Hasbro Inc (HAS) — Q3 2015 Earnings Call Transcript

Thank you, and good morning, everyone. Joining me this morning are Brian Goldner, Hasbro's Chairman, President, and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today we will begin with Brian and Deb providing commentary on the company's performance and then we will take your questions. Our third-quarter earnings release was issued this morning and is available on our website. Additionally, presentation slides containing information covered in today's earnings release and call are also available on our site. The press release and presentation include information regarding non-GAAP financial measures. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Today's discussion will exclude from the third quarter 2015 a pretax gain of $9.9 million or $0.06 per share from the sale of manufacturing operations and from last year’s third quarter a pretax charge of $11.6 million or $0.06 per diluted share related to the restructuring of the company’s investment in its television joint venture. Both are being excluded as they do not speak to the underlying performance of Hasbro. A reconciliation to reported amounts is included in the earnings release and presentation accompanying this call. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. These forward-looking statements may include comments concerning our product and entertainment plans, anticipated product performance, business opportunities, plans and strategies, the potential impact of foreign exchange translation, costs, our financial goals, and expectations for our future financial performance. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on Form 10-K, our most recent 10-Q, and today's press release, and in our other public disclosures. You should review such factors together with any forward-looking statements made on today's call. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Brian Goldner. Brian?

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. The execution of our brand blueprint is delivering underlying growth across brands and geographies. As evidenced by our gains in market share and consumer takeaway this year, our teams are successfully creating the world's best play experiences for consumers around the world, despite the challenging currency environment. Underlying revenues grew 9%, but the growth was offset by a negative $132 million impact from foreign exchange. The strength of consumer demand was evident across our segments. The U.S. and Canada segment increased 6%, and the international segment grew 14%, both excluding the negative impact of foreign exchange. The emerging markets continued to post double-digit growth absent FX. While the economic environments in these markets are challenging, we continue to believe in the growth opportunity in the strategically important countries over both the short and long term. Consumer demand for our brands has remained very strong throughout 2015, with many emerging and developed markets, including the U.S., U.K., and Germany posting double-digit point-of-sale gains this quarter. This demand was evident across categories. In the U.S. and U.K., point-of-sale increased double digits in the Boys, Games, Girls, and Preschool categories. In several countries, point-of-sale also grew in all four categories. Retail inventories are well-positioned to support demand for the holiday season, with increases in inventory focused on new initiatives and growing brands. We continued to see strong demand for Hasbro brands. Absent foreign exchange, Hasbro Franchise brands increased 4% in the third quarter, with NERF, PLAY-DOH, and MONOPOLY posting the largest revenue increases. Over the first nine months of the year, Franchise brands were up 8% absent FX. TRANSFORMERS was down given the difficult comparison, and LITTLEST PET SHOP was flat, despite growth in the U.S. The other five Franchise brands each reported growth in constant currency in the nine months period. NERF is having another outstanding year, with strong innovation driving the core, as well as new initiatives, including NERF Modulus and Rival both off to a strong start. PLAY-DOH's creative play continues to appeal to global consumers. We celebrated the first-ever World PLAY-DOH Day on September 16, and we are supporting new fall initiatives, including Crazy Cuts and Cupcake celebration. The growth in these brands helped offset the decline in TRANSFORMERS. Last year, the brand benefited from the TRANSFORMERS: AGE OF EXTINCTION film. We continue to plan the future of the TRANSFORMERS Franchise in all forms of entertainment, including movies, television, and digital expressions. TRANSFORMERS: Robots in Disguise is airing on Cartoon Network in the U.S. and many international markets, and TRANSFORMERS: RESCUE BOTS is also airing on networks around the world. Last quarter, we spoke with you about the incredibly talented group of writers led by Akiva Goldsman, who were charged with plotting out the next 10 years and beyond of theatrical storytelling around TRANSFORMERS. While Paramount has yet to formally announce our next film, we are excited about the vast potential of the work, which came out of the writers’ room. MY LITTLE PONY demand remained strong around the world, with positive point-of-sale trends for MY LITTLE PONY Friendship is Magic! products and a new PLAYSKOOL FRIENDS line for preschoolers. The Equestria Girls: Friendship Games entertainment premiered last month on Discovery Family with good ratings that beat last year's Rainbow Rocks special in several key demographics. MAGIC ORIGINS was released in the quarter and was the biggest summer set release in MAGIC: THE GATHERING’s history. In addition, in September, the global prerelease for the Battle of Zendikar set previewed at thousands of core Hobby Stores around the globe and was the best-attended pre-release in MAGIC’s 22-year history. Adjusted for the negative impact of foreign exchange, MAGIC: THE GATHERING revenues have increased over the first nine months of the year versus last year. Demand and interest are at all-time highs, and we continue to invest to unlock the full potential of the brand. In addition to our franchise brands, 2015 is an impressive year for our partner brands with multiple global box office successes this year already and one major film yet to come. Force Friday was held on September 4 and marked the global retail launch of Star Wars: The Force Awakens product. Fans around the world turned out, and Hasbro played a major role in this unprecedented event from the global unboxings of the product to record-setting midnight madness events at retail. The franchise is as vibrant as ever, spanning demographics and bringing in new consumers. Star Wars has the potential to become increasingly global, much as Marvel has become as part of the Walt Disney Company. Retailers and consumers have been very supportive of Hasbro Star Wars: The Force Awakens line and consumer takeaway is off to a strong start. Hasbro's Black Series action figures and multiple lightsabers are on the top of consumers' buying lists. During Force Friday week, according to NPD, action figures and role-play were 42% of the dollars spent in the U.S. Hasbro's Black Series figures were the top-selling Star Wars item for that week in the U.S. Total Hasbro Star Wars retail sales to date through September 26 have significantly outpaced the total Star Wars retail dollar growth in the U.S. and the U.K. Of note, these are the only two markets where we have early data. The December 18 premiere of the film is still two months away, and new Star Wars items from Hasbro will continue to hit retail shelves for the remainder of the year and throughout 2016. In addition to Star Wars, the Marvel brand is performing very well this year, and in the quarter, we benefited from initial shipments of Playmation Marvel's Avengers. Jurassic World also continued to contribute to year-over-year growth. The third quarter also marked the on-shelf date for Disney's Descendants. Descendants premiered July 31 on Disney Channel in the U.S. and Canada, and we will continue to roll out worldwide this fall. Point-of-sale has been strong for the launch. During the quarter, we completed the sale of our East Longmeadow, Massachusetts, and Waterford, Ireland manufacturing operations to Cartamundi. While this provided a small gain in the quarter, importantly it secured a valued manufacturing partner for our gaming efforts. Going forward, our team’s expertise will be focused on building global gaming brands. We have a robust games program for the holiday, including a number of new initiatives. MONOPOLY Here & Now features all-new properties voted on by fans this spring, and Internet sensation Pie Face is launching globally and is off to a strong start in all major markets. We also have a number of entertainment-led games, including games based on Minions, Marvel's Avengers, Star Wars: The Force Awakens, and Disney's Frozen. Games category revenues absent foreign exchange were essentially flat in the quarter and increased 3% year-to-date. Consumer demand has been strong, and point-of-sale trends are up double digits in several markets. Our retail merchandising approach this holiday is more closely aligned with the timing of consumer demand. As a result, shipments have shifted later in the year. In 2015, we are operating in a challenging and competitive marketplace. Succeeding in today's environment requires not only great brands but a stronger and more complex connection with the consumer than ever. Our global teams are navigating a year with unprecedented currency challenges, a dynamic demand environment, and one of the most diverse brand portfolios and entertainment slates we've ever supported. As a result, this holiday season we're delivering tremendous innovation, engaging with consumers across mediums, and telling compelling stories around the world. Later this week, in partnership with Universal, is the theatrical premiere of JEM & the Holograms. Through this live-action film and a trend-right licensing program focused on fashion and beauty, a whole new generation of fans will be introduced to JEM. We continue to incubate and develop new brands such as JEM in addition to the further development of our franchise and partner brands. Now, I’d like to turn the call over to Deb. Deb?

Thank you, Brian, and good morning, everyone. Over the first three quarters of the year, we drove growth in constant currency across brands and geographies, good profitability, and strong cash generation, despite the challenging economic environment in a number of our international markets. Year-to-date, foreign exchange has negatively impacted revenues by $266 million and operating profit by $62 million, and we expect it will continue to be a difficult comparison going forward. In the third quarter alone, foreign exchange impacted revenues by a negative $132 million and operating profit by a negative $33 million. Approximately, 18% of the topline impact fell to net earnings in the quarter. Pricing and hedging programs helped offset some of this negative impact. Even with this challenge, we’ve generated $497 million in cash over the past 12 months and ended the quarter with $551 million of cash on the balance sheet. While underlying profitability has grown, we continued to strategically invest in growing our brands and improving the efficiency of Hasbro, while returning excess cash to shareholders. Through the first nine months of the year, we returned $241 million through our dividend and share repurchase program. Looking at our segments for the third quarter, revenues in the U.S. and Canada segment increased 5%. Growth in the Boys and Preschool categories more than offset a decline in the Games and Girls categories. Growth in Franchise Brands NERF, PLAY-DOH, and LITTLEST PET SHOP along with shipments of STAR WARS, JURASSIC WORLD, and DISNEY’S DESCENDANTS more than offset declines in TRANSFORMERS, FURREAL FRIENDS, and FURBY. Consumer demand in the U.S. remained strong, with point-of-sale increasing double digits across all product categories. Given the departure of Target in the region, Canada point-of-sale was negative. Additionally, foreign exchange had a 1% negative impact on the segment revenue for the quarter. Operating profit in the U.S. and Canada segment increased 10% to 23.3% of revenues. Higher revenues more than offset higher expenses, including our continued investment in MAGIC: THE GATHERING ONLINE. The international segment reported revenues that declined 6%. Growth in the Boys and Preschool categories was more than offset by declines in the Games and Girls categories. Franchise Brands PLAY-DOH, NERF, and MONOPOLY along with Partner Brands STAR WARS, JURASSIC WORLD, and DISNEY’S DESCENDANTS were positive contributors to the quarter. These gains were more than offset by declines in a number of brands including TRANSFORMERS, FURBY, MY LITTLE PONY, and LITTLEST PET SHOP. Absent a negative $126.7 million impact of foreign exchange, International segment revenues grew 14% and the emerging markets grew approximately 12%. $74.4 million of the foreign exchange impact was in Europe, $44 million in Latin America, and $8 million in Asia Pacific. Absent FX, revenues in Europe grew 15%, Latin America increased 14%, and Asia Pacific was up 9%. Reported operating profit in the International segment declined 2% versus the 6% decline in revenues, but increased to 18.6% of revenues. Absent foreign exchange, operating profit increased 14%. Finally, revenues in the Entertainment and Licensing segment were down 2% versus 2014. The decline in revenue was primarily driven by lower TRANSFORMERS revenues in the segment the year after the movie. Operating profit increased to $16.2 million. Intangible amortization was lower as certain digital gaming rights were fully amortized in the second quarter of 2015. In addition, last year operating profit was negatively impacted by the acceleration of certain programming amortization costs. Turning to the overall expenses for Hasbro, as anticipated, cost of sales in the third quarter was favorably impacted by product mix, in particular, higher margin royalty-bearing product revenues. In total, cost of sales declined to 39.4% of revenues versus 41% in 2014. Pricing and favorable hedges have helped us offset the impact of currency in the first nine months of the year. Product mix also drove higher royalties, which grew to 7.7% of revenues for the quarter and for the first nine months of the year. On a combined basis, cost of sales and royalties were slightly more favorable than last year, as the improvement in cost of sales was nearly entirely offset by higher royalties. As we stated last quarter, we expect this trend of lower cost of sales and higher royalty expense to continue for the remainder of the year. Product development increased from last year to 4.4% of revenues, reflecting our investment in the Disney Princess and Frozen properties ahead of our 2016 launch. We continue to expect full year 2015 product development to be slightly above 5.5% of revenue. Advertising declined to 9.7% of revenues, reflecting the entertainment-backed mix of revenue in the quarter. Intangible amortization declined $3.8 million. In the second quarter 2015, we recorded the final quarter of amortization associated with digital gaming rights we reacquired in 2005 and 2007. We anticipate full-year amortization will be approximately $44 million. SG&A increased 3% in the quarter to 17% of revenues. This increase continued to be the result of higher equity compensation, higher depreciation, and continued investments in our business, including new systems and The Magic: The Gathering digital platform. These increases were partially offset by favorable foreign exchange. We continue to believe that SG&A will be higher in 2015 versus last year. Through the first nine months, SG&A on an adjusted basis has totaled 22.5% of revenues versus 21.6% in 2014. Turning to results below operating profit, on an adjusted basis, other expense for the quarter was $1.7 million, compared to $4.2 million in 2014. Increased profitability in our 40% share of the operating income from the Discovery Family Channel was the primary driver of the year-over-year improvement. On a reported basis, $6.8 million of the gain from the sale of our manufacturing operations was recorded in this line during the third quarter, whereas an expense of $12.9 million was recorded last third quarter associated with the restructuring of the investment in our joint venture television network. The third quarter underlying tax rate was 27.2% versus 27.8% in 2014. We expect our full-year underlying tax rate to be in the range of 26.5% to 27.5%, reflecting continued higher anticipated earnings in the U.S. On an adjusted basis, diluted earnings per share for the quarter were $1.58 versus $1.46 in 2014. We returned $83.5 million to shareholders in the quarter, $57.5 million in dividends and $26 million in share repurchases. Receivables at quarter end were up 6% and DSOs were 85 days, up five days from last year. In addition to a DSO increase from greater revenue and markets with longer-terms, two days of the DSO increased were due to a delay in the timing of collections in our U.S. Direct Import business. Much of this has now been collected, and we do not expect this to occur again in the fourth quarter. Our accounts receivable are of good quality, with 94% at the end of the quarter currently not yet due for payments, compared to 96% a year ago. Inventory decreased $52 million versus last year. Excluding the impact of the sale of our manufacturing operations and the impact of foreign exchange, inventories were up approximately $34 million. With the inventory on-hand at Hasbro and at retail, we are well-positioned to meet anticipated demand for the upcoming holiday season while managing our inventory risk. The first nine months of the year have set us up well for the holiday season. We have momentum in our brands, a robust entertainment slate, and a number of new holiday initiatives to drive our business around the world. We are also making the necessary investments to continue the execution of our strategy and to build the competencies we need as an organization to continue profitably growing our business over the long term. Brian and I are now happy to take your questions.

Hey, everybody. Good morning and congrats on a well-executed quarter.

Good morning.

Brian, good morning. I wanted to ask you, Brian, first about just a review of the Toy industry as we head into the holiday. Seems like the data industry-wide is very healthy this year against the pretty benign consumer backdrop. So, hoping to get your view on what you think is driving that outside of the slate, obviously, that’s being a big driver. How do you think retailers are positioned in the category? Are they increasing shelf space? And finally, what role is e-commerce playing and how is that evolving within your business?

Yeah. So, first of all, you are right, the trends that we see and the data that we have would indicate that the Toy industry year-to-date is up high-single digits, and we see that as boding well as we get into the holiday season and continue our trends. Our POS across the board is particularly strong, up double digits in most markets that we operate in, high-single digits in a few places, and in the U.S. across all categories is up significant double digits in every category of our business. What we’re really seeing from a retailer standpoint is that space at retail is increasing; our space is increasing, and they are very focused on the major brand initiatives that we have both franchise brands and partner brands for the holiday season. And while we see significant pace of growth at brick retailers and omnichannel retailing and online, we are seeing growth that's two to three times that rate in terms of growth. So, very significant growth rates in the online space and the omnichannel space, and all retailers are participating in that growth to some degree. I would say overall, we continue to feel like the consumer is finding our products and our brands, and that there are a lot of currency effects that are happening at this time, and obviously, different macroeconomic issues in some of the emerging markets, but if you strip out what’s going on there and take out FX, we are growing double digits in the emerging markets both in the quarter and year-to-date. So we continue to believe that those markets play an essential role in our growth, and we are seeing again underlying profitability increase in those markets as well. So I'd say, overall, we feel that the industry is seeing growth and that we are participating in that growth. Finally, our market shares in 10 of our 11 markets have grown year-to-date, with only one market being slightly on par with the industry growth, which is fairly robust so far year-to-date, that’s Mexico. But everywhere else where we get market share data, we are growing.

Good to see. And just a quick follow-up on the Girl segment, I guess, there are two it seems like there were two points of decline there, FURBY, which has been the case for a while now, MY LITTLE PONY. So can you just elaborate on those points, FURBY, how much longer are we going to see pressure out of that brand? And MY LITTLE PONY, if you can just elaborate on revenue decline there? Thanks.

Yeah. I’ll give you a perspective on FURBY. It was a very big brand for us last year. In fact, Q3 last year sales in dollars were bigger than the first two quarters and represented about 37% of 2014’s revenues. Fourth quarter of 2014 FURBY’s revenues were 31% of the full year. So we’re going to see those headwinds through the end of the year. So it was very significant dollars. In Q3, we’re happy to see that our gross POS is up double digits. In MY LITTLE PONY, the core MY LITTLE PONY business, the pony’s part of the business, Friendship is MAGIC! is up in the quarter, and MY LITTLE PONY year-to-date is up a bit. It’s really in the timing of EQUESTRIA GIRLS. The special went on the air on September 17, and the translation and placement of that special are happening throughout the fourth quarter in many markets around the world. I think in many ways it sort of reinforces our belief that programming support that’s over the full calendar year is essential as you look at content storytelling and that it's a little more challenging to put out a one-time per year special, although we do have lots of streaming short videos and other elements to support the EQUESTRIA GIRLS product line. It does impact our timing on that part of the business, certainly.

Hey good luck this holiday.

Thanks.

Thank you. I've a couple if I can. Can you quantify in greater detail how much of the negative impact of currency you were able to offset through the hedging and what's your outlook for that as a benefit going forward?

Good morning, Sean.

Good morning.

From a hedging standpoint, we did say we were able to, you know, between pricing and hedging of our product, able to offset some of the foreign exchange impact while -- which is why we only had about 18%, kind of, fall to the bottom line. We do remain well hedged for the rest of this year as we had talked about. We hedged to protect our pricing, and we’re hedged about the same level as we were at the end of last year. So we expect to continue to have solid hedges to allow us to keep our pricing where it is, where there is obviously good consumer demand for it out there in the marketplace.

Thank you. Curious about something that kind of echoes what Mattel was talking about last week, and that is that in a couple of properties and in your case perhaps more than a couple of properties, you are seeing very strong POS and yet the declines in shipments. So what do you think the retailers are thinking? Are they putting off taking deliveries, and does that increase the risk in the fourth quarter?

No, we’re really seeing our -- several of our brands have grown in the quarter. A few of the brands are restaged to be a bit later in the year. Also, I think you're just seeing the impact of foreign exchange on some of the shipments. And so for example, Games, if you take absent FX, Games are flat in the quarter and up low single digits year-to-date that's not what's indicative of the underlying or as reported results. I think as we look at brands like NERF, we were up significantly, PLAY-DOH in the quarter up significantly, MONOPOLY and several of our games up. So I think it's a matter of certain brands being staged starting the third and going into the fourth quarter and other brands being staged closer to the fourth quarter. Many of our games initiatives really come out into the fourth quarter, more consistent with the timing of consumption of the games. Several of our Girls initiatives happen a little bit later because of the price points, along with StarLily within FURREAL FRIENDS, which is a higher-priced item and more consistent with being a holiday item. And as we continue to make improvements in the supply chain and work with our retailers, I do think that we’re able to deliver more just-in-time inventory against the greater growth in linear feet, and it’s probably our capability and partly their desire to have product that hits more closely aligned with the holiday season.

Okay. Thank you. I’ve some quick ones to conclude. Was Magic up in the third quarter? And finally, Deb, can you give us a guidance on the full-year expectation for program cost to amortization, is that still expected to be in line with last year’s level?

Yeah. So, MAGIC, year-to-date was down a bit in the third quarter. And I think one of the things we will continue to talk about with our analyst community and our own constituencies is the fact that MAGIC is really focused around storytelling. And so what we are going to see as I look out over the near and medium-term future is some up-and-down quarters that are more about the storytelling that's being done in any particular time rather than some of the seasonality because as we know, MAGIC really doesn't abide by the same similar seasonality as the rest of our business. So, year-to-date, up a bit, in the quarter down a bit but again, we've seen very robust takeaway during the quarter, lots of pre-release activity, lots of interest in the brand, total number of gamers and players up. And so I think it’s just a matter of when the storytelling is hitting and then, of course, as you remember, so much of that business is done outside our traditional channels of retail, more in the traditional Hobby Stores. And the number of Hobby Stores that are carrying MAGIC: THE GATHERING has actually increased year-on-year, as have our tournaments. So, I just think it’s a matter of starting to frame that conversation, more about the release schedule and the storytelling versus that expectation that we should see acceleration only based on seasonality.

And as far as the program production amortization, we continue to expect it to be around like 1-ish percent of revenue.

Okay. For the full year?

For the full year, yes.

Okay. All right. Thank you very much.

Thanks.

Thank you. Congratulations on a good quarter. Our question really relates specifically to the Star Wars brand. I’m curious if you can just talk a little bit about the quarter. How that performed relative to your plan and any initial insights from the sales mix? And then just secondly, we are observing some rebalancing within the category post Force Friday. It seems like action figures are actually gaining a bit more space on the shelves. I’m curious if that’s also how you had planned the business. You had guided maybe a bit of incremental surprise to the upside with respect to how the POS looked coming out of Force Friday. Thank you.

Steph, good morning. If you look at the Star Wars business, clearly, we performed quite well during Force Friday. We talked about the numbers of both action figures and role-play being 42% of the business. Up till September 28, where we have data and we only have data for two markets, early data which we work with NPD to get, and that was in the U.S. and U.K. Our business is actually ahead of the retail sales increases we are seeing overall in Star Wars. And I would say, overall, Star Wars is at the high end of our range of expectation for revenues this year. So, we had a range of expectations and Star Wars is performing at the high end of that range. It's incredibly encouraging. We're seeing great rates of sale, but I would also add that contributing to our boys business and sometimes lost in the array of entertainment initiatives that are certainly supporting our business, NERF is having an outstanding year and was up significant double digits in the quarter and year-to-date. And we are seeing great growth there both in the core NERF business as well, a lot of our new initiatives like Modulus and NERF Rival. So it's a great balance between some of our partner brands like Star Wars. Year-to-date, Marvel is really contributing, both year-to-date and in the quarter, Jurassic World is contributing. So again, it's strength to strength between our own franchise brand as well as our partner brands.

Thank you. Then just one follow-up, Brian, if you could talk a little bit about the Disney Princess business. You will receive that license early next year. How should we think about the flow of product into the channel over the course of the first 12 months of that license?

Well, there will be a transition period, certainly in the first quarter of next year as other products sell out and through. There is a period where that can occur and then we will be shipping in, so I imagine in the first quarter we will have a transition period in working with our retailers to make that as streamlined and efficient as possible. But I certainly believe there will be a transition period. And then beyond that, the innovation that we’ve put into the product line, the partnership we have with the Walt Disney Company and our response from global retailers has been outstanding. So, I think longer term, the brand is well poised to perform exceedingly well and probably better than it has historically.

Thanks for the added color. Best of luck.

Yes. Thanks a lot. So, with MAGIC: THE GATHERING, it seems like there's been a lot of television advertising not just with Hearthstone but other card battling storyline type games other than the videgame side. Is that causing you to rethink and if you’re marketing promotions or how you rollout the MAGIC product? And then secondly with TRANSFORMERS, tell me if I’m wrong, but it just seems from an observation standpoint, the shelf space for TRANSFORMERS has been shrinking or seeing for us fewer SKUs. I’m just curious to think, to get your opinion on how that product's evolution will take place over the next couple of years and not at least in non-movie years?

Yeah. First, let's talk about TRANSFORMERS. Year-to-date, TRANSFORMERS is actually bucking the trend of a typical boys’ action property the year following the movie. In fact, it's down by just over a third, which as you know is far better than one would expect in a non-movie year, and that's because of the amount of entertainment. We're also seeing in our preschool TRANSFORMERS growth year-to-date in Preschool TRANSFORMERS product line and being supported again by content. Our licensing year-to-date for TRANSFORMERS is up. So I think maybe we need to take a broader perspective on the performance of TRANSFORMERS and look more globally because it’s performing quite well and, in non-movie years, certainly it’s down in the quarter and down more typical, in the more typical range in the quarter. But again, I think the team has done a great job, great innovation, and expanded product line and again down below those trends one would expect. In terms of MAGIC: THE GATHERING, we’ve launched a product that’s an app-based product this year called MAGIC: ORIGINS. It's a product that enables people to get into the brand and learn how to play magic. But remember, while we are investing in magic online and certainly believe over time, our online business will be more robust. The play pattern of MAGIC is all about face-to-face connections, and all about people getting together to play the brand in an analog space. And you're having visited lots of the gaming stores and hobby shops having spent some time over the summer. They are really nothing that replaces that experience of people getting together, coming together friends gathering together, getting off of their screens and playing face-to-face. We are running more tournaments, and however, we have a more engaged gamer community. And we're seeing great responses to the pre-releases and releases for our card sets. So long term, I think we're in very good shape in MAGIC. And as I said a bit earlier, I think quarter to quarter it's a bit hard to read because again it's not based on any kind of seasonality that's typical in our industry. It's more about the releases that are going on at any period and our users and players playing. We’ll continue to talk about as we go forward.

Very helpful. Thanks. Thanks a lot Brian.

Thanks. Good morning, everyone. So excluding Star Wars, I hope you can talk about any early reads on potential hot toys must-have as holiday product lineup? Thanks.

Wow, that's a big question. So, if I look where we are in the third quarter, what we are seeing is a great double-digit growth in POS. Let’s just use the U.S. for example, double-digit growth in our Boys category, in our Girls category, in our Preschool business, in our games business and our franchise brands. So we're really seeing in a way a great product offering that are being well received by consumers, thus far albeit, we are now into the fourth quarter. So the NERF brand performing very well in the quarter and year-to-date. Obviously, JURASSIC WORLD is being a very strong contributor. MY LITTLE PONY has several new initiatives both core MY LITTLE PONY as well as EQUESTRIA. LITTLEST PET SHOP has performed very well in certain markets, and we've been clearing out old inventory to perform better in other markets as we go forward. We’ve got in FURREAL FRIENDS, a great holiday product, a StarLily. So that’s been quite good. And then our PLAY-DOH brand has performed exceedingly well throughout the year, and we have a number of new initiatives coming into the holiday; PLAY-DOH’s up and up double-digits as well, both in the quarter and year-to-date. So I would say that you’re seeing great strength in our brands and our business across a number of brands and a number of new product initiatives.

Great. Thank you very much.

Good morning. Thanks for taking my question. I’m curious about the effectiveness of your advertising. It looks like the last couple of quarters it’s been down a little bit. And I’m wondering if some of the content creation has been able to substitute in the spend. And how you guys think about that going forward?

If you recall, we’ve talked a lot about how we sort of view our own content creation, our advertising, and then, of course, royalties paid as all points, if you were marketing because we have big partners out there who are creating great content as well. We’re also seeing an overall trend toward more digital marketing. We’re certainly spending more in digital, particularly in developed economies, and we’re quickly increasing our digital marketing where available in more of the emerging markets. On average, digital marketing costs less out of pocket and is more targeted. But again, I think that overall I would still use and guide you toward roughly 10%, 8S ratio in advertising over time. But certainly, in a major entertainment year, we have the opportunity to focus on our own entertainment and content, as well as our partners' entertainment, which helps to deliver our sales for the year.

Okay. And then for girls, can you talk a little bit about your product pipeline as we lap the FURBY sales, or do you think there might be some bright spots in the period ahead?

Sure. If you look at the brands, our new BABY ALIVE offerings are performing quite well out of the gate. Our FURREAL FRIENDS StarLily coming into the holiday should be quite successful. And we feel very good about it, and the early reads are quite good. In MY LITTLE PONY, several new initiatives coming, both in the core MY LITTLE PONY as well as EQUESTRIA GIRLS. PLAY-DOH DOHVINCI has performed well year-to-date, is up year-to-date, and coming into the holiday season we see that as a great news segment for the brand. And then you'll see several new items in NERF REBELLE coming into holiday as well. Then we should also talk about DISNEY DESCENDANTS. DESCENDANTS is off to a great start. The DCOM movie launched end of July and it's rolling out around the world and to different markets, but where we have launched DESCENDANTS, it’s performing exceedingly well. So again, another addition to our girl’s portfolio and lineup. It’s really unique and differentiated and great storytelling. And as you may have read, they've announced another DESCENDANTS television movie coming in 2017. So, I think as we look forward into 2016 and ‘17, lots of great new girls product both from our own franchise brands and great partners. And we talked earlier about, of course, the introduction of Disney Princess and Frozen coming into 2016.

Great. Thank you so much.

Okay. Thanks. Good morning, everyone. So Deb, I think on the last call, you talked about investments being more prominent because they were used in the second half versus the first half. Is this in reference to capital spending, or is this something that we should see flow through the income statement in the fourth quarter? Because I look at your OpEx in the third quarter, it’s less than 2%, whereas in the first half, it was up 4%. So just want to get some clarification around that?

Good morning, Drew. I think you’re seeing it really in both places. If you look at our CapEx, it’s turning a bit higher than it has in the past. And in there, you can see the investment we’re making in systems. But there is also a piece that’s flowing through our P&L. We have a bit flowing through product development, but the largest piece is through the SG&A line. And really as we talk about our investment in MAGIC: THE GATHERING online, it’s putting in the systems and the programming associated. We’re getting that done. As well as some of the investments we're making to drive the long-term efficiencies in our business and streamlining some of our processes as we go forward. So you are seeing a bit of it in CapEx, which you're also seeing running primarily through the SG&A line.

Got it. Okay. And then, just a lot of press coverage on YO-KAI WATCH and your relationship there? When did you guys begin shipping that product? And Brian, just in terms of expectations, how does this compare to BEYBLADE, just a franchise that could do BEYBLADE-like numbers when you initially launched back in 2011? Thanks.

So, I think the place to look for YO-KAI WATCH is to what’s occurred in Japan. It’s been a very successful brand for some period of time in Japan. The TV episodes have just begun airing, and we’ll begin shipping in the next little while. I think most of the impact occurs, or more of the impact that would occur in the first quarter of 2016, but probably a little bit happening in the fourth quarter this year. But as you recall, when we first launched BEYBLADE, it takes a number of months to inculcate play patterns to get awareness up around the brand, and we take a long view of property like YO-KAI WATCH. It’s been very successful, it really is very unique and differentiated in the marketplace and it’s something that we are very looking forward to. I don’t want to try to size it for you, but I would tell you that certainly has been very successful over multiple years in Japan.

Okay. Just one last one, appreciating the lack of seasonality with MAGIC, can you just remind us what the card cadence looks like for the fourth quarter over the next couple of quarters?

Well, we continue to have new releases coming in the fourth quarter and obviously into 2016. I don’t want to try to again size the card releases, that’s part of the fun for the fans and gamers is to hear from the brand as to what the card releases look like. But I think that the way to view the brand is on an annual basis versus quarter-by-quarter, because of the way the storytelling is done and the way the card releases are set and the tournaments that are associated with the brand. And over time we believe that MAGIC Online will play a greater role as our investments start to take hold, and certainly as we look out to 2017 and beyond, we expect to have a more robust system that enables more concurrent play online and to run even more robust online tournaments post or in 2017 and beyond. So we'll continue to build on the Analog business, number of releases coming and again, as you know, this year we have gone to a different kind of release schedule, and you’ll continue to see the team evolve creatively into 2016.

Okay. Thanks, guys.

Thank you. Brian, given your comments on Star Wars and it’s kind of tracking at the high-end of your retail expectations? You had said before that you see the sales balances between 2015 and ’16? I guess, maybe an update on that and then, did that statement just for clarification purposes? Did that statement include only The Force Awakens or also factor in Rogue One?

It’s -- Rogue One is for holiday next year 2016. So we are really -- I am really talking about the overall Star Wars business that includes both Rebels, as well as The Force Awakens product this year and into next year. We don't really have an update relative to the split between 2015 and ’16. What we are just seeing is that the brand is performing both in shipments and sell-through at the high-end of our range and we will have to wait and see as to that rate of sale as we get through. We certainly believe that 2016 Q1 and Q2, as we go through, and lots of young people get to see the movie. Remember, we are still two months out from the movie. So that's going to have a major impact, then we get into the first quarter where lots of people now having enjoyed the movie will put it in context with the other movies that have been out there. And then at some point to be announced, there will be a home entertainment window as well that will continue to spur the brand along. And so not ready to update any broad guidance around the split between ‘15 and ’16. Just wanted to report that we've seen very robust sales that our part of the business is tracking ahead in terms of retail sales versus Star Wars overall, and that overall shipments and retail sell-through at the high end of our range.

Okay. You had also commented on how your just-in-time ability has improved even with broaden distribution. Can you, any type of quantification of how much revenue that may be shifted from third to fourth quarter? The competitor gave some commentary on that from what they thought from their business on Thursday. Any quantification you can throw out here?

No. I don’t think that trying to quantify that at this point would be prudent. I do think that you're seeing a lot of new initiatives coming into the fourth quarter as you would expect. I think what’s heartening to see is that both in Q3 as well as year-to-date, our categories of brands and products are selling very well and our POS has remained strong throughout the year and continues to be strong. I'd also tell you that in many instances our POS has strengthened in the third quarter versus the year-to-date numbers. So again we’re seeing momentum build, and again I’m not going to size Q3 versus Q4.

Okay. And into somewhat profitability-related questions here. How do you see, this is a follow-on to the prior question related to the Princess business. How do you see that profitability ramping in ‘16 and ‘17? And then also, are you seeing any benefits to expect this year from lower transportation costs and then other input cost benefits in ‘16, given the typical delay that you have with the vendors and contract pricing?

If you look, I listed some product input cost. The single biggest cost input to our cost of goods is labor. And we continue to see labor inflation rates in the double-digit range. We have seen a slight decrease in certain types of resins over the period since the end of 2014. But they tend to be more nominal and they run in arrears to whatever the petroleum or gasoline costs prices are out there as you know. But I'd say overall, we haven't seen any significant surcharges in shipping and getting a bit of pickup there. But I wouldn't say there is anything nominal.

Yeah. We do tend to lock in our contracts on a one-year basis. So kind of what you’re seeing now is we’ve locked in our -- certainly our shipping contracts probably back in the springtime. So whatever benefits you’re seeing, you’re seeing them in that as well. But with respect to Princess, so that’s a great question. So if you think back and then you followed us for a while, but for those who haven’t, if you think kind of that to when we took on the MARVEL license, which is just a great partner brand of ours. You do tend to see as revenues begin to ramp, profitability also ramps. We’ve invested a lot in product development. Brian mentioned we have wonderful innovative product coming next year. And you’ll see that over time as we experience more revenue with the license and people become acquainted better with our product line, we will see profitability ramp much like we saw with the MARVEL line.

Okay. And one last on FURBY, just can you remind us how big that was in ‘14?

I don’t think we ever told you to begin with. So I don’t think I can remind you. But what I would say to you, it was a significant brand for us both in 2013. It continued to be a very big brand for us in 2014. I tried to size for you the percent of revenue that we experienced in each of the quarters. And I said that FURBY in the third quarter was 37% last year in 2014, 37% of the dollars were done in the third quarter and 31% of the dollars were done in the fourth quarter. So clearly, the headwind will continue through the remainder of this year.

Okay. Thank you both.

Hey. Good morning. I was hoping you could help us with the breakdown of Star Wars shipments between domestic and international either dollars or local currency or whatever you can provide?

The Star Wars brand is off to a very good start everywhere. I’m not going to right now give you the specific breakdowns, domestic to international. But we believe over time the brand becomes increasingly global. I talked a little bit about that earlier, and we've seen that over time with our Marvel business. But as we continue to develop the brand and as the brand becomes even more familiar to new consumers in the international markets, in emerging markets, we believe it gets even more global in scope. But so far, it's off to a very good start around the world.

Okay. And you said it was tracking towards the high end of your plan. Can you tell us what your plan was for shipments between the third and the fourth quarter?

We are not going to talk about shipments between third and fourth quarter, but it is tracking at the high end of the plan. And I guess I’d give you some broad -- I will give you some broad guidance between international and domestic. It's about 50-50, so that there is an uptick in both international as well as domestic market.

Okay. Okay. That’s what I was shooting for because there is just so much uncertainty. It’s just helpful to get those kinds of breakouts. Thank you.

Yeah. But I think what happens over time, you see it in our TRANSFORMERS business, you’ve seen it in the Marvel business over time, it gets even more developed in international markets and maybe you get to introduce the brand in the emerging markets in places where it doesn't have a long history or is not as well known. So, I think over time, it pertains to good things. And I just don't feel at this moment, I would talk about the cadence of shipments between third and fourth quarter. But I’ve tried to give you some sense in real-time that the brand is performing very well; that our part of the brand is ahead of overall retail for the brand, and our products are on the top of many retailers' toy lists, as well as consumers wanting to buy lists for the holiday, and it’s at the high end of our range, both in terms shipments as well as retail sales relative to our expectations.

All right. Great. Thank you.

Thank you, Rob, and thank you, everyone for joining the call today. The replay will be available on our website in approximately two hours. Additionally, management's prepared remarks will be posted on our website following this call. Our Investor Day is scheduled for November 16 at our headquarters in Pawtucket, Rhode Island, and we hope that you can join us. If you require any information on the event, please contact Hasbro Investor Relations. Thank you.