Michael Ng - Goldman Sachs Eric Handler - MKM Partners Arpine Kocharyan - UBS Stephanie Wissink - Jefferies Felicia Hendrix - Barclays Bank Greg Badishkanian - Citi Jaime Katz - Morningstar Drew Crum - Stifel Susan Anderson - B. Riley FBR Tim Conder - Wells Fargo Ray Stochel - Consumer Edge Research Linda Bolton-Weiser - D.A. Davidson Gerrick Johnson - BMO Capital Markets

Good morning, and welcome to Hasbro’s Third Quarter 2018 Earnings Conference Call. All this time, all participants 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, 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?

Thank you, Debbie. Good morning, everyone. And thank you for joining us today. The global Hasbro team is effectively working through a disruptive year. Our third quarter results reflect last Toys“R”Us revenues in the US, Europe and Asia Pacific, but also showcase the progress we are making to add a broad array of new retailers to lower retail inventory in major markets and to drive a digital-first orientation around storytelling, innovation and growth across the Blueprint. The US and Canada teams have advanced this strategy the furthest and we are making progress. In the quarter, we recaptured about one-third of the US and Canada Toys“R”Us revenues heading into the holiday and we had orders for more that didn’t get shipped by quarter end. Operating profit in the US and Canada segment was also up in the quarter. While there are a number of factors affecting global markets, including an evolving retail landscape and challenging macroeconomic environments in markets like the UK and Europe, Russia and Brazil, our response to these factors is deliberate and measured to capitalize on our Brand Blueprint strategy with audiences and consumers. Just over one year ago, Toys“R”Us filed for Chapter 11 bankruptcy and put into motion a process which ultimately resulted in the rapid closing of most of their stores, including all stores in the US, UK and Australia, and transitioning to new owners in select markets. In certain markets, this transition is ongoing. We continue to believe this is a near-term retail disruption that will last for the next few quarters. Our established and differentiated Brand Blueprint strategy has enabled us to transform and we’ve invested in industry-leading brand building capabilities. To best position our company for profitable future growth, we need to continuously drive new ways of competing. We’re becoming a more agile,…

Thank you, Brian. And good morning everyone. As the year progresses, our global teams continue to manage through a dynamic and challenging environment. Retail disruption, which is not limited to the impact of Toys“R”Us has complicated our efforts to clear inventory in Europe and to address challenging operating environments in other global markets including the UK and Europe, Russia and Brazil. Despite revenues lower than a year ago, our operating profit margin held up well this quarter. A combination of less favorable revenue mix, negative foreign exchange impact and steps to end 2018 team with clean retail inventory offset lower royalty, advertising and administrative costs. As Brian discussed, we continue to transform Hasbro. Based on organizational actions to ensure we have the right talent and capabilities to profitably grow going forward, we expect to record a charge a $50 million to $60 million in the fourth quarter of this year relating to severance. While this will result in $30 million to $40 million of annual savings by 2020, most importantly, it will ensure we are well positioned with the right talent for success in the evolving marketplace we see ahead of us. We remain focused on growing Hasbro over the long-term and continue investing in brands and entertainment to drive future performance. We’ve also returned $422 million in cash to shareholders thus far this year through our dividend and share repurchases. Within our segments, the US and Canada segment revenues declined 7%. Toys“R”Us in the US is now fully liquidated. The Canadian business was sold in the early part of 2018 and is now operating under the new ownership team. Hasbro Gaming revenues grew double-digits and Franchise Brands were up slightly. Partner Brand and Emerging Brand revenue declined in the quarter. Importantly, retail inventory is down significantly. With no US…

Thank you. At this time we’ll be conducting the question-and-answer session. [Operator Instructions]. Our first question is coming from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Great. Thanks for the question. I have one for Brian and one for Deb. For Brian, you mentioned that you guys have captured about a third of the Toys“R”Us revenue going into the holiday. Do you expect to fully recapture all that Toys“R”Us revenue over time? And if so, does it happen in 2019 or 2020? Basically, how long do you think it’ll take to capture the remaining two-thirds? And then for Deb, I just had a question on EBIT margins, EBIT margin is being down this year. Could you just put some bookends on the expected decline? Will it still be in the 15% range between 14% and 15% or worse? And do you expect operating margin expansion in 2019? Thank you.

Thanks, Mike. Good morning. On the US business and Toys“R”Us share recaptured, the team has made tremendous progress and that’s what we’ve been talking about making up the difference. And in fact, we’ll continue to see in the fourth quarter this year additional progress as more retailers have begun to kick-in with their holiday plans and we’re seeing more robust plans come. We’ve added just over the last year -- as part of the 21,000 new doors of retail that we've opened in the US, we've added a 10,000 of the 21,000 just over the last year. So that continues to allow us to expand our channels, continue to work with our major retailers, you'll see them announcing and launching their plans over the next number of weeks, but also additional channels based on a really robust product development strategy. This enabled us to develop product at multiple price points. So as we go into 2019, we certainly believe we'll continue to make up to the Toys“R”Us difference. Our goal in holiday 2018 is not to necessarily make up the Toys“R”Us difference this year. In fact, what we're working on with our retailers is to ensure we get to a new higher level of commitment and capability with those retail relationships. And that we have strong sell-throughs through the holidays, setting us up for a new higher level of retail support in 2019. As we go into 2019, we're very enthusiastic about the lineup. We have strong new initiatives coming from franchise, partners and gaming. And we certainly believe we will return to growth. And as Deb mentioned, we believe this will be profitable growth as we continue to bring forward new initiatives across the franchise. I'm not going to comment specifically on making up Toys“R”Us but as I said, we're very committed to 2019 being a year of growth. And we'll going to -- we'll see that as we stabilize Europe, in 2019 we will return Hasbro to growth.

As far as our operating profit margin, in July, when we talked about Q2, we still had the majority of the year for revenue and profit ahead of us. And we had a plan that would have delivered our operating profit margins that were kind of in line with last year. As we look forward, the US and Canada segments on track we talked quite a bit about that, Brian just elaborated on that, we feel pretty good about that. Europe is a little bit worse than we had thought. And it's brought our margin expectations down a bit. We do remain committed to clearing up the issues that we have there this year, clearing up the inventory, that's impacted our gross margin a bit too. We've had more close-outs than we thought we would have. Typically we would have gotten a higher margin on those as we sold them out throughout the year. And Toys“R”Us took some of those, but other retailers are and these are close-out retailers that are going through too. So it's not our traditional retailers. Those gross margins continue to have -- continue to carry the gross margins that we would expect. So just what we see based on mix, and the mix of the products we expect for the rest of the year, we would expect a lower operating profit margin than last year. We also highlighted some of the charges that we're going to be taking in the fourth quarter. We do expect to take $50 million to $60 million charge in the fourth quarter, relating in this case, specifically the severance. However, underlying, there's no -- nothing that will cause us to not believe that we can grow operating profit in the future. I think this is a year of transition for us and there's been more of a bit of a transition in Europe than we thought but it's working its way through. We're seeing good performance in the US. So we remain positive about -- very positive actually about the future.

Great. And do you have any comments about '19 margins or whether it’d be up or down or is it too early to tell at this point?

No, I think our expectation is that they'll certainly be up from what we report for 2018. And if you look at the line items in our P&L even for this quarter, despite the disruption in revenue, we continue to control our costs and we continue to invest where we said we would from a production standpoint, royalty standpoint, product development, because as you know that’s where we say we're investing for the future. So we continue to make those investments and keep our -- and are keeping our cost in line as well. So there is no reason why we wouldn't expect that to increase in the future.

Great. Thank you both.

Thanks, Mike.

Next question is coming from the line of Eric Handler with MKM Partners. Please go ahead with your questions.

Yes, thank you very much. A couple of quick things for you, Deb. First, advertising came way down as a percentage of revenue on a year-over-year basis. And this year, you seem tracking several -- a bit lower than last year. How sustainable is that advertising as a percentage of revenue to get sort of into that like 9.3% area versus like the 9.6% area. Is that something that can continue on in the future or is that going to have to increase as more products come out?

Well, let me talk a bit about that. What we're really seeing obviously in part that dollar decline you saw in the third quarter has a lot to do with our plans and expectations to support our fourth quarter initiatives as we saw where our retails -- retailers are expanding their efforts and we're getting into the holiday season. Having said that, we've been talking for some time about how using a digital orientation and social listening and scraping were getting better and better at targeting our media. We're able to get more economies in our developed economies like the US and other media savvy markets. We're still spending at market leading levels where we're trying to establish new brands and also build new brands around the world. But I do believe that you'd see that advertising would be in that 9% to 10% range and probably at the lower end of that range, both in 2018 and beyond.

Great. And then one other question for you. Entertainment, the entertainment and license business got a nice increase in revenue. One of the reasons was -- is that the Netflix deal from four years ago that is now fully renewed?

As we look at it, we did renew a digital streaming deal that we had from I think ‘15 was last time we did. And we also are getting revenues in from our My Little Pony: The Movie. So you see that in our program production amortization, but we are getting revenues in there coming through that segment.

Great. Thank you very much.

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

Hi, good morning. Thank you. You mentioned inventories were down significantly at retail. Is there a chance you could give us what that looks like ex-Toys“R”Us? Because Toys“R”Us is a specialty toy retailer. They were more able to take on inventory ahead of holiday season than for example a mass retailer that's a little bit time sensitive. How much is retail inventories actually down ex-Toys“R”Us? And then I have a quick follow-up. Thank you.

So if you look at Europe, obviously Toys“R”Us had less of an impact in Europe and our European inventories are down -- retail inventories are down by more than 20%. In the US obviously our retail inventories are down 17% and we’ve seen that by retailer across the board. So our retail inventories by our brands and across other retailers are down. Recognize, as you're moving more to omni-channel and online retailers, those retailers are taking fewer week supply and in part the changes we made in Europe and the update to eliminating excess inventory is that Europe is actually making very good progress working with new retailers and omni-channel and online retailers as we are in the US and both -- in both cases those retailers take less week supply. So our big partners, as well as that expanded retail channel footprint take less week supply. So these are real retail reductions across our business and then certainly Toys“R”Us has some impact.

And Arpine I would just add to that too. I mean especially as you look at Europe our inventories are down significantly as well so.

Okay, thank you. Then our checks have shown some surprising softness in NERF into Q3. Could you give us the sense whether it is just a function of sort of very tough comp since the brand did so well last year in Q3 I remember? Or is it that we are seeing some structural change in terms of retailer willingness to take on more bulkier items that are more fit for online, which could mean that Q4 could be a little bit better, because that’s more just in time inventory management and online seems like it’s doing -- it’s still doing well?

Yes. The biggest impact in Q3 to NERF was the fact that a year ago Toys“R”Us supported the NERF Fest which originally began in US is now rolled out globally in 2018. And that represented significant linear feet of space and inventory a year ago. In addition, the liquidation in the second quarter certainly impacted unit sales that were up in Q2 and then down in Q3, particularly around some of the basic products. What we are seeing is strong growth of the Rival product, those are the round projectiles. We’re seeing a launch -- launching seven new blasters in Q4. And so we’re very excited about getting new innovation out to the market and clearly that’s performing well. The brand also does perform as you indicated online quite well as people get access directly to the products they’re looking for across the NERF range. So we feel good long-term in that NERF. We’ve seen a few other competitors -- some people have noted competition in the category. But we’re going to continue to add innovation this fall. We have LASER OPS, which is a whole new innovative way to play with great out of the box play. And then we have a lot of new innovations coming for first half of ‘19 including NERF Overwatch and NERF Fortnite. And then we’ll have additional new innovation coming in NERF that we will share with you later in 2019.

Thank you. And one more if I may. Brian, there is a lot of excitement both in the marketplace, as well as investor community about MAGIC: THE GATHERING Arena, as you went into Open Beta recently. Could you share your expectations of what that could mean for Hasbro for ‘19 and in terms of both profitability and incremental revenue?

Yes. First of all, I think we should start by talking about MAGIC: THE GATHERING, because obviously it’s all related and interrelated as it’s a story-led brand. MAGIC is up year-over-year, it’s driven by that Core Set launch from July. But also what we’re really seeing is that a growth in total unique players of 14% year-over-year. We saw growth of new players of 17% year-over-year. So I think MAGIC: THE GATHERING Arena is off to a good start, but really the fact is we’re just in Open Beta. We’re actively engaging with players as we continually refine the game and our work is not done. We’re going to invest in game development. We’re going to across new platforms with new features and we're very excited about what Arena portends for 2019 and beyond. We're not going to frame it other than to say we're continuing to expand in markets, in social and competitive features and platforms. I would encourage you to look at some of the positive reviews that have been out there in PC Gamer and Polygon and a few other publications. And also, I really encourage you to look at the viewership on Twitch. I think the game will officially launch in 2019, but already, you're seeing real excitement on Twitch. And of course, we're going to add new elements to MAGIC: THE GATHERING as competitive gaming has been part of our MAGIC's DNA since the first Pro Tour in 1996. And MAGIC: THE GATHERING Arena provides this amazing digital platform that's as much fun to stream and watch as it is to play. And so, we'll share more with you shortly, but it's off to a very good start. And it's exceeding our expectations.

Great. Thank you.

The next question is from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thanks. Good morning, everyone. Deb, I wanted to just come back to your comments on Europe and the partner brand inventory. I'm wondering if you can give us a sense of the Q4 versus Q3. I understand it's going to continue through the end of the year, but are we getting toward the tail-end of that cleanup? Should we expect the fourth quarter impact to be smaller or larger than what you've just experienced in Q3? And then Brian, a question for you just on NERF. I think that there's a point of focus, just understanding a bit around the distribution changes in that brand in addition to the sales cadence with Rival, Overwatch, Fortnite, do you expect to gain some new distribution into maybe non-toy or non-traditional toy channel or into other areas of your mass retailer footprints, and areas like entertainment and sporting goods? If you could talk a little bit about distribution expansion for NERF that would be helpful? Thank you.

Good morning, Steph. I'll take the inventory question first. I think that as we look at our inventory, both at retail and at Hasbro, we have said we remain committed to deal with this issue in 2018. So, I can't specifically say whether the fourth quarter is going to be up or down from the impact on our gross margin from that. But we just absolutely remain committed to getting it done. And by the end of 2018, we do believe that will be behind us.

Alright. And then if you look at NERF, Steph, you're absolutely right that NERF is a brand that resonates everywhere. But certainly, we are adding significant new points of distribution. We have lots of new retailers as part of our expanded channel strategy, who have come on board, including an array of sporting good retailers, some of the fan-type retailers, electronics and gaming type retailers. As we get into NERF Overwatch, we're very excited because not only do we have great blasters, but we're really allowing people to role play and play blasters, very much bringing the game to life in real life, outside of the game and then later in NERF Fortnite. Again, very character-forward, based on the strong storytelling of those brands and we're very excited about that. Then we'll get into some new innovation for 2019. And we'll share that innovation closer to when we launch. But overall, NERF's footprint continues to expand. And I do think it's important to note that it's just the disruption of Toys“R”Us we talked about a year ago in NERF Fest. And recognize that the Q3 for Hasbro -- Toys“R”Us was it's largest in Q3 last year for Hasbro. It was prior to any liquidation. It was when they were restructuring their business and we believed that they would continue. And then behind Q3, Q4 was the second highest quarter for Toys“R”Us last year. And so, it goes back to where the impact will be. But as we finish this year, we put the European excess inventory issues behind us as well as Toys“R”Us.

Okay. Just one final question for us. I just want to make sure I heard you correctly. A $50 million tail-end of Q3 shift into Q4. Was there any other timing lags or shifts that you think would be worth calling out just in terms of order of magnitude as we should think about modeling Q4 versus Q3 on a total sales basis?

Yes. That was the impact. And again, the team had recognized already that we are going to such an expanded universe of retailers that we were already well underway in establishing a new Midwest warehouse. It's a very innovative approach. And it will also enable us to reduce the mileage to our retailers' distribution centers which obviously helps to mitigate some of the other cost increases we've seen. And we should save some monies there. It gives us also an opportunity to try some innovative approaches with some of our retailers and sharing warehouses, where we can move very quickly to replenish, given several retailers are going to a lower week supply inventory. And so, we see this is again a step up in Hasbro capabilities. And many of these new capabilities we've brought on board in North America and in the US. We're marrying that to our European business. And that's what you're seeing us do in real time and rapidly so that Europe will follow quickly on the successes and the momentum we're seeing in the US as we go through this disruptive year, and again, put the Toys“R”Us business behind.

Thank you.

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

Hi. Good morning. Thanks. Hey, Brian. Just stepping back for a second, I think you and Deb really have clearly laid out the various headwinds that you faced in the quarter and maybe some of those -- well, obviously, some of those were not expected when you talked to us in July. But if you kind of look at where you guys came in relative to the expectations that were out there, on a revenue basis at least, you actually came in better in Franchise Brands than Hasbro Gaming. And so, the real miss seemed to be significant declines in Partner Brands. So, I was just wondering if you could kind of layer that into your overall commentary because with that line being disproportionately affected by the issues you mentioned, I'm just wondering if we can understand what exactly happened there and then how both company and retail inventory levels are in that segment?

Yes. I think it's absolutely right on. In fact, if you go across the Partner Brands -- and let's focus on first year-on-year on Disney Princess and Frozen, last year, we had a number of entertainment initiatives that were supporting the brand, including Moana and Beauty and the Beast as well as some television led initiatives that didn't really repeat this year. In Star Wars, remember, last year, this was when Last Jedi product was setting. So, there was a sizable amount of inventory and merchandising that was going on around the brand. And so, that wasn't repeated this time this year. So, that those two had major impacts to the business over that time. And then again, as we come off of the movie year, you saw some impact from Trolls and a few others. Now, offsetting that, we've seen very strong momentum on the MARVEL business. We're very excited not only about the performance of Avengers and Black Panther, but as we get into the fourth quarter, we'll support Spider-Man, the animated movie, which we're excited about. And then, of course, we'll have our own Bumblebee film, which I can't help but mention. The -- but I do agree that we were up against major entertainment initiatives from a year ago.

And as we head into …

Well, I guess what I'm trying to get …

Sorry. As we head into 2019, we see that continued momentum around entertainment. In MARVEL, you've got Captain Marvel and Avengers. And then from Disney, we've got Aladdin and Toy Story. And there's another Spider-Man. There's Lion King and of course, Frozen 2, and then Star Wars: Episode IX comes at the end of next year. So, as you think about the mix I mentioned and some great entertainment, we've got good momentum in MARVEL. And we've seen good momentum in entertainment to carry our Partner Brands next year as well.

Thank you for all that. It's really helpful. But I guess what I was trying to get to is there were some things that happened in the quarter which were likely not planned. I’m just trying to kind of navigate through this kind of unknown territory, right. But at the end of the day, other than the kind of changes that you talked about in Partner Brands, you seem to have kind of come in -- it wasn't like anything that happened was so surprising. And so, you just laid out Partner Brands and why they were down. Just I mean that would have been some declines I would think normally that you would have had in the quarter. But was there anything kind of specific related to Toys“R”Us or inventories or anything that would have hit Partner Brands harder than the others?

No, I think that, again, year-on-year, we're up against these major initiatives. I think the notion of being a disruptive year is disruptive in a lot of ways. I guess the attention and focus on Toys“R”Us and moving to Toys“R”Us has people missing the fact that we're also up against some entertainment initiatives. I think it's important, to your point -- if you look at the US business, it's really leading the transformation of a company through this year. Both Franchise Brands and Gaming for us were up double -- Gaming was up double-digits. Franchise Brands were up. Our Emerging Brands are up overall. But Partner Brands are down but I think with good reason. And then, of course, we are focused on cleaning up any remaining inventories around all of our brands. And there are some Partner Brand inventories we're also cleaning up alongside of other inventories, particularly in Europe where in Europe our entertainment-led brands from the company do particularly well across Europe. And we have a lot of entertainment initiatives for 2019, as Deb said. So, we have a real commitment here to finalize and conclude all these inventory issues by end of the year. So, we're really set up well for what is a very robust entertainment year across our Partner Brand portfolio.

Yes. Okay. Thank you. And then just for Christmas, consensus estimates call for a flat revenue growth. That seems kind of optimistic at this point. Do you agree with that?

I think -- look, I think we're heading into a very strong holiday season. We have a lot of new initiatives set up. I think our goal is -- again, it will be the continued momentum in the North American business. We mentioned that the Canadian business was up in Q3 in both sales as well as sell-through revenues and sell-through. And that was because we had mitigated the retail situation because there’s new ownership of Toys“R”Us. So, what I think you're seeing is that our brands are really resonating with consumers, whether you see the online sales when you get out of the brick disruption, whether you see it in Canada and now Germany, Austria, Switzerland and Smith's has taken over that business. It's following rather quickly to what Canada looks like. So, as we go through these transitions, our underlying business is quite strong. Our brands are good. Consumers are very excited about what we're doing. It's just that, again, we've got to get through the disruption of the Toys“R”Us business. And as I mentioned, Toys“R”Us was largest for us in Q3 last year followed by Q4.

And then last quarter, you said that you would expect to fully offset Toys“R”Us by the first quarter of '19. Is that still realistic? I know in your prepared remarks, you said it would take a few more quarters.

Well, the reason we mentioned that Toys“R”Us takes a few more quarters is there's been a delay in the resolution of the Asian business of Toys“R”Us. As you know, the two owners are still trying to resolve their differences. And obviously, Asia and Toys“R”Us is -- Toys“R”Us performs frankly best around the world and Asia. So, that's an area for us where we'd like to continue to move forward with new ownership. And we're waiting for that resolution. And that's why we've left it out there that it may take a couple of quarters. But also remember that in Q1 last year, we did make some shipments to Toys“R”Us in the US and other markets that have subsequently liquidated because, again, at that time, Toys“R”Us had not announced their liquidation. So, we're just, again, framing for people. The fact is, we were in business with Toys“R”Us, albeit at a much lower level in Q1 of 2019. And the biggest quarters of impact versus year ago certainly are this quarter and next quarter. Next quarter is less than this quarter was a year ago. But again, just framing it out for folks.

So, maybe US first quarter but then dealing with Asia, probably fully through by second quarter?

Well, I think we and the management there would hope so.

Okay. We don't know.

It's taking a bit longer to get this actual ownership transition resolved than anybody anticipated. The only thing I would say about the quarter is just beyond Toys“R”Us is we are seeing the new retailers that are taking these orders are paying up this share. Some of them -- it's just the cadence is a bit different as how close they take it to when they want it. So, just from a cadence standpoint, we're looking at that. And we'll talk more about that at Toy Fair. But that's the only thing I would add beyond Toys“R”Us.

Okay. Thank you. And then two just quick housekeeping. Deb, how should we think about the $30 million to $40 million in savings spread across 2019 and 2020? And then I was just wondering what tax rate we should use for 2019?

Well, we haven't given any guidance for 2019 for the tax rate yet. But I would say we expect to be slightly -- and when I say slightly, I mean slightly above the 15% to 17% for this year. And right now until we actually get all our budgets rolled together, we'll talk more about that at Toy Fair. I think that's a fair estimate to use for '19 as well, absent anything more specific. But -- and I'm sorry, I completely lost the other part of the question because I was thinking about …

Oh! How we should spread the $30 million to $40 million in savings across '19 and '20?

Oh! Sorry. Yes. I was thinking about the tax rate. And you got me thinking about '19 tax rates now, Felicia. Thank you.

I'm just excited about that.

Always my fun this early in the morning. But no, no. And again, I have to add -- because my head of tax would say absent anything else the US government comes out with to clarify tax reform more. But the $30 million to $40 million, we expect to achieve that full run rate by 2020, you will see some of it phasing-in in 2019. And some of it's just a bit about just timing. And we'll try to give some more guidance on the phasing of that when we get to Toy Fair as well.

Okay. For now, would it be fair if we just spread it 25% in '19 and then the rest in 2020 or something like that?

We'll give more guidance in our 10-K and at Toy Fair.

Okay. Thank you.

Our next question is from the line of Greg Badishkanian with Citi. Please proceed with your question.

Great. Thanks. I am wondering if -- did you mention that ex-Toys“R”Us that POS was up globally? Did I hear that right?

Yes. So, if you take without Toys“R”Us, year-to-date POS was up globally. POS was also up including Toys“R”Us globally year-to-date. In the US, without Toys“R”Us -- because that's where really the biggest impact -- yes, POS was up in the quarter and in year-to-date. And in fact …

No. I'm just going to ask you to quantify it up how much in the US?

Yes. So, if you take, it was up in the single-digits in the quarter. And it was up across our Gaming Brands, Emerging Brands, Partner Brands. Again, it's without Toys“R”Us. And year-to-date, without Toys“R”Us, it's up mid to high single-digits across the board in every category.

Alright. Good. And I know you gave some detail on the Partner Brands and entertainment impact. In terms of your company-owned Franchise Brands, was there any one or two brands that surprised you in terms of retail performance?

Well, we're seeing great performance as we've expanded our retail channel footprint and continue to drive innovation with brands like PLAY-DOH. Really we’re seen that brand accelerate. It's one of our most global brands at very consumable price points. And the brand has performed very well. Really starting to build that momentum with a new array of product and new digital marketing orientation using social scraping and social listening. So, again, I think it's our new trend in the way we approach our brands and approach innovation. It was up sizably in the US but it was up all around the world. And so, as we expand our retail footprint, it's one of the brands that goes not only online with a quite sizable growth but also to a lot of new channels of retail as everyone can participate in PLAY-DOH's innovation, creativity, fun, and growth of the brand. And then in addition -- sorry. In addition, the Gaming business is doing quite well. MONOPOLY was up considerably behind both the original and the Cheaters Edition. MAGIC: THE GATHERING in our Franchise Brands has performed quite well. We've talked about that. And again, we're very excited also about a lot of our new initiatives, what we call our quick strike initiatives which have driven growth in the emerging brands segment of the business. But people are very excited about and we're seeing great response to brands like LOST KITTIES and YELLIES and others.

Yes. Good. Alright. That's helpful color. Thanks for running that out. And then just finally, any thoughts on the last-minute kind of shopping patterns for the year? So, Toys“R”Us was usually the place to go to get gifts ahead of Christmas. What does that mean for this year? Where do you think the shoppers go for that last-minute gift purchase?

I'd say our team has done a fantastic job in working with all of our retailers. As we spoke to you last quarter, we were just in the midst of presenting those plans. And now, we're really seeing them come to fruition as we end the third quarter and enter the fourth quarter. Many of those retailers do merchandise toward the holidays later than a toy specialist who would have product on shelf beginning in July or August. And we're very excited about the expansion of retail space we're seeing at our major partners and retailers. You're going to see very exciting in-store experiences, expanded footprints, very exciting online efforts where we're bringing a lot of digital marketing forward. And so, I think that you're going to see, as I mentioned earlier, a linear footage for the toy industry that's quite sizable and very comparable to a year ago once we get into these last eight weeks of the year. And it's very exciting to see our brands come to life across our portfolio.

Perfect. Thank you.

The next question is from the line of Jamie Katz with Morningstar. Please proceed with your questions.

Hi. Good morning. I'm curious about some of the forward-looking strategy that you guys talked about. You discussed modernizing the global organization. And I'm interested in hearing exactly sort of what that means and what the top priorities might be for that strategy. And that seems to be spurred also by these changing consumer behaviors that were mentioned in the slide deck that you guys offered. And I'm wondering if there's something secular that you guys have seen or are we just talking more of the shift to online purchasing and then the interest in more digital product offerings than in the past? Thanks.

Hey, you're really seeing a transformation of our business across every area, in design and development, the way we go about storytelling and ensuring that we have great stories on every screen, from short form and social media, all the way through bespoke content. The way we're marketing, it used to be that digital marketing was one area of expertise that was in one part of one group in the company. And now digital marketing is embedded across the company. Data analytics and the way that we look at replenishment and working on online algorithms to ensure that our brands are available to people as they search for products for gifting, social listening and social scraping as not only ways to understand what people are doing and how to respond with great product but also so that we understand immediate responses to marketing communications we're putting out and how do we amend those or change those communications to optimize that for the consumer. We also really are forging new ground in content to commerce. This is where you're able to watch and stream content and make decisions. Literally, just click on the content with a chance to purchase product. We're seeing that really begin to work. And we've built great capabilities there. So, this is literally shoppable social content. I talked a bit about that. And we think this is the next new area where people will shop off their mobile phones. And then, of course, we’ve built the expertise for the teams because again an online -- global online team that's focused on the trends within online shopping, the channel teams that are focused on how do we expand our footprint with a product development strategy that allows us to get to different price points and different feature sets for products and different play patterns. So, again, across the board, we're seeing great progress here. And in Europe, we're marrying the strong progress that we've shown in North America. And that's all part of some of the changes we've made. The other thing is we have great leadership across our company. And our teams are quite strong with experts in so many new areas. And they want an opportunity to lead. And we want to give them an opportunity to lead at our company. And so, we've made changes organizationally to enable that to happen.

The next question comes 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 lineup and licensing program you had for Bumblebee relative to other TRANSFORMER films and how you'd expect the sales cadence to progress relative to prior TRANSFORMER film cycles?

Sure. First of all, Bumblebee just began setting on shelves first in the US just in early October. We're already seeing very strong results out of the gate, albeit early days. And our fans are responding quite positively to the product that they've gotten thus far. Our major retailers have identified the property as a top-level property because it not only has great toy and game lineups but consumer products. Our teams are supporting it with digital games as well. And Backflip is offering new effort -- new elements within its EARTH WARS mobile game. The cadence is that the film comes out at the end of December in many markets. And then it will be a bit later in January in some markets. And we're still waiting on getting our date in China which is typical until later you go, and you show the film in China. And then they'll make a decision on the date. But certainly, it will happen likely after the New Year. And there are a few other territories where, for competitive reasons and for retail reasons, it's coming after the New Year. So, the brand’s impact -- the movie’s impact on the brand will certainly [Audio Gap] quarter and in the first quarter. And then, of course, the home entertainment windows for all of these brands, our Partner Brands, and certainly for Bumblebee are more pronounced than ever before as more people are watching entertainment at home. And we would expect that to come in the first half of next year, the home entertainment to come in the first half of next year. And this is all part of new storytelling around TRANSFORMERS and will continue with new television which is launched as well and also stream content for fans. And so, the brand has a robust lineup. And as we mentioned, in the US where we are a bit ahead on the strategy, TRANSFORMERS was up double-digits in the quarter.

Got it. Okay. And then just shifting gears or going back to MAGIC: The Arena, I know it's still very early days, but have you identified or are there any other game properties or IP in the portfolio that lend themselves to a PC, digital-based, free-to-play format? And if so, is that an area of investment for the company going forward?

Yes. This has been an area of investment for us because remember that for MAGIC: Arena, we want to continue to listen to our fans, the gamers who are playing. So, it's constantly iterating the game. Think of games as a service versus a game that you just launch for those listening that -- so, they understand that we'll constantly be iterating and investing in the game and expanding the game in multiple ways to allow them to play on multiple formats. So, it begins as PC game, but you're certainly going to see opportunities to play on every screen for MAGIC: THE GATHERING in a digital format. And you'll also see esports as a major pillar of growth for MAGIC: THE GATHERING go forward. As I said, competitive gaming has been part of MAGIC's DNA since our first Pro Tour in the '90s. And we see that as an opportunity. In addition, other brands, DUNGEONS and DRAGONS and a few other brands also represent an opportunity in that immersive game playing arena. And we're very excited about the early results. And we'll certainly give you further updates as we head to our analyst meeting early next year.

Okay. Great. And then just one last one. Deb, the $50 million to $60 million of charge you expect to take in the fourth quarter, how much is that cash?

That's all cash.

It's all cash. Okay. Got it. Okay. Thanks, guys.

Our next question is from the line of Susan Anderson with B. Riley FBR. Please proceed with your questions.

Hi. Good morning. Thanks for taking my question. I guess just a follow-up on all of the questions on Toys“R”Us. Just curious, do you think that -- you had thought that you would be able to recapture all of those Toys“R”Us sales over time. Has that changed at all? Is the industry not going to go back to the same levels that it was at or is it just recapturing at a slower rate than you expected? And then I guess as we look out to 2019, is there market share opportunity maybe from some smaller manufacturers that sold at Toys“R”Us that don't really have the same opportunity to distribute elsewhere?

Yes. No, I still and we still believe over time that we'll recapture the Toys“R”Us share. And in fact, there's nothing per se about this year that changes our belief about that. Obviously, in entering the second half of the year, you're up against big Toys“R”Us comparable numbers from a year ago. But again, as we move through the year, we're seeing other retailers step up. Our goal is to continue to partner with retailers globally. The one area that was a bit behind was just -- was in Europe because again we wanted to make sure that we made changes to the organization, to our approach to the market, our capabilities and also of course ensure that we exited all excess inventory by year end. And we're doing that. That's our plan. Then again, there are other retailers in the UK that have had some issues. And the team has worked to expand its strategy, the channel strategy to go after new online and omni-channel retailers. And again, that changes the way you send product to them and the weeks of inventory. But again, over time, we believe the demand for toys and games has been robust. The industry has continued to grow. What you're really seeing is the short-term disruption, as we've described.

Great. And then the increased space allocation you're seeing from some of the big retailers, I guess does that change after holiday or do they plan on keeping a higher level of space dedicated to toys after holiday also?

Oh! I think that Deb mentioned this earlier. I think it's important to note that the cadence of quarters will change over time as our retail channel strategy and retail footprint continues to expand but with different channels of retail without a big toy specialist in the US. That just changes the cadence of when product may hit shelves. Our retailers are very excited about market share opportunity in the second half of this year. Recognize that at retail, Toys“R”Us represented about $3.5 billion opportunity at this holiday for share recapture. And as we go forward, our goal, and we said before, is to not recapture all of those dollars this year but rather ensure that our partnerships with retailers enable them to see the success of being invested in the toy business and our business in particular and that as we go forward, having story-led brands that come out throughout the year in addition to other Franchise Brands and Gaming initiatives that come out throughout the year enables us to have great products to get behind and great initiatives to get behind throughout the year. That will become increasingly important, as we've said that story-led brands and entertainment-led brands become increasingly important. And that entertainment might just be social content or stream content or it may be bespoke episodic television or motion pictures. But increasingly to get a 12 month support from global retailers, the consumer insights tied to storytelling are critical.

Great. And then just one last one. Maybe if you could talk about the changes you made at the corporate level. Where were these changes and how should we think about the impact on the business? Maybe if you could just provide a little bit more color on realigning the business that would be great?

Sure. The way I view the changes is that over the last decade, we've been reinventing and reimagining our go-to-market approach. We're constantly mining consumer insights, shopper insights, retailer insights. And our north star has always been the Brand Blueprint over the last decade. We on-boarded a lot of new capabilities across the company. Recognize that half of our employees to date are new to the company over just the last six years. And these new experts are increasingly leading across design and development, storytelling, marketing, data analytics, social listening, and other new areas like shoppable social content. So we felt -- given the current environment, we felt there was an opportunity to make a step change in our organization and to go faster. And yes, there are some cost savings. But this also allows us to continue to invest in our team, in our brands and our capabilities. What I love about Hasbro employees is that they want to lead, and increasingly, they're being put in leadership positions that they both desire and deserve. This is all part of a comprehensive plan to return to growth in 2019 and beyond. And so, we had a strong commitment to diversity in our teams globally, a strong commitment to female leadership across the company. But that's really the context for the changes we've made to the organization.

Great. That's helpful. Thanks so much. Good luck next quarter.

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

Thank you. I wanted to circle back on the company level inventories. Looks like good control progress there. One quick question. Did you all bring in or did you see any vendors that were on this side would have helped sales take any product deliveries in Q3 that would have potentially boosted your own inventories a little bit or boosted sale? Just trying to beat any unknown incremental tariffs. So, that's one question. And then related to future tariffs, we don't know what List 4 will be if it will even be implemented. But if it was 10% or whatever, how much would that impact you, as we would assume it would largely be just on business coming to the US?

Well, from an inventory standpoint, we had some small markets and new markets actually that accounted for that. If you take the FX impact out, our inventories were down. However, markets like India were trying to beat some -- not beat some but get ahead of some additional costs there. So, we see some increases in some of those newer emerging markets for tariffs. But with respect to the US, we did not see any. And Brian, do you want to comment on the future tariffs or we continue to -- I'll do it. We continue to look at the list and what could potentially be on it. We have markets that have tariffs now. The biggest was Brazil. They've had them for a while. And it just kind of adds to the price that's on top of what the import costs are and that impacts the consumer. So, we continue to watch. We can't react immediately. But we continue to look at where we're manufacturing product. Right now, about 25% of our product is manufactured in the US, and we just continued of what’s sold in the US. And we continue to look at moving our product to other markets. We've had a global supply chain project ongoing for a while now. But it's most important for us to have good quality, safe products, as we move them outside of markets that could be subject to tariffs.

And I think, Tim, it's important to note that this fall for the first time we'll have PLAY-DOH manufactured in the US. And Deb said that I think we're probably among the leader in committing to make product here in the US for our market at 25%. That's quite sizable for the size of our market. And again, we're looking at new markets all the time and have expanded into new countries. And today, about 70% of our products made in China for global market and it will probably be closer to 60% out of China over the next year or two.

Okay. No -- and very helpful. Thank you. Deb, any color on the dollar amount that the new licensing agreement contributed to Q3, the Entertainment segment?

If you look at the increase, the increase really was made up of executing that agreement and the MY LITTLE PONY movie. We also had some revenue recognition shift, again that's a shift. Between the quarters, we've had that every year. But I won't specifically say what the amount was.

Oh! Okay. Well, yes. You said that before. That's why I wanted to get a little color on the specific amount but okay. And then lastly, you said globally or just in the EU, you thought you'd have the channel inventories cleaned up. And I guess more focused on LatAm and if you had any issues at all in China or not?

Yes, I'd really say that we've said throughout the year that our inventory issues, the bulk of our inventory issues really were in Europe. We entered the year with too much inventory as we exited last year on certain initiatives with too much inventory. But again, the issues for this company had been focused around Europe. And we've now accelerated and are ensuring we're executing a plan to conclude those inventory issues at the end of this year.

Okay. Thank you, both.

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

Great. Thanks for taking my question. So, for new retailers or additional shelf space being added after Toys“R”Us liquidations, do you have any sense as to what your incremental market share would be? And then can you say philosophically whether you think competitors are attacking this a little more aggressively but with maybe less of a long-term view than you guys had? And then one additional question on that profitable growth for 2019. Is that with or without or both adjusting severance in 4Q ‘18? Thanks.

Yes. We've developed expanded channel strategy. But that begins with changing our product development strategy. So, again, the goal in driving profitable growth is to make the right product at the right price point for different retailers who go to market for different prices. So, if you're working with a dollar store retailer, obviously, you need to make a product that you can sell, and they can sell profitably for that price point. And so, that's taken a couple of years for us to develop. And now, we're able to take those products and move them around the world to different kinds of retailers. And we have a long-term commitment to continue to expand our channels. We also have a very strong commitment to and great success and momentum in our fan business. And we're focused on the fan economy, both direct-to-the-consumer as we've done products like our Sail Barge through HasLab and continue to communicate directly with the fans of our great brands and then increasingly through our retailers who focus on fans. There are several retailers out there who have added Hasbro products to their lineup because again they have gamers and fans of comic book brands, MARVEL brands that come to their stores. And therefore, MARVEL, Star Wars, and other collector-oriented products are perfect for their stores. And so, we continue to look at ways to expand our connection to those audiences. I mentioned earlier to going to new channels of retail for sporting goods around our NERF business and again in games -- a growing array of retailers are committed to our games business. And we're also developing new exclusive ranges of products to ensure that retailers can get behind our properties and products and they can have a unique positioning with those brands.

Thank you. Our next question is from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

Thanks. So, you alluded to some of the challenges in terms of supply chain in supplying a greater variety of types of retailers as you replace the lost TRU volume. Do you expect the actions you need to take along those lines to be completed this year or are you expecting to take some actions next year on a longer-term basis just to kind of adjust your supply chain situation in the US accordingly?

Yes. As we mentioned, we're adding a Midwest warehouse which will enable us to manage that part of our business more effectively. We think that that will really help us to achieve our objectives. Recall, in the third quarter it’s probably our peak shipping period for product this year. And typically, Q3 is quite a high level. We just needed more doors of our -- if you think about warehouses and doors, we needed more doors. We have more differing kinds of retailers we're sending product to. They're not all full truckloads. Some of them are less than truckload full shipments. By putting a Midwest warehouse out there, we actually get cost savings because we're reducing the mileage to our retailers' distribution centers by more than 40% in doing that. And we believe that new warehouse footprint will really enable us to achieve our objectives in the US. And we'll continue to look at our global warehouse strategic plan as we go forward, as other markets adopt more of the capabilities we've seen work so well in North America. And that may have an impact on where we put warehouses.

Okay. And then can I just ask about next year? I know you don't want to go into too much about next year, but when we think about POWER RANGERS, it sounds like you're going to be recording that in Emerging Brands. It surprises me being that it could have a substantial revenue opportunity and you're going to treat it as an important franchise. So, can you just talk about when we could first see revenue? Would that be in April or very small revenue in the second quarter? Is there any way you can just talk about the POWER RANGERS expectations for what you're doing with that next year?

Sure. First, you're already starting to see some of the POWER RANGER licensing revenues come into the company. And we indicated that in our Entertainment and Licensing business. And then in terms of toys and games product sales, that really begins in Q2 next year. There's a sell-off period for the prior product which is first quarter. We feel like putting POWER RANGERS in the Emerging Brand category is a good place to start. But you're right. It certainly in our estimation is a Franchise Brand in the making. And we're hoping and we're certain that our great team that is working on that brand out of the West Coast is very focused on ensuring that brand becomes a Franchise Brand in the future.

And then just for Deb, on the cash flow guidance for the year, I think you had $600 million to $700 million projected previously for the year. Should we think of that as $500 million to $600 million of operating cash flow for the year?

Well, I think on average, we did say $600 million to $700 million. I think that given the way the operations are going right now, we're probably closer to the lower end of that range. And maybe we'll be a bit below it, but we don't see it as a significant reduction to that range right now.

Okay. Thank you.

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

Hi. Good morning. I have three questions, but they're very quick. I just want to clarify. So, margins next year, the comparison is GAAP or is it adjusted?

We will highlight that at Toy Fair. However, our expectation would be that they are adjusted margins. I mean that's typically what we talk about.

Okay. Great. And the organizational changes, can you tell us exactly where they were, how many people, and what they did?

So, the organizational changes in total represented a mid single-digit percentage of our global workforce. The changes were global in nature, really about as I indicated earlier, ensuring that we're able to continue to evolve the organization. We saw an opportunity to step change the evolution, to move more quickly. We have some incredible leadership across all the disciplines that I noted. And certainly, as we continue to change the nature of our business, where we're selling product, how we're selling product, the changes to the organization are reflected in that.

Okay. Thank you. And then just on MAGIC, I know you're not going to give us revenue forecast or targets. But perhaps you can tell us a little bit about how that will be monetized. Will it be free-to-play? Also, when exactly is it supposed to launch? And was it ever expected to launch in 2018? Thank you.

Sure. So, that Open Beta effectively is open to everyone. So, it's just the Open Beta as opposed to being on the market really is more of a delineation of when we begin our major marketing in earnest. So, if you'd like to play the product, it's available in Open Beta. And anybody who is listening can certainly go play the product. And if you’re not -- if you can't play the product, you can simply go on Twitch and watch the product being played and see the very favorable responses we're getting from gamers. So, the big pivot between Open Beta and the product on the market is just when we really begin marketing the product for the marketplace. In terms of when we're going to go, I think all these games -- we want to allow the team at Wizards to set the cadence. Obviously, we're taking all the feedback from our gamers. It's a free-to-play game. So, you can play the game for free. And then there are microtransactions that take place throughout the game play that are ways that we monetize the game play.

Great. Perfect. Thank you.

Thank you. At this time, I'll return 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 Investor website in approximately two hours. Additionally, management's prepared remarks will be posted on our Investor website following this call. Thank you.

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