Hasbro Inc (HAS) — Q3 2016 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. 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. There are many factors that could cause actual results or events to differ materially from the anticipated results, or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on form 10-K, our most recent 10-Q, in today’s press release, and in our other public disclosures. 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 Hasbro team delivered a tremendous third quarter, the highest revenue and earnings quarter in Hasbro’s history. Revenues grew 14% behind innovative products and engaging storytelling, increasing across all major operating segments and geographies. Operating profit increased faster than revenues, up 19%, and we continued investing to profitably grow for years to come. Our financial position is strong, and we returned $112 million in cash to shareholders during the quarter. As we develop Hasbro into a global play and entertainment company, we have built robust brand building capabilities, including storytelling that supports an expansive brand portfolio. Today, we're garnering a greater share of life than ever before by reaching broader demographics, play experiences, and geographies. Our innovation, marketing, and investments are informed by the global consumer insights we are uncovering as we engage with consumers and audiences across touch points and mediums. The investments we have made in our digital expertise enable our global teams to develop immersive brand experiences, which in turn elevate our connection with consumers and fans. This has far reaching implications in how we develop brands, engage with consumers, tell stories, and spend our marketing dollars. Our digital expertise is differentiating our brands. Thus far in 2016, videos Hasbro curated or created, along with user generated content, garnered nearly 5 billion views. Third quarter revenues grew at a double digit pace in both the US and Canada and international segments. Developed economies, including the US, Canada, UK, France, and Italy, each grew revenues double digits. Emerging markets increased 16% with strong growth in Latin America including Brazil as well as in Asia, including China. The industry also continued to grow, up 6% through August according to industry and company estimates, and Hasbro is gaining share. Importantly, we gained share in emerging markets such as Brazil and Russia as well as developed economies including the US, UK, Spain, Italy, and Australia. Global point of sale increased slightly in the quarter, overcoming difficult entertainment comparisons at retail, including a later set date for Star Wars this year and post movie declines for Jurassic World. Girls and games point of sale increased, while boys and preschool declined. We are seeing strong point of sale as we start the fourth quarter. In respect to Hasbro’s third quarter revenues, Hasbro franchise brands increased 2%. This growth was lead by Magic: The Gathering, Nerf, Transformers, and Play-Doh. Nerf grew for the 15th consecutive quarter, while Play-Doh extended its growth streak to 20 straight quarters. In addition, Transformers and Magic: The Gathering revenues increased. Transformers, Robots in Disguise animation, as well as streaming content from Machinima is supporting product lines which have strong initial consumer reaction. Importantly, Transformers has good momentum heading into 2017, which marks the first of three years with planned major theatrical entertainment. We have momentum in our gaming portfolio, with growth in several brands driving the 13% increase in the category. Magic: The Gathering, Duel Masters, Pie Face, Simon, and Bop-It were among the brands posting positive gains. Despite most of Magic’s revenue not being included in our point of sale reports, point of sale for the games category grew. Hasbro's gaming portfolio is unmatched and we are cultivating gaming experiences across a multitude of platforms, including face-to-face gaming, off-the-board gaming, and digital gaming experiences, notably in mobile. One of our newest games, Speak Out, has generated more than 100 million online views. Consumer takeaway has been extremely strong and we are working to catch up to demand. Within our mobile gaming portfolio, Backflip Studios is scheduled to unveil an all-new mobile game, DragonVale World, during the fourth quarter. This marks the first major release for this gaming property since Hasbro took a 70% stake in the studio. Backflip has also unveiled several new mobile games this year based on Hasbro brands, including Transformers, Earth Wars, and just last week My Little Pony Puzzle Party. The My Little Pony franchise continued to drive brand awareness through the strategic use of entertainment, pop culture events, and consumer products expansion. In a very competitive small doll segment, our holiday items and new launches are beginning to drive point of sale gains in many markets around the world. In 2017, the My Little Pony movie will bring global audiences to all new worlds, with both the core cast of characters, along with all new characters. In addition to our franchise brand and gaming portfolio, innovative new offerings at a variety of price points delivered growth for Baby Alive, Furby, and FurReal Friends. Within our partner brands portfolio, revenues increased 19%, driven by positive contributions from Hasbro's shipments of Disney Princess and Disney's Frozen, DreamWorks’ Trolls, and Yo-Kai Watch. For the full year, we now expect partner brand revenues to approach 30% of total Hasbro revenue. Hasbro's line of Disney Princess and Disney Frozen is off to a strong start, behind a favorable reception to our core Shemar fashion doll assortment. Overall, the brands are ahead of our plans for the year, and we recently expanded our offering with new holiday items, as well as new items in support of entertainment for Elena of Avalor and Moana. Star Wars continues to be a top global property with strong consumer and retail support around the world. Rogue One, a Star Wars story product, was on shelves September 30, which was several weeks later than last year's on-shelf date of September 4. This shift most notably impacted our US point of sale results. Our expectation remains that our 2016 Star Wars' revenue may match the level we achieved in 2015. In addition, Yo-Kai Watch and DreamWorks’ Trolls contributed to our partner brand portfolio gains this quarter. Yo-Kai Watch is now available in global markets, including strong initial performances in several countries. Our DreamWorks Trolls line hit shelves in the third quarter. Working closely with DreamWorks throughout the development of the movie, we have a robust offering of dolls, plush games, and more in support of the global movie premieres over the next several weeks. In closing, we've made great strides throughout 2016, including the third quarter, which historically is the largest revenue quarter of our year. Hasbro and our retailers are well positioned to deliver on what we expect to be a strong holiday season for Hasbro brands. Our initiatives are resonating with consumers and we have good retailer support. In addition, inventory available at retail and at Hasbro is improved from this time last year. We are very well positioned heading into 2017 when the entertainment lineup from Hasbro and our partners is among the best we have ever experienced.

Thank you, Brian, and good morning everyone. Our third quarter results highlighted the strength of Hasbro’s business, across brands, geographies, and our global team. Throughout 2016, we've exceeded our expectations in terms of performance, both on the top and bottom line, and we're set for a strong finish to the year. 14% quarterly revenue growth drove a 19% increase in quarterly operating profit. We grew margins while investing in our business, in innovation across our brand portfolio, in storytelling across mediums, in our consumer product global talent, and in digital expertise, including projects for Magic: The Gathering, and new gaming launches at Backflip Studios. Over the trailing 12 month period, we generated $637 million in operating cash flow, ending the quarter with $830 million in cash on our balance sheet. As we look to the full year, we have good momentum in our brands, including our new line supporting Disney Princess and Disney's Frozen. In addition, we're supporting more motion pictures in the fourth quarter than last year. We have the right inventory in the right places, both at retail and in our warehouses to support this momentum. For the third quarter 2016, we grew revenues in each major operating segment. In the US and Canada segment, revenues increased 16%. Revenue growth in the games and girls categories more than offset declines in the boys and preschool categories. Hasbro franchise brand revenues grew 2% with growth from Magic: The Gathering, Nerf, and Transformers. Partner brand revenues increased 13% in the segment, behind contributions from Hasbro’s line of Disney Princess and Disney's Frozen, DreamWorks Trolls, and to a lesser extent Yo-Kai Watch. Additional Hasbro brands, including Baby Alive, Easy Bake, Pie Face, and Furby, also contributed to the year-over-year growth for the segment. US point of sales declined slightly in the quarter, given difficult comparisons to Jurassic World and a shift in timing for Star Wars on-shelf dates versus last year. Point of sale increased in the mid-teens for the first three quarters and is positive to start the fourth quarter. Retail inventory continued to be of very good quality and has grown primarily from the addition of new initiatives. Operating profit in the US and Canada segment increased 22% to $228 million or 24.4% of net revenues. Similar to prior quarters this year, higher revenues drove improved expense leverage. International segment revenues grew 13%, including a negative $3 million impact from foreign exchange. Within the international segment, the boys, girls, and preschool categories grew, while the games category was flat. Franchise brand revenues increased 4% with growth in Magic: The Gathering, Play-Doh, Nerf, and Transformers. Partner brand revenues increased 30%, behind Hasbro’s shipments of Disney's Princess and Disney's Frozen, Yo-Kai Watch, and DreamWorks Trolls. Hasbro brands Baby Alive and Pie Face also contributed to the segment's strong performance. Operating profit in the segment increased 17% to $133.1 million, or 19.3% of net revenues. The international segment continued to generate greater expense leverage. Through the first nine months of the year, currencies negatively impacted revenues by $49.1 million. Based on current economic trends, we anticipate a potential further impact of up to approximately $25 million for the remainder of the year. Despite an improved currency translation outlook from where we began the year, the impact from currency varies by market, and our global teams continue to manage the ongoing economic impact on retailers, and consumers from currency devaluations in several markets around the world. Entertainment and licensing segment revenues increased 8% behind revenue growth in consumer product licensing and digital gaming. Segment operating profit decreased $2.2 million or 13% to $14.1 million or 25.1% of net revenues. Higher revenues and lower program production amortization were partially offset by investments in building our consumer products team globally and higher expenses at Backflip Studios in support of new gaming launches. Boulder Media revenue and expenses are being recorded in this segment, and were not material in the quarter. Overall, operating profit increased 19% and operating profit margin gained 100 basis points versus last year. Double digit revenue growth drove improved expense leverage for the quarter as well as year to date. For the full year, we anticipate operating margin in line with, or up slightly from last year. Cost of sales in the third quarter declined slightly as a percentage of sales and continued to benefit from growth in partner brands. This growth in partner brand revenue also led to an increase in royalties, which at 8% of revenues is up 30 basis points year over year. We now expect royalties for the full year to be in the range of our year to date level of 8.1% of revenues and last year's level of 8.5%. Program production cost amortization declined in the quarter, and is running lower in 2016 than last year as we've delivered and are amortizing fewer television programs. Content development and storytelling remain core to our strategic investments, and we’ve spent $36 million in cash on television and film production over the first nine months of the year. In addition, during the third quarter we acquired Boulder Media to enhance our animation and storytelling expertise. SG&A as a percentage of sales was up slightly versus last year. The increase reflected higher spending on digital programs including Magic: The Gathering and Backflip. Compensation expense increased during the quarter, and we anticipate will increase further in the fourth quarter as we true up two years of successful performance on long-term plans versus measures we set several years ago. Turning to our results below operating profit, other income was $8.5 million versus $5.1 million last year. The improvement resulted from a small foreign currency translation gain this year versus a loss last year. And to a lesser extent, higher interest income and growth in earnings from our share of the Discovery Family Channel. On a reported basis, the third quarter of 2015 included a $6.8 million gain from the sale of two manufacturing facilities. Absent the gain, other expense was $1.7 million last year. The underlying tax rate was 26.1%, down from 27.2% last year and down slightly from 26.4% for the full year 2015. Diluted earnings per share was $2.03 compared to EPS of $1.64 last year. Our balance sheet remains strong. Strong cash generation enabled us not only to invest in growing Hasbro, but also to return cash to our shareholders. During the third quarter we returned $112.4 million to shareholders, $64 million in dividends, and $48.4 million in share repurchases. We've spent $106 million in share repurchases through the first three quarters of 2016. This is in line with our full year target of our purchasing $100 million to $150 million, which as always is subject to market conditions. Receivables at quarter end increased 5% versus the 14% revenue growth, and DSOs decreased 7 days to 78 days. Our accounts receivable remain in good condition and collections continue to be strong. Inventories increased 36% versus last year. The overall quality of this inventory is good, and our inventory availability has improved from this point last year. More than $100 million of the year-over-year increase is in Disney Princess and Disney's Frozen, Yo-Kai Watch, and Trolls, which are all new lines for Hasbro, and for Pie Face, which is a much bigger business this year than last. We’re also supporting multiple films in the fourth quarter, including Rogue One. The later on-shelf date and our better inventory availability for this line resulted in Hasbro having more inventory on our books at quarter end last year. At year end, we believe we will have the appropriate inventory to support our lines as well as new initiatives occurring early in 2017, including Disney's live action Beauty and the Beast film. Finally, our retail inventories have grown in support of these successful new initiatives, and growing Hasbro brands. In closing we have the right brand, the right assets, and the right teams to deliver a successful year and we remain committed to taking the right strategic steps to position Hasbro for 2017 and beyond. Brian and I are now happy to take your questions.

Thanks. Good morning everyone, and congratulations on a very, very well-done quarter. So two questions. One, just a clarification, Deb on the inventory. I appreciate the $100 million of incremental brands that you didn't have last year, but even excluding that, inventory balance was still up into the teens. So can you maybe explain a little bit of where that inventory is basketed and where we should look for that inventory to progress here over the next kind of 90 to 120 days? And then just secondly, your operating profit in the US or in the North American segment was very, very strong. I'm wondering if that's something that we should look for going forward to continue to be strong, or if there was something unique in the quarter that allowed you to really stretch up into the mid-20s. Thank you.

I'll address the inventory question first, and then Brian can discuss the operating profit in the US. Regarding inventory, we have experienced an increase. At the end of the third quarter last year, we were in a position where we were trying to obtain some products and had just started to prepare for the introduction of Pie Face later in the year. Approximately half of the inventory increase is in our international segments, where we saw a rise due to foreign exchange rates that ended the quarter higher than over the entire period. The remaining $100 million increase in inventory was primarily due to new product lines. Additionally, we are better positioned for popular items this year, such as Nerf and Play-Doh. We also have Star Wars inventory related to the Rogue One launch on September 30th, which followed Force Friday on September 4th the previous year. Overall, this has led to an increase in inventory at the end of the quarter, though at a lower percentage than what we experienced at the end of the second quarter. Looking ahead to year-end, we expect inventory to increase, but not as significantly, as we have exciting new launches coming in the first quarter of 2017, including Disney's live-action Beauty and the Beast, which launches early in the quarter. Therefore, we anticipate inventory growth, but at a more moderate pace.

On the US business, Steph, we continue to see the team making great progress. They've continued to partner with retailers. We’re seeing a range of brands and growth across our portfolio, growth in gaming and certainly significant growth in girls. In the boys business, year to date continues to perform well obviously in the quarter. Star Wars is down, but year to date, Star Wars is up significantly, so again that's an opportunity as we think about the full year. So the team continues to do a very strong job in marketing and looking at expenses, and working with retailers to ensure they have great inventory that's delivered more just in time and managing a strong P&L.

Okay, thanks. Good morning everyone. So Deb or Brian, I think you've mentioned that you expect partner brands to comprise 30% of revenue for the year, and you noted that Disney Princess and Frozen was outperforming your original expectations. What else is driving that increase? Are there other partner brands that are driving that mix shift or is there a shortfall in one of your franchise brands? That's my first question. Second question is on point of sale. I think you mentioned that it was up modestly in the third quarter, but you were seeing an uptick at the beginning of the fourth quarter. Are you suggesting that you're seeing an acceleration, and any comment on point of sale trends for Rogue One albeit we know it’s early in the fourth quarter, but just any comment there. Thank you.

So you're right, Drew. We are in fact seeing really strong point of sale trends entering the fourth quarter, particularly in the US. We saw a little bit of softness in point of sale in the late summer, July, August period. And then in September given the shift in Star Wars as well as the impact from Jurassic, that impacted our US point of sale. Internationally, we're seeing very strong point of sale, up double digits, in Europe, up in Latin America, up year to date in Asia-Pacific. And then in the quarter in Asia Pacific, particularly in Australia, recently we've seen some retail issues with a retailer where there was just less inventory taken, and a little bit less of a sell-through and therefore impacted that HAPM number, the Asia-Pacific number because of Australia. So overall we feel very good about the point of sale trends year to date, and the point of sale trends going into fourth quarter, with a little bit of a note in the third quarter due to some of those timing shifts and some of the brands that have come down significantly versus year ago. As we think about Disney Princess, it’s performing incredibly strongly and it's ahead of our original plan for the year. Our global teams in partnership with Disney are doing an excellent job. And in fact, we're seeing great growth from areas like our Royal Shimmer Fashion Dolls. That’s the all 11 princesses, not even including Anna and Elsa. For the holidays, we have a big presence coming for the Royal Dreams Fashion Doll Castle, so we even give girls great places to play with their dolls. Deb mentioned some of the entertainment, but also note that in 2017 in the first quarter, we'll have the broadcast premiere of Frozen. We’ll have a holiday special next year from Frozen. We also have Elena of Avalor, which is off to a very strong start as a television initiative, and then we're also very excited about the launch of Moana. So all of those elements leading to a very strong princess business, and we've made great strides in making great progress there toward our long term objective of growing that business far beyond where it had been in the past.

Okay. Thanks guys.

Hi, good morning, and thank you. Thanks for all the point of sale color. I think some people were curious why it wasn’t in the deck, but if you wanted to comment on that, but that's not really a question I have. If you could comment on your point of sale ex Star Wars and Princess, that would be helpful.

The point of sale for our business was very strong internationally this quarter, especially for Star Wars. While the Princess point of sale is robust, it is a new initiative. We have strong point of sale across various categories. Our games business saw significant growth, and several girls' brands beyond Princess and Frozen also performed well. In fact, the girls' business would have increased in the third quarter even without Princess and Frozen. Our boys' business, particularly from Nerf, is seeing significant growth as well. The Transformers business also showed improvement this quarter. We're observing how the addition of fan-focused content that began this season on Machinima, along with our core boys' and preschool boys' entertainment, is effectively driving that brand. This positioning is setting us up well for 2017, which will mark the first year of three anticipated movies over the next three years. We have considerable strength in our portfolio beyond Disney Princess, Frozen, and Star Wars.

Okay, thank you for the information. I wanted to ask about the change during Force Friday, as it seems to create some confusion in our modeling. Could you clarify the like-for-like point of sale for the Force Friday weeks?

Yes. So as I said, point of sale internationally wasn't as impacted by the shift. The shift is really around a lot of the US, the way the US retailers really went after Force Friday a year ago and this year it was September the 30th. So that was our week 36 last year, which was in our third quarter, and this year it's our week 40 which is in our fourth quarter. So as Deb noted, it means that the inventory for that initiative was on our books at the end of the third quarter wasn't yet really out at retail as significantly it was a year ago. So therefore you didn't have that rate of sell-through in point of sale. And so you saw that reflected in our third quarter point of sale, particularly in the US business. Internationally, you didn't see quite the same impact. So overall, I would say a couple of things. First, Star Wars year to date sales, revenues are up significantly through the third quarter. So as we look at the full year, we look at international point of sale, and the point of sale we're seeing coming into the fourth quarter now that we have inventory, we again reiterate our belief that 2015 levels could equal 2016 levels for the Star Wars brand.

Okay, and the reason why I ask is mainly that there are some expectations in the media community for Star Wars box office to be down year over year in a double digit. So despite that, you’re still confident in Star Wars being flat year over year.

Look, as I said, we're up significantly year to date. I looked at a lot of data coming into this conversation, and I will tell you that the point of sale we're seeing around the world is incredibly strong region for region. We saw a bit of a decline in this quarter due to the timing shift between the two merchandising dates, but as we come into the fourth quarter, whether it's our preschool Star Wars initiative or our product in support of Rogue One, we are seeing great takeaway. We also see the movie as having wonderful play patterns. Obviously you've seen some of the trailers and you could imagine all the character play and vehicle play that will come and role play that will come as a result of the movie. And as we’ve said, we look at the business year on year, versus quarter for quarter, and that's been consistent throughout the year. So we're incredibly excited about this movie, and then obviously as we get into 2017, we’ll have home entertainment window for this movie and then we go into another trilogy movie in 2017. So again we have very strong expectations for Star Wars, and that will happen over time as well.

Okay, great. Deb, can you discuss the impact of foreign exchange on the fourth quarter and how we should view that?

We have about $50 million of FX for the year, year to date through the end of the third quarter, and we said we could have up to about $25 million more for the rest of the year, and really which is not very different from what we said at the end of the second quarter. And really what we're seeing is it's primarily with the UK pound and seeing what happens with the pound over the last few months of the year.

Hi, good morning. Thanks for taking my questions. I think you mentioned that retail inventories were also up as well as in-house inventories due to new initiatives. And I'm curious what you guys might be doing differently this year versus last year to facilitate those brick and mortar sales.

Well, if you look a year ago, I think we forget quickly that a year ago in the third quarter we talked a lot about chasing inventory and that we're trying to catch up given the September 4th launch. So this year we've done a better job across the company and particularly in our US business to ensure we had inventories of great initiatives that we're selling at a high rate. So our retail inventories are up, but up around the brands that are selling quite well, and so we're in support of those. Our percent in stocks have improved year on year. That’s something that we care about. We want to make our shelf spaces productive as possible in partnership with our retailers, but equally importantly we are seeing significant increases in online sales. And those online sales are several fold higher than our overall sales, and we're also seeing online sales increases across every one of our categories, and this is US data. Whether it's boys, girls, preschool or games, we're seeing significant online sales increases. So where we are able to provide our product lines and our brands directly to the consumer via our retail partners online, we are seeing great takeaway and our brands are really resonating. So that also for us is a great bellwether for how consumers are responding to our products and brands.

And then can you guys talk about general trends you're seeing in Europe? I think performance had been pretty lumpy there prior to this year, but the last few quarters have done pretty well. Is there any general trend that you guys are seeing that is making that happen, or a particular segment category that is resonating better with those consumers? Thanks.

We're really seeing overall our European business, it comes first down to great leadership across companies and our countries. Our team is leading quite well. This past quarter we were in the UK with our Northern European team and down in Spain with Southern European team and Russian teams getting to meet a lot of our management teams. They are doing a fantastic job in executing our brand blueprint to a greater extent. We're going to market as one voice, meaning consumer products licensing hand in hand with our toys and games business. We're doing a better job in placing our content around the continent and getting our content played with major broadcasters. We have around the world, so this includes Europe as well as other global players, more than 50 SVOD platforms that are now playing our content. So again, I think that we are just executing the brand blueprint. I said in 2015 I thought it was the first year you could really see the brand blueprint come to life and the European team, along with teams around the world, are really executing the blueprint for the second year in a highly evident way.

Thank you so much. Nice quarter.

Hi, thank you very much for taking my question. Brian, you gave some helpful color on point of sale earlier. You mentioned Q4 so far is up. Could you perhaps give some more color on the actual trajectory, how much it is up because that period will include Star Wars and we know there was a merchandising date shift of course in Q3? And then in terms of Disney Princess, do you have any color at all on point of sale in the US like for like for that brand in Q3? In other words, I know you didn't make the dolls last year, but in terms of industry wide, where that brand is trending year over year in Q3 and heading into Q4? And then I have an operating margin question.

Sure. So if you divide up Disney Princess into two pieces, the princess business is up like for like year on year. If you look at the mix, it's a bit more mixed toward lower priced product and that has to do with the fact that there are some lower price SKUs from prior product inventory that are still selling through in the third quarter. So overall, we're seeing growth in our business and we're seeing like for like stronger takeaway for our products, but we're also seeing a stronger takeaway into the third quarter for lower priced products that will be eliminated over the next quarter or two. We're seeing great takeaway in the fashion dolls offering all 11 fashion dolls. We're seeing great early takeaway from Elena of Avalor, so again overall Princess and Frozen performing well. And Frozen, what's great is that the brand is performing for us at quite a strong level and Frozen has even more of an international footprint than the Princess business on a percentage basis. So more countries around the world are really focusing in on Frozen with great results globally, and you see that indicated in some of our point of sale data. Frozen is tending to be slightly more internationally oriented on percentage terms. Obviously we're benefiting from a great campaign that's begun this fall called Dream Big Princess in partnership with the Disney Company. And of course we're very much looking forward to all of the new entertainment coming next year. The broadcast debut of Frozen, the Frozen Holiday Special, first quarter seeing a Beauty and the Beast live action movie, Elena of Avalor on television and of course Moana coming in the next few weeks.

Thank you. Very helpful. And then I had a quick follow up on full year guidance for operating margins. Seems like in line is slightly up. Could you just talk about what that implies for Q4? Seems like that would imply Q4 would be a little bit softer than a year to date.

What we really do think of in terms of the full year when we think about our business. We mentioned some of the things that we expected would be impacting us in the fourth quarter. Our results are running better than we had planned. Certainly, we planned our business a few years back, so we've got some compensation expense that's in addition, and we continue investing for the future of the business. That impacts the year pretty ratably as we spend for things like our new Backflip game launches and our Magic: The Gathering digital next platform, our online platform for Magic as well. So we'll see some things continuing in to the fourth quarter from what we've seen to date.

Hey, good morning everyone. Just wanted to touch on the boys business, and parse through some of the moving parts of the different properties there, Brian. I think in the past you said Jurassic Park was about $100 million headwind to this year. I think in a past conference call, you also said Transformers was kind of down, or off 20%. Can you can clarify that, and then maybe just give us a view of what some of the others are doing. Star Wars is up, but Marvel, how should we think about that this year?

Yes. So if you look at boys business in the quarter, the biggest decline both for boys and for our company in the quarter was Jurassic. That’s the impact that it had. In the quarter, Marvel is up a bit in the boy’s business. Our action figure business is performing at quite a high level. We had a great partnership on a superhero spectacular retail program with Disney and with Marvel. Our Marvel Legends business is performing quite well. Spider-Man is also performing quite strongly, which is a great lead into next year's movie. And so that's what we're seeing. We also have got a lot of fan-oriented product. It's one of the brands that’s responding the most to our fan orientation and fanning the flames of our fans and providing product to them that they really like and offering that online, and you'll see some products for fans around Doctor Strange. As you go forward, Nerf is growing dramatically for both quarter as well as year to date. Star Wars as I said year to date is up significantly, down in the quarter. Transformers is up. As I noted, Transformers is up pretty substantially in the quarter, and it has to do with the fact that we continue to improve the blueprint and add element to the blueprint this quarter with the Machinima content running the Combiner Wars, and that product performing at quite a strong level. So Transformers business is doing well. We also add to that, the Backflip Studios Transformers Earth Wars, which is all around Combiner Wars. So again, executing that blueprint. We even had fan created product in the quarter, which is a combiner called Victorion created by fans. We’re allowing fans to curate along with the content that we're streaming. So three types of content, and it's a strong lead in to our 2017 plans for Transformers. In addition, I forgot to mention, but in Marvel, we have very strong plans leading to next year in 2017 obviously with Guardians of the Galaxy, with the Spider-Man movie, and a Thor movie. So we're in a good position on the Marvel boys business overall. And then of course a new initiative that's working to particularly well in early days internationally is Yo-Kai Watch. We've just started the launch in international markets, and we're seeing some great takeaway there. So overall that’s kind of our boys’ lineup. And as I said, on Star Wars to repeat, we do expect that Star Wars could equal Star Wars levels of 2015 across the company.

That's very helpful and then just to maybe continue on the Transformers commentary, just kind of the blueprint that you've been laying, I mean the old rule of thumb was, in the year after a movie, that property would fall about 50%. Is there a new kind of way to look at that going forward with the next iteration in Transformers coming next year?

I think we're really entering a new era, and it's really an objective that we have across the company as we expand our blueprint and go to the next iteration of our blueprint for our company. You're going to see in 2017 two Hasbro films, so certainly Transformers. You’re also going to see a My Little Pony animated feature in the fall. The opportunity in Transformers is to take the storytelling into movies for multiple years, and you'll see that in ‘17, ‘18, and ‘19, with different kinds of stories being told. So not every movie will be the same, but every movie continues to add to the character and story of the property. When we first started, our objective was always to build the brand enterprise value through the blueprint. And so this is the next logical step. I took a step back as we came into the third quarter call just to give a perspective on our franchise brands and brands like Transformers. So I looked at franchise brands as we were sitting here at the end of the third quarter in 2013, and take it today, year to date versus year to date ‘13 versus ‘16, our franchise brands are up 33%. And that's the view we take to our business, is that longer view of building brands over time, adding elements to our blueprint, adding capabilities, and taking our brands over time to the next level. So Transformers steps up. My Little Pony steps up for next year and then in the next couple of years, you'll also see the Littlest Pet Shop stepping up to more content in a number of ways.

The intangible is consistent with what we communicated at the beginning of the year. Regarding program production amortization, we anticipate that we will deliver fewer programs than we initially planned this year, which is solely due to timing. We previously indicated it would be about 1% of revenue, but we now expect it to be slightly less than that for the full year. Nonetheless, we still plan to spend approximately $60 million on a cash basis for the full year.

Thank you. Just as we think about 2017 entertainment, there seems to be a lot of entertainment next year. How are you thinking about that overall expanding category sales as it has done in the past versus cannibalizing sales because maybe some of the entertainment gets lost? And also just how you feel about your entertainment in 2017 and then putting into perspective what you have in 2016.

Yes. So overall in 2017, we are incredibly excited about the lineup. I think over time what we've seen is that entertainment is stretching the retail calendar, both online and at brick and mortar globally. With more entertainment initiatives occurring, but spreading the calendar to be now from the first quarter through the fourth quarter, versus the older thinking of just looking at summer movies. And that’s quite good for our business and good for the way we think about executing our blueprint. In the first quarter, we have new initiatives coming from Disney and Beauty and the Beast live action. There’s a Wolverine movie coming that helps to continue to support the X-Men business. And then Guardians of the Galaxy, a Transformers movie both coming in the summer, but spaced. A Spider-Man movie coming, which is very exciting. That's a great brand for us and we're looking forward to really executing that across multiple platforms. My Little Pony comes in fall in October and then you have Thor of course, then you have Episode Eight, sorry, Star Wars Episode Eight in December. So a great spread of entertainment and then combine that with our television efforts across multiple platforms and then the Walt Disney Company with its television efforts across Spider-Man, Avengers, and Guardians. We have a very robust lineup for 2017 that we're very excited about both from Hasbro having two animated films and multiple TV series as well as our partners. And I think we are well positioned coming into 2017.

Yes. Thanks for taking my question. Deb, a follow up question for you on the operating margin outlook for the year and some questions or some statements you made about compensation expense being higher, the Magic: The Gathering digital platform. So as we look at some of the additional line items that make up the expense lines, are we going to need to see then a big increase as a percentage of revenue, the SG&A line relative to where it was last year in the fourth quarter, same thing with gross margin or maybe product development?

Again we've talked earlier in the year and really haven't changed our thought process around product development or gross margin as far as being able to sustain the levels that we experienced again on a full year. So we do try to stress, we think about the business on a full year basis. Royalties, we did say we expected to be up a bit given the performance of our partner brands, the strong performance over our expectations. So we'll see that line item go up and we continue to just invest in product development to the levels that we had talked about earlier in the year. As far as advertising, we do have consistent advertising expectations for the full year. So I think it's just a matter of the additional expense that we see kind of over and above what you would normally see in the quarter. And that's what we tried to explain this quarter as well.

Thank you. Brian or Deb, whoever wants to take this, just want to get a little more color on the strength you're seeing in Brazil. And then China also, a little bit more color there. And then if we take that, can you give us any color how China in particular, your mix of brick and mortar versus online and then after we hit those geographic areas, the other part would go back to inventories. Where do you see turns stabilizing here and when? And as we see the online portion grow, how is that going to factor in on a go forward basis there?

The emerging market business overall grew 16% in the quarter, with significant growth observed in Russia and strong performance in Brazil, despite a somewhat flat market there. In China, we experienced very strong double-digit growth, with our brands thriving in stores. This includes our consumer products, toys and games, and important entertainment content like movies. Transformers remains one of the most recognized and cherished brands in China, which presents us with substantial long-term growth opportunities alongside our other franchise and partner brands. In Brazil, we are currently the leading doll line with Baby Alive, which sees particular strength in the baby doll category. While we’ve seen overall global growth for Baby Alive, Brazil stands out as a significant market for baby dolls. Our inventory turns are clearly improving, and as we introduce new initiatives, we are ensuring that we have enough inventory to meet the demands of these opportunities without affecting the rest of our business. We're experiencing a strong surge in point of sale for these new initiatives, including Disney Princess and Frozen. In the coming weeks, the Trolls movie will be released globally, and we are preparing for the related business across various categories and segments. Our additional inventory from Yo-Kai Watch is already showing positive results, particularly in international markets with strong TV placement. Our inventory management continues to advance, allowing us to leverage our business over time while improving operating margins. Our goal is to grow operating profit faster than revenues, which we accomplished this quarter, and we plan to maintain that trajectory going forward.

Okay, and then any comments on your expectations for Furby and how that's going to ramp?

Furby is in the early days, but early days are good. It’s a very sophisticated product in that it provides content through Bluetooth. It's a closed environment, so we've taken care of all the security and safety measures that are noted. It's not a two-way device. It’s a one-way device that brings out new content to the fan and to the user. And early days are quite good. Takeaway is good and both retail and online sales are strong.

Hi, Thanks for taking my question. I believe you said partner brands should approach 30% of revenue versus about 28% last year. Even with your revised royalty guidance, it would imply that fourth quarter royalty would be down year-over-year, despite potentially supporting more movie franchises in the fourth quarter. Could you maybe help me understand some of the moving pieces there?

It's really about product mix so depending on how you model our franchise and our own brands versus partner brands, that's really all about the mix.

Yeah. If you look in the quarter, royalties are running 8% up against 7.7% last year. All Deb had noted was that we could be 8.1 or a bit for the full year up against a year ago number of 8.5. So again, I think we're in that range. We’re ranging it for you, and again, it does have to do a lot with product mix and certainly we've seen growth of our business in other areas, but trying to give you a broad sense of what we think.

Okay, great. And just kind of following on that then, as partner brands increase as a percentage of revenue, should we see continued slight benefit to gross margin? I know you said sticking with your guidance of roughly in line with last year.

Yeah. So again, we're not suggesting that partners’ brands are going to continue to grow over time beyond the range that they're in. I think they're up a bit versus what we'd said earlier. We thought they might come in around 25% over time. And over time I would believe around 25%, 27% is about right. They’re a bit heavier in this year given the number of new initiatives we're launching for the first time, particularly Princess and Frozen. And obviously that has an impact in the early days on operating margin given that we are building our economy of scale and expertise and investment in that area and that we do believe over time the operating margin for Princess approaches the run rate operating margin for our partner brands. We’ve made great progress there. We’re ahead of where we thought we'd be this time in the year, but we still have a long way to go toward the opportunity to grow that business over time.

Good morning. You did mention performance of Challenger brands. Perhaps a word there. Then related to that, I also understand you may be throwing off some of these brands. Can you talk about that strategy? Thank you.

Sure. In fact, I think we mentioned that several of our Challenger brands were up in the quarter. Baby Alive was up. Easy-Bake was up in the quarter. FurReal Friends was up in the quarter and those brands were all up as well year to date. So our teams who are working on our Challenger brands are doing quite a good job in identifying and creating lighthouse identities. As we normally would say, we don't really comment on M&A overall. We continue to look at our brand portfolio. We own about 1,500 brand names and we look at brands that have the greatest global potential enterprise value. And over time, we may identify brands as we have that are licensed out to other parties. For example, Tonka is licensed out to another party and we receive royalty income, but we're not receiving revenues. So over time, the team may look at different strategic optionality for some of those brands.

Okay, thank you. And also Beyblade I guess launched in Canada, could be here next year. Do you have any early reads on performance of Beyblade there at this point?

It's incredibly early days, but we have been in the Beyblade business before and so I wouldn't want to comment. Not because there's any qualification that I need to provide there. Just again, very early days and that's a brand that as you know has great potential for us, but it will really impact 2017 and beyond.

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 fourth quarter and year-end earnings release is tentatively scheduled for Monday, February 6, 2017. Thank you.