Apr 20, 2009
Executives
Karen Warren - Senior Vice President of Investor Relations Brian Goldner - President and Chief Executive Officer David Hargreaves - Chief Operating Officer and Chief Financial Officer Deb Thomas - Senior Vice President and Head of Corporate Finance
Analysts
Felicia Hendrix – Barclays Capital Robert Carroll – UBS Gerrick Johnson – BMO Capital Markets Margaret Whitfield - Sterne, Agee Timothy Conder – Wells Fargo Drew Crum – Stifel Nicolaus Sean McGowan – Needham & Co. Greg Badishkanian – Citi John Taylor – Arcadia Hayley Wolff - Rochdale Securities Linda Bolton Weiser – Caris Jeff Blaeser – Morgan Joseph
Operator
(Operator Instructions) Welcome to the Hasbro First Quarter 2009 Earnings Conference Call. With us today from the company is Karen Warren, Senior Vice President of Investor Relations.
Karen Warren
Joining me today are Brian Goldner, President and Chief Executive Officer, David Hargreaves, Chief Operating Officer and Chief Financial Officer, and Deb Thomas, Senior Vice President and Head of Corporate Finance. To better understand our results, it would be helpful to have the press release and financial tables available that we issued earlier today.
The press release includes information regarding non-GAAP financial measures discussed on today’s call and it is available on our website at Hasbro.com. We would also like to point out that on this call whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share.
During the call this morning, Brian will discuss key factors impacting our results and David will review the financials. We will then open the call to your questions.
Before we begin, let me note that during this call and the question and answer session that follow, members of Hasbro management may make forward looking statements concerning management’s expectations, goals, objectives and similar matters. These forward looking statements may include comments concerning our product plans, anticipated product performance, business opportunities and strategies, financial goals and expectations for achieving our objectives.
There are many factors that could cause actual results and experiences 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, 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. Now I would like to introduce Brian Goldner.
Brian Goldner
For the quarter, Hasbro’s underlying business performance was consistent with our expectations. As we anticipated and shared with you on our last conference call, the first quarter was extremely challenging given the economic environment, later Easter, the impact of foreign currency and the rebalancing of inventory at our retailers.
Given the challenges we knew we would face this year, the Hasbro team globally stepped up in the quarter, remaining focused on our long term strategy, making smart and tough decisions around investments and spending, working with our retailers, and positioning Hasbro not only for 2009 but for the years to come. These efforts are clear in our first quarter results where despite the decline in revenues our profitability and our underlying business were solid.
We said in February when we reported our full year results we expected revenues to decline in the first quarter. Today we reported revenues of $621 million compared to $704 million a year ago with foreign exchange negatively impacting revenues by $40 million which was about half the decline.
In constant dollars, revenues were down 6%. As expected, retailers rebalanced their inventories in the quarter to lower levels which contributed to the year over year decline.
Net earnings were $19.7 million or $0.14 per share compared to $37.5 million or $0.25 per share. Despite the decline in revenue our profitability is good, as we have continued to focus on managing expenses.
With a 12% decline in revenues for the quarter our global major product categories performance was mixed, preschool was flat, boys was down 14%, girls was down 26% and the games and puzzles category was up 2%. We don’t believe these results are a reflection of the underlying strength of our brands.
Instead this is more a byproduct of inventory being worked down from year end levels and retailers reducing overall inventory levels in the quarter given the challenging economic environment. We had a number of brands that performed well in the quarter including Playskool, Nerf, Play-Doh, Easy-Bake, Tonka, Star Wars, G.I.
Joe and a number of board games including Scrabble, Sorry!, Connect 4, Guess Who?, and Operation. The Transformers brand continues to perform well, although below last years levels which reflected continued demand from the fall 2007 DVD release.
In the first quarter we shipped a relatively small amount of movie related product for Transformers Revenge of the Fallen. Given the theatrical release date of June 24th we will be shipping product in the second quarter in time for the retail launch on May 30th.
During the quarter we were very pleased to announce the extension of our agreement with Marvel through 2017. This is a great partnership that has and is expected to continue to contribute to our success in the boys, preschool and games categories.
With the scheduled movie release of X-Men Origins: Wolverine, on May 1st movie related product shipped in the first quarter. As I mentioned, the games and puzzle category was up 2%.
Over the coming months and remainder of this year we have a number of marketing initiatives planned at retail as part of our family game night program. With the difficult economy many families will be staying closer to home this summer and we want to be sure their plans include playing Hasbro’s great games.
Looking to the remainder of the year and this summer, we will continue to deliver entertainment and immersive brand experiences with the live action theatrical releases of Transformers Revenge of the Fallen on June 24th and G.I. Joe the Rise of Cobra on August 7th.
Movie related products for G.I. Joe are expected to be on shelf July 11th.
The digital games arena is an integral component of our creating immersive brand experiences. In 2009 there will be a full slate of games on all major platforms supporting both of our summer theatrical releases.
Activision will be launching games for Transformers and EA will be launching games for G.I. Joe.
Additionally, EA will be releasing several console games and over two dozen games for mobile and online based on many of our brands including Scrabble, Cranium and Trivial Pursuit. In 2009 we expected to continue growing our digital gaming revenue.
Throughout the year we will continue to invest in our business while closely managing our costs and operating cash flow. We recognize the challenges of 2009 but the Hasbro team remains committed to our strategy and to delivering innovative experiences to our consumers.
This commitment is clearly differentiating Hasbro as we develop our brands in new immersive formats and new geographies and create long term value for our shareholders. With that let me turn the call over to David Hargreaves.
David Hargreaves
During the first quarter our business performed in line with our expectations. We had anticipated the revenue headwinds during the quarter including foreign exchange, retailer inventory rebalancing and the later Easter.
Accordingly, we initiated a number of programs to control costs including a salary freeze, hiring only for critical positions, and a skew efficiency program. All of these efforts mitigated the impact of the revenue reduction on profitability.
Now let’s review the quarter results in more detail. Worldwide net revenues were $621.3 million compared to $704.2 million last year, a decrease of 12% or $82.9 million.
There was a negative impact from foreign exchange of $40.2 million which was about half of the decline. In constant dollars, revenues were down 6%.
US and Canada segment net revenues were $404.5 million compared with $428.5 million last year, a decrease of 6%. US and Canada operating profit for the quarter was $41.6 million or 10.3% of revenues compared to $37.3 million or 8.7% of revenues in 2008.
The year over year improvement is primarily due to declines in royalty, advertising, and SD&A expenses. Net revenues in the international segment were $189.2 million compared to $248.3 million a year ago.
The segment was down 24% in US dollars and 9% in local currencies. The international segment reported an operating loss of $14.5 million compared to an operating profit of $13 million last year.
Operating profit declined primarily as a result of higher US dollar denominated costs particularly in Mexico. In addition, last year’s results included a one time favorable gain on a pension plan in the UK.
Now let’s take a look at earnings. We reported net earnings of $19.7 million or $0.14 per share.
This compares to $37.5 million or $0.25 per share in 2008. Net earnings before interest, taxes, depreciation, and amortization was $73.4 million compared to $100.8 million a year ago.
Gross margin for the quarter was 60.6% compared 61.5% a year ago. When we look at expenses we can see royalties declined $3.9 million to $54.5 million.
Research and product development expense declined $4.6 million to $37.1 million but was consistent as a percent of revenue compared to a year ago. Advertising expense declined $14.7 million to $62.3 million primarily due to lower sales and the impact of foreign exchange.
SD&A expenses at $161.6 million or 26% of revenue compared to $176.2 million or 25% of revenue. In constant dollar, SD&A was down approximately 1% compared to a year ago.
Other expense net of $2.9 million compared to income of $5.8 million a year ago. Investment income declined in 2009 due to both lower interest rates and lower average cash balances.
Our tax rate was 31%. Excluding certain discrete items our underlying tax rate for the quarter was 29.1%, this compares to our full year 2008 underlying tax rate of 32.8%.
Turning to the balance sheet, at quarter end cash totaled $590.4 million compared to $832.2 million a year ago. In the past 12 months we spent $135 million to pay down maturing debt, $80 million to acquire the Trivial Pursuit brand, $50 million to extend our agreement with Marvel and we returned $320 million to shareholders by our dividend and stock buy back programs.
Our receivables of $365 million declined by $23.7 million compared to $388.7 million last year. DSOs of 53 days were up three days compared to a year ago primarily the result of sales occurring later in the quarter, partially offset by favorable translation.
Inventories increased marginally to $295.2 million compared to $291.2 million a year ago. We have worked down the older inventory position significantly since we reported our year end 2008 results when inventory was up year on year by $41.4 million.
In summary, as we look at the year ahead we believe the environment will continue to be challenging. That said, based on the strength of our product line we believe the two most recent quarters will prove to have been the most challenging for Hasbro in this economic cycle.
Our balance sheet is strong and we remain focused on investing in our global business for the long term. With that Brian, Deb and I will be happy to take your questions.
Operator
(Operator Instructions) Your first question comes from Felicia Hendrix – Barclays Capital
Felicia Hendrix – Barclays Capital
I’m wondering if the magnitude of Transformers shipments in the quarter was expected. I know you said it was small the last quarter you didn’t really quantify it.
I want to make sure nothing’s changed there.
Brian Goldner
When we say it’s small, it was small for the movie related product. Overall it was down versus year ago but a good size.
Felicia Hendrix – Barclays Capital
That’s what I was talking about, the movie related product, and nothing’s changed?
Brian Goldner
No, this is as planned.
Felicia Hendrix – Barclays Capital
On the inventory side I was wondering the inventory that we’re looking at on your balance sheet right now how much of that is Transformers product that just hasn’t shipped yet?
David Hargreaves
We’re not going to give you a precise detail of our inventory. Clearly some of it because we’re going into pretty big shipment quarter for Transformers shelf date is May 30th.
Clearly we’re going to be shipping quite a bit of Transformers over the next few months.
Felicia Hendrix – Barclays Capital
That follows on to my next question, I know you said and the numbers will speak for themselves that you’ve worked down a lot but I’m wondering if you’re as lean as you would like or can you do more there?
David Hargreaves
I think we’re very happy with the level of our inventory at the moment. I’ve said on the last two conference calls first in the third quarter and then at year end, I said that I thought that our inventories were too high.
If you remember at the end of last year they were up $41.1 million year on year. We’re down to basically flat to a year ago.
We get a little bit of benefit from exchange rates in there but we also recognize that we’re coming into a Transformers shipping period. We’re pretty happy with the quality and quantity of our inventories at the moment.
Brian Goldner
In the first quarter there were a number of new initiatives. Our cards game business is a new initiative that’s shipping in and is performing very well as is a whole new segment for Nerf and sword.
We do have some good spring initiatives as well that are part of that inventory.
Felicia Hendrix – Barclays Capital
If you just adjusted the inventory for FX would it still be down from the end of the year on a percentage basis?
David Hargreaves
Relative to year end you would see a decline during the quarter.
Felicia Hendrix – Barclays Capital
SD&A you reported an 8% decline year over year I’m wondering if we can take that percentage change as a run rate for the rest of the year.
David Hargreaves
We don’t want to give that much guidance on individual expense line. What was said is that we’ve clearly got a salary freeze on, we’ve got a headcount hiring freeze on apart from a few critical positions.
Within SD&A you’ve got the cost of shipping and clearly with the price of oil where it is today we expect our shipping out costs to be lower then they were a year ago. I think we can look to some savings in SD&A throughout the year.
I’m not going to say that they’ll be 8%.
Felicia Hendrix – Barclays Capital
On advertising, you came in a lot lower then what we were looking for and typically you’ve tracked between about 11% and 12% of revenues. I’m wondering if we can expect that to be down year over year.
David Hargreaves
On advertising we tend to be lower in years where we have a lot of entertainment. This is a year where we’ve got Transformers and we’ve got G.I.
Joe and Wolverine and we think the movies will do a lot to drive the product through and we’ll have to advertise less then in a non-movie year. Really what you’re seeing in the first quarter is always we look to our full year advertising as a percent of our full year revenue and we tend to accrue in line with that percentage.
Full year because it’s a strong movie driven year that we’ll probably be down a bit.
Operator
Your next question comes from Robert Carroll – UBS
Robert Carroll – UBS
I wanted to touch on the point of sale data, do you guys have any color on that to try and help us figure out how much of this segment sale declines were caused by the inventory rebalancing?
Brian Goldner
Last first quarter in terms of shipment as you look for example at the US business we were shipping several million dollars worth of Tooth Tunes. Within that $24 million decline that you see in the US business that’s part of what you’re seeing in the shipment decline year on year.
If you look at POS our boys business through week 15 which is Easter, was up, our preschool business was up double digits, Star Wars performed very well in that period, Nerf performed very well in that period, Marvel Heroes business did as well. Our Playskool core business was up double digits over that same time period in POS.
Play-Doh business was up double digits. Again as you go across, in our core games business if you look at that it was up for that period family games were up slightly more significantly.
Overall a lot of positives in terms of POS, significantly so in our preschool and games business and several initiatives within boys. I think what you’re seeing overall is just the difference in a non-Transformers quarter last year Transformers in the first quarter was benefiting from the DVD that had just been released in the fourth quarter ’07.
Robert Carroll – UBS
For the entertainment properties for the orders that have come in post toy fair have they been obviously in line with expectations or were the bulk of those already on the books before going into the toy fair convention?
Brian Goldner
As our retailers have seen more materials on Transformers and G.I. Joe, the more they see, the more excited they get.
Having said that, they did have plans in place and we’re feeling very good about Transformers around the world, it’s a significant business around the world and had a significant box office. The first time a great DVD business and of course a first year of sales that we reported at $480 million.
People have a frame of reference for that and G.I. Joe, people are excited about what they’re seeing given that its based on the 80’s comics and the G.I.
Joe versus Cobra story it lends itself very well to toys and games business.
Operator
Your next question comes from Gerrick Johnson – BMO Capital Markets
Gerrick Johnson – BMO Capital Markets
I was wondering if you could talk about your guidance, do you still expect to grow revenues and earnings this year.
Brian Goldner
Where we are, we don’t feel that there’s anything that has happened thus far that would change that. We talked about the challenges we saw in the market back at the end of third quarter, at the end of the year we talked about the fact that first quarter would be down and that even with it down in revenues we still expected given baring some kind of a significant change in consumer spending or FX we wouldn’t change from that position right now.
Gerrick Johnson – BMO Capital Markets
So you’re still on target to grow revenues and earnings absent any of those events. I want to know why the royalty rate in the quarter was up.
What in your mix caused an increase there in rate?
David Hargreaves
On the product lines which is really doing well for us at the moment is Star Wars. Since the Clone Wars television, it started earlier in the US but its being rolled out around the world and its driving some very good Star Wars revenues around the globe.
I think everyone appreciates that Star Wars is one of our highest royalty rate items so there was a lot of Star Wars royalties during the quarter.
Gerrick Johnson – BMO Capital Markets
Specifically on Star Wars since you bring that up, are you still shipping Clone Wars product or is it all Legacy Collection at this point?
Brian Goldner
More Clone Wars but also classic product as well.
Gerrick Johnson – BMO Capital Markets
About the girls business you didn’t mention that one on the POS breakdown for the quarter I wonder what that was and how you feel about your girls business right now going into 2009.
Brian Goldner
The girls business was down a bit in POS overall through week 15. There’s a timing difference with Littlest Pet Shop.
A year ago if you remember Littlest Pet Shop in February we were doing all the new launches of all the products. As you know, or may remember, in the third quarter this year we will have the major Littlest Pet Shop launch in time for the Littlest Pet Shop, the LPSO from Electronic Arts.
More of our initiatives time out with that. If you look at Baby Alive the POS was actually up through the first quarter and through week 15.
Easy-Bake was up but Littlest Pet Shop was down through week 15.
Operator
Your next question comes from Margaret Whitfield - Sterne, Agee
Margaret Whitfield - Sterne, Agee
I was wondering if you could comment on retailer de-stocking, do you think we’re at the end both here in the US and overseas?
David Hargreaves
We’re going to have to let the retailers speak for themselves how they feel about their inventory. I suspect it’s probably a bit of a mixed bag.
What we do know is that in most of our major markets our year over year sell out was better then our sell in. We certainly indicate retailer inventories of Hasbro product at least are relatively lower then at year end.
In terms of are we through the worst, I think we probably are. I think retailers are going to display a fairly cautious buying pattern throughout the year.
With that said, we are probably through the worst. Our shipments were significantly down in January and February and then actually we were up in March year over year.
Margaret Whitfield - Sterne, Agee
You mentioned in terms of international last year you had a one time UK pension gain could you quantify that? Also, what would be a good tax rate for the year?
David Hargreaves
The pension gain was about $6 million US dollars.
Deb Thomas
David mentioned earlier our underlying tax rate for the quarter was 29.1% and we would expect our full year rate to approximate this amount.
Margaret Whitfield - Sterne, Agee
The currency impact on the bottom line for Q1?
David Hargreaves
It’s difficult to get exactly to the currency impact because you’ve really got the impact of translation and you’ve also got the impact of transactions. Clearly whilst we hedge most of our transaction exposure we weren’t 100% hedged and I think one of the things we said in talking about international profitability that it had been cut by significantly higher un-hedged to some un-hedged particularly in Mexico where the exchange rate is very weak compared to a year ago.
I don’t have a precise number but I would suspect it’s in the region of $10 million.
Margaret Whitfield - Sterne, Agee
Ten million net?
David Hargreaves
Yes.
Margaret Whitfield - Sterne, Agee
Any news on Universal when we could expect that first movie and the title please.
Brian Goldner
The good news is we continue a number of developments on the movie slate we mentioned in February. I would say we have no new news expect we continue to know that either 2010 or 2011 will have our first movie from our relationship with Universal.
Operator
Your next question comes from Timothy Conder – Wells Fargo
Timothy Conder – Wells Fargo
I think you commented that you feel that most major markets again your inventories are down versus 12/31, what about year over year?
David Hargreaves
What I said is they’re relatively down because the first quarter tends to be a quarter when retailers historically do build a bit of inventory as does Hasbro. It tends to be inventory trough tends to be at year end.
Where I look to say that they’re better is that year on year POS in most major markets was up, whereas our year on year shipments even in local currencies were down. Clearly compared to a year ago inventories at the retailer level have come down.
In terms of what they are, we get pretty good data in the US from our major accounts. If you look at it total around the globe we don’t get real good visibility as to what inventories at the retail trade.
Our feeling is that its lower then it was a year ago.
Timothy Conder – Wells Fargo
Geographically if you looked at Europe, Latin America, Asia, were do you think it’s the most problematic and where it’s performing the best?
David Hargreaves
Latin America is actually performing well for us as you know it was a small business, there’s an established markets like Brazil we invested, we went into Brazil last year and we’ve got a lot of catch up to do in that market compared to other people. Brazil, Chile, and our Latin America distributor markets are all up.
Some of our other emerging markets were also up year on year. Maybe not quite up as much as we would have liked.
These we consider to be very high growth markets for us over the next year and I think given the economic situation that growth is not quite as robust as we would have liked in the first quarter but its clearly up in places like Malaysia, Singapore, those markets.
Timothy Conder – Wells Fargo
The majority of Wolverine did that ship in the first quarter or is there still going to be a significant piece here shipping basically in the month of April?
Brian Goldner
We shipped Wolverine in the first quarter but our expectation would be to ship throughout the year as the movie is released. I don’t know exactly how much we’ll ship for the full year because of course it will depend on the retail take away.
We shipped in the first quarter and we’re looking forward to the movie. Early indications are good.
Timothy Conder – Wells Fargo
Early indications meaning on your initial sell through there what’s been shipped then?
Brian Goldner
That’s right.
David Hargreaves
We have to remember that this time last year also we were shipping Iron Man and we also started to ship Hulk then about this time as well. Whilst Wolverine is good Iron Man was certainly good last year as well.
Timothy Conder – Wells Fargo
Maybe just give us a little update on your foreign exchange sensitivity that you’ve disclosed before.
Deb Thomas
We had talked about that we expected foreign exchange to be down and if I recall at our February meeting we talked about it being 6% in the quarter and it indeed was about 6% in the quarter.
Timothy Conder – Wells Fargo
On a go forward basis.
David Hargreaves
What we said at that time was 6% in the second quarter as well, it reduced in the third and by the fourth quarter it was only about 1%.
Timothy Conder – Wells Fargo
Basically no major changes from what you outlined at the analyst meeting.
David Hargreaves
No, rates are pretty much where we expected them to be.
Operator
Your next question comes from Drew Crum – Stifel Nicolaus
Drew Crum – Stifel Nicolaus
Brian I think you and I have talked about this in the past of the fact that in 2007 you guys were chasing demand with Transformers. Most retailers underestimated the popularity of the property.
As you see retailers managing down inventory in 2009 do you sense that you’re going to again be chasing demand, by design, will you be chasing demand not just with Transformers but all the film properties.
Brian Goldner
We’re certainly planning Transformers as a major initiative. We’re very excited about our prospects, I think our retailers are very excited and I certainly have seen the plans come together.
Around the world they’d indicate that Transformers and G.I. Joe are major for our retailers.
We are careful across the board about inventories at Hasbro and we’re going to continue to manage that. Its not a bad thing to chase inventory to some extent but we have robust plans in place so I don’t think we would miss a lot of sales but I also feel that going out and making sure we have the consumer take away and the retail inventories in place, or demand in place before we would go out and make all the final announcement of inventory is a good idea as well.
Drew Crum – Stifel Nicolaus
Can you give us an update as to what you’re doing with your cash? Did you buy any stock back during the quarter?
David Hargreaves
No, we haven’t bought any stock back during the quarter. We’re waiting for the capital markets to sort of get more stability before we start spending our cash to buy stock back again.
The other thing is once we get a lot of cash on hand at the end of the quarter you have to remember that we’re close to our working capital trough and our trough to peak working capital requirements are somewhere between $500 and $600 million. We’re going to be using a lot of that for working capital.
Drew Crum – Stifel Nicolaus
The amortization was up 8% in the quarter, can you just remind us what’s been added and what’s rolling off?
David Hargreaves
There are a couple of things that have been added. Clearly Cranium and Trivial Pursuit brands were acquisitions during the first part of last year.
The other thing is we’re still amortizing our property rights on Star Wars in line with our sales curve. In a quarter or year where Star Wars does particularly well that drive amortization up.
As I said earlier, Star Wars is doing pretty good at the moment.
Drew Crum – Stifel Nicolaus
You mentioned plans for EA in the back half of the year, what can you say about the performance in the first quarter with that initiative?
Brian Goldner
The EA business continues to perform well for us. We have a number of games that have been coming out and will come out throughout the year.
We feel very good about the relationship we said in the notes that we expect our digital games revenue to increase this year. The plans go throughout the year.
We’ll start with Activision games on Transformers and then G.I. Joe games will follow shortly thereafter so if everything’s tied to our major entertainment initiatives the Littlest Pet Shop then begins in the third quarter, the Littlest Pet Shop Online game.
Overall very good and feel very good about the casual gaming space and Activision games as well as EA’s games.
Operator
Your next question comes from Sean McGowan – Needham & Co.
Sean McGowan – Needham & Co.
Would you say that the effect of the inventory de-stocking by retailers was in line with what you expected in the quarter or was it a little more severe?
David Hargreaves
It was very severe during January and the beginning of February. It was tough to get orders, particularly ahead of a retailing year end.
Since then as I said, our experience at least is it’s sort of got a bit better. Our shipments certainly in the US were up in March.
In the US we’re probably through the worst of it. I’m not sure that we are in some of the international markets.
Places like Australia our POS is running way ahead of a year ago but our shipments just aren’t happening in a way we’d like. Clearly in some of the markets internationally I think de-stocking is probably continuing.
In the US we’re probably through the worst of it. Clearly with the strength of our product line and Transformers movie coming we’re not concerned they’re going to be taking in our product at least in the second quarter.
Sean McGowan – Needham & Co.
I wanted to ask a question about your statement in the release as well as you repeated on the call here that you basically think the most challenging quarters were the fourth quarter and the first quarter. Can we infer from that and the fact that you made a comment about the first quarter going into the first quarter and have not made a comment about the second quarter.
Should we infer from all that, that basically you expect the remaining quarters to be up in sales?
David Hargreaves
Exchange rates are going to continue to be a challenge through both the second and the third quarters. As Brian reffirmed, that we do expect our revenues to be up for the year.
Absent exchange rates we clearly see our revenues being up in each of the next three quarters.
Brian Goldner
Our underlying business and the initiatives that we’ve lined up for 2009 are very significant. We all know that the motion picture business year to date even taking out the accounting for the ticket prices, just attendance is up over 15.5% year to date.
We feel great about going into a Transformers and G.I. Joe initiatives for the year.
Wolverine, the initiatives and the sell through on our preschool business was very robust through week 15, we feel good about our core initiatives in Playskool, Play-Doh, Tonka, and our girls business a lot of new initiatives coming for the back half. Again, that’s why we feel the way we do is because of the strong innovation and the strength in the underlying business and our plans.
Sean McGowan – Needham & Co.
Could you go over what the Marvel slate now looks like for the next couple of years as far as you know. There’s been some changes recently could you just update us on what your current expectations are?
I know you don’t control it but what are your expectations for what that slate looks like in 2010 and 11 as far as you know it.
Brian Goldner
We can go through that, there have been a number of changes.
David Hargreaves
We’re looking for Iron Man 2 in May of 2010. I think Spiderman is in May 2011.
I think Thor is also in 2011. I think the First Avenger, Captain America is 2011.
I believe that the Avengers is now scheduled for 2012. Again, that’s the information that we have at this time and I’m sure the studios will reserve rights and change them if they so desire.
That’s the information we have at present.
Sean McGowan – Needham & Co.
With such a rich slate at some point they risk competing with themselves so they spread it out.
David Hargreaves
Then we’ve got our Universal and our Transformers and G.I. Joe movies as well.
Sean McGowan – Needham & Co.
What was CapEx in the quarter and what are your expectations for the year?
David Hargreaves
I think it was $27 million.
Deb Thomas
That CapEx was about $25 million in the quarter and I think as we said in February our expectations for the year are $90 and $100 million.
Sean McGowan – Needham & Co.
Regarding the cash balance can you give us a sense of how much of that’s in the US and how much of it’s outside the US?
David Hargreaves
The majority of our cash balances at quarter end were overseas.
Operator
Your next question comes from Greg Badishkanian – Citi
Greg Badishkanian – Citi
If you could give us some quick color on the cost environment in commodities and labor in China etc.
David Hargreaves
We spoke about this at the analyst meeting in February and I think that I said whilst oil was way off its high and resins were trending down at that time that most other input costs so like paper board and print and labor and social costs associated with labor, Chinese currency, the cost of regulatory compliance and safety testing, the cost of working capital financing. All of those were higher then they had been a year ago.
Overall although resins were down a bit our costs were higher year over year. Since that time oil is sort of back up by about a third since the end of the year and actually resins, ABS and polypropylene were up 20% during the first quarter.
If this trend continues I think any overall cost reductions that we get from our Chinese vendors are going to be marginal at best. One place that we are seeing cost savings on inbound and outbound freight which are much closely aligned with the price of oil.
While that’s up a bit in the first quarter its still well below the peak last year. We are seeing freight savings.
Greg Badishkanian – Citi
Are the labor rates in China, is that abating?
David Hargreaves
No, not materially. They’re not increasing, the Chinese authorities aren’t increasing minimum wage rates but they’re not reducing them either.
Last year there were new social costs introduced. Whilst I don’t think there’s going to be any new social costs this year which further increase the cost of labor in China I don’t think they’re going to repair or abate the legislation they introduced last year.
Greg Badishkanian – Citi
Most of the labor that works either for you or through contract manufacturing is minimum wage or is it above that?
David Hargreaves
There’s a bit of a mix, depending on the skill set involved. Normal assembly tends to be closer to minimum but obviously more skilled tends to be a significant premium to that.
Operator
Your next question comes from John Taylor – Arcadia
John Taylor – Arcadia
Last year you outlined for us a number of strategic initiatives and outlined the cost impact on that. I wonder if you could give us an update on what that delta looked like in Q1 for build out of the offices in developing markets and the Hollywood effort in digital and all that stuff.
David Hargreaves
Those costs haven’t really gone away, although we would characterize them differently. Last year the fact that we had an office in Brazil and a start in Brazil but we actually hadn’t started shipping any product or invoice out of that company.
You had the costs but no revenue to go with it so we called it an investment. This year the cost is still there but I don’t think we characterize it as an investment.
Similarly for EA last year we had Mark Blackham and his team that oversee our EA business here probably about 14 or 15 people and they were all in place but there was no revenue. This time last year we were talking about that as an investment spending.
Now we’re getting the revenue to go with the costs so the cost is still here but we wouldn’t characterize that as an investment. The costs that we had last year are still here even costs to get digital Dungeons & Dragons and Dracula, some of those costs are still here although there are now revenues to go with D&D inside them.
John Taylor – Arcadia
Have the run rates changed very much year on year then, the cost on rate as opposed to you’re booking revenue against it but the budgeted amount somewhat?
David Hargreaves
If you look at our costs savings versus a year ago it’s not because this investment spending categories have come down. The spending there is pretty similar to a year ago but we wouldn’t characterize it as investment spending this year.
John Taylor – Arcadia
I wonder if you could go up to 30,000 feet and try to characterize what’s been driving demand or retail. The question here is really sort of if you break your anticipated revenues into the property related lines that have Hollywood connections and what not, huge demand drivers from other core, that sort of thing.
I think there was a lot of value pricing going on that was helping retailers de-stock and so on. The question is, if you look at the non-Hollywood stuff, let’s assume that all that goes according to plan, what do you think drives reorders for core product and how are retailers thinking about that?
Brian Goldner
If we focus first on the preschool business I think its good to see a brand like Playskool through week 15 was up 15.5% in POS and you’re seeing strength across a number of the categories in Playskool. Our Tonka preschool business was up through week 15.
Our Play-Doh business was up 20% plus through that same period. You are seeing those core initiatives really working.
In our games business we’re planning a big year on games through the family game night program as well as a lot of new initiatives there. In fact, if you look at the categories of games, whether its family games or our children’s games or adult games, again good POS, growth in POS through week 15 on those key categories in the core business.
If we go look at the kinds of initiatives that are going to grow our business its great that in Australia, for example, they already vote on toys of the year that’s a good early indication of where things may go. Monopoly City which is a major new initiative for us in the back half in the US has already been named game of the year and overall of the year at the Melbourne Toy Fair.
We do see a lot of opportunity in our core business. Littlest Pet Shop really takes off around the Littlest Pet Shop online experience which is in the third quarter.
Our Nerf initiative we’re rolling out Nerf Around the World and we’ve seen great growth there. I think overall a lot focus on innovation and a focus on Hasbro’s core brands continues.
While we talk a lot about our major entertainment initiatives the core underlying business and the great portfolio brands are still performing really well. I think consumers in this environment do gravitate more to brands as have retailers.
If we think about a lot of our retailers they’re plans certainly include more of our branded initiatives and we have the where with all to provide great innovations and focus on that as well as great marketing.
John Taylor – Arcadia
I don’t know if Marvel’s announced this or not but obviously Activision’s connection with Transformers goes back many years and it looks like EA’s going to play a greater role. Do the interactive rights of the movie slate, you talked about in Marvel do those automatically go to EA or is EA sort of the default.
I’m interested in whether you can start working on things together well in advance whether you know that or not.
Brian Goldner
I couldn’t really comment on that. You’d have to ask EA or Marvel.
Operator
Your next question comes from Hayley Wolff - Rochdale Securities
Hayley Wolff - Rochdale Securities
On the SD&A side is all of the shipping and transportation costs embedded in that number or is some of it in cost of goods?
David Hargreaves
Freight in so ocean freight getting it from China to our warehouses in the US is in cost of goods. Freight out getting it from or warehouse to our retailers is in SD&A.
Hayley Wolff - Rochdale Securities
The $20 million year over year savings that you saw in the first quarter is that order of magnitude what we can expect quarter to quarter, year over year?
David Hargreaves
We would clearly hope to get some reductions in SD&A throughout the whole year. We’ve got what we believe is going to be a growing business.
We haven’t had any layoffs and we’ve got skew reduction program but we’re still developing a lot of products. I think we’ve got a salary freeze and our restricted hiring plus the lower freight costs we should be able to get SD&A down a bit.
To talk about $20 million quarter is not going to happen.
Hayley Wolff - Rochdale Securities
You talked about your cash needs, your peak to trough for working capital. You finance a lot of the accounts receivable using a securitization so in light of that what are you looking for in the capital markets before you become more comfortable resuming share repurchase activity?
David Hargreaves
Clearly securitization is an option that we have. I think we were about $100 million at the end of the first quarter which is pretty consistent with the end of the first quarter last year, $98 million.
We have the ability to go up to $300 million at peak. Again, there’s a cost associated with that, the cost of securitization today are higher then they were a little while ago.
There was a time last year and that’s not so far ago where people were worried that securitization facilities were just going to dry up. I think we’re past that but that wasn’t that long ago and we believe that the credit markets are still relatively fragile.
We’ll see as things go on but given that we’re heading into our working capital peak, given that a matter of a few months ago people wondered if the credit markets were going to be open for business and given that things are still pretty fragile we’re just taking a cautious approach at the moment. We tend to be financially cautious guys.
Hayley Wolff - Rochdale Securities
On the first quarter conference call you talked about taking game production rates down at Longmeadow and in the Ireland facility. Is that behind you at this point?
David Hargreaves
No, it’s not totally behind us. In fact, during this month I think we had about 111 people that we hadn’t brought back at our games section at East Longmeadow.
I think we’ve furloughed an additional 70 people so I think we’re up to about 180 of our permanent workforce that we’re not using at the moment sort of if furlough. In Ireland we’ve also got some shorter working going on.
Obviously we’ll be in good shape on games inventories as we get through that and so will our retailers.
Operator
Your next question comes from Linda Bolton Weiser – Caris
Linda Bolton Weiser – Caris
Can you remind us what your toy pricing activities were in ’08 and did you have any toy price increases in January ’09 and are there plans for things for the fall?
David Hargreaves
Yes, we had two increases in 2008. We had a low single digit increase in the first quarter and then we had a further low single digit increase about 3% in September.
Then we had a low single digit increase in February 1st of this year. Internationally they might have been a bit higher then low single digits because they had to contend with currency movements as well.
As we go through the year we are certainly at this stage not planning any increases. We were sort of optimistic as we price our fall line that we may see some reductions coming through.
Although as I said, resin prices have now started trending up again, ABS and Polypro up 20% in the first quarter. Any reductions that we see from our China vendors I think are going to be marginal at best but I’m certainly not anticipating a second round of price increases this year.
Operator
Your next question comes from Jeff Blaeser – Morgan Joseph
Jeff Blaeser – Morgan Joseph
Can you tell us how the international response has been to the G.I. Joe line and do you expect that to translate overseas?
Brian Goldner
The response has been terrific since the beginning; I guess it was about a year ago in Prague early on in presenting G.I. Joe to international retailers.
Again, it’s based on the 80’s comic so you’re talking about G.I. Joe versus Cobra and a great cast of characters.
We did a world tour, we were down in South America and Brazil, we were in Mexico, and we were over in Asia. Around the world people are enthusiastic about the story and also about the product line.
Jeff Blaeser – Morgan Joseph
Shifting over to Transformers, what kind of impact in the first quarter do you think the anticipated movie release would be and the delay in purchasing waiting for the movie specific product to come out of has been?
Brian Goldner
We had mentioned that in the first quarter we shipped a relatively small amount of Transformers Revenge of the Fallen movie product. Our shipments will be in the second quarter in time for the May 30th or thereabouts retail date, in time for the move.
Then we have plans for the third and fourth quarters but of course depending on exactly how the movie does we certainly have capacity in the far east to go above our current plan. We’ll wait and see just how it all unfolds.
Jeff Blaeser – Morgan Joseph
Where do sales trend towards 2007 levels with the first movie?
Brian Goldner
Sales happened just prior to the movie. It happened significantly after the movie.
The DVD came out you saw the results in the fourth quarter as well in the first quarter 2008 as the DVD went into homes and that’s what we were commenting on is the Transformers a year ago was very hot, white hot because of the DVD that had been out in late in the fall 2007 so we’re up against those numbers in the first quarter. We again have shipped Transformers animated product, the classic or core product and really now beginning to ship the bulk of the Transformers Revenge of the Fallen product in time for the May 30th retail date.
David Hargreaves
One of the things that we want to remember about Transformers is that the second quarter is still a relatively low quarter for Hasbro and the toy industry. Still most of the toy industry sales happen in the third and fourth quarters.
Whilst Transformers will be a very important part of our sales during the second quarter if you look to ’07 where the other Transformers movie the second quarter isn’t necessarily the biggest shipment quarter for Transformers. The third and fourth have the potential to be as big in terms of absolute dollars although in term of relative waiting the second quarter is clearly the best.
Operator
Your last question comes from Gerrick Johnson – BMO Capital Markets
Gerrick Johnson – BMO Capital Markets
I was wondering if you could talk about your debt to EBITDA and EBITDA to interest target ratios where do you stand on those right now.
David Hargreaves
We’re within on both of them is the answer. I’ve got the exact numbers here somewhere.
Deb Thomas
Out debt to EBITDA was 1.21% for the quarter and as we’d mentioned our target was 1.5% or less and our EBITDA to interest is 13.8% and our target is 12% or more so we are within our targets.
Gerrick Johnson – BMO Capital Markets
It was about a year ago you bought Cranium and the rights to Trivial Pursuit. How are those brands performing and are they performing as expected when you purchased them?
Brian Goldner
We’re continuing to work on and develop Cranium, we like the brand a lot and we knew even when we bought it that we would want to apply our kind of innovation so that’s now ongoing in developing new innovative products using the Cranium brand positioning which was complementary for us to the brands that we had within the games portfolio. In Trivial Pursuit similarly I think you’ll see some new things on the brand for this year and as we go forward long term we’ve got a lot of great plans in store for Trivial Pursuit, so innovation across the board.
Like any acquisition there’s always work to be done and the teams are busy getting that up and going.
Operator
I would like to now turn the conference back over to our speakers for any closing remarks.
Karen Warren
I’d like to thank everyone for joining our call today. The replay of the call will be available on our website in approximately two hours.
Thank you so much.
Operator
This does conclude our call. We’d like to thank everyone for their participation.
Have a great day.