Hasbro, Inc. (HAS) Earnings Call Transcript & Summary

All right. Good morning, everyone. Wish we are all in Nantucket together, but it's my privilege to host the meeting this morning, the presentation with management team from Hasbro. Joining me today is CEO and Chairman, Brian Goldner; as well as CFO, Deb Thomas.

And we're going to spend this time really unpacking this image that you see on your screen, which is the company's brand blueprint. And I think it's important. This is one of the biggest questions we're getting from investors right now is how does this blueprint come to life in the new enterprise model, including eOne? So I wanted, Brian, to first just start with giving us some context for how this blueprint was assembled and what has changed about it. This is the 2020 version, the updated version. So maybe talk a little bit, Brian, about how this came to be, and then we can use a couple of brand examples to bring it to life.

Sure. Great. Thanks, Steph. So this began nearly 20 years ago, based on the company's history in the 1990s, where the company had relied a lot on other people's properties. And by the early 2000s, we began to redevelop our brands, and we own about 1,500 brands, and we began to redevelop them and to bring them back out into the marketplace, following, of course, consumers' insights. That's been one of our commitments throughout is understanding the consumer and proprietary insights that you see at the center of everything we do, our brands there at the center. And then we drive our brands through storytelling that storytelling has evolved over time, as you can imagine, from early 2000s to today. Clearly, with eOne, we're able to accelerate that strategy, and we go out to global customers. Those customers include buyers of content, our global retail relationships as well as our customers in stores and around the world, and we've developed our brands so that we can take them around an ecosystem that's most relevant and important to the consumer, to the audience. This is how consumers enjoy properties and IP today. We continue to develop our brands through toy and game innovation and digital gaming, headlined by our Wizards of the Coast business, brands like Magic: The Gathering and Dungeons & Dragons. We continue to drive our brands through both short-form social content as well as bespoke television and film and all kinds of the emerging media. And then, of course, as you build stories around your brands and you build relevance, salience around your brands, those brands begin to attract consumer products licensees, and those licensees sign on to those brands as a result of building great character and story, brands that resonate with consumers. And when the consumer loves your brand, they travel with that brand across all of these different platforms. Some are the major platforms of the company, those noted in orange. And then some are smaller, more developing expertise in our eSports business, particularly through magic and D&D; our music business, which gives us, we think, great strengths and opportunity for leverage; publishing business, it's primarily licensed, but it gives us the opportunity to be in every kind of published material from novels or our D&D brand as well as comic books across a range of action brands; and then, of course, our location-based experiences, which is both third-party as well as our first-party business, our touring business that we got as part of the eOne acquisition. So we activate our brands in many of these ways. The consumer really loves to interact with our brands, and we can talk more about some of the big examples of brands that we own here at the company.

Yes. I think that's a great way to do it is to just illustrate using the blueprint, and I've talked about this as a room with many doors. So the gateway in isn't necessarily through the same entry point. Using a brand like Dungeons & Dragons, let's start with that one, which would be a traditional games brand that you're now activating across this blueprint. Maybe walk us through some of the ways in which D&D will show up throughout this blueprint.

I think it's a great example, and thank you for bringing it up because D&D today is one of the most ubiquitous brands among gamers and beloved by tens of millions of gamers. And yet is probably one of the smaller brands in terms of contribution in revenues and earnings today for the company. So one of the biggest opportunities for the company over the next period of time. D&D really manifests itself in a couple of ways today in the company. One is through the published materials that we develop, those are those game playing guides. They get published both digitally as well as in paper. They're sold to our gamers, to help them post D&D games with them and their friends. Sometimes those games are streamed online, if people get together online to play virtually and to share those stories with others. And sometimes they're displayed in people's homes together and someone will host as a dungeon master. Increasingly, we're escalating our efforts in D&D through digital gaming, and you'll see a number of new digital games coming from the company. Some are published by Wizards of the Coast, some are from third party. The most notable one that will come in early 2021 will be our Dark Alliance game, which is a game published by Tuque, a studio that we acquired during the period last year. And we see this as a real opportunity to continue to expand D&D. What's interesting about D&D, like a lot of our brands, it has a very notable history in digital gaming. In fact, during the '90s, Dungeons & Dragons was one of the biggest digital games brands out there, and then that went more fallow. And so we're redeveloping this brand now. Well, as we develop the brand now, we also are hearing from many who have great interest in the IP for storytelling. So we had seen and heard from many streamers and other linear and terrestrial broadcasters an interest in a brand like Dungeons & Dragons because of its salience and the fact that it has such deep mythology in Canon. And so now the team at eOne is developing D&D for storytelling. We imagine that storytelling will be in both film as well as in television and will help us to, again, raise the global brand awareness, the global brand salience and attract more people to the game play of D&D. But just as you described, the doorway here is really in publishing and in digital gaming, which is different than several of our other brands that really begin as either a toy or game innovation like a NERF or begin as some form of animated storytelling and toys and games like a My Little Pony, where those doors are more pronounced at the beginning, and then we develop around the ecosystem around the blueprint over time.

That's a great segue. Why don't you talk a little bit about My Little Pony? It's been a brand that maybe had looked like D&D a decade ago. And it was really a brand that did travel well around the blueprint. You've had a film. You've had numerous seasons of episodic content. You've had the brand expand into new categories, dolls and other play patterns. Maybe talk a little bit about how that has been an illustration of this brand blueprint to life as well?

Sure. If I go back just for a moment to the early 2000s just to speak to the opportunity. In the early 2000s, My Little Pony was a very small brand. It was really probably the teens in terms of millions of dollars of contribution to the company. And we've redeveloped it. At that time, the format, of course, the relevant format for kids were DVD. So we sold a lot of DVDs. The kids watched incessantly and then played with the toys and games that gave rise to the first real growth spurt for My Little Pony in the modern era. And then more recently, about 10 years ago, we began bespoke episodic content. We distributed that content globally. And we ran that series, the Friendship is Magic series for about 9 seasons. Well, our feeling was, with the acquisition of eOne, we had this amazing opportunity for a brand that had become a contributor in hundreds of millions of dollars per year, a brand that was ripe for new storytelling. So after 9 years of a storyline that gets regularly refreshed and updated, it still was an opportunity to bring in new audiences and tell a new exciting story. So the teams are busy at work. At eOne, out of our preschool center of excellence, fashion and lifestyle in London, they're developing our next My Little Pony film. It will be our first 3D CG animated film, and that will be out for later next year. It's a new story with some new characters. And then that gives rise to new television. Some of that new TV launches this year with Pony Life, which is kind of a refresher, a pallet cleanser around storytelling that's more comedic and broader than our classic Friendship is Magic series. And then following the film, we'll have new series of My Little Pony. Well, as we activate the brand, it contributes sizably to the company, and we engender all kinds of passion from our fans and families that has driven our consumer products license business. In fact, My Little Pony has been one of our most successful licensed brands at the company with hundreds of licensees during any entertainment window, entertainment period. We have long-form and short-form content. So if you go to YouTube or any of the social channels, you'll see lots from My Little Pony. And then there's even digital games that are appropriate for kids. In this case, it's really from third-party studios like Budge that develop more kid friendly game playing. Of course, we have great innovation always coming from our toys and games. But the advent in regularly refreshing, reimagining and reigniting that brand through storytelling is what leads to the economic value and the growing value to our shareholders.

Deb, I want to bring you in, just as this brand blueprint has been developed, some of this has been through acquisition-driven capabilities, others has been organic. So maybe just walk us through those areas where you've used the balance sheet, where you've used the cash position to really support the build-out of this blueprint?

Great. Well, it's true, Steph. If you look back, you -- and we can use the 2 examples, Dungeons & Dragons and My Little Pony. Dungeons & Dragons came to us back in the late '90s. And when you look at the company we acquired called Wizards of the Coast, which also brought us another really fabulous brand within the company, MAGIC: THE GATHERING. So as we've looked at that and nurtured that, that's a good example of some -- a brand that came to us with capabilities many years ago. But by putting the right team in place, and understanding, again, going back to the consumer insight of how we grow that, we've been able to take the significant liquidity we have in the business, and invest that to drive the digital gaming and further growth around brands like Dungeons & Dragons. When you look at My Little Pony, My Little Pony is a brand that's been in the company since the '80s. And as Brian said, when we reinvigorated that brand, it was largely through television programming at the time. So again, we understood the need to develop content around the brand, which would bring that consumer in, and it had to be content that was relevant to the consumer. So as you look at that investment and that started, I guess it's been 10 years ago, 12 years ago now, even as I think back on it -- as you think about that investment, people said you're crazy for putting all this money into developing this programming, but it really did reinvigorate My Little Pony. And you have a brand that started out in the tens of millions that now drove hundreds of millions of revenue for the company by making that investment. And we really do look at that as that organic, investing in the business first to drive where the consumer wants to go with our brands, and then we look at what capabilities we're missing. So for example, Entertainment One or eOne, we made that acquisition at the beginning of 2020, as a major acquisition for our company, but it gave us a very disciplined business-driven but super creative ability to create that content around our brands ourselves, rather -- in a larger scale way, rather than paying other people to create that content for us as well as giving us some great family brands like PEPPA PIG, PJ Masks and Ricky Zoom as well.

Yes, that's great. I remember, Brian, a toy fair event, probably 7 or 8 years ago, where I had an aha moment, when you talked about how important content is to building really brand engagement and loyalty. And it was a time when we were starting to see you pulling back on overall ad spend, but investing in content and the P&L started to really open up and the margin started to expand. So maybe talk a little bit about just as a leader in an organization, guiding through that pivot and convincing your brand teams to let go of that natural advertising cadence and instead to invest those dollars into brand activation, and how that's really allowed you to your point on this brand blueprint, really bring your brands to life to maximize the value or optimize the value of each brand through these other avenues of value creation for the organization.

Yes. Well, I think you're on to something. And we felt like early on, we could see how a Hasbro brand when activated, returned to much higher average operating profit margin because we do own all of the different elements of the brand. As we activate the brand in storytelling, especially now with eOne, we're able to deliver profitable entertainment globally. So we get paid for that entertainment. That entertainment gives rise to consumer engagement, and as the consumer gets engaged, we're able to offer far more toys and games. Our global retailers are far more interested in stocking multiple categories of product for that brand in toys and even beyond toys because they know that the consumer is going to be coming into the store, seeking out that brand, that their kids know, that the characters are ones that the kids love and enjoy, and they're going to want to, again, participate, which leads, of course, to licensing out other categories of product, whether it's bedding or apparel or backpacks or stationery. And those categories are highly profitable to the company because we've made the investment in content, and we get the return on that investment in consumer products licenses. As the royalty income flows into the company, obviously, it comes in at very high op margins for the company, and then, of course, it's a virtual flywheel. As you continue to tell new stories around the brand over time, you're able to engage new kids as the demos are constantly being refreshed as kids, both age out of the property as well as age in to the property. Families who have loved the brand or parents who have known the brand since the '80s, as Deb described, want to share that brand with their kids or other kids that are in their families, nieces and nephews. And so that's one of the, again, values of the Hasbro brand is that it has either bimodal or even trimodal love of that brand from fans and families as well as the kids. And so the levers that we really see over time that add not only to the revenues growth and the growing power of the company on the top line, but the bottom line, of course, are the ones that are really highlighted in orange, on the chart. But as you drive a brand, if you drive a Dungeons & Dragons, that's a brand we own and control and you drive that brand in analog and digital, you garner more consumer products and you're able to tell profitable stories. That's a brand that, again, adds to both our revenues, but as well the operating profit of the brand. As you're able to drive more innovative products and get at scale, you're able to get -- again, Hasbro-owned brand has a higher than company average operating profit margin. The consumer products licensing also does that for us, as does third-party digital gaming because those royalty income -- that royalty income comes in at very high operating profit margin. So the way we thought about the growth of the company and adding capabilities is that each of these can be accretive in operating profit and in margin to the core endeavor of the company. And so over time, as you do that, your mix shift should enable you to continue to grow op margins. Once we get rid of some of the exogenous fact -- short-term factors like COVID, you'll grow up margins and grow revenues. You've seen our revenues CAGR that we've been able to create with an open playing field over time, mid-single digits revenues growth and double digits on average net earnings growth. That's our expectation as we go forward, probably accelerated by some measure because of eOne, the ability to, again, tell stories at scale and also have profitable businesses, both in TV as well as film in animation as well as live action.

Yes. Deb, just to give you a chance to talk a little bit about the eOne acquisition from a financial perspective. Just in case people aren't familiar, can you just walk through some of the financial measures, total size of the business. Clearly, it came with a very large library of content. And then you mentioned some of the family brands, but just how people scope out the size of the deal, what you paid and then your commitment to delevering the balance sheet.

Sure. So as I mentioned, eOne, we acquired eOne at the beginning of our fiscal 2020, which seems like forever ago, but it was actually only a few months ago. I think that's for everybody on this webcast, it feels like forever ago. But it's a terrific company. It's a couple of billion dollars in revenue, U.K. listed at the time. So we've taken it in, and you look at the vast majority of their revenue actually came from their film and TV business, where they produce their own content but a larger piece of their EBITDA came from their family brands business. So really 3 primary brands, but several in development, which everyone will get to see in the future, and we're very excited about those as well. The largest being PEPPA PIG, the second being PJ Masks and the third being a newer brand that just started to be introduced in China is being rolled out around the world called Ricky Zoom. Now obviously, those brands fit wonderfully and with our toys and games business because we know it well. So as we look at the acquisition, which was about a $5 billion acquisition for Hasbro on the debt side, we look at rolling those brands in and the synergies that we expect to get from bringing that in. We do expect by the end of 2020, about $130 million in synergies, and those synergies are from straight-on cost savings of -- we don't need 2 public company cost structures and things like that to actually take in some of that toy and game business and in-sourcing it in the company, using our really robust global consumer and customer network with retail, be it both e-comm and brick-and-mortar, rolling that out and also eliminating some of the agent fees that we paid around the world with on the licensed consumer product business because we have a full business to that, too. With respect to the debt that we took on, within that, we probably took on about $4 billion of debt. And it pushed our leverage ratio up a bit higher than what we used to seeing. However, we're committed to get back to 2 to 2.5x debt-to-EBITDA over the next 3 to 4 years on that ratio because as we talked about all the way back at the beginning, that amount of debt actually really helps to allow us to invest in the business for the long term and keep growing revenue and keep growing operating profit and EBITDA of our company.

Brian, let's talk a little bit about the opportunity that you have to take eOne's portfolio of brands. You mentioned Hasbro has this vault of 1,500 brands, but eOne also has a vault, digital vault of IP. So Deb mentioned Ricky Zoom, which is a great new property, but maybe walk us through what Ricky Zoom would look like in the future around this blueprint, entering through this idea of a TV series, and starting with content first and then holding around the blueprint.

Yes. No, I think you're absolutely right that the eOne's team approach to all content creation is one where they are able to go out around the world and get terrestrial and linear broadcasters engaged in the property. And in doing so, they offset or off lay about 85% of any investment in episodic content, whether it be animated content or a Ricky Zoom or live-action content with broadcasters around the world, and then they greenlight those projects for production. So we're really then only talking about selling the remainder of roughly, on average, 15% of the cost. So that's how they are able to get into profits on a lot of their content, I'd say the vast majority of their content over time. And Ricky Zoom is no exception, where they bring in key partnerships around the world in linear and terrestrial broadcasters. They get the A position, the top position in these broadcasters lineups and schedules, so they're getting maximized -- maximum eyeballs for the content. They then begin to develop what the play patterns look like. And so the transition that's going on right now and is going quite well, is that our teams in toys and games -- in toy and game innovation, have begun to develop new product lines in many categories. Not all categories because we'll still have several licensed partners or consumer products licenses for a brand even like Ricky Zoom or Peppa or PJ Mask, but that our team will begin to develop the toy lines for the future in those core categories that Hasbro is very innovative in and also very well-known for. And so those products will begin to launch in fall of 2021, and then you'll see real full product lines in 2022. That is part of that cost synergy discussion that we've been talking about, about 2/3 of those cost synergies just come from the in-sourcing. And also, secondly, the elimination of licensing agents that have been handling the licensing for those properties around the world, our consumer products licensing team is now handling those brands. And we'll continue to grow those businesses, but also eliminate those licensing fees that can be as high as 1/3 of the royalty income coming from any geography. So as we go forward, you've got Ricky, but then you have new properties that are in development at eOne a business discipline that we really like. And we're very excited about some of their new properties that are on their slate, in preschool, fashion and lifestyle as well.

Now there was a question that came up earlier today in a meeting. Just to remind us, Brian, the time line to come back for eOne? The scripted and unscripted live production will come back over the next few months, but your animation business has actually been ongoing during COVID?

Exactly. We can produce animation and have been at distance, people working on their computers has done quite well. So PJ, Peppa, even My Little Ponies, animated feature film have all been in development and continue to be produced during this time. Our unscripted business, which is -- includes documentaries and others have been produced in novel ways during COVID time. It's really the scripted shows, the television shows and films, that have stopped production during this time. And they begin, again, and we have schedules for them beginning late July into August, and that includes both network broadcast shows as well as shows sold to other terrestrial broadcasters around the world as well as streamers. So we believe by late July, August, we get a number of productions back up and running. We have a number of TV series and films that we've developed. The TV series, many of them have already been sold. And so it's just a matter of getting those production scheduled, and beginning to deliver those episodes. And as we deliver episodes, that's how the revenues are recognized. So we don't see any diminution of overall revenues or revenue opportunity for eOne. We see the growth opportunity for eOne alongside of Hasbro. Although some of those revenues may or may not be counted during the 2020 calendar year, some will come into 2021.

Yes, I think that's an important point. So you still have almost an open order that you have to satisfy. It's just when you can actually produce that content to deliver against that order.

Yes. You have a TV series, for example, that you've sold to a broadcaster. They've ordered in a third season, 18 episodes but you're beginning production in late July or August versus that production having -- would have had started much earlier this year, obviously, without COVID. So rather than perhaps delivering half of those episodes or 2/3 of those episodes, you end up delivering less of them during this year. But overall, we have a production end date that we still have, and we will deliver the episodes in total by then and get paid in full for the full 18 episodes in this example.

That's great. Final thought just because we're coming up on time is when you look at this blueprint overall, do you feel like this sets the company in a new direction over the course of the next 15 to 20 years? I mean, could we still be talking about this very design in a decade or more? It seems like most of the capabilities that you need to really maximize and optimize your brands are right here now in front of us.

They really are. Look, we wanted to build capabilities. The long history of the company is one where in the '90s, we were just too reliant on other people's properties. And so as part of the mantra, building our new strategy for the future was the ability for us to own and control the inputs, to the creation of the strategy, to have great capabilities and personnel on board, to change the composition of the workforce so that we're able to, on our own volition, calendarize our own efforts, work with our global retailers to bring those efforts to life for global customers and, of course, global content buyers who can now really buy our content. So you're right. I think this is going to be very much the way we talked about the company going from 2006 and 2007. It took us 5 years to get to 2007 in the first Transformers movie, by the way. And then over the last decade, that has really paid incredible dividends because prior to 2007, even Transformers was a business that was a fraction of the size of what it is today. And just by activating that brand in 2007 with one film that led to future films, that's a brand that's delivered hundreds of millions of dollars per year over time. Now some of those years are larger and some are smaller, but if you can activate a host of brands, if you could take a half a dozen additional Hasbro owned brands that today are contributing very little in terms of revenues, but have great salience and great opportunity, and you put them into our business, you can see how that begins to drive sustainable revenues and earnings power, and then you continue to add to that over time.

That's great. Good way to end. Well, thank you, everyone, for joining us today. Brian and Deb, I'm going to let you go and get to your next meeting. If you have any follow-up questions, just please reach out to us, we'll get you connected with the team from Hasbro. Thank you both.