Good morning, and welcome to Hasbro Fourth Quarter and Full Year 2018 Earnings Conference Call. All this time, all parties will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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, Senior Vice President of Investor Relations. Please go ahead..

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

Our earnings release was issued this morning and is available on our Investor website. Additionally, presentation slides containing information covered in today's earnings release and call are also available on our Investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures.

Our call today will discuss certain adjusted measures, which include these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the release and presentation. Please note that whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share.

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

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

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

Brian?.

Episode IX which debuts in theatres December of this year, with its impact reaching across both 2019 and 2020. The Disney Princess franchise will benefit from new entertainment, including the live action Aladdin film in theatres this May.

The highly anticipated theatrical release, Disney Animation’s Frozen 2, is set to debut Thanksgiving 2019, and will be a factor in both 2019 and 2020. Hasbro is supporting the film with a complete line of fashion and small dolls, playsets, castles, Play-Doh products and games. In addition, Trolls will release all new theatrical entertainment in 2020.

Throughout 2018, the Hasbro team worked in real time to use our industry-leading capabilities as well as adding new capabilities to drive share recapture from the Toys“R”Us bankruptcy and liquidation.

While in the short term we didn’t achieve all the share recapture we were driving for given the higher than anticipated impact of the Toys“R”Us stores’ liquidation, we did create share shifts and new channel opportunities that will benefit us in 2019 and beyond.

Importantly, by lowering retail inventories and having tremendous new brand initiatives, we have laid the groundwork that will enable us to stabilize Europe, while making plans to return Hasbro to growth this year.

Our growth plan is multi-faceted and is based on our ability to grow our brands, deliver compelling new gaming experiences across all formats, create engaging entertainment, and expand our consumer products, while fueling our digital commerce with digital marketing leveraging a right-sized expense model.

As a result, we are well positioned to grow Hasbro this year and beyond. Next week at Toy Fair, Deb, John and our amazing teams will dive deeper into our plans and brand initiatives. We hope you will join us. I now like to turn the call over to Deb.

Deb?.

The Gathering Arena costs versus 2017 when they were expensed. Program production amortization increased to 1% of revenues reflecting the delivery of a multi-year streaming deal for Hasbro television content and amortization of our investment in the My Little Pony movie.

As reported SD&A included $257 million of charges related to the items discussed earlier. Excluding these charges, SD&A decreased by an approximate $94 million in 2018. Stock compensation and bonus expense declined. This was partially offset by higher shipping and warehousing costs in the U.S. and higher bad debt provisions in Europe.

Turning to our results below operating profit. Other income, net was $30.2 million versus $74.1 million last year. While many factors contributed to the change, the three primary drivers were as follows. In 2017 we realized a $19.9 million gain due to a change in the value of a long-term liability due to U.S. tax reform.

In addition, we had $10.8 million of foreign currency losses in 2018 versus a $1.3 million gain in 2017. Also, due to accounting standard changes beginning in 2018, pension expense for our frozen plans is now recognized in this line and totaled $5.8 million. Our underlying tax rate was 18.3% versus 19.9% last year.

The impact from tax reform changes to the U.S. tax code was offset by a significant change in the mix of where the Company earned its profits, mainly the result of lower European revenues. Our effective tax rate for the year absent the impact of U.S tax reform and the Non-GAAP charges was 9.1% compared to 9.5% in 2017.

This includes discrete items such as the benefit of tax planning, reassessment of historical tax reserves, accounting standard governing stock compensation and audit settlements. Adjusted earnings per share, excluding $268 million of after-tax charges, was $3.85. On a reported basis, including the $2.11 of charges, net earnings were $1.74 per share.

Our year end balance sheet remains strong. We generated $646.0 million in operating cash flow during the year and today we announced that the board declared an 8% quarterly dividend increase payable in May. Receivables decreased 15% and were down 12% excluding the impact of foreign exchange. Days sales outstanding decreased 2 days to 78 days.

Hasbro-owned inventories increased 2% at year end and were up 7% excluding the impact of foreign exchange. Inventory levels declined internationally, led by Europe, but increased in the U.S. and in the new Hasbro-operated markets of India and Japan.

The quality of our inventory is good, and we began 2019 with significantly lower retail inventory in several major markets, including the U.S. and Europe. The global team managed through a very disruptive year, working closely with our retailers, engaging directly with our consumers and aligning around our growth plan.

We have a solid financial foundation upon which we are operating and investing which affords us the ability to take actions for the long-term, while also pivoting our near-term behaviors to reflect a rapidly changing global market.

Our teams have tremendous innovation and strategic plans for this and future years, and we look forward to sharing more of those with you on Friday, February 15 at our New York Toy Fair Investor event. We will now open the call up for questions..

Thank you. [Operator Instructions] Our first question today is coming from the line of Felicia Hendrix with Barclays. Please proceed with your question..

Hi, good morning..

Good morning..

Morning..

Hi. Brian or Deb, I'm just wondering if it would be possible to give us adjusted numbers ex Toys-R-Us or some kind of indication of how much the 13% of sales decline was attributed to Toys-R-Us..

Well, the way we look at the business, Toys-R-Us is wrapped up in our results, and we could look at and have seen growth in other customers. We've seen growth in other channels. So we talked about the fact that we've opened other doors, and whether it's value or online, we've talked about the growth there.

But given that we have these big ongoingly successful brands over time, these brands are more impacted by the Toys-R-Us bankruptcy and liquidation, and we've talked about that.

But again, we expect to return to growth in 2019, and in the fourth quarter the big difference was that our estimates of what the liquidation would represent and what experts had indicated about people's purchasing product to be given away sooner versus later were both off.

And therefore the liquidation had a greater impact in the fourth quarter, but we have these big brands and franchises, as well as our partner brands that were being supported substantially by Toys-R-Us but other retailers. And we expect to now return to growth across a number of those brands.

We also had a number of brands grow within the year and in the fourth quarter..

And I think if we had to rate them, Felicia, and we tried to convey that as well in our prepared remarks, but it's - Toys-R-Us really was the most impactful to our business, and you think about the fourth quarter and the holiday season and for the reasons that Brian talked about.

It was, you know, the inventory that was in the channel, which us and experts had estimated would have been cleared through by the end of the third quarter. It really hadn't. And, you know, so that really was the most impactful, and after that it was really Europe. And it's the things we've been talking about all year..

And just in terms of like the mismatch between the estimates and the reality, do you think that's just more because this is something that was just so challenging to kind of forecast versus, you know, perhaps it being a consumer-related issue?.

Yeah, you know, this was an unprecedented yet finite event, and I think that as we look back on our track record from 2012 to 2017, we've been delivering on the medium-term objectives we outlined for you. Over that period we achieved 5% in revenue growth CAGR.

We achieved 13% net earnings growth CAGR, double-digit growth in emerging market, an expansion of operating profit margin by one full percentage point. We saw the emerging market grow double digits. So the fact is we expect to return in 2019 to growth, and we see this as a finite event that began in the fall of 2017, if you remember.

And to remind people, we still shipped product to Toys-R-Us in the first quarter of last year, 2018, but we do see the headwinds from the Toys-R-Us bankruptcy that we've experienced since the fall of '17 that intensified during the liquidation dissipating during the first quarter of '19.

And we are going experience and generate tailwinds in 2019, and that comes from things that Deb and I outlined.

The innovation, a strong entertainment slate, retail inventory's down, our inventory in a great position with inventory down in Europe, and new capabilities that we're on-boarding and addressing our organization to be digital and very strong..

Thank you for that. It actually kind of touches upon the kind of follow-up I have is - because I think on the last call you had said that the Toys-R-Us disruption could continue into the first half.

Sounds like, you know, just from a comp perspective, maybe the first quarter, but past the first quarter are you kind of moving forward or is it still going to be kind of a first half noisy type of thing?.

Yeah, so in the US, we continue to ship in first quarter, and then US no longer ship because, if you recall, right after Toy Fair last year Toys-R-Us announced the liquidation. I think the only other country that goes this little bit beyond is Australia. So you'll probably have a bit of an impact there, and then they ultimately liquidated there.

But yes, 2019's about a return to growth, about move beyond the Toys-R-Us bankruptcy and liquidation, and we expect to see growth this year, as well a growth in operating profit and an expansion of our operating profit margin in our plans..

Okay. Then just my final is just on POS, you both said it was up ex Toys-R-Us. Just wondering if you could give us some magnitude. Was it up low single digits, mid single digits? Just some more color might be helpful..

Yeah, so overall POS globally without Toys-R-Us...was overall globally POS was just down like less than 1% and North America was up low single digits, and Europe was down high single digits. Latin America was up. Asia-Pac was down mid single digits. But our global franchise brands were up low single digits.

Emerging brands were up mid single digits, and our games business was up low single digits. Partner brands were down..

Right, and the Europe is because of the transition that you're having there or was it something else being down high single digits?.

Yeah, the transition and the market, exactly. And the fact is we wanted to ensure that we had completed our goal, our task, and our plan of eliminating retail inventory, and we also reduced our inventory.

And the great part that we're hearing is as teams are leaving Nuremberg and working on the year's plan for 2019, the conversation is really shifted to be about the plan forward, growing our business, and going after the innovations and the entertainment-led brands that we have for the year..

Perfect. Thank you so much..

The next question is from the line of Arpine Kocharyan with UBS. Please proceed with your questions..

Hi. Thank you very much. I wanted to go back to retail inventory for a second, because it seems like POS globally including Toys-R-Us would be down but then shipments were down as well.

But if you look at Q3, that was the case, right? You were down double digits and POS was down double digit, yet we saw inventory impact in places like Europe heading into Q4.

I guess what's inventory situation ex Toys-R-Us at retail? And then owned inventory was up constant currency, and we're heading into Q1 where you have also Easter shift and, as you mentioned, some impact from Toys-R-Us disruption.

Could you just go over what's contributing to that owned inventory to be up ahead of a quarter that's going to be seasonally obviously weak and you have Easter shift? And then I have a quick follow-up..

Yeah, so our inventories are up nominally about $10 million year-on-year, and remember that going into the year, not only do we have new initiatives coming in the first quarter and a number of them new product, whether it's entertainment led like Captain Marvel, our other new brand initiatives like Transformers that goes into its home entertainment window.

It performed incredibly well at fourth quarter. It was up in the quarter both in the US and internationally, so up overall. And then we head into the second quarter with a number of entertainment initiatives there as well. The Avengers is back in theaters. We have Spiderman that hits theaters.

Both in the second quarter, and as I said brands like Play Doh, although not up for the year, had great momentum. And we're really seeing where new initiatives around that brand are taking hold, and we're seeing a good performance there. So I think that we're positioning ourself for a good year, and I know, Deb, you want to....

Yeah. And just from a geographic standpoint, our owned inventories are down significantly in Europe. They're up a tad in the US, and Brian spoke to a lot of the things that are hitting early in the year. And they're also up in markets where we have new offices, so, you know, for example, we have an office in Japan now. We didn't have that a year ago....

And in India..

India, as well, which we've been building in the year, but most of the increase is really coming from that..

Yeah, so we're down….

Right….

We’re down in our owned inventory substantially in Europe as well as retail inventory, and down in retail inventory in the United States. So I think we're really well-positioned in very high quality inventory..

Right, right. No, thank you. I'm just also wondering about your mentioning of stabilization for Europe this year versus sort of growth and return to growth beyond '19. I think you mentioned inventories were down 27% in that market.

Wouldn't that set you up to grow nicely this year in Europe then? Because inventories are down so much?.

Well, look, I think we really, as a team, as you can hear, are very thoughtful about the way we plan out our businesses, and we recognize that we can grow our overall business and stabilize Europe in 2019. We want to ensure that the changes that we're making are taking hold.

We've organized our business very differently right now, and going forward Amazon is our number one customer in Europe. Toys-R-Us no longer really operates as a top customer in Europe. We have it in a couple of territories under new ownership.

We have Smith's, which is a fantastic toy specialist, which was in the UK, but now bought the German, Austrian, and Switzerland business. And so they've grown to become a top customer for us.

So it's just all the shifting dynamics that we want the team to be able to accomplish a number of objectives, and for us we want to make sure we're very clear that stabilizing Europe this year and growing it beyond in an environment where we grow our business overall would be a great accomplishment..

The Gathering Arena outlook for the year and the profitability profile for that franchise? There's a lot of investor excitement around Magic Arena for this year. Anything you could tell in that regard would be very helpful..

Yeah, Magic Arena is performing very strongly for us and exceeding the measures for engagement and stickiness. You know, it's early days. We're still in the open beta. We haven't officially launched, and yet in the fourth quarter we had nearly 350 million games of Magic played in Arena. On average, a Magic player is playing for about 8 hours per week.

The e-sports viewership during the quarter was doubled on Twitch. It's now a top 10 viewed game. And so we are also seeing as we look at measures of engagement and monetization, they are beating our early estimates.

The other great part about what the team is doing, and they are doing a fantastic job, currently Arena is available on PC, but given they're using something called the Unity engine it gives us a flexibility to move to other formats over time. So again, we're in early days. We haven't even launched yet. We'll launch later this year.

But all the indications are quite strong for Arena..

And we'll talk more about Arena at Toy Fair next week at our investor event next Friday, but when we were really talking about gaming and mobile gaming, it's really the Backflip mobile gaming. We were talking about it.

Because of the changes we've seen, we modified our plans, and frankly we think we modified them to be more successful with the way that mobile gaming has moved go forward. It just created an accounting remeasurement, and from an accounting standpoint that created the goodwill impairment. So we believe that all the modifications to the plan are good.

The pacing is better based on what we've seen. We're investing to make sure the games are successful when they launch through advertising and user acquisition. It's just those changes created the goodwill impairment from an accounting standpoint..

Thank you very much..

The next question's from the line of Michael Ng with Goldman Sachs. Please proceed with your question..

Great. Thank you for the time. I have two questions about margins. First, and apologies if I missed the nuance, but when you talk to a return to growth in 2019, is that a return to profitable growth, which I would define as margin expansion? And could you just help us think about how those margins will look next year? And then second - Oh, sorry.

Go ahead..

No, you go ahead, Mike. Sorry..

Okay. And the second question was just about the gross margin headwinds in the quarter, which you said included higher levels of closeouts and higher obsolescence. It seems to me that those are probably discrete issues related to Toys-R-Us and Europe.

Is that true? And if that is, should we see a snapback back to more normal margins in 4Q '19 if it's a more normal revenue quarter, all else being equal? Thank you..

Yeah, so we do want to talk extensively about our plan go forward next week at our analyst event for 2019 and we'll do that, but I'll tell you at a high level we expect margin expansion this year, an improvement in profitability across the company, and an improvement of profitability in Europe despite my comments about stabilizing the business in terms of revenues.

And, Deb, I don't know if you wan to comment on anything else now..

I have to save something for next week's Toy Fair. But I would agree with Brian's comment, and we will get into more detail on the components next Friday..

Thank you. The next question is from the line of Greg Badishkanian with Citi. Please proceed with your question..

Great, thanks. Just on Nerf, Nerf had more exposure than most of your brands to Toys-R-Us.

Can you talk about the impact from Toys-R-Us versus the competition within the category that you also discussed that we saw, and then how impactful could some of the licensing partnerships be like the Fortnite partnership going forward to reaccelerate the brand?.

Yeah. So Nerf by far remains the leader in the category, and you're right. The liquidation had a major impact on Nerf in the near term. We had mentioned before that 2 million Nerf units went into the market during the Toys-R-Us liquidation.

Due to its performance and innovation, Nerf also received also received larger shelf space at Toys-R-Us, and we saw and in the third quarter we talked about the fact that we'd seen the impact from liquidation.

Us and industry third-party data had indicated that much of that would have been gifted, and in fact we've seen a continued impact from that liquidation. Well, we know the blaster category is very competitive, and we are aggressively driving our position in the market.

And we believe that when you buy a Nerf, you don't just buy our innovation but best performance, quality, safety. And so as we go into the year we're entering a new innovation cycle with propriety consumer insights in R&D. We do start with the gamer series this spring in Nerf Overwatch and Nerf Fortnite, which launch in March.

And then we have all new innovation across price points with protectable innovations. And we're going to show some but not all of it at Toy Fair, because again we feel that a lot of competitors are using our insights and innovations to create their products. And so we'll talk more about that.

We've got a great lineup and very exciting things to say and to show in the showroom. But we feel very strongly that we can return Nerf to growth in '19 and beyond..

Good.

And just on some entertainment, Star Wars, Disney Princess, 2019, so outside of being a big movie year for you, anything you're planning to do differently that you're able to talk about on those two properties?.

Yeah, I think, you know, Star Wars did have a difficult year as you compared to Solo to Last Jedi film from 2017. We're very excited about what LucasFilm and Disney have put together for the year. The franchise is going to be well supported with new entertainment and also experiences this year for the first time.

We're going to be delivering innovation in marketing programs directly to kids. We have Galaxy of Adventures, which we'll support, which is a kid-focused initiative with short form content on their Star Wars YouTube channel. There's also new entertainment experiences because The Mandalorian is an all-new TV series.

It's executive produced by John Favreau that comes on Disney+. We're also seeing the opening of a major new theme park land with Galaxy's Edge, which is both in Anaheim and in Orlando. And then we get to the end of the year with the movie, Star Wars Episode IX which debuts in theaters in December.

And that impact from the film and all of our efforts will reach across both 2019 and 2020. So we're really excited about a full year effort. Lots of really good product, very innovative product throughout the year corresponding to the entertainment. And then Princess….

Would that be like a - yeah..

No, no. Go ahead. Sorry..

Will it be like a 50/50 split on Star Wars because it's the end of the year, or is it like 60, 40 or 40, 60? How do you….

Well, look, it's we're for the first time in a couple years back to the entertainment cycle we had seen in 2017, so coming out of all that we've experienced on Star Wars -- Remember that both Star Wars and Princes and Frozen were also very well represented at Toys-R-Us globally, and we know that had a significant impact.

So in addition to being up against some of the major entertainment from 2017, there's that impact as well. So, you know, what I'd say is that we absolutely believe that Star Wars will have an impact in '19 and '20, but I won't quite yet express what percent of that business would come in which year..

Sure. And Disney Princess, I'm sorry, you were going to….

Oh! That's okay. You know, so Disney Princess, there was a lot of filmed and television entertainment in 2017, which we were up against, and so the brand did have tough comps. As well as I just mentioned, it was well-supported at Toys-R-Us, so that combination certainly impacted the brand.

We're very excited about a number of initiatives that are coming for Princess this year. We have a movie that comes, Aladdin, in May of this year, which is a live action film that we will support. We also have a Disney Princess capsule programs around, some new product that's very exciting to see princesses in a different light.

If you saw the Wreck-It Ralph movie, there was a great scene in there of the princesses having a slumber party, and we're playing off of that with our partners at Disney. And then we get to the year end in November, and extremely excited about a full array of product for Frozen 2.

And, of course, being a November film, it will stretch and impact from 2019 through 2020, and I'm sure beyond..

Thank you..

The next question is from the line of Tim Conder with Wells Fargo. Please proceed with your questions..

Thank you, and good morning. Brian, as you called out earlier, you know, you guys had great performance and execution 2012 to '17, and even in China, given everything that's going on over there, even in '18 here you guys have outperformed the industry. But I'll just ask the elephant in the room question here.

As Toys-R-Us started to unravel, initially you didn't have the largest exposure or percent of sales, and yet it seems like that and Europe has been more problematic for you all relative to others in the industry.

Can you kind of expand on what happened there? And then with the shift to digital, I think you called out on the third quarter call, that you need more distribution centers in Europe to react more quickly to the retailers' needs.

Is that part of the equation? And kind of where do we stand with that?.

The Gathering or Dungeons & Dragons or even Transformers in the fourth quarter. Those brands performed quite well, and so you can see really the differences. You also see the difference when you compare Latin America, where there was no Toys-R-Us, or in Canada, where Toys-R-Us changed hands pretty seamlessly. We saw really good performances.

And in Asia, even though we changed ownership of Toys-R-Us and Toys-R-Us is the second largest customer for us there, our business in Asia was good and our business in China was flat. So I think that we have had a level of success with our brands.

As you mentioned and I'll reiterate, from 2012 to '17 we've grown our revenues at 5% and net earnings at 13% growth rates and expanded operating margins. So we view this as an event.

We also believe, and I'll walk you through it in more detail next week, that we have every reason to believe and all the plans in place to get back into that kind of a performance post the Toys-R-Us event..

Okay. And then the distribution in Europe, just the….

Yeah, we continue to -- We always look at our footprint, and really it's not just distribution but it's capabilities and channel strategy.

So today, as I mentioned, Amazon is our number one customer in Europe, and we've moved to be more oriented toward a digital-first strategy to bring our capabilities we'd built in the US, being a top performer on online platforms, to Europe, and that's been a focus. We've also focused on where and how inventory gets placed into the market.

We've also focused on our short-form content, content-to-commerce, and we'll continue to look at our footprint for warehousing..

And I'd also add, Tim, and we've talked about this throughout the year, we've been very thoughtful. Given the economic situation in some of these countries, we've been very careful with extending credit, and as a matter of fact our cash collections have improved.

You see that in our continuously strong cash flow, which was within our targets, based on the fact that we focused on making sure our collections were strong. We're reducing our DSOs. We've been extending credit to the right customers.

So we've been very thoughtful about how we go into these new doors, who we extend our credit to, and making sure we can collect it at the end of the day. So you've seen some of that disruption this year, and we'll continue to do that go forward.

But we believe based on all the changes we've made, the distribution efficiencies we've put in place, that we're really well positioned to stabilize and grow, in Europe and throughout our other markets..

And again, yeah, the cash management, given everything that went on, has been very good, so congratulations on that. As it relates to -- you talked about stabilizing Europe, profits grow in Europe for '19, and then profits grow overall for the company in '19, maybe just give us a little bit of an update.

You'd talked about getting back to that however benchmark you want to have it, the high 15, low 16 in change, operating margin.

Where do we stand and how does that play and look now given the bump here we've had in '18?.

Well, look. I think many people have asked, but, you know, we did experience an unprecedented event, and industry experts have likened it to be the worst event in the industry in the last decade. So we have to re-rate our business off of our performance and where we ended 2018.

We ended the year 2018 with the highest revenues in the industry at $4.6 billion with a strong profitability, albeit lower than prior year given all of the issues that we took on and all the changes the team's made.

And so we grow from here, and we'll walk you through a progression of how we continue to rebuild our profitability and expand our operating profit margin and perform across a number of dimensions over time. But I think that's a great conversation for next week..

Sounds great. Thanks, Brian. Appreciate it..

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

Okay, thanks. Good morning, everyone. Brian, can you talk about the product roadmap for Power Rangers this year? Is it a global launch or staggered, a global launch in 2Q or is it staggered? Was the relative of the line -- I think you mentioned some new content coming on board. Any detail you can provide there is appreciated.

And then I guess separately I think that you mentioned in your preamble you expect to be at 60% exposure to China by 2020. Is there a longer term goal you have in mind for the business? Thanks..

Yeah, we'll continue, on production side, we're going to continue to look at new places to put product. Some of that has to do with just expanding our footprint. Some of it has to do with trying to mitigate some of the...that you face in certain geographies around the world. People have asked about tariffs.

One place we do experience tariffs is in Brazil, so local production of some products is helpful in mitigating those kinds of impacts. We continue to look at how to make sure we're making product in the right place, recognize we're making a really innovative product line that requires all kinds and different types of manufacturing.

So we really believe in our asset-light type model, which gives us great flexibility to get great innovation, pricing, and a great reliable, safe product. So it's the next benchmark at end of 2020 to be 60% out of China.

In the US, about a fifth of our products are already made in the US, and about two-thirds we take in the US is coming from China already. For us, again, it's just a progression, and the team there is doing a great job in expanding our footprint and bringing new brands and our current brands to new geographies for manufacturing.

In terms of Power Rangers, we're incredibly excited. We have our new series that will launch later this spring called Beast Morphers for Power Rangers. The product line is extensive. It's now been shown around the world at multiple toy fairs, and retailers are very excited. Our consumer products teams are really stepping up behind that excitement.

So this is a new original series that's produced by the same team that had produced Power Rangers before, albeit with new energy and a connection between our teams and the original core Saban team that's really just tremendous. And we're incredibly excited.

It will launch in North America in Q2, and then launches in the rest of the world throughout the remainder of the year. So it's a rollout.

Obviously English-speaking territories before it goes to translated territories, in terms of language, but 2020 plans and beyond are even more robust because we get it for a full year and then we do intend to add a movie to the mix in the next few years. And so, again, we will build this brand.

This brand had been far bigger in the past than it was at present, and we feel like there's a lot of opportunity.

It reminds me a lot of the early days of some of our Hasbro brands, where we really looked at how big they had been in their history and asked ourselves, how big could we make this in the future? And we believe in the power and the potential of Power Rangers..

Brian, can you remind us where you're getting distribution for the television series?.

Sure. We have a great partnership with Nickelodeon, and we have a commitment from them.

Great new leadership at Nickelodeon with Brian Robins and the team, and Bob Bakish has been incredibly supportive of our efforts there and also our efforts with Paramount, parenthetically, where we would produce the movie alongside of our relationship on Transformers and other films.

So they have a great team there, and we feel very strongly about our opportunity to work with them and to build this brand together..

Yeah. Okay. Thanks, guys..

Our next question is from the line of Michael Swartz with SunTrust. Please proceed with your questions..

Hey, good morning, everyone..

Hey, good morning..

Just a quick, quick point of clarification, Brian. I don't know if I had this right, but when you talked about inventory's down I think 20% plus in both North America and Europe.

Was that excluding Toys-R-Us?.

No, that includes Toys-R-Us, but inventories are down across the board. And remember, the way the order pattern worked that what we could see is that while retailers were out for share recapture, they also were out for managing yearend inventories. So we were careful in working with them.

We did not end the year with our own inventories up more than the $10 million, but retail inventories in the US were down 24% and in Europe were down 27%. And some portion of that is Toys-R-Us, and then there's a substantial portion of that that's also other retail. But remember also, remember also that we're opening new doors of retail.

We've opened tens of thousands of new doors of retail, everything from food, drug, club, I'll leave something out, sporting goods. And so we have a great channel strategy and product development that's marrying up to bring the right products to the right channels and the right price points with the right retail margins and margins for Hasbro..

Okay. That's helpful. And just adding on to that, I mean, I think, one of the major challenges you've had later in the year was some of the mass retailers tightening up on inventory.

I guess, in your early talks with them about how they're thinking about '19, is there incremental risk that they get even tighter with their inventory levels? Or do you think that's now kind of normalized or stabilized?.

Well, look, I think the way we view it is, it was definitely a change in the business related to the fact that Toys-R-Us was no longer going to exist with inventories in stock in December, and so as a result one can gain market share without necessarily being fully in stock at the end of the year.

And we will always work on our inventories, and just in time our new warehouse in the Midwest is all about ensuring that we get better at just-in-time inventory. We're using even flexible space in that warehouse where we'll able to within a day or two move inventory from our inventory to other retailers' inventory.

And so we'll continue to hone this, but I don't believe that there's a step change in inventory. I believe it's just going to be a perpetual drumbeat to improve inventory, inventory management, just-in-time inventory, around our initiatives go forward, and the team is absolutely prepared for that..

Okay. Great. And then one final question if I may, just I guess a little more clarity on the cost savings that you outlined for '19 and '20. I think I was getting the gross and the net amounts confused, so you can go back over that quickly one more time..

Sure. By 2020, we expect to achieve gross cost savings of $70 to $80 million, and, you know, we've got a transition period, because while we put the plan in place we'll be executing it throughout this year. So in 2019 net of the add backs that we expect to do to, you know, for the items that we continue to invest in.

If you think about we talked a bit about Arena and Wizards of the Coast Earlier, we continue to make investments in our business because that does remain our number one capital priority because we want to make sure we're set up for the long-term. We've always been that way as a company.

So we continue to make investments, so the net is 50 to 55 in 2019..

Okay, great. That's helpful. Thanks, Deb..

The next question is from the line of Eric Handler with MPM Partners. Please proceed with your questions..

Thanks, and good morning. Wonder if you could talk about, with all of the new doors that you've opened and different types of retailers in the last year, I'm curious if there are any segments that you found to be better than expected or over delivered and what they might be able to do. And then I've got a follow-up question after that..

Yeah, look, it really -- this comes back to incredible kudos I give to our product development team and our marketing teams, because it all begins with great product development that's made in the right manner for the right type of retail.

So we've been able to recognize the increased demand for exclusivities among retailers to give them a position on our brands that allows them to market our brands and to feel that they can make a fair return on our brands.

So if we're going to a gaming type company, we want to give them the right array of product that's focused on that gaming fan and collector and the fan economy. If it's a sporting good store, it would probably more focused on our Nerf business and giving them products that are right for their audience.

And so it's really those handshakes and those partnerships that are really important, and then we also have to get to value and discount stores and make sure we're making a product that can be sold to achieve a lower absolute price point and still retain margin for us and for the retailer.

You know, I think that we've made a major pivot here over time where we really want to ensure that kids at every socioeconomic level have an opportunity to play with and participate in our brands, and we work all the time with our teams make sure that we can provide a great product for them.

So that's been a process that's ongoing, but also you really see it take hold when you add so many doors, so many thousands of doors, at retail in the US and now applying that same channel strategy to Europe. We're seeing thousands of new doors opening in Europe..

Okay. And then a question on mobile. It was interesting what you've been saying here. Electronic Arts has some similar issues, it seems, in mobile.

I'm just curious, what is your strategy here with mobile, what you can do with Backflip, what -- It seems like the top -- You need to have a top 10 games if you're going to be really successful in mobile and how that view shapes what you want to do?.

Earth War has been out several years, and it's been reinvented over several different periods. So we do have some games that really track. We're adding some new games, but we also want the team to focus on getting it right creatively from an immersive standpoint but also games that are really able to monetize over time.

And that takes more time and more dedicated focus. For that reason, the long-term plan changes, and therefore you have the associated impact to goodwill. I don't know if you want to comment..

No, you're right. And, you know, some of the changes are you work with development partners on certain things. And you're right. We, you know, took some organizational actions in the fourth quarter to reflect that, and we feel we're well setup with that plan go forward..

Thank you..

The next question is from the line of Ray Stochel with Consumer Edge Research. Please proceed with your question..

Great. Thanks so much for taking my question. How are you thinking about your collectibles business across all your franchises? And is that something you plan to lean into in fiscal '19? And do you need a greater presence, especially within franchise brands given the changes occurring in the market? And then one quick follow-up question after that..

Yeah, look, the way we plan out our brands are based on proprietary consumer insights, and we spend so much time understanding our audience. And our goal is to understand the audience better than anyone for all of our brands.

In addition -- So that really focuses on our franchise brands and other brands, and there may be collectible aspects to those brands because the audience or the consumer tells us that, that they want to participate in those ways.

And then on the other side, we've had our quick strike initiatives, which have been successful, and we saw the impact of those in the fourth quarter, like Lost Kitties and Yellies, where we saw a social media trend and using social media scraping and listening we found a fun new trend that was unique and original.

And we put it in the market to good success, and so we're going to follow the audience and the consumer. We don't have a overarching mandate at the company to come up with just collectibles for collectibles' sake.

There are a lot of companies out there that have done a really good job in this space, and we applaud the innovation and the efforts around companies where their businesses have been built with a single brand. And we don't really create product based on a business objective only.

We're really looking at the consumer and the audience, first and foremost..

Great. Thanks. And then could you comment on Hasbro Toy Shop? I know you're making some changes there.

Is there any way to think about how that could impact 1Q and then how that could impact, you know, 2019, 2020, and beyond?.

It's really exciting. What we're doing there is moving Hasbro Toy Shop to be Hasbro Pulse. The effort there is a combination of a lot of efforts we've had across the company where we are engaging with our fans, and we've seen the fan economy grow. We've spoken to you over years about the importance of the fan economy.

We have used see-now, buy-now strategies for different shows around the world. We obviously are a big participant in ComicCon. We have brands that track incredibly well with that fan base. Our Transformers business has a huge fan-orientation. We put content out for the older adult in that brand and for the fan.

And so this is bringing together several of our capabilities to build a direct consumer offering that has both content and commerce, but it is organized and focused on our fans across a multitude of brands, from partner brands to our own brands. And we're very excited. It's early days.

I don't know, Deb, if you want to comment further on investments, but obviously you'll hear more about it. John will probably walk you through some elements of this next week at Toy Fair..

Great. Thanks again..

The next question is from the line of Steph Wissink with Jaffray's. Please proceed with your question..

All right, thanks. Good morning, everyone. I want to just put a finer point, maybe it's a question for each of you, a finer point on a few of your comments. So, Brian, this one's for you. You said inventory in Europe down 27%. That does include Toys-R-Us, but channel seems very clean. You've rebalanced your retail mix.

You have a really strong pipeline for '19. So why only use the word "stabilize"? Why will that business not grow? That's the first question..

So, Steph, you know us. You know we want to make sure we get things right before we run at pace. The team's been working feverishly for the last 18 months or so.

If you recall, we talked about changes to the organization that we were making, and we took a charge, in fact, to modernize our organization prior to the announcement of the liquidation of Toys-R-Us. So we were already on the case, and yet it does take a period of time, and yet it's not forever.

So I feel that what's important to reassure people of is that in an environment where we stabilize Europe, we can grow our company, and therefore with all of the other factors, including announcements we're hearing this week from the Bank of England and others about re-rating growth rates in countries and across territories, that our company is strong, our balance sheet is strong, our strategies are sound, and our brands are powerful.

So it's just a matter of making sure people feel comfortable and confident that we're not relying on something to occur. Rather we are going to plan appropriately, conservatively, for that in the context of all the initiatives that we have..

All right, that's very helpful. And then, Deb, one for you, and this is really on incremental margins in 2019. So if we look at 2018 was really a sales impact year, but you were still investing behind the business. So the margins were probably a bit lower. In 2019 you get a boost from sales.

If the investment levels are stable, we give you some credit for your cost savings and Magic and some of the film revenues, it would imply that the incremental margins are going to expand quite sharply.

Is that the appropriate way to think about the 2019 opportunity and maybe 2019 as the first year in a multi-year opportunity?.

So we'll give a bit more specific guidance on some of the factors, and, you know, I remind you we've paid for some of these investments and we'll continue to invest in the business.

So for example we had a good discussion earlier about Power Rangers that we are super excited for the long-term, and we think, we continue to say that could be a future franchise brand of ours, performing all the way around the blueprint.

But with that comes amortization, so we only have a partial year of revenues from that acquisition, but we have a full year of amortization. So we have some things and some investments that will offset, but we do see our operating profit margin expanding over time.

And we'll give some guidance next week of where we see that expanding to, but we remain very focused on that.

We're very focused on making sure that when we have revenue growth, we're able to take the leverage of that through to our operating profit, through to our earnings, and then take those positive earnings and return any excess cash after we keep investing for the long-term to our shareholders. That remains our strategy..

Thanks, and then one more, Brian, or maybe John, if he's still in the room. Is this with respect to 2019, your comments seem to suggest that you're consistently if not even more confident than the opportunity set in 2019.

But I just wanted to make sure we're hearing you correctly that your franchise and your games business ex Toys-R-Us did grow this year at the POS level, your inventories are very clean, your partner slate, Brian, you went through extensively. It sounds like it could be even a kind of double positive year, a lot of content coming through.

So if we think about kind of the staging of 2019, you had a growth versus your historic average in that mid single digits.

Are we hearing you correctly that your confidence level remains high and the growth potential -- not guidance per se, but just the growth potential is there to really set you out on kind of a new baseline for a multi-year trajectory?.

Now, so first and foremost, I think there -- I'll walk you through our new view toward broadly what we'll call kind of medium term guidance next week.

Because there are some puts and takes, and a good example is that we don't believe we can rely on the kind of double digit growth we've achieved in the emerging markets over the past five years, 2012 through 2017, going forward. And yet in our plan we believe we can achieve the low-to-mid singles digit growth that we have achieved.

In fact, the 5% growth rate is what we had achieved historically, and we're going to say low-to-mid single digits growth in developed economies. The faster growth will come from gaming, which is an area that we have been focusing on and investing, but again that's a newer investment for us and we want to get to see the returns.

You are right that, let's just look at the US, US without Toys-R-Us, where we had the greatest impact, where Toys-R-Us represented globally two-thirds of the Toys-R-Us business was in the US, without Toys-R-Us, in the US every category of our business was up for the year in POS.

But I also want to recognize that you have the tempering effect of emerging markets, offset by the very exciting early days of our launch of Arena and the acceleration of Magic and Dungeons & Dragons.

So a longer conversation, but suffice it say we feel good about our track record, what we've achieved, and next week we're going to reaffirm the next phase of growth for Hasbro..

Thank you. We'll see you next week..

Thank you. Our last question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your questions..

Last four questions, that is. They're really quick..

Gerrick, I'd expect nothing less..

Okay.

First one, should we expect more severance charges in 2019?.

Well, I think you can never say never, right? But right now, as we look through to 2019, I would say there's nothing significant that we're thinking of right now. However, there are always severance charges in our business..

Okay, great. Thanks. And on Transformers, can you talk about that? How did that perform to your expectations? And is there anything you can give us on expectations for bottom line contribution or expense? Thank you..

Yeah, sure. On Transformers, in the fourth quarter was up both in the US and internationally, so up overall. We really successfully reengaged fans and families with Bumblebee. It's done over $450 million globally.

The early indications as we enter the New Year are for a strong ESP and home entertainment window, and we believe that the enterprise for Bumblebee, including the film, is profitable for Hasbro go forward. Obviously we're in the early days. Haven't hit the home entertainment window yet.

We haven't even opened in Japan yet, and the movie is still in theaters. In addition to the feature film, which is an important element and we are working on new films ideas with Paramount in partnership with Jim Giannopoulos and that team, and they're fantastic, we also have television on Cartoon Network, Netflix offering, and preschool offering.

So across the board, it's a brand that really embodies our brand blueprint strategy, and we continue to believe very strongly in the power of the franchise..

Okay, great. Thank you.

And on Power Rangers, are you accelerating the timetable for full activation? Or is this consistent with what you were planning before?.

It's pretty consistent with what we were planning before. What we didn't know but know now is that we've been through several of the major toy fairs and have shown the product line to several of the industry experts, and they're all giving us very enthusiastic response to the brand.

We've really made, see change, improvement to the product line, to the innovation, to price points. Looking forward to showing you the Mega Mighties line and what that does for brands like Marvel but also in areas like Power Rangers. It's an exciting time, and we're looking forward to kicking that off..

Okay. Yeah, that's a great brand. Looking forward to that. My last question is franchise brands down 9% in the year, so you have an easy comp going forward.

Do you expect growth in franchise brands in '19? And maybe is it too early to start asking about 2020? Thank you?.

Yeah, yeah. I don't want to comment on franchise brands only because it's early, early days, and I wouldn't give you guidance by a product category at this point. Remember that our franchise brands in 2018 were brands that were strongly supported by Toys-R-Us. The impact is clear. We've described how that happens.

But underlying that, we did have, in the fourth quarter, three of those franchise brands grow with Magic and Monopoly and Transformers. And, again, I feel like we have real opportunity as we go forward. We saw real momentum even though the brand didn't absolutely grow in the fourth quarter with Play Doh.

So look, I feel that we're on a good track with great innovation and great teams on those brands..

Right. Thank you, Brian. I'll see you next week. Thanks..

Yeah, see you next week. Thanks, Gerrick..

See you then..

Thank you. I will now turn the floor back to 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. Management's prepared remarks will be posted on our website following this call. We look forward to seeing many of you at our investor event at Toy Fair next week, Friday the 15th. Thank you..

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