Hasbro, Inc. (HAS) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Hasbro Third Quarter 2012 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Our third quarter earnings release was issued earlier this morning and is available on our website. Additionally, also available on our website are presentation slides containing information covered in today's earnings release and call. The press release and presentation include information regarding non-GAAP financial measures included in today's call. Please note that during today's call, whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. This morning, Brian Goldner, Hasbro's President and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer, will review our third quarter financial results and discuss important factors impacting our performance. Following their statements, David Hargreaves, Hasbro's Chief Operating Officer, will join Brian and Deb to field your questions. Before we begin, please note that during this call and the question-and-answer session that follows, members of Hasbro's management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. These forward-looking statements may include comments concerning our product and entertainment plans; anticipated product performance; business opportunities, plans and strategies; costs, financial goals and expectations for our future financial performance, including expectations for revenues and EPS in 2012. 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 disclosure. You should review such factors together with any forward-looking statements made on today's call. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. Now I would like to introduce Brian Goldner. Brian?

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. As early as November of last year, we communicated with you several key objectives for 2012, including growing revenues and earnings per share for the full year absent the impact of foreign exchange, returning the U.S. and Canada segment to historical operating profit margins, executing globally by leveraging our investments in new and emerging markets, stabilizing our Games business and positioning it for growth in 2013 and beyond and growing our Girls business. Nine months into the year, we are delivering on these objectives, and we believe we are well positioned to achieve them for the full year 2012 in a challenging environment. Now as we enter the holiday season, it's all about new Hasbro and partner initiatives across brands, categories and geographies, including reimagined and completely new brands. Furby is one of the most exciting new initiatives for the holiday season and is off to a great start. The team did a tremendous job reimagining this brand for today's consumers by integrating innovative new technologies with a great all-new personality that develops depending on how you interact with your Furby. For more interactive fun, you can download the free app to virtually feed Furby and access a FURBISH to English dictionary. Furby is available in English-speaking markets this holiday season and will ship globally in 2013. Backed by 2 tremendously successful films, we have seen good momentum with our Marvel products throughout 2012. Similar to how we are building Hasbro brand franchises, we partnered with Marvel to expand into new categories, including Games and Preschool and to execute across markets globally. We have the innovative new items for the holiday for both Marvel's The Avengers and The Amazing Spider-Man. In addition to Furby and our Marvel line, we believe we have the strongest holiday line in a number of years, including great new products from brands like FurReal Friends, Baby Alive, My Little Pony, Littlest Pet Shop, One Direction, Nerf, Koosh, Beyblade, Transformers, PLAYSKOOL and Play-Doh. You can see many of these initiatives on Page 5 of the presentation. As with toys, our Games line for the holiday 2012 is the strongest it has been in years. The Hasbro brands and innovative platforms created by our new games team come together for the first time this holiday season. We completely reimagined Twister as Twister Dance, and it's off to a strong start. An entirely new Lazer Tag is delivering live laser combat integrated with your iPhone and iPod. Within our Monopoly brand, the Monopoly Millionaire game is all-new and the first to $1 million wins. This summer, we launched Kaijudo: Rise of the Duel Masters, an all-new brand from Wizards of the Coast. Kaijudo features an online battle game, trading card game, an online trading card game and a television series airing in the U.S. on The Hub TV Network. We have also established new partnerships in the gaming space, which are coming to retail this fourth quarter, along with Rovio Entertainment and Lucasfilm, we recently announced a line of games and toys based on ANGRY BIRDS STAR WARS. Also, our new line of Zynga games, including Words With Friends, CityVille and Draw Something, is available for the holidays. Leading up to the holiday and as we execute 2012, we have reemphasized building a consumer-centric organization and executional plan. This starts by having the right brands with innovation based on great consumer insights, ensuring the right inventories at retail when the consumer is shopping and partnering with our retailers to develop integrated marketing campaigns. This is our model for future years. In the U.S. and Canada segment, we set the objective to return to historical levels of operating profit margins for the full year 2012. Year-to-date, we are on track, posting an operating profit margin of 15.2% versus 13.7% last year and reaching 19.9% in the third quarter. To drive demand in the fourth quarter, we are increasing our U.S. media support by 30% to 40% across TV, digital and social media. Internationally, our business is more global than ever. Our investments in emerging markets are delivering growth in many new countries, including Brazil, Peru, Chile, Colombia, Turkey and Russia. Overall, our growth internationally, absent foreign exchange, was more modest this quarter as mature economies in Spain and France are facing challenging economic environments. For the quarter, we again grew revenues in Latin America, which increased 9% as reported. European revenues were flat absent the negative impact of foreign exchange, while Asia Pacific declined due primarily to Australia. Many international markets face difficult comparisons against very strong Transformers and Beyblade shipments last year. Throughout 2012, our category performance has been impacted by the later shipment pattern in the U.S. Beginning in the third quarter, our new initiatives are starting to have a positive impact. As we highlighted all year, the Boys category has challenging comparisons with last year. Despite very strong performance from Marvel, including Marvel The Avengers and The Amazing Spider-Man, the comparisons with Transformers and Beyblade are difficult. Also, we have expanded the reach of many of our traditionally boys-only brands to outside the Boys category. We now have strong Marvel, Star Wars and Transformers initiatives in both the Preschool and Games categories. For the third quarter, the Girls category posted very strong growth, increasing 17% as Furby, My Little Pony, Easy-Bake and One Direction all contributed to growth year-over-year. Within key brands, Baby Wanna Walk from Baby Alive, as well as Baby Butterscotch and BOUNCY, MY HAPPY TO SEE ME PUP, both from FurReal Friends, are off to a good start. All year, we have remained positive toward our goal of growing the Girls category given the strength of our line for the holiday. The third quarter reinforced this optimism. Also in line with the objective we set at the beginning of the year, our Games category is stabilizing, posting flat revenues in the third quarter, and the team is positioning us for growth in 2013 and beyond. In addition to continued strong performance from Magic: The Gathering, we had several successful game launches this year within Boys Action Gaming, as well as with Battleship. On shelves for the holiday, Lazer Tag and Twister contributed to the category in the third quarter. We also began shipping ahead of the fourth quarter launch for both our ANGRY BIRDS STAR WARS and Hasbro's Zynga games. For the Preschool category, the brand expansion I spoke to is evident in the growth of our PLAYSKOOL HEROES line. Also within Preschool, we launched all-new Koosh blasters and PLAYSKOOL ROCKTIVITY while delivering growth in Play-Doh. In comparison to last year, the third quarter 2011 had significant shipments for the initial launch of our Sesame Street line. Looking across categories, as we execute our branded play blueprint, content for both television and films is helping us build Hasbro's global brand franchises. Television is driving brands, including Transformers Prime and Rescue Bots, as well as My Little Pony. Hasbro Studios shows are airing in more than 170 countries worldwide and on a number of home entertainment and digital distribution platforms around the world. In the U.S., The Hub continues to make significant gains in distribution and ratings. As of the third quarter, The Hub's distribution had increased significantly and is now in more than 70 million households, making it one of the fastest-growing networks year-to-date among all cable TV networks in terms of distribution games. Ratings also continued to grow and in the third quarter was the best in the network's history, posting a 62% increase year-over-year and a 28% increase versus the second quarter 2012 in kids 2 to 11, representing the strongest growth among all kids' cable TV networks. As we look to 2013, the global entertainment slate we're developing per product is deep and broad, with several major films and continued global television support for Hasbro brand and our partners' brands. First, G.I. JOE: RETALIATION is expected in March 2013 in 3D with our partners at Paramount. In May, Iron Man 3 in 3D from Marvel Studios is scheduled for release, as well as STAR TREK from Paramount. Twentieth Century Fox is planning to release The Wolverine in July, and Marvel Studios has scheduled Thor: The Dark World in 3D for November. Lucasfilm is also releasing in 3D Star Wars in Episode II and Episode III in September and October, respectively. Additionally, from Hasbro and Universal, Ouija is scheduled for release next year. As we continue developing Hasbro brands globally in 2013 and beyond, we have a number of television programs slated for next year, including Transformers Prime and Rescue Bots, Kaijudo, My Little Pony and Littlest Pet Shop. Marvel has new programming for Ultimate Spider-Man, Hulk and the Agents of SMASH and Marvel's Avengers Assemble, premiering in 2013. And Lucasfilm continues a successful Clone Wars series. Working with our partners at Nelvana and d-rights, Beyblade has all-new animation planned tied to new brand innovation and new entertainment to help ensure Beyblade remains a vital and evergreen part of our Boys portfolio. In closing, our focus this fourth quarter is on delivering on our objectives for 2012. It all comes down to connecting with consumers and ensuring they give more Hasbro toys and games this holiday season than last year. And we believe we have the brands and the marketing support to achieve that goal in the fourth quarter. Now I'd like to turn the call over to Deb. Deb?

Thank you, and good morning. As you'll recall, beginning last November, we said our plan for this year was that it would come later, and as Brian outlined, we are on track with our plan for 2012. In many markets, the economic environment is challenging, but we are entering the all-important fourth quarter with innovative products, leading brands and a higher level of consumer marketing programs that are just beginning to be executed. In the third quarter, net revenues increased 1% in constant dollars. Including a negative $47.4 million impact from foreign exchange, third quarter worldwide net revenues as reported were $1.35 billion versus $1.38 billion last year. Operating profit for the quarter was $249.6 million or 18.6% of revenues compared to operating profit of $248.1 million or 18% of revenues in the third quarter 2011. Net earnings for the third quarter 2012 were $164.9 million or $1.24 per diluted share. This compares to net earnings of $171 million or $1.27 per diluted share last year. Absent foreign exchange translation, net earnings were essentially flat year-over-year, and EPS was up $0.01 to $1.28 per share versus last year. Cash grew year-over-year to $696.7 million on $143.6 million of operating cash flow year-to-date and $538.6 million in operating cash flow over the past 12 months. We remain in a strong cash position to fund our business and continue returning cash to our shareholders. Looking at the third quarter 2012 results by segment. The U.S. and Canada segment is on track with our plan to return to historical levels of operating profit. Net revenues in this segment in this quarter were $774.5 million, up 1% versus $764.6 million in 2011. We continue to partner with our retailers to align our shipments with consumer demand. As a result, current retail inventories in the U.S. were down, decreasing approximately 22% from last year despite new shipments for the holiday season. With our new holiday items now shipping, the growth in Games category grew in the quarter and were partially offset by a decline in the Boys category and a decline in the Preschool category, which faced tough comparisons against last year's initial Sesame Street launch. As I mentioned, the U.S. and Canada segment is on track to return to historical operating profit margins for the year. In the quarter, operating profit increased 20% to $154.2 million and an operating profit margin of 19.9%. This compares to last year's third quarter operating profit of $128.8 million or 16.8% of revenues. The improvement in operating profit was a result of higher gross margins due to product mix and lower overall expenses, partially offset by higher advertising spend. Third quarter 2012 International segment net revenues grew 1% absent a negative foreign exchange impact of $47.1 million. The International segment revenue as reported was $524.1 million, down 7% versus $563.3 million last year. Latin America again posted growth in the quarter, increasing 9% year-over-year. Absent foreign exchange, Europe was essentially flat year-over-year, and Asia Pacific declined in the quarter. Our global footprint is bigger today than it was a few years ago. Growth in emerging markets helps provide support to offset the challenges facing some mature markets. From a product category standpoint, in the International segment, the Games and Preschool categories were flat, while the Boys and Girls categories declined. Operating profit in the International segment decreased $15.2 million to $85.5 million or 16.3% of revenues. Excluding foreign exchange translation, operating profit decreased by $8.1 million, primarily due to lower expense levels in the third quarter 2011 due to the timing of when certain expenses were incurred last year. This should normalize on a full year basis. The Entertainment and Licensing segment net revenues decreased 7% to $43.1 million compared to $46.3 million in 2011. The segment continues to benefit from increasing sales of television content in all formats, including global television distribution, digital distribution and home entertainment. This was offset by year-over-year declines in movie-related revenue, including lower revenues from licensed product associated with the third Transformers motion picture and a onetime movie payment of $5 million received in the third quarter last year. For the third quarter 2012, the Entertainment and Licensing segment reported an operating profit of $10.7 million versus $15.3 million in 2011. The decline in operating profit reflects the profit impact of the onetime payment received in 2011. For the company overall, cost of sales for the quarter was $586.5 million or 43.6% of revenues versus $599.5 million, which was also 43.6% of revenues last year. From an expense standpoint, total operating expenses declined to $509 million or 37.8% of revenues versus $528.2 million or 38.4% last year. Program production amortization in the quarter totaled $12.8 million versus $7.8 million last year. Year-to-date in 2012, our expense totaled $26 million. We continue to experience lower-than-expected program production amortization due to our current expectations of ultimate revenues in the current mix of programming. For the full year 2012, we now expect program production amortization to be in the $40 million to $50 million range. As we continue to gain production efficiencies, we anticipate spending less on programming from a cash standpoint and now expect cash spend to be in the $50 million to $60 million range for the current year. Third quarter 2012 royalties were 6.6% of revenues compared to 7.9% of revenues in 2011. This reflects strong global growth in Marvel this year but was more than offset by lower sales of other royalty-bearing entertainment properties. For the full year 2012, we anticipate royalties to be in the 7% to 8% of revenue range. Our advertising-to-revenue ratio in the third quarter was 10% versus 9.5% in 2011, consistent with our stated plan to increase our investment in advertising in 2012. For the full year, we continue to anticipate advertising in the 10% to 11% range. SD&A of $210.9 million decreased $9.3 million year-over-year, primarily due to foreign exchange. As a percentage of revenues, SD&A was 15.7% versus 16% in 2011. We continue to target SD&A to be approximately 20% of revenues for the full year 2012. Moving below operating profit. Other expense was $1.6 million in the third quarter of 2012 versus $4.1 million in 2011. Our 50% share of The Hub is included on this line in the P&L. For the third quarter 2012, our share of the earnings in The Hub was a loss of $1.8 million compared to a loss of $1.5 million a year ago. We continue to expect The Hub's impact for the full year 2012 to be in line with 2011 levels. Our underlying tax rate in 2012 was 26.6% compared to an underlying tax rate of 25.1% through the third quarter last year. We expect our full year tax rate to be in line with the third quarter's 26.6% rate versus the 2011 full year underlying rate of 26.2%. Turning to the balance sheet. At quarter end, cash totaled $696.7 million compared to $187 million a year ago and $779.9 million at the end of the second quarter. For the trailing 12 months, operating cash flow of $538.6 million includes $61.6 million in television programming costs over the period. We continue to return cash to shareholders through our quarterly dividend program, and in the third quarter, we paid $46.9 million in cash dividends to our shareholders. Over the past 12 months, our dividend payout has been approximately 50% of net earnings during that period. After repurchasing approximately $5 million worth of shares in the third quarter, $212.2 million remained available at quarter end under our current share repurchase authorization. As we discussed earlier in the year, our repurchases have been more modest in 2012, especially during the periods with lower cash generation for our business. We continue to repurchase shares opportunistically in the open market. The quality of our receivables portfolio is good, and receivables at quarter end were $1.2 billion versus $1.26 billion last year and $651.4 million at the end of the second quarter. DSOs were down 2 days versus last year to 80 days. DSO improvement this year is the result of the timing of shipments and improved collections. Inventory levels at quarter end were down $55.4 million or 11% year-over-year to $463.4 million compared to $518.9 million a year ago and $416.9 million at the end of the second quarter. Declines in the U.S. and Canada segment inventories were partially offset by higher international inventory, supporting our expanded international operations. Depreciation and capital expenditures for the quarter were $31.4 million and $24.8 million, respectively. With 3 quarters behind us, we've made progress toward reaching our objectives for the year. But as Brian stated, the fourth quarter is where it all comes together. We know we have great products, strong marketing campaigns and a focus on quality execution. As a result, we continue to believe we can grow revenue and earnings per share absent the impact of foreign exchange for the full year 2012, including a modest increase in operating profit margins. Our objective remains to grow operating profit faster than revenues in future years. Brian, David and I are now happy to take your questions.

[Operator Instructions] Our first question is from the line of Mike Swartz of SunTrust.

Just a quick question on the -- I guess, on the Games business. Could you maybe provide us some more color just around your commentary on stabilization this year and then reverting to growth in 2013 and beyond? I guess, what do your plans call for as far as category growth?

Yes, if you look at the Games business for the full year 2012, we do expect to stabilize the business. We're focused on a number of new initiatives in the Games category, our own brands as well as some partner brands. Our expectation really stems from the fact that some of our new initiatives are off to a great start. So as we look year-on-year at new initiatives and POS growth for those new initiatives, they're up strongly, double digits. Also, the continued success of Magic: The Gathering as a brand, Hasbro's own brands and then we're beginning to launch ANGRY BIRDS STAR WARS, beginning to launch the Zynga brands, the continuation of our Boys Action Gaming as a category, which has been successful throughout the year, Monopoly and Lazer Tag, as well as Twister, some of our own brands come into the season as well. So overall, our expectation is that we would stabilize the Games business this year and position us for growth in 2013 and beyond.

Great. And I guess, maybe just looked at another way, I mean, if POS in the Games category, just kind of category-wide, continues to decline next year, I mean, would you still expect to be able to grow?

Well, I think if you look overall, our inventory in the Games business at retail is down 39% and yet POS on legacy games is down far less than that. And so we feel that we're well positioned with the new games initiatives, especially given the early traction we're seeing for those, particularly as we move into the U.S. business, where it's been particularly pronounced as an issue. The momentum we also have in our Magic: The Gathering business, the new launch of the Kaijudo brand, which is a brand-new brand from the Wizards of the Coast folks, all points us in a very positive direction in the Games business overall.

Our next question is from the line of Margaret Whitfield with Sterne Agee. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: I was wondering if I could get more color on the declines -- the level of declines you're seeing for Beyblades and Transformers and especially, what is the outlook for Beyblades. And what kind of point-of-sale activity are you seeing for those 2 brands?

Yes, Margaret, Beyblade has held up very well year-to-date. If you take total year, year-to-date, our POS has held up relatively well. Obviously, it's done better in the U.S. from a POS standpoint than some of our European markets where the comps were particularly challenging. But overall, Beyblade is beating the trends, the averages one would expect in the Boys Action category following a phenomenal year. Part of that has to do with the amount of new innovation that we've put into the Beyblade business, the BEYWHEELZ category that's also supported in animation. Something that we learned from the first time around in Beyblade was to reinvent the brand as we move forward, and you'll see additional reinvention next year, 2013, and new animation and a whole new segment of product. So again, beating the trends in Beyblade, and we feel very good about that brand going forward. That's a great brand. It sits alongside of great Marvel brands that have performed quite well this year. Obviously, Transformers is performing kind of on par with one -- what one would expect, as we start to get momentum. We're seeing good momentum in the TV-supported product lines around the world, and the fact that Transformers is on the air in television in 170 countries around the world bodes well for us. So overall, we're just up against some big comps. If you take Beyblade and Transformers collectively together, the numbers that we reported to you but taken together, we did $961 million in those 2 brands a year ago. And so in the Boys business, we've made a lot of progress. Marvel is certainly contributing significantly to that progress, but those are big comps. And particularly in certain categories, particularly in the international market, in Europe in particular, where the Beyblade business performed exceedingly well in the third quarter last year. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: So do you think the Boys category overall can grow this year given those difficult comps?

No, I think that what we've said is we believe we're going to grow overall this year. We're going to grow revenues and EPS absent FX. That's been our guidance, we believe that. I think the comps are challenging, but we're also seeing great momentum in our Preschool business and our Girls business. If you look at Preschool, our POS is up double digits. Our Girls business, our POS in the third quarter was up single digits. There is some timing issues related to last year's third quarter where we launched Sesame Street. But if you look across a lot of our categories, we have a lot of great new innovation. We do have a lot of great new innovation in the Boys business, including in Nerf and several of our boys action brands. But it's a challenging comp. I'm not going to commit to growth this year.

Our next question is from the line of Felicia Hendrix of Barclays.

Brian, you touched on point of sales a little bit. Just more granularly, just wondering overall, what point of sales look like domestically, internationally and then just in the quarter that is. And then, in Games, I just wasn't clear. I thought you -- point of sales in Games, did you say it was -- can you just repeat what you said that was in the quarter?

Sure, yes. Overall, our point of sale is down a bit, really driven by the Games decline in POS. What I said was our POS decline in Games was far less than our inventory decline thus far. Then I said our new Games initiatives that as we compare new initiatives this year to year ago is up double digits. So we're getting a lot of new innovation in our Games business is what we have all strived for as we put the Gaming Center of Excellence together a year ago. Then, what we're seeing, obviously, our Boys POS is down a bit and our Girls POS is up and Preschool is up even more strongly than Girls.

Great. And then just on the Games business, you said in the release you shipped the Zynga's -- particularly the ANGRY BIRDS -- the Star Wars ANGRY BIRDS a little bit early. Just wondering, did that have an impact on your Games business? So in other words, excluding the Zynga, would have you seen Games grow in the -- or flat Games in the quarter?

We shipped a bit of -- we're just sort of highlighting the fact that November 9, we're launching ANGRY BIRDS STAR WARS, and we shipped a bit of inventory in the quarter. We did for several of our new initiatives. That's not special, related to the fourth quarter activity. I'm not going to start to slice and dice by every product category. I think, overall, everyone should be heartened to the idea that games was flat in the quarter. We've said all along that we believe we would stabilize games this year. That's consistent with our broad guidance we've provided. I feel very good about the number of new initiatives we have in the Games category this fourth quarter. I think the team has done a phenomenal job, both in Hasbro-owned brands, as well as in some great partner brands. We also shipped Zynga brands in the quarter. We have some launches going on around Words With Friends, and you'll see CityVille and FarmVille as well. So lots of new games product out there, and you'll start to see a lot of the displays come into retail and great retailer support for our new games initiatives across the board. So overall, I would say, we're well positioned for the fourth quarter.

Okay, great. And then, as you -- you gave us a nice presentation. You gave some color there in terms of how you were thinking about the rest of the year. In terms of revenues, just wanted to double check, are you still guiding to a 2- to 4-point revenue shift? Because if that is the case, that implies a mid-teens revenue growth in the fourth quarter, so I just wanted to check that.

Yes. I think what I would ask you to look at is if you look at the year, obviously, we do continue to expect our year to come later with fourth quarter being bigger than third in terms of revenues and EPS. If you look at the U.S. and Canada segment, it continues to be on track for greater revenue percentages in the second half. I would get you to look at a 2% to 4% growth range versus last year's revenue split, which was 63% in the second half. And we had that in our 10-K in the second quarter, which is -- I would compare it to year-ago revenue, so low end of the range of 2% to 4% growth versus last year's revenue.

Okay. Final question, if you could just elaborate. You touched on a little bit in the prepared remarks, I think Deb did, you've been reducing your program production spend over the past several quarters. Deb said it was due to efficiencies. Can you just elaborate more on that?

Well, actually, what we're saying is the amortization has come down because the ultimate revenue expectation has gone up is one big driver of that. So as we look at our ultimate revenue expectation for our programming, because of the performance we've had on television, because of our digital distribution performance and the revenues now we expect to get from that programming across merchandising, as well as program sales, the amortization comes down.

Right. But you've also been reducing your program production cash spend.

Okay, yes, and the cash spend really has to do with when you have successful TV series. In fact, Hasbro Studios TV shows outperformed other TV shows on The Hub by 74% in ratings. We're 4 of the top 10 shows on the network right now. So as you look at great performance of TV shows, you're able to produce fewer episodes and subsequent series than you needed to produce in the earlier series. If you're -- you know kids love watching the episodes over and over again, but you have to add an element of newness. But you don't need to spend to produce the entire new series again. You can add 13 episodes or 26 episodes to a pool of 52 already produced episodes. So therefore, you're able to, with successful TV series, produce fewer in out-years.

Okay. You're obviously not thinking about the parents who have to watch with the kids.

Well, but I think it's also important to note so that there's no concern. Overall, the Hasbro Studios has greenlit over 800 half hours of programming, and we still have several hundred half hours of programming that we're currently producing for the network for new shows. So it's not that we're not producing, we're just both producing more efficiently and also looking at where there are successful TV series, we obviously then spend less per new series because we're able to produce fewer shows.

Our next question is from the line of Sean McGowan of Needham & Company. Sean P. McGowan - Needham & Company, LLC, Research Division: I also have a couple of questions. Wanted to know to what extent we should be expecting some of the expenses that were lower in the third quarter than perhaps the relationships might suggest. How much of that has shifted to the fourth quarter? I mean, you mentioned advertising, but should we expect to see some other expenses?

Yes, actually, advertising, I'd just remind you. I think we've talked about this prior. Advertising is actually rate-sheeted. So that's how we're able to know it's 10% to 11% for the full year. So we rate-sheet that throughout the year and so therefore, it would not spike in the fourth quarter. That's how we calculate that, Sean. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay. But obviously, like the SG&A...

We've been working on reducing expenses programmatically around the world, and so you'll see continued reduction in certain expenses. Deb, I don't know if there's other areas to...

Right. And one of the things I think you may be referring to, Sean, if we could talk about -- in our prepared remarks, about lower expenses in the third quarter of 2011. That had to do with some duty issues outside of the U.S., and then we expect those to normalize over the course of the year. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay. A couple of other questions. I'm a little confused about what you mean, Brian, when you say new initiatives in Games are up double digits versus last year. I mean, if they're new initiatives, what are you comparing that against last year?

Yes, so obviously over the last 4 weeks, we have sales data. We look at our new games sales a year ago. Obviously, we have several new initiatives this year and far more this year than year ago but also, we're looking at the quality performance of those new games initiatives. And I'm just -- early indicator as we look at getting into the holiday season, how games are performing versus year ago. Sean P. McGowan - Needham & Company, LLC, Research Division: So you mean stuff that's new this year compared to stuff that was new last year?

Correct, exactly, yes. So we're just, again, trying to get a sense because obviously throughout the year, Games POS has been down not nearly as much as our overall inventories that were down nearly 40%. So as we look at new initiatives, what do we see on the horizon? And what we're seeing is a greater impact from new games initiatives and across an array of new games. Sean P. McGowan - Needham & Company, LLC, Research Division: Okay. And to circle back to a question that's been touched on before, but I just want to be clear. So when you say Games stabilized in 2012, do you mean ending the year flattish, kind of the way it was in the fourth quarter or flat for the year so that the increase in the fourth quarter would offset the decreases so far this year?

Yes. We're always talking about the full year numbers. We're really looking at it on an annual basis, making great progress in games, and stabilization was a full year concept. The idea is being stable, and the reason I've been using that term is it's plus or minus a couple percentage points. Sean P. McGowan - Needham & Company, LLC, Research Division: Well, I knew that's what you meant in February. I just wanted to know if that was still what we meant today.

Yes, exactly. We mean the same thing today that we meant then and last November. Sean P. McGowan - Needham & Company, LLC, Research Division: Indeed. And then last question, do you think that the degree to which you -- the shipments in Furby, what would seem quite strong in the third quarter is -- do you expect to get significant reorders on Furby in the fourth quarter?

Well, we have also seen great sales of Furby thus far, and Furby will go out to English-speaking countries this year and then rolls out around the world in several different languages and across many different countries next year. So it's certainly some shipments in the third quarter that we've seen in Furby, but also some good sell-through early days because, obviously, with a lot of the layaway programs, Furby is on the wish list of a lot of kids and also retailers, and so we are seeing great early momentum in Furby.

Our next question is from the line of Eric Handler of MKM Partners.

Digging just a little bit more on the Boys side, can you talk a little bit about Nerf? Has that product did -- was last year sort of a -- actually 2 years ago, I believe, was the peak. What's going on with that segment? And how do you look for that to sort of regain its growth trend?

Yes, overall, we entered the year, particularly in the U.S. with too much Nerf inventory, which we talked about earlier in the year. The new line of product is the Nerf Elite line, which is off to a great start and over time, would become more of the line. We also have more new innovation that comes to the floor between the Firevision, as well as the Nerf Elite. That begins to roll out around the world. So we feel very good about our Nerf business longer term. And certainly, last year, I believe we reported $414 million in revenue. We then entered the U.S., the new year with too much inventory. And so we'll work through that inventory. But overall, we feel good about our Nerf business.

Our next question is from the line of Drew Crum with Stifel, Nicolaus. Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division: Debbie, wonder if you could reconcile the difference in terms of operating profit performance between the U.S. and Canadian business and international. I think you mentioned that you had some lower expenses in the comp for international. But is there anything else you can share there?

Really, it was lower expenses in the comp a year ago in the International segment versus this year. So it's the timing of certain expenses, as well as the impact of foreign exchange in the International segment as well. I think we had about $8 million worth of a negative impact from foreign exchange that hurt operating profit in the International segment this year versus a year ago. Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And maybe, Brian, I can ask the revenue question for 4Q a little bit differently. I think in your prepared remarks, you suggested that you're expecting revenues to be greater than the third quarter. Is that against the reported number of $1.345 billion? Or is that against the number excluding foreign currency?

Well, I would look at the as-reported number. And again, just to make sure we're all clear, as we look at -- we're looking at a 2% to 4% increase on Hasbro Inc.'s revenues coming in the second half. And I would use the comparative now, as we get closer to the year, we can see it's a year ago is the best comparator. Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division: Okay, fair enough. And then last question, can you comment on how you're tracking the guidance around the $150 million of incremental revenue from The Hub?

Yes, we're right on track. In fact, we're probably a bit ahead.

Our next question is from the line of Michael Kelter of Goldman Sachs.

Just, I guess, first off, taking a step back. I mean, your organic revenue growth has averaged about 2% a year over the last 5 years now, and that's below the standing guidance of 5% a year. And my question is, is there a reason you expect your revenue growth to accelerate to meet that guidance in the future despite what we're seeing in industry trends? Or might you revisit that part of your guidance to reflect lower growth at some point?

Actually, Michael, the industry trend, if you look at Euromonitor, has projections for the industry growth across all regions from 2011 to 2015 to be 4% on an annual growth rate. So our expectation of 5% over the medium term is completely in line with external reporting and forecasting. They are also forecasting good growth on the action figure business, consistent with the industry, as well as in the Games business. We certainly are also seeing great expected growth in the Girls category and in Preschool. So overall, we feel that we've had to address certain key issues within our business, which we've taken on, the Games business and the U.S. business. Over time, obviously, we feel that we can grow consistent with the industry projections and probably pick up some market share in certain key geographies. So as we look forward, we feel good about the innovation of our product line. We've had some issues that we've had to address, and I think you see we're turning the corner and we're on the path to delivering on our objectives we set for 2012 and then achieving our medium-term objectives.

And action figures, which you brought up, that's actually one I was curious about because I think we all kind of understand why the games data is what it is and the consumer behavior changes being what they might be. But action figures as a category, down double digits this year, and it's an important category for you. What are your thoughts as to what's going on because the magnitude of those declines are surprising?

Well, if you look over time, actually, if you look over about a 10-year period, the action figure business is actually one of the most inelastic, meaning kind of consistent demand categories, and then it's driven up or down depending on the new entertainment initiatives or innovation in that category. So clearly, we are in a year after a major movie year, but overall, we feel that between the television efforts of not only Hasbro brands but a lot of our partners' brands, as well as the new movie efforts that come there, as well as lots of innovations that we see on the horizon, frankly, as well as expanding the definition of boys action to new categories, including Preschool, where PLAYSKOOL HEROES is performing exceedingly well across a number of brands, between Transformers and Star Wars and Marvel and our Games, Boys Action Gaming, which is performing quite well, I think it's about the way we look at the consumer-centric adoption of boys action play versus necessarily more of the traditional measurement stick of how boys action is measured. And so overall, I would say we're expanding into these new categories of play and getting great response from the kids who are playing with our toys.

And then 2 quick clarification questions, the first one, ad spending. You guys are guiding to 10% to 11% for sales for the year. Given the 30%, 40% increase in the U.S. for the fourth quarter that you alluded to, might that line item be above 11% -- the 10%, 11% range for the fourth quarter?

No. Our forecast is that it would be between the 10% and 11% range. And the reason for that, as I mentioned, is that the way we accrue or account for advertising, it gets rate-sheeted throughout the year. So we already know what we're forecasting to spend. And it's 30% to 40% more in terms of dollars versus a year ago, and that has to do with reorienting our business to the consumer into retailer to be in the market when consumers are out there. We talked in prior quarters about how we were disappointed in the amount of marketing spend we were able to put against the consumer in the most important time periods of the year, and so we have rectified those issues and then some. I think the team has done a great job of not only looking at traditional media but also digital and social media, and you'll see our brands showing up in all those places, everywhere consumers are interacting with brands.

And my other clarification question was the other end of that. If more money is going to advertising and less from trade, as you've talked about, how much did the reduction in trade dollars aid your revenue growth in the current quarter?

No, I don't think it did. I don't think it had any impact. It's not trade spend at retail. What we've been talking about is flow allowances or warehousing allowances where inventory is going into warehouses or into retailers in advance of the demand.

Typically, in the first half of the year.

Our next question is from the line of Jaime Katz of Morningstar.

My first question is on the Preschool category and whether it was down partially from timing or if you guys are seeing any share shifts in the category. And then, I know that your nearest competitor has done a pretty decent push on the TV media aspect for their Preschool category. Are you guys doing anything like that? And can you maybe talk a little bit more about the media push that you guys are doing and how you're allocating those dollars?

Well, in fact, if you look both year-to-date, as well as in Q3, our PLAYSKOOL business is up as is our Play-Doh business, as is our PLAYSKOOL HEROES business. What we're looking at, to your point, is timing. It has a lot -- it has to do a lot with timing of Sesame Street's launch a year ago versus this year and what we were doing in the third quarter a year ago to set ourselves up. Remember, that was the first quarter where we had the new Sesame Street license, and so we were out at retail really developing that brand and putting it out at retail for the first time for Hasbro. And so as we look at trends between the POS trend year-to-date, which is up, as well as in the quarter, as well as the actual sales across a number of initiatives and new initiatives like PLAYSKOOL HEROES, as well as our new Koosh brand for preschoolers, we feel very good about our prospects in the Preschool business.

And then, the media part of it, are you guys -- can you talk about how you're spending those dollars?

Yes. So overall, our media spend is up in the U.S. and for the fourth quarter. And a lot of those media dollars will certainly go toward the Preschool category, so we're spending a healthy amount of media. We won't break out media by category. But as we've talked, overall, for the fourth quarter in the U.S., media spend will be up 30% to 40% versus a year ago. And certainly, given the momentum we have in a lot of our Preschool categories, we would expect to spend more there.

Our next question is from the line of Tim Conder of Wells Fargo.

Just a couple of clarifications to begin with. Number one, Transformers and Beyblade, I think you said that Beyblade was performing better than expectations as far as, if you want to call it the year-over-year burn down, and Transformers was in line with expectations. Just to make sure that we got that correct. And then also, on the channel inventories and action figures, can you talk to us as to where those are collectively and then, your POS, how that's trending as we're seeing it here, especially in the third -- as the third quarter wrapped up?

Yes. Beyblade, overall, is tracking above the typical burn-down rate, if you will, using your terminology, year after a phenomenal year. And Transformers is sort of on trend one -- with what one would expect. We think that as Transformers Prime, the TV series, kicks in around the world, we should perform well in Transformers as we move forward and feel good about the new innovations in the brand there. David, you want to talk about...

Yes, I think we said overall, the inventories were down about 22% at retail, which was 15.9% in Games or about 16% in Games and 39% or 40% in Games & Puzzles -- sorry, 15% and 16% in toy and about 38%, 39% in Games & Puzzles. So if you dig into the toy number a bit more, you're finding that the retail inventory on Boys is probably down about 30%, which is consistent with the fact that we had really big numbers on Transformers and Beyblade last year. And then, it's actually up in Girls, which is, again, where we've got a lot of momentum this year as we're shipping sort of things like Furby and One Direction and the new Furby and Pony items.

Okay. And then, just any comment how the POS in the action figures sort of wrapped up the quarter?

Yes, overall, the boys action figure POS is -- was down for the quarter but not down as much as inventory. And overall, again, it belies the fact to how well Marvel is really performing. We feel great about the Marvel business. We're just up against some big comps there. The other thing that was true, if you remember in 2011, as we all talked about it, we shipped a lot early on in Transformers, and the business didn't perform as well as what we probably wanted later in the year. So proportionately, more revenues went in earlier in the year. Conversely, this year, we have an opportunity because we have great performing movies in the Marvel movies and the great opportunity with the DVDs out in this fourth quarter and the holiday to ship revenues.

Okay. And then, one last question. As it relates to the North American improvement in operating profits for the year, I think you talked about it was better mix but also lower cost. Was there anything in the fourth quarter in particular last year as it related to North American division that you'll be lapping and that will help or something else incremental, again, that you've done and put in place in the North American segment that'll help in the fourth quarter?

In reorganizing our business late last year or early this year, we certainly are running the business differently than we have in years past, and we've talked about getting the U.S. business back to historical levels of operating profit. So the cost structure, the way we go to market and our approach should enable us to create sustainable higher levels of operating profit margin than year ago.

Our next question is from the line of James Hardiman of Longbow Research.

This is actually Phil Anderson standing in for James. Just looking at the SD&A line, you guys are still guiding 20% for the year. Given what you've reported in the 3 quarters so far, that maybe looks a little bit high. Just wondering if there's anything sort of one-off in fourth quarter that would cause that number to be up and if you could kind of just explain your updated thinking around the SD&A number.

Sure, Phil. Thanks for the question. Just to remind you, last year in the fourth quarter, we had an adjustment of about $30 million that hit, in large part, the SD&A line related to compensation adjustments. So as we sit and plan for this year, we would expect the compensation levels to be at 100% until we knew otherwise.

Okay, fair enough. And then, finally, just with all these new games you guys are introducing, it certainly sounds like those are off to a good start here. Just wondering, is there any risk that the growth of those new games comes with you having such a large market share in that game segment sort of some cannibalization occurring there as those brands grow?

Well, actually, what we've seen is both year-to-date and in the third quarter, our digital gaming revenues have grown. We have more digital games being created on top of new games initiatives. So we've talked about in prior years that where we have innovation in our basic game business and digital games they come -- that we don't see cannibalization. We actually see growth, the opportunity for people to try new games in all kinds of different formats and play those games differently in different formats. We think that a game like Words With Friends that on the face of it seems could be similar to other games is great because for the first time, we're adding elements to that game that's never existed before, the ability to play multiplayer, meaning 4 player. If you've ever played Words With Friends on your smartphone, you can only play with one other person. So we're adding this whole new benefit of being able to play with 4 people, which would also be added to the online gaming experience. So we're really building a great ecosystem of online great game play, plus off-line in many cases. And then another case is just great fun off-the-board gaming experiences like Twister with Twister Dance, which is off to a great start or Lazer Tag that uses your iPhone or iPod to create augmented reality as you play a much more enhanced Lazer Tag game. So we don't really see cannibalization as an issue. We've talked about the fact that some of our traditional, call it, one SKU Games business will continue -- the tail of the business to continue to decline over time, but that we have a lot of new gaming initiatives that are really innovative that are connected to digital that should enable us to stabilize the business's share and grow over time.

Our next question is from Greg Badishkanian with Citigroup.

You spoke about your movie lineup for next year. Just wondering, how does that compare with this year's lineup with Avengers and Spider-Man? And do you think there'll be any fatigue impact on Iron Man or Thor toy sales, just given you had Iron Man and then you had both of those over the last 2 years?

I think looking at the Boys business and as we look forward, the great part about 2013 is a number of known brands. And why I say that is both from an audience standpoint, as well as from a retailer standpoint globally, known brands are extremely helpful because retailers know exactly how to plan those and they know where the added excitement comes from new stories being told around those brands, new innovations that are coming from Hasbro and our partners around several of those brands. So we're very excited about the number of Marvel movies that come into theaters next year. Equally, having 2 Star Wars movies next year where people really understand what Star Wars is all about and the fact that they come during more of the height of seasonality in September and October should be quite good for us, and we kick off the year with G.I. Joe. So overall, lots of known brands that are very beneficial with new stories for both global audiences, as well as global retailers.

Do you think it will be equal to this year or less?

No, I'm not going to guide anywhere right now. I just would tell you that between the motion picture support and the number of new TV series that we have coming from Marvel Studios and Hulk support, Avengers support, Spider-Man support, as well as our own brands and Transformers and Kaijudo and as we look at all that in the Boys Action business, we feel very good about both the TV efforts, as well as the movie efforts and the innovation in the category.

Okay. And then just finally, as you talked to your retail customers over the last few months, has anything changed in terms of how they're approaching holiday this year in terms of whether -- their buying patterns or their expectations for overall toy sales in the fourth quarter?

Well, clearly, their buying patterns are later, and we recognized that last November when we first sort of said that our year was going to come later and we were going to work with our retailers to deliver more in line with consumer demand, particularly in the U.S. So we sort of foresaw that, and it's certainly happening. I think in terms of as we look at their expectations for retail, I think they're looking forward to a good year. Certainly, consumer demand has held up pretty well, and I think in September, retail sales did a little bit better than people were expecting. So I think they're sort of cautiously optimistic and their deference to buying later affected our inventory at retail. Being down sort of 22% at this time sort of confirms that.

Our last question is from the line of Gerrick Johnson of BMO Capital Markets.

Deb, we kind of blew past the gross margin discussion. Can we talk about perhaps moving components, moving parts there, price, cost savings and input costs, et cetera?

Sure, Gerrick. Well, as we talked about earlier this year, we did implement a price increase, mid-single digits globally on carryover products, so that's held. And as we've also talked about, we price -- we lock in our prices about 12 to 18 months in advance. So while commodities have continued to move around a bit in the quarter going up and then coming down and going up again, most recently, we're pretty much insulated from that because of when we lock in our costs with our vendors, and our pricing has held. From a gross margin standpoint, our gross margin, if you go back historically in the third quarter, is typically our lower quarter from a gross margin standpoint. But there was really nothing unusual. As a matter of fact, it was 56.4% in both years, and to the tenth of a percent difference was only because currency rates were so high last year, and we had some favorability in NPV. But it really wasn't meaningful. And overall for the full year, we continue to expect our gross margin to be at the 58-point-something percent range.

Okay. And board -- Games, I was hoping you could perhaps break out performance within Games, Wizards of the Coast, perhaps, board games and then the boys action segment, which I guess would be incremental. But how did board games specifically perform year-over-year in shipments, as well as Wizards of the Coast year-over-year?

Well, we have to look by brand. I think, overall, in the quarter, a brand like the new Monopoly coming out and getting off to a really good start, the Monopoly Millionaires, Battleship as kind of a classic board game was up significantly. Certainly, you're right, action battling is -- that whole category has been up for us. We've talked about the fact that the tail of the board game business, the one-off single-SKU games will continue to come down over some time and will be replaced by new innovations like Twister, new innovations in Monopoly and Lazer Tag. Certainly, Battleship is performing as action battling and then some new initiatives that come in the fourth quarter. So really, reinventing what it means to be a board game and also adding to that the Wizards of the Coast business, which has performed very well throughout the year, that's both Magic: The Gathering and Duel Masters. And then, the launch of Kaijudo, we're very positive on. It's early days, and we'll roll that out around the world.

Okay. I think I'll sneak in one more. In the Boys segment, it appears that role play is doing really well, much better than action figures. Brian, what do you think explains why we go in and we look at Avengers and we see the shields and the hammers gone but the action figures kind of still kind of there?

Well, I think that clearly, we're probably just replenishing the action figure business better than the shields in the role play business, and so we probably should get on that. We, for the holiday season, feel like we have performance that's coming in both places. And certainly, the role play business for many, many years back to the LIGHTSABER business has always been a classic play pattern within Boys Action. I think we've really struck a nerve with boys in the shields and the Hulk Hands and so many areas, including the Web Shooter. And we have a lot of new innovation in role play, as well as action figures for the holidays.

There are no further questions at this time. I would like to turn the floor back over to Ms. Hancock for closing comments.

Thank you, Rob. And thank you to everyone for joining the call today. The replay will be available on our website in approximately 2 hours. Additionally, management's prepared remarks will be posted on our website following this call. We look forward to speaking with you in the coming months. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.