Hasbro Inc (HAS) — Q4 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 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. In 2017, the Hasbro team delivered a strong year. We grew revenues 4% to a record $5.2 billion and captured the number one position across the G11 markets for the full year 2017 according to NPD and SIM. Consumer takeaway increased approximately 7% for the year and we grew point of sale in all major regions and all brand portfolio categories. We continued investing in innovation to industry-leading levels delivering growth in Franchise Brands, Hasbro Gaming and Emerging Brands, while building capabilities across the brand blueprint. We delivered revenue and profit growth in the entertainment and licensing segment led by strength in consumer products. We had two successful franchise brand theatrical events, which drove incremental revenue in both Transformers and My Little Pony. We added to our storytelling and content capabilities through an expansive five-year agreement with Paramount, invested in our animation studio, Boulder Media and enhanced our digital-first orientation. We maintained a high level of profitability, reporting a 15.6% operating profit margin. We invested in growing our business while returning $427 million in cash to shareholders. Today, we announced our board increased the dividend 11% to $0.63 per share, the 14th increase in 15 years. Importantly, we remain steadfast in our principles to operate with excellence. In 2017, Hasbro ranked number one on the 100 Best Corporate Citizens list by CR Magazine. We were recognized as the World’s Most Ethical Company for the sixth consecutive year, and we ranked third on Newsweek's Green Rankings. The global Hasbro’s team's accomplishments in 2017 were meaningful and we are excited about our opportunities in 2018 and beyond. Before I discuss the year more closely, let us review the fourth quarter, including where our actual results fell short of the expectations we set in October. Hasbro Franchise Brands sit at the center of our strategy, and in the fourth quarter Franchise Brands revenues grew 11%. Transformers, Magic: The Gathering, NERF, My Little Pony, and Monopoly revenues increased. For the quarter, point of sale increased in all categories other than Partner Brands. However, after 10 months of strong consumer takeaway, the industry and our business slowed in November and December. We have identified three significant factors. First, we did not ship or sell-through as much as we expected in support of the late fourth-quarter release of Star Wars, The Last Jedi. As a result, Hasbro Star Wars revenues declined and performed below expectations in the quarter and for the year. Historically, the brand would deliver a revenue surge in film years and shrink the following year. Instead, we are seeing a pattern like other properties, which have films every year, such as Marvel, where Star Wars should maintain a large, more sustainable revenue level year in and year out. Recognizing this and working with Disney, we can better plan our business with improved visibility, sustainability, and profitability over the long term. As the film has gained a wider audience, point of sale in early 2018 has significantly improved and is up year-to-date, including strong growth in online sales. We are working closely with Disney consumer products and interactive media to continue to drive innovative brand experiences over the coming years and in the near term to leverage the upcoming home entertainment window for The Last Jedi and to ensure that retailers position to take new inventory in support of the May release of Solo, a Star Wars Story. Going forward, merchandise on shelf space will be closer to movie promotional activity and premier dates. Importantly, Star Wars remains a tremendous property and opportunity, one in which Hasbro is deeply committed. In 2017, Star Wars ranked as the number one global property in the toy and game industry according to NPD, and we look forward to driving this success for years to come. Second, revenues declined 8% in Europe during the fourth quarter. Star Wars contributed to our European decline, but as we had discussed throughout 2017, the region was also affected by a weakening UK economy as Brexit negatively impacted consumer and retailer confidence. This impact was more severe than expected late in the year. During the weeks leading up to the holidays, retailers became increasingly risk-averse as online grew dramatically and UK retailers focused on minimizing inventory and maintaining margins. Several UK retailers are cutting staff in stores, and profitability was impacted as we partnered with them to work through in-store inventory. For the year, NPD estimates the UK toy and game market declined 3%, and we estimate the EU5 markets declined slightly. Across the European region, e-commerce is growing rapidly, representing an even bigger piece of the market during the holiday and disrupting traditional retailers’ business models. We have invested in a global omni-channel strategy to make Hasbro brands available wherever consumers shop. We are working through inventory carryover in Europe and anticipate we will face headwinds while we address these changing market dynamics during the year, particularly in the first half. Third, our outlook for the fourth quarter reflected a higher level of uncertainty due to the September Toys“R”Us bankruptcy. This uncertainty materialized and our business with Toys“R”Us was impacted in the quarter about as we expected. We continue to partner with Toys“R”Us to support their turnaround while managing our risk and inventory. We estimate less than half of the stores in their announced closures directly affect our initial plans, but we also expect Toys“R”Us to streamline inventory at remaining stores. Much of this impact will be felt in the first two quarters of the year. We anticipate during 2018 that we will right size our business with Toys“R”Us while leveraging our omni-channel model to ensure product is available throughout our retailer network to meet consumer demand. The development of our omni-channel product and channel strategy is aligned with where retailers are expanding, notably in emerging markets in Asia and Russia, and also in growing channels in developed economies. Despite the slower end to the year, our brand blueprint strategy is working. Franchise Brands grew 10% in 2017, driven by growth in Transformers, NERF, Monopoly, and My Little Pony. Each brand activates the blueprint differently, but the result is consistent: deeper consumer engagement, innovative brand and product experiences, and increasingly expansive opportunities for our portfolio. NERF posted its fifth consecutive year of double-digit growth and was the number one toy and game property in the US according to NPD. We are delivering innovation that is unparalleled. As we say, it is NERF or nothing. Transformers and My Little Pony both leveraged multiple content platforms, including theatrical releases, animation on broadcast and streaming sites, and digital content to drive growth. Transformer revenue grew strong double-digits, and storytelling delivered strong engagement based on compelling insights around the blueprint for both brands. We will talk more about storytelling and its continued importance in brand building at Toy Fair next week. Monopoly had a strong year, including a successful Token Madness promotion and product, as well as Monopoly Gamer, which introduced beloved Nintendo characters to the Monopoly game. Magic: The Gathering finished the year strong as revenue grew in the fourth quarter, but full-year revenue declined slightly. Our investments and activities for long-term growth are taking hold, including a successful closed beta for our new digital initiatives, Magic: The Gathering Arena. As gaming platforms and audiences continue to expand globally, we have increased our focus on gaming. In 2017, Hasbro gaming revenues increased 10%. Our tremendous heritage of gaming expertise is a strategic differentiator that uniquely positions us to capitalize on the dynamic opportunity in gaming across demographics and platforms. Our new innovative social games captured the fun in gaming. Kids, adults, and families are playing games, while many gaming brands contributed to growth. For the year, Dungeons & Dragons was particularly successful. We also grew digital gaming revenues and launched new gaming experiences such as DROPMIX. Emerging Brands revenues grew 2% as Baby Alive continued to perform at a high level. FurReal Friends also had a great year, including Tyler the tiger, which was a top toy over the holiday period. While several partner brands grew in 2017, overall partner brand revenues declined 10%. Beyblade delivered a strong first year, and both Marvel and Sesame Street posted higher revenues. Trolls full-year revenue was down but came close to 2016’s movie year sales, which began during Q4 last year. The softness in the partner brand category came primarily from Star Wars, as we discussed, and to a lesser extent Disney Frozen, as it is one year further removed from the movie year. Disney Princess revenues declined slightly, while full-year point of sale increased substantially, driven by the introduction of new properties. Looking forward, both in 2018 and beyond, we are positioned to leverage our industry-leading investment in innovation and drive new brand experiences across our brand portfolio. We are excited about where Hasbro is today, the progress we are making in our brands, and our organization is unlocking future opportunities for our stakeholders. Across Hasbro, the brands where we have invested to execute the full brand blueprint are the ones that are producing extraordinary results and building value for our shareholders. As we look ahead, the Hasbro team is delivering on the promise of what our differentiated story-led and digital-first strategy offers to consumers, audiences, and customers, and we look forward to sharing more with you on February 16 at our investor event at Toy Fair. I will now turn the call over to Deb. Deb?

Thank you, Brian and good morning everyone. 2017 was a record year for Hasbro. The investments we have made over the last 10 years continued to bear fruit. Overall, Hasbro revenues grew 4%. Our franchise brands utilizing the full blueprint grew 10%. Hasbro Gaming grew 10%. Many emerging brands benefited from innovation and the category grew 2%. Several of our partners' brands grew, but the category declined 10%. Much of this decline directly impacted our fourth quarter, which had revenues lower than we had expected. As Brian discussed, after 10 months of very strong performance in both sales to our customers and sell-through to consumers, the months of November and December slowed significantly for the industry and for us, and we did not achieve the objectives we had set for the fourth quarter. Despite this, our operating profit margin for the full year was 15.6%, and strong capital management continued to positively contribute to fourth-quarter earnings as it had throughout the year. In the fourth quarter, our finance organization assessed the global tax environment, which provided opportunities to utilize tax assets and re-evaluate our current and historical tax reserves. This exercise contributed to an increase in underlying earnings per share for both the quarter and the year. Similar to other US multinationals, we recorded a provisional charge related to US tax reform in the fourth quarter. As these new laws are clarified and additional guidance is provided in 2018, this amount is likely to be further adjusted. However, we anticipate a sustainable benefit to our effective tax rate in the future, and our access to global cash that will enable us to further invest in our business for long-term growth. Our cash position ended the year stronger than ever, and our directors have voted an 11% increase to our quarterly dividend. In the US and Canada segment, revenues grew 5% for the year. Franchise Brands, Hasbro Gaming, and Emerging Brands increased, while partner brands declined. Point of sale increased in the high single digits for the year, with only partner brands declining slightly. Retail inventory is overall in good shape. However, we are working through carry-over inventory in select brands to begin 2018. Operating profit in the US and Canada segment declined 2%, and operating profit margin was 19%. The year-over-year decline was primarily driven by the mix in revenue, increased advertising, and higher bad debt expense related to the Toys“R”Us bankruptcy filing in the third quarter of 2017. International segment revenues increased 2%, including a favorable $75.3 million impact from foreign exchange. Within the international segment, Franchise Brands and Hasbro Gaming revenue growth offset a decline in partner brand and Emerging Brands revenue. Revenues increased in Latin America and Asia-Pacific, while Europe declined 2%. Point of sale increased in all three regions, although Europe slowed late in the year. Operating profit in the international segment declined 22% to $228.7 million, or 10.2% of net revenues. The decline in operating profit was driven by higher sales allowances and unfavorable product mix, as well as higher advertising. In addition, as we indicated earlier in the year, lower gains on FX hedges negatively impacted gross margins. Entertainment and licensing segment revenues increased 8%. Consumer products, digital gaming, and Boulder Media contributed to the revenue growth. The segment’s operating profit increased to $96.4 million, or 33.8% of revenues, as we gained leverage in our consumer products and digital gaming businesses. Overall, Hasbro operating profit margin was essentially flat, declining 10 basis points to 15.6% versus our reported operating profit margin last year. Despite lower-than-expected revenues, our team is focused on prudent cost management and delivered good operating profit margin for the year. Cost of sales increased to 39% of revenues. The 100 basis points increase resulted from higher sales allowances, higher levels of closeout sales, incremental tooling expense, as well as less favorable hedges. Growth in higher-margin revenues partially offset this impact. Royalty expense decreased 40 basis points to 7.8% of revenue from lower partner brand product sales. Our investment in product development remained significant but did not change materially in dollars or as a percent of revenue. Innovative brand experiences remained core to our strategy, and we continue investing at rates higher than our major competitors. Program production amortization was essentially flat year-over-year. Amortization of our investment in the MY LITTLE PONY movie began in the fourth quarter, offset by lower amortization of television programming. SG&A at 21.6% of revenue increased slightly from 21.5% in 2016, excluding the $32.9 million goodwill impairment charge. The increase includes third quarter bad debt expense associated with Toys R Us, higher depreciation, as well as an unfavorable impact of foreign exchange. We received some benefit from lower stock compensation and bonus expense, and we closely managed discretionary expenses. Turning to our results for low operating profit. Other income was $74.1 million versus $1.8 million last year. This included higher interest income as we generated better returns on higher levels of invested cash. We also realized a $19.9 million gain due to a change in the value of a long-term liability due to lower corporate tax rates associated with U.S. tax reform. In addition, in 2016 we recorded foreign currency losses of $32.9 million. In 2017, this was a gain of $1.3 million. Our underlying tax rate absent the impact of tax reform was 19.9%. The reduction from our previously guided rate reflects the favorable impact of tax planning and the revaluation of current reserves. This benefit to our underlying tax rate is sustainable into the future. Our effective tax rate for the year absent the impact of U.S. tax reform was 9.5%. This includes discrete items such as the benefit from our adoption of the new accounting standard governing stock compensation and the fourth-quarter reassessment of historical tax reserves and audit settlements. We anticipate U.S. tax reform will lower our overall underlying tax rate, and we'll discuss this further at our Investor event at Toy Fair. In the fourth quarter, we recognized a net charge of $296.5 million related to U.S. tax reform. This net amount included a provisional charge of $316.4 million recognizing income tax expense and the gain of $19.9 million I referenced earlier in other income. The tax charge includes an estimate for the one-time repatriation tax liability and adjustments to the company's deferred tax assets and liabilities to reflect a lower corporate tax rate as we take the segment into 2018. As I said earlier, this number could change as there is clarification to the new law. Adjusted earnings per share absent the impact of the U.S. tax reform was $5.46. On a reported basis, including the $2.33 per share impact resulting from U.S. tax reform, net earnings were $3.12 per share. Our year-end balance sheet is strong, and we generated $724.4 million in operating cash flow, ending the year with $1.58 billion in cash. We paid out $277 million in dividends and we purchased $150 million worth of common stock. In 2018, the board has increased the quarterly dividend of 11% and we have $178 million remaining in our current share repurchase authorization. We have a long-standing commitment to deploy capital for the best long-term return. This includes investing in our business; rewarding our employees for their contributions to our success; and returning excess cash to shareholders. We will continue to review our capital strategies as we gain better visibility to the ultimate impact of tax reform. Receivables increased 7%, and day sales outstanding increased six days to 79 days, including two days related to the timing of collecting Toys R Us receivables. The remaining increase was related to the timing of collections and foreign exchange. Absent the impact of foreign exchange translation, receivables increased in line with constant currency revenue growth. Inventories increased 12%; absent foreign exchange, inventories were up 5% with half of this increase due to new markets we entered during 2017. Our overall inventory at Hasbro was in good condition and associated with growing brands. With respect to retail inventory, our commercial teams in most markets collaborated to sell-through and clear inventory heading into 2018. We continue to work through higher than desired retail inventory levels primarily in Europe as we begin the year. The teams addressed significant issues in 2017, including the Toys R Us bankruptcy; a shifting retail landscape; the implementation of tax reform; and a slower than expected holiday season. While the last two months of the year are below our expectations, our strength through most of the year, combined with our strong financial discipline, delivered a very good year. We continue to execute our strategy with excellence, and we are excited about our product lines, innovation, and offerings in 2018 and beyond. We look forward to sharing these with you at our Toy Fair Investor event on February 16th. We will now open the call up for questions.

Hi, good morning everyone. And thanks for taking our question. Deb, we want to focus on the inventory cleanup and then just have you give us some perspective on the cadence of the first task; I know there are some comparison effects that are unique this year. So, if you could talk about those two inputs on both the inventory cleanup in Europe at the retail level and then the comparisons for particularly STAR WARS, and any other FX that we should be considering in the first half on both the sales and earnings.

Sure. Good morning, Steph. As far as inventory goes, we spent, as we said in our prepared remarks, a good part of the end of the year cleaning up the inventory that was at retail and making sure that our retailers had sufficient allowances to go ahead and clean that inventory out as we come into the early part of the year. That being said, we do have some pockets of heavy inventory out there at retail that we expect will get cleaned up in the early part of the year. With respect to our inventory, our inventory is in growing brands; that's really where the increases are, and we had a pretty significant impact of FX just because of the translation rates. When you back that out, the majority of the increase is in new markets that we entered into this year, such as India and South Africa. So, our new markets inventory is growing for that. As far as our inventory, it's only growing brands and it's in great shape. We do think the early part of the year will be cleaning up some pockets of high levels of inventory, but beyond that, we're not worried about the impact of it on the full year.

Yes. And in terms of STAR WARS, what we saw was that Force Friday was very effective in 2016 after not having a film for a decade. Didn’t have the same impact in 2017. I think we were too far out from the sale, and we did see that initial fan response, particularly around our Black series product and other fan-oriented products. Going forward, we're partnering with this need to merchandise our films closer to the movie dates and take advantage of the film marketing. So, for example, for the Han Solo movie, the toys will be available in April for the May movie. We also saw an outsized impact on STAR WARS in our international markets, particularly in Europe. The international revenues as a percentage declined more than overall revenues. I think as we go forward, what we see is STAR WARS has a large brand that contributes to the company with greater visibility to an extraordinary annual entertainment slate. The way I'd look at it would be if you took the five years leading up to the 2015 movies and then thought about the way we perform last year absent excess inventory. The next five years would be more valuable to us as well as to the Disney Company. So, we see STAR WARS as a major contributor going forward, albeit at a more normalized level.

Thanks, Brian. And do you want to follow Deb on the tax rate? I think you're suggesting that the 19.9% or roughly 20% is kind of sustainable rate going forward. Is that how you'd like us to model starting in 2018?

I think, beginning in 2018, we do see all the benefits that we got that led us from our previous guidance to that rate as being sustainable. And that's what I wanted to convey. We've done significant tax planning and done a lot of work to make sure many of these attributes that contributed to a tax benefit before U.S. tax reform were sustainable. So, I'd like to make sure people take that away because the things that we did are sustainable going forward. That being said, we do think that U.S. tax reform, in addition to giving us greater access to our international cash, is going to help provide further benefit to our tax rate. We actually think our tax rate going forward in 2018 will be between 15% to 17%, and we'll talk more about this at Toy Fair, but we do believe we have a sustainable lower rate going forward.

Hi, good morning. Thanks for taking the question. I was wondering if you could elaborate a little bit on why consumer demand slowed in November and December. I'm just trying to understand whether you're seeing any impact from the shift toward e-commerce or if there's anything changing in terms of the consumer perception of toys in general. Thanks.

Yes, thanks. Well, actually what we saw is just differentiated performance between different product categories. Our franchise brands remained incredibly strong through the holidays, growing double-digits. In fact, we saw significant growth in TRANSFORMERS, one of our strongest growth brands in the fourth quarter and for the full year. NERF grew, and several of our franchise brands grew. We also saw great consumer demand and great growth in MAGIC: THE GATHERING and from MY LITTLE PONY. So, what we're seeing is where we're activating the full brand blueprint, we're seeing that growth in the consumer takeaway where we're really engaged with that consumer on a significant basis. We also saw, in our gaming category, we saw growth where we had not for one or two brands like PIE FACE from a year ago. Our games business overall performed incredibly well. We did see a difference in consumer demand in the partner brands and particularly across the number of different partner brands. We did have some great performance from partner brands like MARVEL and SESAME STREET and several others. But recall that a year ago, TROLLS launched in Q4. So, all of the revenue for 2016 was in Q4 for TROLLS. And we said that TROLLS, for example, had a very good year around the same revenue as 2016 but on a full-year basis. Therefore, Q4 versus Q4 year-on-year would be down considerably, and it was. So, between that, the impact of brands that were dissipating like YOKAI WATCH from a year ago that had an outsized impact in the international. And then, of course, STAR WARS, we do see some differentiated demand between different product categories. So, overall, we are seeing very strong consumer takeaway across several of our product categories, and in fact, our emerging brands POS was quite strong, gaming was strong, and franchise brands were all strong in Q4 and for the full year. The one area that was down in Q4 was partner brands, and POS.

Okay. And just a quick follow-up. Could you just remind us what your key capital priorities are? And you mentioned tax reform being one of those things that will give you more access to international cash. What do you expect to do with that cash?

I think, as we evaluate tax reform and as the clarification for the laws come out, we'll see the amount that ultimately will bring back. We're constantly looking at what our requirements for cash, combined with, and we talked about this a bit earlier, that we're actually earning interest income on the smart investments we're making with our cash. So, we will look at cash requirements and continue to do first and foremost what we say we always do: invest for the long-term growth of our business for our shareholders; and then absent that, we will return cash to our shareholders. Excess cash to our shareholders.

Hi, thanks. Good morning.

Good morning.

So Brian, in your prepared remarks, you highlighted a number of challenges in the first half including resale carry-over in Europe, UK, and then also right sizing your business with Toys 'R' Us. So, I'm just trying to kind of peel back the layers there. What would be the impact on the year of those things, also inclusive of evolving more towards omni-channel, and could this quote-on-quote right sizing drive a full-year revenue decline in '18 or are you expecting revenue growth?

Yes. We feel very good about full year 2018 prospects. We're very excited about the initiatives that we have lined up for 2018. We come into the year with great franchise brand growth, a very strong games business, and great performance for MAGIC: THE GATHERING. In the fourth quarter, we ended slightly below a year ago in full year revenues. We have MAGIC: Arena that had a very successful closed beta, and we will launch Arena in 2018 and we'll talk more about that at Toy Fair. We have a number of product categories that are working for us. We're going to work through the inventory that remains in Europe, but I feel very strongly that Europe can grow again, of course, because it has grown over the last several years, and I think they are addressing those issues in real-time. In terms of Toys 'R' Us, we've always said we had an expanding retail channel network. We go to more doors today than even before and more new channels, including value, drug, and grocery. Some of our biggest new retailers have really grown in places like Russia. We have very strong success in China, and we'll talk more about the kinds of initiatives that we have going on there. So overall, we feel very good about 2018 but we do have some headwinds early in the year as we right size the Toys 'R' Us business and we deal with some pockets of inventory in Europe.

Okay. Just and beside before I go to my follow-up. What's your online exposure now versus what was it for '17 versus what you think it could be in '18?

It continues to increase at a fairly fast rate. In fact, POS and online is growing at about three times the rate of our brick-and-mortar business. Many of our, quote-on-quote, brick-and-mortar customers and now omni-channel customers were performing quite strongly like Wal-Mart, who's performing quite strongly in an omni-channel environment. So, overall, we're seeing a very strong double-digit growth, but we're also seeing overall POS growth for our business. I'd say you'll continue to see online grow. We're seeing it more highly penetrated in Asia, and in Europe, and I think that potents that kind of percentage we should see over the next couple of years. 25% to 30% of our business should certainly be online.

Okay. And then just on STAR WARS, I'm just trying to really understand the change because the path during movies now have been kind of released the same time of the year. And it just seems like there was more of a challenge this year, and you're changing your strategy a bit in terms of merchandising and timing. So, if I may use the term, is STAR WARS the key, I mean I'm just not understanding what's different.

Yes. No, I don’t. And really, I don’t see it at all as STAR WARS fatigue. I think the entertainment has been quite good. I think it was about the timing of merchandising versus when you started to see the sale through. So, we had Force Friday that was quite early in 2015 because there had not been a movie out there for 10 years. Clearly, there was a lot of pent-up demand across the board, a lot of marketing that happened very early on and a lot of both paid and earned media that happened around that brand during the 2015 period. In 2016, with Rogue One, the merchandise was much closer to the movie launch. We went back to more of a Force Friday approach with a longer window before the movie launched. The movie marketing kicked in, and we began to really see our sell-through accelerate. But remember, the movie was mid-December, and by then we were tracking below the kinds of POS numbers we had seen in prior movies. So, what's really heartening is as people are now enjoying the movie and more people are enjoying the movie, and as we head toward the home entertainment window, and those home entertainment windows are increasingly important in our business again, which is great. We're seeing very strong POS growth year-to-date in 2018. We'll head toward, approaching the home entertainment window for The Last Jedi and then, of course, we'll move in April to merchandise the Solo movie, which, of course, comes in May. So, again, I feel that there's great vitality in STAR WARS and just to put a point on it, we had great results in the underlying business and we've seen great takeaway for the underlying business. The size of the business is still very large, and we know was the number one toy game property for the full year of last year, internationally or globally. We continue to believe it will be that kind of business for us with great visibility to entertainment and great sustainability, and frankly some better profitability for us as we go forward, as we partner and go forward and therefore we could have a more valuable brand over the next five years than we've had over the period that led up to the 2015 movie, those same five years.

Okay. So, the punch line just seems that people are now or consumers are now buying the product much closer to the release than they were in the past, just given the kind of cadence of where we are in this plaza.

Well, I think it's really more about we entered into an unprecedented era of entertainment. There is so much great entertainment that is out there. Just think about, as one example, you had Force Friday that launched earlier and then you had a great storm movie. They came in between the launch of the Force Friday merchandise and the STAR WARS movie. So, you just have a lot of entertainment coming, so narrowing those windows so you're really able to take advantage of the specific marketing and these big marketing campaigns around the brands enables you to do quite a strong job in merchandising those films. You see for the year that MARVEL was up for the year, and MARVEL was up quite considerably in the fourth quarter for us. It was a great performer for us. We saw a great growth in Thor contributed; Guardians of the Galaxy contributed; Spider-Man was spectacular for us, particularly in the fourth quarter. So, I think what we have to do is look at what this kind of entertainment with people enjoying so much content and entertainment. We put the merchandising closer to when the marketing for those properties really takes hold, and we start to see that great sell-through that we've come to expect.

Okay. Makes sense, thank you so much.

Thank you. Just a couple of follow-ups, clarifications. Deb, on the tax rate, the 15% to 17%, is that all in or is that just federal? And then, Brian or Deb, whoever wants to take this, just to clarify that percent of your business that was online in 2017, and then just in general broadly, do you anticipate the follow-up on Felicia's question, revenue growth in '18?

Regarding the tax rate, I would mention that there will still be discrete items, such as settlements from audits. I’m pleased to say that any benefits from stock compensation under the new tax flow will be included in our rates. However, I should note that there will likely be further clarification needed on the tax law. Some aspects may not be as clear as they should be, and as lawmakers work on making those clarifications, it could affect the rate. We will evaluate that and discuss it as it unfolds, along with everyone else.

And overall, for online sales, I'd say it was in the very high teens on average. But there are regions where it's much higher than that, like Asia and several markets in Europe. And we continue to see the acceleration of online. As I said, 2018, we feel very good about our initiatives, about the performance of our brands, the way the brand blueprint in our gaming businesses has grown, and our emerging brands. So, we feel good that we can grow in 2018 and beyond as we have grown over the last number of years.

Okay. Well, thank you. And Brian, on STAR WARS, you mentioned that if I understood you rightly and correct me if I'm wrong here, that it was weaker internationally. How do we kind of balance that versus the movie had broader distribution and promotion by Disney versus the property being weaker internationally?

Yes. Look, I view it through the lens of the fact that we saw challenges in Europe and we saw challenges particularly in the U.K., which is a major market for properties like STAR WARS. So, I would say that clearly both the paid marketing and earned marketing, the fans in the U.S. really helped to deliver a strong box office here. It also delivered a very strong box office globally. But in terms of the retail takeaway and sell-in, it was lower in particularly outsized impact in places like Europe and in our international market. This represents more of the line share, the decline in percentage terms. And that's what we've seen.

Okay, Brian.

So, right. It's a great global property. But by contrast, just to give you an example; TRANSFORMERS international business was incredibly strong; the U.S. business was strong; the brand overall was strong. So, our proportion of international business for brands like TRANSFORMERS or frankly they successfully had in MY LITTLE PONY this year with our film and our all-screen strategy along with consumer products and gaming. That formula of the brand blueprint is delivering a bigger global footprint for the company. The way we're executing our games business, including MAGIC: THE GATHERING is a bigger global footprint, and we're getting a higher proportion of our sales internationally than in the U.S. for those brands versus a brand like STAR WARS that's still at the end of the year in 2017 more domestically oriented.

Okay. Well, helpful, thank you. And then lastly, you alluded to a little bit about Toys 'R' Us. Let's take the draconian that they end up having the liquidity in North America. It sounds like you're continuing to push very hard to spread that distribution among other customer bases, which has been ongoing. But just maybe anything on a contingency plan, anything which you can additionally share?

Yes. Since we spoke in October, the one other element to the Toys 'R' Us business that was out there for everyone's benefit was their CVA, which is similar to the bankruptcy they executed in the U.S., the CVA they executed in Europe and in the U.K. business. And so, we are seeing the store closings in the U.K. as well that did. That's what I talked about in my prepared remarks as I talked about retailers pairing stores and personnel and certainly coming down. Our team has built a plan for the right sizing of the Toys 'R' Us business. We have continued to grow the number of doors and continued to grow our revenues outside of Toys 'R' Us. We continue to be supportive of them, but most importantly, we continue to manage our risk and inventory as they streamline the amount of inventory they can take. We are prepared for any eventuality. Obviously, the more time we have, the better it is, but our teams have responded to challenges before. You've seen how they've responded and maintained operating profit even in a challenging quarter and a challenging finish to the year like 2017. We understand we're working in a dynamic market.

Okay, thanks. Good morning, everyone.

Good morning.

Hi, Drew.

Talk about directionally how you see gross margin in 2018 and some of the puts and takes influencing that line. And then separately, Brian, can you talk about your expectations for BEYBLADE in '18? And then relative to past products like well year two, which you are in, and you typically see a spike or a peak with the brand to this. I want to know how you're thinking about that because win factor on '18 fail.

Yes. I'll take BEYBLADE first, and then Deb will do gross margin. On BEYBLADE, we had a very good year last year. It was kind of comparable in pattern to two years prior that first year you're absolutely right through. This business very well. BEYBLADE is performing quite at a high level, obviously different by certain countries. But BEYBLADE is off to a very good start, and we would expect it to be a contributor to this year's business. I won't specifically size it for you, but suffice it to say you're right it's our second year in most countries around the world.

Sure. And with respect to gross margin, we were down 100 basis points. And we said at the beginning of the year, we expected our gross margin to be down because we had lower gains on hedges coming in. So, that was a piece of it; that was about a quarter of the impact. We also had, because of underperformance on some other brands that we've talked about, add some trolling impact to that as well. As we look forward, we're very positive on gross margin. We see no reason why we will get back to the levels that we had a year ago. We'll talk more about the puts and takes on that at Toy Fair. But those were some of the bigger impacts on the full year.

Okay. And then maybe one last one, Brian. This with respect to STAR WARS, were there minimum guaranteed shortfalls on the property or is that something that is a potential risk as you think about the brand and the licensing arrangement?

Yes. I know that no minimum guarantee shortfalls. We continue to earn out that contract in a very strong manner. When I'm talking about that ongoing business, I'm talking about a business, it's quite sizable. I'm talking about a business which is a major contributor to us and to the industry. I do think it's a brand over time, over the next five years, that could be more valuable, having more revenue over a five-year period than the five years that would even include the 2015 movie year. It's more about having that visibility and line-of-sight to great entertainment that's coming in the future and the ability to plan and seeing less of that surge and strength that we used to see between film years and non-movie years.

Yes. Good morning, and thanks for the question. Two things for you. First, I wonder if you could dig a little bit into NERF. You said this was the fifth consecutive year of double-digit growth. Where is that growth coming from? Is it new markets, or the existing markets still growing at a similar level as the new markets? And how big is the opportunity to keep NERF growing at a double-digit rate? And then secondly, just wonder if you could do a clarification as we think about ship-in for 1Q or 2Q with The Avengers kicking off the summer movie season at the beginning of May. Will that be a 1Q ship-in? And then same thing with Solo, you said that ships that those products are going to be on shelves in April. Does that mean you get a 1Q shipping for Solo Toys as well?

Yes. So, only comment on that first step. I would expect both of those properties to have more of an impact in the second quarter, far more. Because of again this, the way we're windowing and merchandising around those films. And so, I would not count those ship-ins in any considerable way in Q1. Obviously, we're very excited about Black Panther. There obviously it's been ship-ins in the first quarter for Black Panther. We're very excited about the score that it's received. The global excitement around that brand is palpable. We're very excited to add that to the already powerful line-up from MARVEL that's coming for 2018. As I said before, I thought the line-up from MARVEL was among the strongest we'd ever seen and therefore really impacts the fact that I think our line-up for the year is among the strongest we've ever seen. And I've also, although you didn’t ask specifically about this, as we get through the year, I've had a chance to see the Bumblebee movie and where that's coming out. So, as we even go into the end of the year, we got strength-to-strength and Bumblebee is a delightful movie that I'm very excited to share with people as well. So, throughout the year we have a great line-up in schedule. For NERF, it's really come down to great industry-leading innovation insights driving user-generated content. It's really the full blueprint execution. It was the number one property in the U.S. We're seeing strength across all the different categories; our Rival business, very strong; Elite was strong, NITRO was a very strong launch internationally and a very good launch in the U.S. But yet, still plenty of running room for a lot of those new initiatives. Our core business on NERF is very strong. We take nothing for granted in continuing to innovate. You're going to see new categories of innovation as we go forward. We're seeing growth both in developed economies and emerging markets. We continue to build out the footprint of Rival. Our basic NERF business is very global. It's among the favorite products and brands around the world in any number of countries around the world. So, again, we're very excited about what we've done there. But it's about industry-leading innovation, and again, it goes back to the focus on our brand blueprint and how our franchise brands have that superior profitability. We continue to still invest and deliver that outsize profitability relative to the company average, and we see NERF is able to grow for many years to come.

Great, thanks. But just one quick follow-up. So, you mentioned Bumblebee. Bumblebee is coming out in late December, I think the 22nd. That's going to be sort of sandwiching between the Spider-Man animated movie, which I imagine should be very kid-friendly, and then you got Aquaman. We'll have to see how that performs. But I would think you probably have some competition from STAR WARS home video toys around the holiday as well. Does that make things very challenging for Bumblebee?

No, look, if you look at TRANSFORMERS, I think that we go from strength-to-strength. This year, TRANSFORMERS in the fourth quarter was in dollar terms, our biggest growing brand. Overall for the year grew very strong double-digits. It's because we are perpetually engaged with our audience by demographic and psychographic. We have a preschool RESCUE BOTS show, we have our Cyberverse focused on our core kid six-to-nine-year-olds. We continue to run more adult-oriented content on Machinima for that fan. Fan business is growing in a very significant manner. And then, of course, we have our movies. It was a movie year but our products were about the movie but also about all these other dimensions of TRANSFORMERS. This is a brand that's working everywhere globally, it's a brand that's exceedingly strong and getting stronger in China. We'll talk more at Toy Fair about the major global initiatives and in gaming and how this brand comes to life. So, when we talk about our Bumblebee movie, it's really the focal point of an entire blueprint activation that will take place around that time of year. We will bring to bear all of the different strengths and power inside the blueprint to bring Bumblebee and TRANSFORMERS to life at that time. So, we know that there is an amazing array of entertainment with the beneficiaries of a lot of that in the world today, and we think our brand like Bumblebee and TRANSFORMERS holds its own.

Hey, good morning everyone.

Good morning.

Good morning, Michael.

I just wanted to touch on advertising spend during the quarter. It came in a little higher than I would have expected given the revenue decline. So, maybe talk a little bit about what drove the year-over-year growth there. Was it timing? Was it something kind of a nuance to the fourth quarter?

No. Actually, we talked about partnering with our retailers to make sure some of the inventory that maybe was a little bit slow-moving in November and December really was moving. It was probably more of that than anything else. We really wanted to make sure we headed into 2018 with the best momentum behind our product as possible. So, that's really kind of what you were seeing in the fourth quarter.

Got it. Would imagine over time in '18 that advertising gets back to more of a normalized level on a full-year basis.

On a full-year basis, I would.

Well, look, I think as we, this has number of levers that exists inside of the marketing elements around the blueprint in the company. You have the traditional advertising; you have an increasing array of digital opportunities for digital marketing and advertising including inspiring user-generated content. Then we have all kinds of forms of content from all the way as short as to short form to stream content or bespoke episodic content. So, it's really we look at all that as marketing and advertising. So, traditional advertising does change and probably does overtime come down a bit, but it's being augmented by and rounded and replaced by some of these other categories of marketing where we're able to talk about story and character and branding brand engagement where our audiences and consumers are globally. So, overtime again I think you're seeing the benefit of the investments we made in our own brands including our games business and our emerging brands and that we will continue to get leverage in advertising and marketing and storytelling.

Hi, thank you. A lot of my questions are answered, but maybe I can be a bit more specific. In terms of first half revenue growth puts and takes and thank you for all the color in the prepared remarks as well as the Q&A. Given some pockets of inventory as well as sort of the Toys 'R' Us situation, do you feel growth in the first half could be tough to come by for the industry and for Hasbro, or do you feel that you can fare better given not all of those closures perhaps directly impact you? Thank you.

Yes. Look, I'm not going to comment by quarter on our revenues. I'd say that I think our prospects for growth in 2018 are very strong as a company for the full year 2018. And by quarter, we're going to work through first quarter, second quarter, particularly in some of the pockets of inventory Deb has talked about in Europe. With Toys 'R' Us, says like said, we have a plan on how we manage our risk in inventory and support them, but also have a growing array of destinations for great product, innovative product, this product that's selling. We have great levers and ways to engage our audiences and consumers in those brand stories and characters, including our partners' brands. So, I'm not going to really give any specific guidance by quarter, suffice it to say I gave you some sense of where some of the shipment should occur more in the second quarter than the first quarter on some of the entertainment brands.

Thank you, Rob. And thank you everyone for joining the call today. The replay will be available on our website in approximately two hours. Management's prepared remarks will be posted on our website following this call. We look forward to seeing you in our Investor event at Toy Fair, next Friday, February 16th. Hasbro's first quarter earnings release is tentatively scheduled for Monday, April 23rd. Thank you.