Hasbro Inc (HAS) — Q3 2018 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 Investor website. Additionally, presentation slides containing information covered in today's earnings release and call are also available on our Investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which include these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the release and presentation. Please note that whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on Form 10-K, our most recent 10-Q, in today’s press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Brian Goldner. Brian?

Thank you, Debbie. Good morning, everyone. And thank you for joining us today. The global Hasbro team is effectively working through a disruptive year. Our third quarter results reflect last Toys“R”Us revenues in the US, Europe and Asia Pacific, but also showcase the progress we are making to add a broad array of new retailers to lower retail inventory in major markets and to drive a digital-first orientation around storytelling, innovation and growth across the Blueprint. The US and Canada teams have advanced this strategy the furthest and we are making progress. In the quarter, we recaptured about one-third of the US and Canada Toys“R”Us revenues heading into the holiday and we had orders for more that didn’t get shipped by quarter end. Operating profit in the US and Canada segment was also up in the quarter. While there are a number of factors affecting global markets, including an evolving retail landscape and challenging macroeconomic environments in markets like the UK and Europe, Russia and Brazil, our response to these factors is deliberate and measured to capitalize on our Brand Blueprint strategy with audiences and consumers. Just over one year ago, Toys“R”Us filed for Chapter 11 bankruptcy and put into motion a process which ultimately resulted in the rapid closing of most of their stores, including all stores in the US, UK and Australia, and transitioning to new owners in select markets. In certain markets, this transition is ongoing. We continue to believe this is a near-term retail disruption that will last for the next few quarters. Our established and differentiated Brand Blueprint strategy has enabled us to transform and we’ve invested in industry-leading brand building capabilities. To best position our company for profitable future growth, we need to continuously drive new ways of competing. We’re becoming a more agile, modern and digitally-driven play an entertainment company. At this pivotal point, it is critical we have the right teams in place with the right capabilities to lead us into the future. As we continue to transform, we took actions which impacted our global organization. We’re focusing our teams on the most profitable, differentiated and strategic areas of our business, while aligning our resources and costs to drive profitable growth. Hasbro is executing robust plans for this holiday season with a broad and growing array of retailers. Following Toys“R”Us liquidation in the US, the third quarter was the first quarter without the retailer and it is clearly visible in point-of-sale at brick retail, which was down globally for Hasbro brands in the low-teens for the quarter and increased slightly through the first nine months of the year. Looking at the US data more closely, where the consumer had direct access to the brands and products they were seeking, Hasbro’s online POS increased high single-digits in the third quarter and increased double-digits over the first nine months of the year. Hasbro has invested to establish a leading presence online. According to One Click Retail, through the first nine months of the year in North America, Hasbro is the market share leader on Amazon in the Toy & Game category. In the US, Toys“R”Us liquidation and stores closings drove an incremental 2.5 million units sold through the first half of this year versus a year ago and impacted the third quarter’s unit sales. However, The NPD Group data indicates that 83% of industry purchases made at Toys“R”Us during the liquidation in the US would be given away by the end of the third quarter. In recent weeks, retailers are activating their share recapture plans for the holiday period. Many retailers set their shelves later in the quarter to begin their holiday efforts. But retailers are stepping up to capture the Toys“R”Us market share. Hasbro's channel strategy has enabled us to open a significant number of new doors at retail. But this also drives new requirements for our US supply chain. We're working with a greater variety of retailers that have differentiated shipping requirements. Our growing retail footprint adds retailers shipping smaller quantities per truck to take product closer to the holidays and require more carton volume than previously, including more cartons of high demand toys and games later in the quarter. In fact, Hasbro shipped more products domestically in September than ever before, and we were unable to meet all the demand within the quarter. As a result, approximately $50 million of US third quarter orders shipped in the first week of the fourth quarter. By mid 2019 we'll add a Midwest warehouse to better meet demand, shorten delivery time and reduce trucking mileage to our retailers’ distribution centers. We're also working closely with our retailers in new innovative ways including sharing warehouse space to dramatically reduce delivery times. While our US retail footprint is growing, our retail inventory declined by 17% versus a year ago. And we have maintained our cost of business across retailers. We have story-led innovative brands and products to successfully support retailers and consumer demand for the 2018 holiday period. And importantly, we expect to return to growth in 2019 and future years. Where the retail disruption has been mitigated and the retail transition moved more quickly, you can see the resilience of our business and our brands. For example, in Canada, where the Toys“R”Us transition has already happened, our revenues and point-of-sale were up for the third quarter. Europe and Asia Pacific are behind both Canada and the US in respect to retailers share recapture and Toys“R”Us ownership transition. In Europe, as previously discussed, we began 2018 with excess inventory at retail. We're making meaningful progress with retail inventories down over 20% and it will take through the end of the year to complete our efforts. A rapidly evolving retail landscape where consumers are shopping across borders and traditional retailers are struggling, added to the challenge of rightsizing our inventory. Revenues from omni-channel and online retailers are growing but haven't yet offset the decline from Toys“R”Us and other retailers. As our retail and consumer landscape evolves, we are building innovation across brands, price points and channels. Global revenues for several Hasbro Franchise Brands grew in the third quarter, including MONOPOLY, MAGIC: THE GATHERING, PLAY-DOH and BABY ALIVE. Emerging Brands revenues were up 2% behind new initiatives, LOST KITTIES, LOCK STARS and YELLIES, and the addition of POWER RANGERS licensing revenues. Gaming remains a meaningful differentiated growth opportunity for Hasbro. We're leveraging our global portfolio of brands and expertise to target a broad and growing demographic of players across analog and digital platforms. In fact, in the US and Canada segment, gaming revenues were up double-digits in the quarter. MONOPOLY original and the Cheaters Edition have driven growth, and a strong launch of MONOPOLY Fortnite in early October continue to reflect our fast and first-to-market approach. The NPD Group identified MONOPOLY Fortnite as the number one new item in the games supercategory for the week ending October 6 in US. MAGIC: THE GATHERING grew in the quarter, led by Core Set sales and the strong story-led launch of Guilds of Ravnica. In addition, the team has taken important steps digitally as MAGIC: THE GATHERING Arena moved to Open Beta on September 27th. There has been an incredible response from players. In the first four days alone, 70 million games of Arena were played. Retention, engagement and monetization are all above goals and streaming and viewership rates are beating our targets. The launch of Open Beta is just the start. The team continues investing to expand the game's markets, social and competitive features and platforms. Arena is the first and a host of the new gaming and marketing initiatives for MAGIC as this brand expands across digital and analog including tabletop console and mobile in 2019 and beyond. The team also delivered another quarter of revenue growth for DUNGEONS and DRAGONS and late in the third quarter drove a strong release for an all new TRANSFORMERS trading card game. In our Partner Brands, Hasbro's toy portfolio based on MARVEL franchise is having a tremendous year and delivered extremely positive results in the third quarter, behind strong sales of Avengers: Infinity War product as well as continued robust sales for Black Panther and Legends fan-focused merchandise. Product from Spider-Man: Into the Spider-Verse launches this month, ahead of the December animated film premiere from Sony Animation. We also have new products supporting Deadpool, Venom and ANT-MAN AND THE WASP. In addition, Hasbro's new product line for Marvel Rising supports MARVEL's newest animated franchise that launches exclusively at Target this month. BEYBLADE with its digital first strategy also contributed to growth in the quarter. Star Wars product revenues declined as Star Wars: The Last Jedi product was on shelf in September of last year. For the fourth quarter and holiday season, we have diverse and innovative brand initiatives rolling out globally. In partnership with Paramount, our TRANSFORMERS feature film Bumblebee will arrive in theaters December 21. Product was arriving on shelves to begin the fourth quarter and sales are off to a strong start. In the US and Canada segment, TRANSFORMERS revenues in the quarter increased double-digits. Retailers are enthusiastically behind this initiative, which promises to be our most all-family all-audience, dual-gender film ever. Feedback from early audience screenings has been outstanding. We have a significant number of innovative brand offerings arriving for this holiday season across Franchise and Partner Brands as well as Gaming. In fact, you will see Hasbro's strong representation as retailers unveil their holiday initiatives for consumers across converged retail, in stores, online and mobile and in all forms of marketing digitally, including content to commerce, shoppable social content, toy books and toy list. To fuel our future growth, we have tremendous innovation in entertainment for 2019. This includes all new initiatives in Franchise Brands such as product and story-led innovation for NERF, including NERF Overwatch and NERF Fortnite Lines. We are supporting a robust entertainment slate across many of the Walt Disney company brands, which touch diverse demographics and we will drive innovative gaming experiences both digitally and face-to-face. We will share more details on our 2019 plans early next year. As the global audience and consumer landscape continues to rapidly evolve and the retail environment continues to seismically shift, we are positioning Hasbro to profitably grow in 2019 and beyond. I would now like to turn the call over to Deb. Deb?

Thank you, Brian. And good morning everyone. As the year progresses, our global teams continue to manage through a dynamic and challenging environment. Retail disruption, which is not limited to the impact of Toys“R”Us has complicated our efforts to clear inventory in Europe and to address challenging operating environments in other global markets including the UK and Europe, Russia and Brazil. Despite revenues lower than a year ago, our operating profit margin held up well this quarter. A combination of less favorable revenue mix, negative foreign exchange impact and steps to end 2018 team with clean retail inventory offset lower royalty, advertising and administrative costs. As Brian discussed, we continue to transform Hasbro. Based on organizational actions to ensure we have the right talent and capabilities to profitably grow going forward, we expect to record a charge of $50 million to $60 million in the fourth quarter of this year relating to severance. While this will result in $30 million to $40 million of annual savings by 2020, most importantly, it will ensure we are well positioned with the right talent for success in the evolving marketplace we see ahead of us. We remain focused on growing Hasbro over the long-term and continue investing in brands and entertainment to drive future performance. We’ve also returned $422 million in cash to shareholders thus far this year through our dividend and share repurchases. Within our segments, the US and Canada segment revenues declined 7%. Toys“R”Us in the US is now fully liquidated. The Canadian business was sold in the early part of 2018 and is now operating under the new ownership team. Hasbro Gaming revenues grew double-digits and Franchise Brands were up slightly. Partner Brand and Emerging Brand revenue declined in the quarter. Importantly, retail inventory is down significantly. With no US Toys“R”Us shoppers this quarter and retailer activation still rolling out, point-of-sale was down in the low-teens for the quarter yet remains positive year-to-date. Absent the impact of Toys“R”Us in both periods, point-of-sale was up in the quarter and year-to-date. U.S. and Canada segment operating profit increased 4% and operating profit margin was 24.5%. Favorable product mix and lower royalty expense contributed to the improvement in operating margin. In the third quarter of last year, we recorded $18 million of bad debt expense associated with Toys“R”Us. Retail continues to change and last week Sears filed for bankruptcy. Sears represented less than 1% of overall Hasbro revenue last year and our bad debt exposure is immaterial as we have closely managed the account for some time. International segment revenues declined 24%, including a negative $30.3 million impact from foreign exchange. Revenue declined in each region during the quarter. Emerging Brand revenues increased, but the other brand portfolio categories declined. Europe revenue was down 29%, reflecting several factors tied to the evolving retail landscape. Lost Toys“R”Us revenues contributed to the decline. The UK stores are closed liquidating early in the year. France and Spain are undergoing ownership transitions. And while we aren't doing meaningful business with them now, we look forward to working with them go forward when the transitions are completed. We are also aggressively working to lower retail inventories across the region. The team has made significant progress and will continue these efforts going forward. We believe we will work through this issue by the end of 2018. Currency negatively impacted Europe revenues by $11.3 million. In Latin America, the political and economic environment continued to negatively impact our results, especially in Brazil. Currency devaluation had a negative $16.4 million impact on revenues, accounting for more than half of the quarter decline. Point-of-sale increased slightly in the quarter and is up year-to-date behind strength in Mexico. In Asia Pacific, Toys“R”Us impacted Australia as the retailer is no longer operating and the share recapture is ongoing. In Asia, Toys“R”Us is operating, but we have limited our shipments as the sale of the business has not yet been completed. Asia is also facing a difficult comparison with the strong TRANSFORMERS business last year, but is poised to capitalize on the launch of Bumblebee in the fourth quarter and into 2019. Currency had a negative $2.5 million impact to Asia Pacific's revenue. Across the International segment, macroeconomic factors and retailer health continue to impact our decisions around extending credit to certain retailers. While this has resulted in an improvement in our DSO, it has impacted our revenues in the near-term. International operating segment profit declined to $66.3 million. Lower revenues combined with higher costs to clear inventory drove the decline in operating profit. Entertainment and Licensing segment revenues increased 45%. During the quarter, we signed a multi-year digital streaming agreement for Hasbro television programming. This happens every few years and we last signed such a deal was in 2015. Revenue from our share of the 2017 My Little Pony theatrical film also added to the quarterly revenue increase. In addition, the adoption of the new revenue recognition standard continued to contribute to higher revenues in the segment. This standard has impacted each quarter this year as revenue spread more evenly throughout the year. The segment's operating profit increased 99% on higher revenues, favorable mix and lower costs. Overall Hasbro operating profit margin declined 10 basis points. Given year-to-date trends, we now anticipate full year operating profit margin will decline versus a year ago. As Brian discussed, we believe we can return to profitable growth in 2019 and we are taking the steps to ensure we can grow operating profit margin over time. Cost of sales as a percentage of revenue increased 100 basis points in the quarter. Favorable product mix from higher revenues in certain gaming brands such as MAGIC: THE GATHERING, as well as Entertainment and Licensing revenues was more than offset by lower Partner Brand revenues, cost associated with clearing out inventory and the impact of foreign exchange. As we discussed last quarter, the loss of Toys“R”Us combined with continued pressure of higher retail inventory primarily in Europe is having a short-term impact on our gross margin. Royalty expense declined in dollars and as a percentage on lower Partner Brand revenues. Intangible amortization increased as we began to amortize the POWER RANGERS acquisition. The increase was partially offset by other intangible assets which are now fully amortized. Due to the acquisition, we anticipate approximately $5 million in incremental amortization expense in the fourth quarter of this year and $21 million in 2019. Program production amortization increased as we're amortizing My Little Pony: The Movie production expense in addition to the delivery of digital content. Based on our current expectations, we will begin amortizing production costs associated with our funding of this year's Bumblebee film in the latter half of next year. Given the change in the expected timing of receipts on tax credits, we now expect full year content spend of approximately $145 million to $150 million. SG&A was down 13% and flat as a percentage of revenue year-over-year. The decline in dollars reflects lower incentive compensation expense, lower bad debt expense and a positive impact from foreign exchange translation. We continue to see higher shipping costs in the US from new trucking regulations and driver shortages. Below operating profit, other income decreased in the quarter. Several items contributed to this decline, including the loss on foreign exchange this year versus a gain in 2017 and pension expense now being recorded in this line item. As expected, our interest expense declined year-over-year as we executed favorable long-term borrowing in 2017 and are using our global cash more effectively thereby reducing our need for short-term borrowings. Our underlying tax rate absent discrete events was 17.6% compared to an underlying rate of 23.5% last year and 19.9% for the full year 2017. The lower rate reflects the benefit of US tax reform and a slight increase from our previous guidance due to geographic mix of income. During the third quarter, we recorded a $17.3 million tax benefit or $0.14 per share related to our interpretation of US tax reform guidance that was released during the quarter. We now believe our full year tax rate will be slightly above the high-end of our previous 15% to 17% range. For the third quarter, reported earnings per share was $2.06. Adjusted earnings per share excluding the $0.14 tax benefit was $1.93. Operating cash flow over the past 12 months totaled $697.3 million and we had $907 million in cash at the end of the third quarter. In mid-June, we closed on our acquisition of POWER RANGERS and other entertainment assets from Saban Properties. At closing, we paid approximately $155 million in cash and issued approximately 3.1 million shares of common stock to Saban. We have remaining cash payments of $100 million due in 2019. During the third quarter, we returned $159.5 million to shareholders, including $80 million in dividends and repurchasing $79.5 million in common stock. Year-to-date repurchases totaled $192.3 million. Our full year share repurchases are expected to partially offset the shares issued in connection with the POWER RANGERS acquisition. We expect to continue opportunistically repurchasing shares in the open market. Hasbro’s balance sheet remains strong. Both our debt-to-EBITDA and EBITDA-to-interest ratios at 2.1 and 8.8 respectively remain within our targets. Receivables decreased 16% and day sales outstanding decreased to 81 days. Excluding the impact of foreign exchange, receivables declined 13%. Hasbro-owned inventory decreased $18.2 million and we are well-positioned to support demand for our brands this holiday season. Absent the impact of foreign exchange, owned inventory increased 1%. As discussed earlier, retail inventories are down significantly in the US and internationally, notably in Europe. We are positioned for successful holiday period and to move beyond Toys“R”Us in 2019. In a rapidly changing retail environment, we are adding strategic new accounts to grow our business, while continuing to deliver innovation across the portfolio and introduce new ways to experience our brands, all positioning us to profitably grow in future years. We’re tackling the challenges head on and making timely and appropriate changes to our business. We remain focused on investing in our business for long-term growth and we’re excited by the initiative, entertainment and innovation we see in 2019 and years to come. We’ll now open the call up for questions.

Great. Thanks for the question. I have one for Brian and one for Deb. For Brian, you mentioned that you guys have captured about a third of the Toys“R”Us revenue going into the holiday. Do you expect to fully recapture all that Toys“R”Us revenue over time? And if so, does it happen in 2019 or 2020? Basically, how long do you think it’ll take to capture the remaining two-thirds? And then for Deb, I just had a question on EBIT margins, EBIT margin is being down this year. Could you just put some bookends on the expected decline? Will it still be in the 15% range between 14% and 15% or worse? And do you expect operating margin expansion in 2019? Thank you.

Thanks, Mike. Good morning. Regarding our US business and the share we have recaptured from Toys“R”Us, the team has made significant progress, which we have been discussing as we work to bridge the gap. We expect to see further advancements in the fourth quarter this year as more retailers start implementing their holiday strategies and we're observing more comprehensive plans being rolled out. Over the past year, as part of the 21,000 new retail locations we have opened in the US, we have added 10,000 within that timeframe. This growth enables us to broaden our distribution channels and strengthen our partnerships with major retailers, who will be announcing their plans in the coming weeks, as well as expanding into additional channels through a solid product development strategy. This approach has allowed us to create products across a variety of price points. Entering 2019, we are confident in our ability to close the gap left by Toys“R”Us. Our objective for the 2018 holiday season is not solely to make up for the Toys“R”Us shortfall this year, but rather to work with our retailers to achieve a new, higher level of commitment and capability in our retail relationships. We aim for strong sell-through rates during the holidays to prepare us for enhanced retail support in 2019. We are very optimistic about our product lineup for 2019, with exciting new initiatives coming from our franchise, partners, and gaming sectors. We believe we will return to growth, which we expect will be profitable as we continue to introduce new initiatives across our franchise. While I won’t specifically address the Toys“R”Us recovery timeline, I can assure you that we are committed to making 2019 a year of growth. As we stabilize our European operations, we anticipate returning Hasbro to a growth trajectory.

Regarding our operating profit margin, in July when we discussed Q2, we still had most of the year ahead for revenue and profit. We had a plan that would have kept our operating profit margins similar to last year's. Looking ahead, the US and Canada segments are on track, as Brian just detailed, and we feel positive about that. However, Europe is performing worse than we anticipated, which has slightly lowered our margin expectations. We remain committed to addressing the issues there this year, including clearing up the inventory that has affected our gross margin. We've had more close-outs than expected, typically yielding higher margins throughout the year. While Toys“R”Us took some of those, other close-out retailers are facing similar situations. The gross margins continue to align with our expectations. Based on the product mix we foresee for the remainder of the year, we anticipate a lower operating profit margin compared to last year. We also noted some charges we will incur in the fourth quarter, specifically a $50 million to $60 million severance charge. Nonetheless, we believe there are no underlying issues preventing us from growing operating profit in the future. This year is seen as a transition period for us, with more challenges in Europe than anticipated, but we are seeing solid performance in the US. Therefore, we remain very optimistic about the future.

Great. And do you have any comments about '19 margins or whether it’d be up or down or is it too early to tell at this point?

No, I think our expectation is that they'll certainly be up from what we report for 2018. If you look at the line items in our P&L for this quarter, despite the disruption in revenue, we continue to control our costs and invest where we said we would in production, royalties, and product development, because that’s where we believe we are investing for the future. We are making those investments while keeping our costs in line as well. Therefore, there’s no reason to think that we wouldn't expect that to increase in the future.

Thanks, Mike.

Thank you very much. I have a couple of quick points for you, Deb. Firstly, advertising has significantly decreased as a percentage of revenue compared to last year. This year, it appears to be tracking slightly lower than the previous year. How sustainable do you believe this advertising percentage will be, as it seems to be around 9.3% rather than 9.6%? Can this trend continue in the future, or will it need to increase as new products are introduced?

Let me address that. The decline in the dollar you observed in the third quarter is mainly related to our plans and expectations for supporting our fourth quarter initiatives, particularly as retailers expand their efforts and we approach the holiday season. We have been discussing for some time how our digital focus and social listening have improved our ability to target media effectively. We are achieving better efficiency in well-established markets like the US and other media-conscious regions. We're maintaining high spending levels as we establish and build new brands globally. I believe advertising will likely be in the range of 9% to 10%, leaning towards the lower end of that spectrum, both for 2018 and beyond.

Great. One other question for you. The entertainment and licensing business experienced a significant revenue increase. Is one of the reasons the Netflix deal from four years ago that is now fully renewed?

As we look at it, we did renew a digital streaming deal that we had from I think ‘15 was last time we did. And we also are getting revenues in from our My Little Pony: The Movie. So you see that in our program production amortization, but we are getting revenues in there coming through that segment.

Hi, good morning. Thank you. You mentioned inventories were down significantly at retail. Is there a chance you could give us what that looks like ex-Toys“R”Us? Because Toys“R”Us is a specialty toy retailer. They were more able to take on inventory ahead of holiday season than for example a mass retailer that's a little bit time sensitive. How much is retail inventories actually down ex-Toys“R”Us? And then I have a quick follow-up. Thank you.

In Europe, Toys“R”Us had a smaller impact, and our European retail inventories are down by more than 20%. In the US, retail inventories have decreased by 17%, which is consistent across all retailers. Our inventories, both from our brands and other retailers, have dropped. As we transition to an omni-channel approach, online retailers are adopting shorter supply periods. The changes we've implemented in Europe to reduce excess inventory are resulting in positive progress as we partner with new omni-channel and online retailers, similar to what we're seeing in the US, where these retailers also require less supply. Our major partners and the expanded retail channels are taking in less inventory overall, reflecting significant reductions across our operations, although Toys“R”Us does have some influence.

And Arpine I would just add to that too. I mean especially as you look at Europe our inventories are down significantly as well so.

Okay, thank you. Then our checks have shown some surprising softness in NERF into Q3. Could you give us the sense whether it is just a function of sort of very tough comp since the brand did so well last year in Q3 I remember? Or is it that we are seeing some structural change in terms of retailer willingness to take on more bulkier items that are more fit for online, which could mean that Q4 could be a little bit better, because that’s more just in time inventory management and online seems like it’s still doing well?

The biggest impact on NERF in Q3 was the lack of support from Toys“R”Us for the NERF Fest, which started in the US and was rolled out globally in 2018. This event previously provided significant space and inventory. Moreover, the liquidation in the second quarter affected unit sales, which were strong in Q2 but declined in Q3, especially for some basic products. We are seeing strong growth in the Rival product, which features round projectiles, and we are launching seven new blasters in Q4. We are excited about introducing new innovations to the market, which are performing well. The brand is also doing well online, as customers can directly access the full range of NERF products. Long-term, we feel optimistic about NERF. We have noticed increased competition in the category, but we will continue to innovate this fall with LASER OPS, which offers a new way to play. Additionally, we have several new innovations slated for the first half of 2019, including NERF Overwatch and NERF Fortnite, and there will be more innovations coming in NERF that we will announce later in 2019.

Thank you. And one more if I may. Brian, there is a lot of excitement both in the marketplace, as well as investor community about MAGIC: THE GATHERING Arena, as you went into Open Beta recently. Could you share your expectations of what that could mean for Hasbro for ‘19 and in terms of both profitability and incremental revenue?

Yes. First of all, I think we should start by talking about MAGIC: THE GATHERING, because obviously it’s all related and interrelated as it’s a story-led brand. MAGIC is up year-over-year, it’s driven by that Core Set launch from July. But also what we’re really seeing is that a growth in total unique players of 14% year-over-year. We saw growth of new players of 17% year-over-year. So I think MAGIC: THE GATHERING Arena is off to a good start, but really the fact is we’re just in Open Beta. We’re actively engaging with players as we continually refine the game and our work is not done. We’re going to invest in game development. We’re going to across new platforms with new features and we're very excited about what Arena portends for 2019 and beyond. We're not going to frame it other than to say we're continuing to expand in markets, in social and competitive features and platforms. I would encourage you to look at some of the positive reviews that have been out there in PC Gamer and Polygon and a few other publications. And also, I really encourage you to look at the viewership on Twitch. I think the game will officially launch in 2019, but already, you're seeing real excitement on Twitch. And of course, we're going to add new elements to MAGIC: THE GATHERING as competitive gaming has been part of our MAGIC's DNA since the first Pro Tour in 1996. And MAGIC: THE GATHERING Arena provides this amazing digital platform that's as much fun to stream and watch as it is to play. And so, we'll share more with you shortly, but it's off to a very good start. And it's exceeding our expectations.

Thanks. Good morning, everyone. Deb, I wanted to just come back to your comments on Europe and the partner brand inventory. I'm wondering if you can give us a sense of the Q4 versus Q3. I understand it's going to continue through the end of the year, but are we getting toward the tail-end of that cleanup? Should we expect the fourth quarter impact to be smaller or larger than what you've just experienced in Q3? And then Brian, a question for you just on NERF. I think that there's a point of focus, just understanding a bit around the distribution changes in that brand in addition to the sales cadence with Rival, Overwatch, Fortnite, do you expect to gain some new distribution into maybe non-toy or non-traditional toy channel or into other areas of your mass retailer footprints, and areas like entertainment and sporting goods? If you could talk a little bit about distribution expansion for NERF that would be helpful? Thank you.

Good morning, Steph. I'll take the inventory question first. I think that as we look at our inventory, both at retail and at Hasbro, we have said we remain committed to deal with this issue in 2018. So, I can't specifically say whether the fourth quarter is going to be up or down from the impact on our gross margin from that. But we just absolutely remain committed to getting it done. And by the end of 2018, we do believe that will be behind us.

NERF is a brand that has global appeal, and we are significantly increasing our points of distribution. Our expanded channel strategy involves bringing on new retailers, including various sporting goods, fan-oriented, and electronics and gaming retailers. With our NERF Overwatch line, we are excited not only because of the impressive blasters we have, but also because we are enabling players to immerse themselves in role-playing, effectively bringing the game to life. In NERF Fortnite, we continue to focus on strong character-driven narratives, and we are looking forward to that as well. We will introduce new innovations for 2019 closer to their launch date. Overall, NERF is expanding its presence, and it's critical to highlight the disruption caused by Toys“R”Us, which we discussed a year ago during NERF Fest. Last year, Q3 was Toys“R”Us's largest quarter for Hasbro before any liquidation efforts began, and Q4 was the second highest. This highlights the potential impacts. As we conclude this year, we have resolved the European excess inventory challenges and the Toys“R”Us situation.

Okay. Just one final question for us. I just want to make sure I heard you correctly. A $50 million tail-end of Q3 shift into Q4. Was there any other timing lags or shifts that you think would be worth calling out just in terms of order of magnitude as we should think about modeling Q4 versus Q3 on a total sales basis?

Yes. That was the impact. And again, the team had recognized already that we are going to such an expanded universe of retailers that we were already well underway in establishing a new Midwest warehouse. It's a very innovative approach. And it will also enable us to reduce the mileage to our retailers' distribution centers which obviously helps to mitigate some of the other cost increases we've seen. And we should save some monies there. It gives us also an opportunity to try some innovative approaches with some of our retailers and sharing warehouses, where we can move very quickly to replenish, given several retailers are going to a lower week supply inventory. And so, we see this is again a step up in Hasbro capabilities. And many of these new capabilities we've brought on board in North America and in the US. We're marrying that to our European business. And that's what you're seeing us do in real time and rapidly so that Europe will follow quickly on the successes and the momentum we're seeing in the US as we go through this disruptive year, and again, put the Toys“R”Us business behind.

Hi, good morning. Thanks, Brian. Looking back for a moment, I believe you and Deb have clearly outlined the various challenges you faced this quarter, some of which were not anticipated when you spoke to us in July. However, in comparison to the expectations out there, your revenue performance in Franchise Brands was actually better than in Hasbro Gaming. The significant decline seemed to be in Partner Brands. Could you elaborate on that in your overall commentary? Given that line was notably impacted by the issues you mentioned, I'd like to understand what exactly happened and how the inventory levels are for both the company and retail in that segment.

Yes, I think that's absolutely correct. If we look at Partner Brands, specifically year-on-year for Disney Princess and Frozen, last year we had several entertainment initiatives supporting the brand, including Moana and Beauty and the Beast, as well as some television-led initiatives that didn't recur this year. For Star Wars, last year marked the time when Last Jedi products were being set, which resulted in a significant amount of inventory and merchandising around the brand. That was not the case this year, so those two had a major impact on the business during that period. Additionally, as we moved past the year of the movies, we saw some influence from Trolls and a few others. However, on the positive side, we've experienced strong momentum with the MARVEL business. We're thrilled not only about the success of Avengers and Black Panther, but as we approach the fourth quarter, we will be supporting the animated Spider-Man movie, which we are excited about. We will also have our own Bumblebee film that I must mention. Overall, I agree that we were facing significant entertainment initiatives from a year ago.

And as we head into 2019, we see that continued momentum around entertainment. In MARVEL, you've got Captain Marvel and Avengers. And then from Disney, we've got Aladdin and Toy Story. And there's another Spider-Man. There's Lion King and of course, Frozen 2, and then Star Wars: Episode IX comes at the end of next year. So, as you think about the mix I mentioned and some great entertainment, we've got good momentum in MARVEL. And we've seen good momentum in entertainment to carry our Partner Brands next year as well.

Thank you for that information; it's very helpful. However, I wanted to point out that there were some unexpected developments in the quarter. I'm trying to make sense of this unfamiliar situation. Overall, aside from the changes you mentioned regarding Partner Brands, nothing that occurred was overly shocking. You explained the reasons for the decline in Partner Brands, and I would have expected some decreases in that area during the quarter. Was there anything specific related to Toys“R”Us or inventory issues that might have impacted Partner Brands more significantly than others?

No, I think that, once again, year-on-year, we are facing significant initiatives. The idea of this being a disruptive year is true in many respects. The focus on Toys“R”Us has overshadowed the fact that we are also tackling some entertainment initiatives. It's important to note that, particularly in the US, our business is leading the company's transformation this year. Both Franchise Brands and Gaming showed double-digit growth. Franchise Brands also saw an increase, and our Emerging Brands overall are performing well. However, Partner Brands are down, but there are valid reasons for this decline. We are working on addressing any remaining inventories across all our brands, including cleaning up some Partner Brand inventories, especially in Europe. Our entertainment-led brands have performed particularly well there, and we have numerous entertainment initiatives planned for 2019. As Deb mentioned, we are committed to resolving all inventory issues by the end of the year, positioning ourselves well for a strong entertainment year across our Partner Brand portfolio.

Yes. Okay. Thank you. And then just for Christmas, consensus estimates call for a flat revenue growth. That seems kind of optimistic at this point. Do you agree with that?

I believe we are approaching a very strong holiday season, with numerous new initiatives in place. Our objective remains to sustain the momentum in the North American market. During Q3, our Canadian business saw increases in both sales and sell-through revenues, largely thanks to the new ownership of Toys“R”Us which has helped alleviate retail challenges. Our brands are truly connecting with consumers, evident in online sales and our performance in Canada, as well as in Germany, Austria, and Switzerland following Smith's acquisition. As we navigate these changes, our core business remains solid. Our brands are well-received, and there is significant enthusiasm among consumers regarding our efforts. We just need to overcome the disruptions caused by the Toys“R”Us situation, which was our largest source of revenue in Q3 last year, followed by Q4.

And then last quarter, you said that you would expect to fully offset Toys“R”Us by the first quarter of '19. Is that still realistic? I know in your prepared remarks, you said it would take a few more quarters.

The reason we mentioned that Toys“R”Us may require a few more quarters is due to the delay in resolving the Asian business of Toys“R”Us. The two owners are still working out their differences. Asia is where Toys“R”Us performs best globally, so we want to move forward with new ownership in that area. We're waiting for a resolution, which is why we've indicated it might take a couple of quarters. It's also important to note that in the first quarter of last year, we made shipments to Toys“R”Us in the US and other markets that later liquidated, as at that point, Toys“R”Us had not announced their liquidation. We want to clarify that we were conducting business with Toys“R”Us, albeit at a much lower level in the first quarter of 2019. The most significant impacts compared to last year are this quarter and the next. Next quarter will be less impactful than this quarter was last year. We just want to provide that context for everyone.

So, maybe US first quarter but then dealing with Asia, probably fully through by second quarter?

Well, I think we and the management there would hope so. It's taking longer than expected to resolve the ownership transition. Regarding the quarter, beyond Toys“R”Us, we are noticing that the new retailers accepting orders are offering a higher price for this share. However, their rhythm for placing orders is different, depending on how close they are to when they want the products. We're monitoring this aspect and will provide more details at Toy Fair. That's the only additional point I would mention beyond Toys“R”Us.

Great. Thanks. I am wondering if you mentioned that POS was up globally excluding Toys“R”Us. Did I hear that correctly?

Yes. Year-to-date, POS was up globally without Toys“R”Us. It was also up globally year-to-date when including Toys“R”Us. In the US, excluding Toys“R”Us, where the impact is most significant, POS was up both for the quarter and year-to-date. In fact…

No. I'm just going to ask you to quantify it up how much in the US?

Yes. So, if you take, it was up in the single-digits in the quarter. And it was up across our Gaming Brands, Emerging Brands, Partner Brands. Again, it's without Toys“R”Us. And year-to-date, without Toys“R”Us, it's up mid to high single-digits across the board in every category.

Great. Thank you. And then just finally, any thoughts on the last-minute kind of shopping patterns for the year? So, Toys“R”Us was usually the place to go to get gifts ahead of Christmas. What does that mean for this year? Where do you think the shoppers go for that last-minute gift purchase?

I'd say our team has done a fantastic job in working with all of our retailers. As we spoke to you last quarter, we were just in the midst of presenting those plans. And now, we're really seeing them come to fruition as we end the third quarter and enter the fourth quarter. Many of those retailers do merchandise toward the holidays later than a toy specialist who would have product on shelf beginning in July or August. And we're very excited about the expansion of retail space we're seeing at our major partners and retailers. You're going to see very exciting in-store experiences, expanded footprints, very exciting online efforts where we're bringing a lot of digital marketing forward. And so, I think that you're going to see, as I mentioned earlier, a linear footage for the toy industry that's quite sizable and very comparable to a year ago once we get into these last eight weeks of the year. And it's very exciting to see our brands come to life across our portfolio.

Hi. Good morning. I'm curious about some of the forward-looking strategy that you guys talked about. You discussed modernizing the global organization. And I'm interested in hearing exactly sort of what that means and what the top priorities might be for that strategy. And that seems to be spurred also by these changing consumer behaviors that were mentioned in the slide deck that you guys offered. And I'm wondering if there's something secular that you guys have seen or are we just talking more of the shift to online purchasing and then the interest in more digital product offerings than in the past? Thanks.

We are experiencing a significant transformation in our business across all areas, including design and development. We're enhancing our storytelling approach to ensure we have compelling narratives on every screen, ranging from short-form content and social media to customized content. Digital marketing, which used to be a specialized function within one group, is now integrated throughout the entire company. Our focus on data analytics has improved our inventory replenishment and enhanced our online algorithms, ensuring our brands are easily accessible to consumers searching for gift products. We are utilizing social listening and scraping not only to gauge consumer behavior and respond with appealing products but also to refine our marketing communications in real-time to better serve our customers. Additionally, we're pioneering the content-to-commerce model, allowing viewers to watch and engage with content that seamlessly integrates purchasing options. This shoppable social content is gaining traction, and we believe it will be a significant area for mobile shopping in the future. Furthermore, we have cultivated expertise within our teams, enabling a dedicated global online team to stay attuned to online shopping trends. Our channel teams are working to expand our market presence through a product development strategy that accommodates various price points, features, and play patterns. We are seeing substantial progress across the board, particularly as we align our successes in Europe with those in North America. Our company benefits from strong leadership and skilled teams eager to take on leadership roles, which has prompted us to make organizational changes to facilitate this opportunity.

Okay. Thanks. Good morning, everyone. Brian, can you talk about the product lineup and licensing program you had for Bumblebee relative to other TRANSFORMER films and how you'd expect the sales cadence to progress relative to prior TRANSFORMER film cycles?

Bumblebee just started appearing on shelves in the US in early October, and we are already seeing strong results, though it’s still early. Our fans are responding positively to the product they have received so far. Major retailers see this property as a leading one, due to its impressive toy and game lineups as well as consumer products. Our teams are also supporting it with digital games, and Backflip has added new features to its EARTH WARS mobile game. The film is set to release at the end of December in many markets, with a later release in January for some others. We are still waiting for the release date in China, which is typical, as they confirm dates after seeing the film. It is likely to be scheduled for after the New Year. Additionally, a few other territories will also have their releases after the New Year for competitive and retail reasons. The film is expected to significantly impact the brand in the fourth quarter and into the first quarter. The home entertainment window for all these brands, including Bumblebee, will be more significant than ever as more people are watching at home. We anticipate home entertainment sales to occur in the first half of next year. This all contributes to new storytelling within the TRANSFORMERS universe, which will be supported by new television content and streaming for fans. The brand has a strong lineup, and in the US, where we are ahead with our strategy, TRANSFORMERS saw double-digit growth in the quarter.

Got it. Okay. And then just shifting gears or going back to MAGIC: The Arena, I know it's still very early days, but have you identified or are there any other game properties or IP in the portfolio that lend themselves to a PC, digital-based, free-to-play format? And if so, is that an area of investment for the company going forward?

We have been investing in this area because for MAGIC: Arena, we want to keep listening to our players. This means we are continuously updating the game. Think of it as a service rather than just a game you launch. We will keep improving and investing in the game and expanding it in various ways so players can enjoy it across multiple formats. It started as a PC game, but you will see opportunities to play MAGIC: THE GATHERING on every screen in a digital format. Esports will also be a significant area of growth for MAGIC: THE GATHERING moving forward. Competitive gaming has always been a part of MAGIC's identity since our first Pro Tour in the '90s, and we view this as a chance for growth. Other brands like DUNGEONS and DRAGONS also present opportunities in immersive gameplay, and we are excited about the early results. We will provide further updates as we approach our analyst meeting early next year.

Yes. That’s an area that we've been looking at and in fact we've looked at for the last couple of years as well.

Okay. Great. And then just one last one. Deb, the $50 million to $60 million of charge you expect to take in the fourth quarter, how much is that cash?

That's all cash.

Hi. Good morning. Thanks for taking my question. I wanted to follow up on the questions regarding Toys“R”Us. Do you still believe you will be able to regain all of those Toys“R”Us sales over time? Has your outlook changed? Is the industry not expected to return to previous levels, or is the recovery happening at a slower pace than anticipated? Also, as we look toward 2019, do you see potential for gaining market share from smaller manufacturers that used to sell at Toys“R”Us but don't have the same distribution opportunities elsewhere?

Yes, we believe that over time we will regain the Toys“R”Us market share. There is nothing about this year that alters that belief. As we enter the second half of the year, we face significant comparable numbers from last year's Toys“R”Us sales. However, as we progress through the year, we are observing other retailers stepping up. Our objective is to continue partnering with retailers globally. One area where we lagged was in Europe, as we needed to implement changes in our organization and our market approach, as well as ensure we reduce excess inventory by year-end, which we are working on. Additionally, there are other retailers in the UK facing challenges. Our team has adapted its strategy to target new online and omni-channel retailers, which affects how we deliver products and manage inventory levels. Overall, we believe that the demand for toys and games remains strong, and the industry is growing despite current short-term disruptions.

Great. And then the increased space allocation you're seeing from some of the big retailers, I guess does that change after holiday or do they plan on keeping a higher level of space dedicated to toys after holiday also?

Oh! I think that Deb mentioned this earlier. I think it's important to note that the cadence of quarters will change over time as our retail channel strategy and retail footprint continues to expand but with different channels of retail without a big toy specialist in the US. That just changes the cadence of when product may hit shelves. Our retailers are very excited about market share opportunity in the second half of this year. Recognize that at retail, Toys“R”Us represented about $3.5 billion opportunity at this holiday for share recapture. And as we go forward, our goal, and we said before, is to not recapture all of those dollars this year but rather ensure that our partnerships with retailers enable them to see the success of being invested in the toy business and our business in particular and that as we go forward, having story-led brands that come out throughout the year in addition to other Franchise Brands and Gaming initiatives that come out throughout the year enables us to have great products to get behind and great initiatives to get behind throughout the year. That will become increasingly important, as we've said that story-led brands and entertainment-led brands become increasingly important. And that entertainment might just be social content or stream content or it may be bespoke episodic television or motion pictures. But increasingly to get a 12 month support from global retailers, the consumer insights tied to storytelling are critical. Thank you all for your questions. We appreciate the time today and thank you for your support of Hasbro. Goodbye.

Thank you, Rob. And thank you everyone for joining the call today. The replay will be available on our Investor website in approximately two hours. Additionally, management's prepared remarks will be posted on our Investor website following this call. Thank you.