Q4 2019 Earnings Call
Good morning, welcome to Hasbro fourth quarter and full year 2019 earnings conference call.
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This time it let's turn the call over time as Debbie Hancock Senior Vice President Investor Relations. Please go ahead.
Thank you good morning, everyone. Joining me. This morning are Brian Goldner, Hasbro's, Chairman and Chief Executive Officer, adept Thomas Hasbro's, Chief Financial Officer today, we will begin with Brian adapt providing commentary on the company's performance and then we will take your questions our earnings release or presentation slides for today's call.
Posted on our Investor website, the press release or presentation include information regarding non-GAAP adjustments and non-GAAP financial measures our call today, well discuss certain adjusted measures, which exclude these non-GAAP adjustments.
Conciliation of GAAP to non-GAAP measures is included in the press release a presentation.
Please note that whenever we discuss earnings per share or Aes were referring to earnings per diluted share before we begin I would like to remind you that during this call into 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.
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. These factors include those set forth in our annual report on form 10-K, our most recent 10-Q in today's press release, and then or other public disclosures will undertake.
The update any forward looking statements made today to reflect events or circumstances occurring after the date this call.
I'd now like to introduce Brian Goldner, Brian.
Thank you Debbie good morning, everyone and thank you for joining us today.
2019 was a pivotal year for Hasbro, we achieved our plan to profitably grow revenue is performing well that dynamic retailer and global trade environment.
Well revenues grew 5% absent FX and adjusted operating profit increased 12%.
Ended the year with good momentum in many markets at cross brand, which is carried forward to the start of Twentytwenty.
We executed throughout the year as a more agile moderna digitally driven company after redesigning our go to market strategy and commercial organization in 2018.
Global teams delivered double digit revenue at point of sale growth in pure play E com.
Our child strategy drove growth for the year, including double digit gains in the value channel the fan channel and grocery and drug we advanced our retail strategy and execution for online and omni channel partners, ending with retail inventory of good quality and levels as well as product designed specifically for these growing channel.
Yes.
We navigated the challenges are disruptions that arose in the global trade environment implementing programs to meet revenue and margin goals during the important holiday season.
We delivered compelling gaming experiences led by the work of our teams at Wizards of the coast are positive results to date have us on plan double Wizards of the coast revenues over five years from 2018 2023.
Magic the gathering revenues increased more than 30% in the year behind double digit growth in tabletop play and a strong first year for magic the gathering arena.
Dungeons and Dragons revenues grew for the six straight year, and we are meaningfully investing in both brands to drive engaging storytelling, while developing new digital games with high margin profitable growth longer term.
We look forward to sharing our 2020, new gaming plans for Magic and D. N D on February 21st.
Monopoly had double digit revenue growth and grew in each region with new themes and relevant entertainment tie ins.
We advanced our consumer products licensing business growing revenues double digits and expanding operating profit margin.
We broadened our licensed brand portfolio and expanded our reach with original live events that drive consumer engagement.
The team is actively working to leverage easy ones brand across global multi category licensing efforts and already making great progress.
We will share more about our plans at our upcoming Investor meeting.
We leveraged and created compelling entertainment to drive creativity across brands.
Partner brand portfolio revenues grew 24% for the full year and 50% in the fourth quarter.
Disney's frozen to and descendants three.
Marvel's Avengers, and Spiderman franchises and Star Wars contributed to the gains for the year.
We added power Rangers to our Hasbro owned portfolio executing the brand across our blueprint in consumer products Entertainment and digital gaming.
2020 won't be our first full year globally, and we will offer new expressions across product gaming story and experience.
Transformers had its second highest non movie year in its history fueled by growth of fat oriented product and Bumble Bee home Entertainment.
And I'd December Thirtyth, we closed the acquisition of anyone adding great global brands to our portfolio and tremendous expertise and capabilities across film TV and music.
In addition to he wants profitable business, we are poised to bring more hasbro IP to audiences fans and consumers globally, while further developing Hasbro anyone's cross platform storytelling.
I'm encouraged by the early days of our teams working together and later this month, we will share more about our new stronger Hasbro.
For the full year, the global Hasbro team delivered on our plan reinventing our approach to commercial markets.
Each major region grew revenues absent FX.
Entertainment licensing and digital segment increased 22% to $435 million or 9% of revenues behind growth in digital gaming entertainment and consumer products.
The U.S. ended the year with strong fourth quarter performance, including high single digit revenue growth.
It made disruption from paraffin certainty the U.S. team worked closely with our retailers to preserve orders at risk ahead of the list for be tariff implementation, which ultimately did not go into effect.
Point of sale was positive for the quarter as well as for the full year absent toys R. Us.
We increased our investment in supply chain and logistics during the year to ensure revenue continuity and to meet the increasing just in time inventory requirements of our retailers, which will remain a priority of our commercial and supply chain efforts going forward.
Our teams, both Hasbro and our third party providers executed at a high level in the fourth quarter to meet the changing needs of our evolving retail or base.
We view these improvements I sustainable in 2020.
In Europe, we executed our goal to stabilize revenues had improved profit.
Full year revenues grew 4% absent FX had operating profit increased more than three times with room for future improvement.
We enhanced our digital and online selling capabilities across the region to succeed in an environment, where retailers carry less inventory and new channels are expanding.
Amazon is our largest and fastest growing customer in the region.
Well the European region is not without its challenges, including continued retail disruption in several countries, which contributed to a softer toy and game market.
We grew revenue in Germany, Russia at Iberia, as well as a modest increase in the UK, Despite a down market.
Point of sale declines moderated for the region during the fourth quarter, but Pos was down absent toys R us for the full year.
Several brand launches occurred later here or will happen in 2020, such as Nerf Ultra and new Plato offerings.
Latin America revenues were up slightly off set of facts behind gains in Mexico, which offset disruptive unrest in several countries in the region.
Asia Pacific revenue increased 7% absent FX led by growth in Japan, China, India, and Korea, where the fan economy as an important growth driver.
Our brand successes were led by innovation, new platforms and compelling stories.
In addition to those have already highlighted Plato revenues were up driven by our popular kitchen creation play items and the rollout of five new compounds in the U.S., which will be distributed and marketed globally and twentytwenty.
Hasbro's robust product line across price points for Disney's frozen to had a tremendous holiday and momentum continues into the year with the new home entertainment window beginning today.
In partnership with the Walt Disney Company. The team created a highly innovative line to captured the imagination of our consumers with strength across price points.
According to NPD Hasbro's fourth quarter 19 sales across the GE five markets, where the highest in the brands history in the product categories, where we have right.
Star Wars benefited from the year end theatrical release of Star Wars, the rise of Skywalker, and the man Delorean airing on Disney plus.
The man Delorean Black series figure was one of the top sellers in the fourth quarter and Hasbro leveraged the global phenomenon the child.
Affectionately called Baby Yoda to drive preorder sales across several new products, which shipped this year.
Through new stories and characters young fans are increasingly engaging with star wars in major markets around the world.
Finally, hasbro's product for the Marvel franchises, including the adventures in Spiderman had an outstanding year behind an extremely robust entertainment slate.
Beyblade leverage new product entertainment and digital integration for another year of revenue growth with good momentum to start the year.
For Nerf, a very successful fortnight line and a promising start with nerf ultra in the U.S. helped us gain share globally in the Blasters category in 2019, according to NPD.
Performance improved throughout the year and the revenue in Pos declines were modest in the fourth quarter.
We will launch ultra globally and have additional break frame product launching this year.
We believe in the growth opportunity for this brand across product and experiences.
Our total games category grew 6% for the year full fueled by growth in magic the gathering and monopoly.
Higher revenues from Dungeons and Dragons and several classic game titles did not offset declines in our Hasbro gaming portfolio, including the contribution of new game launches.
Okay, all comparisons to the prior year pie face and speak out sales.
The team acted nimbly reorienting marketing at retail campaigns midyear to gain incremental space at retail for the holiday and we'll continue to drive a regional product and impactful marketing across the business.
In closing.
On the strength in diversity of our portfolio, we set up plan to profitably grow last year and we delivered on that plan.
Including revenue and operating profit gains for the full year and the fourth quarter.
As we look to 2020, we are excited about the branded entertainment opportunities. The team is executing to deliver continued revenue and profit improvement.
In early 2018, we set a target that set of certain things broke bright hasbro's 2020 business without anyone could look much like 2017 in terms of revenue and operating profit margin.
We've made tremendous progress and expect to continue to deliver profitable growth, but there are a few key factors, which have changed over the period for hasbro's business pre one.
These include an approximate negative 160 million dollar impact from foreign exchange.
Decline in U.S. retail inventories alone of close to $200 million. When you include the Toysrus exit.
And the Twain game industry that not has not yet returned to growth.
What will stand out in the market. This year are excellent brands across gaming toys, and consumer products with innovative product lines and increasing array of compelling stories.
With 2019, good performance and investments in future growth drivers as a backdrop over the past year, we took a major steps to create the hasbro of the future.
We have built profitable revenue streams across consumer products, including toys and games in gaming led by our efforts at Wizards of the coast.
And in entertainment, which we bolstered with the acquisition of E. One.
And are making great progress to achieve the synergies we outlined around our combination.
On February 21st we will speak in more detail about the opportunity for Hasbro executing it evolved blueprint strategy.
As we focus unlocking the value of from that you want acquisition and de levering over the coming years, we remain committed to investing in our business for growth and maintaining our dividend.
The board has declared our next quarterly dividend up 68 cents per share to be paid in may.
I'd like to now turn the call over to adapt to speak to the financial performance and strength of Hasbro debt.
Thank you, Brian and good morning, everyone.
2019 was a good and important year for Hasbro.
We delivered on our goal of profitable growth, we manage through a challenging trade environment and we undertook financed and at the beginning of fiscal 2020 close the one acquisition.
Our teams worked extremely hard to ensure we executed a high level. This holiday to dry fourth quarter and full year revenue and profit growth well also diversifying our supply chain and completing a major acquisition.
2019 revenues, excluding foreign exchange increased 5%.
Operating profit margin adjusted free one acquisition related expenses increased to 14.2% in full year adjusted EPS was $4 an eight cents per share.
We generated 653.1 million in operating cash flow during the year and returned 398 million to shareholders.
In support of the one acquisition during the fourth quarter, we raised $3.3 billion and net proceeds from our equity and debt offerings, which is included in our yearend cash balance of $4.6 billion.
Excluding these financing activities our yearend cash balance is in line with 2018.
During our first fiscal quarter of 2020, what's the deal close we borrowed 1 billion of a term loan to round out our E. One financing and paid $3.8 billion for each one shares as well as approximately $830 million to redeem their outstanding notes and revolving cry.
<unk> facility.
We are so please that everyone is now part of our team.
Overall Hasbro's revenue grew at actual in constant rates and on an as reported and adjusted basis operating profit increased.
Looking at our segments U.S. and Canada segment revenue grew 3% for the year with growth in partner and emerging brands.
Underlying profit was essentially flat as we absorbed higher royalty costs in support of strong partner brand growth.
Higher intangible amortization associated with power Rangers and higher shipping and warehousing cost from carrying more domestic inventory and managing an increasingly just in time retail network.
Retail inventories were up slightly in the U.S. at yearend behind growth and partner and emerging brand inventory.
International segment revenues grew 4% absent an unfavorable FX impact.
Partner brand revenue grew and absent FX emerging brands were up.
Following significant reductions in 2018 retail inventory levels they remain in good shape internationally.
Operating profit for the segment more than doubled as retail inventories were at much improved levels allowances declined operating costs came down and revenues grew.
Entertainment licensing and digital segment revenues increased 22% with growth in digital gaming led by Magic the gathering arena.
Revenues from the Bumble Bee film and consumer products licensing.
Adjusted operating profit and profit margin declined as we invest in digital gaming initiatives, including magic, the gathering arena and future magic and Dungeons and Dragons digital games.
In addition, we recorded lower streaming television revenues and had higher program amortization associated with the Bumblebee film.
Despite the near term margin impact of investments the segment margin of 22.9% remains meaningfully accretive to our corporate average.
Overall cost of sales as a percentage of revenue improved 200 basis points for the year.
We had forecasted and delivered improvement based on lower retail inventory in Europe, which drove a meaningful decline and allowances and close out.
In addition, we benefited from favorable product mix from higher entertainment licensing and digital revenues higher entertainment, driven toy and game revenues, such as frozen to Marvel and Star Wars, and a greater mix of magic the gathering.
This was partially offset by higher cost to bring inventory into the U.S.
As we discussed last quarter royalty expense grew to 8.8% of revenues for the year on higher partner brand revenues, including strong frozen too and Star Wars shipments in the fourth quarter.
Advertising declined $26 million for the year, including a decrease of 46 million in the fourth quarter, which was in part due to higher entertainment back revenues, which require lower advertising investments.
When viewed together, our royalty and advertising expense in 2019 increased 30 basis points from prior year.
We are also driving greater efficiency in our advertising, reaching more consumers through lower cost more effective platforms, including social media.
Program production amortization increased as expected coming in at 1.8% a full year revenues, reflecting the revenue timing and amortization of Transformers Bumble Bee.
S DNA declined to 21.6% of revenues, excluding he one transaction expenses.
The benefit of our cost saving initiatives and favorable foreign exchange were partly offset by higher investments in digital gaming increased compensation expense and additional warehousing costs.
Our team did a good job prioritizing in managing expenses in the fourth quarter.
Below operating profit interest expense reflected $10.7 million from bonds issued to fund the one acquisition.
Reflecting this financing for 2020, we estimate interest expense to be approximately 210 million.
2019, other income includes a $111 million settlement charge associated with the termination of our U.S. pension plan earlier in the year.
There are also several items associated with the one acquisition.
These include a full year gain of 114 million associated with hedging the British pound purchase price.
In the fourth quarter. This equaled a gain of 140 million pretax.
The fourth quarter and full year also included 20.6 million a financing transaction fees, primarily associated with the bridge facility.
With the financing complete the bridge facility has been terminated.
Excluding these even one acquisition related items adjusted other income totaled $60.4 million for 2019, and 23.3 million for the fourth quarter, which includes approximately 6 million of interest income associated with higher cash balances ahead of the closing.
Our underlying adjusted tax rate absent discrete Vince was 17% compared to an underlying 18.3% last year.
Based on our customers reaction, depending tariffs, we had forecasted the tax rate to be at the high end of our previously guided range.
However, the teams worked with retailers during the quarter to preserve direct import orders from China, and ultimately list for be terrorists were not implemented.
As a result, the buying practices were closer to historical levels than expected and direct import orders declined only three percentage points of the.
That trend along with sales exceeding expectations in certain foreign jurisdictions changed our mix of income and resulted in a more favorable tax rate.
The 12.4% GAAP effective tax rate includes the favorable tax impact of the pension termination as well as certain items associated with the one transaction.
Moving to the balance sheet, given the fourth quarter entertainment releases in the later timing of direct import orders due to tariff uncertainty our shipments in collections came later in the year.
As a result.
Receivables increased 19% and days sales outstanding increased 12 days to 90 days.
The impact of FX on the receivables balance was less than a million dollars.
[noise] receivables are a good quality and by the end of January we collected nearly 550 million of the yearend balance.
Our teams navigated the past 12 months extremely well as we execute in major brand campaigns met the needs of a changing retail landscape dealt with a disruptive trade environment and completed a major acquisition.
Our combined organization is becoming one.
Were about six weeks into our work together with the one and we look forward to sharing more with you regarding our view 2020 on at toy Fair.
In closing I'd like to comment on the Corona virus.
Our thoughts are with those impact impacted by the outbreak.
There is disruption to our supply chain and commercial operations in China as travel is limited and employees in factory workers have been delayed and returning to work.
The impact to our business to date is small, but it's challenging to quantify the potential magnitude at this time as it will depend on how long it takes to contain the outbreak.
If it takes significant period of time to control there could be a larger impact on their business.
We are rescheduling any China based direct import shipments and production mix during the past week and we're monitoring the situation closely to determine how quickly our manufacturing partners can resume full production levels and catch up on the missed activity.
This is a lower revenue in factory production period for us and we're working to protect the flow of goods.
We have a cross functional team working to identify and mitigate the impact to Hasbro.
We've identified priority items with launch dates in the coming weeks and months as part of our contingency plans and we'll work to recapture any lost productivity in the near term to meet demand throughout the year.
Now, Brian and I are happy to take your questions.
Thank you.
At this time will be conducting a question and answer session. If he wants to ask your question. Please press star one from your telephone keypad and a confirmation total indicate your lines and the question Q.
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So the way we address questions for his many participants as possible, we actually you limit yourself to one question and one follow up.
Participants today that are using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
Thank you know first question is from the line of Stephanie Wissink with Jefferies. Please go ahead with your question [laughter]. Good morning. This is actually hogans on for Scott. Thanks for taking your questions [laughter]. So digital gaming put up impressive growth can you speak to the key measures, you're saying that give you confidence in credit sustainability and what can we expect to 2020 in terms of mutual digit.
All games or features.
Sure well good morning, and we did see very strong growth for magic, the gathering and ending increased gross for Dungeons and Dragons and for magic. It really was growth in two fronts first our tabletop game grew substantially and that brings a lot of new players and unique players.
Into the game, so we saw growth and unique players and we also saw growth for all the event in our revenue for tabletop was up and of course in the fourth quarter was down as we had described because of the release cadence in the release timing.
We've seen a lot of engagement across an array of new offerings there.
For magic the gathering arena, we saw great growth for the brand that aspects the brand throughout the year.
Magic Arena was ranked as a top E sports brand number seven it was also one of the top 10 reviewed gains from Metacritic, we've seen over 1.8 billion games played thus far.
72% growth in new players for the year and on average Magic players Arena players continue to spend about eight hours a week.
We're also seeing incredible streaming metrics, 43% growth in viewer hours year to year, we're seeing over 70000 streamers since the open beta and it continues to be a top 20 game on Twitch week to week.
In January just a few weeks ago, we began the launch of magic the gathering arena on the epic games store. So that gives us access to 100 million PC gamers and we're just ramping up the marketing to bring in Moremagic players as we go forward.
We're very excited about some other new initiatives that will continue to drive our partnership with 10 cents will also talk more about our migration to mobile and Chris will outline our 2020 plans on the 21st.
In addition for DMD, we did see our sixth straight year of growth.
We are seeing about 150 million hours of content viewed on twitching, you too which is up nearly 50% year on year.
In the first half of 20 to 20 were seeing a lot of new initiatives coming for the brand, but again I'm going to let Chris walk us through at a at our analyst day, our plans for digital gaming, which are again substantial for DMD that begins in 2020.
Thanks for all the color congrats on the quarter.
Our next question it's from the line of RPD culture with Yes. Please proceed with your question.
Hi, Thank you very much. So this might be too early to ask but I'm going to try now that you've taken a closer look or do you want book.
I do you have thoughts around sort of puts and takes the synergy God youve given out so the initial 130 million.
When you announced the acquisition, even if you cannot give exact numbers how do you feel about that number now versus one acquisition was announced or anything broadly about the portfolio of brands you're looking at today in this retail environment. Thank you.
Hi, Good morning Arpino. Thanks for the question you know today, we're only six weeks into operating a with the one and we're still in the process of finalizing our combined budget, but I can say that side you know nothing has changed what we estimated from synergy impacts so far for.
For what we see well give more color on what the two businesses looked like together and on the 21st as best We can you know as I said, we're only six weeks through but Brian do you want to talk about our brands together and sure you know it's great now to have Hasbro anyone come together as a company.
Together will focus and three major areas that will continue to talk about certainly entertainment and storytelling and they're profitable entertainment business and driving more Hasbro IP across storytelling platforms, our gaming business, and then consumer products, including toys and games.
We continue to see the top growth drivers of the toy and game industry, all being associated with both storytelling as well as engagement across gaming and storytelling. So we also see of course that streaming is going to play an increasingly important role we can talk more about that.
So I immediately we add peppa pig PJ maskin Ricky resumed to our portfolio.
The teams done a great job there and we expect additional growth. We're also beginning to partner together between E. One and Hasbro teams to Reimagine brands like my Little Pony as you know in 2019. It was our ninth season final season for the current my Little Pony TV series and now the teams taking up the math.
On my little Pony in earnest for our plans in 2021 and beyond that would include.
Animated feature films as well as new television for that brand.
Great opportunities as the team has begun and we want to talk about all those initiatives today, but certainly over the next several weeks and months you will see more Hasbro IP come to the market via incredible talent and expertise city one.
Thank you.
Our next question comes in line of drew Crum with Stifel. Please proceed with your question.
Thanks, Good morning, guys. Brian you made a couple of comments about nerve can you talk about how it.
Form relative to your expectations during the year is it still the company's largest Brandon.
How are you thinking about the brand in 2020 should we assume growth for nerve this year. Thanks.
And nerf made substantial progress in 2019 in fact.
In the U.S., where we had all of our new innovation, including our fall tried as well as the four night line in the marketplace, we really saw.
Very good momentum for the brand in fact that we were up Npls online where consumers have direct access to their favorite Blasters, we grew market share and the Blasters category as we described for the global business.
And overall, our sales for the brand were only down.
Very low single digits in the fourth quarter. So we expect that momentum to pick up as we now get the access to new innovation that will go out globally, we have several new innovative launches coming in twentytwenty as well the brand is still our top brand for the company.
And we also saw that the brand enjoyed some of our top sellers over the holidays online included both fortnight as well as our ultra one product. So again very enthusiastic about the brand brink believe fully in the long term growth prospects for the brand and believe the Twentytwenty.
As a pivotal year as we bring more innovation and we bring the momentum we've seen in the U.S. and actually in a few other territories around the world Nerf is continued to perform well and we'll bring that all to bear in 2020.
Thank you our next questions from the line of Felicia Hendrix with Barclays. Please proceed with your questions I.
Hi, Good morning, So Brian I, just wanted to get back to your comments about 2020 compared to 27 team I'm interpreting your comments that given the headwinds it may take a further here to get to does 2017 metrics. So I'm just wanted to see didn't comment on that and then my my follow up is.
On some of the POS details that you gave in your prepared remarks for them for fourth quarter. I think you gave some of the business lines, but not all so I was wondering if you could give us overall Pos and then just review them by revenue line and I'm also wondering how Ricky Jim has been doing since launch thanks.
Sure.
You know for first in for foremost.
We talked about ER our plans for.
For 2020 now include E. One and so of course, we immediately add brands like pop a big PJ mass and resumed so that.
The comparisons that we had had historically now are no longer relevant as we sort of stepped forward and beyond.
What was our expectation for 2020 to look somewhat like 2017, having said that in the underlying toy industry. We've noted a few the headwinds we do expect to continue to grow profitably that underlying Hasbro business in revenues and enter continue to grow our operating margin.
In overtime as we continue to make progress around gaming and our consumer products business Entertainment licensing and digital.
And so I'd say that we're now moving ahead into 2020 as we operate as one company with Hasbro anyone.
As we as we look out over the time horizon clearly we believe the.
Substantial growth opportunity over the next several years through a 2022 as we've outlined for you as part of the acquisition.
No the Pos Oh, we talked a bit about on the call clearly North America saw some growth globally.
For the full year Pos was down literally a low single digits.
That again.
As we as we look at the business, we see some really substantial growth around for the full year around our toy business.
We see obviously substantial growth around our partner business and brands I'd also say, we wanted to look at year to date, because we have seen some really good momentum.
Year to date in the U.S., our Pos year to date is up 10% and in Europe. Our Pos is up as well so again as we moderated those declines in the fourth quarter were seeing gains in Europe, but beginning for the first quarter 2020.
And again it was a it was a late holiday we saw the momentum build around the holidays and we saw very good performance from several of our brands recognizing that brands like magic, the gathering and Transformers faced year on year headwinds Transformers from the fact that there had been a movie the prior year.
And magic, we talked about the release cadence how the fourth quarter of 19 would be lower than the prior year given the release cadence.
Of the brand over that period.
And Ricky do.
Oh resumes had a great start its a scene hundreds of millions of streams coming off of Yahoo in China as well rolling out around the world and I think the teams can you talk about the second season of Ricky coming shortly but I'll, let them describe that to you or for you I tweeter.
Great. Thank you.
[noise] Nick I got next question is from the line of Jamie Katz with Morningstar. Please proceed with your questions.
Hi, Good morning, Thank you, that's kinda quite a bit on supply.
Our supply chain expenses being elevated can you, let us know how bad is expected to play out over the remainder of 2020 doesn't that level out and then I don't think there were any comments on the Disney contract renewal, which I believe it or.
So if you have any comments on that that would be helpful. Thanks.
Sure. So from a supply chain standpoint, we did mention that you know with the changes to domestic versus direct import shipping and we're still saying you know we saw some higher domestic shipping its requiring more costs, particularly in North America as we add additional warehouses that you don't see the impact.
On the full year as strong as we did on the third quarter, [laughter], where we talked quite a bit about it but you know that that it is a reality, it's a slightly higher cost you know that being said our ocean freight contracts are looking good go forward and our air freight contracts actually bringing product here.
If it's coming to the U.S., yes, it's a bit less expensive. However, it's a matter of you know moving it through the supply chain when it gets here, but we do think that that mitigates out and of course, we look at that when we set our overall pricing for our product.
In terms of Disney We you know we've had a very strong year together and very successful partnership that continues in 2019 and into 2020 now first and foremost a partnership with Disney on frozen to was amazing a we are Hasbro is the leading company on the frozen property.
Thus far and we expect to continue to see strong results in 2020.
The home entertainment Windows going on now we've got new innovative products from our teams.
We're also driving our Princess business Milan comes in March and we have right.
The last dragging that comes up in the fall.
We're also seeing the great impact from Disney plus the fact that the library of Disney Princess films are now available together only gives us more opportunities to continue to work with Disney to bring to life those characters in product.
And we see a major of course expansion of Disney plus across Europe, and Twentytwenty, which benefits us in the holidays. The castle was a among the top sellers. They are in del castle for frozen.
Marvel We had a tremendous year for Marvel we had a tremendous year around vendors as well as with Spiderman. We also focus on the fan economy with the Marvel 80 as product 80, if your product. So again, it's very strong partnership and and up four Star Wars, we saw.
Great results around Star Wars both.
From Triple Force Friday, and support of the rise in Skywalker as wells for the man Delorean, we're incredibly excited that the mandatory in season, two will come to Disney plus this fall.
We're also seeing.
And we'll have great support around the clone wars, which is the seven season, which are comes to Disney plus in the spring and.
Again, we continued to drive and support the brand I give you all that as backdrop for how we work in such a substantial way with the Walt Disney Company, we continue to engage with them and while we take nothing for granted we believe we will continue to be a partner of choice across these properties into the future.
Thank you.
That's questions from the line of Tammy is a car yet with JP Morgan. Please proceed with your pricing.
Hi, Thanks for taking my question could you talk about the puts and takes on the gross margin line, but do you saw in the fourth quarter and that I've a follow up.
Sure. So from a gross margin standpoint, we really did see the impact of the benefit Oh, Hi Entertainment.
Related property, so we talked about the great movies from actually Brian just talked about the great movies that came in the fourth quarter from our partners at Disney because those properties tend to carry a higher gross margin because they have royalties to assess them I'm a bit further down the panel or to go against them I shouldn't say offset them. So you see the impact of that.
In the fourth quarter, you also see the impact of a better performance on closeouts throughout the year as well as pricing of our product overall, so you're saying all of those things next into the fourth quarter and we we are getting the benefit that we talked a little bit about a bit earlier on within the gross margin line.
No some reduced cost from our supply chain and all the work that our team has started to actually bring product into the country.
Got it that's helpful and then a your entertainment digital and licensing revenues were up an impressive tied to present for the year. So could you provide some color on the mix of this growth coming from Bumble Bee buses magic the gathering arena.
So we saw growth across each of the discrete parts of the entertainment licensing and digital business, our consumer products licensing business was up our digital gaming.
Business was up with a number of our digital games with partners performing incredibly well, including Yahtzee with bodies, which was a top 50 game on the Apple App store, we added new monopoly game launching from Marmalade Studios that launched in December and charted as number one as it launched our power Rangers digital games continue to perform.
And well and in first quarter 2020, we have a Joe game and supported the brand called G.I., Joe War on coal brother launches in Q1 as well as a a scares scrabble go game that will launch a firm scope lean Q1, So digital gaming group, our entertainment business grew and our Wizards Wizards digital business.
As all grew in 2019.
Arena groups throughout the year.
Arena grew in the fourth quarter offset by a bit of decline in the.
The legacy Magic the gathering online business, but overall arena had a fantastic year and we expect continued progress as I outlined a expansion of the brand across multiple platforms for 2020.
Got it thank you so much.
Our next questions from the line of Eric Handler of MKM Partners. Please proceed with your question.
Yes. Thank you very much of the question or two things first can you talk a little bit about for modeling purposes, the seasonality associated with.
The one I know you you know you're going to talk a little bit about this during.
The analyst meeting, but for modeling purposes, now wondering if you could talk a little bit about this and then also you've alluded in the past about this sort of being no flexion year for power Rangers Wonder if you could go into some details about power Rangers and some of the products that you've got for this year.
Sure. So Eric you know as I mentioned, we are actually just working on put finalizing our combined budgets with E. One and really looking out the seasonality so much of their seasonality I'm in their family of brands business is very similar to our seasonality our historical seasonality, but in the television.
In in film business, it's really just dependent <unk> actually very similar to US last year, one of the things Brian didn't mention in or entertainment and licensing is we had a big delivery of our streaming revenue last year, which offset some of that benefits were saying on the revenue side and entertainment and licensing, but so much of that is dependent around delivery so well.
Give a bit more color on that as we move into the February 24 state and propel Rangers. It was a great year on Beast more for is it was a strong year one recognize that the bulk of our business really didn't begin until the second quarter in 2019.
In 2020, we have the benefit of the full year.
And as we look at our ratings on Nickelodeon we're number one in our time slot for kids two to 11 season, two obese morford launches Q1 in.
North America, and it will rollout globally.
Very excited about the brand because we continue to execute in gaming in consumer products and toys and games and will also add an array of experiences a live experiences for the brand as we rollout globally.
We believe in the gross growth prospects of the brand.
And the teams are a very excited about executing across the blueprint.
Thank you.
Yeah.
Our next question is when a lot of Tim Conder with Wells Fargo. Please proceed with your question.
Thank you and just a couple follow ups here, one Deb little more color on the dust DNA seemed to be down substantially.
And again on an adjusted basis, if you could just give us a little more color there the sustainability of that from the cost programs to know that or or just a again, just a little bit more color on that and from what happened in the quarter and then as it relates to a star wars in them into Lorient. If we look into 20, how do you how would you say that.
Cool the trajectory of the core Star Wars is relative obviously made the Loring debuted at all that's going well, but if you put those two together the click to star wars, or just maybe or how that how that's looking.
Sure. So Tim you are right, you're seeing the benefit of our cost savings initiatives coming through that S. DNA line, but what somewhat offsetting that and you also get a little bit of benefit of FX. So all FX is negative on the top line the impact translation impacts a bit positive on on a lines like like S. DNA.
Okay, but within that we're seeing the investment that we're making in our digital gaming business. So well a piece of that comes into product development line, you're seeing a portion of that you know for what we've capitalized anywhere depreciating is coming through the S. DNA line. So I sorry sustainability, we do believe.
We've our cost savings are sustainable we might get a bit more in 2020, but it's going to be difficult to pull out west we have even one together. So we'll try to highlight what we think that lines going to look like in 2020 on the 21st so a lot of 20, but you know it but we will continue also.
So to make those investments in digital gaming because as we've talked about those are really driving revenue for the future. So while we're seeing some of that expense coming through now and we continue to see that as a gray area of growth Brian's talked about magic and Dungeons and Dragons at all of the other great things you're going to hear a cross talk about on the 21st.
And we continue to believe that's a really important line to invest and the other thing that's offsetting some of those cost savings. This year is conference, it's a bit of compensation expense as well.
So for Star Wars.
Great to see the level of brand engagement, that's coming for the fan but also.
It's a really impressive to see how kids are coming into the brand and their engagement or the comes from both the rise of Skywalker as well as for the man to lowering.
We are very excited to see the mandatory in season two coming later this fall Disney plus also has the clone wars that are on in the spring.
There's also a live action kids game show called Jed I Temple Challenge, which we think we'll continue to engage kids and then of course they have a two major theme park launches Gallic for galaxies edge, both the Disneyworld and at Disneyland, We think all of that as it is all adds to the engaged.
Going around the Star Wars brand and we're seeing that in the results certainly.
We've seen great growth of our Black series and the fan oriented product, but we're also seeing engagement around lightsabers enroll play that are expressly designed and made for kids.
We think the brand continues to perform.
Very well in 2020, we're obviously excited about the home entertainment Windows.
For Star Wars of course, as well as for frozen and we believe that will just continue to add to engagement I think that this is a property Disney's outlined that will perform both in film, but also in television and continue to evolve as a as a property that will be in a stream television via Disney plus and in.
Gauge fans and families.
In the in that way I think that a as we sort of step back we think that this streaming entertainment that also engages people in other attributes of brands, including merchandising and consumer products is.
The next watchword for our industry and for the category and it's up perfectly timed with our efforts with the one.
Develop our properties up for television on for Phil.
Thank you.
Next questions from the line of linking with Goldman Sachs. Please proceed with your question.
Great. Thanks for the question I, just have one for Devon, one for Brian.
Can you just talk a little bit about.
Advertising expense in the quarter is lowest level in Fourq you that we've seen several years I know you mentioned a few things the high level of partner brands mix and some marketing efficiencies, but could you just give a little bit more color there and does that definitely should we expect next year's advertising expense to return.
Closer to 2018 levels of partner brands mix Normalizes, and then for Brian and I was just wondering if you could talk a little bit more about the engagement and revenue trends for Magic Arena.
How did that look in the quarter relative to earlier in the year for instance, thank you.
Sure. So good morning, Mike It from an advertising standpoint, we did talk about we had the unusual effect of these two major held a entertainment properties coming late in the fourth quarter, both in frozen to N. Star Wars. So on combined the the advertising spend around that.
With a bit and while it was still high and were very engaged in making sure. We're promoting products along with all the wonderful promotion that was done by a that by the Walt Disney Company. We did see that we had lower advertising in the quarter in particular, but when you look at that combined with royalties, which is a reflection.
The product that moved in the quarter was actually we were up 30 basis points. When you look at the two items combined we are actually seeing saving so in our advertising line, particularly as we move more and more to social media and we see where our consumer is actually can is actually consumed.
During the media and advertising compelling it so we expect our costs to be a bit lower in 2020 than they have been in the past and well give a little bit more color around that as we move into the 21st and aren't best Investor day and for Magic. The gathering as you know Mike It operates on.
A number of levels and.
The brand was up more than 30% for the year and you can't underestimate the power of all all of the storytelling. Your comes from the card releases and the fact is the table top game was up in such a substantial way with engage me.
Around events and unique players all pointing to incredibly strong metrics, our digital magic Arena.
Business also grew several fold throughout the year and we saw strength in each and every quarter, including growth in the fourth quarter.
We were gearing up for and have now executed.
Magic Arena on the Epic game Star, which just occurred and we're really going to be ramping up all the marketing in partnership with epic to bring magic to more gamers than ever before.
Magic Arena will move to mobile.
Through in the year in 2020, I'm going to let Chris outline the plans there, but that's incredibly exciting as we gave give more people access to magic arena recognize it's been a PC based game thus far.
As well our partnership with Tencent, we expect that to ramp.
And to have an impact on the brand in Twentytwenty as we look at new markets in new geographies around the World. In addition to that for Magic you will see a new game launch this year in magic into casual arena.
And I'll, let Chris walk you through that you'll also see.
Great Digital game development for DMD and I will see you on February 20, Onest outline that.
Great. Thank you both.
Our next question it's in line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.
Hi. Thank you you had mentioned in your commentary that retail inventory in the U.S. was slightly up year over year at the end of year does that caused you any concern going into the first quarter or isn't that the Pos trends are strong enough. So that it's not of concern. Thanks.
Yeah sure the inventory levels in the U.S. are up just slightly and so yes, the Pos trends, we're seeing or in excess of the inventory level increase that we've seen and we do feel good about the momentum into brand, we're seeing great take away at retail lots of engagement around several of our properties.
Lots of new initiatives coming for Q1, we've outlined just a few on the call today, but certainly a home entertainment windows coming up for both Star Wars in for frozen with frozen home Entertainment window, beginning today, certainly incredibly helpful. As we engage more kids stands and families and those.
And so it's very exciting it's a great start to 2020.
<unk>.
Right and then can I just ask you about your E. Commerce, maybe if you could just give us a little color on how your penetration in E. Commerce has progressed and remind us what percentage of your revenue. It was in 2019 and how that compared to 2018 and how you think you rank for instance.
Competitors and penetration and E commerce. Thanks.
Yeah, our E Commerce business was up substantially in 2019 far in excess of our underlying Pos gains and.
We've seen incredible growth in both a pure play E Commerce is wells with omni channel.
We see our retailers are gaining share in those areas.
We've seen that for E com players as well as omni channel Oh competitors.
And our products on E commerce performed incredibly well with top sellers that included products from frozen from Nerf are for real kabi, which enabled for real to the to regain its status as a number one brand in that space.
Seed Hasbro gains, particularly the classic games over the holidays performing very well.
And we have seen several percentage point increase in our overall sales and E com as a percent of total.
So I would expect that E com sales as a percent of total now should be and low twentys. We're just looking at some final numbers there, but again, we expect that to continue to progress year to date 2020 E Com sales continue.
To be several fold stronger than underlying retail sales and underlying retail sales are good. So again as we give consumers direct access to our products either through E. Commerce Romney channel. They are making the choice for several of Hasbros brands and and our innovative products.
Right and then just one final question on any one I know, it's early days, but I think there's some businesses there that somewhat.
Regard as potentially nonstrategic are there any pieces of the one that could be carved out and divested to help you de lever or your balance sheet, a little bit more quickly.
Well right now we're really focused on the t. with the teams on engage man and getting a several of our initiatives and their initiatives.
Off into the market. In addition to the preschool and kids initiatives that they have in market today, they're taking onboard some of Hasbro IP as well as they have some new original creations that will come out in the market over the next couple of years.
We're very focused on the revenue synergies and also achieving and hopefully going beyond our on our cost synergy side on the guidance that we've provided.
To you and that in due course will take up the the question of whether there are opportunities for elements of the business that may not be core strategic but our focus right now is great momentum as we come together as one team achieving their cost synergies and beginning to stand up.
The revenue synergies that you will see impact our business over the next number of years.
Right. Thank you very much.
Thank you. Our next question is from the line of race still with consumer Edge Research. Please proceed with your question.
Great. Thanks for taking my questions are you seeing any changes or are you. How are you implementing any changes as a result to view to this children content policy changes, whether it's for on boxing Influencer marketing, how you think about the fan economy or the collectibles market.
Yeah, we're engaged with you too.
Fully understand where those changes will come out obviously, we abide by all the relevant rules.
Not only for you too but for Carew another.
Governing regulatory bodies and of course, we want to ensure the safety of kids as they view content on the Internet.
And so I'd say that say an ongoing conversation and we'll probably give you more color over the next few months.
Got it thanks, and then in terms of the difference between launching something launching content on a more more traditional linear media and feature films. How do you think about measuring and planning for demand for big streaming launches and then how are you thinking about any upcoming streaming platform.
<unk> launches in how you might be able to participate.
Well, it's what's been fantastic is the success that the Walt Disney Company as seen with Disney plus we're I'm very happy to see the success that they're having a number of subscribers into the tens of millions and the engagement with properties like demand Delorean, we believe.
That's just the beginning of this next phase with engagement for fans and families around the world and.
It really portends, great things as we look at our efforts with the one to develop Hasbro IP for multiple platforms.
Dr. storytelling and engagement of our brands you know what we've seen across the industry is that the top growth drivers in the traditional toy and game industry are all associated with storytelling as well as engagement across platforms like gaming and ER and other and other experiences just thinking.
About in the nerve business alone impact from coordinate and as we've been able to develop innovative line for fortnight.
Whereas the man to Lorien hasn't really captured the imagination of fans families kids are just our opportunity there even beyond.
The child and some of those products. The fact that the black series.
Products from the man to Lorien were were stopped selling so strongly over the holidays you know at all it all says that people really want to engage with great character and story, it's been our belief all along that's how we've oriented our company and it's why.
I will continue to lead and also how we're able to engage people in an online and Omnichannel E Commerce world the opportunity to connect contact with commerce is incredibly compelling.
Great. Thanks again.
Thank you.
Questions from the line of Bryan Goldberg with Bank of America. Please proceed with your question.
Oh. Thanks, So two quick ones I'm, just curious based on your past experiences with Disney.
How significant are the home entertainment window releases for intellectual property.
Like a frozen or Star Wars.
In terms of stimulating partner brand sales, if you could walk us through a little more what you could do to leverage than.
That'd be very helpful. And then my second question is related to your comments on.
Essential lumped in supply chain disruptions that you are seeing from Corona virus, you called out some priority item.
Lags.
Making contingency plans for and I was just wondering if you would be able to update as to what brands those items, let the associated with.
Sure.
I'll take the first one on Doug can walk you through.
The second question you had sort of the second question.
You know if I step back historically of that.
Back in the days, where Dvds, where the way in which people saw home entertainment, we saw incredible impact from the launch of the Dvds has it came into the home it engaged a family engage kids, who want to view content over and over again.
We're really seeing other return of that kind of heyday of home entertainment enjoyment now through streaming services and through electronic sell through windows as well as for the DVD business. So.
Entertainment is back to being at its a pinnacle of success in engaging fans and families. The opportunity for kids to see content over and over again for families to enjoy that content and also share it with younger siblings, who may or may not have made the trip to the theater, but certainly can watch the content.
Along with a family and friends at home. The fact that more people are watching content or homes through stream services also benefits us and we're seeing that across our business. So I expect that home entertainment will continue to increase in importance that streaming services will continue to play.
An important role and I think an increasingly important role overtime as we now connect.
These great stories with People's desire to engage with brands across multiple platforms and we're very excited about it we're entering a next era of a consumer in audience engagement.
Great. Thanks, Brian in the Corona virus, you know as we look at it your thoughts are obviously with the people impacted by the outbreak and includes our third party manufacturers and also our employees in China. You know, we've had and we continue to have office and third party factory closures and real.
The biggest saw known right now is how quickly the manufacturing factories can get their production ramp back up given the amount of travel if you think about it when people travel to visit family in Chinese New year's Chinese new year now they need to travel back. So travels limited you know places are still close our employee.
These are working from home. So we have protocols in place with that so as we think about.
How all the efforts we've made to diversify our manufacturing into different locations still about two thirds of our product overall.
Our global sourcing is coming from China. So you know we are looking at it very closely right now the impact is small the commercial impact is small there's a bit in China as people couldn't shop during the holidays, but it's small but that being said our first quarter is typically a lower revenue quarter for us so the longer.
It last at the outbreak contained and people can't travel back and start production up again, there there could be an impact on our first quarter, but for the full year, we remain optimistic that we'll be able to catch up over the full year and we'll continue to add color to the impact as as we look through there's no one particular.
Brent that that we would call out on that we are prioritizing what needs to be done quickly and moved here quickly as well.
Thank you very much.
Thank you at this time, we'll turn the floor back to Debbie Hancock for closing remarks.
Thank you Robyn. Thank you everyone for joining the call today, the replay will be available on our website and approximately two hours management's prepared remarks will be posted on our website. Following this call a as we mentioned we're hosting our annual toy fair Investor event on Friday February 21st and we look forward to see many of you there.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.