Hasbro Inc (HAS) — Q3 2017 Earnings Call Transcript

Thank you and good morning, everyone. Joining me this morning are Brian Goldner, Hasbro's Chairman 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'd 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 very good third quarter, the highest revenue and earnings quarter in our history. We’ve positioned Hasbro to unlock the full potential of our brands, investing significantly across the brand blueprint. We're still in the early stages of realizing our ambition. During this quarter, we demonstrated our strategy's ability to deliver growth amid challenging conditions, across a number of dimensions. Revenues grew in each operating segment with double-digit consumer takeaway globally at retail. Franchise Brands, Hasbro Gaming, and Emerging Brands revenues increased led by growth in NERF, TRANSFORMERS, MY LITTLE PONY, MONOPOLY, BABY ALIVE, FURREAL FRIENDS, SPEAK OUT, and TWISTER. Our commercial and finance teams are effectively managing the short-term disruption from the Toys 'R' Us restructuring and bankruptcy filing in the U.S and Canada, as well as ongoing softness in the U.K and Brazil. And our investments in our multi-screen content to commerce and omni-channel retail strategies are building deeper consumer engagement across multiple brand experiences as evidenced by the growth in TRANSFORMERS and MY LITTLE PONY. The industry data supports our success. And through August, Hasbro ranked first in the G11 toy and game markets according to industry sources. Hasbro revenues grew in developed economies including the U.S., Canada, France, Germany, Mexico, and Australia. Emerging market revenues increased 8% with growth in China and Russia, as well as from our new operations in India. As we discussed last quarter, the U.K and Brazil continued to face tough economic conditions and we forecast that to continue in the near-term. Our diverse geographic and brand portfolio positions us to overcome these challenges with strength in other major markets. In addition, over the past several years, our global commercial teams have invested in an omni-channel retail strategy, which puts Hasbro where consumers are shopping not just at mass and toy specialty, but importantly in e-commerce where consumer takeaway continues to outpace total point-of-sale, as well as in emerging channels including value, grocery, and drug, new feature shops at retailers, fan and specialty retail. While the near-term impact of Toys 'R' Us is disruptive, and we paused shipments for a short period as we gain clarity on the situation. We are working with them as we enter the holiday period. This doesn't impact our outlook for overall consumer takeaway, which has continued to be strong, but does introduce higher uncertainty as to the level of shipments to them in the fourth quarter. Importantly, we're also well positioned in new and growing channels with the wealth of retail options, in store, online, and omni-channel, we're confident in the collective long-term outlook for the retail landscape. For the third quarter, Hasbro's Franchise Brand revenues increased 7% with growth in NERF, TRANSFORMERS, MY LITTLE PONY, and MONOPOLY. Hasbro Gaming increased 22% and Emerging Brands were up 9%. NERF has posted double-digit growth throughout 2017 and Q3 was no exception. Global POS was up in the mid to high teens for the quarter, increasing in all regions. NERF Nitro launched and is off to a good start. TRANSFORMERS multi-screen entertainment continued to drive revenue growth in the franchise. Point-of-sale was up versus last year and up versus the last movie year. This fall, we continue with new entertainment initiatives to engage our fans. The global home entertainment release of Transformers: The Last Knight took place on September 28 and all new episodes of Robots in Disguise and RESCUE BOTS are running on linear and streamed services. In addition, in partnership with Machinima, in November we're debuting the second chapter of the critically acclaimed digital animated series Prime Wars Trilogies: TITANS RETURN. We see every day that brands backed by multi-format stories combined with merchandise based on robust investment in innovation deliver engaging experiences for consumers, fans, and audiences. Consumer insights, storytelling, and content remain an integral part of creating successful sustainable brand franchises and Hasbro is building industry-leading expertise. My Little Pony revenue increased behind the release of MY LITTLE PONY: THE MOVIE and successfully drove point-of-sale gains around the movie debut. Our content to commerce model delivers multiple revenue streams, including entertainment and merchandise, and we are well positioned in our investment. The film was successful in reinvigorating and energizing our core consumer base and our fan base, while inviting new fans into the brand. The film is yet to be released in a number of international markets and will be followed by the Home Entertainment window, an important element of expanding the audience. MONOPOLY revenues were up with several new games, including the Token Madness edition as well as MONOPOLY Gamer, featuring Nintendo characters and new gameplay. As expected, MAGIC: THE GATHERING revenues declined in the quarter, while play numbers remained high and sentiment from players and stores is positive. Our new digital gaming initiative MAGIC: THE GATHERING arena was announced on September 7 and will go into close beta in November. MAGIC: THE GATHERING franchise remains strong and our investments in its content, storytelling, and digital platform will continue as we believe there remains significant future potential for the franchise. Hasbro Gaming revenues grew 22% and consumer takeaway increased at a similar level. Gaming growth continued across multiple formats and our expertise in gaming coupled with our ability to translate social trends into commercial gaming experiences is driving growth around the world. Partner brand revenues decreased led by declines in YOKAI WATCH as well as DREAMWORKS' TROLLS, which was down versus last year's third quarter launch of movie product. Point-of-sale for the category was up, including gains in MARVEL, DISNEY PRINCESS, and DISNEY DESCENDANTS, DREAMWORKS' TROLLS and Sesame Street. Trolls is performing well this year and we look forward to the upcoming entertainment DREAMWORKS' TROLLS Holiday airing November 24 on NBC. STAR WARS revenue increased in the quarter with robust global retail support of STAR WARS: The Last Jedi merchandise released on September 1. We anticipate consumer interest building as promotional activities increase and we get closer to the film launch date. The multi-year entertainment slate for STAR WARS has created a larger, more sustainable level of business for this top industry property. Today's entertainment cadence enables a higher, more repeatable level of sales versus historical periods when revenues will decline significantly in years without theatrical entertainment. Beyblade is now available in all regions and contributing to year-over-year revenue gains. Europe and Latin America launched in the quarter and both are off to a good start. We continued to release new waves of Beyblade, supporting ongoing innovation in the line. Hasbro's portfolio of Marvel toy lines saw consumer momentum in the third quarter behind the theatrical release of Marvel Studios Spider-Man: Homecoming, as well as the home entertainment release of Guardians of the Galaxy: Vol 2, with especially strong brand momentum in our Marvel Legends segment across Marvel franchises, as well as SPIDER-MAN role-play items. We also have a new line supporting the November 3 theatrical release of Thor: Ragnarok. In 2018, Marvel has eight theatrical films, including Marvel Studios Black Panther in February, and Marvel Studios Avengers: Infinity War slated for release in May. Disney Princess and Disney Descendants consumer takeaway increased behind strength in Moana and new Descendants 2 entertainment. In addition, Hasbro's new line in support of Disney's new holiday featurette Olaf's Frozen Adventure is now at retail ahead of the limited theatrical release in front of Disney/Pixar's Coco on November 22. Finally, from September 8 to 10, we hosted our first ever HASCON in Providence, three days of hands-on brand experiences, meet and greets, sneak peeks, and fan-centric events for families and fans of all ages. This first-of-a-kind event is emblematic of our journey from a toy and game company to a global play and entertainment leader, delivering immersive entertainment experiences around our brands. To conclude, I want to reassure you that our brands and global POS are strong through today. Our growth plans for the holiday had been impacted by recent events at Toys 'R' Us as well as the economic outlook in certain countries. As a result, we currently expect fourth quarter revenue growth in the range of 4% to 7% year-over-year. This is a shift from our prior expectation, but reflects our current shipment plans for the next 60 days. Consumer momentum continues to drive our business and we are well positioned with a diverse, in-demand brand portfolio to deliver growth for 2017 and beyond. I’d now like to turn the call over to Deb. Deb?

Thank you, Brian, and good morning, everyone. The third quarter presented economic and retailer challenges, yet the Hasbro team delivered revenue and earnings growth, while returning $164 million to shareholders through our dividend and repurchase program. We ended the quarter with $1.2 billion in cash and are well positioned to capitalize on the innovation we have in the marketplace as holiday season. As Brian mentioned, the Toys 'R' Us bankruptcy filing in the U.S and Canada negatively impacted our third quarter revenue and operating profit, including incremental bad debt expense associated with the bankruptcy. Excluding the incremental expense, total company operating profit would have been approximately 100 basis points higher in the quarter. While this event has also negatively impacted our initial growth outlook for the fourth quarter, we continue to work closely with Toys 'R' Us to be able to deliver the right products to consumers for successful holiday season. For the third quarter, revenues in the U.S and Canada segment increased 7% and grew in all product categories, including Franchise Brands, Partner Brand, Hasbro Gaming, and Emerging Brand. In total, U.S and Canada point-of-sale increased double digits for the quarter and the first nine months of the year. Retail inventory remains of good quality. Operating profit in the U.S and Canada segment declined 5% to $217.3 million or 21.9% of net revenues. The year-over-year decline was the result of a shift in product mix, including the decline in quarterly MAGIC: THE GATHERING revenues, the revenue impact from ceasing shipments to Toys 'R' Us for a short period, and incremental bad debt expense. Excluding bad debt expense, operating profit margin in the segment was down slightly. International segment revenues increased 7%, including a favorable $27.9 million impact from foreign exchange. Within the international segment, Franchise Brand and Hasbro Gaming revenue growth offset a decline in partner brand and emerging brand revenues. Revenues increased across all three regions: Europe, Latin America, and Asia Pacific. Although Europe declined 1% on a constant currency basis. Point-of-sale increased in all three regions for the quarter and over the first nine months. The challenges we saw emerging in the second quarter have continued in the U.K and Brazil, and we anticipate this will continue for the remainder of the year. We entered the quarter with good quality inventory at retail, having addressed pockets of inventory we previously discussed. Operating profit in the international segment declined $1.1 million or 1% to $132 million or 17.9% of net revenues. The decrease was primarily the result of a less favorable product mix. Entertainment and licensing segment revenues increased 4%. Growth was the result of higher consumer product revenues associated with our entertainment initiatives, as well as a contribution from Boulder Media. Segment operating profit increased 20% to $16.9 million or 28.9% of revenue on the higher revenues and expense leverage. Overall, Hasbro operating profit dollars were essentially flat and operating margin declined to 20.1% versus 21.6% in 2016. As mentioned, operating profit margin would have been approximately 100 basis points higher, excluding the bad debt expense. Cost of sales increased 11% to 40.8% of revenues. The primary driver of the increase was a less favorable product mix, including the expected decline in MAGIC: THE GATHERING revenues and slightly lower partner brand revenues. Royalty expense decreased 20 basis points to 7.8% of revenue, and the small decline in partner brand revenue is partially offset by the continued growth from Transformers: The Last Knight movie product, which carries some external royalties. Our investment in product development was essentially flat year-over-year but declined as a percentage of revenues due primarily to lower expenses at Backflip Studios. Our investment in innovation remains a point of differentiation and a high priority for our team. Program production amortization declined slightly in the quarter but will increase in the fourth quarter as we begin to amortize our investment in the MY LITTLE PONY movie. SG&A increased as a percentage of revenue to 17.4%. The percent increase over 2016 is the result of higher bad debt expense associated with Toys 'R' Us. SG&A declined as a percent of revenue absent this expense. We remain focused on the most efficient cost structure for our company. Given the current environment, changing revenue expectations may slightly impact our operating profit margin outlook for the year. Turning to results below operating profit, other income was $14 million versus income of $8.5 million last year. Consistent with prior quarters, the biggest components of this line are higher interest income and our share of the earnings from the Discovery family channel. During the quarter, we refinanced $350 million of 6.3% maturing debt by issuing $500 million of new 10-year 3.5% debt. We took advantage of the low interest rate environment to raise an additional $150 million to use for general corporate purposes. We're pleased with this result and expect this transaction to provide a very low cost of capital over the next 10 years. Going forward, this will have a favorable impact of approximately $4 million per year to interest expense. The underlying tax rate was 23.5%, down from 26% last year and versus the 24.5% for the full year 2016. The quarter included an approximate $0.04 benefit from our adoption of the new accounting standard governing stock compensation. This is consistent with our forecast from August and we continue to expect the fourth quarter's favorable impact to be in the range of $0.11 to $0.13. Our underlying tax rate is trending to the lower end of our estimated range. Based on our projected mix of revenue and earnings for the remainder of the year, we expect this trend to continue. Diluted earnings per share for the quarter were $2.09. Hasbro is in a strong financial position, including a healthy balance sheet and good cash generation. We generated $823.6 million in operating cash flow over the trailing 12-month period, ending the quarter with $1.2 billion in cash. During the quarter, we paid out $71.4 million in dividends and repurchased $92.9 million worth of common stock. We continue to target approximately $150 million in share repurchases this year and had $216.5 million available in our authorization at quarter end. Receivables increased 14% and day sales outstanding increased 5 days to 83 days. The increase was due primarily to the mix of revenues as well as the timing of collections. Our accounts receivable are in good condition and collections continue to be strong. However, we expect the timing impact of ultimate collection from our Toys 'R' Us receivables could add an incremental two days on our year-end receivables compared to the end of 2016. Inventories are in good shape, increasing 4% versus revenue growth of 7% and essentially flat absent the impact of foreign exchange. Inventories both at Hasbro and at retail are well positioned and of good quality to support our growth expectations for the holiday season. In closing, despite a dynamic environment which has impacted our initial estimates for the year, we now expect our fourth quarter revenues to grow year-over-year in the range of 4% to 7%. Consumer trends remain positive through today, but there is higher near-term uncertainty regarding Toys 'R' Us as we see how they'll begin to execute their plan to emerge from Chapter 11. Our global teams are effectively executing our strategy with the industry's best brands and strong commercial programs heading into the holiday season, while profitably driving our business both in the fourth quarter and beyond. Brian and I are now happy to take your questions.

Great. Thank you so much for the question. My first question is for Deb. Deb, I was just wondering if you could revisit some of the seasonality comments that you made with some of the revenue shift being more concentrated in the fourth quarter due to a retailer preference for just-in-time and a growing share for e-commerce. Did the quarter come in as you expected despite some of the Toys 'R' Us bad debt expense headwinds?

Thank you. Good morning, Mike. As far as the quarter, we did mention earlier that we had some shipments that we stopped when we heard of Toys 'R' Us declaring their bankruptcy, but just for a short period of time. So I would say absent that, the quarter did come in as we expected and absent the bad debt expense. As far as the seasonality, we continue to see that. And with Toys 'R' Us just having filed for bankruptcy so late in the third quarter, we've adjusted a bit our thoughts around the fourth quarter. However, we still expect to grow and wanted to just give context around that as well. We found that moving to omni-channel retail strategy has certainly helped and moved a bit more to just-in-time. However, we are about close to 60 days out from year-end now, and we're starting to get more visibility into year-end every day as we get closer and closer.

Okay. And could you expand a little bit just on your assumptions around Toys 'R' Us. I’m just trying to get a better sense of what you're assuming in terms of Toys 'R' Us for the fourth quarter? Are you assuming that you ship less than to Toys 'R' Us? Are you assuming that Toys 'R' Us orders less? Any color around that would be very helpful.

Sure. Hi, Mike. To be clear, I think first and foremost, we do expect to grow more than the industry in Q4 and the industry growth rate estimate now is between 3% and 4%. So we do expect to grow more than that. We've seen great, very strong sell-through up until this weekend. So, that Chapter 11 is just one month old. We've come to an agreement on receivables and we also now agreed to terms moving forward just over the last few days on our finance and the Toys 'R' Us commercial teams have been working on and focused on getting an agreement which we signed just a few days ago. So now our Toys 'R' Us team and the merchants can focus and refocus on the holiday joint business plan with just two months to go. In fact, this wouldn't have been an issue had it happened earlier in the year and it's not an issue for us in 2018. We do have a more expansive retail channel strategy that gives us great confidence that we can deliver industry-leading growth this year even in this environment. We just need to determine what Toys 'R' Us can receive over the next few months. But meanwhile it's great to see that our POS is outstanding and very consistent with our expectations.

Great. And the last one for me, I think DISNEY PRINCESS was down in the quarter. I was just hoping if you could help parse out what happened there? How much of that was because of the Elena of Avalor rollout a year ago, and how much was Toys 'R' Us?

Yes. Year-to-date, DISNEY PRINCESS has seen an increase, and it showed positive growth in international markets during the quarter. It's encouraging to note that point-of-sale for DISNEY PRINCESS improved significantly. In fact, it ranks among our top point-of-sale achievers in the partner brand category. Throughout the year, we have experienced strong growth in our entertainment initiatives, with titles like Beauty and the Beast and Moana being key contributors to this year-to-date growth. Additionally, we are entering the shipment phase for Frozen with the release of Olaf's Frozen Adventure in Q4, which contributed to Frozen's growth in the U.S. during this quarter. Descendants also performed very well. Overall, while there is some timing involved, we're witnessing robust sales for the brand, especially strong shipments this quarter in international markets.

Great. Thank you very much.

Hi, guys. Good morning.

Good morning.

Going back to Toys 'R' Us, Brian, were you able to divert any of the product that you had previously earmarked for shipments for Toys 'R' Us to other retailers? And as you think about the fourth quarter any uncertainty around shipments that may go to Toys 'R' Us? Do you have the flexibility to move those other retailers and is that in any way embedded in that 4% to 7% sales guidance that you’ve provided?

We are evaluating what Toys 'R' Us can receive, and our expanded retail channel strategy gives us confidence in finding homes for our inventories. Our inventories are in great condition, and point of sale is growing at double digits globally and in the U.S. both year-to-date and for the quarter. We feel positive about our position, and our teams are focused on achieving strong growth in the fourth quarter. We believe we will outperform the industry growth overall. We aim to find a home for all our inventory and do not see it as an issue. However, we need to assess what Toys 'R' Us will contribute to our total inventories in the fourth quarter.

Okay, got it. And then I didn't hear STAR WARS mentioned as being one of the partner brands where POS was up in the quarter, maybe I misheard that, but could you comment on consumer takeaway during the quarter and do you think Brian having just five months in between the two STAR WARS films in any way limits sales upside for The Last Jedi to the holiday period?

Yes, so overall for STAR WARS shipments were up in Q3. And we saw that POS was up in the U.S. and Latin America, and improving in the other territories and that's just because the way marketing is just beginning to roll out. We're very encouraged about the long-term opportunity for The Last Jedi. In fact, I think a lot of the impact will happen not just in '17, but as we get into the home entertainment windows that are becoming increasingly important again in spring of 2018. And we're very excited about the new Han Solo movie, Solo: A STAR WARS story. I think that will be great and I don't think it will cut off the tale of The Last Jedi. In fact, I think it really sets us up for a great 2018 for STAR WARS. And then you add to that the fact that we just started to ship The Forces of Destiny product, and we're very excited about that initiative and the content that’s streaming online. And so, I think overall STAR WARS is in pretty good shape now. Obviously, we've come through a couple of quarters where we worked through some Rogue One product and feel very good about where we’re heading at this point.

Okay, great. Thanks, guys.

Hi. Good morning and thank you.

Good morning.

Good morning.

Brian, I wanted to ask you about Toys 'R' Us for a moment, and then I have another question regarding it. Based on what you mentioned about managing receivables, does that mean you have received critical vendor status?

Yes, we have.

Okay. So, does that mean that when everything is finalized, there could be a possibility of reversing some portion of the bad debt expense?

Our expectation would be as we see how things settle out, we would certainly look at the situation at the time and adjust whatever expense we needed to on the receivable.

Okay. You’ve mentioned several times that you’re evaluating what Toys 'R' Us can receive. I’m curious if, after reviewing that in light of your 4% to 7% shipment guidance for the fourth quarter, there’s a possibility that you could ship more to Toys 'R' Us than you currently expect, or do you have a fixed number in mind?

I believe this is a very dynamic situation. As we gear up for earnings this Monday and navigate a month-old Chapter 11 scenario, we finalized an agreement very late last week regarding our path forward. I think the teams can refocus on our joint business plans that were established before the holidays, and Toys 'R' Us had been performing well for us. Our overall business is thriving. Now, it’s about refocusing on the holiday season. If this situation had occurred at any other time of year, we would have had plenty of time to devise a new plan before the holiday period and do it in a more sustainable manner. However, we feel confident about our overall business. The point-of-sale growth we're seeing across categories is robust, with our toy and game segment's point-of-sale up in the high teens. Franchise Brands are seeing similar growth, and partner brands have surged more than 20%. Hasbro Gaming's point-of-sale has also increased by over 20%. Overall, we are optimistic about the fourth quarter and believe we can outpace industry growth. However, due to the Toys 'R' Us scenario and challenges in the U.K. and Brazil, we did want to emphasize that it's a more fluid environment. Ultimately, most of the variability in our perspective stems from the Toys 'R' Us issue. We want to get our teams focused again on a wider retail strategy; we are reaching more stores than ever before. We are witnessing accelerated growth in omni-channel and online retail, which is still two to three times stronger than our overall point-of-sale increases. Thus, we are providing a range, considering the timing of the earnings and our renewed focus on the holiday season.

Is there a risk that you might end up shipping less than you expect to them?

Well, even if we shipped less than we would expect, again that's what I was saying that we think there's an opportunity to put our inventory out in the marketplace in a number of places. Obviously, Toys 'R' Us has been a growth arena for us, a growth partner for us, and we want to continue to support their initiatives now that we have an agreement in place, we can do that. And so our teams are very focused on continuing the kind of strong growth that we've seen throughout the year, up 7% year-to-date. And so we just give you a range because again as we formulated our look at the earnings picture as of today we felt that our range would be prudent.

And is there any way you will quantify the revenue impact of Toys 'R' Us in the third quarter?

No, but we did note that we had stopped shipping for a number of days as a result of the bankruptcy. We wanted to get clarity on the situation and we're now shipping to Toys 'R' Us in all the retail, and again the POS gains are quite considerable against shipments.

Okay. Final one, not about Toys 'R' Us. Just wondering, I think you’ve talked about this, so I just you want to expand, you had the MY LITTLE PONY movie in the quarter, maybe the movie didn’t end up being as successful as you may have expected. Just wondering what that did for toy sales?

Well, the movie as of this past weekend globally is just shy of about $40 million. The brand is up in the quarter across every region and across our entertainment and licensing business. We are really building this media digital mix model and our brand blueprint we think is really working. And the film will absolutely pay back its investment. Remember, we made the film for modest budget. It is driving consumer products. It's driving toys and games. It's also driving our digital gaming business and MY LITTLE PONY is up year-to-date. So, again, that combination of storytelling between stream content, television content, and the film is a great formula for the brand. So we feel very good about the brand heading into the holidays in 2018.

Great. Thank you so much.

Thanks. Good morning, everyone.

Good morning.

I have three questions as well. Brian, I want to ask a broad question about the investment cycle related to your capabilities and how you're progressing with your blueprint. Are there any significant advancements expected in the next couple of years? Deb, I have a question for you regarding operating margin. About 18 months ago, you mentioned three challenges, including the Princess business as it scales, MAGIC digital investments, and emerging markets, specifically China. Can you provide an update on where we stand regarding operating margin improvements related to those initiatives? Lastly, I want to acknowledge the success of the games segment, which seems to be exceeding expectations. Could you share some insights about the pipeline for that segment in Q4 and into 2018?

You got it. So, look, I think that the MY LITTLE PONY approach is very emblematic of what we're going to do as we go forward, meaning modest investments in film type content, using very strong partnerships and strong investment from a major studio that will pay for the best proportion of our films and distribute those films very effectively and market them globally. So, again, our approach is the television model, stream content model, a digital first model and then modest investments where appropriate in the film model and we're adding capabilities and personnel, people who are professional storytellers in those spaces. As you know we continue to add great capabilities around the blueprint and MY LITTLE PONY and TRANSFORMERS growth are absolutely all about the fact that we're really executing our model quite strongly. You want to talk about the …?

Sure. From a margin perspective, we have had Princess and Frozen for shipping all last year and this year as well. We are beginning to see some improvement in our margins as we have scaled that business. I believe we are on the right path, although there is still some distance to cover. We discussed Arena back in August during our Investor Day and announced that MAGIC: Arena is currently in beta. Our investments in that area are wrapping up, but it requires ongoing investment in MAGIC, albeit not at the same level as before. Nevertheless, it remains a crucial brand for us, and as one of our major Franchise Brands, we will keep investing in it, although perhaps at a reduced level. We look forward to a broader release of Arena in 2018. Regarding emerging markets, we faced some challenges in Brazil this year due to less than favorable economic conditions resulting from the political climate. However, our products have been well received by consumers, and our profitability in emerging markets continues to improve, with expectations for growth as our business expands in China.

Yes, China's POS growth in the quarter was quite significant, as was Russia's, and our new market in India performed well too. Brazil is really the only exception within emerging markets, which overall grew by 8% in the quarter. Regarding games, the team has done an excellent job. The social trend games focused on social listening and understanding the global market for streamed content have brought great results. Additionally, our classic games are also seeing growth through innovation. For instance, MONOPOLY has seen considerable growth, along with Fantastic Gymnastics, Clue Life, TWISTER, and Risk, as well as fun social games like SPEAK OUT. We have a number of new games launching in the fourth quarter, including Simon Optix, Hearing Things, Get a Grip, Coinhole, and we've just introduced our Drop Mix Gaming System, which is very exciting. The initial reviews have been positive, and while it's still early, we're optimistic about this new music mixing platform as we approach the holidays and into 2018. The team has done an outstanding job, and we will continue to leverage our digital and social media capabilities to create an impressive product lineup.

Thank you. Very helpful.

Thanks. Just a follow-up on one of Brian's comment. So, I think you mentioned you were seeing great sell-through until the weekend. So is that a continuation from the third quarter? Is it little bit slower, faster, pretty similar and any change in trend that you’ve been seeing since you did bring up fourth quarter trends and POS?

I want to assure everyone that our double-digit growth trend has continued into this quarter. As of October 23, we are still experiencing strong trends for the fourth quarter, particularly in the past week, and this is evident across our entire business and various regions. This gives us significant confidence, especially since we are growing at a rate higher than the industry overall. If the Toys 'R' Us situation hadn't occurred this quarter, we wouldn't be discussing the range of outcomes that we currently are. We need to address the Toys 'R' Us situation and adjust our broader retail strategy, focusing on omni-channel and online retailing, where we are seeing growth rates two to three times higher than the overall market growth. For instance, this quarter, Franchise Brands grew in the teens, and online Franchise Brands saw a 30% growth. This acceleration is noticeable across our business, including brick-and-mortar, omni-channel, and online platforms. All this suggests promising developments for us in the current fourth quarter and moving into 2018.

Yes, that's a good point. Thank you, Brian. I have a quick follow-up. I’m sure you’ve heard this often, but the entertainment lineup for 2017 has been outstanding. Looking ahead to 2018, do you anticipate achieving similar revenue growth or perhaps even exceeding it when comparing next year's entertainment offerings to those of 2017?

Yes, I believe that the entertainment lineup for 2018 is actually stronger than 2017. If you think about the opportunity that begins early in the year with Black Panther, an exciting new movie from Marvel Studios, we get into Avengers by May, we have a Han Solo: STAR WARS story movie in the end of May. We have our very own Bumblebee movie that comes in December next year, you’ve got Toy Story 4. You’ve got Ant-Man and the Wasp, and then you have a Spider-Man animated movie that comes at the end of the year as well, at the end of '18. So the lineup is quite considerable from Marvel, from Lucasfilm, from Hasbro. Of course, we have all kinds of television entertainment that's also going to support all those brands both from Disney as well as Hasbro's own Studios. And so we feel very good about the lineup in '18 and entertainment should continue to be a key driver of our business.

Okay. And then, just finally on Toys 'R' Us. Did I hear you right there, you're not expecting an impact in 2018 or material impact from Toys 'R' Us? This is limited to 2017?

Yes, we will see how things emerge, as they begin to execute their plan and give more color around it to emerge from bankruptcy.

Yes.

As we sit and see how that goes, and if something changes in that, that could have an impact. But as we sit here today, we do not expect a significant impact from the situation as we know it today.

Okay. Thank you very much.

Thank you for taking my questions. I have a couple of inquiries. First, I would appreciate guidance on the fourth quarter revenue. Is there any change to the expense forecast compared to what has been discussed earlier this year, especially regarding the rising resin costs? Secondly, concerning MY LITTLE PONY and the recognition of revenue and operating income from the film, are you permitted to recognize any revenue before Lionsgate recoups its marketing expenses? Additionally, how much of the film was pre-sold internationally, and how much did that help you recover your budget? Lastly, focusing solely on the film, excluding toys and other licensing opportunities, is the expectation that the film itself will be profitable?

Let me begin with MY LITTLE PONY, and then Deb will discuss the resins briefly. Lionsgate operates by pre-selling the film in a significant portion of the global market. They handle distribution themselves in the U.K. and largely in Latin America. For other markets, they pre-sell, which allows for upfront recovery against production costs. The movie is expected to contribute positively to the company over time. However, it might not be until the fourth quarter this year, as production expenses will be incurred then, although it has a modest budget. The various revenue streams from this project, including consumer products and the toys and games sector, are promising. The digital game from Budge Studios is performing exceptionally well, and we have new games in the pipeline, which we believe will enhance the brand. Additionally, the seventh season of the television show is airing globally on linear and streaming services and is performing strongly on platforms like Netflix. We view this as an effective model for future growth.

We have observed some increases in resin prices. It's important to note that we set our pricing 12 to 15 months in advance, allowing us to hedge our expected costs and mitigate some of the foreign exchange impacts. We also adjust our pricing accordingly. For the fourth quarter, we do not anticipate any impact from this.

But then as you think about '18, how does that resin price now sort of impact '18 potentially?

Well, we would set our prices accordingly.

Thank you. Deb, let's address a couple of housekeeping matters first. Regarding the tax benefit you mentioned for Q4, is it mainly a one-time occurrence due to some singular option grants, and should we consider Q1 as the period where the tax benefits will be more consistent under the new accounting standard?

Yes, exactly. I think we have a grant that's larger than usual that will mature in the fourth quarter this year. When we reach Toy Fair, we will try to outline what we expect our normal quarterly basis to be. However, as we consider the first quarter, I anticipate it will be around the same level as the first quarter of this year.

Okay. And then we will return to the main topic of the day, Toys 'R' Us. Brian, you’ve mentioned several times that you’re further developing the omni-channel, enabling consumers to shift among retailers. So let’s consider a drastic scenario, hypothetically, where Toys 'R' Us North America liquidates in 2018. Again, this is a drastic hypothetical at this point. Based on past experiences with Woolworth in the U.K. and Target's exit from Canada without going bankrupt, how quickly do you think we would see the reallocation of the channel in that hypothetical situation? If you could provide any insights on that?

You know. I’m so heartened our financing commercial teams have really executed the current plan during the holidays with such excellence. Our belief, as we go forward is that the current situation would not be an issue for us in 2018. I don't know how to answer a hypothetical like the one you post. However, I will tell you that we’ve increasingly found great homes for our great products. Our products sell quite well at a number of different new channels that we've expanded into including value and drug as well as other new retailers. Our mass partnerships as well have really expanded. Our performance with Amazon, our performance with Walmart and Target have been very substantial and very strong. So, again, long-term as you described, our business will be fine and our products will find homes and we will find the consumer, and increasingly we’ve talked about how online continues to dis-intermediate some of the toy departments, and the consumer continues to find our products and it's really heartening to see how online sell-through is even stronger than brick-and-mortar sell-through when there's no friction in the finding of our products. It just says that our products really resonate with consumers.

Okay. And then the agreement that you signed late last week, was that in preparation of tomorrow's hearing for Toys 'R' Us or could anything change coming out of that hearing tomorrow from what you know from last week?

We want to ensure that Toys 'R' Us has all the necessary support to recover from bankruptcy, which is why we have agreed to assist them in this process. We'll monitor the development of their plans and the outcomes of any upcoming hearings, but we expect that there won't be any changes.

Okay. And then as you talked about, Deb, the costs related to some of the investments in the trading card business in MAGIC and so forth, should we start to see that lever in the back half of '18 sort to see some good leverage benefits from that?

That would be our expectation. As a matter of fact if you look at our SG&A expense, absent the bad debt charge, you're starting to see us getting leverage from the higher revenue numbers now. And as MAGIC Arena is out there, our expectation is that we would continue to see that leverage and when we get to Toy Fair, well, you know us, we will give more specific guidance about what we think the different category should look like at that point.

Hi. Thank you. Good morning.

Good morning, Arpiné.

So, if we were to adjust the operating profit for $18 million of Toys 'R' Us charge. Growth in that line would still be below where the top line came in and that's despite very strong high margin entertainment and licensing growth for the quarter? And I know, Deb, you mentioned obviously MGT mix impact for the quarter, MAGIC: THE GATHERING which is the high-margin business for you. But could you perhaps go through the puts and takes on gross margin outside of mix? What drove that 160 basis point of decline for the quarter?

Absent the charge, our operating profit would have been 100 basis points higher. We expect our gross margin and cost of sales to be higher compared to last year due to product mix and some less favorable hedges. We are indeed hedging to protect pricing and margins; however, buying euros at $1.40 was much more favorable than the current rate of around $1.20. We anticipated that our cost of sales for the full year would be a bit higher, especially considering the phasing and product mix, which can significantly impact gross margin. As we mentioned, we expected Q3 to be down in MAGIC, and that did affect our mix for the quarter.

Okay. Regarding the operating profit margin guidance, Deb, you mentioned in your earlier comments that you anticipate an impact since our last discussion. However, you had previously indicated growth based on the GAAP adjusted number of about 15.7%. Given the visibility you have for Q4, could you provide an update on your expectations for the year's operating margin?

Yes, I believe our operating margin for the full year will be quite similar to last year's margin. We previously anticipated some modest growth, but now it seems more in line with the previous year, with only about a 20 basis points difference. We were aiming for the 15.7% figure, and I expect it to be comparable to that this year.

Thank you very much.

Yes, hi. So you’ve some very good performance with several of your Franchise Brands and PLAY-DOH was such a big success story, but yes, you’ve had some sales declines this year. Can you talk about what’s going on with that brand and the outlook for rejuvenation of growth there? And secondly, with MY LITTLE PONY, do you think that the movie here in the second half that’s improving growth of the brand, can that have some carryover effect into 2018 to support the brands that you can expect growth next year as well in that brand? Thanks.

Yes, I think the model for MY LITTLE PONY has really worked and I think the team is beginning to think about what our next movie might look like. Meanwhile, we have ongoing television support. The brand, we believe, will halo quite strongly. We're seeing a great reinvigoration of our core fans as well as families and inviting a lot of new fans into the brand around the world. So, we like the model combination of the horizontal of television, the verticals of film for brand like MY LITTLE PONY done well. On the PLAY-DOH side, we’ve seen very strong performance around the PLAY-DOH itself. There have been a few play sets in the spring that have had a weaker performance. Having said that, as we come into the holidays we have some new play sets which are performing early days, very, very good level including our Rapunzel full play set. We also have a number of play sets and something they call Kitchen Creations, which we would expect good performance on. So I think long-term PLAY-DOH has been one of our most global brands. It's one of the most heavily consumed, parents really enjoy and it's definitely a part of children helping to create or enjoy developmental milestones. And so I think long-term I’m very confident in the PLAY-DOH and the PLAY-DOH's teams ability to grow that business over time.

Thank you.

Hey, good morning.

Good morning, Gerrick.

Good morning.

Hi. It seems three questions per, I’m going to ask three. First, can you just quantify your answer to Arpiné's question about the operating margin being similar to the 15.7% last year. Does that include or exclude the bad debt charge, that’s one. Number two, STAR WARS for the year $500 million, has kind of been the bogey that everyone has been shooting for, how do you feel about $500 million of STAR WARS this year? And then, lastly a more open-ended, you talked about the shift in retail sales for movie based properties, sort of from movie released to more of DVD streaming. Can you talk about that shift and is there any way to quantify how much revenue sort of shifted away from the movie debuts and towards the DVD and streaming? Thank you.

Sure. Let me address STAR WARS and the transition, and Deb, you can start. STAR WARS has clearly evolved into a significantly larger and consistently popular brand year after year, and that's what we've observed. This year, as we approach The Last Jedi, the brand is performing well in the quarter and we anticipate excellent results this holiday season. Additionally, as Gerrick mentioned, we expect a strong spring for the brand. We experienced this with The FORCE AWAKENS and have seen similar trends this year with Moana and Beauty and the Beast. Furthermore, we are noticing robust performance around TRANSFORMERS since its DVD release on September 28. People are enjoying films both in theaters and through electronic sell-through as well as DVD windows. Overall, this indicates a positive outlook for storytelling across various platforms. This principle is central to our strategy, which emphasizes both digital and content approaches. I expect this trend to continue with our properties, along with Marvel, Lucasfilm, DISNEY PRINCESS, and FROZEN.

From an operating perspective, if we set aside the bad debt expense, our year-to-date operating profit margin is only slightly lower than last year. As a company, we consistently prioritize maintaining the most efficient cost structure. Given the current environment and our fluctuating revenue expectations, this may have a minor impact on our forecasts from earlier in the year. Nonetheless, we remain committed to establishing a highly cost-efficient structure for the company as a whole.

Okay. 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 fourth quarter and year-end earnings release is tentatively scheduled for Monday, February 12. Thank you.