Operator: Good morning, and welcome to the Hasbro Second Quarter 2013 Earnings Conference Call. At this time, all parties will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Today's 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.
Debbie Hancock - IR: Thank you, and good morning, everyone. Our second quarter earnings release was issued this morning and is available on our website. Additionally, presentation slides containing information covered in today's earnings release and call are also available on our site.
The press release and presentation include information regarding non-GAAP financial measures included in today's call. Please note that 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 financial results and discuss important factors impacting our performance. Following their prepared remarks, Brian and Deb will be happy to field your questions.
Before we begin, please note 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. These forward-looking statements may include comments concerning our product and entertainment plans, anticipated product performance, business opportunities, plans and strategies, costs, and cost savings initiatives, financial goals and expectations for our future financial performance.
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. 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?
Brian D. Goldner - President and CEO: Thank you, Debbie. Good morning, everyone, and thank you for joining us today. We are driving our global brand building efforts, across our brand blueprint, through toy and game innovation, digital media, licensing and entertainment, to deliver long-term profitable growth for Hasbro and our shareholders. While we are up against challenging comparisons in the Boys arena this year, we have seen growth in our other categories and believe that these efforts position Hasbro to successfully execute our strategy and leverage our brands and our strategic investments in both the near-term and in the years to come.
Our second quarter performance reflected the difficult comparisons in the Boys category, while at the same time highlighted areas of growth and opportunity for Hasbro. Second quarter revenues of $766 million declined 6%, while year-to-date revenues declined 2%. Second quarter operating profit, excluding charges, declined 11% reflecting the lower level of revenues in the quarter. However, year-to-date operating profit was up 3%, absent charges.
We are focusing on our most important initiatives, while right sizing our cost base and organization. This focus is having positive results. Five of our seven franchise brands grew and three of our four product categories were up, both in the second quarter and year-to-date. We have extraordinary people, doing outstanding brand building globally around these high priority initiatives. Geographically, our emerging market investments continue to pay off. In the second quarter these markets grew 24% behind gains in many countries including Russia, China and Brazil. Supported by our investment in innovation and a focus on our top initiatives revenues in our Girls and Games categories grew 43% and 19% respectively this quarter.
Preschool revenues gained 4% in the quarter. Content is clearly driving our brands. Our investment in Hasbro Studios is powering our franchise brands including MY LITTLE PONY, TRANSFORMERS and TRANSFORMERS RESCUE BOTS and most recently LITTLEST PET SHOP.
Our partner brands; MARVEL, STAR WARS, and SESAME STREET are also leveraging global entertainment to build franchises now and into the future. Supporting future growth in Games and the convergence of digital and analog play, we invested in our mobile gaming innovation portfolio with the recent acquisition of 70% of Backflip Studios. With established brands including DRAGONVALE and PAPER TOSS, Backflip has a track record of sustained performance including profitability; strong development capabilities; and games which address an end consumer similar to that of Hasbro brands.
We are really excited to begin working with Julian Farrior, Dale Thoms, and the great team in Boulder and look forward to developing great games on their brands and Hasbro brands. Additionally, we also recently signed a new multi-year agreement with EA that focuses on eight core Hasbro game brands for mobile gaming. Both of these steps ensure consumers can experience our brands anytime and anywhere.
Importantly over the next several years, we are headed into a period of significant Boys entertainment. We are developing comprehensive and innovative lines behind both film and television including Transformers 4 in 2014 and several Disney entertainment initiatives for MARVEL and STAR WARS in 2014, 2015 and beyond.
For the 2013 holiday season, we are well positioned with new initiatives across product categories and geographies. Retailers have shared their excitement with us for Hasbro's holiday offerings and we continue to partner closely to manage inventory and ensure the right amount of product is at retail at the right time. At the end of the second quarter, inventory at our top four U.S. retailers was of good quality and down versus last year.
As I mentioned, revenue in three of our four product categories Girls, Games and Preschool grew in the second quarter, marking three straight quarters of growth for both Girls and Games. Innovative and immersive brand experiences contribute to the continued strong growth in MY LITTLE PONY, MAGIC-THE GATHERING and PLAY-DOH as well as in a number of other brands, including FURBY, TWISTER, JENGA, and TRANSFORMERS RESCUE BOTS.
For the holidays, we are launching major new initiatives in each of these categories to continue their momentum. While I can’t touch on all of the initiatives across our brands, we hope you will join us in Providence on September 10th for our Investor Day, where we will talk in more detail about our brand initiatives. Today, I will highlight a few important fall initiatives and launches which should help continue the momentum in these categories.
For Girls, NERF REBELLE will be on shelf in the third quarter. We have been cultivating the NERF REBELLE brand for more than two years and have talked to thousands of girls about what they would expect from a sports action line. Retailers and girls alike are excited about this all new offering.
Additionally for Girls, we continue to leverage the globally popular MY LITTLE PONY Friendship is Magic television program with new products launching in markets around the world. We are also building on the momentum of MY LITTLE PONY with the launch of MY LITTLE PONY EQUESTRIA GIRLS, a new full-length feature film introducing a whole new dimension into the world of MY LITTLE PONY. The film launched at the LA Film Festival on June 16th. It then rolled out to over 250 theaters in the U.S. and Canada. Based on positive audience reaction, screen vision added more showings.
In mid-August, the MY LITTLE PONY EQUESTRIA GIRLS movie is planned to roll out in over 20 different countries and will be available on DVD. Additionally, it will air on The Hub Network on September 1. Product supporting the film will be on shelf beginning in August and is highlighted by a line of fashion dolls based on the characters in the film.
Also for Girls, following a tremendous launch in 2012, FURBY is rolling out in 12 languages and across all regions globally in 2013. This fall, we are unveiling FURBY BOOM in English speaking markets. Featuring all the magic and personality of its predecessor plus twice the content, the new FURBY BOOM creature combines physical and digital play.
Within Preschool, we have several new launches for our franchise and partner brands including BIG HUGS ELMO in SESAME STREET, innovative new technology in TRANSFORMERS RESCUE BOTS BEAM BOX, and new play sets featuring our all new PLAY-DOH PLUS compound.
Our Games launches will showcase new innovation and game play this fall. MONOPOLY EMPIRE, TWISTER DANCE RAVE, BOP-IT TETRIS and a new Preschool game, CHEEKY MONKEY, as well as the launch of our value game initiative which offers classic games at lower price points, are all delivering on compelling on and off-the-board game play.
Moving to Boys, as I mentioned, the category had difficult comparisons with 2012, which included two very strong MARVEL Entertainment initiatives; The Avengers and The Amazing Spider Man and higher sales of BEYBLADE.
As we look ahead to the next several years, we are developing and supporting significant Boys entertainment in both television and film distributed across all screens based on Hasbro and partner brands. In 2014, the fourth film in the TRANSFORMERS franchise is scheduled to be in theatres and, for future years, we continue to develop new Hasbro brands including STRETCH ARMSTRONG and MICRONAUTS with our studio partners.
MARVEL has several films planned for 2014, including Captain America The Winter Solider, The Amazing Spider-Man 2 and an all new franchise Guardians of the Galaxy and in 2015 the second Avengers film is anticipated. Importantly, Lucasfilm is unveiling all new STAR WARS television programming in 2014 and is scheduled to release STAR WARS Episode VII in 2015.
In the near term, for the 2013 holiday season, we have new Boys initiatives inspired by our extensive global consumer research including TRANSFORMERS CONSTRUCT-BOTS; an all new KRE-O initiative, KRE-O CITYVILLE INVASION featuring our new Sonic Motion Technology; and new NERF ELITE products including the NERF NSTRIKE ELITE MEGA Series.
Over the past several years, we have invested in developing Hasbro brands holistically across consumer groups, geographies and immersive experiences. Our efforts are enabling us to build a more robust and diverse portfolio around our brands.
Instrumental in accomplishing this has been the development of all elements of our brand blueprint; toy and game innovation; digital media; lifestyle licensing and immersive entertainment experiences.
Innovation and new technology development is central to this strategy and increasingly the integration of digital and analog play is an essential element of these efforts. FURBY, MAGIC-THE GATHERING and even MONOPOLY are effectively delivering against the promise of integrated play.
Last week we elevated our efforts in this space with the unveiling of TELEPODS, an all new mobile gaming platform. TELEPODS uses innovative new technology to allow kids to play in two ways; in the physical space and through full and unprecedented integration into top-tier mobile apps. The TELEPODS play experience will first be available in a line released this August based on and fully integrated into the highly anticipated new game app ANGRY BIRDS STAR WARS II, from Rovio Entertainment and Lucasfilm. We are very excited by the potential of this platform in the mobile space and will expand the TELEPODS experience to other Hasbro categories and brands.
We have also continued developing our brand blueprint by expanding our digital gaming capabilities through a majority investment in Backflip Studios. The addition of in-house digital gaming capabilities allows us to more fully participate in the value being created by our brands digitally. Our expectation is that the addition of Backflip will be neutral to slightly accretive to our financial results in 2013.
We also continue to have tremendous partnerships in the broader digital gaming space with EA, Activision, Gameloft, DeNA and others. Through the combination of in-house and partner resources, Hasbro brands are being developed across all gaming platforms for markets around the world so that consumers can play our brands anytime and anywhere.
Moving to immersive entertainment experiences within our brand blueprint, our television strategy is enabling us to reach audiences across all screens globally. Hasbro Studios has received 7 Daytime Emmy Awards for its programming, which can be experienced in over 170 markets around the world on television, on all the major digital platforms and on DVD. Recent developments include; Transformers Prime now airing on national television in China after an almost 30 year absence and we have begun to roll out LITTLEST PET SHOP internationally – where it is now airing in the U.S., Canada, U.K. and France with distribution planned in all regions by year-end. MY LITTLE PONY Friendship is Magic, Transformers Prime Beast Hunters, RESCUE BOTS, and Pound Puppies remain highly rated shows globally.
Another element of our global television strategy is our joint ownership of The Hub Network in the U.S, which continues to make significant year-to-year strides with kids and adults. The second quarter represented the seventh consecutive quarter of growth among its key demographics. In June, the Hub Network received 7 Daytime Emmy Awards – tying for the most awards among kids networks.
The Hub Network is well-positioned for success with distribution now in over 72 million homes, quality, award winning programming and a recent decision to further connect its advertising efforts with the reach and expertise of Discovery Communications. The network now has a plan to achieve pre-tax profitability in 2014. When you combine our Hasbro branded entertainment with that of our partners for both television and film, we have a tremendous entertainment slate planned for several years to come.
In closing, while we are slightly more than half way through the calendar year, most of our selling year is still to come. We are entering the important second half of the year and holiday season in a good position, with new innovation across categories, which is supported by global integrated marketing campaigns and a strong presence and partnership with our retailers.
Over the longer-term, we remain strategically committed to executing against our brand blueprint as we work to unlock the full potential of our brands globally and drive the long-term profitable growth of Hasbro.
Now, I would like to turn the call over to Deb.
Deborah M. Thomas - SVP and CFO: Good morning everyone. While our investments in innovation are reflected in the second quarter growth of our Girls, Games, and Preschool categories, this growth was not sufficient to offset the difficult comparison in the Boys category that Brian spoke to. We are however in a strong financial position and have innovative brand initiatives across categories and geographies as we enter the important second half of the year.
We remain focused on profitably growing our business over the longer-term through the successful execution of our brand blueprint. This focus is evident in our performance so far this year. Specifically; operating profit is up 3% year-to-date, excluding restructuring charges, despite a 2% decline in revenues over the same period. Our cost savings initiative and savings targets remain on track.
Our cash flow and balance sheet are strong. We generated $632 million of operating cash flow over the past 12 months and we ended the quarter with more cash and lower inventories than a year ago. We continue to strategically invest in our business. Early in the third quarter, we acquired a majority interest in the successful, innovative, and profitable Backflip Studios thereby expanding our capabilities and participation in digital gaming, one of the key elements of our global brand blueprint.
In both the U.S. & Canada and International segments, the Games, Girls, and Preschool categories grew in the quarter. Globally, this growth was 43%, 19% and 4% respectively. This growth, however, did not offset the decline in Boys revenues, globally or in either segment.
Additionally, in the second quarter of last year we entered into a multi-year streaming distribution deal for Hasbro Studios television programming. As we said at that time, this revenue and related operating profit will continue to be part of our programming sales mix but it is lumpy and inconsistent by quarter. This made for difficult comparisons in the Entertainment & Licensing segment on both the top and bottom line in the second quarter.
As a result of both items, second quarter revenues declined 6% and operating profit, excluding $2.5 million of pre-tax partial pension settlement charges, declined 11%. The $2.5 million of pre-tax partial pension settlement charges are associated with our restructuring activities. Consistent with the potential $10 million pension settlement charge we discussed in the first quarter, we may have up to an incremental $8 million in additional pension settlement charges in the remainder of the year. The ultimate amount depends solely on whether or not participants request a lump sum payout.
We did not have any other additional restructuring charges in the second quarter, but continue to expect full year charges of $30 million to $35 million. We recorded $28.9 million of those charges in the first quarter.
Our full year savings target remains to generate gross savings in the range of $45 million to $48 million for the year and net savings of $13 million to $15 million for the full year before the pension charges. We continue to target $100 million of cost reductions by 2015.
The following review of the quarter excludes pension and restructuring charges. A full break down of these charges by segment and by line item on the income statement was included in today's earnings release and slide presentation.
Looking at our segment results for the quarter. The U.S. and Canada segment net revenues decreased 4%. As I mentioned, growth in the Games, Girls, and Preschool categories was more than offset by a decline in the Boys category.
The U.S. and Canada segment reported a 3% decline in operating profit, but an increase in operating profit margin to 15.2% from 15% last year. The margin improvement is primarily due to a favorable mix of revenues, including continued growth in MAGIC-THE GATHERING.
In the International segment, revenues declined 6%. Foreign exchange had a favorable $1.2 million or 0.3% impact on the quarter. Emerging markets continued to post good gains, growing 24% in the quarter. However, economic conditions and difficult comparisons, particularly in the Boys category in developed economies, more than offset growth in emerging markets.
As in the U.S. & Canada segment, the Games, Girls and Preschool categories all increased internationally, but did not offset the decline in the Boys category. International segment operating profit margin declined to 4.3% in 2013 compared to 8.3% in 2012. The margin decline reflected the lower revenue level and the timing of certain expenses in the quarter. The margin impact of the revenue decline in the International segment is greater in the first half of the year as overheads are generally incurred ratably throughout the year, while the majority of segment revenues and profits occur in the second half of the year.
The Entertainment and Licensing segment net revenues declined 18%, primarily on lower television programming revenues as we anniversary the multi-year streaming agreement signed in the second quarter of 2012. As a result, operating profit in the segment declined 55% on the lower revenues.
Looking at our overall expenses, cost of sales as a percentage of revenue increased in the quarter. This increase reflected lower sales of entertainment-based products, such as MARVEL and BEYBLADE, which generally carry a higher gross margin. This increase was more than offset by a decline in royalties in the quarter.
Lower product development and advertising expense were partially offset by higher SD&A, which included higher compensation and depreciation. Excluding restructuring, SD&A is down slightly over the first six months from a year ago.
Before I move on in the quarter review, I wanted to speak briefly about the impact of the acquisition of Backflip on our financials. As Brian mentioned, for 2013 we anticipate it to be neutral to adding at most a few cents to EPS.
Beginning in the third quarter, we will be consolidating the results of Backflip into our P&L. From a segment standpoint, 100% of Backflip's revenue and expenses will be in the Entertainment & Licensing segment. In respect to product categories, we anticipate Backflip revenues will be classified in Games, similar to our other digital gaming revenues.
On our P&L, there will be an adjustment made after net income to reflect net income and earnings per share attributable to Hasbro, Inc. and net income attributable to the 30% non-controlling interest share in Backflip.
Overall the impact to our individual expense line items is expected to be immaterial. However, intangible amortization will increase. We are performing a more thorough valuation with respect to intangibles and their amortization, and will be in a better position to discuss this impact prior to our third quarter earnings announcement.
Turning back to our quarterly results, below operating profit for the second quarter, total non-operating expense decreased $3.6 million. For the second quarter 2013, our 50% share in the Hub Network was a gain of $131,000 compared to a loss of $2.4 million a year ago. As we stated previously, we expect the contribution from the Hub Network in 2013 to be similar to 2012, and as Brian stated the Hub Network has a plan to achieve pre-tax profitability in 2014.
Our underlying tax rate for the second quarter 2013 was 27.4% compared to an underlying tax rate of 26.8% in the second quarter 2012 and 27% for the full year 2012. The slightly higher rate reflects a higher mix of profits from the U.S. and Canada segment. We expect our underlying rate for the full year 2013 to be approximately 26.5% to 27%.
For the quarter, average diluted shares were 132 million compared to 132.1 million shares last year. Diluted earnings per share, absent pension charges, were $0.29 versus $0.33 in 2012.
Now let's turn to the balance sheet. Our business continues to generate strong cash flows from operations. During the quarter, we generated $298.1 million of operating cash flow. For the trailing 12 months, operating cash flow was $632.2 million. At quarter end, cash totaled $1 billion, up $242.4 million from 2012. After strategic investments in our business, we've continued to return cash to our shareholders through our dividend and buyback programs. Our next dividend payment is scheduled for August 15th.
During the second quarter 2013, we repurchased approximately 771,000 shares of common stock at a total cost of $35.4 million and at an average price of $45.84 per share. At quarter end, the Company had repurchased total of 1.29 million shares of common stock year-to-date and $71.8 million remained available in the current share repurchase authorization. Early in the third quarter, we paid $112 million for the acquisition of 70% of Backflip Studios. This acquisition was funded through short-term borrowings.
Receivables at quarter end were down 2% or $11 million, and DSOs were 75 days versus 72 days last year. The increase in DSO is primarily due to the growth in our markets with longer payment terms, such as Brazil, as well as receivables arising from the placement of our television programming outside of the Hub Network. The quality of our receivables remains strong.
Inventories declined $56.9 million versus last year. Inventories declined in the U.S., Canada and Europe but increased, albeit to a lesser extent, in emerging markets and at our Wizards of the Coast subsidiary supporting growth in those businesses. Overall, at Hasbro and at retail, our inventory remains of good quality.
The focus of our team remains on delivering profitable long-term growth, while driving innovation across our key brand initiatives and successfully executing our multi-year cost savings initiative.
In the second half of 2013, we are supporting our innovative product offerings with strong, integrated marketing campaigns globally, while executing our global brand blueprint for long-term growth in the business.
I would now like to turn the call back to Brian.
Brian D. Goldner - President and CEO: Thank you Deb. Before we open the call to questions I want to take a minute and highlight another announcement we made this morning. After years of successful partnership with Disney, MARVEL, and Lucasfilm, we are pleased to have expanded our relationship with Disney for these great brand franchises.
Now through 2020, we have the rights to develop toys and games for both the MARVEL and STAR WARS franchises including all television and film content during that period. We are very excited about entering the next stage of our relationship with Disney as we collaborate on amazing play experiences for kids and fans around the world.
Now, Deb and I are happy to take your questions.
Operator: Sean McGowan, Needham & Company.
Sean McGowan - Needham & Company.: I have a couple of quick questions one of which is very quick. Why is some back lifting accounted for – payment of licensing where like all the other games would be?
Brian D. Goldner - President and CEO: It's a part of our digital gaming business and so it'll align there.
Sean McGowan - Needham & Company.: Just to match it up with the others. I know you are not going to give us the rate, but can you comment on these extensions for STAR WARS and MARVEL whether the royalty rates underlying these extensions are comparable to what's already in place?
Brian D. Goldner - President and CEO: Yes. The royalty rates are comparable to what's already in place and the deal as an amendment was structured very similarly the way we had done our deal more recently on the MARVEL business. This expands our rights and begins to align our advances and guarantees with additional entertainment that's now contemplated by the Walt Disney Company for both these STAR WARS and MARVEL brands.
Sean McGowan - Needham & Company.: Any comment, Brian, on point-of-sale movement for Hasbro brands?
Brian D. Goldner - President and CEO: Year-to-date we feel good about where we are, particularly growth in our Games and Girls business, Preschools just below flat. The Boys business is really where the decline is in (PLS), that's true both domestically and internationally. Again as we indicate, we are really cycling through some very big numbers in comparatives versus a year ago. So as we go forward with the raft of entertainment that we have and our partners have in the Boys arena plus the growth in the other three product categories as well as five of our seven franchise brands we feel very comfortable with the current position we have.
Sean McGowan - Needham & Company.: With regard to Boys, can you comment on the point-of-sale movement versus the sell-in year-to-date?
Brian D. Goldner - President and CEO: We look at Boys; they are pretty similar. In terms of sell-in versus POS very similar.
Sean McGowan - Needham & Company.: And then final question, you have given us help in recent quarters on the magnitude of the increase in MAGIC any help there at this time?
Brian D. Goldner - President and CEO: The great news about our GAMES business is certainly that MAGIC has continued to grow at double digits but the rest of our GAMES business, excluding MAGIC has also grown at double digit. In fact, if you recall those charge that we talked about back at our February Analyst Meeting, we're seeing growth across a lot of those components, in fact, mostly all through the quarter and year-to-date all those different components are growing. So, again, I think the team is doing a great job of bringing innovation back to our business in the Games business, and that's true in the U.S., where we have a more technologically savvy consumer, as well as internationally.
Operator: Stephanie Wissink, Piper Jaffray.
Stephanie Wissink - Piper Jaffray: A two really quick ones for ask. The first, Deb, if you could just talk about the International business, in particular, any signs of improvement during inspection, in either Asia or Europe as you look into the back half? Then secondly, just looking at the Boys business, I think, a follow-up to Sean's question, how should we think about the comparisons over the next two quarters, and is there any of the 2014 product that will actually fall into this 2013 year as you prepare for some of those movie events?
Brian D. Goldner - President and CEO: Well, for the second half, we have a number of new Boys initiatives that hit across a number of our brands, whether it's in NERF with the Mega Elite across the MARVEL business with the number of new additions in TRANSFORMERS, our brand new major segment call CONSTRUCT-BOTS and we're seeing in Preschool Boys with TRANSFORMERS RESCUE BOTS. So, we see both entertainment support and television in the fall, as well as a number of our innovative platforms launching. So, we feel again like, obviously, second quarter was our most considerable comparison versus 2012, but it will remain a more challenging year as we go forward in 2014. Obviously, we line-up strength-on-strength both Hasbro Boys brand, as well as our partner brands in '14, '15 and beyond. Again if you look at the regions, you see that really the POS is comparable to the POS I just cited with Boys really being the strongest negative comparison to year ago and we feel again good longer term about our Boys business given the rest of entertainment both television as well as film coming in the both near and long-term. We also feel good about the growth of our business in Girls and Games and Preschool. We're also seeing great growth in the emerging markets, up double digits 24% in the emerging markets. And we are gaining share in markets like Brazil. If you look at our POS internationally where we do get we do get POS, we're up in about half of the countries where we get POS in the second quarter. So, we get POS data outside the U.S. in six countries, we're up in half of those.
Operator: Michael Kelter, Goldman Sachs.
Michael Kelter - Goldman Sachs: Hi, I wanted to ask about SG&A for the quarter which came in at $195 million. We're essentially in line with each of the last two years second quarters. Why are we not seeing lower SG&A at this point given all the layoffs this past spring?
Deborah M. Thomas - SVP and CFO: I think as you look at in – we try to point out in the release, SG&A was impacted this quarter by the pension charge. So when you back that out in the second quarter we – as the time that we tend to incur any stock-based compensation expense because that's when it's granted by our Board. So, what you are really seeing with your comparison to the second quarter is an increasing compensation expense as well as depreciation from our capital assets. Now, they are not big numbers in their total but they just happen to impact the second quarter. If you actually look at SG&A on a year-to-date basis and back-out the restructuring charges year-on-year you will see that SG&A is down as a percent of revenue.
Michael Kelter - Goldman Sachs: And then maybe more broadly when all of the changes are implemented in restructuring the organization can you talk about 100 million of savings. How much of that's actually going to flow through to the bottom line versus being offset by investments. Meaning what might SG&A look like in absolute dollars, let's say, two years from now when you've implemented everything and this may all goes to plan?
Brian D. Goldner - President and CEO: Michael, for the full year 2013 we've already identified nearly half of that $100 million run rate and we've identified going into 2014 and '15 the additional savings that we would anticipate and are targeting by '15 $100 million in production. Deb, you want to talk about the underlying?
Deborah M. Thomas - SVP and CFO: We've always said that there will be some element of inflation in the cost but to say we will take out $100 million in savings not all of it will be in SG&A and we highlighted in February the line items that we expected that would come out from. But we remain on target for $100 million of cost savings by 2015.
Michael Kelter - Goldman Sachs: Follow-up on the question earlier make sure that we understand the renegotiated MARVEL deal. Just maybe if you over simplify it for us why did you have to give them another $225 million?
Brian D. Goldner - President and CEO: All that would be the maximum we would provide over the contract and that has to do with the fact that Disney is, of course, lining up far more entertainment than was originally contemplated as part of our relationship. So, as you have seen the Walt Disney Company gear up around STAR WARS began to talk about the major entertainment initiatives and movies, as well as television. The MARVEL extensions, which goes for another two years, and the additional entertainment that MARVEL is now planning, all of those things line up well for us. Again, the way it gets paid is as those entertainment initiatives are launched – and as those entertainment initiatives are launched then we would have advances paid around each of those new movies and again the 225 is a minimum payment based on the amount of entertainment that is anticipated.
Michael Kelter - Goldman Sachs: Then one last quick one. Any progress in our marketing any of your overseas cash?
Deborah M. Thomas - SVP and CFO: Well, we continue to look at the best ways is for investing in the business. As we pointed out, our investments in emerging markets have been paying off and we saw that with the growth this quarter again. So, we believe that we're providing the most effective use of our cash and we continue to look at the most cost effective ways to use that cash to grow the business.
Operator: Michael Swartz, SunTrust Robinson Humphrey.
Michael Swartz - SunTrust Robinson Humphrey: Just a quick question on the Boys business. I mean, is there anything fundamentally that you're seeing, hearing from retailers just on maybe their appetite for this whole entertainment driven phenomenon and then maybe getting away from that?
Brian D. Goldner - President and CEO: No. In fact, the Boys business and the Boys industry or category historically has been one of the most demand elastic categories that exist in the toy industry. So, in fact, when you have entertainment and major initiatives and entertainment be it television online, all screens or theatrical across all screens, in fact you can drive significant business. It just so happens that in second quarter of 2013 up against '12 we have three major Boys areas that are down versus a year ago, which makes for a challenging comparison. But again if you think about the ability of entertainment to build brand affinity, to build retail purchases across the shopping basket and the fact that many of these entertainment initiatives comes during the second and third quarter, so prior the holiday season that's all very important to retailers globally. Then if you add to that the fact that one of the biggest areas of growth for the motion picture business or the emerging markets and the number of multiplexes that are being built there and the amount of consumers and audiences going to movies there. In fact it pertains good things for the Boys entertainment globally and it's certainly something that we look forward to both as we plays hard television and our partner's plays television as well as movies around the world.
Michael Kelter - Goldman Sachs: Am I right in saying that for the year the Avengers franchise, was most of that shipped in second quarter?
Brian D. Goldner - President and CEO: Most of our Boys brands and I won't speak specifically about Avengers, but in general there is a significant proportion of ship-in and then as sell through occurs we continue to ship product through the third and fourth quarters of the year and because we also add new items and initiatives for the holiday season and new price points. So I would say proportionally there is a proportion, certainly a significant proportion that happens in the second quarter, but then you continue to ship products throughout the remainder of the year.
Operator: Gerrick Johnson, BMO.
Gerrick Johnson - BMO: Emerging markets can you tell us what that revenue base is?
Brian D. Goldner - President and CEO: Well, at the end of 2012 we said it was $461 million.
Gerrick Johnson - BMO: And were there any gross savings in the quarter from restructuring and in the six months of the year?
Deborah M. Thomas - SVP and CFO: Well, we said that we remain on track for the full year for the gross savings of 45 million to 48 million. I don't think we've gone through and disclosed how much we have by quarter.
Gerrick Johnson - BMO: And on the minimum guarantees what are the unamortized amounts you still have on the books for each of those properties MARVEL and Lucas?
Brian D. Goldner - President and CEO: Zero.
Gerrick Johnson - BMO: Okay. Does that include or exclude the $50 million that will be paid this month?
Deborah M. Thomas - SVP and CFO: That's correct.
Gerrick Johnson - BMO: And then on Games, can you give us a breakdown between trading card games, traditional board games and Boys action gaming?
Brian D. Goldner - President and CEO: What I will do because again if you look across the business games, excluding Wizards of the Coast was up. And across the major segments of our business we talked about MONOPOLY growing. Our gaming Mega brands grew, our core 20 grew. So, I'd say most of the major segments. In fact almost all of the major segments grew in the second quarter and year-to-date every major segment of our Games business is growing.
Gerrick Johnson - BMO: Maybe one easy one here. What is expected (indiscernible) of some of the Hasbro related movie events; Candy Land which I haven't heard much on those. Stretch Armstrong and anything else that maybe coming in the next couple of years?
Brian D. Goldner - President and CEO: They continue to be in-development. We have scripts in the works as well as directors in some cases attached and we feel that over the next couple of years we will have the opportunity to launch new Boys brands some of those will be launch in movies, some of those will be launched by a television, some of those will be launched in new and innovative, additional – new and innovative ways and across platforms. So, our intention is to selectively and strategically launch new Boys properties over time. We're also equally happy about and I'm looking forward to launching some of the new initiatives from some of our partners. We've seen the beginnings of Guardians of the Galaxy and very excited about what that portends for MARVEL, as a new brand for them.
Gerrick Johnson - BMO: So, other than TRANSFORMERS 4, which is next June I guess, STRETCH ARMSTRONG is that the only one we have a hard date for?
Brian D. Goldner - President and CEO: Yeah, we do and the others are in development, and we continue to work with Bad Robot and Paramount on Micronauts and we are working on a script right now and the other projects sort of similar state. So, that's just the nature of making movies if you remember, we started, you may not know this, but it took us almost five years to get the first TRANSFORMERS into theaters and the time we began working on it and that's the nature of making sure you have great characters and great story telling first and foremost.
Operator: Felicia Hendrix, Barclays.
Felicia Hendrix - Barclays Capital: Brian, on BEYBLADE, when do you see the client anniversarying?
Brian D. Goldner - President and CEO: The biggest – recall, and this has to do with some of our results in the quarter relative to Europe versus rest of the world. BEYBLADE was more developed in Europe as it was back the first time it was launched and it was this time as well. We launched a brand new initiative around BEYBLADE called Bay Warriors, this fall has all new television. So we are exploiting some new television entertainment support and new innovation in the toy line that we didn't have the first time around and we would believe that, that should mitigate some of the comparisons as we go forward into the third and fourth quarter. But BEYBLADE throughout this year will continue to be a negative comparative throughout the rest of the year.
Felicia Hendrix - Barclays Capital: You got to my second point just if you are seeing any traction from other spin-offs and how is BeyWheelz doing?
Brian D. Goldner - President and CEO: BeyWheelz has done well. Again, as it's launching, most of the new initiatives for BEYBLADE's will come in the third and fourth quarter and the major initiative this year is this BeyWarriors product line up. We're very excited about that. It has all new entertainment attached and we're getting placement around the world for that programming with our partners and the products look great.
Felicia Hendrix - Barclays Capital: Deb, on the gross margin side they were lower than expected, but I am assuming that was driven by probably the decline in Boys, but I would have thought it would have been somewhat offset by the increase in games and puzzles. So, I was just wondering if you could talk to us a little bit about what drove the gross margins lower year-over-year and relative to expectations.
Deborah M. Thomas - SVP and CFO: I think you actually hit it Felicia and what we are seeing is if we look at from a percentage of revenue standpoint, you typically get a higher or lower cost of sales as a percent of revenue when you have a lot of the entertainment, Boys' entertainment property. So when you have the MARVEL and BEYBLADE it was a lower cost of sales percent of revenue, but a higher royalty percent. So, if you look at the two of those together, the decline in our royalties as a percent of revenue is actually greater than the increase in cost of sales as a percent of revenue .
Felicia Hendrix - Barclays Capital: Then did I hear you say that SD&A was going to be up in the next two years?
Brian D. Goldner - President and CEO: No.
Felicia Hendrix - Barclays Capital: No, okay. Then just Brian, maybe you could discuss just the view of mobile gaming and the magnitude that could have on your P&L going forward as you are seeming to kind of get involved this more initiative?
Brian D. Goldner - President and CEO: Well, clearly as we've done extensive consumer insight work and anybody you has a young person in their house can tell you, particularly in developed economies. Kids are increasingly and rapidly gravitating towards mobile gaming. So, we really feel that we are lining up to go after the engine of this train, and the engine is in mobile gaming and out of home gaming. So the combination of the 70% acquisition of Backflip Studios, our partnership with Backflip in executing games and I'll tell you that Blackflip has millions of monthly active users already playing their games. So, therefore we see this is a great avenue not only for their current raft of games but the development of new games. Then the connection between mobile gaming and integrated play opportunities between our brands, we are doing this on MAGIC-THE GATHERING, we are doing this today on MONOPOLY, we are doing this today on FURBY and other brands you will see as we go forward. Then the addition of new platforms like TELEPODS, which is an all new mobile gaming platform which has both an analog play element as well as the mobile gaming play element. It's really great frame and we are very pleased to hear the early responses from media as well as from consumer research that we've done and that will launch in August and rollout in line with some of the new apps that are coming out from our partners at Rovio and Lucasfilm. Then lastly, but equally importantly, we have some great partnerships with mobile gaming companies which will continue with EA. We are partnered on our eight core brands around their initiatives. Then we have (DNA) on certain brands and Gameloft on our MY LITTLE PONY and LITTLEST PET SHOP brands. So, we really feel that the sweet spot for gaming, particularly for young people is mobile gaming, and we see a great opportunity continue to build revenues and earnings around this and across gross margins that are accretive to our underlying toy and game gross margins.
Operator: Gregory Badishkanian, Citigroup.
Gregory Badishkanian - Citigroup: Just two questions related to Boys. You mentioned that this quarter tough compares, I think, last year sales for Boys in the second quarter was down about 15.5%. I think you had some pretty decent movies, so I do understand tough comparisons. But can you just kind of walk us through the components and then as a kind of a second question to that and you may have mentioned it already I may have missed it, but if you exclude movie related toy sales from the second quarter of 2013 and in second quarter of 2012 what would overall company sales have been versus the reported negative 6% would that difference pushed you into the positive category or not?
Brian D. Goldner - President and CEO: Well, let me try to answer the second part of your question a different way from numbers that we have reported because again that breakdown is something that we've not reported and probably not the right way to think about things. But clearly, if you look in the quarter, you see the growth in three of our four product segments and you see significant growth in Girls and double-digit growth in Games, and then growth in our Preschool business. You also see growth of five of our seven Franchise Brands, in fact Franchise Brand growth was up double-digits in the quarter and double-digits year-to-date. So, what we said as our objective is in fact happening. The two brands that didn't grow in the quarter, TRANSFORMERS was just down a bit and then LITTLEST PET SHOP, as you know is in the process of a reinvention around entertainment that's rolling out throughout the year, particularly in the third and fourth quarter and all the innovation in the product line. So long-term our focus on franchised brands and growth there is particularly hardening. We're on track for our objectives in that area. If you look at Games we go from strength-to-strength and our teams have done a great job in bringing innovation back to the Games business across a number of different segments, in fact as we said year-to-date all of the gaming segments as we have broken it out for you in our recent analyst meetings are up and we would continue to drive in gaming across those segments. And add to that our efforts in mobile gaming, I think you are seeing us really activate our brand blueprint around our franchise brands, around gaming and Girls and then is Preschool we've got a number of sweet spots there where we've really developed a unique positioning and added product innovation with PLAY-DOH this year with a whole new compound and PLAY-DOH Plus, TRANSFORMERS RESCUE BOTS bringing character play to that younger consumer in a way that moms can really buy-in has been quite fantastic for us and we are seeing that roll out around the world. So again, it really comes down to comparisons versus year ago. There were three major initiatives a year ago that were driving our Boys' business, BEYBLADE and then movie related entertainment initiatives. As we go forward I think we've highlighted for you a superior level of entertainment that will come both from Hasbro brands as well as partner brands in 2013, fall and certainly into '14, '15, and beyond.
Gregory Badishkanian - Citigroup: I understand that movie related properties are going to drive strength in 2014, '15, think everyone knows that. I am just trying to understand your core business if you excluded movie related events which can be very volatile year-to-year in the quarter would you have seen growth if you just – if you excluded that or not. I know you've walked through some other things, but I…?
Brian D. Goldner - President and CEO: Yeah, I'd reassure that if you look at our core business, excluding boys or the movie related boys brands we would have been up.
Operator: Eric Handler, MKM Partners.
Eric Handler - MKM Partners: Quick question on the mobile side. I thought it was interesting that the same week you made your investment in Backflip, you also renewed your contract with EA. I'm just curious, what's going into your decision in terms of making with Backflip versus licensing out with EA. I would imagine the cost analysis of sort of taking in the license that you have from EA why not just make those games on your own?
Brian D. Goldner - President and CEO: If you think about it, it's much more of long-term strategy that we have around gaming, particularly around mobile gaming. As we said to you number of years ago we wanted to build the expertise in-house and we've now done that. Mark Blecher and his team have done a fantastic job in mobile gaming and embedding our teams with the best in the business across a number of partnerships be it the EA, in mobile or Activision, (DNA), Gameloft and other companies and really understanding the trends that are out there in the industry the way that industry players understand the trends. As we began our conversation with Backflip, they have a tremendous management team and they built new brands within these new brands within this industry and have millions of monthly active users. We really saw a joint opportunity to not only work on known Hasbro brands, but introduce new brands together using this mobile gaming to integrated play model. So, we had an original deal with EA that went out, it was a six plus four year deal. So, this is the renewal for the four additional years and we felt very good that EA would continue to handle those eight core brands, that's really where their focus is, and that enables us to work on all the other brands of the company.
Operator: Jaime Katz, Morningstar.
Jaime Katz - Morningstar: Can you guys talk a little bit about developed markets overseas. You made it sound like they were pretty weak. Have you thought about marketing any differently to them or how are you positioning the brands, I guess, for the holiday season this year?
Brian D. Goldner - President and CEO: If you look at the markets, there is differences by market. Within Europe, you have Eastern Europe, including Russia and Poland and other countries that are particularly strong, clearly, as you look at France and U.K. a little bit weaker, and we would expect that as the economic environment changes, as well as we add our third and fourth quarter initiatives, we would see changes there. As I said, where we have POS data in the six international markets, we're up in three of those that includes two European countries, where we're up in Germany and Spain. So, we are beginning to see the turnaround in Spain that we'd hope for and also plan for. We are seeing good strength in a number of markets in Latin America with Brazil's growth in growth and market share, POS growth in Mexico. So again, I think that you have a couple of that Continental European markets there that are more challenging, Australia within Asia has been more challenging, the economic environment there has been more challenging, And again, as we get beyond some of these comparisons in Boys', the categories like Girls', Games and Preschool are up there consistent with our overall results. So as we add new Boys' initiatives in the third and fourth quarter this year and then longer term new Boys' entertainment in the form of TV and film as well as online content, we expect that along with economic turnarounds in those economies, we should see better things.
Jaime Katz - Morningstar: Then are you guys perceiving the commitment from retailers for the holiday season as better or worse equal than last year or is it still kind of like the visibility is difficult to interpret because they are ordering closer to the holiday season?
Brian D. Goldner - President and CEO: We have executed our plan to bring in inventory closer to consumer demand and see that with our inventory being down enables us to get new initiatives out and new inventories in the market in a timely fashion and times for the holidays. We're actually seeing great gains in our Girls business with retailers support with FURBY, NERF REBELLE, MY LITTLE PONY EQUESTRIA GIRLS, PLAY-DOH, ELEFUN & FRIENDS, BABY ALIVE and in Preschool we're seeing gains and also strong response from retailers in SESAME STREET as well coming back and was up for the quarter and is coming back. In Games, we're seeing some increases there, in terms of retailer commitments. So we have a pretty good sense of retailers and their commitments for the holiday they've been very happy with a lot of the new innovation and initiatives we're bringing to the market. And we are bringing some new platforms to the market that are quite literally upon game changers like TELEPODS where the whole new gaming platform that surround mobile gaming and again very excited retailers and partnerships that we are building globally.
Operator: Drew Crum, Stifel.
Drew Crum - Stifel: Deb, you guys have $432 million of debt coming due within the next 12 months. Can you comment on your plans with that outstanding balance?
Deborah M. Thomas - SVP and CFO: We are currently evaluating our alternatives for settling that debt. But I would say given the current interest rate environment, we currently would anticipate that we would refinance a portion if not all of that, but as we move closer to the due date, our plans will firm up and we will certainly let you know at that time.
Drew Crum - Stifel: And Brian, I didn't hear you talk about LITTLEST PET SHOP for the quarter. The ratings on the Hub have been quite strong. What is the timing on – or do you have products in the market today to support that or can you talk about the timing of new initiatives for LITTLEST PET SHOP?
Brian D. Goldner - President and CEO: Yeah, in fact I mentioned it in our prepared remarks and talked about it briefly, but let me sort of summarize. LITTLEST PET SHOP has performed very well on the hub it's among the most highly rated program on the hub. It's also among the most highly rated program that we are having and we are in about four, five countries beginning in English-speaking territories and rolling our way through the rest of the markets in third and fourth quarter. Brand new innovative product lines for this year as well all new innovation for 2014. The team is really getting some traction here and I think we'll have an opportunity to show you in September some of the new product for holiday season. Then by next February, I think you'll really see what we've done and modeled on MY LITTLE PONY is what we would tend to do on LITTLEST PET SHOP and that effort is beginning to roll out around the world.
Operator: Tim Conder, Wells Fargo.
Timothy Conder - Wells Fargo: Just a couple of clarifications. Deb, on the royalties, would there any payments or advances or true-ups done in the second quarter related to the new Disney agreement?
Deborah M. Thomas - SVP and CFO: No, there was nothing done in the second quarter.
Timothy Conder - Wells Fargo: Because it was just signed, okay. Then just to clarify on the cost savings, the 100 million, you're saying you're going to be at that run rate entering '15 or that will occur during the early part of '15?
Deborah M. Thomas - SVP and CFO: We said in '15. So, hopefully earlier in the year, but by the end of '15 we'll have identified for you $100 million of cost reductions.
Timothy Conder - Wells Fargo: Then Brian, just a follow-up on an earlier…
Brian D. Goldner - President and CEO: Tim, let me just clarify. So, what we said is, if you looked at 2015, we're saying at that point, but just as this year we've identified for you $45 to $48 worth of cost savings in 2013 and then a run rate toward a $100 million. So, by 2015, we're targeting the $100 million.
Timothy Conder - Wells Fargo: On – is it relates to Hasbro related additional properties and movies in that? Are you maybe – does it have to be on the big screen or could you run it through Hasbro Studios coupled with onlines and (indiscernible) and other types of things for some of the properties instead of maybe just ship packed a little bit, has there been any discussion internally about doing it?
Brian D. Goldner - President and CEO: I actually appreciate the question because in fact our brands – if you go online our brands are everywhere online in terms of digital shots, once you are producing television episodes that are 20 minutes long, you're able to have any number of shots and music videos and all kinds of online line entertainment we're seeing kids enjoying that entertainment online. We've produced now are – on our way to producing over 800 hours of programming. So that gives us an inordinate amount of online content. In addition, it gives us the opportunity to stream our content in partnerships around the world. So no, we are wedded to having to be in the movie business with additional properties. We look at movies as great if we can get the right story, highlighting the right characters, you saw us with a new innovative approach launching EQUESTRIA GIRLS this year with a limited run of an animated film in about 300 theaters followed by home entertainment followed by broadcast on the hub and other broadcasters around the world, which will be followed by streaming. So, that's a whole new innovative way to platform the launch of a property. So we really do adhere to the concept in an all screen strategy and to the fact that brands can be invented in any form and format and then driven across all of the different elements, all the different touch points that are important to consumers and audiences to build brand affinity. So we are agnostic about where we begin and where we end. We just have built the capabilities to create those experiences including digital gaming as an opportunity to create experiences around these brands and then to take that concept of integrated play and playing with our brands into entertainment and content. So, I do appreciate the question and certainly we are not (vetted) to only being in the movie business.
Operator: Thank you. I would turn the floor back over to management for any further or closing comments.
Debbie Hancock - IR: I'd like to thank 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 the call. I'd also like to mention that as Brian referenced in his call we will be hosting our Investor Day on September 10 in Providence. Registration details will be sent out this week, so we hope you can join us. Thank you everyone and have a great day.
Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.