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Hasbro, Inc. (NASDAQ:HAS)

Analyst Day

February 08, 2013 8:00 am ET

Executives

Debbie Hancock

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

John A. Frascotti - Global Chief Marketing Officer

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

Wiebe Tinga

Analysts

Gregory R. Badishkanian - Citigroup Inc, Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

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

Alexander Fodor - Sonica Capital

John Taylor

Hector Guenther

Justin Bandy

Robert Fagan - GMP Securities L.P., Research Division

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Debbie Hancock

Good morning, everyone. I'm Debbie Hancock, Hasbro's Vice President of Investor Relations. And I want to thank you all for joining us today for our annual Toy Fair event. We look forward to this event every year because it is all about our brands and new innovation. This year, it is our first opportunity to share with you much of our line for the coming year. This morning, you will hear from Brian Goldner, Hasbro's Chief Executive Officer; John Frascotti, our Chief Marketing Officer; Deb Thomas our Chief Financial Officer; and David Hargreaves, our Executive Vice President of Corporate Strategy and Business Development. We're going to then take your questions. And following the Q&A, we will break everyone into groups for product tours, and we expect to be done by about 12:00 at the latest. Before we begin our presentations this morning, I would like to remind you that during the formal presentations and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. These forward-looking statements may include comments concerning the company's future products, opportunities and strategies, performance, entertainment plans, cost and expectations for achieving our objectives. There are many factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements, including consumer and retailer interest in, and acceptance of our products and product lines; changes in marketing, entertainment, and business plans and strategies; and future global economic conditions, including foreign exchange rates. Some of those factors are set forth at our annual report on Form 10-K and quarterly Form 10-Q, in today's meeting and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this meeting. [Operator Instructions] Now I am pleased to introduce Brian Goldner. Brian?

Brian D. Goldner

Thank you, Debbie. Thanks, Debbie, and thanks to all of you for being here today. Today, we are going to outline for you how Hasbro is going to profitably grow over the long-term through innovation, rich content and immersive entertainment experiences, focusing on our brands with the greatest long-term potential. There's a lot of creativity and a number of great innovations that we're going to introduce for 2013, and many of them you're going to see today. One of them, tested so highly with kids at our fun lab and also retailers around the world, have deemed this the best one yet. And let's take a look.

[Presentation]

So we're very excited about our new kid-sized huggable Elmo for 2013. And now let's recap 2012. In 2012, we made significant progress. The Brand Blueprint strategy is working, and we're going to show you many of the examples of what worked in 2012 and what our plans are for 2013. We can no longer be a company that just focuses on creating thousands of SKUs every year. We're completely focused on brand building that resonates globally. We're redeploying our resources and aligning our cost structure. This will enable us to enhance our total shareholder return and to deliver profitable growth. In 2012, we set objectives for the company that we communicated to you, and let's look at the scorecard.

For the year, we grew EPS to $2.91 versus $2.74 last year, absent forex, but excluding restructuring charges in both years and a tax benefit in 2011. We returned the U.S. segment to historical operating profit margins despite lower revenues, and we achieved a 15.1% operating margin versus 12.4% a year ago. We grew in our emerging markets 16%, and we were profitable in all our major markets except China.

Our team grew the Games business 2%, with our highest operating profit margin in the last 8 years. Girls grew 7%, not just from Furby, but also from My Little Pony and the Easy-Bake Oven. However, we were unable to grow revenues given challenging comparisons with revenue declining 2% absent FX.

For 2012 it's also great to see that we grew our Entertainment and Licensing business in a year following the Transformers movie, and I'm going to outline for you a little later how we achieved this.

This past Christmas, we saw a rapidly changing and more challenging retail in developed markets. Lower point-of-sale trends from Thanksgiving to just before Christmas didn't enable us to get the year-end shipments as strongly as we'd anticipated. We did see significant year-end increases in point-of-sale, which helped us to finalize our plans to reduce inventory at retail for the year.

In emerging markets, we achieved 16% growth, and brands that were executed across the blueprint performed well globally. As we look at the results by category, we saw a growth and are building momentum in the brands where we've activated the blueprint. This includes Marvel, Furby, My Little Pony, Magic: The Gathering, as well as several gaming initiatives. Our overall Games and Girls categories did grow in the year, however, the Boys business declined as we were up against challenging comparisons in 2011 when Transformers and Beyblade delivered nearly $1 billion in revenue.

Let me remind you about the blueprint and talk about our Brand Blueprint 2.0 using some examples. Hasbro brands sit in the center of everything we do. Our 2.0 upgrade has us focused on driving fewer brands in more significant ways. And of course, we ensure that our brands were informed by consumer insights. Clearly, our blueprint works, and there are some great brands that grew in 2012 as the team fully activated them globally, and let's talk about some examples.

We saw a strong double-digit growth for My Little Pony globally. We drove the theme Friendship is Magic inspired by consumer insights in 2012. And in 2013, we take the My Little Pony brand to a whole new level with television in 180 countries, and we're activating this brand across every element.

Now for a totally different consumer, this same approach is true. For Magic: The Gathering, our growth was up a strong double digits globally, including emerging markets and developed economies. Magic is a great example of how we're building our analogue and digital expertise, and we're offering both of these experiences to our gamers. Our Magic consumer is experiencing the brand in any form or format they want anytime and anywhere. And John Frascotti is going to take you through a deeper dive in just a bit.

Play-Doh is now a franchise brand with strong growth. A particular note is how our emerging markets teams are making huge strides with this brand. For example, in China, in partnership with Toonmax, we're spreading the brand via television in a series that's known as Pei Le Doh. In Turkey, the teams are creating ways for Play-Doh to be part of the preschool curriculum across the country. And globally in 2013, we're launching a whole new compound that will expand the brand.

Our goal and objective is to focus on our biggest brand opportunities globally. Now you've seen some examples of what we can do with these 3 brands. In 2013, we're using our creativity and our innovation in activating Littlest Pet Shop across the blueprint. Like we did with My Little Pony so successfully around the world, we intend to do the same thing for Littlest Pet Shop. We have a new TV series that's already #1 on The Hub along with digital experiences and consumer products, and this blueprint will roll out late this year.

So as we line up our 2013 initiative, let's take a step back, and let's talk about the strategy and how it's enabled us to perform over the last decade. Over this period, we generated a 4% growth rate in revenues. Over this same time frame, we've generated a 21% growth rate in EPS. We've repurchased almost 90 million shares of stock since we began the buyback program in 2005.

Our focus on profitability is working. Over the last decade, we generated an 11% growth rate in operating profit dollars. In 2012, we improved our operating margin to 14.7%, and we returned the U.S. and Canada segment to historical levels of operating profit. In fact, this segment achieved a 15.1% OP in 2012 versus 12.4% last year.

As we complete the picture of driving total shareholder return, we have to ensure that we're moving aggressively toward being better brand builders and less focused on historical SKU-making behavior. This means we're aligning cost for profitable growth, and we're using the blueprint to drive global revenue for our brands. We've added hundreds of jobs in emerging markets, and we've built new capabilities, but our headcount has been steady since the early 2000s. We just announced the plan to generate $100 million in annual cost savings by 2015, including a 10% reduction in headcount.

Over the last year, we've also reduced SKUs year-over-year by 16%. Our objective is to get the number of SKUs down by 30% by 2015 and items down by 40%. Let me explain the development process. We start by creating a item like a Furby, and let's talk a little Furby math. We start with 1 Furby, shipping to 9 countries in 20 colors resulting in 104 SKUs. By focusing only on our key brands we pursue, we drive down the number of items and the corresponding SKUs. Reducing items helps us to reinvest those development dollars in our most important brands and reducing SKUs saves us operational dollars, which means savings from manufacturing all the way to retail.

Now let's talk about the state of the industry. Over the last 5 years, we see the acceleration of industry growth rates in Latin America and Asia Pacific with more modest growth coming from Europe and a flat industry in the U.S. While third-party research says growth will be more robust in emerging markets and developed economies, and while we'd like to believe that, we are going to be prudent and organize our company to drive growth in any environment.

Now there are positive signs as we look out across the industry and the consumer landscape. Industry research says that kids still find toys to be their #2 favorite activity. And as you can also see, there are another -- a number of other elements of Hasbro's blueprint strategy that are among kids' favorites.

Kids are still bending time every day. You and I may have a 24-hour clock, but our kids have a 27-hour clock. They continue to spend nearly 9 hours a day multi-tasking and bending time. I think we've always known that to be true. Another positive is that projections indicate that the child population will grow globally by 4% by 2020, which translates to 1.8 billion more kids.

Given the industry growth is coming from more emerging markets, we're seeing a rise in the middle class, who have more money, and we're also seeing rapid urbanization. It's remarkable that for the first time ever, 50% of all people in China live in an urban area. Given these trends, you can see why emerging market growth is far outpacing developed economies. Hasbro is outpacing industry growth in emerging markets by more than 2x over the last 5 years, and we expect to see double-digit growth in emerging markets continue. We've also achieved positive profitability ahead of our schedule in all major emerging markets except for China, and China is certainly a longer-term focus and with great opportunities.

Within emerging markets, we're seeing growth across several key categories of business whether China, Russia or Brazil. Our brands resonate with consumers. We're seeing great growth rates. And interestingly, these are also the 3 fastest growing market in terms of global box office. Hasbro has shows on the air in all 3 markets. Our blueprint is coming to life in those markets, and both our TV and non-TV supported brands are performing well.

Over the last 5 years, we've made investments of over $400 million and expensed those through our P&L in developing our capabilities in emerging markets, immersive experiences and licensing, and this does not include our joint venture investment in The Hub, and our investments are clearly paying off. We've grown emerging markets from virtually nothing, and now they represent more than 10% of global revenues. Our global growth rates over the last 5 years in both in revenues and operating profit are really significant, and we're ahead of our profit plan by 1 year across all major emerging markets except for China.

We are driving the blueprint with global brand teams and Hasbro teams in place. Our infrastructure's in place. We see no new infrastructure investments to create our capabilities, and we're now focused on growing our most important brands, and these are the brands that resonate globally with consumers and with retailers.

Now this is how we look at our brands. The top box represents the most important franchise and partner brands that we intend to grow. We're also driving our challenger brands to hopefully be future franchise brands. For example, Play-Doh was once a challenger brand. And we're selectivity and strategically launching new and reinvented brands through our brand blueprint as we did with Furby, and we have several new brands planned, and you'll hear about those.

Let me highlight for you some of our new brand initiatives for 2013. We have major initiatives planned for several of our most important brands in 2013, and these are just a few of them. We have a major new brand expression in Nerf called Girl Nerf Rebelle. We have a global rollout of Furby. We're introducing an all-new intellectual property within My Little Pony. And we're completely reinventing Transformers, and it's called Transformers Beast Hunters.

In a few moments, I'll turn things over to John Frascotti, our Chief Marketing Officer, and he's going to take you on a deep dive of our key initiatives for 2013. We did extensive proprietary research globally on the modern boy. As leaders in the category, we wanted to ensure that our brands in 2013 and beyond would be informed by more clearly understanding our audience. When you look at our new products we've developed like Avengers Assemblers or Transformers Construct-Bots, you'll see that we have the modern boy in mind.

And speaking of Transformers, when you see the revenue history of the brand, a few key facts emerge. First, when we started this brand, it was much smaller than it is today. That was before we created the blueprint to activate our brands. Transformers was the first brand we fully activated, and now revenues are more twice the size than they were at that time. And second, you can see the impact of global TV. Our strategy as Transformers is 10% bigger in 2012 than it was in 2010 when we didn't have television following movie. We're acting like leaders in the Boys category in partnership with the Walt Disney Company across its expanded portfolio of boys brands. With Disney's global scope and consumer-oriented approach, we expect that the boys action business will increase internationally as we introduce a whole new generation of boys to an array of exciting play patterns.

We're already seeing incredible momentum across the Marvel brands. We're working with Marvel and Lucas's incredible teams of content creators for film, TV and digital, and together we're going to drive these brands across toy and game categories. When you look at our Games business, you can clearly see that Hasbro is executing its strategy to focus on its most important initiatives and to reduce SKUs.

In 2012, the Games business was up 2%, and the operating profit margin was the highest in 8 years. The focus is on our gaming mega brands and that's driving growth over the last several years, including Monopoly and with significant growth at Wizards of the Coast. Our digital game business is growing. We're adding many new categories like Action Battling.

However, as I mentioned earlier, the tale of the gaming business that includes games like poor old Lucky Ducks continues to decline. And we've licensed out our puzzle business to Cardinal. We made a great deal of progress since we set up the Gaming Center of Excellence, but we're in the early stages of unlocking the full potential of this business. We're evolving our approach and going to be more in line with how consumers are playing and gaming. Importantly, we'll continue to innovate our gaming experiences across platforms to offer gamers globally an opportunity to play Hasbro games in any form or format they want, anytime and anywhere.

Over the last several years, if we told you that we created the brand blueprint and we invested in building our capabilities that consumers would not only enjoy these experiences but they'd be willing to pay for them as well. Well, our investment is beginning to pay back. Hasbro Studios content is on all screens globally, and the Brand Blueprint elements are driving our brands. As we talk about developing TV content, it's not about content for one screen but for all screens, anywhere and anytime. We're getting paid for our branded content on TV, all screens and home entertainment. And through this strategy, we're generating incremental merchandising revenue for the company.

In the U.S., one of our keys to our content strategy is our partnership with Discovery on The Hub TV network, and we're seeing strong results. The Hub is now available in 72 million homes, up from 56 million at launch. We're experiencing excellent year-to-year growth in total day ratings for the fifth consecutive quarter across all key demos, and the Hasbro shows are 4 of the top 5 original series on The Hub. And as you remember from the research we just shared with you, kids' #1 favorite activity was watching TV. In 2013, so many of our brands from Hasbro and our partners' brands have TV support. This year, Marvel Entertainment and Disney have 3 new TV series airing.

For 2013, we have a number of exciting movies planned, including 3 from Marvel and its studio licensees beginning with Iron Man 3. We're very excited that next month, G.I. Joe: Retaliation comes to theaters globally in 3D together with our partners at Paramount; and also from Paramount, Star Trek Into Darkness supports our expansion of the KRE-O line.

We have several films coming in 2014, 2015 and beyond. Our unprecedented partnerships will allow us to lead and grow in the boys action category. It's clear from these incredible box office numbers you can see why we are excited, and you'll remember that the global box office is growing particularly in emerging markets and across, of course, all these movies that have been out in theaters already have enjoyed incredible merchandise sales success over their history.

Digital engagement is another key element of our strategy. And while John will talk about it in more detail in a few minutes, you can see that there's a digital component in most everything we're doing. On the digital gaming side over the last 3 years, our brands have represented $1.5 billion at retail, cumulatively. Our licensing programs are being expanded globally and driving revenues with a great number of partners.

As we bring all the elements together, it's clear that our focus is on branded play. We have content rich brands that are proven successful with consumers and retailers when backed by the blueprint globally. We're continuing to drive to enhance the shareholder return, and so let's talk about our expectations for the medium term. Through the execution of our branded play strategy, Hasbro is focused on delivering long-term profitable growth and enhanced total shareholder return. In terms of revenue, in developed economies, we'll grow primarily through market share gains. And Hasbro is targeting double-digit growth in emerging markets.

In terms of operating profit over the next several years, we expect underlying operating profit absent restructuring charges to grow faster than revenues. This growth will be delivered by global investments across fewer, more significant global initiatives and profitability improvements in emerging markets.

We expect to generate operating cash flow in the amount of $500 million on average, and we'll use that money to invest in our business and to return cash to shareholders through dividend and buyback program. In fact, over the last 5 years, Hasbro has returned 130% of its net earnings to shareholders in the form of dividend payments and stock buybacks.

John Frascotti's going to now take you through some of our 2013 brand initiatives. You're going to hear answers to your key questions from David and Deb, and then we're going to answer any additional questions you may have. Of course, we will arrange the showroom tour to you. But before I turn things over to John, I want to talk for you -- with you for a moment about David Hargreaves' new position.

As you know we announced on Wednesday that David will be assuming the new role as Executive Vice President of Corporate Strategy and Business Development. In this role, David will focus on building Hasbro's new business pipeline, identifying opportunities for long-term growth and fostering relationships with not only our current partners but with new partners as well. David will continue to be a critically important member of my team.

And now I'd like to introduce our Chief Marketing Officer, John Frascotti. John?

John A. Frascotti

Good morning, everyone, and thank you for joining us this morning. As Brian mentioned, I'm going to share with you this morning several of our key initiatives for 2013. Now I won't be addressing every one of our brands or every one of our products, just focusing on the difference makers for us this year, which we'll be executing across our blueprint. You'll have the opportunity later this morning to see many more of our products and our brands downstairs, and there are a number of additional initiatives that we're going to be unveiling later this year.

So let's begin with My Little Pony, one of our franchise brands where we've had a tremendous amount of success lately. Powered by our very popular My Little Pony: Friendship is Magic television show and by our execution of My Little Pony across our entire blueprint, we've been able to capture the hearts of millions of fans around the world.

When we look back at 2012, it truly was a breakout year for My Little Pony. As Brian mentioned, our POS was up globally. In fact, it was up 50% in all major markets around the world. And in several international markets, our POS was up triple digit. When you look at My Little Pony, what's great about this brand is that it's being embraced and defined by millions of active and engaged fans throughout the world, who are publicly demonstrating their love for the brand and they're emerging as what we call brand advocates. These engaged fans often refer to My Little Pony as their inspiration, and they're finding unique ways to celebrate their own inner pony with pony-inspired hair and makeup and nail art. Girls of all ages are dressing like, quoting and blogging about the brand and telling their friends to do the same. So as a result of this groundswell of fan activism around My Little Pony, it's quickly become a significant part of our pop culture. So clearly, our strategy is working, and we captured a broader consumer target as a result.

When you look at My Little Pony, historically as a brand, it's always been very strong amongst younger girls, 3 to 6 years old. But as a result of the success of our brand lately, we've been able to capture an older girl, girls in the 6 to 12 -year-olds age range. And the fan mania for this brand has had a dramatic sales impact on our license products as well in a broader range of categories from apparel to Halloween costumes, teen jewelry, tees, accessories, even My Little Pony toothpaste.

Our comic books, which we launched in partnership with IDW earlier this year, are now already in their fourth printing, and they've been ranked in the top 100 of all comic books from 2012. So now, more than ever, it's cool to love My Little Pony and consume My Little Pony in multiple ways across multiple platforms.

The press has been fascinated by this growing fan base and how Pony has become a cultural phenomenon. It's been featured in articles across a wide array of publications from the Wall Street Journal to People Magazine, and the brand has even been featured in popular television shows like Glee and Modern Family with product placements that have happened entirely organically.

Our entertainment strategy, which we'll continue to invest in, in 2013, is hitting on all cylinders. Importantly, resulting in significant daily brand exposure in daily fan engagements. Season 3 of My Little Pony: Friendship is Magic launched on The Hub this past November, and it continues week on week to grow in viewership. My Little Pony is now broadcast in 180 countries around the world, and consumers today have more ways than ever before to watch the show. They can watch it on TV, on DVDs. In fact, we've released 4 DVDs since February of last year and on the most popular digital streaming services as well. My Little Pony is one of the most popular kids shows on Netflix today.

Now we're also engaging our fans with digital gaming. Our My Little Pony Gameloft app, which we launched in November of last year in partnership with Gameloft is one of the top-ranked kids games for the iPad and the iPhone in almost every major market, and it's outperforming some of the perennially most popular kids games. So clearly, kids are loving to play this new mobile game for My Little Pony.

So as we look ahead to this year, we're going to continue to execute My Little Pony across our Brand Blueprint and activate all the levers on our blueprint, and we're going to focus around a major event that's happening in entertainment. One of our main ponies, TWILIGHT SPARKLE, is becoming a princess. So we're going to celebrate this event and focus all of our product and marketing on this event.

Now as we look ahead to the fall of 2013, as Brian mentioned, we're launching an entirely new pony brand expression in our top 10 countries. We're going to launch it with a made-for-TV movie and full execution of this new IP across our blueprint. We did a tremendous amount of research, and our consumer insights told us that girls want more ways to play with My Little Pony and more ways to experience My Little Pony. So we've developed a brand-new expression of My Little Pony, an entirely new IP that will appeal to slightly older girls and give them an even cooler way to play with My Little Pony, and we'll deliver this IP across multiple product categories within toy and other categories as well, and then importantly across all of our digital platforms. We'll be revealing this new IP later this summer with full-fledged, pink-carpet event at major pop culture venues like San Diego's Comic-Con. So you'll be hearing more about this new IP as the year unfolds.

I'd now like to switch to the Littlest Pet Shop, one of our girls franchise brands that we're feeling very optimistic about. Now while our Littlest Pet Shop business actually contracted last year, we now have the right strategy and the right entertainment assets to stabilize the business and return it to growth, so allow me to share that with you. Our first big step for Littlest Pet Shop is that we brought the Littlest Pet Shop and the pets to life with a brand-new television show. It premiered on The Hub in November and it was the highest-rated original series premiere in The Hubs Network history. And when we look back at all of 2012, Littlest Pet Shop was the #1 rated show on The Hub for kids 2 to 11. I'd like to share with you this morning a short clip of the show that will give you a sense of how we brought magic to Littlest Pet Shop.

[Presentation]

Great story, great music, great characters. We're incredibly excited about this reinvention of Littlest Pet Shop. The ratings for this show, as I mentioned, have been excellent and they continue to grow week on week. So based on the very strong debut of this show in the United States, we're now rolling it out around the world. We've partnered with the largest, fully-distributed networks and the strongest digital streaming partners. In fact, this past November and December, Littlest Pet Shop was one of the top 10 most downloaded kids episode on iTunes.

Now in addition, we're seeing a great response to our new Littlest Pet Shop mobile game. We've partnered with Gameloft again on this property. It's been rated 4.5 out of 5 stars and it was the #1 grossing free kids app in France for almost every day since its launch. This year, a digital pet will be included in every one of the roughly 30 million pets that we sell at retail, giving girls the opportunity to create their virtual collection of pets and get great in-game rewards. And the app is creating great buzz for the Littlest Pet Shop brand, with strong social media presence on Facebook and YouTube, it's generated over 450 million impressions for the brand. So as you can see, we're delivering with Littlest Pet Shop a new story, new ways for our pets to magically come to life on multiple screens and creating powerful fan engagement, and reconnecting with our Littlest Pet Shop girls. And as a result, we are getting this brand back on track.

I wanted to give you a quick update this morning on Furby. Last year, we totally reinvented our Furby brand and it was really the first step for us in building a brand based on technology and innovation and new ways to play. And I'm happy to report that we're off to an excellent start exceeding even our expectations. A few weeks ago, we were awarded Toy of the Year for Furby in the U.K. And one of the big reasons for Furby's success is that the technology enables kids to develop a relationship with their Furby. So not only is Furby incredibly cute and fun, but by giving it the opportunity with digital apps, we've given kids the opportunity to create a relationship with their Furby. What happens is that Furby changes depending on how the child plays with Furby. It develops different personalities. In addition, you can use your iPhone or iPod touch or iPad to feed Furby, and also it translates Furbish into English. So last year, we launched Furby only in an English language version and only in a few select markets. This year, we now launched Furby in 12 new languages in markets around the world where retailers have been eagerly anticipating its availability. You can see on the screen, those languages that are entirely new this year.

Now from the beginning there's been a public fascination with Furby, and we've been able to establish the brand across multiple touch points with strong activation from our licensing and retail partners. This spring for English markets, and in the fall for the rest of the world, we've developed a new theme that we're marketing across all of our platforms called Furby Party, and we've developed a new product called the Furby Party Rockers, as well as introducing Furby in new wild colors. And the Party Rockers are a lower-priced item that interact with Furby and bring out some of Furby's more social features.

The other important thing that we're doing with Furby is continuing to launch new updates to the Furby app like Furby karaoke, where you have Furby and the Party Rockers can now sing along. And what's important about these updates is that they give kids new ways to play with their Furby, in some cases, new even since they purchased the product, and we've seen the kids really love to play with their Furby apps. We monitored this very closely. And in fact, we saw on Christmas Day, that the Furby app was the #6 free app in the App Store. That's out of over 750,000 apps. So this year, we're going to continue to use digital marketing and our apps as our predominant strategic lever for Furby to continue to entertain our Furby fan base and to keep kids engaged with the brand. Leading up to, in the fall, in the United States, our next generation of Furby called Furby Boom, where we'll continue the reinvention of this digital and physical play and provide kids with all new ways to play with this new generation of Furby.

I'd now like to turn to one of our most successful franchise brands, which is Nerf. You've all seen over the past 8 years, that we've been able to grow the Nerf business by delivering significant product innovation and by delivering segment expansion, all of course based on consumer insight. So we're very excited and enthused to share with you today a major new brand initiative for Nerf coming this fall. It's called Nerf Rebelle and it's a new, active and heroic lifestyle brand for girls, which addresses a unique white space opportunity in the girls market and breaks from traditional views of girls toys.

Several cultural trends, most notably the emergence of aspirational and inspirational heroic female characters have paved the way for this opportunity. There's also a need and an opportunity for Nerf Rebelle in the girls toys department. We've seen over the past few years an evolution of the girls aisle with a few new introductions, and our own success with Furby has shown us that older girls do, in fact, continue to shop the girls aisle, but there remains an unmet need. And that unmet need is for active play, with sports really being the only alternative for girls today, so Nerf Rebelle fills that need. We're delivering active play experiences for girls and building strongly on the girls' empowerment theme. I'd like to share with you this morning our inspiration for Nerf Rebelle.

[Presentation]

From a consumer insights perspective, this is spot on. We have spent several years researching this. We've talked to thousands of girls around the world. We've done extensive testing to gain insights into this consumer. And as a result, we identified 4 key need states and points of difference for the brand: Empowerment, social play, made-for-me and of course, style. And we've infused these across all of our product categories, messaging, communication and marketing. Now our consumer research told us that Nerf Rebelle appeals to girls 6 to 12 and aligns most strongly with active, social, creative and leader girls. And while this was expected, the key take away is that this opportunity is not just for girls who are into competitive sports, but this extends to a much broader, pop culture savvy consumer. So this fall, we'll be introducing a global line of Nerf Rebelle bows and dart blasters and collectible darts in a variety of colors and designs. We've presented this line to a few of our key retailers and we've received an overwhelmingly positive response.

And what's great about this is that we're leveraging all of our innovation and technology from Nerf into this line. So all of the products performed on par with the boys Nerf Elite line, which means they shoot at least 75 feet. Our research told us that girls wanted product made for them, but they wanted the same performance that was available to boys and Nerf Rebelle is not just about toys, it's a lifestyle brand, which we'll launch with both digital and lifestyle fashion extensions. And of course, we'll deliver the message across all those platforms that matter most to girls. We'll partner with our retailers to create engaging in-store experiences and we'll also drive digital in a big way with content, with gaming, with digital marketing programs that enhance the play for girls and deepen the emotional collection. And last but not least, we'll be seeding our message in ways that provide for organic and authentic buzz building, creating those so important brand advocates and empowering those brand advocates to spread the Nerf Rebelle message.

So now let's move to boys and our Transformers business. Our Transformers Prime television show is now broadcast in 182 countries around the world, as well as streamed digitally. This year, we're introducing 2 big new initiatives for Transformers. The first is called Beast Hunters. It's a whole new story that will drive across all product, all entertainment, all licensing, a real focal point for us. And the second is an entirely new segment in a new play pattern called Construct-Bots.

So let's start with Beast Hunters. When you look at Transformers, the story has historically been about Autobots versus Decepticons but we felt the time was right this year to create new storylines and new characters that will be highly appealing to that large, existing transformer fan base, but will also recruit and attract new fans into the franchise. So we're introducing this year Transformers Beast Hunters, with all-new enemy characters. Shown on this screen here is Predaking, he is the leader of the Predacon faction, and you'll see a replica of him downstairs. We're delivering all-new play experiences and all-new digital engagement. And of course, we will execute Transformers Beast Hunters around our entire strategic blueprint with new characters in all of our product segments, in our Transformers figures, in Transformers Bot Shots, in Transformers KRE-O, as we invite kids of all ages to join the Beast Hunters hunt.

At Hasbro Studios, we've developed an entirely new Beast Hunters television series and we've also developed a wide array of digital assets that we'll leverage throughout the year. I'd like to share with you this morning a quick look at our new Transformers Beast Hunters entertainment.

[Presentation]

Transformers Beast Hunters. To support this new IP, we've also developed several cross-category Beast Hunters retail programs that will feature a broad array of our toys, as well as licensed lifestyle products. The other major Transformers initiative is the launch of an all-new way for kids to play with Transformers called Construct-Bots. We know from the modern boy research that Brian referenced that boys love customization and the creativity of building. So based on these insights, we're giving boys around the world a whole new way to construct and to customize their Transformers and still convert it from a robot to a vehicle back to a robot. This fresh new platform converges construction, action figures and transformation, with hundreds of pieces allowing for limitless customization. And it's worth noting that they're simple to build and easy to convert. Transformers Construct-Bots.

Now we're also focusing in on customization in our Marvel business. The first Marvel Studios movie this year is Iron Man 3 and we're using Iron Man as a platform to launch a new initiative in Marvel called Marvel Assemblers. Inspired directly from the Iron Man lore, we've developed our first line ever of buildable action figures and interchangeable armor systems called Assemblers, where kids can build and customize Iron Man right out of the box and then mix and match parts across the entire product line with an incredible number of combinations, giving kids the ultimate power to customize their Iron Man.

Also in our boys segment, you're all familiar with how successful Beyblade has been for us over the past several years. Actually, since 2010, we have sold over 90 million tops. And importantly, we've had over 40 million battles played digitally on beybladebattles.com. If you recall, beybladebattles.com is our digital site where kids enter codes, customize their Beyblades and can battle against kids anywhere in the world. And this brand has been so successful for us because it uniquely addresses boys' desires to collect, to customize and to battle, and because we've used this digital engagement to drive our analogue sales. So this fall, based on our consumer insights, we're launching an entire new brand expression called Shogun Steel. It has new characters, new storylines and of course, a new animated program behind it. And we're also introducing a whole new way to battle called BEYWARRIORS. These are fully customizable battling figures. And of course, we'll use the entire beybladebattles.com community of Beyblade players globally to launch this new initiative. So that's BEYWARRIORS.

Now let's talk about Hasbro gaming. As Brian mentioned, we grew our gaming business in 2012. When you look in the United States as one market, we had 6 of the top 10 games in the U.S. and 12 of the top 20 games. So what do we see when we look ahead in gaming? Well we see several trends that are driving the business and that we're addressing. First, there's going to be continuing demand for face-to-face, physical, off-the-board gaming like our Twister Dance line. Kids still want that opportunity to have that type of game play. Secondly, mobile gaming is going to continue to grow in popularity, which will create more opportunities for corresponding face-to-face games to be brought to the market. If you recall at the end of last year, we launched ANGRY BIRDS STAR WARS in a face-to-face format and had great success with that, and we'll continue those type of initiatives. Third, party games mainly for adults are going to continue to grow. And lastly, games for under $10, traditional board games for under $10 will continue to be a robust area.

So about 12 months ago, we unveiled to you 10-point strategic plan. We refined that now for 2013. Our strategic plan 2.0 focuses on 4 main initiatives: First, driving our gaming mega brands. We're going to continue to invest in our mega brands. These our top 10 gaming brands. Secondly, continue to be the innovation leader. How? By delivering new gaming experiences. Third, we're going to build a Hasbro mobile destination for our brands. And fourth, we're introducing a new gaming new line under $10. And by executing these plan, we're going to be able to profitably build our games business.

Allow me to briefly take you through each. The first is continuing to drive our mega brands. We are going to continue to invest in growing these brands. With Monopoly, which is our largest gaming mega brand, we just concluded a global vote, which resulted in our retiring the iron token, and of course replacing it with a brand-new token, the cat. Now this promotion received a phenomenal amount of global publicity and we saw consumers in 185 countries around the world voting for which token should be taken out and which should be added. So clearly, there's an incredible amount of consumer passion for Monopoly globally. So this spring, we offered our consumers one last opportunity to buy the classic set of Monopoly tokens. And then this fall, we're introducing an entirely new Monopoly game called Monopoly Empire that lets players own the world's top brands and introduces new tokens featuring iconic elements of those brands.

Our second objective is to continue to be the leader in gaming innovation by delivering new gaming experiences. As you can see on the screen, we've developed a raft of new off-the-board gaming experiences, and none of these are traditional board games but instead, they provide kids with fun new ways to play and they leverage the incredible popularity of classic titles like Tetris and Bop It, as well as new hits like ANGRY BIRDS STAR WARS. You'll get a chance to see these new innovations during your tour this morning.

Our third -- and while we're talking about off-the-board gaming, I wanted to tell you about a great new initiative we have, where we're introducing the next big thing in boys action gaming and digital integration called B-DAMAN. What is B-DAMAN? It's head-to-head battle featuring Marvel blasting action. So it builds on those things boys love, shooting, competing and winning. And it offers the same addictive play as Beyblade with collectible and customizable figures and it will be supported by an animated television series and of course, a fully integrated physical online and mobile experience where kids will be able to scan their B-DAMAN and unlock virtual figures online and battle online just as they have done 40 million times on Beyblade battles.com.

Mobile gaming. In mobile gaming, Hasbro brands have had a great amount of success in fact, 4 of our games in mobile gaming have ranked in the top 100 paid games over the last 3 years, over the last 3 consecutive years. So we're going to leverage this installed base by creating a new Hasbro mobile gaming network, which is an aggregation of several of our existing Hasbro mobile games, as well as several new apps. And this network will enable consumers to move seamlessly between all of the Hasbro gaming apps. We'll use this network to cross sell our physical games through our mobile network, and we'll also use the mobile games to add value to our physical games.

Fourth in gaming, is our value gaming initiative. About 35% of the business last year in the U.S. for boardgames was done under $10, and we were under indexed in that group. So this fall, we're taking a collection of several of our classic board games and introducing them at these value prices, and we've engineered them in a way to deliver appropriate margins to our retailers and to us.

I'd like now to talk about Magic: The Gathering, it's one of our most successful franchise brands. And it focuses on a different consumer, it focuses on the hard-core, hobby gaming consumer. Now over the past several years, we've been very successful in growing this brand and in fact, 2012 was another record year for Magic. We looked back over the last 4 years, Magic has had 4 consecutive years of significant year-over-year growth and we've nearly tripled revenues in those 4 years. Now this increase has come from 2 things. We've been able to grow our player population with now about 3.3 million active magic players worldwide, and we've also been able to grow the amount spent by each of those players. So how have we done it? We've done it by implementing the magic success formula, which involves 3 basic elements: Digital investment, serialized entertainment and in-store branded play.

So let's start with digital investment. Magic at its core is a trading card game, but our 2 main digital experiences, Duels of the Planeswalkers and Magic Online, have truly fueled the growth of Magic over the past several years. So Duels of the Planeswalkers, we introduced last year on the iPad for the first time. And according to Metacritic, we were the #3 rated game on the iPad for 2012. That's out of all of digital games. With over 2 million duels players last season, this entryway into the Magic brand is one of our most important acquisition drivers, and it's a very effective way for us to bring new players into the franchise.

The other key digital component of Magic is called Magic Online. This is a full-on, virtual trading card experience and it's currently optimized for the most advanced-level, competitive Magic player. But starting this year, we're embarking on a major investment program that is going to make Magic Online a richer and fuller experience, not only for that experienced Magic player, but also make it more accessible to Magic players of all levels around the world.

The second element of our success formula is serialized entertainment. When you look at the Magic game, it's delivered through a series of major card set releases each year that contain these great new characters and great new stories. So last year, we released the Return to Ravnica card set and what we saw was tremendous success. It drove our event attendance up 86%. So this year, we're releasing the second and third installment of Return to Ravnica in the first half of the year. And then in the second half of the year, we'll be introducing an entirely new world.

And then the third element of our success formula is in-store branded play. It's a key element because these in-store gaming events are where critical, social engagement bonds are formed amongst Magic players, that community of Magic players. And in the past year, these in-store play experiences has driven active player growth for us by 29%. And we've also been able to increase the number of hobby shops who are holding these live player events. We increased that number of hobby shops in our Magic network by 14%. So clearly, we're having a lot of success with this Magic formula and we're going to continue to invest in the Magic brand.

I wanted to finish up today by giving you a quick update of our KRE-O business. As you all know, the construction category grew again last year, and with KRE-O, we continue to expand and gain momentum in this important category. In 2012, we debuted KRE-O in 10 markets. Last year, we expanded to over 25 countries and I'm proud to report that KRE-O is now in place at over 10,000 retail destinations around the world. So we're going to continue to invest in this business. This spring, we're expanding our KRE-O portfolio with new Kreons and new building experiences in Transformers, in G.I. Joe and in STAR TREK.

Starting with Transformers, we'll expand the offering. We've had a lot of success with our Micro-Changers collection, so we're going to expand Micro-Changers. We're also going to create a new category called Micro-Changers Combiners, which allow you to combine the Micro-Changers into a giant robot. And then we'll, of course, be introducing 8 new BEAST HUNTERS building sets.

With G.I. Joe, with the G.I. Joe:Retaliation movie in 3D coming into March, we're delivering a full G.I. Joe collection, 24 new collectible Kreons and 9 new building sets. And then in May, as the STAR TREK movie comes to the big screen, we're featuring a variety of intergalactic space vehicles from the movie, including one of the most iconic space vehicles of all time, the U.S.S. ENTERPRISE, collectible Kreons that we're introducing a new technology called Light Tech [ph] that allow every space vehicle to come to life with lights.

We've also partnered with J.J. Abrams and Bad Robot and Paramount to create a KRE-O STAR TREK stop-motion digital short. It features the KRE-O STAR TREK sets and Kreon figures and it tells an entirely standalone STAR TREK storyline. I would like to share with you this morning a little behind-the-scenes look at the making of the STAR TREK KRE-O stop-motion digital short.

[Presentation]

And finally for KRE-O, we're launching a major new IP for KRE-O this fall. It will deliver the ultimate mash-up for boys in a new world where boys will defend against an invasion of monsters and aliens and zombies and we'll also launch an entirely new mobile game app to accompany this IP that will tie together the analog and digital play, more to come on this as the year unfolds.

So as you've seen, we have several exciting new major initiatives coming this year. They represent great opportunities for us to continue to execute our brand blueprint. You've seen the importance of analog-digital integration across a number of these platforms. And with that, I'd like to thank you for your attention this morning and introduce Deb Thomas and David Hargreaves. Thank you.

Deborah M. Thomas

Well, thanks, John, and as Brian mentioned this morning, David and I would now like to address some of the frequent questions that we get from investors.

Question-and-Answer Session

Deborah M. Thomas

So I'm going to ask the first one and David hopefully will give us a good answer, as I know he will. So our first question that we frequently get is, you reported that games category revenues were up 2% in 2012. However, third-party data would seem to indicate that the games category was down and that Hasbro lost market share. How do you reconcile the difference?

David D. R. Hargreaves

Firstly, the third-party data that most people focused on is based on POS at 4 major retailers. Our Magic: The Gathering trading card business, which was up significantly in 2012 is done predominantly through small hobby stores or online and is, therefore, not captured by the third-party data. This understates both our gains and our overall company market share. Secondly, the games revenues that we report include all licensing revenues related to our games' brands, including those from EA, Activision and Gameloft and D&A related to digital gaming and those from WMS, IGT and Sci Games related to casino and lottery gaming. And also, those from USAopoly that create the MONOPOLY City and affinity editions. None of these revenues are captured by the third-party data. Thirdly, our action battling games such as Transformers Bot Shots and Star Wars Fighter Pods, while games tend to get retail with the rest of the brand in the action figure aisle and therefore, get recorded as boys' action in the third-party data. And finally, the games business in Western Europe is down less significantly than in the U.S. and in all the emerging markets where we are growing rapidly, Brazil, Russia and Turkey, we are selling more games than we ever did in the past. So Deb, a question for you. In 2012, your gross revenue margins increased above the traditional 58% to 59% range. What can we expect for 2013 and what are the trends in input costs and pricing?

Deborah M. Thomas

Well, most of you have seen this slide before. It outlines our cost of sales by major inputs. The components haven't changed significantly since previous years. In 2012, our cost of sales decreased to 40.8% of revenues driven by improved inventory management and favorable product mix. This translates to a gross margin of 59.2% slightly above our traditional annual range of 58% to 59%. During 2012, we reduced our own inventory levels by 5%. This resulted in lower obsolescence costs. Additionally, as we lowered the number of SKUs we're developing, we've seen a reduction in our tooling expense. Input costs themselves are expected to increase again in 2013. We are taking and have taken low single digit price increases on carryforward items to offset these rising input costs. But keep in mind, approximately 2/3 of our product is new every year, and for those new items, the prices are set based on their cost. In respect to the specific input cost, labor is our largest input cost at 9.2%. It's also anticipated to have the highest percentage increase in cost as well, as wage increases continue to put upward pressure on costs for manufacturers. We currently expect low single digit increases in other input cost and anticipate a mid single digit increase in the yuan. However, foreign currency is always difficult to predict. All of these items lead us to believe that gross margin in the range of 58% to 59% remains reasonable and many of the actions, which led us to achieving the high end of the range in 2012, are sustainable. So David, at the end of 2010 and 2011, inventories of Hasbro products at major U.S. retailers were significantly higher than you would've liked. Given that shipments and point-of-sale fell short of your expectations during the fourth quarter of 2012, should we assume that retail inventories are again excessive?

David D. R. Hargreaves

I'm pleased to report that the inventory of Hasbro products at our 4 major retailers in the U.S. is down by more than $100 million or 20% and is within the range that we will consider more normal. There are a number of positives associated with this. Firstly, it should not adversely impact our first quarter shipments. Secondly, the level and quality of retail inventory meant that we had to provide less for closeouts, markdowns and promotions as we closed our 2012 books. Thirdly, it means that the reduction in our North American POS was far less significant than our 137 million or 6% reduction in shipments. You would also -- you'll see from our balance sheet that Hasbro inventories of $316 million were 5% down from $334 million at the end of 2011 and down from $364 million at the end of 2010. So overall, we are comfortable with the quality and quantity of our inventory, both at our major retailers and in our warehouses. So Deb, you talked about a new cost savings initiative targeting $100 million in annual cost savings by 2015. Where do these cost savings come from? Can you provide more specifics on the charges in 2012 and 2013, as well as the timing of cost savings? And are these cost savings incremental to the business?

Deborah M. Thomas

So as we announced a few weeks ago, we did commence the implementation of a cost savings initiative that's targeted to deliver $100 million in annual cost savings by 2015. In connection with this, we had a pretax charge of $36 million in the fourth quarter of 2012 related to a reduction of approximately 10% of our global workforce and the consolidation of the sales and marketing offices in the U.S. and Europe. This was the first phase of our plan to ensure that Hasbro remains set for the future. We expect that we'll incur additional charges associated with the initiatives throughout 2013 as we implement additional phases of the plan. These costs are anticipated to be related to our recently announced voluntary retirement program in the U.S. and further facility consolidation. In addition, we'll be undertaking other components of the plan, including system enhancements and process improvements, that we expect will provide cost savings in the future. As we undertake the reduction in headcount, including the early retirement program, we're also planning on enhancing the talent and skill sets that we believe are required to meet the needs of a global-branded play company, serving consumers in all forms and formats. We expect to begin recognizing savings during 2013. However, these savings will be largely offset by anticipated additional cost associated with the 2013 actions. We expect to fully realize an annual expense reduction of at least $100 million by 2015. While many of our cost savings are expected to come from the net reduction in headcount, we'll also gain further savings from consolidation of facilities, including offices, warehousing and distribution centers and process improvements and other cost-saving initiatives. These process improvements and other cost-saving initiatives include our ongoing SKU rationalization. As we reduce our number of SKUs, we'll become more efficient and achieve better leverage from our development, marketing and manufacturing costs as we focus on fewer, larger global brands and initiatives. We're also targeting other manufacturing and sourcing efficiencies and have a laser-like focus on other expenses throughout the company to ensure we have the appropriate cost base for our profitable future growth. So David, we understand that you're not giving specific revenue guidance, however, we would expect that your Marvel numbers will be lower given the strength of both The Avengers and Spider-Man movies in 2012 and that Beyblade would also continue to decline. What do you see as the major offsetting initiative?

David D. R. Hargreaves

Firstly, if you look at our Marvel business, we will benefit from Iron Man 3, Thor 2 and the Wolverine movie. And within Beyblade, we have some exciting new initiatives, such as the BEYWARRIOR Battling Tops. But beyond these 2 brands, there are many brands which should provide incremental revenues either due to entertainment or new innovations. Brian and John have talked about some of these in more detail, but let me recap. Furby should grow as we will roll out multiple language versions around the globe. Remember, 2012 Furby sales were predominantly the English-language version. Transformers should grow with all new television programming and product line based on Transformers BEAST HUNTERS and CONSTRUCTION-BOTs, the Transformers boys can customize. My Little Pony, which has shown a lot of growth over the last 2 years should continue its upward momentum given the freshness of our programming and product line. Nerf is expected to grow as we introduce the all new girls-targeted Nerf Rebelle line. We also have what we consider to be the most interactive Elmo ever. We expect this to be a top seller and grow our Sesame Street business and you will see more of Elmo downstairs in our showroom tour. Additionally, we expect growth in many games brands, including Twister and Elefun, which both have line extensions, and Jenga with the ANGRY BIRDS Star Wars edition. Finally, we are launching B-Daman, a Marvel-based action battling game.

Deborah M. Thomas

So David, I have a follow-up question. We've seen a number of reports during the holiday season that tablets, rather than toys and games, were high on children's Christmas list. Do you believe that this will significantly impact toy, and more importantly, games sales going forward?

David D. R. Hargreaves

You are correct that there was a very high demand from children for tablets during the holiday season, and they do compete the children's disposable dollars and time. However, you are not correct in assuming that this signifies the beginning of the end of the traditional toy and games business. Disruptive technologies are not new to our industry. Having been in this business a long time, I can remember when Atari first came out with Pong and people predicted that this would be the end of the traditional toy and games business. That assertion was made each time we moved to the next generation of video consoles, from 8-bit to 16-bit to 32-bit and 64-bit. But history shows that the toy and game business continued to grow even as the video games business grew from nothing to tens of billions of dollars. And while many of our games can be made into an app, giving us incremental revenue, physical games cannot be replicated by an app and will always be in demand. You can't play Twister on an iPad. Deb, you have indicated that the company will no longer be providing guidance. What can you tell us about modeling for our 2013?

Deborah M. Thomas

Well, David, you're correct. As we stated, we are not going to be providing annual revenue and EPS guidance. We told you we've begun the implementation of our cost-savings initiative, but as we stated earlier, we expect the full benefits to be realized by 2015. In 2013, we'll have additional costs related to the next phases of the plan and therefore, minimal savings. As we look at our P&L, the 5-year average operating expense for each line item is a good starting point for modeling 2013. Let's speak to each of them independently. Product development cost as a percentage of revenue has averaged 4.7% over the past 5 years and has generally ranged from 4.5% to 5%. Although we expect to achieve more leverage from our development spend, our focus will be on delivering more innovation in our product offerings. We expect our development cost will continue in this historical range as we drive more innovation across fewer brand initiatives. Television programming cost have ramped since we commenced our television initiative, from $22 million in 2010 to $36 million in 2011 and $42 million in 2012. Annual programming costs are impacted by the level of current and future programming cost, as well as our anticipated program-related revenue. We expect this cost will increase in 2013 as we amortize our current and soon-to-be-released programming. Our 5-year average royalty expense is 7.5% and has ranged from 6.2% to 8.1%, depending on the level of entertainment properties from one year to another. The variability in our royalties is generally due to the level of product offerings based on significant entertainment initiatives of our strategic partner, including Disney, Marvel and Lucas. For 2013, we will have products based on several entertainment properties from Marvel. However, our Marvel-related revenue in 2012 was quite strong based on the success of Marvel's The Avengers and The Amazing Spider-Man. Advertising has averaged 10.4% of net revenues over the past 5 years, ranging from 9.7% to 11.3% over that time. Advertising increased in 2012 as we increased our spending in the U.S., shifting dollars from supporting early shipments to retailers to more productive spending aimed at the consumer. Excluding restructuring charges, our SG&A expenses have ranged from 19% to 19.9% of net revenues, averaging 19.6%. We expect amortization expense related to intangible assets to be approximately $51 million in 2013 and our underlying tax rate has averaged 28.08% over the last 5 years, with lower rates trending in the past few years.

David D. R. Hargreaves

Deb, I've got another question for you. I just need to find it.

Deborah M. Thomas

I bet I can guess what it's going to be.

David D. R. Hargreaves

You ended 2012 with $850 million in cash, but most of it is overseas. Can you continue to fund your business and your dividend? And will you repatriate the cash? Finally, what are your priorities for use of the cash?

Deborah M. Thomas

See, I knew I was going to get this question. Yes, David it's true. We ended 2012 with $850 million in cash. This is a reflection of our strong operating cash flow, which we continue to believe will be in the $500 million range. Most of the cash was held overseas as we've optimized our U.S. cash to run our business and return funds to our shareholders. During 2012, we returned $323 million to our shareholders through dividends and share repurchases. And at year end, we had $127.3 million remaining on our share repurchase authorization. Our strong cash flow generation is the basis for our confidence in our ability to continue to return cash to our shareholders. In addition to our cash flow from operations, we continue to have capacity to borrow under our short-term facilities. In fact, in 2012, we increased our short-term borrowing facility to $700 million and extended the maturity through 2017. So what about the cash we have overseas? We continuously look for ways to maximize the return on this asset, whether through investments in our emerging markets as we've done in the most recent years, through the development or acquisition of IP or elements of the blueprint, which we believe are now essentially all in place and systems, which can provide further efficiencies in cost and how we run the business. We could return this cash to the U.S. if there was a compelling need. However, we believe the investments we've made to date have provided a greater return to our shareholders for the long term and we think this is evidenced by the profitable 16% growth in revenues we experienced in our emerging markets in 2012. We remain committed to returning excess cash to our shareholders and this is evidenced by our board's recently announced increase of 11% to the quarterly dividend. We continue to target a payout ratio of approximately 45% to 50% per year, which in 2013 will be impacted by our board's decision to pay the February dividend in December of 2012. Hasbro remains committed to a long-term debt-to-EBITDA target of 1.75x. Hasbro remains ready, willing and able to meet all its planned financial obligations to all of our stakeholders, including investors in our commercial paper and bonds, our employees, our customers, vendors and all of our business partners around the world. While our current debt-to-EBITDA ratio is above our target level of 1.75x, we remain committed to that target level and expect it to come down over time as we continue to improve profitability and determine the right level of debt for the company as we approach the 2014 maturity. So David, I have one last question. On Wednesday, Hasbro announced changes in its executive management structure, which included you moving into a new position in corporate strategy and business development. Would you explain why Hasbro has created this new position and give us more detail on what you'll be doing and who will be filling your current role?

David D. R. Hargreaves

Well, as Brian said, both in our conference call and in his presentation earlier today, we are in a rapidly changing environment. The toy and games industry in developing markets is now becoming more of a market share battle, and tablets are creating both challenges and new revenue opportunities to our brands. The toy market in Asia Pacific is now as large as the toy market in North America, and the market in Latin America, although smaller, is growing rapidly. Given this pace of change, we've decided that we need to be more proactive in adapting our company to meet these challenges and opportunities. This does not mean we are changing from our branded play position or blueprint. Indeed, our focus is to the strengthen our capabilities around the blueprint. There may be compelling opportunities in a consolidating toy industry. Alternately, we may become slightly less dependent on toys and games if we step further into digital gaming, immersive entertainment experiences or lifestyle licensing. We would also look at opportunities to expand our reach geographically. I'm sure that we would look at a lot of opportunities over the next year or so, but we will do so with a healthy degree of skepticism and we may end up doing nothing. Additionally, looking at new opportunities doesn't automatically mean acquisitions. We have achieved much in the past through strategic partnerships such as our partnership with Discovery Communications on The Hub, our digital partnership with EA and our co-development agreements with Takara Tomy in Japan and Alpha Audi [ph] in China, as well as our studio relationships that have brought our brands to life as movies. As I vacate the Chief Operating Officer role, we will not be filling it directly. Some of the things that I've historically been responsible for have already been transitioned within the past year to Duncan Billing and to Deb Thomas. Now my responsibilities for commercial operations in all our markets around the world passed to Wiebe Tinga, who becomes Hasbro's Chief Commercial Officer. Wiebe, please stand up and be recognized. Wiebe will be reporting directly to Brian and will have reporting to him at 4 regional heads in North America, Europe, Latin America and Asia Pacific. Wiebe, a 25-year-old veteran of Hasbro is uniquely qualified for this new position. In his early career, he ran our markets in North and Central Europe and subsequently, Canada. More recently, Wiebe served as President of our Latin America and Asia Pacific regions during which time, he was very instrumental in establishing Hasbro's presence in new markets and building the local management teams. Most recently, he has served as President of North America, returning this business to historical levels of profitability. I am very confident, therefore, that Wiebe will make a great contribution to Hasbro's profitable growth as he takes on his expanded responsibilities. Thank you. And with that, Brian is going to join us back at the podium and we would be happy to answer any questions that we have not yet answered. We have people with microphones, so if you just sort of raise your hand and someone will give the microphone to you.

[Operator Instructions]

Gregory R. Badishkanian - Citigroup Inc, Research Division

Greg Badishkanian, Citi Group. So just looking at the medium-term goals, over what period of time -- is that the next 3 years, the next 5 years?

David D. R. Hargreaves

Yes, it's about 3 to 5 years.

Gregory R. Badishkanian - Citigroup Inc, Research Division

And just as a second part, obviously, it's going to be more challenging in 2013. 2014 looks like it's going to be a lot stronger. Is that kind of going to be typical where it's maybe not as smooth but you're -- it's going to be a little bit more lumpy year-to-year?

Brian D. Goldner

Well, actually if you look at the number of initiatives that we're talking about 2013, we would say we have a lot of newness, a lot of innovation, a lot of new segments and a lot of new brands. Obviously with that and with acceleration of our International markets, we're talking about double-digit growth in our emerging markets. We don't take a position on -- I think what you're really referring to is something that's more entertainment-centric, when, really, we're talking about developing our blueprint across all these elements for these brands we try to demonstrate this morning, I think we have exactly what we're doing with our brands and how successful that's been for us in the last several years. What we're really doing it is, by focusing on fewer brands, we want to get more of those brands propelled by the brand blueprint and so that way, we really grow pretty regularly over some period of time.

Please, up top. Felicia?

Felicia R. Hendrix - Barclays Capital, Research Division

Felicia Hendrix from Barclays. A few questions for you, David, you answered the question a few ways -- different ways last night and you gave it to us in your prepared Q&A here, so helpful, in terms of looking at your games point of sale and you talked about Magic: The Gathering not being in those numbers and some other things, just wondering if you could give us, perhaps, the magnitude or some understanding of how large Magic is so that we can actually really understand the impact that it had?

David D. R. Hargreaves

I don't think we're going to tell you exactly how large it is. There was a chart up there today, I mean, it's always been a significant business and the chart up there today said that we've actually tripled it in the last 4 years. So it's gone from being meaningful to triple meaningful. We tend not to give individual volumes for individual brands.

Brian D. Goldner

I think there is a scale there on the side of that chart. I think you can get a sense for it.

Felicia R. Hendrix - Barclays Capital, Research Division

And then I want to make sure, you talked about your inventories being down $100 million at your top retailers but were inventories also down at your secondary retailers, so across the board in the U.S.?

David D. R. Hargreaves

Yes. So if you look at the U.S., I mean, such a vast majority of our business is done in the major retail is where we get the very good POS. But I think it will be fair to say that, in the secondary retailers as well, inventories down and equally good of shape.

Felicia R. Hendrix - Barclays Capital, Research Division

Just final question, Deb, you gave us that very good chart that showed where your cost savings were coming from a by line in terms of what the impact was, but can you just help us understand maybe the impact it would have on SG&A and on, perhaps, cost of sales, it could be helpful for our modeling.

Deborah M. Thomas

Certainly. Well, we think that as we spread the cost out -- if you essentially look at where the cost were, which by line item, in 2012, we had $2.8 million in cost of sales, $10.9 million in product development and $33.5 million in SG&A. Proportionately, that makes sense to see where the savings would be, going forward.

Brian D. Goldner

Please down here, Michael?

Michael Kelter - Goldman Sachs Group Inc., Research Division

Mike Kelter, Goldman Sachs. First of, just a quick one, the 30% of SKUs that you plan to reduce, what proportion of your revenues does that represent?

Brian D. Goldner

A very small proportion. I mean it's the 80-20 rule. So we have a lot of big initiatives and big brands and what we tend to find in any situation, any year, is that there's a number of SKUs that have been done that may not overlap any other set of retailers as we're working now more as a global team as Weibe takes on his role globally. We really look at the opportunity to make both those first run SKUs, as well as exclusives available and be better about creating that Venn diagram around those major initiatives. So historically, we always find that there is a series of SKUs in any given year that aren't that meaningful to us in terms of revenue and I would say, in this case, again, the 80-20 rule, 20% of the SKUs representing 80% of our revenues.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then you mentioned earlier that your brands generated $1.5 billion of digital sales, retail sales in over 3 years, so call it $500 million a year or thereabouts. I guess, the concern some have is your ability to realize revenues and profits from those sales given the alternate channel versus the traditional toys. So of that $500 million and I'd hope you could be as quantitative as you can in answering this, how much revenue and profit do you make from those retail sales.

Brian D. Goldner

We get above average royalties for several different categories of digital gaming licensing and that's one way that we're going forward with digital gaming. Another way we're going forward is in some joint venturing, where we're joint venturing with Jagex, for example, to create a Transformers MMOG, which is, as you know, they're a European company. So over time, we may have some more sort of joint venturing, not a significant amount of money, but where were more involved in the actual digital gaming process and, of course, getting more of the revenues not just those royalties. If you go to the royalties and you look, whether it's a mobile gaming royalty or an online royalty, they all tend to be above the average royalty that we gather, I should say operating profit that we get, for the revenues of our Games business recognizing though that they are digital dimes versus revenue dollars. And therefore, over time, between that and participating there, the partnerships or joint venturing -- and now we are venturing out and doing a few digital games within the company as we built our expertise, what we always said was, when we're able to work with the best in the business, whether it's EA or Activision or all these companies, we learn a lot and we also onboard a lot of expertise over time, and there's also a lot of great casual gaming digital capacity that's out there in the marketplace. So you don't need to own a digital gaming studio anymore, because it's not a console game. And so we're out and now working selectively to make a number of digital games in that casual space that we may even make ourselves and, again, not a significant amount of money, but of course, then, we start to onboard the revenues and not just the royalties.

David D. R. Hargreaves

I think you added Brian earlier in your presentation that our games business actually enjoyed it's highest operating return for the last 8 years.

Brian D. Goldner

And the reason I mentioned that -- thank you, Dave. The reason I mentioned that is, I think, so often, when I have conversations with you, there's a concern that as you transition or evolve from what had been the board gaming business and you go to this more off-the-board and multiple forms and formats that somehow you're going to give up the operating margin, giving growth. So in fact in growing revenues, this is the highest operating profit margin in 2012 that we've enjoyed in the last 8 years. So as we said, we brought the right expertise on it, we took the right approach to the business and we focused on the brands with the greatest opportunity. We could, in fact, grow the operating margin and so that we could be agnostic about the kinds of games we make, because we're really following the consumer trend and if we're able to do that, that should allay any of your concerns that in going this direction, somehow, and not focusing only on board games, that somehow that, that would degrade our operating profit margin.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then one last one, it seems that you guys are making pretty meaningful changes at the organization, looking for growth in emerging markets and technology, restructuring your operations, yet, there haven't been many new faces to Hasbro, many of the promotions have been internal. Are there opportunities for you to bring in a fresh set of eyes or people who have already built the emerging-market businesses, already built technology businesses or do you feel like you have everything you need in-house today?

Brian D. Goldner

Yes. I think that, in fact, 2 points to that. If you go back and look at the amount of expertise we've brought on board, we've actually hired several hundred new people that are running markets around the world. Augusto Brambilla who's here has been with -- was originally with Sony Ericsson. He's on board with us for 3 or 4 years. He's running our Latin American business, had reporting first to Wiebe and then to David. That's a whole new team in Brazil, a whole new team in Colombia, a whole new team in Peru. And so we're building these individuals, you may not have met them yet. And I think that, that's really part of what we've been doing is bringing on hundreds of new people to run our emerging market business in these new markets around the world. As well, within Hasbro Studios, you've you met Steve Davis, who's the President of Hasbro Studios, and dozens of new people making great content, distributing that content all around the world. What I did say, however, was, through that process, it's kind of invisible, if you will, to you guys from the early 2000s to 2011, we have been flat in terms of headcount, because we're constantly evolving our businesses. As we launched the brand blueprint, we knew we would need new expertise. So there's hundreds and hundreds of new people. We've added an office in the West Coast, so that we would have our studio as well as our joint venture Hub out there. New offices in Brazil. We talked about building an office and infrastructure and warehouse in Russia. I think it's just a matter of maybe not knowing all these folks and John Frascotti, who's our CMO, only joined us 4 or 5 years ago, right? Five years ago. So these are relatively new faces to our industry and, as well, lots of new expertise throughout the company. In digital gaming, I just mentioned, that's really a whole new team that had never really been part of the company before. So we see it as this constantly refreshing, if you will, of our business, and we think that, that's very healthy. In this case, for 2012, we felt there was an opportunity to offer an early retirement, an opportunity to take down our overall cost structure. We'll continue to hire folks, as Deb mentioned, we're going to be hiring new expertise and we continue to do that, we have to get those new behaviors about brand building and literally eliminate some of the historical SKU making behaviors that have been part of the company. So I think that's just maybe a little bit invisible to you guys and certainly, over time, I would expect that you would meet more and more of our new and refreshed management team.

Sean?

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

Sean McGowan from Needham and Company. I have a 2-part question for Deb and then a 2-part question for Brian. This should be quick though. Deb, you've had -- helped in the past with understanding kind of the cadence of the year and shifts that are going on. Is there anything like that, that we should expect this year, understanding that we're not getting real guidance, but is it going to be shifted more to the end of the year again or should it be similar to last year? And along those lines, when do you imagine that those restructuring charges would be taken?

Deborah M. Thomas

That's a great question, Sean. I think we said last year, as we are coming into 2012, that we will purposely shifting our business later in the year and that there's no reason why we would change that expectation. We think it helped our profitability. So I would suggest that, that we wouldn't change that. As far as the restructuring charges, one of the things that's going to really impact 2013, and I won't get too technical, but because of the early retirement plan, we have a potential of having some pension curtailment charges. They're non-cash charges but they will impact the P&L and we'll only know if they happen when people actually take the program and we can see how they're actually taking payments whether lump-sums or any way.

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

But on the revenue cadence, would you say that's similar to 2012 or continued shift...

Brian D. Goldner

No. [indiscernible], Sean, to be similar to 2012. And we've sort of set up -- I think the point we were making is, just like we did internationally and the U.S., we've set up the new template. It's not going to continue to shift further and further. We needed to do that on a one-time basis to get more in line with the consumer demand.

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

And then Brian, 2-parter for you, regarding games. So you could stand at Wal-Mart and see Scrabble about 12 inches away from Words with Friends, physical versions, and the Scrabble is actually cheaper. So how does that trade work? Are you happy with what the implications are for that, going forward, as you look at more face-to-face games based on digital? And just help us understand how does mobile destination of Hasbro mobile games, how does that affect and not affect your existing relationships with your other partners?

Brian D. Goldner

So, I'll answer the first part and I'll ask John to answer the second part as the team's putting that together. I think you've what happened to select the needle in the haystack with Scrabble. It's one of the only games in our portfolio where we actually share the rights with another toy company. So we only the own Scrabble rights for North America. So for us, we saw Words with Friends and the opportunity to work with Zynga is to get to a global word game very similar to our Boggle brand, which is our global word game as well. So we saw that as a great opportunity and, in fact, that's sort of unique to the line up of our portfolio...

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

But generally speaking, the games that you have already under one brand and, now, you're partnering with somebody who has a similar IP, similar gameplay in different IP, you could say that for Draw Something and PICTIONARY, Boggle and Scrabble...

Brian D. Goldner

Yes. What's happening is, as we change the format in the form of the games that we're talking about and you add other elements of the form that take it off the board or add a 3-dimensional form that's part of a board game, you really change, if you will, the price points and what goes into the costing. So you're also able to work with people that are creating great topicality. What we want to do is give people endless number of choices for gaming. We see how quickly people are moving from games in the casual space and how quickly one game is popular and moving to the next game. So we have to have much more of that rapid change, the constant new games that go to the market, a little less focused on what we would normally look at just the historical, get all the new games initiatives out right before Christmas time. You're going to see a pace of new gaming that comes throughout the year because we think that's how people now think about gaming and then also going into different categories of gaming like B-Daman, which is a brand-new brand for us, and a wholly new launch that goes over the blueprint, and that's a different way to think about it and that's really contributed, that battle action gaming that you've seen with Fighter Pods and BOT SHOTS. And, now, B-Daman is a significant contributor to our games business and very different than the action figure business or the role play business within the boys action.

John, do want to talk about the network?

John A. Frascotti

Sure. Sean, so in terms of Hasbro brands that are mobile games today, we've worked with several partners, we mentioned My Little Pony, Littlest Pet Shop with Gameloft, and we have a number of Monopoly, obviously. Those are all mobile gaming apps. We're going to continue to work with selective licensing partners to do more of mobile game apps. We're also going to selectively develop some of our own. We talked about some of the expertise we brought on board. In the last several years, we brought on board a lot of digital gaming expertise. The network is going to allow people to move seamlessly between the apps. And so it's an aggregation app, if you will. So it will give us the opportunity from a marketing standpoint to move consumers across markets amongst those mobile games and also market our physical game.

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

Will the existing partners' games be part of that network, eventually, you'll integrate maybe coins or points or whatever across those games, that kind of thing.

John A. Frascotti

Well, I won't go that far, Sean. They will be part of the network. So you'll be able to move between the license and games. We haven't announced yet the actual sort of mechanism within it.

Brian D. Goldner

Yes. But one of the strengths of the whole area of casual gaming, as you know, is once you have a number of monthly active users, people are then offering interstitials and the opportunity to play other games and that almost becomes, if you will, that little miniature network, and that's what John is talking about there.

Okay. Other questions? Please. Over here.

Alexander Fodor - Sonica Capital

Alex Fodor, Sonica Capital. I have 2 questions. The first one regards your margin looking at them regionally, it's kind of interesting because, I think, a year ago, the U.S. dipped 200, 300 basis points on an EBIT basis and then you had a nice bounce back and then, this year, International dipped about that same amount. And so I'd love to hear the puts and takes in both businesses. I mean, we've heard a lot about that, but I'm just curious as how you view both regions, longer-term, the U.S. is 15, where it was prior to last year's dip? And then some comments on International business. And I have a followup.

Brian D. Goldner

Great. Sure. What we'd always said was we wanted to return the U.S. business to more of a historical level of operating profit margin. We feel, now, we can execute a strategy where the U.S. business should stay at this level and obviously, over time, as we expand our gross margin and we expand and take cost out and focus more, we should be able to amortize more of our expense, drive bigger initiatives and over a long period of time continue to improve steadily. Similarly, if you look at the International markets, really what happened there is the mix of geographies and also the mix of product. So obviously, contributing overall to our operating margin was the mix in terms of gaming and games obviously contributes, because games are highly profitable and more profitable now as I mentioned. But as you give up a bit of revenue in Western Europe, which tends to be more profitable and more established and you go to more revenues from places like Russia or Brazil, which are just now beyond breakeven as a proportion, that's what's driven down the operating profit margin in the International market. I don't know if you want to comment further, if there's another element.

Deborah M. Thomas

Certainly. And as I mentioned earlier, when we talked about our cost savings actions, we've continuously looked at facilities and locations that would require consolidation and part of the offices and distributions that we've looked at is in the International segment as well. So we're not just U.S. action, but they're global actions that we're taking.

Alexander Fodor - Sonica Capital

So it sounds like you view International as there's a 1-year sort of transition, as you said, a lot of these markets to breakeven and you expect to scale that back beginning in 2013.

Brian D. Goldner

Yes, well. Which should happen and we said we expect to get double-digit growth at the emerging markets. They're now just beyond breakeven with the exception of China, where we're going to continue to invest to build out that business. But as that grows, as you get more revenues now with the teams in place, you should expand the operating margin. Obviously, we want to see where Western European economies go but certainly, over time, we should more normalize those. And so then you do get that expansion, which is one of the contributions to an expanding operating margin over time. And then what Deb's talking about is in certain areas we had marketing and sales organizations that we're putting together or warehousing that we no longer need with this new global structure, and so we'll take those out and that will be expenses at first and then savings over time.

Alexander Fodor - Sonica Capital

So higher before lower?

Brian D. Goldner

Sorry?

Alexander Fodor - Sonica Capital

Higher before lower?

Brian D. Goldner

No. I would say -- well, maybe if you -- as part of these changes and these reductions, you'll see some of that coming to that, those costs in the -- the cost reduction in the International segment and then, over time, they go away.

Alexander Fodor - Sonica Capital

And then the follow-up is on the Games business, since no one's talked about it, today or ever. Just curious, you had that fantastic slide with the different products and the Magic game is obviously an incredible business. What were the -- there was the classics and I'm just trying to get a sense of -- just more of a consolidated breakdown between, let's say, Magic, digital and then board and puzzle?

Brian D. Goldner

Yes. I think you sort of have it. On the left-hand side of that chart, you saw gaming mega-brands, Monopoly we happen to have broken out and Magic or we called it Wizards of the Coast, because you also have Dungeons & Dragons. And you also have a new brand in there called Kaijudo, which is a new brand that's for younger kids that we're launching. And you also had in there a brand that's primarily in Japan called Duel Masters, which is like an entry-level version of Magic. Combine all that, sort of the Mega Brands on the left-hand side of the chart and 2 or 3 different towers of revenue. And on the right-hand side of the chart, you have the tail of the games business, we call it, the other games. Poor old Lucky Ducks and his friends are sort of in there and those aren't places where we can get that expandability and drive a brand across the blueprint. And you have what we call the classics, which we think, over time, strategies like the value-oriented strategy that will impact positively in terms of revenues. We've reengineered those games to be cost-effective for us where we can make money, the retailer can make money. So those classics need to be sold at a bit of a different price point with a different cost structure. But the tail of the games business, we've said we're going to focus on growth, we've gotten that growth and we're going to get that from sort of the left-hand side and right in the middle, the littlest box, were 2: One was digital gaming, which is increasing but we talked about digital dimes versus analog dollars; and then the other box was the action, battling gaming and you're going to see us introduce new platforms over time. So we included that as a new category because there really is -- and David described how really in NPD is almost being or it is being looked at as male action but in fact, it's a new category of gaming.

Alexander Fodor - Sonica Capital

So should we assume that the Mega Brand is still physical, paper -- corporate based

Brian D. Goldner

It's really everything. I mean, just think of Monopoly. Monopoly will be a great new Monopoly Empire. It's going to be an iPhone game or a smartphone game. It's an online game. It's a lottery ticket. You can go to Paris and play a slot machine. So we're going to execute a Monopoly or Magic across the blueprint. Each blueprint looks different based on the audience, but the approach that the company is taking and the expertise we've now on-boarded at the company allows us to go after each brand differently, that's why showed you have My Little Pony and you have Magic next door to each other, totally different audiences but the philosophy's the same.

Alexander Fodor - Sonica Capital

On Magic, is there any context or history as far as how big a game like that can get? Whether it's something seen in the industry.

Brian D. Goldner

What we are doing and we're sort of putting our foot down strategically and carefully, but strategically on the accelerator. What we're saying is we're seeing great growth rates. We want to make the user interface of our Magic digital online, I'd encourage you to go online and look at it. Right now, it's very oriented towards that committed, the Magic-committed player. The interesting thing about Magic players is they are younger. They're in college. They're all together. They may be playing together in high school and college. When they get a little bit older, they move apart. And so what we've done with our digital game is really bringing them back together virtually and that's why we're getting that player-base back and that's why they're now sharing that with their friends. But we need to make that online community more accessible for the uninitiated the way we've done it for the very initiated. And so some bits of investments that we're going to make there. We think that brand can absolutely continue to grow and we have some great leadership that we put in place there a few years ago in Greg Leeds and his team and that's what we said about the Gaming Center of Excellence. We're going to follow the same lead a few years later and we feel we can turn around that business, our overall Games business and grow it.

Alexander Fodor - Sonica Capital

And last question on that, is Magic tied to entertainment properties at this point?

Brian D. Goldner

We have -- the web -- John, you want to talk about some of the entertainment that they do.

Alexander Fodor - Sonica Capital

And I mean the sort of like TV or film.

Brian D. Goldner

No, no. Nothing just to see, kind of call it, a major immersive experience, but we do have all kinds of webisodes. There's all kinds of publishing. But it's really more oriented around that group.

Alexander Fodor - Sonica Capital

Would you consider something larger?

Brian D. Goldner

We can consider everything.

Alexander Fodor - Sonica Capital

As you should, right?

Brian D. Goldner

Exactly. Steve Davis -- the team we have, sort of the development opportunities, I think we've shown in prior meetings, we use something -- a very disciplined approach to the way we look at our brands, we call it a BEV, or a brand enterprise value, that we create for each of our brands, that's how we delineate between the franchise brands and the challenger brands, and then we grow those brands over time. We pressure test our challenger brands and see how far we can take them and that brand enterprise value is something that we look at as a way of measuring the possibility.

Please, up here. JT.

John Taylor

John Taylor from Arcadia. I had 3 questions, I guess. One is the Rebelle line in Europe, is there anyway you can kind of give us a rough scale of what your expectations are and assuming of all the things you've seen, this seems to me to be the blue ocean that you're going after this year. So I mean any way you can feel it? And as you report boys and girls breakdowns in the future, this is going to kind of confuse the Nerf line a little bit. So that's my first question.

Brian D. Goldner

I think what you're really getting at, over all, is that idea that this is just such a great white space for us. We've seen other great initiatives go up in the girls category and do quite well. We've had our own with the My Little Ponies of the World and others. I don't want to scale it for you, except to say, obviously, we're executing this fully. We believe in this. You're going to see product development not only for fall of 2013, we're already working on 2014. We know that this is a major white space for us. We're bringing our expertise. We're giving girls the performance they want, and as a father of a daughter, it's just, I think, it is tremendous.

John Taylor

Yes, I agree. Did you say on the call yesterday, I've heard it kind of late, that you had reached your $150 million goal of The Hub programming driving merchandise sales.

Brian D. Goldner

Yes we did for 2012 and we also said, a couple of years ago, that we would expect, over time, to achieve several hundred million dollars of merchandise sales being driven from television-supported brands globally and that's still true.

John Taylor

Right. So I was hoping you might be able to update that $150 million. Is there any number you can lob out to us in the 2, 3, 4, 5 timeframe?

Brian D. Goldner

Well, obviously, David mentioned several of our brands as part of key drivers that we thought there was growth this year. So obviously My Little Pony, Littlest Pet Shop and Transformers, off the top of my head, are all part of our TV strategy globally, and so we would expect those to grow. So I could only say to you, we would expect our TV revenues to grow and get more in line with that notion that we put out a few years ago, the several hundred million dollars being driven by television, globally, in terms of merchandise, as well as license and consumer products, as well as digital games.

John Taylor

And then my last one's kind of a more general, philosophical one. So you guys are reducing your SKU count by 30 items, by 30 SKUs, by 40. It seems to me the implication of that is going to be you're going to have less ability to constantly refresh a line over time and generate reasons for people to go into the store. At the same time, in the digital universe, people are upgrading their apps all the time and with new features and characters and storylines and whatever. So on the surface, it looks like you're going against the grain of that. So I wonder if this signals a real shift in the company moving more towards nonphysical, A, or is there a media umbrella strategy or something that you can create those storylines and take it further. You see what I'm saying? In order to keep it fresh.

Brian D. Goldner

I am. You sort of hit on 2 trends. I think the one that's most significant, most profound within that is the fact that we're doubling down or tripling down on our biggest brands opportunities and we are creating an endless number of SKUs on those biggest brands. In fact, in addition to the mainline products, we're providing those exclusives that retailers look for. We're providing all kinds of waves. We're very good, as you know, in the Action Figure business and the Preschool business and the Girls business, whether it's Playskool Heroes, that's growing quickly, Littlest Pet Shop or My Little Pony or Transformers, we're very good at wave management and offering all the different characters. We'll continue to do that. What we're really talking about are tertiary brands in this environment where consumers see those as less relevant and retailers are seeing those as less relevant. They'd rather expand the space around Nerf, they'd rather provide great space around Rebelle, Littlest Pet Shop, My Little Pony that are being supported all around this blueprint. In addition, our partners are providing those same kind of blueprint brands, Marvel's that brand, Star Wars has always been that brand and will only get to be more so globally with the acquisition by Disney. So what you're really seeing is that fact that brands today need to be executed across all these platforms. We'll make a ton of SKUs around those brands, we're just not going to work on some of the brands that are less important to the company. We already have other toy companies that are working on some of the brands that we own. As you know, we license out Lincoln Logs and Tinker Toys to other companies. Those are the kinds of brands that we're talking about, where we make selections, we may get some value out of those brands by putting them out to other people who can do a better job with them, maybe regionally or domestically. We need to be in the brand business that's the global brand business, that not the SKU-making business

David D. R. Hargreaves

I think the other point is when you go downstairs, look at our line and you look at the all the SKUs we've got, no one retailer carries even half of our line. So in fact, they look at our line and one retailer will take these items, the another retailer will take the others. If you actually reduce the amount of SKUs, it doesn't mean you lose any shelf space. It means that you get more commonality in terms of the line, which will, of course, still, retailers like exclusive. So we will continue to make exclusives for certain retailers that you'll find that just having less choice for them in terms of the breadth of our line, will mean that we just -- still get as much listings and as much shelf space that we can do that with first SKUs as well.

Brian D. Goldner

Yes. We'd rather focus on great destination exclusives for retailers and our biggest brands that they really like versus, again, those secondary or tertiary brands that are less meaningful in multiple markets.

Other questions? Down here please, and get a mic.

Hector Guenther

Hector Guenther with ANZ Bank. I thought it was a great show and you all do a great job talking about your plans for the future. I'm interested in -- a two-part question on Asia Pacific, China but also some of the other populous markets out there, Indonesia, the Mekong. So on the revenue side, I'm curious, general comments about when you say want to build out the business in China, that's obviously a medium to long-term kind of undertaking, big-time cultural barriers, et cetera, et cetera. Interested to hear more a little detail about that. And then also in regards to Asia Pacific on the sourcing side, obviously, the managing expenses and getting your margins up is important. So given all the change in China, the higher wage rates, the more economic volatility there, what do you think about in terms of changing where you're sourcing a lot of your product. Are you considering moving some of the sourcing to other countries like the Mekong region in Asia.

Brian D. Goldner

I'll answer the sourcing question first and David if you would take the region, you can talk about the selling regions up until now. And then maybe Wiebe could comment kind of go-forward, in terms of China, what his plans are and what the team's plans are. If you look at sourcing for China, China still offers a very affordable platform for sourcing product and a tremendous amount of expertise in the toy industry. We've been there for decades. There's an infrastructure that goes around the manufacturing that's critically important because you can manufacture in a lot of places but if you can't get it to global markets, it's not really that helpful. Having said that, we are manufacturing in Vietnam. We've done -- and doing a partnership particularly around some of our brands, so we're looking at some new geographies for manufacturing. Clearly, the wage rates in China are still very affordable relative to some of the more developed markets. And so we want to look at that and be open-minded to going to different places and for different kinds of products, those expertise that's outside of China. So still open-minded to that, recognizing though that the wage rate in China is still here relative to a developed market that's here. So even though you have a growth rate in salaries or in income, that growth rate could go on for quite a long time and not equivalate [ph] to the domestic or a more established market. So that's one thing.

David D. R. Hargreaves

Yes, I think we said earlier that the Asia Pacific market today is as big as the North America or the U.S. market for toys and games and, clearly, we need to do more in there as time progresses. If you look at probably the largest market there, historically, it's been Japan but probably, today, it's China. Today, the Chinese market probably at retail dollars is maybe close to $7 billion or maybe $3.5 billion of wholesale. But it's bifurcated. It is really -- 10% of the market is for branded Western goods and Japanese goods, which tend to get sold a bit like luxury goods like Coach and Louis Vuitton and the rest of the market is for Chinese domestic goods that probably sell at about 20% of the price of the imported goods. I think, over time, in China, we need to do 2 things: One, as the emerging middle class grows and they have more money and they devote more to brands, we'll both benefit at sort of that top end of the market. But also we announced earlier this year, a co-development agreement with Alpha [indiscernible], who is one of the leading domestic Chinese manufacturers. And under that, we are going to take one of our brands and one of their brands and we're going to redevelop jointly, so they will actually -- and do television programming around that, so they will actually place the television programming and sell the product in the Chinese market and we will place the television programming and several product outside of the Chinese market. So that means a couple of things for us. That means it will participate in the revenues on their brand, which sells in China because we're a co-developer and we'll get the revenues outside. And then on our brand, our brand that we choose to put into this joint venture, for the first time, will be developed by a Chinese company for the Chinese market at Chinese prices. So that gets us to participate much more fully in the bottom end of that market, which is by far, the larger end. So that's a couple of things that we're thinking of doing. We also work with Takaratomy in Japan, which is also about a $7 billion market. So these are some of the things that we talked about, what am I doing going forward, building some of these relationships and ensuring that our product gets into all these markets is part of that.

Brian D. Goldner

And part of the strategy and our blueprint, Steve Davis and his team, we now have Transformers Prime on the air in China. We're also making a brand-new TV series for Transformers that will be indigenous to the Chinese market. Transformers is one of the most popular brands there. The brand was there in the '80s. So we're actually making a brand-new TV series that will be produced in China with Chinese partners and will air on CCTV. That goes in partnership with the other brand that we're working on right now, Play-Doh, known as Pei Le Doh, which is really a great, very broad Preschool show in partnership with Tune Max [ph], a Chinese company and that is also going on the air in China. So that is part of the blueprint strategy as we take it to China. Wiebe, you want to comment going forward?

Wiebe Tinga

Today we've talked about Japan in itself. If you look at the rest of that region, it is almost like 3 buckets. You have the Pacific markets, Australia and New Zealand, which has a lot of similarity from the retail build up, from the brand awareness, from the structure of the toy industry itself, which has a lot of resemblance with the U.S., with Canada or with mature markets or developed markets in Europe. Then you have the smaller markets, the Taiwans, the Singapores, the Hong Kongs, the Malaysia, we have had sales and marketing organizations there for over 10 years. So we have -- these are not huge markets. That markets would drive, let's say, moderate revenue and are meeting our profitability standards and then you have markets where we set up our own offices over the last years. China, we've been building our team in Shanghai for over 4 years now. We have around 40 people on the ground, marketing and salespeople, go-to-market strategy specialists, digital people, licensing people. And with all the initiatives Steve is driving with his team, we're building on a brand awareness in a very, very significant way. We have been working with distributors over the past in China. As of the beginning of this year, we have our hands free with our own sales and marketing organization to go to retail in China. So this will kind of open up a new chapter of expansion in China. And then 3 years ago, we started our own operation in Korea. As you know Korea is one of the leading industries -- the leading, let's say, economies especially in Asia. We feel that it's a significant upside to market with more than 60 million people with a high level of GDP and we've been very successful with our box offices with Transformers and with G.I. Joe in Korea. So we believe that gives us significant opportunity for us in the near term as well.

Up in the -- in the middle there.

Justin Bandy

Justin Bandy of Artisan Partners. My question is around pricing. As you guys focus on less SKUs, you said you're doubling down on the Mega Brands, I'd like to hear you guys talk about what that means for your ability to take price, I think about what Lego's been able to do over the last few years. Should we expect something like that from you guys?

Brian D. Goldner

I can't really comment on what Lego's done but what I can say is that -- and Deb mentioned it earlier that we've taken our low single-digit price increase on carryover items. The great part about the toy business, the fashion-orientation of the toy business is every year when you make a new initiative, call it Transformers CONSTRUCTION-BOT, when we make that product, we're able to build it from the ground up. It's brand-new. So there's no frame or reference about pricing. So we've built the cost of goods to make that product line, that brand or that element of the brand and ensure that we're getting a good gross margin and good operating profit out of that brand. So every time we're introducing those new items or SKUs within the brand, we're able to calculate what it looks like given current cost environment. It's really the carryover items that get where we apply a low, in this case, single-digit price increase, because those items we're carrying over we're seeing the inflation in our cost of goods in those items and we want to ensure that we're able to maintain or, over time, grow our gross margin as we've done most recently. As Deb said, we think we can stay in the high end of that 58% to 59% gross margin range over time, but I'm not going to comment beyond that. Certainly as we take cost out of the business as we are able to amortize more of our brands over more geography. And our R&D and marketing, obviously, that has a great knock-on effect to earnings and operating profit.

Justin Bandy

Just thinking a little more broadly, I mean it sounds like the way you think about how you price your products is almost on a cost-plus basis, so you're managing to a mark rather than thinking about what the monetization value is of your brand as you build them, maybe I'm not understanding...

Brian D. Goldner

No. I'm just trying to explain the mathematics. Obviously, we feel where we're getting, where we have innovation -- great innovation, which we do in our Mega Brands, our challenger brands, franchise brands. We get paid for that innovation. We obviously look at the innovation that we have in those brands and we want to get paid for that. So I'm not saying that we have to pick a price point. Obviously, if it's a brand-new brand like a Furby, a reinvention, we want to pick a price point where we can make good operating return and get a good operating return for the retailer. But the idea of -- in this environment, I'm not going to talk about what our overall pricing plans are going forward. But clearly, what we're talking about is the opportunity to get paid for our innovation in the category where we're a market leader, where we're offering uniqueness and innovation, as well as an execution across the blueprint and entertainment, we can see that we can get paid for that innovation. So maybe I should've started there for you but, obviously, that's part and parcel of what I'm talking about. I was just commenting about the mathematics.

Unknown Analyst

Pria [ph][indiscernible] with Barclays. Just one housekeeping question, as we think about you getting back to your long-term leverage target by mid-next year, how should we think of the cadence around that? Should we expect to see sort of short-term increase just given your needs and then a decline thereafter? Or should we expect a steady decline from here to then?

Deborah M. Thomas

Well, as we talked about earlier, most of our cost saving initiatives, the savings from that will come by 2015. So as we look to our earnings and those cost savings coming through, flowing through to our earnings, we said that there may be some blips in between. In 2013 and we have some cost as well as some savings and in '14, we would expect to have a little bit more of the savings to fully recognize the plan by 2015. So as we look at our EBITDA and our profitability improvement, we've clearly targeted the cost savings by 2015. So we remain very committed to achieving our target of 1.75.

Brian D. Goldner

I think right across the aisle.

Robert Fagan - GMP Securities L.P., Research Division

Robert Fagin GMP Securities. Just wanted to ask with respect to Transformers CONSTRUCTION-BOTS and the Iron Man Assemblers, seems they have a little bit of commonality with your KRE-O line, how are they going to be merchandised at retail and do you see that as having a cannibalization on your KRE-O products. And additionally, in terms of KRE-O, you've positioned it as the challenger brand, and I was wondering, in general, for challenger brands, is there any differences in long-term implication for the future as compared to the Mega Brands.

Brian D. Goldner

Great question. So on KRE-O, the challenger brand is maybe a new brand that we've launched and now we're putting out in markets and adding fuel to the fire, new innovations, new marketing, new markets, and that's what makes a challenger brand, a challenger brand. Play-Doh was a challenger brand a few years ago and as we made it more global and we added product development and, this year, we're adding a whole new compound to Play-Doh, it just gets to ascend in order and we look at it that way as we assess its brand enterprise value. And so, there's nothing about KRE-O being a challenger brand other than where it is in its life-cycle and our ability and desire to invest in growing it over time. The Assemblers and the CONSTRUCTION-BOTS will both be merchandised in the boys action category. What we see in boys action is the opportunity to create that customization and the endless number of permutations where the boy can actually control the play and make his Iron Man and all the armor, make all the different factors within the Hall of Armor for Iron Man is a great product to start with, but you'll see that Assemblers idea continue to grow across Marvel. And then in Transformers, the notion of construction, the notion of transformation is such a core part of the Transformers brand and CONSTRUCTION-BOTS in our research, as well as from retailers, they're telling us it's a great product line with that endless amount of combinations, customization and, again, additive to the boys action aisle. It's really not -- it's not made to be compatible with brick construction. We'll continue to develop Transformers and KRE-O, because that's a totally different category and we actually don't see as much overlap there as you might imagine.

Other questions? Back in the corner, please.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Drew Crum, Stifel. First question is, can you talk about some of the puts and takes to your first quarter. I believe you're cycling against an extra week of cost in a year ago period and you've got an earlier Easter, that's the first question. Second question, Brian, you talked about the boys business, longer-term, you've got a very large franchise at least from 2 years ago in Beyblades that it feels like it's on a downward trajectory, given the history of that property. You've got some new entrants in the category, Disney is getting in with its Infinity line, but then you also have a big opportunity with Star Wars through the Lucas Film acquisition by Disney. So you could you just talk about the boys business, longer-term, how do you feel about it.

Brian D. Goldner

Great. I'll start with that and then maybe, Deb, you'll comment on kind of where we see the puts and takes in the quarters and the cost. If you look at the boys action business, it's actually one of the great categories that's both very consistent at the baseline but very demand-elastic over time. As a category that's so entertainment-centric and entertainment-sensitive, you get great initiatives in there in television, online, webisodes, beybladebattles.com online, 40 million kids are playing and they're going off-line to buy the Beyblades. So it's that combinations -- a perfect category to execute the blueprint. We have not only Transformers 4 coming for next year, but obviously any number of great movies and our partnership with Marvel and Lucasfilm. And you're right, Lucasfilm has always been a great brand and Marvel has always been a great brand for us. The great part about the Disney partnership is the globality [ph] of their business and their sensibility and understanding of how to make those brands more global. We've seen it in Marvel. Over the last few years, we're getting to introduce the male action category across all these great different play patterns that we create, role play and action figures and customization and all these things that we see now going out to more of the world. And so, over time, that's enabling us to get to be a bit less dependent on North America and frankly, growing our International footprint for the company and for these male action brands based on the Marvel business. Obviously in Star Wars, the Walt Disney company and Lucasfilm have now started to work on the next generation of Star Wars, Star Wars 7, J.J. Abrams has signed on to direct and they expect that the movie will come out in 2015 and they've also talked about making 3 more movies within that trilogy. So that's just additive to our overall view of the boys business being a great long-term category. We're leaders in this category, we're doing a lot of proprietary research, an incredible amount of really innovative product development, not just in analog products but across the digital spectrum. And I think it bodes well for us and for that category, long-term.

Deborah M. Thomas

And as for the year, you're right, Drew, we have a 53-week year in 2012, we have a 52-week year, like most other people now in 2013. But as we talked about earlier, we expect our business pattern to be similar to '12 and that more revenue is shifted to the latter half of the year. And as I did mention, when we talked about our cost savings initiatives, the one thing that will make the quarters potentially a bit different is just the restructuring charges and the pension impact we have, which we won't know until we see how many people will take particular payout ratios under the early retirement program, which does close in the first quarter. So we could begin to see the impact in the first quarter, but we'll certainly call that out so everybody understands how that's different from the underlying business.

Brian D. Goldner

Question, anybody? Yes. So one more here and then I think we're going to wrap up and get you on tours.

Unknown Analyst

Just wanted to ask, since no one's asked about it, Nerf is about 10% of the company, I think. And I was just curious if you could talk a little more about that product, and it seems like it's one of your bigger initiatives for 2013, has that business been impacted by recent publicity around kids playing with toy guns? Is that something that we should be thinking about as a possible negative impact to Nerf or no measurable impact of late?

Brian D. Goldner

Since 1994, we've been creating blasters of some kind. Obviously, we really redesigned and reimagined the whole brand more recently, but since 1994 we did it. It was really to solve an age-old problem that actually parents and kids kind of agreed on, which was kids were too sedentary, parents agreed with that. Kids wanted to be play high-action play, parents didn't want that in-house, particularly moms. And so we went out and did a lot of work around that. I think where Moms really respond is you've got a foam dark blaster being played in a really fun way and a team orientation. And so that's really the way we've always positioned Nerf ,we'll continue to position Nerf and we'll continue to expand around that. So we don't feel like long-term, certainly, globally, as well as domestically, we're very sensitive to how we market to kids. We've been that way for perennially and we'll be that way forever more. And so, we feel like, long-term, the Nerf -- there's, obviously, tragic incident, but the Nerf business is really very different than, I think, the conversation that's going on out in the community.

Unknown Analyst

And then one other, because I think we're all trying to understand the gross margins a little better, they were surprisingly better than any of us were expecting. There was a slide earlier, if I think back, you guys took mid-single-digit price increases in '12.

Brian D. Goldner

We did.

Unknown Analyst

And it turned out your inflation was only 3% per this slide. So now this coming year, you're taking only low single-digit pricing, are you expecting inflation to be 6%, kind of going the opposite direction. Should we expect some gross margin pressure from that dynamic?

Brian D. Goldner

No. It's a really good -- I'm glad you asked the question so we can clarify. There's a lot of new initiatives in 2013 and all of those new initiatives, we already contemplate what that cost increase would look like. So where we take the low single digit price increase, that's on carryover product, I think it really speaks to the number of new initiatives that we have at the company, the way we thought about those new initiatives, we've only seen and scratched the surface of all the new initiatives we have for '13, we didn't want to show you everything in this room. What we wanted to do is really focus on the most important initiatives that we see as difference-makers for the year. You're going to see a raft of additional initiatives down on the showroom, but you're also not going to see the entire product line up down in the showroom. So there's additional products as well, but lots of new product we're still making, lots of new items for the year. We're just focusing in on those most important, most global opportunities. I think that's maybe a great way to wrap up. I want to thank you all for this. I'm going to invite Deb up and she's going to give you the logistics of your tours and thank you all for being here and for being here on the webcast.

Deborah M. Thomas

So that's going to conclude our time here in this theater and the presentation and the Q&A session, I thought that was a really good discussion. Our management team will join us down in the showroom for the tours and if you have other questions, you can speak with them down there as well. But what we're going to ask you to do is just exit the theater the way you came in, through the back of the room. There'll be tour guides who'll split you up into groups and take you to our showroom. It's about maybe 1 hour and 15 minutes long terms of the tour. And when you leave, make sure you stop by the registration desk. We do have a gift bag for you to take with you and we thank you all for coming today.

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