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Hasbro (NASDAQ:HAS)

Q4 2012 Earnings Call

February 07, 2013 5:00 pm ET

Executives

Debbie Hancock

Brian D. Goldner - Chief Executive Officer, President, Director and Member of Executive Committee

Deborah M. Thomas - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

David D. R. Hargreaves - Executive Vice President of Corporate Strategy and Business Development

Analysts

Sean P. McGowan - Needham & Company, LLC, Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

Jaime M. Katz - Morningstar Inc., Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Gerrick L. Johnson - BMO Capital Markets U.S.

Operator

Good evening, and welcome to the Hasbro Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

And at this time, I'd like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead.

Debbie Hancock

Thank you, and good afternoon, everyone. Our fourth quarter and full year earnings release was issued this afternoon and is available on our website. Additionally, also available on our website are presentation slides containing information covered in today's earnings release and call. The press release and presentation include information regarding non-GAAP financial measures included in today's call. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share.

This afternoon, Brian Goldner, Hasbro's President and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer, will review our financial results and discuss important factors impacting our performance. Following their statements, David Hargreaves, Hasbro's Executive Vice President of Corporate Strategy and Business Development, will join Brian and Deb to field your questions.

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

There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures. You should review such factors together with any forward-looking statements made on today's call. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call.

Now I would like to introduce Brian Goldner. Brian?

Brian D. Goldner

Thank you, Debbie. Good afternoon, everyone, and thank you for joining us today. In 2012, Hasbro made significant strides toward accomplishing many objectives we set and communicated for the company. Specifically, we grew 2012 EPS to $2.81 versus $2.74 per share in 2011, including a $0.10 negative impact of foreign exchange. This excludes restructuring charges in both years and a tax benefit in 2011.

We returned the U.S. and Canada segment to historical operating profit margins despite lower revenues in the year. In turn, overall operating profit margins for Hasbro increased to 14.7% before charges.

We leveraged our international investments, growing our emerging markets revenue 16%. These are markets in which we have significantly invested over the past several years. Importantly, we delivered better than breakeven profit for all major emerging markets outside of China, 1 year ahead of plan.

We grew the Games category against an objective of stabilization and improved operating profit margins in the category. We grew revenue in our Girls category, driven by Furby and My Little Pony's brand innovation and immersive experiences.

And although we did not originally state this goal, we grew Entertainment and Licensing segment revenue and operating profit in a year following a major Transformers motion picture.

However, 2012 revenues declined $197 million. This reflects a negative $99 million impact from foreign exchange and a more than $100 million reduction in retail inventories.

As we outlined for you earlier this year, we employed a proven approach to rebuild our U.S. business much the way we have driven our international markets. It involves shipping inventory later in the year to be more in line with consumer demand, supported by increases in marketing spending.

Unfortunately, this holiday season, we saw a rapidly changing, more challenging retail environment. Lower point-of-sale trends from Thanksgiving to just before Christmas did not enable us to realize year-end shipments as strong as we had anticipated. There was a concern at retail about purchasing too much inventory later in the year given weak point-of-sale trends leading up to Christmas.

Point-of-sale did improve significantly at year end, but that demand did not result in additional shipments for Hasbro. Importantly, we ended the year with lower retail inventory in the U.S., as well as lower inventory on hand at Hasbro. This puts us in a strong position to begin 2013.

We recognize our industry is changing. In fact, to address these changes, we've been investing over the past several years to build our capabilities supporting our brands and our brand blueprint. Tomorrow at our Toy Fair event, we will walk you through the evolution of the blueprint and speak to the next stage, the Brand Blueprint 2.0.

As we continue to accelerate the transformation of our company while operating in markets with new consumer and retail dynamics, we have outlined a company-wide cost-savings initiative designed to deliver $100 million in annual savings by 2015.

Our 2012 fourth quarter results include a pretax charge of $36 million related to the initial implementation of this program, and we anticipate $20 million to $30 million in additional charges in 2013. We expect to realize 2013 net savings of $15 million to $25 million, with the remaining of the savings being fully recognized by 2015 as all aspects of the plan are implemented.

We are reviewing the organization from top to bottom to identify cost-saving opportunities. To date, these include an approximate 10% reduction in workforce, including an early retirement offering; facility consolidation, the continuation of our item and SKU count reduction programs and the implementation of process improvements.

Over the past several years, we've invested in strategic growth opportunities for Hasbro. We've added new brand-building capabilities while eliminating many historical SKU-making behaviors. We will continue investing strategically for the long term, where we anticipate strong returns on that investment. But we are accelerating our cost-saving efforts to reflect the market environment and our strategic decision to focus on fewer, more significant initiatives and working to ensure that in any environment we continue to enhance our total shareholder returns.

Now let's take a look at 2012. We had a number of successful brand initiatives for Hasbro. We had a record year with our Marvel partnership supporting 2 great films, Marvel's The Avengers and The Amazing Spider-Man, building on the tremendous brand innovation and storytelling for Marvel combined with the global scope and strong consumer-oriented approach of Disney. We are very excited about growing our partnership with Disney, and we'll spend some time tomorrow during our presentation outlining some of our 2 companies' global brand-building opportunities.

Also last year, Furby launched in English-speaking markets and delivered a great year. By November, the U.K. was entirely out of stock. Furby was supported by a strong digital marketing campaign, and on Christmas Day, the Furby app was the sixth most downloaded free app in the App Store.

In 2013, Furby goes global, and we will continue to add to the Furby line with new innovative brand experiences.

With the support of global television, product innovation, inventive licensing, a new digital app game, online experiences and a strong retail execution, My Little Pony continue to post very strong double-digit growth year-over-year. In 2013, we have exciting plans for the brand, which we'll begin to share with you tomorrow.

Our Games category grew versus our objective of stabilization. Magic: The Gathering had another tremendous year, growing more than 30% and marking the brand's fourth consecutive year of 25% growth or greater.

We also had a number of games initiatives that performed well, including Twister Dance, MONOPOLY Millionaire and Battleship. Additionally, we launched a very successful new action-battling gaming initiative across several brands, including TRANSFORMERS BOT SHOTS, Star Wars Fighter Pods, and despite launching late in the year, a strong contribution from our new partnership with Rovio Entertainment and Lucasfilm for ANGRY BIRDS STAR WARS.

We made a great deal of progress within Games this year as we continue to evolve our approach to gaming to be more in line with how consumers are playing games today. We continue to innovate gaming experiences based on consumer insights and offering gameplay, which cannot be replicated online or with an app.

Importantly, we improved profitability in our Gaming business to its highest level in several years. We reduced inventory in the U.S. retail channel and grew the Games category overall, backed by a number of these new initiatives.

Despite these successful initiatives across categories, we did face revenue headwinds in 2012 relative to the $916 million in Transformers and Beyblade sales in 2011 and a challenging retail environment in the U.S. and a number of Western European countries.

In respect to Transformers, 2012 revenue was down in line with other post-movie year performances for Boys brands. However, the brand grew 10% versus 2010, our last non-movie year, with support from global television and new brand initiatives.

Looking ahead to 2013, we are excited about the complete reinvention of Transformers across platforms, including a TV series distributed globally, online and mobile games, licensed products and a full line of new toys based on the all-new Transformers Beast Hunters.

In 2014, we anticipate the next installment of the Transformers movie franchise with an all-new cast and characters in partnership with Paramount Pictures and Michael Bay.

For Beyblade, 2012 revenues exceeded our expectations, declining less than we had planned. Beyblade remains a very popular brand globally and in the U.S., Beyblade ranked as one of our top selling items based on point-of-sale data for the year.

In 2013, we have new brand initiatives integrated with all-new animation from our partners at d-rights, Nelvana and Tomy Takara.

Looking more closely at our performance by region, our U.S. business declined, reflecting retail inventory reductions, tough comparison and a challenging market. But we generated greater earnings power from sales, increasing our operating profit margin to 15.1% versus 12.4% in 2011. In 2012, we changed our approach to the market and how we partnered with retailers. This allowed us to grow profitably and importantly positions us for profitable growth in future years.

At the beginning of 2012, we tasked the new U.S. team with returning the segment to historical operating profit margins and through a disciplined focus on quality execution and strong inventory management they were successful in 1 short year.

Internationally, revenues grew 1% absent foreign exchange, representing the largest revenue year internationally in company history. Including the impact of foreign exchange, revenues declined 4%. Latin America grew 8%, contributing to our emerging market growth of 16%. Additionally, we achieved profitability in every major emerging market except China, including Brazil, Russia and Columbia, a year ahead of plan.

I've talked today and over the past few years about the importance of supporting brands with rich digital and media content. As a result of the investments we've made in recent years, our television, film, digital and licensing strategy is firmly in place and working.

If you look at our brand performances and those across the industry, brands with a comprehensive strategy across these platforms are connecting with consumers and outperforming those operating outside of this model.

Since announcing our entry into television and television programming several years ago, we've made significant progress. Our shows are now in more than 170 countries worldwide. And in 2012, these programs drove approximately $150 million in incremental merchandising revenue.

Our television presence is also helping to build our brands in many emerging market countries. In the U.S., The Hub is now available in 72 million homes versus 56 million at launch. Advertising has grown significantly. Ratings are growing and have posted 5 consecutive quarters of year-over-year growth in Total Day. And in 2012, The Hub was the fastest-growing kid cable network.

While we continue to record a small annual loss after amortization in this investment, the network is cash flow positive and our overall global television strategy is on track and delivering profitable incremental revenues for Hasbro.

In 2013, we have another year with an extremely strong television slate, supported by Hasbro's and our partners' programming airing around the world. We're also supporting a number of major motion pictures in the coming year, providing additional global opportunities for Hasbro and partner's brands.

There are a number of film slated for 2013 and beyond from Hasbro and our partners. We're thrilled that our partner, Marvel, and its studio licensees, have a number of films planned, including Iron Man 3; The Wolverine; Thor: The Dark World; Captain America: The Winter Soldier; The Amazing Spider-Man 2; an Avenger sequel, as well as the launch of a new brand, Guardians of The Galaxy.

Lucasfilm is now developing new Star Wars movies, including Star Wars 7, planned for 2015 with J.J. Abrams directing. Marvel's character franchises, including Avengers and Spider-Man, along with Disney's new acquisition of Star Wars, our major franchise brands for Hasbro and our partnership with Disney is enabling us to develop these brands to be more global than ever before.

Today and in the future, consumers and retailers are increasingly looking for compelling innovation integrated with a multitude of digital experiences. At Hasbro, we work with tremendous brands and experienced global team developing innovative brand initiatives, including a strong multiyear slate of television, films and immersive digital engagements, which we believe positions us to deliver long-term profitable growth and enhance total shareholder returns.

Tomorrow, we'll speak further about the evolution of our brand blueprint at our Toy Fair presentation, as well as provide you with the first look at much of our 2013 product line.

Now I would like to turn the call over to Deb. Deb?

Deborah M. Thomas

Thank you, Brian. As Brian stated, we accomplished many of the objectives we set for the company in 2012. Through solid execution and good fiscal discipline, we increased our company's underlying operating profit margins fueled by gains in the U.S. and Canada segment margin. We drove further growth in the emerging markets and achieved our profitability target a year ahead of plan. Posting 16% growth, emerging markets now represent more than 10% of our total revenue, and our major markets, such as Brazil and Russia, are profitable.

We generated operating cash flow above our $500 million annual target, which continues to provide us with capital to both strategically deploy it back into our business and to return to our shareholders.

Today, we announced an 11% increase in our quarterly dividend.

Finally, we began the implementation of a cost-savings initiative designed to generate $100 million in annual savings by 2015. This program is wide-reaching and strategic in nature, designed not only to lower our cost basis but to drive higher levels of efficiency and effectiveness from our global teams. We have great confidence in our people and our strategy, and we believe in our ability as a team to accomplish the goals we set for Hasbro.

Turning to our 2012 results, full year net revenues were $4.09 billion compared to $4.29 billion in 2011. Excluding a $98.5 million negative impact from foreign exchange, revenues declined 2% to $4.19 billion.

Operating profit for the year as reported was $551.8 million compared to operating profit of $594 million in 2011. 2012 operating profit includes $47.2 million in restructuring charges. 2011 operating profit includes $14.4 million related to costs associated with establishing our Gaming Center of Excellence.

Excluding these charges in both years, 2012 operating profit was $599 million or 14.7% of revenues compared to $608.4 million or 14.2% of revenues last year.

Net earnings as reported for 2012 were $336 million or $2.55 per share compared with $385.4 million or $2.82 per share in 2011. Absent charges and a favorable tax benefit in 2011, 2012 EPS was $2.81 per share versus $2.74 per share in 2011. Additionally, 2012 EPS includes a negative $0.10 per share impact from foreign exchange.

Cash grew year-over-year to $849.7 million as we generated $535 million of operating cash flow. As I mentioned, we remain in a strong cash position to fund our business and to continue returning cash to shareholders.

Looking at our full year 2012 results by segment. The U.S. and Canada segment net revenues were $2.12 billion, down 6% versus $2.25 billion last year. Growth in the Girls and Games categories was more than offset by declines in the Boys and Preschool categories.

The U.S. and Canada segment reported 15% operating profit growth to $319.1 million or 15.1% of revenues compared to $278.4 million or 12.4% of revenues in 2011. The increase in operating profit came primarily from product mix, as well as improved inventory management based on the change in execution of our U.S. business and the decision to shift shipments later in the year versus last year.

The U.S. team's execution drove improved margins in the segment, a 23% reduction in our own U.S. and Canada segment inventories, and a 20% reduction in U.S. retail inventories.

In the International segment, absent a negative foreign exchange impact of $98 million, net revenues grew 1%. As reported, net revenues were $1.78 billion, down 4%, versus $1.86 billion in 2011. The results in this segment reflect 8% growth in Latin America offset by a decline in Europe and Asia Pacific. Revenues in the emerging markets grew 16%, driven by strong double-digit growth in Brazil and Russia. Internationally, the Games and Preschool categories were flat, while Boys and Girls declined.

Operating profit in the International segment decreased $55.1 million to $215.5 million or 12.1% of revenues compared to $270.6 million or 14.5% of revenues in 2011. The decline in operating profit primarily reflects our geographic mix of revenues. Our emerging markets posted strong growth, representing a higher percentage of the segment. But they currently carry lower profit margins, while our more profitable developed markets declined as a percentage of the total.

The Entertainment and Licensing segment net revenues increased $19.2 million or 12% to $181.4 million compared to $162.2 million in 2011. In 2012, the segment benefited from increased sales of television content in all formats, including global television distribution, digital distribution and home entertainment. This was offset by year-over-year declines in movie-related revenue, including lower revenues from licensed product primarily associated with the third Transformers motion picture in 2011.

For the full year 2012, the Entertainment and Licensing segment reported 24% operating profit growth to $53.2 million compared to $42.8 million in 2011. Operating profit growth was the result of higher revenues and improved expense leverage.

In 2012, we recorded $47.2 million of pretax restructuring charges. From a segment basis, substantially all of these charges are in corporate expenses. And looking at the income statement, approximately $2.8 million of these charges were recorded in cost of sales; $10.9 million in product development; and the majority, $33.5 million, is in SD&A.

2011 also included restructuring charges of $6.8 million in product development and $7.6 million in SD&A. The following discussion excludes charges for both years.

For the company overall, cost of sales for the full year was $1.67 billion or 40.8% of revenues compared to $1.84 billion or 42.8% of revenues in 2011. The year-over-year improvement came primarily from improved inventory management in our operating segments and favorable product mix. From an expense standpoint, total operating expenses were $1.82 billion or 44.5% of revenues compared to $1.84 billion or 43% of revenues last year. Full year program production amortization totaled $41.8 million versus $35.8 million last year. This was in line with our expected range of $40 million to $50 million for 2012.

Royalties declined to $302.1 million or 7.4% of revenues for the full year versus $339.2 million and 7.9% of revenues in 2011. This reflects strong global growth in Marvel during 2012 but was more than offset by lower sales of other royalty-bearing entertainment properties. In 2011, we had nearly $1 billion of sales from the third Transformers film and Beyblade.

Our advertising-to-revenue ratio increased in 2012 to 10.3% versus 9.7% in 2011, consistent with our stated plan to increase our investment in advertising in the U.S. SD&A of $813.9 million was essentially flat with last year and totaled 19.9% of revenues.

Last year's SD&A reflected approximately $30 million of lower-than-expected compensation expense. In 2012, we gained about half of that amount back, which was mostly offset by the favorable impact of foreign exchange.

Looking below operating profit, other expense net was $7.2 million in 2012 versus $18.6 million in 2011. Our 50% share of The Hub is included on this line on the P&L. For 2012, our share of the earnings in The Hub was a loss of $6 million compared to a loss of $7.3 million a year ago. 2012's lower total other expense reflects investment gains versus losses in 2011 and lower foreign currency losses this year versus last. Our underlying tax rate in 2012 was 27% compared to an underlying tax rate of 26.2% last year.

Now let's turn to the balance sheet. Hasbro has generated $2.2 billion in operating cash flow over the past 5 years, and we've used that cash to strategically invest in expanding our global footprint and capabilities across several long-term growth opportunities, including the emerging markets and Entertainment and Licensing. During that time, we've also paid $731 million to shareholders through our dividend program and spent $1.6 billion in share repurchases.

In 2012, our business generated operating cash flow of $534.8 million, ahead of our annual target of $500 million. 2012 television programming spend totaled $59.3 million. And at year end, cash totaled $849.7 million compared to $641.7 million a year ago and $696.7 million at the end of the third quarter.

In 2012, we returned $225.5 million to shareholders through our quarterly dividend program, including $46.6 million associated with the accelerated payment of our historical February dividend, which we paid in December. Excluding the accelerated dividend payment, our payout ratio in 2012 was approximately 53%, slightly above our stated 45% to 50% target.

In 2013, we anticipate one less dividend payment given that February 2013 payment was paid in December 2012. Today, we announced the ninth increase in our dividend in the last 10 years. The new quarterly dividend rate is $0.40 per share, up 11% or $0.04 from the previous rate. This increase continues to reflect the confidence management and our board have in Hasbro over the long term.

In 2012, we also spent $100 million on share repurchases, buying back 2.7 million shares at an average price of $37.11. At year-end, $127.3 million remained available in the current share repurchase authorization.

Receivables at year-end were $1 billion, consistent with last year. DSOs were 72 days, up 2 days versus 2011, reflecting growth in emerging markets with longer terms, in particular, Latin America.

We continue to lower inventories this past quarter, ending the year with $316 million in inventory, down from $334 million in 2011.

We ended the year with lower inventories in the U.S. and Canada, partially offset by higher levels of inventories overseas in support of our expanding emerging markets, including a new warehouse in Russia.

Depreciation for 2012 was $99.7 million and CapEx was $112.1 million.

We enter 2013 in a strong financial position, as we are leveraging recent investments across our business.

Our cost-savings initiatives will not only lower our overall cost structure but strategically align our organization's efforts with our most significant opportunities. This focus will help us drive profitable growth for Hasbro and enhance shareholder value over the long term.

I'd like to now turn the call back to Brian before we take your questions.

Brian D. Goldner

Thank you, Deb. Before we take your questions, you may have noticed we have not provided guidance for the coming year. Everyone at Hasbro globally is focused on delivering profitable growth year-in and year-out for the long term. We believe this focus will result in delivering compelling long-term total shareholder returns as we have provided over the last decade. We are not, however, going to be providing annual guidance on revenues and EPS going forward. We will, however, continue to work hard to communicate to you our strategy, our milestones and the progress we are making in our evolution towards becoming a world-class branded play company.

With that, Deb, David and I are happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sean McGowan with Needham & Company.

Sean P. McGowan - Needham & Company, LLC, Research Division

Number one, could you give us a sense, more detail, on U.S. point-of-sale movement in the quarter?

David D. R. Hargreaves

So I think, Sean, one of the things that we've said is that in the U.S., our shipments were down in the fourth quarter, I think about 6%, and we're clearly -- or for the year. And one of the things that we've done is we've reduced our retailer inventory by over $100 million during the year with our big 4 U.S. accounts. So I think it's clear that our POS was, therefore, down sort of significantly below than the reduction in our shipments in the U.S.

Brian D. Goldner

It was less then.

David D. R. Hargreaves

Yes.

Brian D. Goldner

Yes. The other thing in terms of the NPD data, one thing to note particularly in our Games business, Sean, is that Magic: The Gathering really doesn't appear in a lot of the NPD data because so much of that business is done through hobby shops and other channels of distribution. And so not only does NPD data get that in terms of sales, it also doesn't get that in terms of market share both for the Games business, as well as for the company.

Sean P. McGowan - Needham & Company, LLC, Research Division

So is that how Games was able to, so far, outperform what NPD was suggesting?

Brian D. Goldner

Yes, exactly. If you look at -- frankly, if you look at both trading card game business, according to NPD, as well as the Games business, and, frankly, as well as Hasbro, that's a big difference maker because NPD doesn't track all of the sales that we get, which is the predominant amount of sales that we get, and the expanding number of sales we get for Magic: The Gathering in the hobby channel.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. All right. And then you mentioned better -- I think Deb mentioned better management and a favorable product mix as gross margin drivers. Can you give us some sense of what was the most important driver there?

Deborah M. Thomas

Sean, the most important driver was really better inventory management. By having lower inventory both at retail and our own inventory, it really drove down obsolescence costs and the other things that come with that. In addition to that, we did have some favorable product mix. As you recall, we have stated earlier in the year that we had taken some price increases on carryover product, and that helped with the margin on the carryover product. And our new product was well received at the price points that they were offered.

Brian D. Goldner

Yes. The other thing, Sean, is in Games, our operating profit margin in Games is the highest that it's been in the last 8 years. So as I told you guys, as we talked about, as we were able to develop games across all these different formats with this expertise coming from the Gaming Center of Excellence, we are able to create games in any form or format and do that in a very profitable way. And so, obviously, with Games growing, that changes the mix profitably and favorably.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. Last question, and I don't know if this is in any of the supplements you just provided, but can you tell us where these various charges are taken through up and down the P&L?

Deborah M. Thomas

Sure. We do have that. Is that in the -- so in the P&L, let me just find that section, if you don't mind, for a moment. We have in cost of sales, $2.8 million; in product development, $10.9 million; and in SD&A, $33.5 million, for the total of $47.2 million.

Brian D. Goldner

Sean, that's in the -- one of the charts that we put out as part of the presentation, the last chart.

Operator

Our next question comes from the line of Felicia Hendrix with Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

I just wanted to follow up and just to clarify your answer to Sean's question. So just want to understand, was your U.S. point-of-sales down more than the 6%?

David D. R. Hargreaves

No, less than. Because our shipments were in, we're down 6%, but we reduced our inventory in the trade by over $100 million. It means that our POS decline was substantially less than that.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay. Okay. And then are you saying that the Games POS was up if you include Magic?

Brian D. Goldner

Well, we -- obviously, we don't get to track -- the tracking from hobby the same way we get the absolute sales and we know the sell-through. But we don't have NPD data for the Magic portion of the business. But we do know what the sales were overall, and we knew how the sellout went because we get that data in a different manner from our hobby channel.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay. And then, Brian, in the -- you mentioned in your prepared remarks and you also showed in the slides that the retail inventories in the U.S. and Canada were down. I was just wondering if you can give us some color where they were internationally?

Brian D. Goldner

Yes, the inventory in International markets and certain areas were up, frankly, because we're growing those businesses in emerging markets. We put into place and we talked to you guys about the fact that we have now our Russian warehouse where we're putting product in. The Russian business is one of our strongest growth businesses. In Brazil, we have warehousing and are shipping product direct. So those are areas where we're growing inventory. You want to comment?

David D. R. Hargreaves

Yes, but I think in the aggregate, we were certainly down in Australia, we were down in Mexico. I think we were down in Canada. Europe was a little bit of mixed, with some markets up. So in the aggregate, not only were we down $100-plus million in the U.S., but in the aggregate, I think our retail inventories were down at least $100 million.

Brian D. Goldner

Right. And then Hasbro's inventories, as you saw, were down.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay. Yes. And just final, maybe a bit of housekeeping. Just trying to understand, your tax rate was lower than expected despite the higher mix of U.S. sales in the quarter. So I was just wondering what drove that?

Deborah M. Thomas

We had a few discrete items, but our underlying rate was 26 point -- 27%.

Brian D. Goldner

So actually, it was up a bit versus a year ago.

Operator

Our next question comes from line of Jaime Katz with Morningstar.

Jaime M. Katz - Morningstar Inc., Research Division

I actually have 2 questions. First, you guys didn't talk very much about the Preschool segment, but while it's not the largest segment, it can move the needle. Can you talk about kind of your outlook for this segment? Because I think your nearest competitor maybe reported some more promising data. And then, do you guys have an outlook for when you think Hub turns positive? I think you said it was a $6 million loss that was flowing through.

Debbie Hancock

Yes, if you look at the Preschool business, we have a lot of positive elements there. The biggest difference in Preschool and why it was down was the year-on-year comparison for Sesame Street. The year prior, we had a very big Elmo program, and, this year, less so. If you look within PLAYSKOOL, the PLAYSKOOL HEROES line is among the fastest-growing action figure lines for Preschool, Boys, and with a number of brands there. Play-Doh performed quite well in the category, as well as some other PLAYSKOOL items. So the -- again, the biggest difference is Elmo. And we're looking forward to showing you the Sesame Street line for 2013 tomorrow, so we think we'll build that business back in 2013. In regard to The Hub, we made great progress. The Hub's now available in 72 million homes. Ratings are up quarter-on-quarter, the last 5 quarters. Ad sales up, affiliate fees up. So I just think it's a matter of a bit more time. But our studio, given the fact that we're selling shows both digitally, in television and as well as in home video, is profitable. And so again, it's just a matter of the amortization that drives the loss. If you took out the amortization, we'd actually be profitable. So it's just paying for the acquisition.

Operator

Our next question comes from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to ask about the restructuring, and hoping you could help us with some of the major buckets of savings to come. And, I guess, part of the reason I ask, is the 10% reduction of the workforce could probably only account for around 1/3 of the $100 million projected savings. So where is the rest going to come from?

Brian D. Goldner

Well, actually, Michael, the -- by 2015, on a full year basis, the reduction in workforce will account for over 1/2 of the savings. It's about $55 million, and we think it's at least $100 million in savings. And then, Deb, you can comment on the Other category.

Deborah M. Thomas

Sure, and we will give more detail on this and more description tomorrow at our investor events. But our cost-savings initiative will come from facility consolidation with our warehousing and distribution facilities and some of our sales offices and some other process improvements that we're looking to achieve and some system enhancements as well. So like I said, we'll give more color on that tomorrow. But as Brian mentioned, the largest piece is coming from our headcount reductions.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And 10% of the workforce is something in the area of 600 people. So $55 million assumes about $100,000 per person. So that does that mean that we're going to be looking at some mid to upper-level management departures? Or is it -- or how is it that it's that much per person that you're saving?

Deborah M. Thomas

I think it's interesting when Brian made his comments today, he said that we reviewed the organization from top to bottom. So throughout the organization, we've looked at areas where, perhaps, we need to change out some skill sets from what we have today. And the 10% reduction is a reduction, but it's a net -- it will be a net number at the end of the day.

Brian D. Goldner

So, Michael, if you look over the period prior to this change from 2000 through 2012 prior to the restructuring, we've added hundreds of people around the world in all of our emerging markets, in sales and marketing organizations. We've also added the capabilities of television, licensing, digital gaming, you name it. But our headcount through the end of 2011 was flat to 2000. So, in fact, we've been redeploying resources, been changing out personnel and been very prudent about how we hire so that we're able to add skill sets, new talent, while we've also had departures of personnel. This is ensuring that we get to lower level of overall costs given the changing environment and our need to go out and get some new and additional skill sets as we continue to drive for long-term growth.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then a couple of the more senior executives, there was a press release yesterday, have switched roles. Can you maybe help us with what your intention is there?

Brian D. Goldner

Yes, one thing is that Wiebe Tinga has a 25-year history with Hasbro. He has run several of the major regions for the company. He was very instrumental, working with David in building our teams in Latin America, building our teams in Asia Pacific, has run Northern European business, and, most recently, ran the North American business and helped us to get back to the historic levels of operating profit margin and a better partnership with our retailers in a 1-year period. We also brought an executive down from Canada who had been running our Canadian business named Michael Hogg, and he's now running the U.S. business. So that -- those are the changes in the sales and marketing by regions. And now the 4 regions around the world selling will report to Wiebe, our Chief Commercial Officer. David, you want to talk about what you're doing?

David D. R. Hargreaves

Yes. I think in terms of what I'm going to be doing, clearly, Michael, as you know, our industry is changing pretty rapidly. Our industry hasn't been growing recently in the developed economies around the world. At the same time, the emerging markets are growing very rapidly. In fact, the Asia Pacific market is now larger than the U.S. market. And then we've got things like, it's an ever-increasing proportion of toys driven by entertainment. And we've got tablets, which are really in great demand by children now, which are giving both a challenge and an opportunity through our brands. So I think what we've decided we need to do is we need to -- given all this rapid change, we need to be much more focused on understanding and much more proactive in reacting to these challenges and opportunities. And that's what I'm going to spend most of my time doing.

Michael Kelter - Goldman Sachs Group Inc., Research Division

That's very helpful. And very lastly, I just want to ask about the inventories, which sales missed your own expectations by a decent amount in the fourth quarter, but yet you didn't end up with a large amount of inventory on the books. So, I guess, I'm just trying to understand where the extra product that you would've manufactured to meet your initial expectations, where did that product end up?

David D. R. Hargreaves

Well, I think with $316 million inventory on our books at the end of the year, we certainly could have shipped another $100 million or so if it had materialized. Obviously, we try and react as quickly as possible when we see sales aren't coming. So and I think as far as the retailer inventories, I think we've said in our first quarter call, second quarter call and third quarter call, we've repeatedly said that retailer inventories were low. So they were very low coming into the third, fourth quarter. And therefore, a bit of a shortfall in POS that we weren't expecting hasn't meant that they've ended up with excessive inventories by any regard.

Brian D. Goldner

Michael, if you go back several years, it used to be the fact that it would take in supply chain about 16 weeks to get it from the Orient. And today it's, in a just-in-time world, we're much closer to 6 weeks. And, obviously, that enables us to flex up-and-down production and to take and go after hot sellers and to dial down on things that may not be selling. And so as we said, as we saw the POS declines from about Thanksgiving to right before Christmas that, that was an area where I think retailers are increasingly concerned about the POS and about that last turn of inventory. And then we did see great POS, a very strong growth year-on-year in the last part of the year. Someone on CNBC said maybe the fiscal cliff wiped Santa Claus from the front page. And I think that's a bit of the case. And so that helped us to sell down our inventory at retail, and yet we didn't get that last turn of inventory that we might have shipped in.

Operator

Our next question comes from the line of Tim Conder with Wells Fargo.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Just to follow up on a couple of previous questions. Number one would be related to the restructuring charges. You outlined what you expect for '13 and then said that, obviously, there'd be quite a bit more in '14. How much did you realize in savings in the fourth quarter? Clearly, I think there was some headcount reductions going on in that. How much of the savings did -- accrued in the fourth quarter from the overall program that you just implemented?

Deborah M. Thomas

None.

Brian D. Goldner

None in 2012.

Deborah M. Thomas

None in 2012.

Brian D. Goldner

And, Tim, and so for 2013, we're saying we could save $15 million to $25 million, but we'll also have some additional costs maybe in the $20 million to $30 million range.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay, okay. Okay, that helps. And then on the Games & Puzzles POS -- and, again, not to beat this to death, but you said you -- obviously, you know what NPD is. And then you mentioned that the channel is not tracked by NPD, but you have a pretty good idea from other sources, both -- so putting those 2 together, Brian, what was U.S. Games, your -- your overall POS in the U.S.?

Brian D. Goldner

In the U.S., looking there, that's flat.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay. So for '12, as a whole, you were flat in Games & Puzzles?

Brian D. Goldner

No. Games was down. Games in the -- if you take the POS for the part of Games that we have POS data for, it was down a bit.

David D. R. Hargreaves

Yes. I think Brian said that the problem is that one of our highest growth Games spend this year was Magic: The Gathering. We'll talk about -- more about that tomorrow, but it's been really doing great growth for us. But the trouble is that Magic: The Gathering is sold predominantly through hobby shops. And therefore -- and we don't get the POS information from the hobby shops that we get from the likes of Walmart and Target and Toys"R"Us, but neither do NPD or does anyone else. So no one can really track that. I think what we're saying is that, clearly, we believe that our Games shipments worldwide have been up. We know that our Games inventories at retail are down. So, on a global basis, we clearly believe that our POS is up on Games.

Brian D. Goldner

And we know what our sellout is, Magic: The Gathering, Wizards of the Coast knows what its sellout is at the hobby shops because of reorders.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay, okay. So, globally, everything on Games up, is what you're saying?

Brian D. Goldner

That's right.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay, okay. And then maybe this is a better question for tomorrow. Should we anticipate anything in the new area that's been pretty hot, obviously, in the overall Games area, the infinity type of genre?

Brian D. Goldner

We're working on games across a number of different platforms. We are going to -- we'll talk about a number of different initiatives that we have in Games. This year, we're launching a number of different brands, including off-the-board games, as well as a totally different way to think about action battling, which has been a great category for us, launching a new brand there. And over time, we'll be able to show you a lot of new platforms that we have for games. But certainly tomorrow, we are going to talk about certain new Games brands and ideas that we are launching in Games.

Operator

Our next question comes from line of Mike Swartz with SunTrust.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Could you maybe, just talking about your cost savings, did you say if you were reinvesting as far as the $15 million to $25 million you expect in 2013? Will that be reinvested or is that expected to fall at the bottom line?

Brian D. Goldner

That's savings. So all we were saying is we had $20 million to $30 million in additional expense as we work through this program, and then $15 million to $25 million savings.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So that would be a gross number?

Brian D. Goldner

Correct.

Deborah M. Thomas

Correct. And the reason why we have these costs is largely due to our voluntary retirement program. Depending on how many people choose certain types of payments out of that program, we could have some pension costs that come through the year. And that's predominantly why we have such a large range on the cost side. And until it happens, we can't determine exactly what that'll be.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Great. And then just maybe on your comments around SKU rationalization. Do you expect the pace of that to accelerate in 2013, or is that going to be a meaningful difference versus 2012? And then are there any categories in particular where you're focused on rationalizing?

Brian D. Goldner

Right. We're really focused on growing our brands with the most global potential. Our franchise brands and partner brands, we have a number of challenger brands and we'll talk about what those brands are tomorrow. Obviously, there are elements within our business, like we've talked the tale of the Games business that aren't key and critical to growing our business and don't have the same awareness or interest globally. And so we're focusing on those brands that have the greatest potential and the greatest opportunity to execute them across our entire brand blueprint. Year-on-year, this is 2012 versus 2011, we reduced SKUs by 16%. And our overall target, which we'll talk about certainly a lot more tomorrow, is to reduce SKUs by an additional 30% and our items by about 40%. And we'll talk about the difference between an item and a SKU tomorrow. I'll walk you through some of our development process.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

That's an additional 30 SKUs...

Brian D. Goldner

No, 30%.

Michael A. Swartz - SunTrust Robinson Humphrey, Inc., Research Division

Sorry, an additional 30% versus what you've already cut out?

Brian D. Goldner

Correct. Our total for the period will then be a reduction of 30%.

Operator

Our last question comes from the line of Gerrick Johnson with BMO Capital Markets.

Gerrick L. Johnson - BMO Capital Markets U.S.

Your cash balance, $850 million. How much of that is overseas? How much in the U.S.?

Deborah M. Thomas

The -- a significant portion is overseas. There's probably about less than $10 million in the U.S.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay. And Furby, was Furby a global launch back in 1998, or was that just English-speaking markets?

David D. R. Hargreaves

Ultimately, it became a global launch, so you're going to catch me out which year. I have to go back and...

Gerrick L. Johnson - BMO Capital Markets U.S.

It's okay, year doesn't matter. But people globally know Furby from the last year.

Brian D. Goldner

Yes.

David D. R. Hargreaves

Yes. We sold 40 million Furbys way back the first time, and it was probably equally as hot and -- in Europe and some other markets as it was in the U.S.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay. How many of them did you sell this year?

Brian D. Goldner

We didn't really report that. But we sold it in English-speaking -- in 2012 in English-speaking countries. And this year it rolls out and will be distributed in several languages and globally.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay. One more. Earlier, David said that there was $100 million worth of inventory that could have shipped in 2012 if demand had materialized. Now how much of that $100 million is sellable at full price now that we're in '12, '13?

David D. R. Hargreaves

We've got very good quality of inventory. We ended up with $316 million of inventory on our books. That's certainly down versus a year ago, and it's down versus 2 years ago. But it's probably still up versus 3 years ago. So, certainly, if our retailers had come back and said, Look, sales are robust, we need more inventory. We could have shipped it. Most of it is a good quality of inventory. As Deb said, we -- because of the quality of our inventory, we took far less in terms of markdowns, closeouts, obsolescence this year-end than we had in past year-ends. So it's predominantly very good inventory, which will sell as we go into this year.

Brian D. Goldner

Yes, and if you -- Gerrick, just talking about operating profit, if you look at the U.S. and Canada segment, the operating profit for the U.S. and Canada segment increased by 76% to nearly $90 million in the quarter. So it's really returning that business to higher levels of operating profit, spending less in shipping allowances and other markdowns and other liability inventory.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay. Maybe one more, if I could slip it in. One Direction, is that a worldwide license or just North America, U.S.?

Brian D. Goldner

It's worldwide but not the U.K.

Operator

There's no further questions at this time. I would like to turn the floor back over to Debbie Hancock for closing comments.

Debbie Hancock

Thank you, everyone, for joining the call today. The replay will be available on our website in approximately 2 hours. Additionally, management's prepared remarks will be posted on our website following this call. We look forward to seeing many of you tomorrow at our Toy Fair event. If you can't join us in person, the webcast to the event will begin at 8 a.m., and the replay will be available several hours after the live webcast concludes. Thank you, and have a good night.

Operator

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

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