Debbie Hancock - VP, IR Brian Goldner - Chairman, President and CEO Deb Thomas - CFO.

Arpine Kocharyan - UBS Eric Handler - MKM Partners Felicia Hendrix - Barclays Stephanie Wissink - Piper Jaffray Jaime Katz - Morningstar Tim Conder - Wells Fargo Securities Gerrick Johnson - BMO Capital Markets Drew Crum - Stifel.

Presentation:.

Good morning and welcome to the Hasbro second quarter 2016 earnings conference call. At this time all parties will be in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad.

Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time I would like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead..

Thank you and good morning everyone, joining me this morning are Brian Goldner, Hasbro’s Chairman, President, and Chief Executive Officer; and Deb Thomas, Hasbro’s Chief Financial Officer. Today we will begin with Brian and Deb providing commentary on the company’s performance and then we will take your questions.

Our 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.

Please note that whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share.

Before we begin I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives, and similar matters.

There are many factors that could cause actual results or other events to differ materially from the anticipated results, or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on form 10-K, our most recent 10-Q, in today’s press release, and in our other public disclosures.

We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Brian Goldner.

Brian?.

THE GATHERING. Its popularity remains unmatched within the strategic trading card genre and we are successfully expanding global engagement and advancing the game into new formats including E-Sports and digital.. Within Partner Brands, STAR WARS and DISNEY PRINCESS and DISNEY’S FROZEN represented the largest increases in the quarter.

STAR WARS demand remains very strong. During the third quarter we will begin shipping product in support of the December release of ROGUE 1. However, the third quarter last year marked the initial shipments for new STAR WARS products. DISNEY PRINCESS and FROZEN lines are selling very well, both in fashion dolls and the small doll line.

We also have plans to launch two new properties this year, Elena of Avalor later this summer to support the new Disney animated series and Moana in the fourth quarter tied to the theatrical release.

The transition to our DISNEY PRINCESS dolls product has been smooth overall and we look forward to a second half of the year as retailers should have transitioned out of previous inventory.

This year we have several other great brands we are supporting including Yo-Kai Watch, which has been rolling out in markets globally and the upcoming Dream Works release of TROLLS. Our TROLLS product will begin to hit retail in August ahead of the November 4 premier. We have tremendous partnerships with great IP owners.

We approach each of these brands as if they were our own, committing to them the best talent, resources and innovative ideas in the industry. Looking ahead, we have positive momentum and a powerful line of brands and play experiences for the remainder of 2016 and clear line of sight to growth in future years.

We have made tremendous progress in advancing our strategic capabilities to execute brands around the blueprint, but continue to prioritize the further development of our skill set and our culture toward creating the world’s best play experiences.

Deb will speak in detail about our financial results, but we are very pleased with the strength of the first half of the year and remain focused on growing both revenues and profitability to enhance shareholder value over the long term. I’ll now turn the call over to Deb.

Deb?.

THE GATHERING, marketing, and higher compensation expense. Through the first half of the year, operating profit margin has improved to 10% from 8.6% last year. This gain is being driven by the strength of our brands, solid execution from our global teams, and continuous strategic investment to drive growth over the long term.

Turning to our results below operating profit for the quarter, other income was $6.1 million versus $2.3 million last year and reflected increase investment gains. The underlying tax rate was 26.1%, down from 27.1% last year and down slightly from 26.4% for the full year, 2015. Diluted earnings per share were $0.41, compared to $0.33 last year.

Our balance sheet remains strong. Cash totaled $924 million at quarter end. We generated $585 million in cash over the past 12 months. During the second quarter we returned $85.8 million to shareholders, $63.9 million in dividends, and $21.9 million in share repurchases.

Receivables at quarter end were down slightly and DSO’s increased eight eights to 72 days. Absent the impact of foreign exchange, receivables increased approximately 3% versus the 12% revenue growth absent FX.

The decline in DSOs was driven by the timing of revenue and collections in the quarter, as well as the bad debt provision we took in the first quarter. Overall, our accounts receivable remain in good condition, and collections continue to be strong. Inventories increased 42% versus last year.

Adjusting for a negative foreign exchange impact, inventory increased 48%. Approximately 80% of the year-over-year increases in brands which are knew to our portfolio or delivering high growth, including DISNEY PRINCESS and DISNEY’S FROZEN, STAR WARS, NERF, PLAY-DOH and Yo-Kai Watch.

The quality of our inventory is high, both at Hasbro and at retail, as we’re supporting new initiatives in addition to our planned growth. We enter the second half of the year in a very strong financial and market position. We have compelling brand initiatives and remain focused on delivering a very successful year.

This strength of our business not only reflects the results of the investments we’ve made in our blueprint and teams, but more importantly allows us to continue on our path of strategically investing in our brands and capabilities to further drive long-term profitable growth for Hasbro and our shareholders.

Brian and I are now happy to take your questions..

Thank you. At this time we’ll be conducting the question-and-answer session. (Operator instructions.) One moment, please, while we poll for questions. Thank you. Our first question is coming from the line of Arpine Kocharyan with UBS. Please go ahead with your question..

Hi, good morning, thank you. I have a bigger-picture question, but to just get this one out of the way, could you perhaps break down the $6 million of other income? Were there in FX one-time gains? I know that earnings from joint venture are going to that line, but if you could just break down, because it was about $0.04 in EPS in the quarter.

And then I have a follow-up. Thank you..

Sure, this is Deb, good morning, Arpine. The other income and experience line item includes lots of different things. There’s no one-time FX gains in there. As a matter of fact, our impact from FX losses are fairly similar to what they were last quarter, in what we talked about versus last year, where currency is not quite moving in the same direction.

We did have a gain from the sale of an investment in that line item and that was pretty much the only unusual thing that happened in the quarter..

Okay. Helpful. And then, Brian, you are probably at peak production currently. Could you perhaps talk about the visibility you have on the second half of this year in terms how your largest customers are thinking about the toy category? And then I noticed, and thank you for that color, you broke down the inventory increase as a percentage of sales.

It was highest over the past ten-plus years in terms of inventory and balance sheet as a percentage of sales. Maybe you could give a little bit of color on that..

Sure. If you look around the world, the industry is growing at quite a good rate. In most markets around the world it’s growing from mid to high single digits. In a few markets it’s growing as high as double digits, including Spain, Italy, Russia, and Mexico. Our business continues to grow around the world.

We’ve gained market share in 10 of the 11 markets that we measure and have measurement in the quarter, and very strong market share gains. We’re also obviously seeing overall revenues growth above market growth strong double-digit growth for the company.

And as we look out to the second half of the year, we have great momentum in our business, great POS momentum as well as momentum across both franchise and Partner Brands. Our retailers have clearly made plans that involve many of our brands.

In fact, if you look at just the quarter and look at revenue contributors to the quarter, seven of the top ten revenue contributors in the quarter were Hasbro brands and the remainder were our Partner Brands, so a great balanced portfolio of our owned and operated brands plus our Partner Brands.

And both NERF and PLAY-DOH were the top two brands in terms of overall revenues. So you’re clearly seeing a number of strength in our product portfolio. They are in categories of business within the NPD categories that are also growing double digits, including action figures, dolls. Arts and Crafts is down a bit, but our business is up.

And then outdoor sports and games. So, again, I say good visibility not only to the rest of the year, but as we go into 2017 and 2018 we have as good of visibility as we have ever had for multi-year plans for growth..

That’s helpful. Thank you. Everyone is focused on STAR WARS, and I know you mentioned seven of your ten top brands are franchise brands. It seems like franchise brands came in around 3% for the quarter, partner brands grew five times that rate.

As you look out for the full year, do you still expect franchise brands to grow at a higher rate versus partner brands?.

Yeah, so I’m not going to guide on growth rates, one versus the other, but the one thing that did impact our franchise brands in the quarter was certainly TRANSFORMERS, and that is because a year ago, we were still selling plenty of TRANSFORMERS movie-related product, because we were coming off of movie four the prior summer, and the carryover was quite strong.

Reassuringly, if you look at the product line that’s associated with our television series Robots in Disguise in the quarter it was up significantly, but overall the brand was down, and that had an impact on our overall franchise brands growth rate.

Despite, or if you took that out, obviously you would see stronger growth underlying for our franchise brands, particularly incredibly strong growth for NERF and PLAY-DOH..

Right. Double-digit, that’s helpful, and then could you talk about the cadence of STAR WARS shipments this year? We know that STAR WARS was over indexed last year, but you had the movie going into home entertainment in the first half.

And there is some industry chatter about Force Friday being a month later this year, I don’t know if you can comment on that. You probably can’t comment on that.

But are you still expecting STAR WARS sales roughly flat to last year’s, and the percentage of sort of total, what percentage you expect to come from Force awakens versus Rogue One in terms of when we think about that 500 million? Thank you..

We continue to believe that STAR WARS year should be roughly equal to last year. Every indication, the brand is off to a great start for calendar year 2016. We continue to see both strong shipments, but equally importantly, strong take away.

A number of our product initiatives are selling incredibly well, and Hasbro’s share of the STAR WARS business has improved as well.

As you look quarter by quarter, I would remind you that -- that you are right, that -- if you look last year, Force Friday was September 4th, the merchandising date for Rogue One product is about a month later, at the end of September, and, you know, if you look overall quarter by quarter, there have been shifts.

Obviously the first couple of quarters, we have been up significantly versus a year ago, but as I said for the full year, we would expect to achieve around the $500 million we saw last year..

Thank you very much..

Our next question comes from the line of Eric Handler with MKM Partners. Please go ahead with your question..

Yes, thanks for taking my question. Just a quick question on YO-KAI WATCH, seems to be building some momentum in the U.S.

Just curious how you are thinking about the product launch- how many markets is it out this year, versus last year, and also, you know, how do you think about this property as sort of like a multi-year -- on a multi-year trajectory?.

Yeah, you know, you are right. The TV placement continues to expand across a number of markets. It’s in a handful of markets through 2016 and will roll out to more markets in 2017.

And it’s in Australia, European markets have just begun in May and will continue to roll out over the next month, and then the Latin American markets are really planned for late summer and early fall. We see it as a multi-year opportunity.

It has been a multi-year strong brand in Asia, again we’re sort of in the early days, although it is certainly a contributor to the quarter to year-to-date..

Okay. Thanks..

Next question is from the line of Felicia Hendrix with Barclays. Please proceed with your questions..

Hi, good morning, and thank you. Thanks for all of the color, and your comments on DISNEY PRINCESS and FROZEN were nice to hear. Obviously you’re seeing strength there, just wondering how DISNEY PRINCESS and DISNEY FROZEN is selling versus your expectation..

DISNEY PRINCESS and FROZEN are selling quite well. In fact our approach to all 11 princesses has worked incredibly well. The consumer take away is strong. And we’re seeing great strength versus predecessor product. We expect that the markets have -- are clearing, and we’ll see a clearer view as we go through the remainder of the year.

Also in the small dolls -- what we call our Little Kingdom, the small dolls offering for both PRINCESS and FROZEN are doing quite well, and we continue to make great progress on that brand, and over time we expect we’ll make progress. We’re already seeing progress on the profitability.

It will take a bit of time there, but again it’s building momentum both in terms of shipments, but, again, very important to terms of sell-through. We’re seeing great response to our product offerings..

So in line with kind of how your plans and expectations?.

Actually it is ahead -- it is ahead of our plans..

Okay. Great.

And with the profitability just to help us as we model -- I know you don’t give guidance, but how should we think about that?.

Think about it as profitability approaching company average operating profit for a partner brand, which as you know is a bit lower than the company average, over the next two years..

Okay. Great..

And just scale that out. As I said, our teams in development and creation and product development have done a very good job in identifying opportunities to continue to get our profitability on track toward our partner brand average over the next two years..

Super, and since you said it several times, I think it begs the question, how much is TRANSFORMERS down year-over-year?.

TRANSFORMERS is down less than the boys’ average one would expect in a movie year. It’s down by, you know, around 20%, and again, it’s as we mix out of the movie-related product and we get into the TV-oriented product, so this quarter has that impact.

The biggest impact to the boys’ category overall is JURASSIC PARK, and JURASSIC WORLD product is down significantly versus a year ago, and that also impacts our preschool lineup, because of Playskool Heroes, where we had preschool JURASSIC PARK product..

That’s helpful. Just a final one, in the slide deck, for the -- for your international business, it said in the second half POS was up, but in the little box for the second quarter it didn’t mention anything about POS for the second quarter. So I was wondering internationally if anything changed in the quarter..

Yeah, if you look at POS, in the quarter, POS was up globally 6%. In Europe POS was up high single digits, Latin America mid-single digits Asia Pacific double digits..

In the quarter?.

In the quarter..

Okay. So nothing to read into there. Great. Thanks..

Our next question comes from the line of Stephanie Wissink with Piper Jaffray. Please proceed with your questions..

Thank you. Good morning, everyone.

Good morning..

Two questions for you Deb, the first is on the product mix.

I know you cited that as favorable in the quarter, and Pony and Transformers were down, so should we expect that trend to continue through the second half and then start to reverse in the early part of 2017 as Transformers and Ponies come back online? And then second question related to Boulder, I know it’s not expected to have a material impact this year, but as we look out over the next couple of years there is a third-party revenue stream in that business, is that going to flow through the entertainment and licensing line, or how should we think about that within the context of the P&L? Thank you..

THE GATHERING is now launching the new set in the second half of the year, that will continue to improve our product mix. And just as a reminder from a hedging standpoint, because I know people who will be thinking about that as well, we hedged about 76%, 75, 76% of our product costs last year.

We have got about the same amount hedged this year as well, so as we think about the impact of FX, specifically on cost, we are in about the same place. And with respect to Boulder, we’re really excited to add the studio to part of our business. They create award-winning animation, and they’ll continue to do that for third-parties as we go forward.

The revenue and expense associated with it will show up in our entertainment and licensing segments, and just a reminder, we did say it is a profitable studio, so that’s why we don’t expect it to have a material impact on our results, but more importantly with their good quality animation capability, it really adds to our opportunity to continue to create world class animation.

The one thing I would mention in the quarter is we talked a little bit about the investments we make, and there was a small impact on an expense from professional fees in the quarter that will be non-recurring. That would have had our SG&A line..

Thank you..

Our next question comes from the line of Jaime Katz with Morningstar. Please proceed with your questions..

Good morning, guys, thanks for taking my questions. I’m curious what is motivating consumers in preschool. I think you guys had mentioned that it was weak in North America, or maybe I misheard that.

And how are you thinking about facilitating sales going forward maybe in that category specifically?.

Yes, actually if you look at the preschool business, particularly our Play-Doh business was up significant double digits, and the one area of weakness was really that we could talk about -- considerable weakness was the -- in Playskool Heroes, which is our preschool lineup of figures.

And Jurassic World’s business was down significantly in that segment, down much higher than the typical -- we would see for a boys’ action property. And that was true as well in our boys’ business as well. And so that’s -- that was the area of weakness there, and then the growth was in the Play-Doh business..

Okay.

And then for Boulder Media, how do you think about that in the -- sort of under the umbrella with Allspark the Discovery Family relationship, and maybe do you think about how to organize them to get the best sort of synergies or allocate the best opportunities to each silo within that content angle?.

Yeah, what we have been doing is running Hasbro Studios as a virtual studio.

We bring on animators and professionals internally to help us to create the initial content, and then we’re rendering and developing our content around the world in geographies, eight or nine geographies around the world, where there’s an opportunity in great teams to develop content.

They also, in many places have tax advantages oriented toward creating animation in those geographies, and we’ll continue to work with those teams over the next period of time. We have lots of shows in production. We have our animated feature film in production.

But we also see the opportunity to build the Boulder business and to scale, in fact if you look at the kind of animation they create, it’s world class and theatrical-quality animation. They are working for many different networks around the world and making shows for them.

And we see an opportunity as we are developing new brands, as well as new stories within our franchise brands, an opportunity to expand Boulder’s capabilities and to continue to build our content capabilities as a company.

So it’s a matter of balancing between different resources, and continuing into looking at how we scale Boulder’s operations, because they do provide incredible animation content at a great price point..

Thank you..

Our next question comes from the line of Tim Conder with Wells Fargo Securities. Please go ahead with your questions..

Thank you. And Brian, congrats to you and the whole team again for your ongoing execution here, it’s great. Just a couple here, if I may. I don’t want to belabor the inventory point, but a little more color if you could, I know you mentioned it was STAR WARS and it was the DISNEY PRINCESS, which all makes sense.

Can you kind of bucket it? If you put those two in one bucket versus everything else of the percentage increase, how much those two collectively versus the other drove the increase?.

Yeah, Tim, if you look at our overall inventory increase, 80% of the inventory increase were associated with best-selling brands as well as new business. So that would include princess and FROZEN. It would include increments in STAR WARS, NERF and PLAY-DOH and several other brands that are selling quite well, in fact.

Baby Alive is up significantly in the quarter, and for the year we’re seeing growth in FURREAL FRIENDS. So there’s a number of brands that would be part of that. So we feel like the inventory is in very good shape.

It’s just consistent with our forecast, and it’s well balanced between regions, about 40% of the incremental inventory in the quarter was up in the U.S. and 60% outside of the U.S. and international markets.

But we feel like we are well positioned with inventory, and it’s associated with brands that are selling quite well, and/or are new to the company..

Okay. Helpful. Very helpful. And then as it relates to -- circle back to some previous questions on STAR WARS. You have us given good color about how you expect ‘15 and 16 to be rather balanced in the total revenues from STAR WARS.

Anything you can say given ROGUE ONE is a spinoff, it would seem that that may not be quite as big so -- as we think about that in the latter part of the year here, and then carrying over into next year, ahead of episode eight coming at the end of ‘17, how should we kind of the about the balance if you look at the main episodes versus the spin off, if you can kind of look at them that way, as far as scale?.

Yeah, we’re incredibly excited about ROGUE ONE, and from the materials that have been out there I think you can see by now, that it’s really around a classic story that everybody in the world knows of the Death Star and the plans around the Death Star. It’s got a lot of great classic play patterns in it.

We’re very excited about the product opportunities and we’ll have a robust line that’s launching in late September. And we see it as a great compliment to the Trilogy story that’s being told. And, as I said, for the full year, we expect STAR WARS to be similarly sized.

That’s obviously really contributed to our Boys business as has NERF contributed to the Boys business, and SUPER SOAKER. I think the one headwind to think about for the remainder of the year certainly is JURASSIC WORLD that was down significantly and above the Boys action average for the second quarter. We still have about half of the revenues.

If you compare it in a movie year, Jurassic does about $100 million. So we have about half of that to do to compare to 2015, and we have made the decision at the end of 2017 we will no longer handle JURASSIC PARK. We had a many year relationship with Universal.

We’ll no longer handle JURASSIC PARK because we were unable to arrive at a mutually beneficial financial arrangement on that brand. So, again it’s about $100 million in a movie year, it was a significant Q2 headwind and it will be a bit of a head wind for Q’s 3 and 4.

So as you think about the full year, and getting to your questions about how to think about gaiting around the Boys business and STAR WARS, I think that’s a factor to consider..

Okay.

And then lastly, any color you with talk about the POKÉMON GO? It’s only been out there since the early part of July, but how that made headwind a little bit of maybe a brand or two within your portfolio? Or maybe even indirectly give a little bit of boost? Any color you could provide there?.

Well, we have been developing our mobile gaming business for some time and we love that mobile games are really coming to the floor and the ability to use all of the capabilities of the smartphone in engaging a mobile gaming player is great. So we’ve not seen any negative impact on our business, nor would we expect to.

But we certainly believe in the mobile gaming genre, it’s a wonderful way to contribute to storytelling as well as to get monetization of games through a premium model. And our brands in the quarter performed at a very high level around mobile gaming, and we continue to like the category, and we’ll continue to build our business there.

We love that mobile gaming is something that people are focused on..

Great. Thank you..

Our next question is from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead with your questions..

Good morning, two questions. First, Europe. What drove Europe to basically double the domestic growth for their shipments of certain categories that happened there in the second quarter that might not have happened in the first? And the second question is on BEYBLADE. When does that launch? What are your expectations for BEYBLADE? Thank you..

DISNEY PRINCESS and FROZEN and STAR WARS as well as significant growth in NERF and PLAY-DOH. PLAY-DOH is one of our more global brands and certainly impacts more of our international regions.

And BEYBLADE is being placed and has placement in different markets around the world, and we see that as a late 2016 initiative, really contributing more fully to 2017..

Great. Thank you, Brian..

Our next question is from the line of Drew Crum with Stifel. Please proceed with your questions..

Okay, thanks. Good morning, everyone. Deb, you mentioned the operating profit margin in the first half was up 140 basis points. I think you said you expect gross margin for the year to be kind of flattish. How are you thinking about the EBIT margin for the second half.

I know you don’t like to guide, but any swing factors that could move that either direction that we should be thinking about? And then just to follow-up on the boys’ business Brian. No mention of Marvel in the quarter. How did that business perform for you in the quarter? Thanks..

Sure. I’ll take Marvel and let Deb take your other questions. Marvel performed at a very high level, it was one of our top brands for the quarter. It was off a bit versus year ago, but much lower than any Boys average decline one would see in a non-movie year because they just have done such a great job in entertainment.

So you just, again, a major contributor the company in the quarter. They have great plans go forward. Obviously CAPTAIN AMERICA and some of the Marvel legends product were great contributors and obviously we’re down a bit versus AVENGERS in the year ago. But again, very strong contributor overall and off just a bit.

As I said, the biggest impact of the Boys category in the quarter as headwind was Jurassic..

And as far as our margins, we don’t have anything that changes our estimates from what we talked about at toy fair last quarter, significantly. So we expect revenue to continue to drive expense leverage. We will continue to make investments for the long-term growth of our business. You have seen us do that consistently while growing our margins.

And I think the estimates that we talked about, with the exception of FX, which we tried to say will be a little bit below where we thought it would be in February from a percentage and point of revenue, we’re still looking at the same -- roughly the same estimates as then..

Okay. Thanks, guys..

Thank you..

Thank you. At this time, I’ll turn the floor back to Ms. Debbie Hancock for closing remarks..

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately two hours. Additionally, management’s prepared remarks will be posted on our website following this call. Our third quarter 2016 earnings release is tentatively scheduled for Monday October 17th. Thank you..

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation..