, we see plenty of opportunity to use our strong boys’ brands to expand into other boys’ categories beyond action figures.

For tweens brands like Nerf have seen dramatic growth in the US over the past five years and we are now seeing significant growth potential outside the US.

In the last six years the Nerf business has grown from a relatively small brand into a sizable business with most of our sales occurring inside the United States. Recently we began to expand the geographic footprints of the Nerf brand by using dart tag as our primary vehicle to introduce Nerf into Europe, Asia, and Latin America and we are seeing nice growth for Nerf in these markets.

For families, adults, children and preschoolers, we have the most significant games portfolio in size and scope in the world and although we have a leadership market share in board games in the US we actually have a relatively small share of the overall casual gaming markets. However, by expanding our brands into new forms and formats like digital gaming we are beginning to expand beyond the traditional board game universe and there is significant opportunity for growth simply by getting a larger share of this broader market.

So clearly we have a strong portfolio of global brands for each major consumer group and we are very focused on continuing to grow these brands. The key to growing our brands is to have a well-designed and well-researched game plan for each of our brands. The proprietary brand development methodology that we use to develop our game plan is called the Way to Play. The Way to Play is a holistic way to ignite creative ideas, to reinvent our brand and to create new game changing initiatives. We have applied the Way to Play methodology to several of our largest and high potential brands like Transformers, Littlest Pet Shop, and Monopoly and we have had great results.

Let me take you through a Way to Play.

The first part of the process involves using in depth consumer insight to develop long-term strategies for our brand. We believe that a deep understanding of our consumer is absolutely essential to developing and executing sound strategies.

The second part of the process involves brand planning. This is where we ensure that our brands are developed in a globally consistent way that fully optimizes each brand’s potential.

The last part of the process is when we take these tools and measure and assess the success of our plans.

Way to Play for us is a global approach to brand building that ensures consistent global execution. Reinventing, reigniting, and re-imagining our brands are the cornerstones of our growth strategy. Using the Way to Play we bring relentless creativity to this process.

For our core brands, this brand reinvention and re-imagination typically includes toy and game product innovation, lifestyle licensing, digital gaming, and immersive entertainment experiences, which we then take and deliver to all of our markets around the world. Let’s take a look at each of these four elements.

First is product innovation. Our design and engineering teams in the United States, in Europe, and in Asia, led by our Chief Development Officer Duncan Billing, are continuously developing exciting new innovations, some of which you will see today, to keep our brands front and center for our consumers. As Brian mentioned earlier, we make product innovation a top priority for all of our brands and we make sure that this innovation is informed by our brand strategies.

Secondly, we use our licensing programs to extend our brands across a wide spectrum of product categories beyond traditional toys and games, but always in a manner consistent with our brand strategy and our brand essence. In 2009 you will see us continuing to grow our licensing program around brands like G.I. Joe, Transformers, and Monopoly, but also around brands like Littlest Pet Shop, My Little Pony, Nerf, and Tonka.

Third, we are continuing to expand the digital footprint of our brands by making our brands available to people who want to play them on all types of digital platforms. This year, in partnership with Electronic Arts, we have launched brands like Monopoly, Scrabble, Littlest Pet Shop, Nerf, Boggle, Yahtzee, and several others, on every major digital platform including the Wii, Xbox 360, PS2, and 3, Nintendo GS, mobile phones, iPods, and others. This initiative is a key component of our strategies to reinvent and reimagine our brands and expand the number of ways consumers around the world can enjoy and interact with our brands.

While we will take you through this in more detail later in the day, I can tell you now that our relationship with Electronic Arts is off to a very strong and productive start. By the end of 2008 the EA and Hasbro will have launched over 30 games. We also have licensing arrangements with other digital gaming companies like Activision who are helping us further extend our Transformers brands.

The fourth element is entertainment and this is a critical component of our brand reinvention. Clearly our partnerships with some of the most well known and well-respected studios in Hollywood such as Dream Works, Paramount, and Universal enable us to use entertainment to deliver these immersive entertainment experiences to our consumers.

Our second Transformers movie Revenge of the Fallen is expected to premier on June 26th next year and our first G.I. Joe movie, Rise of Cobra is expected to premiere on August 7th. We expect both of these movies to be released in more than 50 territories around the globe. These films, however, are just the beginning for us.

As you know, earlier this year we entered into a long-term strategic partnership with Universal. This partnership encompasses universal producing and releasing at least four motion pictures based on Hasbro brand beginning in 2010 or 2011.

We now have an office on the Universal lot in Hollywood and we put in place a team of film executives led by [Bennett Scherer] who are developing motion pictures based on several of our brands. These films represent powerful opportunities for us to reinvent our brands and importantly to reintroduce them to entirely new generations of consumers. I am pleased to report to you today that we are making excellent progress with our development efforts on these properties and interestingly we found that the creative community in Hollywood, the writers, directors, and producers, have strong affection for our brands and their interest in our brands has been very high.

Now immersive entertainment experiences are not limited to major motion pictures and not every one of our brands will be used as the basis of a motion picture. We also use television to deliver our brands to consumers in new ways. Our animated Transformers television show, which debuted earlier this year on Cartoon Network, is the third highest rated program on Cartoon Network’s Saturday morning day part and the show has been sold for broadcast in over 100 countries worldwide.

In September we launched Trivial Pursuit America Plays, a syndicated television game show which has over 91% clearance in the US. The show currently runs five days a week in 157 markets.

We also deliver other forms of entertainment such as DVDs, Webisodes, comic books, and even theme park rides to deliver these immersive experiences to our consumers. All of these elements of our strategies, innovative products, licensing, digital gaming, and entertainment, are part of our strategy to keep our brands meaningful and relevant to our consumers on a daily basis.

In addition to reimagining and reinventing our own brands we work very closely with Lucasfilm and Marvel to deliver innovative toy and game merchandise based on their brands. To Lucasfilm, Star Wars the Clone Wars has been a huge success on Cartoon Network in the US and is expected to be rolled out globally next year. In fact, Clone Wars was the highest watched premier episode in cartoon history with over 8 million viewers and this popularity is contributing to very good sell through of our Clone Wars merchandise at retail

In 2009 Marvel expects the major theatrical release of the X-Men Origins Wolverine movie based on the famous Wolverine character in Marvels X-Men comic book series and in 2010 Robert Downey Junior will return as Tony Stark in Iron Man 2 and again as Iron Man in the Avengers movie in 2011.

By focusing on building our strong global brands that are expandable across multiple categories, formats, and territories and that provide us with significant licensing opportunities, we are confident that we will continue to grow the business.

To accomplish our strategy we put in place a centralized global marketing organization that enables us to develop and deliver products and marketing to all four regions of the world. In addition to our global brand organization we also have regional marketing organizations who create specific marketing programs tailored to the unique needs and opportunities of each region. The global and regional teams are working very well together. We recently completed our global sales and marketing meeting and over the past several weeks we have met with most of our major customers around the world and retailer reaction to our 2009 product and marketing has been very positive.

Later today you will hear from our global brand leaders who will share with you how they are executing these strategies in 2009 and beyond to grow and expand our global business.

We feel we have the right brand, the right brand development methodology, the right strategies, the right products, and the right marketing, the right organizational structure, and the right team to continue to deliver profitable growth to our shareholders.

I would now like to introduce to you our Chief Operating Officer and Chief Financial Officer, Mr. David Hargreaves.

David Hargreaves

Today I will reaffirm our medium term financial objective and identify the key drivers of our planned revenue growth, margin improvement, and cash generation. We believe our plan for growth is fully cognizant of the challenging external environment in which we operate, but many of these challenges are not new and our track record in recent years shows that we can grow revenues, improve margins, and generate significant cash flow despite these challenges. Following this Deborah Thomas Slater and I will both ask and answer some of the questions which we know are on investors’ minds.

Firstly, our medium term financial objectives are unchanged and call for revenue growth in a range of 3 to 5% on average over time, operating and margin improvement to 15% of revenues, and while this will be the highest in Hasbro’s history, it is not uncommon for leading consumer goods companies and operating cash flow in excess of $500 million per annum. And certainly if we do grow revenues and improve margins and continue to manage inventory and receivables, then we will throw off operating cash flow in excess of $500 million per annum.

Turning to the external environment, we believe our plan for revenue growth and margin improvement is fully cognizant of the challenges for toy industries has, does, and will continue to face.

Firstly, economic recession: we do believe that we are facing a significant consumer led global recession which will last at least through mid-2009 and while history has shown that we have been relatively recession resistant, with most of our toys selling for less than $20.00 at retail, we do believe that given the severity of this recession, we will be impacted and as we indicated on our third quarter conference call, we have reduced our previous expectations for both the fourth quarter 2008 and for 2009.

In addition, there are a number of other factors that people will site as challenges for the toy industry. We understand these, but we do not believe they are prohibitive to our growth and margin improvement objectives. These include declining kid populations in mature markets, and while this may be true, we do have increasing kid populations and rapid expansion of spending power in emerging markets. Furthermore, even in mature markets we have an expanding preschool population as the baby boomer generation starts to become grandparents.

Next, kids getting older/younger and growing out of traditional toys. Well if so, we need to make exciting products for older kids such as Nerf and I-Dog and games such as Monopoly and Game of Life that all ages from 8 to 88 can enjoy. Furthermore, our relationship with EA puts our brands where the older kids are, on cell phones, iPods, gaming consoles, and the internet.

Next retail concentration may compress margins. That may be true for companies that are making generic goods that sell on price alone, but we have great brands. If major retailers want to be a leading player in toys and games they need our brands; so as long as we make innovative toys and games and through our marketing we create the excitement and the value proposition for the consumer, then we will get retail space and both the retailers and Hasbro will make good returns.

Finally, import process situation. Yes it is a challenge, but we have been undertaking cost saving initiatives to mitigate these increases. We have introduced new work practices at our factories in East Longmeadow and Waterford, Ireland. Some of our vendors have moved further inland in China where labor is less costly and there are more government incentives, and we have a major project to reduce the size and complexity of our packaging. And of course to the extent that we cannot mitigate cost increases through cost saving initiatives, then we will take selective pricing to protect our margins.

Many of these challenges have been around for a number of years, but our 2002 to 2007 track record shows we can still do well. During this period we achieved a compound annual revenue growth rate of 6%. In February 2001 we articulated a 10% short to medium term operating margin goal. We achieved this in 2003. We then increased our goal to 12%. We almost achieved that in 2006 and we significantly exceeded it in 2007 delivering an operating profit of 13.5%.

In terms of cash we generated $602 million of operating cash flow in 2007 and we have generated over $2 billion of cash in the last two years which we have used this cash wisely to create additional value for our shareholders.

So going forward the four main drivers of our revenue growth will be firstly building our core brands into globally mega brands. We first articulated this strategy in February 2001. We have been focused on it. We have reorganized our company around it. We have introduced new business processes to support it and we are having success with brands like Littlest Pet Shop, Playskool, Monopoly, and of course Transformers and there is much more to come.

Secondly, strategic licensing: In some categories core brands alone are not enough. Boys’ action is an entertainment driven category with no dominant plans. To be the leader and grow in this segment, you need a portfolio of entertainment driven brands and we have that through a combination of Transformers, G.I. Joe and the two best boys licenses, Star Wars and Marvel, both of which will continue to be major contributors to our business.

Thirdly, emerging markets: In 2007 our revenues were less than $120 million in aggregate in the emerging markets of Eastern Europe, Asia, and South America. We believer our major competitor did somewhere between $4 and $500 million in South America alone. We have fallen behind. From 2001 to 2005 we had other priorities. We had to fix our balance sheet and get our core business growing. Now we have achieved that, we can invest in spend and are doing so in China, Brazil, Russia, and the Czech Republic. We intend to play catch up very quickly.

Fourthly, licensing and entertainment: As we build global mega brands our opportunity to out license into publishing, back to school, and apparel grows. Additionally, our EA deal will yield substantial licensing income. EA had a stated objective to grow casual gaming revenues from $400 million to $1 billion over the next three years with this growth being driven by Hasbro brands.

Finally, we do participate, albeit modestly, in the box office of Hasbro based movies.

The four main drivers of our operating margin improvement will be one, core brand growth. As we build our core brands into global mega brands margins will improve as we leverage development tooling advertising cuts across higher volumes and more geographies.

Two, to increase work income from licensing and entertainment. This is highly profitable with as much as 70% dropping down to operating profits. So for an example, an incremental $100 million of licensing and entertainment income could improve Hasbro’s overall operating margin by 1 ¼-percentage points.

Thirdly, today Hasbro has significant intangible asset amortization that relates to many acquisitions that were undertaken in the second half of the nineties. In some cases the amortization period was 10 years. For example, we have been amortizing intangibles associated with our Wizards of the Coast and laddering the acquisitions at the rate of $29 million annually. By the end of 2009 these assets will be fully amortized giving a 7/10 of a percentage point improvement in operating margin.

Finally, we believe we can leverage our SG&A cuts by keeping the rate of increase in SG&A below our rate of revenue growth. We have a number of new business process improvements and systems initiatives underway to ensure we do this, including an FAP software upgrade, a global planning process, plans for a single point of invoice in Europe and greater use of shared services.

Finally, cash generation and deployment: I have already mentioned that if we achieve our revenue growth and margin improvement objective we will throw off in excess of $500 million of operating cash flow a year. That’s $2.5 billion over the next five years. Our first priority for this cash will be to invest in the growth of our business. We will incrementally spend in new product development and marketing to build our core brands such as Playskool. We will continue to invest in the emerging markets in digital and in entertainment. However, these investments require tens of millions of dollars, not hundreds of millions of dollars and it is likely that we will have significant excess cash flow after making these investments.

We are somewhat skeptical of acquisitions and subscribe to the notion that most acquisitions done over the last 10 years have proven to be dilutive for the acquiring companies’ shareholders. We will not pay down our debt. We believe some degree of leverage is good and we do not want to sit on a pile of cash, as this would dilute our return on assets. It is probable, therefore, that we will continue to return cash to our shareholders, either via higher dividends or further share repurchase.

For now, turning to our top investor questions, in the past we have always answered the top ten questions; however, in this recessionary environment we are cutting back across the board. So today we are going to only have the top five questions. In addition, I want to invite Deborah Thomas Slater, our Senior Vice President of Corporate Finance to join me. As I have taken on more responsibilities for the COO position, Deborah has eased my burden in finance and now has Tax Treasury Investor Relations and the Controllers office reporting directly to her.

Let me begin by asking Deborah the first question.

Given the current economic environment, could you describe how Hasbro is funding its working capital needs?

Deborah Thomas Slater

As David has already shared with you in his discussion about uses of cash, Hasbro generates significant cash flow from operations. Additionally, the current credit situation has not impacted Hasbro’s liquidity. We ended the third quarter with over $350 million in cash and we had available capacity, if needed, on both our securitization program and bank revolver. In addition, we are clearly through our working capital peak for this year and we will be generating substantial cash flow and be cash flow positive for the next two quarters.

While most of our cash at the end of the quarter was outside of the US we are planning to recalculate approximately $250 million before the end of the year without a significant tax cost.

Globally we expect to have over $500 million of cash on hand at year-end. In addition to the cash we have on hand and the cash we will continue to generate from operations, we have a short-term revolver facility in place which we can borrow against. Our revolver has capacity of $300 million and is supported by nine banks in our bank group.

All of our banks have been able to weather the recent credit crisis and have not had any issues in meeting our funding requests under our revolving credit facility.

At the end of the third quarter we had $223 million outstanding under this facility and our agreement does not expire until June of 2011.

In addition to our cash from operations and our revolver our securitization program allows us to monetize our receivables earlier than we would have otherwise. The program has capacity up to $300 million from October to January and $250 million for the rest of the year.

At the end of the third quarter we had approximately $173 million outstanding under this facility and we have not experienced any issues with funding under the facility.

Finally, to touch on a related topic, we do have funded define benefits pension plans. As the market has taken a downturn the investments in our plans have obviously declined in value. In order to ensure that we do not have an immediate funding requirement we assessed the value of our pension investments and compared that with the overall liability and amount of cash outflow we have for benefits under the plans on a monthly basis. Based on our assessment at the end of the third quarter we do not have an additional pension-funding requirement.

Now David, question number two.

During Hasbro’s third quarter conference call you said that early October PLS is down and that you adjusted your expectations accordingly. Can you update and expand on those comments?

David Hargreaves

October PLS was disappointing. This may prove to be a unique month as people focused on the election, the economy, and congress passing the Financial Stability Act. It means however, that we enter the all-important November/December selling season with much more uncertainty and a broader range of potential outcomes.

If in November we regain the PLS momentum that the product line delivered through September than we will remain on track to deliver both revenue and EPS growth in 2008.

If however, November’s PLS performance continues at October’s disappointing rate there is potential that retailers may pull back materially from their previously indicated levels of purchase.

Question three: could you talk more about the investments you are making in digital, emerging markets, and entertainment? Specifically, how long do you expect to be making these investments, how much are you investing, and when do you expect these investments to contribute to operating profits?

Deborah Thomas Slater

As we have been discussing all year, throughout 2008 we have been investing in growing the future of our business in the digital arena as well as emerging markets. We have also been laying the groundwork for our entertainment endeavors, investing in script writing as our Universal deal gets off the ground.

In the early part of the year these and other investments were running us about $15 to $20 million a quarter and had a more pronounced impact on our operating profit margins as revenues in the early part of the year are lower than later in the year.

While we have been investing this year in getting these new areas of our business up and running we have also begun to see revenue from many of these ventures, as well as seeing less of an impact to our operating profit margins as our overall revenues are higher.

Our digital partnership with EA is expected to be a profitable business for us in 2008 with most of the revenues for this year occurring now in the fourth quarter, while our investment in the infrastructure has been occurring all year long.

We do not expect the cost of this part of our business to grow meaningfully, but they will continue at announced stable level, as we have added the people to support this business. As the revenues begin to grow we also expect this business to carry a higher operating profit margin than our more traditional toy and game business. Additionally, we have been investing in our Wizards of the Coast Dungeons and Dragons Insider a subscription based online service. This site is now up and running and generating revenue.

In addition to investing in our digital business we have also been investing in emerging markets. As we said before, while our competitors were investing in these markets over the past year, particularly in Latin America, we were focused on rebuilding our core business.

As we have consistently achieved our operating profit target we have now been able to incorporate greater investment in emerging markets into our overall growth strategy. During this year we have added marketing support in many new markets in Latin America, Eastern and Central Europe and Asia. We have opened our own subsidiaries in Brazil, the Czech Republic, and China and recently opened an office in Russia. This summer we issued our first invoice in our new entity in Brazil and our revenues continue to grow each month.

We will continue to support these businesses as needed to achieve our growth objective. In addition, we will incur future costs to invest in forming our own businesses in other markets where we see significant opportunities. As we have done this year, we expect to make these investments and remain within our stated operating profit target.

For the markets we currently have invested in we expect those businesses overall to be contributing positively to operating profit by 2011.

In addition to growing an emerging market, we have discussed that we are using more entertainment to leverage awareness and growth of our brand.

In order to grow our entertainment group, which is overseeing script writing, our partnership with Universal, and the development of additional TV programming, we have also been investing in adding the right resources to develop this part of our business. We have invested in head counts and have a team based on the West Coast working on this business. We have also funded script to help develop the creative ideas which will support entertainment around our brand. While we have been incurring costs in this area our revenue has been limited to date. We expect to begin reaping meaningful revenues from these efforts with the first movie from our deal with Universal, which we expect to be released in 2010 or 2011.

Now for question number four: Has the recent drop in oil prices reduced share purchase costs from Chinese vendors and obviated the need for you to take further price increases?

David Hargreaves

Despite the recent drop in oil prices, the costs in China, where the vast majority of our toys are manufactured are still projected to increase for 2009 versus 2008, the number is even.

Firstly resin prices do not move in close correlation with the price of a barrel of oil. While oil increased 145% between the fourth quarter of 2007 and June 2008, and is now falling back to $60.00 a barrel, resins increased by between 20 and 25% at peak and are trending down more slowly.

Secondly, resins account for approximately ¼ of our material costs. Paper prints and board are our most significant commodity group followed by electronic components and these are all up significantly year-to-date, after our Chinese labor costs and the costs of meeting new regulatory and safety standards.

Furthermore, all of these pressures have squeezed Chinese vendor margins and you may have read that China has lost over 3,800 companies from its toy-manufacturing base during the last year. These were mainly more or less tier-three vendors, but one major manufacturer that employed several thousand people has also closed down.

So, at this point in time, even after commodity costs are starting to trend down, Chinese vendors are still playing catch-up on cost increases and many are trying to recover some margin in order to stay in business. As a result we do believe that our average costs to Chinese manufactured products in 2009 will be higher than our average costs in 2008. We intend to price our new lines to reflect these costs and we will take selective pricing on carry-over items to maintain our gross margins.

Question five: What impact will the strengthening of the dollar have on Hasbro’s financials? Secondly, do you have hedging strategies to offset the impact of that debt?

Deborah Thomas Slater

Our medium term financial plan that underpins David’s comments that we will grow revenues by 3 to 5% on average over time is based on the dollar at 138 to the euro and 193 to the British pound.

During the last two months the dollar has gained approximately 20% from 157 to 127 against the euro and from 188 to 156 against the pound. At the current rate percent, our compound annual growth rate would be approximately one percentage point lower. If the US dollar were to strengthen by a further 10%, for example 114 to the euro and 140 to the British pound, that translation would reduce our compound annual growth rate by approximately 2 ½ percentage points or in the range of ½ % to 2 ½%.

While we do not hedge against the impact of currency translation, we do hedge against the impact of currency on transactions. For example, most of our subsidiaries around the world are selling their local currencies, but buy products from China and either US or Hong Kong dollars. And through out the course of the year our overseas subsidiaries have been locking in rates for a portion of the US dollar requirements for 2009, 2010 and 2011. This will mitigate, but not eliminate, the impact of the strengthening dollar to our bottom line. Our overseas subsidiaries will therefore need to take selective pricing action to protect their margins.

Now we have a special guest to ask David the bonus question.

Christopher Knight

David and Deb, it’s Christopher Knight from Trivial Pursuit America Plays. Here is today’s bonus question. America wants to know what are your expectations for 2009?

David Hargreaves

Thank you, Chris. Brian has already given you the answer to this question. He said earlier we should be able to grow both revenues and earnings per share in 2009. The strength of our 2009 product line is such that we should grow revenues even during this recessionary period.

In the boys’ area major motion pictures based on our Transformers and G.I. Joe properties and Marvels Wolverine should drive incremental business, while we expect Star Wars and Spider-Man to remain significant contributors.

In the girls’ area we anticipate continued strong performance from our carry over brands Littlest Pet Shop, My Little Pony, FurReal Friends, and Baby Alive and we are adding Strawberry Shortcake to our girls’ portfolio.

In preschool we are adding to and rolling out globally our core Playskool lines. We anticipate growth from In the Night Gardens and we are adding Care Bears to our preschool portfolio.

In the games area we expect another solid year from this most stable part of our business which is under pinned by Evergreen brands such as Monopoly, Scrabble, Trivial Pursuit, Candy Land, Clue, the Game of Life, and Battleship.

We expect belated growth in emerging markets to exceed the corporate average as many of these economies, such as China, will still grow, albeit at a slower rate.

We expect the Transformers and G.I. Joe movies to drive increased licensing income from publishing, apparel, back to school, and party goods, and we expect higher licensing income from digital gaming. Activision will release the Transformers video game and EA will have a major movie related G.I. Joe release.

In addition, we will have our first full year of licensing income from the EA strategic alliance that put Scrabble on Facebook, Monopoly on iPhone, Yahtzee on iPod, Littlest Pet Shop in Nintendo DS, Nerf on Wii, and a host of our game titles on line at pogo.com.

Given all of this we do expect to grow revenues in 2009, although clearly we have recently reduced the amount of growth we expect in light of the difficult external environment.

We believe we will also grow earnings per share, but while we will continue to invest in the growth engines of our business we are budgeting our 2009 expenditures very tightly.

Thank you. Now Brian, Deb, John, and I will be happy to answer any other questions that you may have for us.

Brian Goldner

So, I guess from now on we’ll have to call it David and Deb’s famous questions. So with that, are there any questions?

Question-and-Answer Session

Question

Can you maybe just talk a little bit about the market opportunity in some of these emerging markets that you’re getting into? What is the size of these markets, how could revenues grow over the next few years, as an example in Latin America, China, Russia and then the second question, maybe just break down a little bit of that sales growth, the 3 to 5%, is that 1 to 2% in the US and then 8 to 105 international or how do you look at that?

Brian Goldner

First let me start with about a week ago David and I just got back from Brazil where we were presenting G.I. Joe and Transformers and also seeing retailers and understanding that market. It is interesting to note that if you look at the US business, 0 to 14 year olds make up about 60 million. If you look at Brazil there are 50 million 0 to 14 year olds. So, think about the size of that market having just moved from a distributor model to our own company down there that represents significant opportunities for growth.

As we look at the kinds of markets that we’re growing in we really have divided those markets up into three types. They are mature, they are underleveraged markets, mature underleveraged and then emerging. Clearly, if you think about those as a pyramid, the emerging markets should grow the fastest, the under leveraged markets, Mexico for example is an underleveraged market, significant opportunities for additional growth and then of course the mature markets will probably grow more slowly over time.

David, do you want to talk about the emerging?

David Hargreaves

No I think we certainly do see the emerging market opportunity as being very large. Some of the markets that are an established market, it is just that during the period of ’01, ’02, when we were margin in there balance sheet constrained we really didn’t investment spend. So I think they are established markets, maybe competitive is doing a better job in those markets today and I think we’ve got an opportunity to play catch-up very quickly.

In terms of the 3 to 5%, clearly we are expecting in some of the emerging markets, because the signs are very low based, we are looking at 30 to 40% growth over the nearing years. But of course that is from a very low base.

I think on average, yes you are right to say that our rate of growth in emerging markets will be considerably higher than growth in mature markets.

JT.

JT

Hi, I have two questions. First I wonder if you could break down your sourcing, what percent you get from China, what percent you are making here in North America and key concentrations elsewhere that is the first one. Then if you reduced your expectations for growth next year I wonder if any of that, whether that is kind of an across the board cut back, just because of conditions or whether there were certain lines, products, brands, maybe geographies that got hit harder or some that got left alone.

David Hargreaves

I think any pull back in our expectations for next year is being really just across the board due to the economic situation. Who knows, hopefully it will turn around and be a lot better, but clearly you read the same newspapers as we do. People are talking about severe recession; you start to hear about people who have got credit cards that their credit is being reduced on. Nobody is going to be going to be going out and taking home equity loans like they used to; so clearly there is not going to be as much credit around. The consumer is not going to have as much [indiscernible] capacity, who knows how many people are going to lose jobs. I mean there are certainly expectations that unemployment in the US could go up to as high as 10 million.

Given all that it is very tough, but while we have basically been recession resistant in the past, it would be sort of tough for us to sit here and say given everything that is going on we are not going to be affected by this next year, so clearly we think we will be. It is tough to exactly calculate how much that will be, but we have scaled back our expectations a little bit accordingly.

That said, we are still here with a great product line. Actually we have got a lot of great entertainment driving our business and we are telling you that we think we will grow our business in ’09 irrespective of sort of how bad it gets out there.

Brian Goldner

We still believe that we are the best in this business and we continue to believe it. If you look at the rates of decline that we have seen as people have announced their earnings over the last few days, we have all watched television. Car companies are at the bottom. We just saw apparel companies yesterday announce results that were down 15, 20%, but what we are seeing in those numbers is some interesting insight that sort of supports this idea, it reinforces this idea of recession resistance.

As you look at the apparel numbers you see that women’s apparel is down most significantly. I know there was a CEO on last night talking about just that. Women are cutting back on themselves as they try to provide the necessary items for their families, as they provide for their children. That is what we have talked about. The parents and grandparents are going to still provide. But, recognizing the severity we have to be prudent to cut back on our expectations, but still say that we will grow revenues and can grow earnings in 2009 as well.

If you look at our line up, if you look at the kind of holistic brand experiences our team is creating and you are going to hear about, it is phenomenal. We have an excellent team of marketers and product developers. We are really starting to tap into all of these new experiences that consumers can have with our brands and again, we feel that we can be very competitive in this market place.

Do you want to take the sourcing question JT asked?

David Hargreaves

Yes, in terms of our sources all, virtually all of our toys for both [indiscernible] around the world, whether it is Europe or it is Latin America or whether it is in the US, come out of China. Our games, our traditional board games, are made to Europe and Waterford, Ireland factories and for the US in a factory up in East Longmeadow, Massachusetts.

Some of the more complicated electronic games, the more turreted games with a lot of plastic also come from Europe, so I think that probably our split is probably we are 80 to 85% of our products come out of China and Hong Kong.

Question

You commented on recent sales trends in the US. I wondered if you could give us a perspective on what’s going on in your international markets and what the appetite might be for toys in both US and International retailers, have you experienced any significant cancellations? Finally what do you think about Universal? Will it be 2010, 2011, what title or titles do you think might be coming out first?

Brian Goldner

Let’s start at the beginning. We have seen some reasonably good numbers over the last few days in the US in PLS. You know a few days does not a season make, but again if, as David said, if the numbers are more like October then it’s one thing; if the numbers sort of trend right and continue to go where we’ve seen them more recently, that’s another thing.

I need to give you a little world tour, because I think as you look around the world there are some differences that we are seeing in markets. So, as we look internationally clearly Northern Europe, Germany, some northern European countries have been more challenged these days in terms of sales. But if you look at emerging Europe, we were talking about emerging markets, Poland and Czech Republic, significant growth in percentage terms, albeit off of a smaller base.

As you go to Southern Europe and France and Spain we are still seeing good growth rates. Consumers are still spending and our toys and games are performing well.

If you look at Latin America we talked about our gaining traction in Brazil and Chile and around the region there are great growth rates. I think Mexico is starting to catch a little bit of what we have seen here in the US, albeit some great growth we have seen out of Mexico and under leveraged markets for us and a significant opportunity for growth.

As we go to Asia, great growth rates. The only country that we are seeing within Asia where there is a bit of a pause, and it is more about consumer sentiment and retailer sentiment than it is about absolute sell through, is Australia. But I think people are expecting to catch what’s been going on around the world and they are sort of waiting for that shoe to drop. But, if you really look at the PLS data it has been holding up and our teams have been doing a very good job.

David Hargreaves

The UK is probably the most akin to the US experience at this moment.

Brian Goldner

Universal, we are busy working, Bennett [Scherer] is here with us today. We are busy working on the development with great creative stewards, filmmakers, writers. What is so heartening for all of us is when you go into a meeting with these filmmakers, they have all grown up on these brands. They know these brands. Now their experiences of these brands may be different depending on where they grew up, but they have all experienced our brands. Our brands have these great global templates.

We are working on a number of different projects. I am not going to comment yet on whether it is 2010 or 2011, but suffice it to say we believe that it will be in 2010 or 11. How about that?

Question

Hi, just a couple of questions I wanted to clarify. First, on the FX is it possible to just kind of give us an aggregate figure so that if currency were to stay where it is now through 2009 what would be the EPS headwind ’09 versus ’08? Then also, say if it were to move 10% on average kind of the increment? That would be my first question.

David Hargreaves

Well we certainly tried to do that for the three-year plan. What we did say is that given the dollars strengthening roughly 20% over the last couple of months rates are currently, the European currencies, are below where when we first put our plan together, we underpinned to see the 5 to 10% growth. When we said that if rates stay where they are, our 3 t0 5% on average over time could be impacted by one percentage point.

If rates go by another, if the US dollar strengthens or International rates deteriorate by a further 10%, you are talking something like $1 and 14 to the euro. If you get to that kind of level than our growth expectations would have to be revised down by 2.5 percentage points. So if the dollar strengthens, so like $1.14 against the euro and $1.40 against the UK pound, then my guidance of 3 to 5% growth on average over time becomes guidance of 0.5 to 2.5 on average over time. It is still real growth, but obviously you get the translation impact.

If you are talking about what is the translation impact on the bottom line, that is never quiet that simple, but globally [brushed] if you go to a billion dollars business overseas and you are making $100 million overseas, which isn’t too far from sort of what we’re doing, obviously a 10% improvement in the dollar means that that is now translated to $900 million of revenues and $90 million of operating profit. Over and above that, if we said we get the translation impact where our [Phillips] around the world but you are selling in local currencies and buying in Hong Kong and the US.

We have done a lot of hedging, I think, as Deborah said. We’re pretty well covered out for ’09 and we have done some hedging out into ’09 and ’11, which will certainly mitigate the impact of the strengthening US and therefore Hong Kong dollar against European currencies.

To the extent that it doesn’t fully offset it, then again we are going to have to take some pricing in these international markets to make sure we maintain margin. So if you would, the guidance is, other than transnational impact, we will either have done enough hedging to mitigate it or we will take pricing to maintain margins.

Question

[Indiscernible] creation. Can you say a little bit more about why the decision to do that now and then why no tax impact, number one. Then second just in thinking about the EPS you guys are looking for growth next year. Is there any benefit just from their reduced amortization or is that really more of a 2010?

David Hargreaves

I will answer the second part and then I will let Deborah answer the first part of that question. She gets the difficult question.

In terms of the amortization, our Wizards of the Coast acquisition happened at the end of the third quarter of 1999 and we get one quarter of that, which is the coast amortization, which falls off in ’09. I said about $29 million between Wizards and Laramie which is a Super Soaker company we acquired. 23 of that is Wizards, so about ¼ of that 23 will impact ’09 and then the other three quarters incrementally impacted in 2010.

Deborah Thomas Slater

As far as the repatriation goes, we have been planning to bring the approximately $250 million back in the later part of this year, so that is just coming into place now.

With respect to the tax costs, it is just part of the plans that we had put in place originally with the Americans Jobs Creation Act years ago and this is the culmination of those plans.

Brian Goldner

David?

David

First to follow up on your comment now about the repatriation and you said this is the culmination. What happens in 2009, 2010 if you try to repatriate? Do you still have the same favorable tax impact or having culminated it we no longer have that?

My second question is in light of the recession, in light of the PLS situation, have you increased your reserve to lock down money for ’08 and will you have a higher reserve to lock down money in ’09?

Deborah Thomas Slater

Let me answer the first part of that, on the tax repatriation. As we have been disclosing in our 10-Qs and our 10-K last year, we have been providing a bit of extra tax expense in anticipation of potentially repatriating some of our international earnings in the future. So to the extent we bring those earnings back those will not have additional tax cost to the company. To the extent we decide to bring more than that back, if we need to, then those would have additional tax costs, but we are not anticipating that at this time.

David

Are you saying after the $250 million comes back this year anything over and above that is not covered by the taxes that you have already shown on the income statement to the shareholders?

Deborah Thomas Slater

No, I am saying that some of that has been covered in tax expense that we have already shown, but some of it has not and it depends on how much we decide to take back in the future..

David

But, that is my question. What is the quantity that is covered beyond the$250 million?

Deborah Thomas Slater

I don’t have that answer off the top of my head. I think that we have provided for a certain level and we have also provided to keep a certain level of international earnings invested in our international [interposing].

David Hargreaves

One of the things we have been talking about is the growth of the emerging markets. We need a certain amount of overseas earnings, whether they come from Europe or whether they come from other parts of the world. We need to leave that permanently overseas to reinvest in the growth of the business. So those monies we are going to have actually come back to the US.

Obviously to the extent that we made monies in lower tax jurisdictions overseas and repatriate it those are tax cuts. Every year we look to work out how much that we think we are going to repatriate in any given year and we establish a tax rate which is consistent with that level of repatriation. But as I said, quite a significant amount of money will stay overseas on a permanent basis as we invest and grow, particularly in emerging markets.

Question

[Indiscernible]

David Hargreaves

Well I mean obviously on a mark down money our product line is performing very well at the moment and there are things, this time last year we were looking at things like past [role with the tower] which we had to sort of specifically set mark down provisions on the floor. There is nothing sort of that significant at the moment, but we are looking into saying no we have got a big mark down issue there.

Each year, obviously when we get to the end of the year and we are closing our books, we look to see what inventory is out there at retailers and what we might have to take a markdown on, and obviously we work through that carefully. We make the appropriate provision and it gets ordered to make sure that it’s the appropriate provision, so we will be fine at the end of the year.

Question

Can you talk a little bit about how you reinvent these brands? In other words walk me through either Transformers or something else that you’re working on. Say this is sort of what it was doing before, here’s how we can leverage it over digital entertainment, all the things that you are doing and here is the improvement afterwards; sort of, however you measure it; an ROI on that sort of thing or an acceleration in growth or whatever.

Brian Goldner

I will start and then I will let John comment on this as well. If you go back to 2001 and you look at our gross business, we were doing around $60 million and at that time My Little Pony, Littlest Pet Shop, Baby Alive, were all brand names that the company owned, but none of those were on the market. So it was a process of going back and looking at the heritage of those brands and what had worked on those brands, but also recognizing the contemporary situation that we would re-launch those brands into.

So the team has done a phenomenal job, you will hear a little more about it later, in re-launching and re-imagining and re-thinking about those brands and then launching those brands. My Little Pony was first and Littlest Pet Shop and now Baby Alive. What is so interesting, of course, about those brands is how well they often go globally. Those brands have a historical template globally and then we can grow those brands over time. As we think about the different forms and formats of entertainment and leisure consumers are expecting from brands like that.

My Little Pony we have done a host of DVDs, we have done a live stage show. For Littlest Pet Shop it is an older girl, again you will hear a little bit more about that and so for them the height of entertainment is digital gaming. Just this past few works Yeah has launched three Nintendo DS titles and a Wii title and they are already beginning to perform very well, because again, for that audience understanding the consumer insights about that audience is critical.

The baby doll business is not only significant in the US, but as you look at emerging markets baby dolls, especially in Latin America, are significant categories of growth. These are their leading categories for the current consumption, so as we catch up brands like Baby Alive have significant meaning. Of course not every brand needs a major motion picture, but every brand is regularly re-imagined, and as we talk about the Way to Play it is that process; insights through re-imagination, through execution, and then using metrics to understand the progress that we’re making.

John, do you want to add something?

John Frascotti

Yes, you are going to see a lot today about how we have reinvented our brands. You mentioned our boys’ brands and two you are going to hear about the Transformers and G.I. Joe. Transformers are a brand that has been around for a long time, but when the group really looked at what it was, it had basically been sort of robots that transformed into cars and vice versa. Through a creative process that we under took we really looked at more than that and we created a new mantra for the brand called “more than meets the eye”. What that new focus allowed us to do was really expand into a world of entertainment through a movie which obviously came out last year and now a new movie next year where this “more than meets the eye” theme informed a whole range of products and creative process and story line that weaves it way through the movie.

With G.I. Joe you are going to see that G.I. Joe has actually been, originally in the 1960’s it was a 12” army man, in the 80’s it was reintroduced in the comic books as Joe versus Cobra and now with the movie that we have coming up next year it will be reinvented again based on that 80’s lore.

What it allows us to do is really reintroduce these brands to whole new generations of consumers who maybe weren’t around the 60’s or even weren’t around in the 90’s. The process we go through, as Brian mentioned, is Way to Play and in many cases we look back at the heritage of the brand and that heritage informs the future.

In the case of some of our board games, like Monopoly and Clue and Game of Life, we look back at the board games and what’s most emotionally resonant about those brands with consumers, sort of our age, and then we look at sort of expanding on that, but making contemporary for today’s consumer. With Monopoly, for example, we have taken something and we have introduced a concept called electronic banking, which for our children is as natural for us as it was putting money in our savings account when we grew up. We allowed that, sort of, contemporary cultural aspect to inform a whole new way of playing the game.

So reinventing, re-imagining, reigniting sometimes involves looking back in order to look forward, but in all cases it is about keeping it relevant for today’s youth. So when you see G.I. Joe, what we are doing with that, it is actually sort of based on that 80’s lore, but made really contemporary and in may cases future looking for today’s generation.

Question

You guys have brought on a lot of talent recently, especially on the entertainment side. Can you talk about how you think about compensation and retaining talent?

Brian Goldner

Well we think people are fairly compensated. We obviously tie a lot of people’s performance to the performance of the company and, again, I think that we are all appropriately incentivized based on the success of the company. It is not just about base salaries. Certainly we have stock programs and other programs that we look for and we talk about and I think people here feel like they are part of this process and really part of this company and there is a lot of excitement about joining Hasbro.

I think people are seeing what we’re doing with these brands and they thought Transformers was really just the beginning, but if you look back in the history of this company, and you go back to the 80’s and Steven [Hassenfog] and the management team then, they transformed this company based on entertainment and launched many brands in animation for the first time. So people have seen that, they are starting to see what we are doing here. They are very excited about being on board and we pay competitive rates and then of course we incentivize people to be owners in this company just as our shareholders are.

Mike?

Mike

Thanks, I have two questions. One, on getting back to international sales and currency, for each international sale what percent of cost of goods sold and then what percent of operating expenses are denominated in that local currency and what percent are denominated in US currency?

David Hargreaves

Our gross margin is usually about 58 to 73, our cost of goods sale is 42% and that is not distinctly different between overseas and Europe. So once you get above cost of goods sold, then most expenses are local in terms of local marketing sales, local sales, local SG&A, and advertising would be primarily local. Below cost of goods sold there are some local expenses in terms of receiving into the receiving warehouse, but most of those costs within the sort of 42% of cost of goods sold would be dollar denominated, or Hong Kong dollar denominated.

Mike

{Indiscernible} decline in sales due to currency change and you had a 10% corresponding decrease in operating profit.

David Hargreaves

On translation, yes, not on transactions. Transactions I said that what happens in transactions is a [indiscernible] hedge for most of those and to the extent that we haven’t we have to take some price increases. For example go back to my model, when I spoke to that translation, $1 billion of sales and $100 million of operating profit, dollar includes 10%, you now have $900 million of sales, and $90 million in operating profit.

Going to your point, on that billion dollars of revenue there is probably $420 million, let’s call it $400 million, of dollar denominated costs and if the dollar has increased by 10% that cost would go up between $400 to $440 which would be a $40 million on cost the company and if you did nothing about it, it would be a $40 million profit erosion.

What we said, and certainly in the nearer term as you look to ’09, we have hedged the majority portion of our requirements to US dollars, so we sold forward the euros and sterling and we bought US dollars. We’ve done certainly the major part of our requirements for ’09 and we are probably close to the major part for ’10 and ’11 as well. So, in the example I just said a $40 million cost increase. Let’s say we’ve hedged 75% of that $30 million the other $10 million I’ve said we will have to go out and take pricing to protect margins.

I think the message is translation we can’t do anything about, transactions through a combination of hedging and the pricing that we will have to take internationally our objective is clearly to protect margins.

Now obviously taking pricing internationally is going to be difficult. Some of the economy is like the UK, it is [indiscernible] the US at the moment and going to our retail [indiscernible] take pricing, we are going to get some push back, but certainly our objective at this point in time is to offset that.

Question

I have a couple of questions. Given the environment and obviously, David, you talked about some of the vendor consolidation out there on how that’s impacting the whole industry. How do you see this playing out not only in ’09, but maybe a multi-year from your customer/competitor consolidation? Can you kind of give us a little color on how you see that filtering through?

Then again, Brian, I think also you alluded to some of the additional new products. What is the mix between totally new properties to the Hasbro portfolio and say Volt properties that are brought out and reinvigorated?

David Hargreaves

The customer consolidation clearly there has been an ongoing trend in the United States where Walmart, Target, and Toys R Us are taking an increasing part of the overall market share of the toy industry. I suspect that that will continue as we go forward.

Overseas most markets are not as concentrated as we are in the US. The UK probably comes fairly close, but when you go to markets like France and Germany you have many, many, many more customers and some big ones like [Carpol] in France and Metro in Germany and clearly textiles and Toys R Us is big everywhere, but it is not as consolidated. I think we will continue to see consolidation and increasing concentration at retail around the globe and the rate of increased concentration around the globe will probably be a little bit faster than it is in the US where the process is that much more done.

Brian Goldner

In terms of products historically you have to sort of look at the toy and game business a bit differently and again go back a ways. Historically the toy business has been a series of brands and we have tried to focus more on those brands and then the reinvention of those brands underneath where maybe 60 or 70% of the SKUs might change in any given year, but recognize that the umbrella, the brand, is still resonant and still there in the marketplace.

I think we have come a long way in the toy industry, and certainly here at Hasbro, to believe that brands can be forever. They are no longer like the old toy industry where people thought a brand would have its run for a year or two and then need it to necessarily go away or be rested. So you are seeing things, the reinvention of those brands, the ability to keep catapulting those brands forward.

On the games business historically it has been sort of the inverse. About 30% of reinvention and then about 70% of carry over and both are changing over time. What we are seeing is the ability to drive more toy type SKUs over more geography and to amortize our effort as we go into these emerging markets. So, it is great that we are going to get more impact for the toy reinvention that we are going through.

Similarly, in games we are actually expanding the amount of reinvention we’re doing in games. You have seen a rash of new games from us. You are going to hear more about brands like Pictureka and Partini and other reinventions of our games brands and more new SKUs within those brands; so a brand new Clue, a brand new Monopoly and along those lines.

Again, for similar reasons, the games business is also a great global business. As we go into these new markets, as we make more indigenous products, or adaptations, for local markets there is nothing better than seeing Monopoly selling well in China. We will do both of those things, but again this is a careful balancing act as we go forward and we are really looking at the consumer insights behind that reinvention to sort of help us drive the amount of reinvention we need per brand.

Question

Lastly, on the entertainment side Brian, how do you see your partnerships with the studios? Do you see going deeper with fewer or looking to further spread those partnerships among more studios?

Brian Goldner

Right now we really like the partners we have. We feel very strongly about our Universal relationships. We have gotten off to a great start. It’s really heartening to see what the creative stewards in the marketplace as they look at our brands; again we are working on the development of those nine titles that are associated with our Universal deal. Of course Transformers Revenge of the Fallen is expected for next summer. G.I. Joe the first the Lives of Cobra is expected.

We did all around the world on G.I. Joe and Transformers; we were in Prague earlier this year, like I said we were in Brazil earlier this month and we were in Mexico, the team has been to China. It is great to see, again, the reaction to Transformers, which you would expect by now, but also to G.I. Joe based on this 80’s story that had been a brand that was around the world back in the 80’s. So G.I. Joe versus Cobra has a history, a template, so we will continue to develop that.

We like the relationships we have. We feel that with the number of franchises that we have that are part of those studio deals that we are in a good position.

Again, our re-imagination process doesn’t end with motion pictures so some brands we think are really right for motion picture business, other brands will be reinvented via television. Some brands are going to be reinvented in the digital space because that is most consistent with what those consumers and those audiences would expect.

So, we really look at the consumer experience and understand what the forms or formats of play those consumers would most expect and would desire and what they are doing with competitive brands and then we look at, think about, how to reimagine, reinvent those brands for those spaces. I think what you will see is a great variety and an in depth understanding of what the consumers do and that drives our decisions related to, broadly, those immersive experiences otherwise known as entertainment.

David Hargreaves

Can I just step back to retailer consolidation as well, because when I get asked that question people generally try to do it in sort of a negative light. Well retailer consolidation is going to be a problem for you. It is not. We actually have a great relationship with all of our major retailers and to the extent that Walmart, Target, Toys R Us, [Carpol], Tesco get a good share of the pie as we go forward, that is not an issue for us.

In fact as we build in the emerging markets, you know Tesco is very prominent in Eastern Europe, so we are leveraging our relationship with Tesco in the UK to get us a lot of distribution and a quick start in some of these emerging markets. [Carpol] which was always strong within France and had a great relationship, is obviously strong in South America and we are leveraging that relationship and of course Walmart in China and some of the other markets; Toys R Us in Japan for example.

We actually see retailer concentration not as a negative, but as a positive especially as emerging retailers move out into emerging markets that we are trying to get growth in.

Brian Goldner

Let me add to that. We have great teams at Hasbro. They work on collaborative forecasting and planning and what’s good for us is that as a new retailer that we know how to do business with goes into a new territory we are able to apply those practices. Most notably, as we have seen growth from Walmart and many different forms and formats in Mexico our team, between the teams doing collaborative forecasting and planning and those teams are able to actually learn a lot from each other. They learn the indigenous differences within those markets, but then also to learn some of those best practices those retailers are looking for as they grow globally. So, I think it works well.

Question

With respect to the Marvel licensing relationship that you have it would appear that with the success of the Iron Man property this year probably exceeding your original expectations for, I am wondering as you look at that with a sequel coming in 2010 what potential you see there for that to become a significant brand for you.

Secondly, what kind of tail might you expect in 2009 given the plans for animation to be there to support it? Then looking broader at the Marvel relationship, I think a lot of people think of that as being kind of Spider-Man centric with another strong character potentially emerging there, has that changed the way you think of the potential with that relationship that you have with Marvel?

John Frascotti

That is a good question. Actually from the very beginning both David and I, as well as our team have always understood the value of the 5,000 characters in the Marvel library and that is why we did the deal., It wasn’t just about Spider-Man, it was about all of these characters and their re-imagination process and their motion picture process and television process that they as well are going to.

We are very well aligned companies and we feel very strongly that their management team is doing all the right things with those brands and we like the plans that they have out there. You may have heard about Avengers coming in 2011, Captain America the first Avenger, followed by the Avengers movie. The Iron Man sequel is a terrific opportunity. We have seen a number of things from them that, again, just continues to reinforce our original belief in the strength of their brands, this partnership, and the strategic operation, the strategic license that we have with them and the fact that these companies are very aligned. We are very enthusiastic about what they are doing.

We think there are a number of new franchises that can be introduced over the time and then of course there is also Spider-Man, which again is more of a known quantity, but as these brands come into the market, like an Iron Man, they too now become known quantities both to us as well as retailers around the world and it gives us this great opportunity to continue to now reinvent that business, to see the imaginations of the creative stewards and the filmmakers and where they are going with those stories and build great, big product lines.

Question

Hi, given that it has been such a tumultuous environment, on the PLS data it is interesting to know what the trends are. On the earnings call they were down a little bit in October. Did it get worse in the second half of October and then picked up in November to back to year-over-year, I mean any more color you could give on that would be a little helpful.

David Hargreaves

Sure, as we said, through the first nine months we had seen up PLS single digits and then it actually was improving through the sort of September period as we kind of came into the holiday season. Almost week-on-week, as we went through October it got worse, sort of through the week before the election and through the election week, that was probably the worse two weeks in consumer PLS. As we got through the election it took a day or two.

As we look at this past weekend, Friday, Saturday, Sunday and we are hearing some early numbers about Monday, again you have the flip on Monday because of Veterans Day. A year ago it was the other way. We are seeing some better signs, but as I said, four days does not a season make. I think that is encouraging, but again, let’s not go with four days data points and take it out the window.

I feel good about where Hasbro is positioned. We have a very innovative, very competitive line. Whatever this industry will do we will do as well as anyone if not better and we fundamentally believe that. We have seen with this industry if you take the rates of sales through that period they have not been as appreciably down as some other categories. We know that. Consumer durables have been down significantly. If you look across the board of all those different categories we’ve heard, we are starting to finally get some benchmarks. At first we didn’t have a good sense for what other companies were doing during this period; it was a little bit foggy.

As people are starting to talk about their sales I this period we are starting to get a good sense for benchmarks and reaffirm this idea that the toy industry is recession resistant, but recognize that we have never seen a situation quite like this.

We don’t want to over promise, but we believe that, again, that we Hasbro are exceedingly well positioned.

Question

I am not going to extrapolate the last couple days of November, but were they actually up year-over-year?

David Hargreaves

A day or two were up year-over-year yes.

Brian Goldner

Okay we are going to wrap this part. We are going to sign off on the webcast. Thank you very much.

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Source: Hasbro, Inc. Fall 2008 Analyst Event Transcript
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