Q3 2020 Hasbro Inc Earnings Call
Good morning, and welcome to the Hasbro third quarter 2020 earnings conference call at.
At this time, all parties will be in listen only mode.
Next question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Today's conference is being recorded if you any objections you may disconnect at this time.
At this time I'd like to turn the call over to Miss Debbie Hancock, Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone. Joining me today 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. Then we will take your questions our earnings release and presentation slides for today's call.
All are posted on our Investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures our call today, we'll 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 whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share before we begin I would like to remind you that during this call and the question and answer session that follows members of Hasbro management may make forward looking statements concerning managements expectations goals objectives and similar matters. There are many factors that could.
<unk> 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 and today's press release and done or other public disclosures, we undertake no obligation to update any forward looking.
Thats made today to reflect events or circumstances occurring after the date of this call I would now like to introduce Brian Goldner, Brian.
Thank you Debbie good morning, everyone and thank you for joining us today.
The global has one team did an excellent job delivering a strong third quarter with revenue this growth in toys, <unk> games and digital initiatives well live action production begins to return.
Consumer demand remains strong globally.
Global point of sale for Hasbro brands was up mid single digits, including double digit gains in the U.S. UK and Australia among others.
Overall point of sale grew despite declines in Latin America, and Asia, and some out of stocks and the games category.
Nearly all stores globally have been opened an operator with Latin America experiencing the most restriction.
What traffic in stores remains meaningful lower but E com continues to deliver.
50% growth globally in the quarter.
We also benefited from the reopening of choice specialty retailers in Europe.
Production at our third party factories is up and running and supply is largely in line with the math where demand remains above trend we are working to catch up.
The restarting of live action Entertainment, it's gradually occurring with some of our larger productions beginning late in the third quarter. As a result deliveries were low but are set to improve in the fourth quarter and some revenue will move into 2021.
Magic the gathering delivered strong third quarter results and revenue was up double digits for the first nine months of the year.
Release of double Masters Undercar rising drove the year over year gains in the quarter, including growth in analog and digital play.
Patrick the gathering is providing its players connection entertainment, despite not all being able to gather to play.
That connection and entertainment continues to drive gaming demand broadly.
Revenues grew for our gaming portfolio and the overall gaming category, including Magic and monopoly was up 21%.
Point of sale gains were limited by product availability work the catch up on production.
Hasbro has an unparalleled position in gaming we.
A broadest portfolio with the industry's best known brands, reaching all demographics across multiple genres.
Importantly, we have invested to bring new games to the market over every period every year.
Our core games remained our best sellers, including monopoly jenga connect for life and operation and we have new games to bring home the fund this holiday.
This includes a new game for the whole family in the airport and new games like the child inspired monopoly Super Mariano celebration monopoly.
Any others.
To further long term growth, we are investing to drive digital gaming experiences for Wizards of the coast Brett.
Magic the gathering arena will launch on mobile in early 2021, as we fine tune the game this year.
We also have spell Slingers, all new digital game for the mobile first generation slated for next year and 10 sites continues to lead the efforts to publish in China.
Dungeons and Dragons continued to benefit from a strong release schedule and the quest for at home Entertainment.
Revenues for the brand were up more than 20% in the quarter and year to date.
The digital is also ramping.
All their escape three has released into early access on steam to a strong reception and we'll be more broadly available next year.
Also in 2021 Dark alliance from our own two games is planned for release.
DMD and magic the gathering were among the brands on virtual display at our first ever all Scott.
Postcards delivered to fans one of a kind access to their favorite franchises as well as interactive experiences with creative talent.
It generated close to a billion social media impressions we.
We unveiled new products across multiple franchises posted two days of panels and successfully fully funded two has lab campaigns.
One for the Star Wars vintage collection razor Kras and one for the Euro Quest gaming system if.
If you missed that life, you can find that sessions online.
While the revenue for our house lab projects will be recognized in future periods, when we build and deliver the products Hasbro products first star Wars delivered strong growth in the third quarter.
Disney Class continued to drive engagement among kids and fans for what.
Results were fueled by August shelf sets.
Our wide range of items for the child as well as continued global strengthen our fan business, particularly with our Fortyth anniversary Empire strikes frac product and our retro figures.
This year, we also launched the Star Wars Galaxy edge exclusive program designed to capture the park experience.
No.
Last year on October 4th we executed on shelf events for Star Wars in support of screening and theatrical content and for frozen too.
We are up against those comps in 2020, but with new products new streaming content for both properties, we have a great lineup for the holiday.
As this year develops entertainment plan shifted our teams did a tremendous job of rebalancing our initiatives for the year.
Reprioritizing factories shifting marketing plans and partnering with our retailers around the world. They leveraged our portfolios innovation for the holiday and ensured we have strong representation across demographics.
These efforts include items like baby alive baby grows up.
For real friends Mama, Joe see the Kangaroo.
Nerf elite 2.0.
Play Doh candy delight place that and many more.
The fourth quarter is unfolding in multiple stages kicking off successfully earlier this month with Prime day major initiatives from our largest omni channel retail partners.
Hasbro lines sold very well during this period.
Teams are working in concert with our retailers to drive and build demand this holiday season.
They are doing an excellent job managing this dynamic environment.
The business forward for this year and beyond.
Importantly, they have positioned us for what we believe should be a good holiday season for Hasbro.
In entertainment the last few quarters have been difficult given the inability to get onset and produce much of the live action contact we plan for the year.
However, the integration is progressing well, we've been able to make more progress than planned in the development of future projects.
We recently announced a producer and director Jonathan Entwistle has come on board to Shepherd, New film and television adaptations of power Rangers.
The one will develop and produce the projects with and twists all set to direct.
We also launched the competitive cooking show based on Candy last hosted by Kristin Chenoweth.
Can see that series beginning November 15th on the food network.
Looking ahead. Some revenue originally planned for 2020 will shift into 2021.
Both from you on projects and from theatrical releases, which were originally slated for this year.
During 2020, we continue to advancing E com focused the teams at our highest priorities for the near term.
Long term growth.
Carbonite team remains a reality in our markets around the world and we're working closely monitoring developments to ensure we can execute while keeping the safety of our employees and communities.
Priority.
I'll now turn the call over to Deb Deb.
Thank you, Brian and good morning, everyone.
Our teams delivered a very good third quarter in a difficult environment.
The results reflect a growing consumer demands for Hasbro brands, an improved operating environment as third party factories warehouses and retail stores were mostly open and excellent execution by our teams, including strong cash collections and cost management.
My discussion today will be versus pro forma adjusted 2019 earnings.
The third quarter 2020, adjusted results exclude after tax amount of 19.6 million of purchased intangible amortization and $1.7 million of acquisition related expenses associated with the one acquisition and 13.7 million of incremental.
Ahcs expense related to a change in the UK tax code.
We ended the quarter with one of our highest ever third quarter cash balances and delivered an additional 230 basis points on adjusted operating profit margin for the quarter from both favorable product mix and cost savings.
We continued to have one and a half billion dollars available under our revolving credit facility should we need it.
And we remain well within our financial covenants.
The team drove strong cash collections in Q3 Dsos decreased to 74 days from 83 days last year and 96 days in the second quarter.
As light action production has been limited our cash spend on content. This year is now targeted to be at the lower end of our prior $450 million to $550 million range for the full year.
Due to the timing of this return to production certain deliveries expected in the fourth quarter 2020, we'll move to 2021 shifting expected revenue.
We currently expect next year to have a more normalized cash spend level as production and deliveries are slated to improve from the lower 2020 levels.
Our capital expenditures year to date are in line with 2019 and are now expected to be slightly below the 145 to 155 million we targeted for this year.
This amount includes the capitalization of digital gaming development relating to games to be launched in future years, some of witchcraft spoke too as well as several others for 2022 and beyond.
Hasbro owned inventories down 7% absent FX as demand remains strong.
Retail inventories declined led by the U.S., reflecting the shift to E com and higher consumer take away.
In Latin America, we continue to work through inventory, we began the year with.
Our goal is to reduce excess inventories by year end to position us to stabilize the region's performance next year.
Our integration with the one remains on track and we continue to target synergies of 130 million by year end 2022.
This includes 2020 cost savings of at least 20 million before onetime expenses recognizing that you won business like the overall Hasbro business is not operating to our original plan due to COVID-19.
Synergies are planned to increase in 2021, as we begin to Insource toys and games for England properties and recognize more of the benefit of cost savings.
For the quarter revenues were down 4%, reflecting growth in toys games and digital initiatives offset by a decline in entertainment.
In the U.S. and Canada segment revenues grew 9% behind growth in franchise brands led by magic the gathering emerging brands and Hasbro gaming.
Gaming supply was catching up to demand during the quarter.
Part of your brands declined behind good growth in Star Wars, but a decline in Marlin and frozen revenues.
Point of sales for the segment grew double digits and retail inventory declined double digits.
Revenues grew more than 50%.
Segment operating profit grew an operating profit margin expanded 530 basis points.
This gain was the result of revenue growth favorable product mix, including growth in magic, the gathering and inventory cost management.
International segment revenues were down 7%, excluding the impact of foreign currency.
European revenues grew 4%, excluding FX, but both Latin America, and Asia Pacific revenues declined.
Hasbro gaming revenues were flat absent FX and the other brand portfolio categories decline.
E Com revenues grew approximately 40%.
Segment operating profit was down due to lower revenues, but operating profit margin improved 40 basis points on favorable mix, including growth in magic, the gathering lower advertising spend and cost management initiatives.
In the entertainment licensing and digital segment revenues declined due to lower film revenue versus last year. When we first recorded bumble bee offset in part by higher digital gaming revenue.
For consumer products revenue and profit held up well in the quarter.
As we look ahead the fourth quarter in part reflects licensee sales from the third quarter.
It's a big quarter for the category and retailers are being very cautious with inventory management, given store closures and lower sales in license categories.
This also had an impact on family brands and then in one segment.
Despite the decline in that revenue operating profit and operating profit margin increased due to increased revenue from high profit digital licensing and decreased advertising cost versus the 2019 initial launch of magic the gathering arena.
We won the segment's performance was hampered by the timing of live action production restarts and the TV and film business and lower digital content advertising revenues.
The segment reported just small adjusted operating loss due to these lower revenues.
For Hasbro overall gross margin increased 180 basis points, including both cost of sales and program cost amortization, driven by favorable product mix and inventory cost management.
Oh, when amortization is expected to be more in line with last years levels as a percentage of revenue for the fourth quarter.
Advertising declined to 7.7% of revenues on lower spend at you one due to the lack of theatrical releases as well as lower advertising within the commercial business.
Given the expected shift a digital gaming launches from Q4 to Q1 2021.
Advertising is expected to be at similar levels as a percentage of revenue in Q4.
Well, let's DNA declined in dollars it was up as a percentage of revenues.
Cost savings are having a favorable impact the freight expense was up on the higher domestic U.S. in European orders as well see alignment of accounting for certain you on expenses in the current year versus last.
We expect fourth quarter to be more in line with last year's level as a percent of revenues.
The underlying tax rate for the quarter was 19.8% compared to 18.2% last year.
The rate is driven by the change in geographic mix of income and the impact of the evil on acquisition.
As I mentioned to start during the quarter, we recorded incremental tax expense, which increased our effective rate to 26.5%.
This expense was related to the UK Finance Act of 2020 enacted during the quarter that maintained the UK corporate income tax at 19% instead of the previously inactive reduction to 17%.
This resulted in a remeasurement of our UK net deferred tax liability driving the rate higher.
In closing the team is continuing to do an outstanding job and I could not be prouder of them.
We are set up for a good holiday season, leveraging our broad portfolio, including strength in games customer relationships and E com expertise backed by strong execution of the team.
We are watching the development of COVID-19 infections in various markets around the world, but so far retail has remained accessible to customers including through E Commerce.
Well, leveraging our global manufacturing partners to have supply to meet demand and E. One is back in production with more deliveries anticipated in the fourth quarter and some shifting into 2021.
We feel good about next year and our opportunity to execute successfully with innovative products robust entertainment and strong execution from our global team.
We have invested to ensure Hasbro is best positioned to drive profitable revenue growth around our blueprint.
As we look to the next stage of our company, we've pivoted to create not only more entertainment based on our brands, but more profitable entertainment.
We have over 30, Hasbro properties and development would be one across various platforms, which drill pipe high margin revenue streams and entertainment consumer products and digital gaming.
Combined with revenue growth from our core toy and game business and the pipeline of digital games in development. We are set up well for delivering improved profit and cash flow for the long term.
I'll now turn back to Brian for some closing remarks before we take your questions Brian.
Thank you Deb.
I want to take a minute and recognize John Prescott.
Earlier this month, we announced that John has decided to retire after 13 years with Hasbro what is existing contract ends in March 2021.
John has been an important part of our senior management team since 2008.
The loyal colleague mentor and friend to so many of us over the years.
In addition to the leadership roles. He has held John has always been a champion for our culture, our purpose and our values.
Embodies the idea of servant leadership.
<unk> impact on our company will be felt long after he departs.
John Reid Big shoes to fill but I'm extremely confident in the leadership of our company and the strength of our teams to lead Hasbro into the future.
Deb and I are now happy to take your questions.
Thank you.
At this time, we'll 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 tone indicate your line is in the question queue.
You mean for star two if you'd like to move your question from the Q.
Due to the number of analysts joining us on the call today, we ask everyone to ask one primary question and one follow up question to accommodate as many participants as possible.
For those participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you and our first question is coming from the line of Steph Wissink with Jefferies. Please proceed with your question.
Thank you good morning, everyone and Brian I would echo your comments on John John We're going to Miss you.
My question is really about the Hasbro properties in development with you one Im wondering if you can talk a little bit more about just how broad based what.
Different form factors that might take and I think Debbie your comments on more profitable growth is really intriguing you could just talk really quickly about what you're most excited about in that pipeline that would be great. Thank you.
Sure. Good morning steps first we saw some announcements over the last week or so Jonathan Entwistle has come on board you will be handling the development of both live action television around power Rangers. In addition to the kids oriented didn't show that's in its 27th season.
I will also be working on a live action film.
The team is busy working on Dungeons and Dragons live action feature film.
There are also working on a couple of different approaches because there is so much mythology, and cannons Dungeons and Dragons for live action television and there has been very strong interest we've talked about how many.
Many global streamers, another thrust real Black Crown Castle, which had been very interested in dungeons and Dragons.
For next year, we will have a my little Pony theatrical feature film it'll be the first C.G. I felt that the team is producing a it looks beautiful and we're very excited about next fall.
Theaters in September of next year.
And then as we go across the different ideas of what we're seeing is incredible interest non scripted shows as we develop more game show type formats and other fund formats like we see coming onto the food network. This fall, which is a candy land TV show hosted by Kristin Chenoweth, who.
We're also seeing very strong demand desire for IP around the Hasbro brands in scripted television. Let me remind you that just this past summer we had a scripted animated show called war for cyber coupon for Transformers. It was only six episodes and yet.
That show posted top performance across the entire net flicks platform during June and July and August and in fact grow considerable growth in Transformers brand. So we're seeing the connection between creating great IP.
And the response that we're getting from fans and families. In fact Transformers Pos has been quite strong.
Transformers was up in the United States as a result, this without take that out around the world. We expect to continue to see how the teams are able to fly all brands all that great stuff.
Just as we've seen a great streaming content work for Disney plots and amend the lauria. So there's many many new initiatives that are coming in as we've said we've got more than 30 brand said.
More than 40 projects stood up some brands will get the benefit of both.
Film and television treatments.
We're very excited they've made the teams have made more progress than we could have ever imagined I guess, it's the silver lining in our playbook for 2020 as we all work through this cold it environment and we're all on screens together yeah.
And I would add to that too stuff that you know we've been continuing with our integration activities are on track to deliver the 20 million in cost savings, we talked about this year and next year with our we expect to have more in cost savings. So when you think about creating this wonderful entertainment around.
Around our brands being able to leverage the blueprint achieving the cost savings that we've talked about and we're well on track for hitting $130 million and synergies.
By the end of 2022, you know that's going to lead to great Greater profit for company and based on these investments along with digital gaming, we really see the benefit of the acquisition over the long term 2020 has been an interesting year for all of US, but you know we continue to think the future looks very bright.
For our company.
Devin I could just to close the loop I think you mentioned program amortization in the fourth quarter would be flat on a pro forma to the prior year can you just give us a base number just to square up that for our model.
Absolutely then the pro forma number last year was 7.1%. So we're looking at a number similar to that for the fourth quarter.
Around that level.
The next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.
Yes, thank you very much Doug.
Did you since you one is a bit of a black box in terms of modeling I'm just wondered if you could maybe give us a sense of the TV filmed entertainment was like 166 million in the third quarter.
Do you expect deliveries to resulted in that number being higher.
In the fourth quarter about the same I think last year on a four on a pro forma fourth quarter number. It was 179 million just sort of give us some directional color on how to think about that for modeling purposes.
I think last year in the fourth quarter, you know looking out with translation and and everything else over all the E. One segment was around 230 million in the quarter or if you think about overall. However, if you think about this fourth.
Quarter, you know, we're really excited we believe that we could grow revenues and adjusted EPS from our pro forma Q4 result for 2019 overall as a company because while you won and the wide action production is returning we bend in production on animated overall funding for better deliveries.
Some of those will move into the first quarter, just because you know as Brian mentioned earlier, we started our biggest live action production late in the third quarter say kind of think about finishing it delivering it some of that's going to shift when we start getting through all of those episodes, but overall, our brands and our business.
Including the Hasbro <unk> business is performing very well the only thing I would remind people of is our comps from last year, we had a big quarter for frozen or frozen business with the highest fourth quarter had the highest fourth quarter sales ever across the G. Five for the brand I'm in all the categories that we have right. According to NPD. So.
Well Star Wars is performing well we have we do have that they could have been frozen, but we do believe we could grow revenues and adjusted EPS for Q4 the year ago.
Okay, and then just as a follow up your retail inventories were down.
In the third quarter, our your own inventories were down in the third quarter a year over year basis, how much of that is due to because you have tough comps with last year was star Wars and frozen how much is just you know getting back up to speed.
Yeah. If you look at the Star Wars business in the third quarter was up considerably in fact Star Wars is performing at a very high level. So.
We had the inventory on Star Wars right.
Brad was up high double digits for the quarter, it's up high double digits year to date.
It's really been about very strong demand across the portfolio for our products.
We talked a bit about the fact that games Bakken as we reported second quarter had been at low fill rates they'll still rates began to notch upwards throughout the quarter. So from July end of July to August August or September.
And exiting the.
Third quarter as we look at October the month of October Pos we're seeing our Pos for the month of October our games up 17.9% so far.
And our toys up 16.4% so far so we did have if you recall for the year to date or sell through on games.
Online game sales were up Oh.
70% year to date and in the U.S. business was up 39% in.
And global international or globally games were up 29%. So we had sold a lot of games that we needed to catch up.
And that we're seeing that now as we head into fourth quarter. So yes retailer inventories are down down in several different areas of the U.S. down in Mexico as Deb mentioned managing that business. So that we can stabilize and grow again for 2021.
And.
Down at a couple of other territories up slightly in Europe, because the European business is performing very well was up 7% in the quarter with growth from franchise brands gaming and partner brands in the quarter.
So again.
This is.
The cadence that we're executing this year as a result of high demand and then try to catch up in certain categories.
Thank you.
Next question is from the line of Felicia Hendrix with Barclays. Please proceed with your question.
Hi, Thank you so much and that to your answer is a great segue to my question. So you had talked about just kind of catching up on the on the game side and wondering if we could just move to the franchise side and maybe you could just dissect that a little bit in terms of what.
In there and how that did you know nurse baby alive play Doh and also I guess on the family brands. Debbie you mentioned that the retailers are being cautious with inventory and it affected. This line. So I was wondering if you could elaborate there. Thanks.
Sure. So as you look at franchise brands growth globally.
Up 4% I think it's most interesting as we get some of the new products into the market that franchise brands in the United States and Canada, North America were up 20% and we saw growth in five of our franchise brands with nerve just about flat to a year ago in revenues.
And my Little Pony was down it would be talk we have that big movie approach for next year.
If you look at North Pos it grew globally by nearly 4% it was up more than 7% North America.
Again, we talked about how coming out of India as we've expanded our strategic sourcing footprint that that was benefiting us but it also led to some delays of some new products, but we have seen.
Really good take away, we have three new segments for Q4 on nerve elite 2.0, which is that cord Oh.
<unk> last or it's off to a very strong start.
[noise] ultra product is doing quite well that's the one that flies 120 feet and were up two ultra five so five new blasters there.
And then we have a new Mega Blaster.
And a holiday item for ultra called the Faro, which is going to sell for about $50 U S.
And.
We we feel really good about all that and then you add to that new fortnight Blasters, which are again performing quite well and it really break frame social marketing campaign called nerve House, It's got a great line up of Oh celebrities athletes. So what that brand is up performing well and I think we're at an inflection point now as we catch up.
On production and we respond to just the strong demand that's out there.
We talked about Plato being up for the quarter and you know Pos was up Oh, we have a lot of new compounds loss <unk> launching we talked a bit about transformers.
Which was a brand that was up in North America, Pos is up double digits.
And again really responding to the content.
Netflix app as well as the.
The content that we have four kids and for preschoolers and cyber fraud and for a rescue Bots Academy.
The other brand I'd say, you know again with challenges in supply or our shipments are down a bit on power Rangers, but rpos power Rangers for Q3 was up.
Hi, double digit 77% year to date that Pos is up by more than a 100%. So the you know again the new episodes were very excited about the new creative stewardship, that's coming there.
Forming incredibly well, we have 900 episodes available on Netflix and.
New products coming from the holidays and step up are you.
I may have mentioned.
Another Brad.
I'm not sure, which Oh, yeah, I was talking and the family brands with units had mentioned that retailers are being cautious inventory, which affected that my answers when it's more color there.
Absolutely, yes, thanks, Felicia I you know it's interesting because if you look at our largest customers they remain Walmart target and Amazon right and all three of them have remained largely open and operating for toys and games and in fact, you know, it's really a low single digit percent of our stores retailers are close goes.
Really right now, but when you look at consumer products licensing and family embryonic is in that category has a lot of that category for consumer products, the revenue and profit held up well in the quarter, but when you think about the fourth quarter is going to really reflect part of the sales from the third quarter, its a bigger quarter for the cash.
Category year on year, when you look at her those retailers are being very cautious with inventory management given that there are still store closures and that there are lower sales or licensed categories. When you think about things like you know parallel back to school kind of as an interesting back to school year there.
Gary. This is this is having an impact so that's why we say we're still watching the fourth quarter. We think it'll have an impact on that segment, which impact family of brands that as well, but overall the health of the whole segment is good. It's just could have some impact in the fourth quarter from those continued store closures and retailer cautiousness with.
Inventory in those categories.
Okay. That's helpful. And then just as my follow up I mean, it sounds like you guys are kind of.
Leasing demand in the fourth quarter like others aren't in the industry.
As we kind of assess the puts and takes there where where would your biggest risk C.
Well, you know a satisfying that demand yeah.
Yes, you know what we had said back at the end of Q2 as we spoke together at the end of July we said that our fill rates were low that we intended to catch up by the end of third quarter. We made a lot of progress and catching up we're still behind on the games category just given the.
Substantial demand that we're seeing there, but we've talked about you know successfully launching orphan and so.
Several other brands initiatives.
Fourth quarter.
Our partner brands.
Yeah, Dan Star Wars is having a had a great Q3 up Princess business Disney Princess business was up in Q3 year to date frozen business was up beyblade held up quite well so our toy business now.
For the month of October has come through some of the big Omnichannel events and the early launches for the holiday through the Prime days plays it dropped more than 16% 16.4%.
Earnings were up nearly 18% so that catch up that we talked about through the third quarter and supply is starting to have good impact.
And the only thing I would just say as you know we continue to watch that the consumer products category, just because some of those license categories just aren't as strong at retail right now.
Understood and John Bittersweet Goodbye.
Thank you for all.
All your help over the years and a woman she.
Thanks Felicia.
Your next question comes from the line of Arpine Kocharian with Qbs. Please proceed with your questions.
Thank you so much John it's been great working with you your desk, we'll definitely Miss you best of luck with everything.
It seems like retail has held up strongly in Tokyo sober I, mostly trying to understand whether it is in line with what you have planned for in your production plans earlier this year and whether there are any production limitation related caps are you going to keep looking to Q4.
Well you know we're sitting here today.
With the benefit of being a about a third of the way through the fourth quarter at the end of October and so we expect the holiday season to be a good one we've talked about the fact that we have a lot of new products launching it talks about the fact that we could grow this year on a pro forma basis versus 2019.
And there you know a little more than 60 days last and we again, we feel very good about this holiday season.
It's great to see the level of consumer take away. It's also great through our research to understand how many new fans had families are coming into the category.
Which really bodes well for 2021, as we continue to execute with innovation in IP and games.
Remember, we also had a great benefit that magic the gathering as we described.
It would have more releases those releases would very well well when she buys players in Q3, and we have a continuation of some really good reserve releases of the Q4.
But we feel good about where we are right now again Ah there's enough room left in the calendar year to have a good holiday season.
And to turn the page and move onto a great 2021.
Our next question is from the line of David vessel with Berenberg capital markets. Please proceed with your question.
Hey, Thanks, So much my primary question relates to you to which you called out again this quarter as a as a minor headwind on the advertising side. Just curious if you can expand a little bit on that is.
Is it a function of lower AD rates ad loads or lower engagement sort of related Lee. If you don't mind, expanding just generally on digital engagement trends that you're seeing across your portfolio of brands that would be really helpful. And then I have a quick ball.
Yeah sure the digital engagement the viewership of our brands has been outstanding Peppa continues to be the most viewed branded those formats around the world.
We're also seeing as the teams taking on more of our brands with my Little Pony.
Improving viewership as the team has managed that.
Quite well and bell add other brands from Hasbro's portfolio to their overall oversight of the way they manage the algorithms and deliveries of a social content and you to contact has been quite good engagement for PJ mask was quite strong additional productions for PJ mask and PEPFAR.
It's all about the change to the algorithm that you tube made.
To be more restricted to advertisers was just limit some of the advertising revenues that we claim.
As a as the way we manage that business. The team has always done a very good job much better than Hasbro and one in managing that engage the gaining those revenues and being able to.
Drive revenue growth, we think it will get healthy or overtime, but right now of course, we're just responding to the changes in the rules, making about the way advertisers to advertise side, it's caught that I don't want to.
[music].
It was going to say it was that there were some other changes that were made last year that just impacted it for the quarter. It was a bigger impact for the quarter, then, but as Brian said, they algorithms have changed and we're seeing that this year, but it was just a particularly a bigger impact on the quarter. So we wanted to call it out.
Got it helpful. Thanks, and just as a quick follow up I don't think you mentioned it specifically, but I'm curious if you can kind of frame for us how much of an effect the inability to meet demand because of supply chain constraints affected Pos in the quarter.
Well look I think that if you look at if you look at the Pls number I think the biggest impact if you look at global Pos being up mid single digits was the fact that Latin America was down some.
Substantially as we get that business is healthy and get.
Get it on track for 2021 also hoping that colds, a major and package having their begins to dissipate. So we've gotten retail inventories in line with retail inventories in Mexico for example be down nearly 20%.
And that does.
It has an impact if you look.
Across the regions North America had double digit Pos gains in the quarter.
Asia Pacific had double digit Pos gains in the quarter Europe had mid single digits you asking so it's just the average that comes out to mid single digits are you asking because the Latin American decline.
As we work through the issues related to the substantial cove it impact stretching some stores lack of as robust E com business, but I'd say overall as we are now entering the October period with more supply to see high teens Pos growth for both games.
Toys is Ah Ah has us well positioned for the holiday.
Great. Thanks, so much.
The next question is from the line of Tami is a carrier with JP Morgan. Please proceed with your question.
Hi, Thank you so much for taking my question. So could you comment on your plans around digital gaming licenses next year.
And any comment on the format of those meaning would those be mobile or PC free to play any details you can share.
Sure. So if you look at no magic the gathering for the quarter. It performed quite well as you know our storytelling around magic. The gathering is a synchronized between what we do in the analog business had to digital and a magical arena performed quite well it was up in the quarter as we.
You go forward Magic Arena now having over 2.8 billion games play, which is up quite quite a lot since Q2.
Still shows that people are playing on average nine hours a week.
We'll move Magic Arena to mobile in early 2021, which is of course, the most popular format for gaming that equity and a number of players should really benefit the brand.
Oh, we're continuing to work with Tencent to publish magical arena for China.
We also have spell slowing or is coming which is a casual mobile game.
Or magic, the gathering which will come following a move to mobile.
And then just Dragons right now you can play in early access on steam I was actually playing it it's quite a great game Baldor skates free.
For those fans it's off to a very strong start that's available now in early access launch a fully in 2021. We then have dark alliance from two games that comps.
In in 2021, as well and the team is making great progress there we've seen some of the early work and that's very exciting as well and then there's a a raft of games that talks about.
Are the work that's going on a raft of games that will come in the future for.
Years, 22, 23 24, it's all in about as we speak and it will line up with a.
Initiatives of those brands as well as with our entertainment efforts that were now developing fully developing.
Got it that's that's really helpful. And then another quick one from me the quarter to date Pos trends you mentioned in October.
Is that including Amazon Prime and some of the deal data from other retailers or are those Pos numbers normalized for those events.
Yeah. We just took me we took the effectively the month. The first month October so yes, those impacts are in there, but those were over specific days.
If you look at the progress we've made even over the last week following five but the numbers are quite strong. So I don't want to get down to kinda week by week, Pos, but just suffice it to say for the month those are really good numbers. The peaks during the prime days were even higher.
But overall, we're seeing a day for day really good growth around our brands will go back in stock on new initiatives like nerve.
Play Doh as our games in stocks have improved and were very excited as we come up in the next week will have a big launch around them and the Lorien.
New season, that's coming.
We have a more than 20 items available for the child product.
75 products around Star Wars Star Wars is performing at a very high level. This year, we expect a good holiday season, which should enable us to have good performance from our partner brand category, recognizing that said earlier, which is we have very strong comps from a year ago, but it at least position.
Yes, well in partner brands.
And allows our business to continue to move forward.
Got it very helpful. As always thank you so much and to John you will be missed dearly best of luck to you and thanks for all the help.
Our next question is from the line of drew Crum with Stifel. Please proceed with your question.
Okay. Thanks, guys. Good morning, Brian I Wonder if you could comment on your expectations for magic the gathering for Q I mean, you gave us some.
Good good detail entering Threeq and your expectations there.
And I have a follow up.
Sure. So I'll give you a kind of a little bit about progress on Q4, you will see at least three really robust launches coming up.
We have agenda car rising product that will be specifically around fans and gifting, we have a commander legends product that will launch in November secret layer will continue.
Into November as well. It's interesting is that are you know we made a number of launches in Q3 that are continuing to have an impact into Q4 as well.
More offerings that were very well at least it very well received by the players double Masters sat was released in Q3. The core set 2021 was our best core set of all times because it contains these must have cards for the tournament play.
It also welcomed a lot of new players into magic or more at home play in many new and in franchise players really like that offering.
We also had added this jumpstart booster and collected boosters they'll continue to roll out.
In the fourth quarter, because we had some production challenges we have talked about that before and that we're going to roll that out into the you in Q4 jumpstart for those of you interested allows players to immediately get into the game with these ready to play 60 card decks.
And the commander legends combines two of magics most popular formats Mandarin draft. So I think you've got a lot of the analog play coming into Q4, we talked about how force entertainment always leads engagement AD or we were well positioned to finish the year out strongly from ads.
Sure.
Got it Okay very helpful. And then Doug, yes, $369 million of long term debt classified as a current liability on the balance sheet can you talk about what the company's plans would be to address that upcoming maturity what would you pay it down or look to refinance thanks.
Sure well within her dad as you know about this year, we've only got really committed to pay 20 to 23 million.
Under our term loans and were on track for that and you know depending on how liquidity and our cash position goes we may address some of the stat that debt earlier or we may wait till may of next year. It's predominantly due in the may timeframe right now our plans would be to pay that debt down.
So that's our current plan.
Yes.
Our next question comes from the line of Mike King with Goldman Sachs. Please proceed with your question.
Great. Thank you very much for the question.
It was encouraging to hear about the revenue and EPS growth for the fourth quarter given the content delivery shifts for you. One I was just wondering if you could talk about how that might affect gross margins for the fourth quarter and just about your expectations for gross margins were broadly. Thank you.
Well overall for E. One you know, we said deliveries they're on track to be hows on you know we have a lot of.
Hi items and and productions in the pipeline right now right. So we said some of them could shift into a into Q1 as we look at them overall, but you know the coated I would just add you know coated protocols are increasing costs on some of our production. So they are increasing in a different way.
Great and different production. So when we think about margins that's going to be something we need to look at over the long term to see how that plays out now we see some of those costs are actually reducing.
Since we've been back in production, but I think that's something we'll be looking out over the long term. So when you think it over about overall margins you have to kind of how to factor in that but we did say that our expectation is just based on product mix that you know we had good product mix the more.
Our some of our gaming brands, we sell in the quarter the more brands like magic. The gathering we sell in the quarter that improves our cost of sales from a product mix standpoint, and our program production. We said, we thought would be around the same level as a year ago as a percent of revenue, which was about in the fourth quarter, 7%.
So well have to see over time, how are margins get impacted by those additional costs. The cost, but you know right now we expect those program production cost to be about the same level for Q4 as they were a year ago.
Great. Thank you and just as a follow up to you one more broadly.
The ones, obviously been impacted by a lot of the guidance factors because as you.
Like TV production theater closures.
I'm just wondering do you see you one revenues getting back to those those 2019 pro forma revenues.
At some point in the near future with when things get back to normal or.
You know is there just something structural in this.
You know new environment that prevents us from getting back there. Thanks.
Yeah, no like a the short answer is we do expect the D., one revenues can grow and grow back to being more the way they were in the recent past.
Recognize a couple of things there will be there will be very beneficial to the company increasingly those revenue as we'll have more Hasbro IP attach more of our production capital spend will be around Hasbro IP over time, we'll continue that Mitch.
Mix shift into more Hasbro IP, which has that knock on benefit that that described in her prepared remarks, where.
It enables us to get more consumer products licensing.
Enables us to drive more of our high margin or a toy and game business enables us to provide profitable entertainment was looking at entertainment as a.
From a marketing expense and then it will also support the Wizards of the coast brands that have such deep candidate mythology, and the opportunity.
To take that families and bands.
It's really substantial so we do believe that we've got to get through the phases of call. It you have to apply the.
The protocols to our production is and were doing that we have 25 productions up and running right now around the world. We're sharing some of those cove it costs with our broadcast.
Broadcasters or others, who have sponsored or paying for the shows for the US shared cost. That's like I've said, we've got to look at where the shared costs are the ultimate cost but.
The Big picture answer is that we see the opportunity not only go back to where you one was in the recent history, but to grow beyond that overtime and to drive.
A full range of Hasbro IP.
Both vault IP as well as in market IP to.
Two audiences of consumers around the world.
Great. Thank you, Brian Thanks, Ben John I'll Echo others' comments on the call that it was a pleasure working with you and learn from you best of luck.
Our next question is from the line of Devin preschool with Bank of America. Please proceed with your question.
Hi, Thanks for taking my question I, just have a couple of E commerce or do you still expect E com to be about 30% or more of sales for the full year and as the proportion of.
Your sales mix that came from E com in the quarter inline with expectations and could you just walk through E Commerce Pos trends.
By category or are your major brands.
Sure Bob you know, we do expect E com to probably be about a third of our total global sales by the end of the year, we mentioned that E com sales in the quarter it grown by 50% so clearly.
Can you to track forward and also we saw more store reopenings, which balances that E com sales as a percent of total sales but.
E com growth or in the U.S. in the third quarter was 35%.
Year to date, it's been 65% a franchise brands were up 34% partner brands were up 54% emerging brands.
Were up 79%.
Specific brands like monopoly were up 31%, Plato, 56% and Europe was up 16%.
So anyway, you just see that you know strength the strength that we have a lot of growth in this category recognizing that it's are on track to be about a third of our business.
Okay. Thank you and the gap between Pos trends relative to shipments meaningfully improved from the second quarter. It was still a headwind is this delta is something that we should expect to continue to improve particularly as you catch up on some demand in the games category.
Yeah, I think that you know our goal over all we said was as the point as we ended.
The third quarter, we expected to be run rate are catching up.
The demand in certain categories is still outstripping supply to some extent that's why we made some of the comments on the call but.
Some of our new gaming initiatives and games category are quite popular some.
Some of our new products and therefore very popular but overall I would say we should have demand much more in line with supply.
For and that's why we said we expect a good holiday that's not only a comment you know and I think I think the only thing I would just add if we continue to watch I'm kind of what's happening with some of our manufacturers around the world, especially in places like India in some markets were not worried we have essentially.
So supplier status you know first and foremost we are concerned about our employee health and that includes our third party manufacturing place help as well. So we wanted to be cognizant of that but you know to the extent we have some shutdowns around the world. We may still be catching up on you know come Q1.
Thank you.
The next question is from the line of Gary Johnson with BMO capital markets. Please proceed with your question.
Thank you good morning, and also congratulations to John the nicest kind of towards this is Pete.
So where are you chasing it sounds like a games and nerf and those are factors that ramped up a little bit late how much better could your overall sales.
Sales and revenues have been in a quarter. If you shift what you wanted to shift and related to that also is there are there any other distribution issues. We should know about other than just a factory starting up late however, your warehouses and the rest of the distribution channel expansion.
Yeah look.
Clearly, we've seen where games has been.
Year to date and in the third quarter globally, it grew but less so.
POS trends that we're now seeing in Q4 indicative of the fact that we've been catching up on supply.
ER and the team has done a great job Deb mentioned that no Ireland is going through a six week shutdown, but our Irish factory as it should.
The central status and it continues to produce.
Are we we've done that around the world to try to help protect our business.
Add to finish out the year very positively.
But the Q4, where we're shipping a lot of new initiatives and we.
We are continuing to watch certain areas like India, but.
We're seeing the products come in and we're seeing strong demand out of that as you want to comment further on.
Yeah, I was going to say I mean, I think our teams have worked so hard to put really good protocols in place to make sure within our warehouses and our third party manufacturing that our employees are sales and they can come to work. So first and foremost you know how you gonna give a big shout out to all of our warehouse employees that have just been.
Tremendous for all banks and have been so responsible in how how they're doing business right. Now so it's really it's safe and just really terrific, but you know we do continue watch there's certain states that we manufacture and particularly in India. I think that you know give us some level of concern, but overall really.
You know we are catching up her in demand.
Okay, and then on Magic <unk>. This gives us what the split is right now between digital and physical.
No because its an absolute dollar number but <unk> percent split 50, 50, 60 40, what's the split between the two that's contributing right now so.
Well I think I think we continue to see you know the analog business of course, if it's been around a lot longer than a digital business. So as you'd expect that's probably a larger size, but the interesting thing Eric we continue to see when we launch things arent arena.
As well as what we're building for the future on the digital side of the business and on the mobile space you know its getting a lift to the to the in like business as well. So the overall the you know the releases have just been so well received and as we release more and did you know it is giving that.
To analog but analog gets the larger piece so.
Okay. Thank you.
Thank you. Our final question today comes from the line of Jim Chartier with Monness Crespi. Please proceed with your question.
Hi, Thanks for fitting me in just a quick question. So wonder if you could let us know how much if you want to revenue historically is tied to the movie box office and life music events.
Sure well the first thing is the one is the very facile it moving movies over the to overtime from theatrical to stream movies, where they get paid and make a margin.
So I I'm not concerned in the short term that you once movies are.
Oh, Oh won't benefit from exhibition and we can't sell them.
As everyone is looking for it increasingly is looking for.
Content.
The music business has performed well has held up well.
And it's a smaller piece of the total you won business that I don't if you want to comment further.
Yeah I was just I was just looking at some you know it is a smaller piece of the business, but is he said the business that definitely has been impacted by the inability to do touring and you know with some of the recording access as well as I think revenues, an advertising impact as well, but it is a smaller piece of business.
Yes.
Great. That's helpful. Thanks Best of luck in fourth quarter.
Thank you.
Thank you Weve reached the end of the question and answer session I will now turn the call over to Debbie Hancock closing comments.
Thank you for joining the call today, the replay will be available on our website in approximately two hours. Additionally, management's prepared remarks will be posted on our website. Following this call. Thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.