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Hasbro, Inc. (NASDAQ:HAS)

Q4 2008 Earnings Call

February 9, 2009 8:30 am ET

Executives

Karen A. Warren - Investor Relations

Brian Goldner - President, Chief Executive Officer, Director

David D. R. Hargreaves - Chief Financial Officer, Chief Operating Officer

Deborah Thomas Slater - Senior Vice President, Controller

Analysts

Felicia Hendrix – Barclays Capital

John G. Taylor - Arcadia

Margaret Whitfield - Sterne, Agee & Leach

Robert Carol - UBS

Tony Gikas - Piper Jaffray

Timothy A. Conder - Wachovia Securities

Gregory Badishkanian – Citigroup

Drew Crum - Stifel Nicolaus

Sean P. McGowan - Needham & Company

Gerrick L. Johnson - BMO Capital Markets

David Leibowitz – Horizon Asset Management

Operator

Good morning and welcome to Hasbro's fourth quarter earnings conference call. (Operator Instructions) With us today from the company is Karen Warren, Senior Vice President of Investor Relations. Ms. Warren please go ahead.

Karen Warren

Good morning, everyone. Joining me today are Brian Goldner, President and Chief Executive Officer; David Hargreaves, Chief Operating Officer and Chief Financial Officer; and Deb Thomas, Senior Vice President and Head of Corporate Finance.

To better understand our fourth quarter and full year results, it would be helpful to have the press release and financial tables available that we issued earlier today. The press release includes information regarding non-GAAP financial measures discussed on today’s call and it is available on our website at Hasbro.com. We would also like to point out that on this call whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share.

During the call this morning, Brian will discuss key factors impacting our results and David will review the financials. We will then open the call to your questions.

Before we begin, let me note that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives and similar matters. These forward-looking statements may include comments concerning our product plans, anticipated product performance, business opportunities and strategies, financial goals 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. Some of those factors are set forth in our annual report on Form 10-K, in today’s press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call.

Now I would like to introduce Brian Goldner. Brian?

Brian Goldner

Thank you Karen and good morning everyone. Let me begin by saying that in 2008 we achieved our stated goal of growing revenue and earnings per share in what can be described as one of the worst holiday seasons in decades.

Revenue grew 5% to $4 billion compared to $3.8 billion a year ago. The strength in our portfolio was broad based with key drivers in each major product category contributing to our growth. We delivered earnings per share of $2.00 compared to $1.97 in 2007. Our results in 2008 reaffirmed that we should be able to grow both revenue and earnings per share in 2009 assuming we do not see further deterioration in the global economy or foreign exchange.

After a very strong performance in the first nine months of the year the fourth quarter clearly had significant headwinds between the impact of foreign exchange and the broad based economic downturn. Fourth quarter net revenues declined 5% to $1.2 billion. However, net revenues increased 1% absent the $80 million negative impact of foreign exchange.

We reported an operating margin of 12.3% or $151.6 million compared to 15.4% or $200.1 million a year ago and earnings per share of $0.62 compared to $0.84 in 2007. If you go back to four months ago on our third quarter conference call we spoke to you about the changes in consumer demand we had seen since September and we described weakness in October retail POS.

At that time we indicated we had reduced our previous expectations for the fourth quarter 2008 and for 2009. We further stated at our analyst event in November if the weakness we experienced in October continued into November and December there was the potential that retailers could pull back from previous indicated levels of purchase and there would be more uncertainty about how we would finish the year.

Following the November meeting we did not see the improvement in retail sales we had hoped for. As consumers pulled back on their purchasing this resulted in higher levels of inventory at retail. To address this issue we began to look at new ways to drive incremental business at retail and to finish the year in as strong a position as possible. Prior to Thanksgiving our discussion with our key retail partners around the globe shifted to developing additional programs to ensure the best possible sell through for the remaining weeks of the holiday season.

Together with our retail partners we put promotional programs in place. The programs provided incremental mark downs as well as discounts to drive store traffic and to get product moving through retail in these very critical selling weeks. The goal was to keep our core brands strong and to finish 2008 in a much better inventory position than we would have otherwise. In this regard the programs were successful.

That said these actions resulted in a decline in operating margins in the fourth quarter. Given the environment we viewed these decisions as necessary and the impact on our financials as short-term.

Looking at the full year while we took proactive steps in the fourth quarter to address the short fall in consumer spending it was our commitment to our longer term strategy that enabled us to grow our business in 2008. We continued to focus on four key areas as part of our ongoing strategy.

First, to reinvent Hasbro’s core brands. Second to expand and drive Hasbro brand into digital gaming. Third to continue to make our brands meaningful by bringing them to life by lifestyle licensing and publishing. Finally to expand and contemporize our brands by delivering the right entertainment and immersive experience for every consumer audience. In addition to these key strategies we continued to execute our plans to grow globally including our emerging market business.

Our focus on core brands including continued investments in marketing and product development grew solid growth for the year in our Boy’s, Preschool, Girl’s and Tween’s categories. Board games were also up for the year.

The Boy’s category was up 6%. In the beginning of 2008 we said we believe that our top six Boy’s entertainment properties could quite possibly equal the top three Boy’s properties in 2007. In fact we exceeded our goal. Star Wars was up significantly for the year. The Marvel brands performed very well with Iron Man exceeding expectations. The Transformers brand was remarkably strong. It did not show the type of decline we typically see after a movie year. In fact it was the lowest percent decline in the year-after movie of any of our Boy’s entertainment properties we had launched in the last ten years.

This summer we will continue to deliver entertainment and immersive experiences with the live action theatrical releases of GI Joe: The Rise of Cobra, Transformers: The Revenge of the Fallen and Wolverine, one of our Marvel properties.

Our Preschool and Girl’s businesses were up double digits. Preschool was up 11% with continued strength from our Playskool brand and In the Night Garden. The Girl’s category grew 13% led by Littlest Pet Shop which was up a strong 26%. The Tween category grew 7%. Nerf continues to be strong and was up 51% with the Nerf End Strike Vulcan and the Nerf End Strike Recon performing very well. iDog also continued to contribute significantly to the category.

Board games were up 2% while the total games and puzzle category was flat compared to a year ago. We did have tough comparisons due to shipments of Are You Smarter Than a Fifth Grader in 2007. There were a number of successes in the games category primarily from brands we targeted for reinvention with products like Twister Hop Scotch, Guess Who Extra, Sorry Sliders, Monopoly Here and Now the World Edition and the 60th Anniversary Edition of Scrabble. In addition, Pictureka was launched globally and performed very well.

With all the strength in our core brands it is clear that our strategy to grow and reinvent Hasbro brand is working. In our digital business our brands were re-imagined through our partnership with EA where we saw great success with Hasbro branded games including strong selling titles for Nerf for the Wii and Littlest Pet Shop for the Wii and Nintendo DS. Monopoly also had a great year and launched on a number of platforms including mobile, iPod, the Wii and Xbox 360.

In 2009 EA is launching several new video games and over two dozen games for mobile and online including Scrabble, Cranium and Trivial Pursuit. Additionally, Activision will launch a full slate of games in conjunction with the Transformers theatrical release this summer. In 2009 we expect to continue growing our digital gaming revenue.

The investments we made in the emerging markets also contributed to our growth. In the key markets we targeted for expansion; Russia, the Czech Republic, Brazil, Korea and China, growth exceeded our expectations and many of our core brands performed well including Transformers, Nerf, Playskool, Monopoly and Littlest Pet Shop. Our continued investment in these markets will contribute to our growth over the next several years.

In 2008 many retailers experienced difficulty due to reduced consumer spending and the global financial crisis. At the end of last year two customers went out of business; Woolworth’s in the U.K. and KB Toys in the U.S. These events have not had a material impact on our business.

As we look to 2009 given the severity of the downturn in global economies we are focused on keeping costs down, managing our operating cash flow and continuing to invest in our business for the long-term. Without question we expect it to be another challenging year with the first quarter probably being the most difficult. As the year progresses we would expect to see more momentum around our major movie initiatives and as we roll out our many new brand initiatives this fall.

In closing, we remain committed to our long-term strategy, a strategy that has been successful and one that we believe will drive growth, differentiate and create sustainable competitive advantages for Hasbro and deliver value to our shareholders for the long-term.

With that let me turn the call over to David Hargreaves. David?

David Hargreaves

Thank you. Good morning everyone. Before we begin reporting our numbers in detail I’d like to spend a few minutes talking about the fourth quarter. As Brian indicated, the fourth quarter was extremely challenging with consumer spending on toys down from a year earlier in most of our major markets.

In almost all cases Hasbro out performed the industry and we are reporting fourth quarter revenues which absent the adverse impact of exchange rates grew 1%. This growth didn’t just happen; it took some major tactical initiatives. You may recall that at our November Investor Event we indicated October POS had been down significantly and we potentially had some business at risk. We decided to proactively work with our retail partners undertaking additional promotions and giving them incremental mark down money to enable them to reduce the retail price of higher priced and slow moving product lines.

This proved to be successful. It enabled us to meet our revenue goal and to finish the year with a reasonable level of inventory. However, these actions clearly hurt our operating margins during the fourth quarter and were the major factor in the reduction to 12.3% from 15.4% last year.

Now let’s take a more detailed look at our full year results. In a very difficult environment we delivered our fourth consecutive year of revenue growth and our eighth consecutive year of growth in earnings per share. Worldwide net revenues were $4 billion compared to $3.8 billion last year, an increase of 5% to $184 million. For the full year there was a negative impact of foreign exchange of $10 million.

U.S. and Canada segment net revenues were $2.4 billion compared with $2.3 billion last year, an increase of $113 million or 5%. U.S. and Canada operating profit for the year was $283.2 million or 11.8% of revenues compared to $287.8 million or 12.5% of revenues in 2007. Net revenues in the international segment were $1.5 billion compared to $1.4 billion a year ago. This segment was up 3.8% in U.S. dollars and 4.3% in local currencies.

The international segment reported operating profit of $165.2 million or 11% compared to $189.8 million or 13.1% of revenue last year. Operating profit in both the U.S. and Canada segment and International declined as a percent of revenue. This reflects the costs associated with the incremental programs we implemented at retail in the fourth quarter.

In the U.S. and Canada segment we also had increases in product development and marketing expenses related to the investments we are making in our core brands as well as our Wizards of the Coast digital initiative. In the international segment we had expenses related to the investments we are making in our emerging market strategy.

Now let’s take a look at earnings. For the full year we reported net earnings of $306.8 million or $2.00 per share. This compares to $333 million or $1.97 per share in 2007. For 2008 average diluted shares outstanding were 155.2 million compared to 171.2 million last year. Earnings before interest, taxes, depreciation and amortization were $654.3 million compared to $653.5 million a year ago. Gross margin for the year was 57.9% compared to 58.9% a year ago. The decline in gross margin is primarily due to the actions we took in the fourth quarter.

As previously discussed in our quarterly conference calls throughout the year we have been making significant investments in the emerging markets, in digital gaming and our entertainment strategy. This investment spending not only impacted our gross margin it also impacted development, advertising and SG&A expenses as well.

Now let’s take a look at expenses. Royalty expense for the year was $313 million or 7.8% of revenue compared to $316.8 million or 8.2% of revenue a year ago due primarily to a lower mix of movie based product lines. Research and product development expense for the year was $191.4 million or 4.8% of revenue compared to $167.2 million or 4.4% of revenue a year ago. Advertising expense while increasing $19.9 million to $454.6 million was consistent with last year at 11.3% of revenue.

SG&A expense at $797.2 million was relatively flat on a percentage basis although it did increase $42.1 million compared to last year. Interest expense increased by $12.5 million to $47.1 million primarily due to the $350 million of long-term debt we issued in the third quarter of 2007 offset somewhat by the repayment of $135 million of notes that matured in July 2008.

Other expense net totaled $6.1 million compared to $22.4 million a year ago. 2007 included a $44.4 million mark to market expense on [inaudible] warrants. Our 2008 tax rate was 30.4%. Excluding certain discrete items our underlying tax rate for 2008 was 32.8%. This compares to our 2007 full year underlying tax rate of 30.5%.

Now let’s turn to the balance sheet. At year end cash totaled $630.4 million compared to $774.5 million a year ago. We generated $593.2 million in operating cash flow in the last 12 months. However, we spent $146 million to acquire Cranium and the Trivial Pursuit brand, $135 million to pay down maturing debt and we returned $467.3 million to shareholders via our increased dividend and stock buyback program.

Our receivables at $611.8 million declined by $43 million compared to $654.8 million last year. This is in line with the lower fourth quarter sales. Our DSO’s of 45 days were consistent with last year. Inventories increased to $300.5 million compared to $259.1 million a year ago. Although inventories are up year-over-year we are satisfied with the overall quality of our inventories.

In summary we are very pleased with the full year results we reported today. We grew revenues and earnings per share in a difficult economic environment and at the same time we were able to continue to make investments in our future. As we look to the year ahead we believe it will continue to be very challenging. Given this we are focused on keeping costs down and maximizing operating cash flow while continuing to invest in our business for the long-term.

That said, we do believe the underlying strength of our brands and our balance sheet will enable us to continue to do well even during these difficult times. We look forward to talking to you again on Friday from our Investor Meeting in New York where we will be providing more detail on our 2008 results and our outlook for 2009.

With that Brian, Deb and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Felicia Hendrix – Barclays Capital.

Felicia Hendrix – Barclays Capital

David you gave a very detailed overview of the expenses for the year but I had some questions for the quarter if I may. First, can you just walk us through the promotional impact on your margins in the fourth quarter?

David Hargreaves

What I think I said is most of our deterioration in operating profit and indeed gross margin was a result of the additional promotional activity and mark down monies we gave. For example, coming into the last couple of months of the year we realized that some of our higher priced products like Kota the Dinosaur just wasn’t going to move at $249 at retail. People weren’t really buying too much at that level. So we took some fairly aggressive actions working with our retailers and gave the price of these higher priced items down. In fact, Kota we brought all the way down and it retailed at $99. It was very successful. That sort of cleared out at that level. We took a lot of actions like that to make sure any slow moving product or product that really wasn’t going to carry forward so much this year, maybe things related to movies like Indiana Jones or The Hulk we took fairly aggressive actions to make sure we cleared all of that out during the fourth quarter. That is the main reason why our margin was lower.

Felicia Hendrix – Barclays Capital

So it might be hard to back this out but if you backed out the promotions you did, and again maybe it is difficult because you weren’t able to get the revenue growth but what I’m trying to figure out is underlying the promotions how did your margins look?

David Hargreaves

Our underlying margins were basically at a normal level. If you go back over the years we have typically for the year had about a 58% margin and that has been fairly consistent going back over the last 10 years. If you look at the year we came in at 57.9% and in fact the only reason we were down was really due to the actions we took in the fourth quarter. So I think the underlying margin in our business are as robust as they have been. I think a lot of people were concerned earlier in the year where the commodity cost increases were hurting our margin. We took some pricing, as you know, at the beginning of September and I think absent the actions we took we would have posted normal fourth quarter margins.

Felicia Hendrix – Barclays Capital

Regarding the inventory, I know when you were finishing your prepared remarks you said you were comfortable. Although again at the year end they were higher. If you could reconcile being comfortable with the level.

David Hargreaves

I think when people talk about our inventories and they talk about retailer inventories as well. I think on the retail end it is a mixed bag. We deal with several major multi national retailers around the globe and I don’t think there is one answer which is accurate for all our retailers. So really I am really talking in the aggregate. I think in the aggregate both our inventory and our retailers’ inventory is a bit higher than we would like to see in a normal year.

We have to recognize this is not a normal year and in fact retailers are probably going to rebalance their inventories lower in the first quarter recognizing we are in a recession. Now that will be a challenge we have to face and we are already starting to face that challenge. We had an extended Christmas break at our factories in both East Longmeadow, Massachusetts and Waterford, Ireland. We have instigated a short working week in Ireland and we have held off bringing a number of people back at our East Longmeadow factory.

In addition, we are selectively slowing down some of our purchases from the [inaudible]. So it is a challenge and we are already addressing it. That said, I think there are a lot of positives as well. Firstly we did clear through most of the slower moving and higher priced inventories. That went so most of what we have and our retailers have at year end is in strong brands that have momentum and it will sell through.

Secondly, even in times when retailers are adjusting inventory they will still buy in really good, innovative products or products associated with much anticipated movie releases. We are in the fortunate position that we will be shipping inventory associated with Wolverine and with Transformers II during the first quarter. So I think in summary, our inventories are probably a bit higher than we would like. We recognize this challenge. We are taking actions to address it and I think overall because of the strength of our product line we are in pretty good shape to emerge from it fairly quickly.

Felicia Hendrix – Barclays Capital

Finally, the other expense line was that related to foreign exchange? The $12 million?

David Hargreaves

Other expense we certainly had some foreign exchange. That was a good part of it yes.

Felicia Hendrix – Barclays Capital

Was that the majority of it?

David Hargreaves

I think it was, yes.

Operator

The next question comes from John G. Taylor – Arcadia.

John G. Taylor - Arcadia

On the movie front it looks like there are some excellent catalysts coming on. How do you think retailers are going to approach sort of average quantities of movie based items this year given all the skittishness out there? I don’t expect any specific number but do you think they would bring in maybe 10-15% less on average than they would on a similar movie in a better year? Is there any way to try to gauge that on the front end?

Brian Goldner

As we look at the movie initiatives, Wolverine is in May so as David mentioned we will begin shipping that product later in the first quarter. Transformers there is a lot of excitement around the world. Transformers comes at the end of June. Our products will come in the end of May. As we have gone around the world and looked at the film and I’m sure you saw on the Super Bowl the first Transformers commercial. We are very excited and our retailers are very excited. They saw what they did last time. We recognize we left the market a bit short in 2007. The brand had a really strong year last year with a lower decline than we have seen in prior non-movie years after a movie. So people feel very good about that.

GI Joe we have been all around the world seeing retailers and feel very good about that albeit later in the summer. So we don’t have a specific. I wouldn’t say there has been some wholesale decision upon retailers to take inventories one way or the other prior to movies. I think they want to be in a good position prior to these movies because of all the excitement, the marketing comes and all the promotional partnerships that comes and all Hasbro’s marketing that comes during those times.

John G. Taylor - Arcadia

On the Girl’s side, I don’t want to steal any thunder but the Boy’s outlook seems pretty solid. It seems like a lot of key Girl’s categories started to slow down at retail during the holidays and so on. Do you have some surprises up your sleeve? Is there anything you can talk about on the Girl’s side in terms of brand focus this year?

Brian Goldner

Yes, in fact we are going to talk on Friday about a brand new initiative for Littlest Pet Shop that is very exciting and Littlest Pet Shop performed very well in the fourth quarter around the world. As we go forward we will also see new initiatives. Some of the key drivers in the showroom we will have some of those going on. Again there is a recognition that we are going to get more into the insights of our Girl’s and you are going to see more interesting digital initiatives that tie together with our analog business as we go forward. We will talk about that on Friday. We feel good about our Girl’s business as we go forward. The opportunity to expand those businesses globally and in emerging markets has been really excellent for us in 2008 and we expect that kind of momentum to continue in 2009.

John G. Taylor - Arcadia

David, where did you bring in the EA royalty from the digital partnership? Which line?

David Hargreaves

In comes in our net revenue line and then it will get recorded in our other segment and our product line reporting in the K it will be spread between the various categories.

Brian Goldner

Let me just go back on one thing also I forgot to mention and should. Strawberry Shortcake will launch this year in 2009. So we will talk about that as well.

Operator

The next question comes from Margaret Whitfield - Sterne, Agee & Leach.

Margaret Whitfield - Sterne, Agee & Leach

I was wondering, the rebalancing you talked about in Q1 apart from the entertainment properties given the ending inventories do you imagine you will have to provide added promotions to clear out what exists in your pipeline in Q1?

David Hargreaves

No we don’t. As I said, we took aggressive action in the fourth quarter on anything that was slow moving or high priced and as I said we are very happy with the quality of our inventory. It may be a little bit high but we are very happy with the quality of the inventory that is there. We think this will be a fairly quick, sharp and short adjustment by retailers and then we have got quite a lot of new and exciting products which we know they are planning to buy into and obviously we do have the advantage of shipping for the major movies.

Brian Goldner

If we look at Playskool they performed well in 2008. We had a lot more carry over items into 2009 than we had in previous years. A couple of new initiatives in the spring including a whole card gaming initiative headlined by a Monopoly product as well as a new Nerf initiative around our swords and so we have a lot of right price point new initiatives in the first half of the year.

Margaret Whitfield - Sterne, Agee & Leach

You mentioned the spending on emerging markets, digital, etc. Can you quantify the spending in Q4 and for the year?

David Hargreaves

I’m not sure we have added it all up exactly like that but we have certainly indicated in the earlier quarters it was running around $20 million a quarter and it was to tail off towards the end of the year. So I would say in the aggregate somewhere between $60-70 million of investment spending behind these various strategies which include the emerging markets, advancing our in house force to support our EA initiative where revenues only start in the fourth quarter but we had people on board all year, included our Wizards of the Coast digital initiatives which is Dungeons and Dragons Insider which if you go to the internet and see now and so there was a whole bunch of initiatives that were included in there and the aggregate spending over the year was probably in the region of about $70 million.

Brian Goldner

You would add to that the opening of the offices in Brazil and starting a company in China and the Czech Republic. Again, investments in personnel and marketing and sales personnel to help us build our business globally including emerging markets.

David Hargreaves

I forgot to say in our entertainment strategy we brought on an executive to help with the Universal Studio relationship, Bennett Schneir, and Lisa Licht we announced and we have started our own company registered with the Screen Writers Guild in order to write scripts and we have been funding some script development. So a lot of investment spending went on during 2008.

Margaret Whitfield - Sterne, Agee & Leach

Will the incremental spend in 2009 therefore might be more limited year-over-year?

Brian Goldner

Yes we would expect it to be more limited. The Wizard of the Coast digital initiative is now up and running. We have opened many of these offices. We will have the ongoing cost of personnel in those offices. Some of those offices now will begin marketing programs but again more nominal spending overall.

Margaret Whitfield - Sterne, Agee & Leach

You had a major gap between Mattel and yourselves in the emerging markets. Could you comment on whether or not you have seen a big up tick in the sales to emerging markets in 2008?

David Hargreaves

I think this year we only started our company in Brazil and issued our first invoice in June. Clearly Brazil was good for us but it was still in the early days. I think as you look at the next few years we certainly think we are behind and we need to close that gap and we will do it fairly rapidly. I don’t think the incremental revenue to Hasbro overall in 2008 was that material. I think it becomes more material in 2009 and 2010.

Margaret Whitfield - Sterne, Agee & Leach

Finally, a competitor has announced a price increase which took effect Jan. 1. What are your thoughts on price increases this year?

David Hargreaves

We will be taking a price increase. We are really only taking that to cover our cost increases from our vendors. Whilst a lot of people look at resins and ABS and Impact [inaudible] and say they are going down resins are only about 6% of our overall revenue. So if you look at our cost of goods sold the higher commodity usage for us is paper, board and print. Certainly these costs were higher at the end of 2008 than they were at the end of 2007. Our largest single component in cost of goods sold is labor and Chinese minimum labor rate is certainly higher at the end of 2008 than they were at the end of 2007. In addition you had vendors having to deal with additional social cuts; additional safety testing that had been imposed by the Chinese authorities. The Chinese currency was higher at the end of 2008 than it was at the end of 2007. Like everyone else in the world our vendors do have to finance their working capital. As you know, as everyone knows, with costs advancing working capital has gone up.

I think overall there were a lot of pressures on vendors and our costs have gone up and we are going to take a sort of mid single digit price increase in order to offset those costs.

Operator

The next question comes from Robert Carol – UBS.

Robert Carol - UBS

As you kind of go towards the contract negotiations going forward on the commodity costs what are you seeing right now? Is there any leeway?

David Hargreaves

Clearly resins have come down very dramatically and clearly the cost of oil used in transport has come down quite significantly. So we are going back to our vendors and are saying to them you need to pass that on to us. We are hopeful that we will be able to get some reductions in our costs particularly on items that have a high plastic content and we are hopeful we should see a year-over-year reduction in terms of our ocean freight which also goes into our cost of goods sold.

Brian Goldner

This should help us to mitigate some of the early cost increases we have seen and we have taken costs now but wouldn’t expect to have to do that again throughout the year.

Robert Carol - UBS

I know this is still a ways out but in terms of the Marvel agreement have you even started to look at extending that, adjustments to the term or increasing the scope? Have there been any changes from either side?

Brian Goldner

We are very pleased with the Marvel relationship. We have seen the development they are putting forth during our current term in the contract and we are very excited about properties coming in 2010 with Iron Man and Thor and 2011 so we still have a number of years there to work together and we will see how it goes.

Robert Carol - UBS

On the share repurchase obviously there were none in the quarter. Has there been a change going forward given the current environment about how you will be addressing share purchases?

David Hargreaves

In the fourth quarter credit markets virtually seized up. People were worrying if there would be any credit at one time and would people be able to make payroll or draw down their revolvers or would people be able to go and get into the bond markets even if you were an A rated credit. So in that kind of environment we clearly hit the pause button on our stock repurchase program. Obviously as the credit markets ease over time we will continue to consider. We have open authorization and we will consider our buy back. But certainly we do believe at the moment cash is king.

Operator

The next question comes from Tony Gikas - Piper Jaffray.

Tony Gikas - Piper Jaffray

A little bit on the investment in international and digital, you made a lot of investments over the past few years. Can you quantify when the full benefit of that kicks in? It sounds like more so in 2009 and 2010 but when do we see the full benefit? What is next in terms of international investments? What countries will be coming next?

On the digital side with EA those revenues last year I would expect were relatively minimal. Maybe talk a little bit about the growth. Does that go from $7 million to $15 million in 2009? Do you expect the spending, the investment in that should be rather limited this year relative to last year?

Brian Goldner

First, in international we now have opened offices in the emerging markets and now we will have some additional spend there as we look at marketing plans, promotional plans and sales plans for those countries but not really increases per se in personnel overall. Maybe a few countries like China will continue to grow, a few Asian countries. More nominally in terms of cost and salaries and more into marketing and advertising.

In terms of additional countries we are looking at a number of countries. We haven’t made any decisions yet on opening additional offices this year although there are a few plans we are looking at preliminarily. In digital gaming you are right. You will begin to see more of those revenues and earnings come to the company this year as we go full on a full year of EA’s initiatives. We have our team in place so again in terms of additional cost from Hasbro against that it is probably more nominal with revenues increasing not only from Electronic Arts but of course Activision coming in with an array of games for the Transformers movie.

Again, growth in digital gaming revenues although I am not going to quantify it for you year-over-year. Suffice it to say the number of new initiatives and the size of those initiatives have grown dramatically.

Tony Gikas - Piper Jaffray

I was just referring to the EA digital part of that. Was that a relatively break even type even for you in 2008?

David Hargreaves

I think from the get go we always said our revenues from the EA deal would not be that material during 2008. We did have or they did have some cell phone and some online games up earlier in the year but in fact the big console and hand held DS games really didn’t start to ship until November and December. So we really only had a couple of months on the higher performing platforms.

Brian Goldner

If you notice, Littlest Pet Shop in the fourth quarter didn’t launch until the fourth quarter and Littlest Pet Shop’s Nintendo DS games EA reported they sold around 3 million units and made it a top ten SKU for the holiday season beating out some very well know titles. We will talk more about that on Friday. Clearly our Girl in that audience is responding quite well to the digital gaming platform and I think it has caused us all to look at great, additional opportunities across our business with EA.

Tony Gikas - Piper Jaffray

Any material changes to floor plans or shelf space for the next nine months, kind of the non-holiday period of the year? Are you seeing any meaningful shifts at retail? Then two housekeeping questions. The first Universal movie will that be in 2011 and then the last one, Transformers I believe in 2007 you indicated revenues were in the $480 million range. What was the count of 2008?

Brian Goldner

We will start with Transformers. What we said was the Transformers decline was more nominal than we had seen in any Boy’s Entertainment property over the last ten years. We didn’t report the number. Typically we report the number if it is more than 10% of our revenues. But it was quite good. Quite strong and it gives us great opportunity for this year which segue’s into your second question. The one thing we are seeing obviously is with the new movie initiatives happening earlier in the year a number of sizeable initiatives obviously our retailers are gearing up for that around the world. A lot of great excitement. You would expect Transformers to be a top program at many of these retailers and it is. The kinds of square footage we would get early in the year is of course is consistent with that kind of excitement. So you have the three major movie initiatives and continued strength in some of our other core businesses. So again you should see some business earlier in the year.

Tony Gikas - Piper Jaffray

The first Universal movie?

Brian Goldner

2010 or 2011. We are very excited about the kind of development we have done. You have probably seen some of the announcements out there about writers and potential directors. We’ll talk more about that on Friday but again Bennett and the Universal team are doing a tremendous job in getting an incredible array of creative stewards who are all very excited about our properties, who have grown up with these properties and believe in the potential of these brands and so we will talk more about that. Again, 2010 or 2011.

Operator

The next question comes from Timothy A. Conder - Wachovia Securities.

Timothy A. Conder - Wachovia Securities

On the EA relationship given what has happened in the overall global environment and Brian what you said regarding the Littlest Pet Shop success do you anticipate if you rewind to a year ago, that ramp rate in revenue with EA to be more similar or less similar to what you thought it would be a year ago?

Brian Goldner

What we are really seeing and I think you are seeing it across the video game industry is casual gaming really coming to the fore. Whether it is the Wii or online games or Nintendo DS and handheld games and as we said all along we believe our brands are the sweet spot for those kinds of games given the generational appeal, the global appeal of those brands and the brand names and the opportunity for those audiences to participate now in more casual games. EA obviously recognized that in doing the deal with us but we are seeing the early successes there and so we will continue to build that business. I know EA still has committed plans across our business and a number of new titles across a number of platforms. So we feel very encouraged by the progress we are making and it is as good as we hoped it would be.

Timothy A. Conder - Wachovia Securities

I think about a year ago you said EA is looking to grow that business $600 million and you anticipated being about half of that business over a three year period. So you are saying that is basically intact?

Brian Goldner

I believe as you look at the mix of the business overall in the industry as well as what we are doing and you see how well our titles are performing we will continue to move business plans in that direction.

David Hargreaves

At that time we were actually quoting what Kathy Vrabeck and what EA said at their analyst meeting. They expected to grow family and casual gaming from about $400 million to $1 billion over the next few years and that Hasbro titles would be a key driver. So that was them speaking as opposed to us.

Timothy A. Conder - Wachovia Securities

David on the inventory side, what geographic markets performed the best or the worst? Then I know you said it kind of varied by individual retailer but looking at it from a country or geographic perspective? Maybe what categories you feel either at the company level or in the channel that you are in the best shape or a little hesitant on?

David Hargreaves

I think first of all that the industries were down in a lot of markets. I suspect when TIA announced the industry here it was down particularly in the fourth quarter. Canada I believe was down in the fourth quarter. Certainly the U.K. was down in the fourth quarter. France was down in the fourth quarter. There were a lot of major markets at an industry level that were down in the fourth quarter and we believe we out performed the industry in those cases. That said, when the industry is down that much things are moving slower and you end up being a bit heavier on inventory.

I’m kind of repeating myself but I think most of the problem areas we took care of. I think the markets most hit by the economic downturn were probably the U.S. and the U.K. was hit pretty badly. Fortunately we don’t do any business in Iceland. I think the German market actually finished relatively strong and whilst the industry was down in France we finished very, very strong in France with Littlest Pet Shop and other brands. So France, for example, I would say our retailer inventories are in much better shape and our own inventories are in much better shape.

Again, in the U.S. some retailers tend to be more inventory averse and shut down earlier and probably ended up being out of stock in some items. Other retailers said we are going to kind of go for it and didn’t miss any sales but were probably heavier on inventory. So it is a kind of mixed bag out there.

Timothy A. Conder - Wachovia Securities

Overall, as you are saying you out performed relative to the industry overall so what you are saying is that you believe your inventories in the channel are in better shape than the overall industry? Is that what you are saying?

David Hargreaves

I’m not going to answer that one because it is almost like I’m commenting on other companies’ inventories which I am not going to do. I do think that clearly the market the industries were down in the fourth quarter and absent exchange rate our shipments were up and our POS was good. So I feel comfortable about where we are. When you talk about the quality of inventories, we have a lot of inventory in things like Littlest Pet Shop, Star Wars and Transformers. All of those things are continuing to do well and have a lot of momentum. So we are not worried about that at all.

Brian Goldner

We take obviously at the end of the year a hard look at the inventory and anything we would see as a liability obviously we take account for. So the things that we are carrying over in addition to the great, strong product lines like Playskool and the ones David mentioned we do have some new initiatives for the spring that we are clearly putting in inventory and sending out into the market and we are seeing some great early results at the right price points for a lot of brands. Things in Nerf and our card games business along those lines.

Timothy A. Conder - Wachovia Securities

Lastly, a housekeeping item. David you mentioned the overall operating cash flow. Could you talk about G&A Capex for the year and expectations for 2009?

David Hargreaves

For the year our depreciation is coming in at about $87 million and amortization at about $78 million. So it is $87 million plus $78 million. I think as we go into next year our capital spending in 2008 was a bit higher than usual at $117 million because we are doing an SAP systems upgrade and we drove some new work practices in and staff reductions in our factories and we committed to spending a bit more in the factories. So capital spending at $117 million was up a little bit in 2008. That would lead to depreciation being a bit higher in 2009 than it was in 2008. I think amortization will get the first full year of Trivial Pursuit and Cranium but come the fourth quarter Wizards of the Coast amortization sort of drops off. So I think on balance amortization might be about even.

Timothy A. Conder - Wachovia Securities

The Capex plans?

David Hargreaves

Capital expenditures in 2009 will probably be back down to $90-100 million. It won’t be $117 million again.

Operator

The next question comes from Gregory Badishkanian – Citigroup.

Gregory Badishkanian – Citigroup

Just looking at the currencies, let’s assume that currency stayed constant for the remainder of the quarter. How much of an impact would that have on your first quarter? I believe you said $80 million impact in the fourth quarter?

Brian Goldner

Yes it was $80 million against revenue in the fourth quarter.

David Hargreaves

It will be fairly significant. Let’s remember that over the last few months last summer Sterling was at $2.00. Right now it is closer to $1.40 hovering a little bit above or a little below. The Euro was up at about $1.50 last summer and that has been around $1.30 a little above and a little below. So we have had a fairly dramatic weakening of overseas currencies and certainly over the full year that has probably reduced our full year expectation by about 5%. In the first quarter it is probably even a little bit more than that. That said, as Brian said on the conference call, if economies don’t deteriorate any further and exchange rates stay around about where they are today then we actually do think we will be able to post revenue growth in 2009. But clearly it is a significant headwind in terms of foreign currencies and the overall economy.

Gregory Badishkanian – Citigroup

Speaking about revenue growth in 2009, you have got a number of interesting movies coming out or toys related to those movies. Wolverine, GI Joe, Transformers II…how do you think that compares with the line up that we saw in 2008?

Brian Goldner

As you remember we created some new math about a year ago and we said we thought six would equal three in 2008 and in fact it did. It exceeded the three. So I would say the next round of new math is four may equal six as we go forward.

Operator

The next question comes from Drew Crum - Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

I just wanted to ask you about the Star Wars property. You mentioned significant growth in 2008. What you saw in terms of sell through during the period and what remains in the pipeline as far as programming is concerned for 2009 and 2010?

Brian Goldner

We did see great growth in Star Wars and the innovation in the product line contributing to that. We believe that animation in 2009 will continue and further on in 2010 or 2011 it will be more live action. I don’t believe there has been a specific announcement on the date but Star Wars having some entertainment support going forward will certainly be there. Again, we believe Star Wars the performance from last year just indicates with great innovation and story selling the brand is very strong.

Drew Crum - Stifel Nicolaus

As far as the EA initiative is concerned you had a lot of commentary around that. I wanted to know the number of console and handheld games that are planned for 2009? I think you mentioned two dozen games for mobile and cell phones?

Brian Goldner

I believe we will be able to get into that more fully on Friday. I believe that between now and Friday EA is planning its own set of announcements around its line up for this year. So you will get a lot of specificity there from them. We did talk about a number of new products on all the different formats for 2009 and that is true. Trivial Pursuit, Cranium, more Monopoly titles, more Littlest Pet Shop titles. Again they are going to do their announcement and then we will talk about it more fully on Friday.

Drew Crum - Stifel Nicolaus

Can you say what the games and puzzles business did in the fourth quarter in terms of year-over-year growth or decline?

Brian Goldner

Games and puzzles for the full year was down slightly while board games was up a few percent.

Drew Crum - Stifel Nicolaus

How about in the fourth quarter?

Brian Goldner

In the fourth quarter games and puzzles were down a bit more significantly as were board games.

Drew Crum - Stifel Nicolaus

The tax rate was a little lighter in the quarter. What drove that? Your expectations for the effective tax rate in 2009?

Deborah Thomas Slater

Our tax rate was down in the quarter due to some benefits we got from repatriating some cash from overseas that we had previously recorded some provisions on that. As far as our expectations for 2009, we will talk a little bit more on that on Friday. We expect that our 2009 tax rate will be more in line with the underlying rate for 2008.

Operator

The next question comes from Sean P. McGowan - Needham & Company.

Sean P. McGowan - Needham & Company

A question regarding the advertising expense in the quarter as a percentage of sales. When you take these promotional programs to discounting and mark down money that typically has the effect of reducing what your reported net sales are and often that shows up especially if you are negatively priced as an increase in the advertising in the fourth quarter as a percentage of sales and yet it was down. I’m wondering how these promotions work if it didn’t result in at least a stable or increased rate on advertising as a percentage of sales?

Brian Goldner

It actually is from gross to net revenue is where it is reflected.

Sean P. McGowan - Needham & Company

So your net revenue would be down so if you are looking at the numbers we are looking at the advertising percentage as a percentage of net revenue would tend to increase. I think in the fourth quarter relative to last year it is actually down.

David Hargreaves

I think one of the things that we did show is we clearly had a re-balancing towards more specific, customer directed promotions and mark down money which clearly goes up to the reduction in net sales. I think there was some advertising which was uncommitted and we do it sort of on an accrual basis which we pull back on some TV in order to do much more targeted, much more specific against slower moving, higher priced items.

Brian Goldner

So the total marketing was up but the mix changed late in the fourth quarter.

Sean P. McGowan - Needham & Company

It sounds like the recognition at the consumer was looking for a deal and you can whistle all you want on TV but if you are not doing something at point of sale it’s not worth it?

Brian Goldner

I think it is important to note that it wasn’t an across the board thing. There is a lot of our core brands that we supported with television throughout the season that were selling well. Then there were some slower moving items where we felt that to get more impact with additional retailer programs and dialing back on TV for those specific items.

Sean P. McGowan - Needham & Company

Brian when you went through the performance of the major categories I think all those numbers you gave were full year numbers. Could you go through those categories for the fourth quarter?

Brian Goldner

If you look in the fourth quarter Preschool was up 8%. Girl’s business was up 7%. Tween’s business went up 43% driven by our Nerf business. Boy’s business was down low double digits, 13%. I noted already games and puzzles and board games. That is where we ended. Again a number of initiatives that were really working for us in the quarter and so we can look at that as the differentiation where we had items like Kota we had to address where we were pulling back on advertising and putting it into retailer programs.

Sean P. McGowan - Needham & Company

Did you say that Iron Man II and Thor are both expected in 2010 or is that 2011?

Brian Goldner

2010. Iron Man is expected May 2010. Thor is expected July 2010.

Sean P. McGowan - Needham & Company

Spiderman is still expected in 2011?

Brian Goldner

I believe so yes.

Operator

The next question comes from Gerrick L. Johnson - BMO Capital Markets.

Gerrick L. Johnson - BMO Capital Markets

I was just wondering if you could give us the $60-70 million in investments you talked about earlier from 2008 how much of that has been expensed already and how much is still to come through?

David Hargreaves

It is all expensed. It all went through. We have used that by way of explanation of why operating margins have been down and that is because it essentially all went through the P&L.

Gerrick L. Johnson - BMO Capital Markets

On pension how have your assumptions changed and what does that do to your funding level?

Deborah Thomas Slater

Our assumptions really haven’t changed. We haven’t had a re-mix of our assets. I will say that we were in a very down market and were relatively pleased with investment losses on our pensions only around 12%. We don’t expect that we have any contribution requirement outside some of the smaller international contributions that were required to make the statutory purposes in 2009.

Gerrick L. Johnson - BMO Capital Markets

The exact street dates for the three movies this year?

Brian Goldner

The expected dates are May 1 for Wolverine. Transformers is June 26.

Gerrick L. Johnson - BMO Capital Markets

Is that the street date for the toys?

Brian Goldner

No, sorry. I thought you were asking about the movies.

Gerrick L. Johnson - BMO Capital Markets

No the street date for the toys.

Brian Goldner

I would back up five to six weeks from these dates. GI Joe is August 7 as a movie. I think I mentioned that Transformers we were talking about something at the end of May.

Gerrick L. Johnson - BMO Capital Markets

That is when we see the stuff on the shelves, not necessarily when it was shipped?

Brian Goldner

Correct. Exactly. On the shelves and ready for retail.

Operator

The next question comes from David Leibowitz – Horizon Asset Management.

David Leibowitz – Horizon Asset Management

Very little was said about Star Wars until the Q&A. Are we to take that to mean that Star Wars is not quite as important in your outlook for 2009 as it might have been for 2008 and 2007?

Brian Goldner

No, not at all. In fact, we can’t cover everything in our scripting so we are happy to have had a question about it and clearly we can talk more about it. Star Wars performed exceedingly well last year. We feel very good about that brand going forward and the kind of entertainment that Lucas is doing in Television has certainly been beneficial to the business. Our teams have done a tremendous job in innovation which is evident in the market and consumers are really enjoying products that we are putting out both in the core as well as in the Clone War related products. So that will go forward.

David Leibowitz – Horizon Asset Management

Are we saying, again I don’t mean to put you on the spot although I know I am, which is that Star Wars might have a better year in 2009 than it did in 2008?

Brian Goldner

I don’t think I am going to be able to answer that. I could tell you I thought I gave you some good intelligence when we said we thought four would equal six.

David Leibowitz – Horizon Asset Management

Second, David you made a comment near the end of your presentation that you are positioning 2009 to be a good year. Now I believe in the November meeting the term was an up year. Am I to take good year to mean a step back from an up year?

Brian Goldner

Let me just comment on that first. Obviously barring the further deterioration in the global economies or as we talked about foreign exchange we would expect to be able to grow both revenues and earnings per share again in 2009 as we did in 2008. We talked about the current levels in foreign exchange. Again, we have the initiatives to be successful. Although we also said back in our third quarter conference call and at our Analyst Meeting that we were tempering our expectations to reflect the realities of the market. We still feel very good about our business barring these major exogenous factors.

David Leibowitz – Horizon Asset Management

That explains the choice of words. A follow-up on Shawn’s observation, if I look at your total mark down money in 2008 versus the total market down money expended in 2007 the differential between the two equals how many cents per share of the earnings shortfall for the year?

Brian Goldner

I think we have given you about all the guidance we are going to give you. Suffice it to say we said the decline in our earnings in the fourth quarter was mostly attributable to the additional mark downs and promotions we had done. We are not going to quantify that year-on-year. Again, I think the important thing to leave you with is that both our gross margin going forward as well as our earnings in the quarter would be more normalized going forward, gross margins in particular, because we again said we dealt with a lot of these inventory issues that were out there in 2008. We took a decision to be more significant earlier feeling that we could drive both consumer demand and lower inventories.

David Leibowitz – Horizon Asset Management

If we look at 2009 you have already made your basic assumptions about mark down money which you accrue each quarter. Is that number for 2009 higher or lower than the amount that you accrued for 2008?

Brian Goldner

It would be in line with the more traditional sales expectations.

David Hargreaves

It will tend to be lower. The fourth quarter came upon us fairly quickly and as we go into this year whilst we are expecting it to be a difficult year we are going to plan it a bit differently. We are going to have less higher priced items out there as we go through this year and we will have more lower priced items. In addition, retailers will be ordering in line with the market expectations and have their inventories accordingly. So they are not suddenly going to get caught by going into a very severe recession in the fourth quarter like we did this year.

Brian Goldner

If you look at the situation if we all can remember September 15 of last year we were in the throes of chipping a lot of inventory for the fourth quarter. We are in a very different position now having the opportunity to look out on the horizon to make a different type of plan for 2009 which we indicated months ago we would be tempering our expectations although again believing we could grow both EPS and revenues this year barring any further declines in the global economies or exchange rates.

Operator

There are no other questions at this time. I’d like to turn it back to our presenters for closing remarks.

Deborah Thomas Slater

Thank you. I’d like to thank everyone for joining the call today. The replay of the call will be available on our website in approximately two hours.

Operator

This does conclude our call today. We’d like to thank everyone for their participation.

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