Q1 2020 Earnings Call
Good morning, and welcome to the Hasbro first quarter 2020 earnings conference call.
At this time, all parties will be in listen only mode.
Question answer session will follow the formal presentation.
Anyone should car I pretty assistance during the conference. Please press star zero on your telephone keypad.
Today's conference is being recorded if youve any objections you may disconnect at this time.
At this time I'd like to turn the conference over to Miss Debbie Hancock Senior Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone. Joining me. This morning are Brian Goldner, Hasbro's, Chairman and Chief Executive Officer, adept Thomas Hasbro's, Chief Financial Officer today, we will begin with Brilinta, providing commentary on the company's performance.
An update on the company's response to the covered 19 pandemic then we will take your questions. Our earnings release. Some presentation slides for today's call are posted on our Investor Web site. The press release. Some 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 a reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whatever we discuss earnings per share U.P.S., we're referring to earnings per diluted share before I begin I would like to remind you that during this call and the question and answer session.
That's all I was members of Hasbro management May make forward looking statements concerning managements expectations goals objectives and similar matters. These statements include among others the impact of the Corona virus on our business financial results and liquidity our efforts to protect the health and wellbeing of our workforce customers consumers manufacture.
Sure as and suppliers are for our efforts to ensure we have adequate liquidity at our initiatives to support our communities and they are global work force children and their families. During these difficult times. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these fourth.
Since these factors include those set forth at our annual report on form 10-K, our most recent 10-Q in todays press release and in or other public disclosures. We undertake no obligation to update any forward looking statements made today to reflect events or circumstances occurring after the date of this call I would now like to introduce price.
Goldner Brian.
Thank you Debbie good morning, everyone and thank you for joining us today.
Every day I'm inspired by the inventiveness and creativity of Big Global House protein.
We're finding new genius ways to get product from production into cars in home safely and efficiently.
They're finding new ways to create and deliver content as this year continues to evolve.
Our people are supporting each other from our homes around the world.
There are adapting to an ever changing environment as they worked tirelessly to minimize the impacts the cobot 19 on our business and our people.
Okay, well I'm for critical areas.
The man.
Consumers want our products and experiences.
Looking for connections and engagement during this time.
We are leveraging our extensive product portfolio in diverse retail network I cannot global consumers, what the product and experiences they want.
We are offering compelling story, telling the continues to create strong viewership globally.
Second supply.
Hasbro team is working to utilize heart diverse manufacturing and supply chain network, who ensure product is available for customers and consumers.
Third liquidity, we have substantial liquidity and we are taking prudent steps to ensure hasbro remains in a strong financial position by aligning expenses to today's environment and preserving cash well paying our dividend meeting our debt commitments and making essential investments are the long term.
And finally community this is a top priority.
We're making decisions to protect our employees and stakeholders, but also help where we can through this challenging card I.
I'm, so proud to be amazing work, our teams have accomplished including to supply much needed P. P for frontline medical workers by producing 50000 base yields per week that will be donating a local hospitals in Massachusetts, and Rhode Island.
The Wizards team in Retton supporting Wizards play network member stores through its mystery boost live and several productions donated P. eat up front line workers, Toronto General Hospital, you CLA and others.
These are just a few examples of our commitment to our communities.
I will at least today later, how extensive details at each of these areas. So my comments will focus on a few key topics.
The Hasbro management team has been together for more than a decade, we've recently added new expertise and experience.
Gather we're managing this new truck that's a challenge we are well equipped to successfully navigate.
Over the past several years, we've invested to diversify our revenue in college across play in entertainment.
Expanding our branded portfolio to reach more demographics and play patterns, while building, new businesses and entertainment and digital gaming.
We realigned our commercial efforts to reach more consumers and Belk best in class online and omni channel execution as well as new channels, such as drugs grocery dollar and value.
These are strength you need to Hasbro.
Our first quarter results were good reflecting strong consumer demand and our ability to get products to customers and to consumers.
Global point of sale increased in the mid single digits led by double digit gains in the U.S.
Ecommerce point of sale increased significantly as shoppers turned to online and curbside pickup didn't meet their needs.
Well point of sale, it's positive in April continuing these positive trends will likely become increasingly difficult as more countries are practicing social distancing, including limiting production of product in entertainment distribution activities and shopping.
We are leveraging our global sourcing network to got product made and deliberate to consumers.
We expect the second quarter may be more challenging then first.
Since due to several factors, including that late in the first quarter at the start the second quarter more stores in countries have shutdown activities Entertainment properties, where we are launching products at moved to later release dates and 2020 and into 2021.
And some have gone straight to PDL today.
And our own live action in TV and filmed entertainment production is limited.
We have done extensive scenario planning to understand these impacts to our business for multiple different periods when the consumer economies could reopen.
We are acting nimbly and creatively to address these factors throughout the business.
Across our portfolio, we have innovative product and compelling entertainment to deliver a good second half of the year, including for the holiday.
2021 is also set up well given the shift of several entertainment initiatives to next year. In addition to our established plans for the year.
In the first quarter consumer sought out several hasbro brands and experiences.
James played out and content viewership or amongst the strongest.
Face to face gaining demand stood out in many Hasbro gaming brands.
Demand is robust and we're working to continue meeting consumer purchase interest with games production from multiple locations some of which had been closed in recent weeks, but we expect to reopen this summer.
First quarter results for magic the gathering were above trend behind strong releases, but also due to steps we took.
We adapted the physical release cadence about Korea layer of that units, including pulling product shipments into the first quarter to support a rolling release plan with a global launch currently scheduled for most of the World R&D team.
The team canceled physical events and develop new initiatives to keep our organized play engines operational by transitioning to digital play off Arena with Friday night Magic at home and Magic fast online.
Despite a decline in organized in person play event. This pivot drove an increase in new players across the brand.
Upcoming expansions into mobile China and back in 2020, well continue to expand the arena audience.
We are supporting Wizards play not work stores through innovative programs to create revenue opportunities for the store owners in the absence some players physically in them.
Importantly, this was our first quarter with you want as part of Hasbro.
Integration between Hasbro and you want is on schedule and the teams are actively engaged together, allowing us to create and uncover new revenue opportunities through entertainment in merchandise.
We expect to deliver synergies in line with our plan for 2020 and are on track to deliver the $130 million and synergies we've communicated by year end 2022.
We've transitioned anyone to lead our company wide entertainment content efforts and we've integrated the creative teams, including development on potential Hasbro brands for television and film.
He ones first quarter, TV and solid results reflected a difficult comparison to the first quarter of last year when they deliver at a high volume of programming.
Revenue is tied to production deliveries and diesel variant timing each year.
In 2020. This was slated to be later and is being cost further as production activities have closed and the deliveries have been delayed.
The key team can do development work in virtual pitches as well as animation production.
Delivery of programs will happen just later than initially planned.
First quarter licensing revenues for Pepper pagan PJ masks include holiday 2019 sales.
Strong demand for content across all platforms was offset by lower licensee shipments to retailers.
Well take is now the most viewed preschool show in the world on the you tube platform and PJ mask is one of the most streamed children shows on Netflix in the UK and U.S.
We have a line the consumer products efforts for these brands along with Rickys home under Hasbro's consumer products team and our identifying opportunities for expansion.
However, certain consumer products categories in particular soft goods like apparel are showing weakness within the industry and we expect this will be a challenging period for license categories.
Our teams have reacted creatively and constructively to identify a successful path forward during this unprecedented global pandemic.
The underlying drivers for our business are sound and with great innovation brands and storytelling, we are well positioned to successfully executing twentytwenty and beyond.
The North Star of our company has not changed.
Hasbro is creating play in entertainment experiences, which are vital in desired by consumers and audiences this year and for years to calm delivering value for our stakeholders.
Ill now turn the call over to adapt.
Yep.
Thank you, Brian and good morning, everyone.
How so it was in a good financial position.
Simerson audiences are engaging with our brands and content.
We're profitable we have substantial liquidity and we continue to take the necessary steps to align our expenses in cash than with the current environment.
We completed the E. One acquisition in early fiscal 2020 and performed a first quarter closes the combined company remotely.
Globally, our combined finance and accounting team did outstanding work and we provided 2019 quarterly historical results in accordance with U.S. GAAP for he won in today's earnings release.
We have booked opening them out and as we complete our evaluations and purchase accounting over the coming here there may be further items impacting our results, which will highlight as we progress through 2020.
We continue to target synergies of 130 million by year end 2022.
We slowed the pace of certain activities early in the year to reflect the current environment, but we remain on track to achieve the targets, we have sat including 2020 cost savings of approximately $20 million before one time expenses.
My discussion today will be versus pro forma adjusted 2019 earnings and exclude E. One acquisition related expenses and amortization.
In our reported numbers, we reflected 147 million after tax.
One time expenses and acquisition amortization or an impact of one dollar in seven cents per share.
As Brian highlighted our organization is focused on four things.
I'll start with our top priority community.
Our teams around the world have showcase tremendous ingenuity and resilience during 2020.
Their health safety, and well being guide or every decision.
I'd like to reiterate what Brian said I'm tremendously proud of the work our teams are doing to support not only each other but the communities in which we're operating.
It's a testament to their belief in our purpose of making the world a better place for children and their families.
Let me tell liquidity, we ended the quarter with $1.2 billion in cash and the balance sheet.
We have one then half billion dollars available through our revolving credit facility and are well within our financial covenants.
As a reminder, oh low cash Pierre you traditionally occurs in the fourth quarter and the October and November timeframe.
We have significant cash and liquidity and have also identified opportunities to reduce our expenses and our cash spend.
These include pausing planned headcount additions and broad scale merit increases.
Reducing future travel expenses and moving plans live events to virtual.
These are just a few of the actions were taken.
Our next major debt maturity of $300 million is due in may of 2021.
The board remains committed to our dividend and in February we paid the first dividend of the here with the next payment already declared Sunday.
That's fine discuss entertainment production anyone is shut down for most areas of their business.
This is driving a lower than planned cash then for content in 2020.
Assuming an early third quarter returned to production, we expect to spend approximately a $150 million less this year than originally planned and within a range of $5 million to $600 million for the year.
We've also closely reviewed capital expenditures.
About half of our capital spending is related to tooling for our products for future periods and the timing of that's done is weighted to the second half of the year.
We've reviewed I T projects in facility renovations as well as investments in digital gaming development and reduced our 2020 spend expectation to $145 million to $155 million.
Moving to the balance sheet.
And Tories declined overall and include approximately $7 million from E. One.
Accounts receivable increased $325 million, approximately 223 million of which relates to easily.
For the remainder much of the increase is coming from the U.S. and is driven by the timing of sales in the quarter and the shift to more domestic revenues versus direct imports that we were seeing at the end of 2019.
When we compare the March 2020 idea so to the comparable pro forma measure in 2019, we've increased dsos two days.
We're closely monitoring credit for our customers. However, we should recognize our three largest customers remain Walmart target and Amazon.
Next lets discuss demand.
So the first quarter revenues declined 7% absent FX.
20% growth in the U.S. in Canada segment, including growth in gaming such a magic the gathering monopoly Dungeons and Dragons the game of life agenda connect floor in others and our products for Disney's frozen to along with 8% growth in Europe was more than offset by the declines anyone.
Getting a slate which was planned for later deliveries this year versus last.
In Asia Pacific, which was impacted by Cobot 19 during the quarter and Latin America, which is working through access retail inventory.
We currently expect the impact of Kobin 19 to be more significant in the second quarter due to retail store closures.
Supply chain disruption live action production shutdowns and changing theatrical release schedules.
However, consumer demand to April has continued to be up and we're working aggressively in creatively to meet that demand.
It's Brian highlighted we've seen high viewership for our content, which is driving brand engagement.
Finally supply.
The global operations team is working to ensure we can make and deliver the product or customers and consumers are looking for.
About 55% of our production. It's currently done in China and has returned to normal levels.
In other states in countries, we have varying levels of supply chain operations, including some clothes warehouses and talk duties.
As outlined in our release, we expect to catch up on production over the coming months and be positioned to meet holiday demand.
Sure the facility closures last longer than anticipated this would be more challenging.
We've also recorded incremental shipping costs to support the movement a product of course, our global supply chain network.
The one business TV and film production teams are able to perform development in the nation work as well as pitch ideas.
They are being incredibly creative on how to get work done, but the majority of production is not happening.
As I mentioned earlier, our plans currently habits resuming live action production early in the third quarter.
Finally, let me touch in a few expense items on a pro forma basis.
Gross profit margin, including both cost of sales and program production cost amortization increased 110 basis points aided by the state by favorable mix due to strong gaming, including magic, the gathering and lower program amortization.
Cost of sales decreased 4% due to the favorable product mix mentioned, partially offset by higher airfreight costs associated with moving product out of China once the factories reopened.
Well when production cost amortization declined 21% on a pro forma basis on the lower entertainment deliveries in the quarter.
On the advertising like the year over year rate was higher due aligning he wanted hasbro's accounting policies.
We are reducing advertising levels, while adjusting campaigns and their timing to reflect the current environment.
This is one of our most variable line items and we are appropriately aligning the spend to both you'll never topline and lower cash outlay, and we'll be well prepared to drive demand for the third and fourth quarters.
S DNA increased 2%.
We're implementing cost saving activities related to compensation in hiring as well as professional services travel and other discretionary areas such as shifting live events to virtual items.
In the corridor, we only need accounting policies on cost capitalization stock compensation, which resulted in higher admin cost for anyone.
We also experienced higher shipping expense due to the unplanned significant increase in game sales, which offset savings from the decline in warehousing expense.
We've done extensive scenario planning to understand the impact of cobot 19 or business mapping out the implications for various returns to more normalized activities as well as the impact of operating in a global recession.
Despite having a good understanding of the factories and how we can manage them.
The outcomes very wisely and that drove our decision to withdraw our full year 2020 guidance.
As we move toward reopening economies, we are planning for a good holiday season, with great innovation and entertainment across our portfolio.
We have confidence in the strategic advantages of our business model as a global play an entertainment company to both navigate the near term and should drive long term profitable growth.
Now, Brian and I are happy to take your questions.
Thank you.
At this time will be conducting a question and answer session.
If you like to ask a question. Please press star one on your telephone keypad and a confirmation Tony indicate your line is in the question Q.
You mean first start to feel they turn move your question from the Q.
Just for choosing speaker equipment that may be necessary to pick up your handset before pressing the star keys.
One moment. Please so we poll for questions.
Thank you. My first question is from the line of Steph Wissink with Jefferies. Please proceed with your question.
Thanks, Good morning, everyone and hope everyone is staying well.
Brian. The first question is for you if you could just help us contextualize their scope your directional comments on Q2, you clearly Pos up quarter to date, but I think you signaled you know not anticipating that strength to persist how should we think about the relativity as of Q2 versus Q1.
Yeah. Good morning stuff, so I think that for us the greatest lever that's driving our thought process around Q2 is just a path to the consumer.
And as we've seen major retail store closures around the world as we've seen warehousing in certain areas of our business close and as we look at a certain factories for example in Massachusetts that are presently close that we expect to open reopened shortly as part of the phase three openings, we just recognize.
That the path to the consumer is more challenging while we're also seeing in April.
So far.
A very good growth in our Pos in fact I think this is a story this year, where E com and omni channel really are stepping up and we're seeing growth in E com and omni channel in the United States of more than 60% growth and our games business growing as well so there's a multi variable.
Going on where we're just looking at how we move through many close retailers. How we look at our licensees who are trying to sell product not only from the biggest retailers that remain open and are executing incredibly well, but also smaller retailers, where they are close in our planning opening.
For a later in Q2 and Q3.
As we get more clarity and as we engage with more administrations in the United States and around the world. We're starting to see the path toward these reopenings add we're starting to see that phased reopening schedule come to light and I think that that will help us as we get through the remainder of Q2, but Q2 will be.
A more challenging quarter than any quarter or this year, we have very robust plans that have continued throughout this quarter I'll bring home the fun campaign, our brands and across the board and gaming, which we can talk more about all are doing quite well, but out of abundance of caution and as we see where.
The where the levers are in the past to the consumer through our customers that's really our caution on Q2.
Okay. Thank you indicated that's one clarification question at the very end of your prepared remarks, he talked about aligning policies across even in house or from an accounting perspective, including advertising and stock comp.
It's kind of onetime reconciliation event or do we see that over the course of 2020, each quarter and tell you anniversary the acquisition.
Good morning stuff, yes, I think well, we will see that across each quarter. If you look out the pro forma numbers that we were included in today's release and we wanted to make sure. We included those so everyone would have those for modeling purposes. If you look at the pro forma and back out those one time expenses that we tried to highlight.
From last year, and those to hasbro's with any onetime expenses, we Ah we did call out during the year or not we'll give you a sense of adding the companies together for the full year, but as we look at that that total amount. It's if you think about it kind of in the.
10 ish million between the two line items per quarter, it's not the most significant number and again, it's not in the underlying business. It's just aligning accounting policies U.S. GAAP everything else. So you won't see it again in 2021.
Okay. Thank you very much.
Next question comes from Atlanta, Felicia Hendrix with Barclays. Please proceed with your question.
Hi, good morning, Thank you so much.
Brian you had I'm just talk to that the on factory. He said that I'm expecting that just open soon goes just wondering what that road map looks like in the U.S.
Also just in the meantime, if you've been able to shift then you that manufacturing elsewhere and more importantly has this whole computer situation given you the opportunity to take a look at your supply chain and implement further improvements in the future.
Yep. Good morning, Yeah, I would use that we've used a variety of sources around the world and I think the strategic sourcing footprint that we had put in place is really benefiting us we're getting about 55% of our products today out of China and that supply chain is up and running is robust and will catch up on our new initiatives.
We were producing for later this quarter Q3, and four and just the next couple of weeks to months.
And we have a number of big new launches that are coming a including a around our whole trials, we roll that out.
A round the world.
We're also clearly working through some of the warehousing closures that have occurred in parts of the country. It's part of the reason why in addition, just to the demand for magic. The gathering tabletop game cards. We also moved up some shipments of magic. The gathering in Q1, we began a rolling.
Police calendar for a Korea, there a layer behemoths. So we started with the launch on Arena mid April and then we'll have the official launch by mid May but we made cards available earlier, we also produce mystery card boosters earlier and got those out to our Wizards play networks stores. So.
So that they would have those cards free of charge and they could keep the proceeds of the sales of those cards to help support those small store owners that are part of our play network longer term. So it's a variety of levers that we're pulling the team is doing an incredible job.
We're seeing the continued growth in Pos in April we saw very strong growth throughout Easter, but really we gone we very very strong growth and a trade off here is really very strong growth in online E com and of course with less store traffic or less footfall, we're seeing a.
A decline in the brick and mortar Pos offset by tremendous increases and E com and ER and omni channel executions.
And that's helpful. It did have sneak a segue to my next question because I'm just talk a bit about the magic and so I was just wondering if you could just talk a minute about the transition.
From the physical games to arena, given the social distancing environment, you mentioned that in your in your prepared remarks, just wondering how how sticky do you think that'll be in the future on and how much of arena revenues really benefited from that almost forced transition and on could you see this as as a permanent change.
We do see it adds up an opportunity for a permanent step up I think people are discovering more of our games as you look at our games business overall, what research tells US is it's not just the fans of all of our games, including our face to face games and magic that are coming to our games business, but rather we have increased penetration we're seeing a people.
I'll take hold of gaming globally, a more people wanting to make connections to play a variety of our games our game sales.
By brand are going more deeply into our portfolio. So it's not just the top games that you and I can talk about but really across the portfolio from preschool all the way to adult.
Now, let's talk about Magic go Magic got during the quarter, we could see with our team in Seattle, Washington, where business was going and they transitioned our organized play to digital and we've seen a high level of engagement, including new growth of arena, but also new net players a poor.
For the quarter.
We shipped a Korea Atlantic events earlier, that's the trading card and move towards <unk> Rolling release clam that gets the fall worldwide roll out by mid Bay.
The teams shifted to digital Friday night Magic at home, which has worked incredibly well and also a magic fast online that's performing well us as a in addition to magic or at home.
We're also supporting the hobby stores as I mentioned, but I'll have to say magic table top was up in the quarter and a substantial way because we started back in January with their own beyond data release.
We had several other releases throughout the first quarter.
And we have a number of TCG or trading card game releases scheduled for the remainder of the year. So storytelling, we'll continue to be robust throughout the year on arena. We've now seen 2.1 billion games played and on average players are spending more time on arena than ever before were up an hour.
Per week to nine hours from eight hours.
We're seeing overall player engagement and satisfaction is very high with the highest engagement and satisfaction from players who are playing both tabletop and arena.
So that leaves us or nets us eight an increase in new players across the brand as we made these fast changes the team has done a fantastic job.
And also as we go forward to the point a permanent increases in game players and ER and play for magic or we can confirm that we're bringing magic arena to mobile this year, both in iOS and Android and we're also launching with partners 10 cents in China, and you'll see it as well on Mac.
So we're having a very strong period for arena in fact this period over the past month, that's been the strongest period since launch and we're seeing acceleration I Korea preorders are the strongest versus all previous arena said and the Weve added some new features as well so hopefully that's helpful.
Yeah. Thanks for all that detail I appreciate it.
Our next question it's from the line of Mike Inglese Goldman Sachs. Please proceed with your question.
Great. Thank you so much for the question I was just wondering if you could elaborate a little bit more of them on what was happening you one I'm specifically in the in the press release, you guys talked about TV deliveries being down and some licensing agency transitions that affected type of pig as well.
The retail inventory issue for for PJ masks, you know how much does that change the.
Revenue trajectory from the a 1.2 billion that you guys realized in 2019. Thank you.
Oh My God. Good morning, no. So overall our plan for the year as we laid it out for you earlier. This year was that he was going to deliver more half hours that in 2019.
And in fact, probably about 20% more.
In the first quarter. It was always plan that we were going to de lever last half hours than the prior year and then that was exacerbated by the fact that we were unable to finish certain episodes within the quarter as the editorial houses were shutting down along with production. So we expect to deliver episodes that work to be.
Finished in the first quarter later, you know it's around really high rated shows like the Rocky for example were delivering those episodes produces a very strong revenues for the company.
The plan for the year was always a little more back half loaded and we continue to believe it will be obviously offset by now considering the fact that into Q2 period or unable to go back into production is obviously productions are shut down editorial shutdown having said.
That the animation side of the business is very vibrant up and running and people are able to create animation produce animation and render animation all during this period. So that the family brand side is very healthy and they're continuing to produce a product.
For.
Legacy you one brands as well as continuing to work on the my Little Pony feature film, which we intend to bring out Mcg next year.
So overall the key questions Bocom, one where when we can get back for production and the timing of that obviously our team is working along with a whole group of producers and studios to determine how to reopen production it to do so safely and to.
Do that as a as an industry our expectation right now is it would begin to reopen it get back productions in the third quarter.
Also the team is being in very inventive, our Colorado scripted team has figured out how to create production in a box where they literally the delivering a production studio to people that they want to interview or put as part of their own scripted shows and delivering that box to doorsteps and producing shows and then taking those boxes back so the team.
As being very thoughtful about how to get productions done and yet the major productions out we'll have to be a waiting until we get more of the production capabilities up and running as we.
Moved through the different phases of reopening economies.
Great. Thank you very much Brian.
Thank you. The next question is from Atlanta Drew Crum with Stifel. Please proceed with yours.
Okay. Thanks morning, guys.
Brian Games has historically been very weighted before Q, and I think 60% or so derived in the U.S.
How do you see that shifting given what you experienced in one two and given the current backdrop.
And then separately.
How do you think about the sales for gone.
Given the absence of the theatrical window for product that's tied to entertainment properties.
I'm understanding the production could resume later this year, but I'm not sure if anyone's going to be trafficking frequently theaters anytime soon so how does that impact your toy sales on a go forward basis. Thanks.
Yeah. So first we've done a lot of work in the games team is really looked at just what the demand has looked like in the first quarter and how that could have a bearing on the overall games business and what they really concluded and we've talked a lot about is the fact is the penetration of gaming has increased substantially we're seeing a lot of new people buying our games and buying them more deeply.
And yet the increases were saying while incredible during the first quarter is not nearly as big as what games are in Q3 and four during the holidays and so we continue to believe that we will see games continue to be an area that will sell quite well.
So face to face as well digitally or the number of new innovations that we're bringing to games in the second half of the year.
It is a.
Really just so heartening to see what the teams have been able to do and how they've been able to innovate and continue to bring games forward. So.
Across every brand LT, new ways to play are great games.
Including operation Pet scan clue wires and a number of monopolies, including 85th anniversary addition.
So we really see this is just a step up in the first half but the games.
We have significant meeting to people as we're able to connect socially.
And we're seeing that as I said across every demographic and psychographic for magic the gathering a monopoly to sheets and ladders.
Then as we think about the theatrical business. We certainly are going to see less movies released this year than in 2021. So in fact 2021 is shaping the shaping up to be quite a great year, where we'll have more than a half dozen movies that will be supporting.
We have a lot of innovation coming from the set for the second half of the year. We saw the great support that we got and the growth that we saw in frozen in Star Wars in Q1.
I will see a home entertainment window for trolls later, this year and Ah that will be very helpful. As we continue to market that brand in partnership with Universal and I feel that no clearly people may not be back in the theaters as much in the short term, we don't have that in any theatrical initiative.
As planned for the back half of this year and far more now for 2021.
Thank you.
Our next questions from the line of our Phoenix, which are you with Qbs. Please proceed with your question.
Hi, Thank you very much good morning, and do you go over what percentage of your retail doors remain open today and how many you expect to remain open in Q2. It seems like top three customers are up and running that's probably around 40% of so if your sales.
What else is open right now and how you expect that to change into Q1.
Well you know, we're seeing clearly our top customers are open but also other stores that sell essential goods are also open and a drug and values stores are opened dollar stores. Many of them are open.
Around the world.
Hyper markets are open back in Asia stores or reopening in the Pacific We saw very strong growth of our business around the big mass retailers and online continues to grow globally Lilly toy specialists are not open.
And they're selling online where they have those capabilities.
We have a sense you know that probably 25% to 35% of our retail doors are closed right now.
But then again it varies so much by geography.
As to what's going on because of course, you know markets like Italy have been completely closed in Spain.
Been completely closed a as as is the UK. So that's not a place where we were to give you a figure because in fact I, we're down to just the stores selling essential goods.
For groceries, and very little footfall inside of stores, where people are buying online so I'd say overall.
That's why we've tried to give you some guidance around Q2 and yet as we look at the reopening plans, which are now really starting to accelerate.
And geographies are starting to make a thoughtful plans.
Around the science and bringing people back out into the world.
We would expect that economies start to get going and people will come back into stores, albeit through a protocol designated by different geographies around the world.
That's very helpful. Thank you I'm going back to you won so I understand the production disruptions to the here in some of that moving into the back half of 2020 to 2021, but has there been reduction in that production schedule at all where before these disruption within your plans and now maybe not foreseen best.
And then has there been I understand the shifting that's happening but has there been any actual reduction in that production schedule for you on specifically no. We look at what's how heartening about E. One and that team is their expertise in creating amazing entertainment and they'd been one of the top independent producers and studios for several years.
We've seen their strength they have more than 100 projects in development, we already have more than 15 Hasbro projects in development. The teams have done an incredible job of coming together, albeit virtually over the past the six seven weeks or the inculcation on Hasbro brands the development and are moving costs.
Howard on Hasbro brands has really been quite heartening and people are really embracing the opportunity to work together so our our expectation for the year was that a number of half hours would grow.
And it just matters how many of those episodes, we can deliver in the back half of the year and that's why in addition to other levers. We've just said it's hard to predict it or are those those predictive models change a little bit it changes the outcome and so we don't believe there was a loss of demand. We just believe it's a shift the time.
And that we will deliver all of these episodes and all of these new initiatives and there are several that are continuing to come forward and just a few weeks ago. There was a new series on H.B. Oh that that was produced by you one called run I encourage you to.
The watch it it was really fantastic. So we're seeing new series come from the one that's just a matter of when were able to deliver those series and whether that's all in 2020 or some of that moves to 2021 lab to say.
That's great. Thank you.
The next question comes from the line of Tammy said carrier with JP Morgan. Please proceed with your question.
Hi, good morning. Thank you so much and I hope you are all doing well. So my first question is did you see a benefit to April Pos as seamless checks hit consumers bank accounts.
Or it was the April strength uniform throughout the month.
That's a great question and good morning, now we've seen a pretty consistent growth in Pos our overall Pos in North America. For example is up in the U.S. is up by double digits overall, including brick and mortar and online with online Pos continuing to perform at a very strong level up and through the.
The Easter period, even post Easter, we're seeing very strong.
Results in Pos, obviously, driven around our gaming portfolio around Plato around nerf and Nerf ultra.
Or there other brands that are really doing quite well for us our partners brands a in frozen and Star Wars Beyblade is performing well.
And so we didnt see a specific change as people receive checks. We've just seen it overall very strong and positive Pos and demand for our products.
Got it that's super helpful and my follow up is since you're pulling back content production expenses. This year to $500 million to $600 million do you still expect production costs amortization to be 9% to 10% of revenues this year.
No actually look at the content that we're able to de lever as Brian said, we may or may not be able to deliver the full amount that we had originally planned to but we would expect.
Got to to change commensurate with revenue asked me went public so we're not able to deliver as product and air at then we can and let me start amortizing them.
Got it definitely when the impact to Uh huh.
Perfect. Thank you.
Our next question is from the line of Fred Whitman with Wolfe Research. Please proceed with your question.
Hey, guys. Good morning does the board is just the Kurtz. It does the current situation impact how you're thinking about potential asset sales that entertainment one.
Look I'm, not really where in our fourth month.
Whether as a team we're really focused on.
Our four areas of our business you know as people work distantly, we've always said to break it down into what really matters and that every person. It Hasbro is able to contribute to one or more of the four key tenants of our business.
Obviously, the most important of those is a in addition to focusing on our community and supporting our communities to create demand for our great products in our great Entertainment.
To ensure that we continue to build the supply of our our toys and games as well so supply of entertainment everywhere. We can and then of course underlying all of that as liquidity.
Of our business and finishing the first quarter with $1.2 billion on our balance sheet, our access to our revolver. All speaks to the fact that were managing cash very well and Deb and her team have been amazing as they are really navigated the current environment.
We haven't really focused on asset sales and nor nor do we have to Ah. We are liking. The fact that the music business grew in the first quarter clearly, it's a digital business.
With a great artists and also our audio networks, a contributing and we'll see you know where we go from here, we have the opportunity with an amazing Ray of brands. Some of those brands are already licensed out to third party boy end game companies. So Tom cause being produced primarily by another key.
Company Micromachines as being re launch by another smaller company until we have that flexibility to license, our toys and games to other companies, where we see that opportunity to do that and to focus in on our top priorities of a very expansive unique in the industry portfolio.
Okay that makes sense in the most people tend to think toys is a recession positioning category can you just remind us what the biggest two or three lessons, we're coming up in the last recession and then how you guys think you can utilize those in today's environment.
Sure well if we go back to 2008 2009 timeframe, you'll see a coming out of 2008, we actually grew in 2009 and it's about the story, telling the content and when you talk about the industry. This piece of the industry Bang really recession resistant it is.
People tend whether its parent grandparent caregiver relative they tend to stop spending on their children last right. So they'll go without themselves before.
They go without spending on your children. So when you look at that you do see the industry is fairly recession resistant and you know we're very fortunate we have a very solid balance sheet as Brian said, we've got great cash on balance sheet, we have terrific liquidity.
To kind of see us through a recession and we feel pretty good about coming out the other side and we also have great content that into math. So when you have that storytelling around it and that content and you know, we we think that.
We are well positioned because the diversity of all the pieces of our business now more so than even come it kind of coming out of the 2008 recession I got that Lisa.
Yeah. The other thing that's interesting as we work with Darrin.
And Steve Bertram in Olivier them on and that you. One team you know we went back and looked at how they had performed during fiscal years and in that period and in fiscal year, not Oh, nine and 10 and they also had very strong years with lots of demand for content increases in revenues and Ah you know we're seeing clearly.
Changing consumer behavior that benefits many of our categories of business, whether it be our digital business gaming business, our entertainment business. The content business, you know the Plato business and.
We just want to work our way through Q2, which will be a challenging period, mostly because of our access to global consumers as people are and our rightfully spending time in homes and many of the retail doors have been shut.
Thank you. Our next question comes in light of Eric Handler with MKM Partners. Please proceed with your question.
Yes. Thank you very much of the question couple of questions for your first.
When I look at we're trying to figure out what to Q 19 pro forma looks like for you guys.
On a revenue basis, it looks like it should be pretty easy to figure out like $1.2 billion, but I wondered on an adjusted operating income in adjusted EPS basis, If you could maybe help us.
Navigate what those numbers should look like.
Sure. So if you look at the 2000 1981 that we put in today's release and the onetime items that were called out I think we call them non-GAAP items on the schedule that were set out on that schedule in the release as well it back those out because those will not be.
Ongoing items, so they're not representative of the underlying business and also just look at anything I don't recall that we had any one time non-GAAP adjustments in Q2 of 2019, but Ah you know it just look at our result for two resolved and add them together.
Uh huh.
As well as looking at will have approximately $25 million a quarter on amortization for the acquisition and we'll we'll back that out were called that out just like we did this quarter and that we said we would do at the beginning of big here. So if you think about that that translates down to what the come.
Mind, Oh P. should be now when you look at the revenue as he said we think.
That Q2 will be our most challenging quarter of the here, we talked about bringing some game sales in Q1 to meet demand and actually make sure that they were positions in the right place. So they can actually get out to consumers and would it be trapped in a warehouse and you know so we have a little bit of impact from that.
We have the impact of not being able to deliver production.
Under our assumptions I mean, we've just half the teams the saying you know not up to 25% of retail could be closed for the second quarter can we just don't know yet, but we're watching that as Brian said, where there's a robust E. Com channel, we're still able to get some product there, but we do think the second quarter will be our most chat.
Clinching corridor.
Great also Brian you talked about some excess inventory that you're working through in Latin America can you just remind us what some of the issues were in Latin American and how long those have been going on and.
And how long you think it takes to work through those issues.
Yeah, because we have an incredible sales team led by Michael Hog and if you go back a few years each of our regions have been reinvented and are now performing at great levels every time, Michael and his team have gone into look at how.
The business is being Disintermediated in how we operate go forward. So you know five or six years ago is the U.S. business and then the European businesses, which is now performing well and.
And in Latin America, we don't have the same accessed the E. Com ecommerce penetration is a in a single digits. So we've had to work through retail stores. There's been a lot of a social unrest and consumers are changing their shopping behavior reduction in consumer shopping during the holidays. So would you.
Working through what was some carryover product from the holiday period places like Brazil, and in Mexico, Our two biggest markets.
We also seeing some of that in some of the smaller markets like Chile.
In Peru, and it's just a matter of a bit of time I figure that we'll work our way through that this year and as we get into 2021 will be back in a better place again, recognizing that we don't have the levers at E com or as much of omni channel as we have in other markets clearly you know walmex.
Walmart are present in several countries down there are we clearly work with them across the several different formats, but there are other retailers, who are struggling more than than a big retailer like Walmart given the changes in consumer behavior and shopping patterns.
Thank you very much.
Our next question comes from the line of race National with consumer Edge Research. Please proceed with your question.
Great. Thanks for taking my question how much are you willing to flex advertising is this just commensurate with as production and sales or is this a reduction as a percentage of sales and then on that overall, if you could be a little bit more hopeful into Q on the downside if trends continue sort of at at this overall rate and there's no big surprises.
Is it likely that you'll be profitable in the second quarter.
Yeah. So.
No.
Why don't we have but didn't talk about the first part or the second part of that and then I'll come back to the first part.
Sure well if trends continue and retail is down significantly you know as we as we talk about.
I'm not being able to deliver our production just because it can finish them. It's a timing issue a we're taking a lot of steps to reduce our expenses I mean, everyone around the company is looking out at we've already taken some.
There is a potential that we would be challenged on the profitability side in the second second quarter. However on a full year basis again, we think it's going to be a good holiday. We think that the holiday will still come we have bought we're developing only innovation you know if we look at our full year variable cost about 40% of.
Our brand costs are variable so we're managing each and every one of those and I'll, let Brian address advertising, but well flexing advertising spend to when we will need at the most to drive demand, but also be mindful of you know the expense and the cash side of that.
Yeah, there's been a real inventiveness and the advertising a line because we're able to work differently with our online and omnichannel retailers and creating content commerce, which can be part of that way in which we work with retail or the teams are working more digitally and through social which obviously saves on <unk>.
Overall advertising expense and yet becomes even more.
Concentrated and targeted to audiences that we're trying to reach you know great example of that a in the first quarter and through the holiday was what we're doing and Nerf, we created something called nerve house, which is almost.
Short form the.
Production delivered on social headlined by several NFL stars kind of a 90 style sitcom format, where they're playing with all of the new nerve product Nerf Ultra one and ultra too.
And that cost far less to execute than linear television advertising and so I think you'll see a shift from linear television advertising to more social and digital that gives us the savings and yet the effectiveness actually increases and then a stab said we're going to follow our.
Patterns as we see it we expect revenues in Q3 in Q4 can be very healthy in fact as consumers continue to get access back and economies open with the trends that we're seeing in the research that we've done about how sticky are games businesses and our preschool business and people then get access.
More of our toys that have been inside retail we expect that we can have quite a robust second half a year and I mentioned 2021 is now setting up to be even a better year. Then we had originally expected with more than a half a dozen of theatrical releases that are expected during the period.
Oh.
Got it things for the answer and one last one for me.
On tools, you mentioned briefly and I know, it's a small piece of your business, but could you give us a sense of what you're seeing retails retail is saying on troubles and what consumers are reacting to controls given the change in there.
In their distribution strategy as we sold to cover the 19th and what that tailwind for you as an industry long term.
Yeah look I think there's some differences between making a shift spent the last moment toward PV Eau de and presenting a piece of a entertainment as a intended for streaming.
So clearly we were able to launch controls, but our plans were intended to be executed a substantially through brick and mortar retail. We also of course have access to inventory for E com and omni channel, but when you expect that theatrical release your event Tizing array.
On that theatrical release with our retailers and bringing people in stores for multiple categories of consumer products include including toys and games were really heartened with the fact that there will be still a home entertainment window patrols, we think that that will be incredibly effective and continuing to market patrols property as well.
Seen in the past we've been very successful with frozen Universal, that's where kids and families get to watch the movie over and over again as you know the P. D O <unk> de window was for a very limited time.
Where people got to see it.
I've had the access to the to the show for a couple of days and Ah, we're going to market. The property throughout you know as compared to the Amanda Lorien, where that was intended to be a streaming series Ah we were able to market. It through digital knowing that it was coming in that matter, we're very excited about.
Launching our first array of a baby yoda product in May.
And then the Oh more interactive product the animatronic product is still on track.
For the fourth quarter this year and Oh Presales had been very strong there. So you know two different elements of a similar strategy and the teams have done a great job in adult instances and the partnership continues throughout the year in the fall we'll have the second season of the Basil oriented we're very excited about that watch that should come around.
Back over.
Got it thanks, so much again.
Our next question is from the line of Bryan Goldberg with Bank of America. She was your question.
Oh thanks.
Most of my questions have been answered I just had a quick one on each one.
And the the content sales pipeline you mentioned.
[music] team still actively pitching development ideas. So wondering if you could give us a little more color on the demand patterns here.
Are you seeing your networking customers still ordering new shows that relatively normal levels or has there been a change in trend there.
And then in terms of content sales mix has there been any notable shifts in demand by content type for example.
Is there an opportunity to ramp up reality sales.
To backfill the gap most networks are going to face given the long longer lead time associated with scripted content. We often we appreciate any color you could you guys.
Yeah, It's a it's a great question and and so a couple of things number. One is our teams are continuing to pitch a number of buyers and we're seeing very robust demand for our new original IP.
And we're starting as we stand up more Hasbro projects to see an incredible interest we've already as I said working on more than 15 different Hasbro IP projects in different categories or platforms of IP creation.
The second thing to note is the demand for our library and our Library productions as studios have been unable to produce as much themselves and as much original content as they may want we're seeing very strong demand for high quality library content that has not been exploited in certain geographies or territories.
And so that's been a new opportunity for us as we go through the year.
Then finally as you talk to colleagues and you look at the marketplace, but again heartening to us is increased desire.
For many buyers streamers and other platforms for IP, that's more fantasy oriented IP, that's more family oriented IP that happy and fun and allows people that enjoy together.
And other John Reserve IP may see in certainly in the next few years a bit of a diminished interest. So we think we have an array of great branded IP that fits really well in the marketplace and an opportunity to develop not only for this year, but for years to calm things that are will be in high demand for.
The services the platforms and most importantly audiences of consumers around the world.
Thank you very much.
Thank you. Our next question is from the line as Tim Conder with Wells Fargo. Please proceed with your question.
[noise]. Thank you.
I wanted to follow on the line of a couple other questions and I think this is kind of this been emerging developing over the last year, especially but maybe kovats now accelerating this.
But from from your partners and just from your experience in the industry. How was cobot change the thinking of studios about movie distribution via theaters, which obviously they make more per view and the theaters in the box office and they do on PV odier streaming.
And then how does that impact does it hurt short term IP related to that but over the long term, maybe kind of smooth it out make it make it make it more consistent I guess is a better question I mean, we've been seeing that but how does that accelerate and especially how does that impact 20 and 21 at this point versus your thoughts there.
Wayfair.
They'll look I think that what you are going to see is a continuation of studios, making products specifically for theaters and you know from both kitchen research and more extensive research I don't think any of US only want to watch content at home, although we watch plenty of content.
At home with friends and family people want the shared experience of going to a movie theater, it's been a part of a global way of life. It sort of part of the middle class a disposable income.
Experience and all of our our friends and family certainly mix going out the movies and I I expect that people all over the world Miss that opportunity as well it I think it will continue to be that way I.
I do think that a few studios were caught in the midst of the transition.
And open market place to one that was a social distancing.
And given they had spent so much on marketing for theatrical release and that marketing is obviously very precious I think probably decisions were made to make a transition in that period and also probably to look at an opportunity to bring it straight consumers.
I think people are pretty intentional you are hearing from Disney and Disney plus what their schedules are going out for many years, what's going to be in theaters versus what's on Disney plus you're seeing the same from other studios, you'll see that from Hasbro as well, where we're going to continue to produce great branded content for.
Theaters, you know you're going to continue to see new.
But transformers movies coming we obviously have snake eyes coming over the next year.
Well have a my little Pony movie that will come but you'll also see great stream content because Ah I think the key is banned the unlock has been.
Our people are now engaging with character and story so much on these platforms that were able to drive.
Interest then engagement in merchandising game, playing as we've seen for them as the Lorien and some other stream platforms other stream properties for you.
Okay, Okay and so.
So really a little bit of changes in plans, but broadly not a lot of changes in from what you're seeing over the over the last few months.
Well look I think I wouldn't characterize it quite as you have I think that there's going to be a lot of change in the near term as people work work their way through reopening of theaters and how do you do that safely and securely, but I think longer term I think all of us Miss the opportunity to go into a movie theater.
Her and enjoy a show together and get the broad audience reaction that you can't replicate just by watching at home, having said that we're going to continue to consume more content than ever before we've seen that every time a new platform has been introduced people are viewing more content than ever before young people are you know bending time.
Ah with multiple formats of content being enjoyed a at the same time, we've talked about that over the past few years and we expect that to continue.
Okay and my follow up is Pos International you could give a little color, there and and I.
I guess also related to that then the E. Comm penetration you talked about Latin America, but do you pump penetration Europe and Asia relative to North America and is that had any any bearing also on on the Pos here given covert lockdowns in those areas.
Yeah, we've we've clearly seen a if we look at just overall global Pos by region growth in Europe and growth in Asia Pacific Obviously decline in Latin America, that's consistent with what we just described to you.
As you look at global E. Com Europe was very strong on some of our top customers or E. Com customers also people, who develop more robust omni channel executions, we talked about how our team it.
Oh, I really in reinvented that business in Europe to look at the way that there was a disintermediated new E com in omni channel structure that was emerging and how consumers get product.
In Asia very robust the E com business as you know and that also in Pacific meeting, Australia, New Zealand, we saw very strong growth.
In the first quarter the team down there has done a fantastic job now there are other markets that are less penetrated on.
On E Com and that's where the challenges in this particular period or more substantial more more.
This higher.
Okay, great. Thank you.
Thank you at this time was reached the end of a question answer session I will turn into flew back to Debbie Hancock for closing remarks.
Thank you Robyn thanks, everyone for joining the call today, the replay will be available on our website and approximately two hours first and management's prepared remarks will be posted on our website. Following this call as well. Thank you.
Thank you. This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation.