Highlights From HAS's Q4 Conference Call: Strong Results, Several Catalysts for 2010-11

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February 8, 2010 12:04 PM EST

Hasbro, Inc. (NYSE: HAS) reports Q4 EPS of $1.09, versus the analyst estimate of $0.81. Revenue for the quarter was $1.38 billion, which compares to the estimate of $1.34 billion. Shares are up 13.54% today.

Highlights From HAS's Q4 Conference Call:

(CEO) Across our business, Hasbro employees came together to deliver our fifth consecutive year of revenue growth and our ninth consecutive year of EPS growth.
The results include the dilution from our television investments in our joint venture with Discovery Communications and the launch of Hasbro Studios.
Overall in 2009, the global economic environment did not improve significantly but it also did not deteriorate further.
There was a continued lower level of consumer spending and poor market conditions in countries like the U.K., Spain, and Mexico.
We further expanded Hasbro's presence in emerging markets through share gains in our key markets such as Brazil and China, growing our existing businesses and emerging Eastern European, Asian, and Latin American countries and establishing new offices in important geographies including Russia and Romania.
In the Entertainment arena, we partnered with Discovery Communications to form a new children's television network, The Hub, launching in the fall of this year. Simultaneously, we established Hasbro Studios to develop compelling programming based on Hasbro brands.
In Motion Pictures with more than 1.1 billion in box office revenue between Transformers and GI JOE and strong product sales in 2009, we are working with Paramount on Transformers III and GI JOE II. In addition, we're pleased to add Sony as a studio partner as we reached an agreement to develop risk and major motion picture.
In addition, we're pleased to add Sony as a studio partner as we reached an agreement to develop risk and major motion picture. For the full year, we grew key brands including Transformers, GI JOE, Nerf, The Littlest Pet shop, Play-Doh, TONKA and Magic: The Gathering. And we gained share in our major markets.
GI JOE recorded revenue in excess of $125 million and Nerf continued its growth increasing 25% driven by continued growth in the U.S. and the expansion of the brand internationally.
Both Coda and the Dream Town Rose Petal Cottage were not carried forward into the 2009 preschool line and we decided not to produce several products in the FURREAL FRIENDS line which created difficult year-over-year comparison.
In addition to Family Game Night, we grew our games business by remaining brands like CONNECT 4!, OPERATION, and BOP IT, and through the creation of our new card game product line. Our digital games business grew with partners EA, Activision and Glu Mobile. We also delivered a strong result with Magic: The Gathering trading card games.
We will continue to build on our core brand momentum globally with brands like Nerf and Littlest Pet Shop. In 2010, we'll continue to reinvent and drive our preschool business, we are very pleased Jerry Perez has joined us to lead these efforts as we take our PLAYSKOOL business to the next level and begin to develop Sesame Street product for launch in 2011.
In 2010, from partners Marvel and Disney Pixar, we have two major theatrical releases; Iron Man II and Toy Story III.
Also for 2011, Michael Bay and Paramount are working with us on Transformers III, expected to be released on July 1st, 2011, and we're excited about two new Marvel features, Thor, and Captain America: The First Avenger.
We're so pleased to Universal sees the same major potential in our brands as we do and Universal is investing in Battleship to make it a global summer tent pole release in 2012. Finally, as I mentioned earlier, together with Paramount, we're developing the sequel to GI JOE.
(CFO) For the full year 2009, worldwide net revenues of 4.07 billion grew 1% compared to 4.02 billion last year. Excluding the $65.2 million negative impact of foreign exchange, revenues were up 3% from 2008.
Operating profit improved for the year to a record 588.6 million. Operating profit as a percentage of revenue was 14.5%, a level Hasbro has not achieved since the mid-80s. This compares to 494.3 million or 12.3% of revenue last year.
Moving on to our segments: U.S. and Canada segment net revenues at $2.45 billion increased 2% compared with 2.41 billion last year.
U.S. and Canada operating profit for the year was $380.6 million compared to $283.2 million last year. Operating profit increased to 15.5% from 11.8% in 2008.
Net revenues in the International segment were $1.46 billion compared to 1.5 billion a year ago, a decrease of 3%. Absent a negative foreign exchange impact of 64.5 million, net revenues grew 2%.
The International segment reported operating profit of $162.2 million compared to 165.2 million last year. As a percent of revenue, operating profit was essentially flat at 11.1% versus 11% as we continue to invest in emerging markets.
The Entertainment and Licensing segment net revenues were 155 million compared to 107.9 million a year ago, an increase of 44%.This is primarily due to growth in Transformers and G.I. Joe, as our brands continue to expand outside of traditional toys and games and new categories, including lifestyle licensing and digital gaming.
The Entertainment and Licensing segment reported operating profit of $65.6 million compared to $51 million last year.
Moving to expenses, operating margin improved to 14.5% from 12.3% due to lower spending in research and development, advertising and SG&A.
Below the operating profit line, interest expense increased by 14.5 million to 61.6 million, primarily due to the new long term debt we issued related to our investment in a joint venture with Discovery.
Other income net totaled 2.7 million compared to an expense of 6.1 million a year ago. 2009 includes income of 3.9 million, representing a 50% share of earnings in the joint venture with Discovery.
Our underlying 2009 tax rate is 29% compared to our 2008 full year underlying tax rate of 32.8%.
Now let's turn to the Balance Sheet. At year-end, cash totaled $636 million compared to $630.4 million a year ago. In the last 12 months, we raised $425 million through debt offerings. We also made significant investments in our business including spending $300 million for our 50% investment in the joint venture with Discovery, $95 million to extend our agreements with Marvel and Lucas, and 25 million in royalty advances to the joint venture network.
Additionally, we returned cash to shareholders. During 2009 we spent $111.5 million through our dividend program and last week announced an increase in our quarterly dividend to $0.25 per common share, an increase of $0.05 per share or 25%. We also repurchased 3.2 million shares of common stock at a total cost of 91 million and an average price of $28.67 per share.
A couple of questions just on the JV and The Hub and the studio and that whole area, could you clarify what the dilution was in the quarter and Deb, did you say it was $0.12 for the year and I think we can do the math but if you could clarify what the dilution was in the quarter?(A)Certainly, Sean. It was $0.12 during the year and it was $0.04 in the quarter.
Okay. But I think you said in the other income line is actually income, that's because it's just, that's what shows up in there is just the JV? Was it in fact profitable in the fourth quarter?(A)That's correct. The JV was profitable in the fourth quarter.
Okay. A couple of other questions on that then. Is there any change in your outlook as to what you expect in terms of dilution I think you were saying like $0.25 a share for 2010, any change in that outlook and along those lines what more needs to be done for the studios and The Hub in terms of increased spending?(A)Good morning, Sean, yeah. Our guidance for 10 is 25 to $0.30 for 2010 for the...
Deb, you said you were satisfied with the board games, with the inventory at retail. Could you comment specifically on Board games, since that was the biggest area of increase and a lot of that seemed to be late, it's the category that does seem to be very concentrated in the fourth quarter. Are you satisfied with the level of inventory that you have at retail?(A)Yes, we are very satisfied. I think it is a category that's got momentum at the moment for us and we actually see that sales continuing throughout the year. We're going to be running the Family Game Night marketing programming for the full year in 2010. It really didn't start until later in the year in 2009 and as I said, at the moment, people, consumers seem to see that there's a real value in the board game business. And we're very happy with our inventories and we hopefully will see retail sales running ahead of a year ago for the first and second quarters.
Okay, thanks. Last question, then I'll hand it off is, when would you expect us to begin to see real operating leverage in that licensing segment? In other words, operating income growing faster than revenue?(A)Well, actually, I think in 2010, you will probably see us going backwards in the licensing segment revenues because there was so much revenue associated with licensing programs around Transformers and to a lesser extent G.I. Joe. I think the real leverage will start to come as all these incremental movies that Brian has talked about, Hasbro based movies particularly in 2012 and then also in the Entertainment and Licensing segment we have the television. So as we've said before, that will go from dilutive to accretive in 2011. So I think it's 11 but certainly 12 you're really going to see start to benefit.
Hi. Deb, can you just walk me through the amortization, Wizards of the Coast burned off. I'm assuming there was some amortization from the JV in the fourth quarter. Can you just walk us through what was in the 25 million?(A)Certainly, Felicia. Good morning. Well what we have in the amortization for the quarter is just our amortization on our normal product line. There isn't actually any amortization from the TV programming in there and we do have the tail end of Wizards of the Coast which is coming out of in 2000 and - which is coming off of our P&L in 2009. In addition to that, we had just some small adjustments to product lives of some of the assets we have on the books, so beyond that, t's just our normal amortization.