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

Welcome, everyone. I'm Devin Brisco. I'm an analyst at Bank of America. And today, it's my pleasure to introduce Chairman and CEO, Brian Goldner; and CFO, Deb Thomas. This is a veteran management team that's had over a decade of experience. So thank you for joining us, Brian and Deb.

Good morning.

Good morning. It's really great to have you here. So I think it would be great if you could start off with a little bit of background on the company and some of the history around the Brand Blueprint and developing and maybe [Audio Gap]

[Audio Gap] travel with us across many different platforms to enjoy those brands. And so that gave rise to the Brand Blueprint. So within the last 10 years, we've been developing our capabilities, onboarding new skills, new ability to manage both in the digital and analog space. And so we surround our brands with our toy and game expertise, with digital gaming, with our consumer products business, that's a top 10 business in the world of consumer products and licensing. And now more recently, adding the capabilities of Entertainment One so that we can tell more robust and more substantial stories around Hasbro's brands and IP activating more of those brands in unscripted entertainment and live action streamed television and entertainment as well as in feature films. And so as we move forward, we really see our business activated across these 3 very important areas. One is the Consumer Products business, headlined by our toys and games business. We also have our digital gaming business, headlined by our Wizards of the Coast business, MAGIC: THE GATHERING and Dungeons & Dragons as headline brands, along with an incredible robust portfolio of games brands and then our toys and games business as part of that and then the entertainment business, where we tell stories about our brands, to go way beyond just our Transformers movies and G.I. Joe films and begin to develop other Hasbro IP, recognizing that we have a vast portfolio of nearly 1,500 brands that we own and control. And we are going to monetize those brands, bring value to consumers and audiences and of course, therefore, build the value for our shareholders.

And could you provide some color on some of the brands that are being activated across this Blueprint right now? Maybe starting off with Wizards of the Coast with 2 Dungeons & Dragons digital games coming out in the next year, while there's Gate 3 and Dark Alliance, what do you see in terms of early interest for those games as they approach their official release dates? And what are the next steps in your journey to building a virtual flywheel around D&D?

Yes, D&D is an incredible brand with incredible canon and historical mythology. In fact, D&D really isn't one monolithic brand, but rather multiple story worlds. In fact, there are more than a half dozen different story worlds within the D&D universe. So multiple metaverse within that. And we've had more than 2 dozen New York Times best sellers in fantasy publishing. We had multiple stories told around us and tens of millions of people playing the game. In fact, we've seen great growth of the game and doubling the size of that business over the last 4 or 5 years. And we expect that between MAGIC: THE GATHERING and Dungeons & Dragons, we can double the size of Wizards of the Coast again over the next 5 years. And yes, we're working both in the analog space and the digital space. You're right. We have a couple of very exciting new digital games that will be coming for 2021, one published by our own Wizards of the Coast team, Dark Alliance, which is a team-based game and adventure game very much the way people adventure and campaign in the D&D world. And then we'll have Baldur's Gate 3 for Larian Studios, which is, again, a partnership -- significant royalty income for the game that they will publish and manage for us. But in addition to that, we see a great opportunity to activate D&D in storytelling. So in fact, D&D is one of the headline brands that we're working on not only in the feature film space but also for live action stream television entertainment. As you can imagine, with all of these published materials, canon and story, with tens of millions of game players around the world, our opportunity is to continue to raise the awareness and engagement of D&D to make the brand even more ubiquitous globally, and we see that as a major unlock as we move forward.

And then for MAGIC: THE GATHERING, after facing some tough comps in the second quarter, how are current trends progressing with the reopening of hobby stores and a number of SAT releases in Q3 and then more projects in the pipeline, including the mobile launch Arena this year, Spellslingers spin-off next year, how much more of an opportunity is there to activate new forms of MAGIC IP over time?

Sure. I'll comment a little bit on our current launch cadence, and then Deb should talk about where we're going with Arena as well as our partnership in China. But if you look at MAGIC, we've been on a trajectory of growth. We've said that we could double the size of the MAGIC: THE GATHERING business as part of Wizards of the Coast. We had doubled it over the last 5 years. Second quarter had been a challenging comp versus a year ago. We just had such a big quarter 1 year ago in the second quarter. But we said that the trajectory for the business for full year 2020 was quite robust. And in fact, in Q3, we have a number of different launches and we also have a Mythic Invitational tournament that's actually starting today and will run for the next 4 days. That's where we have $250,000 in prize money. We have more than 100 participants across every one of our levels of game play from professional down to more novice, and it's also being streamed on Twitch. The engagement in MAGIC has been incredibly robust. The team has worked on really novel techniques to keep our game players engaged whilst many of the hobby shops were closed earlier in the year. We do run MAGIC tournaments every Friday in more than 7,000 hobby shops around the world. So overall, for a given year, we're running more than 1 million MAGIC: THE GATHERING tournaments at different levels. So it really is a head-to-head competition, kind of a bracketed style play. And we believe that MAGIC will continue to progress in growth. Clearly, a very profitable business for us. And I'll let Deb talk about Arena and mobile and where we're going in China.

Sure. If anyone who wants to actually experience the MAGIC tournament that Brian just talked about, you can watch it on Twitch. So I encourage you to do it if you haven't watched the MAGIC game. It's really -- it's very -- gives you a good, great flavor for the passion behind the brand and with the players. But for Arena itself, we have internally developed Arena. And it started on the PC, it's migrated to the lap. And it's going to be available on a mobile version, as Brian said and Devin, you spoke about in the not too distant future. But including a relationship with Tencent, it's also going to be published in China. So we're really looking forward to that because MAGIC is a popular game in China, and this will just make it even bigger. So we've got plans to continue investing in this business over the next few years to continue to bring it out from different platforms in different game plays. It's also a really great storytelling experience. So when you think about MAGIC, we've got a plan in place for live action programming in connection with Netflix and it's just perfect for our graphical development. We have an agreement with Fox. It's been in place for quite a bit of time, but it's just perfect for the environment. It's rich in storytelling, much like Dungeons & Dragons. So we do believe that we, as Brian mentioned, overall, for our Wizards of the Coast business, we are well on track to doubling that business over the next 5 years, starting last year, like we did the past 5 years.

And another brand that comes to mind is your largest brand NERF. After a couple of down years, can you talk about some of the innovation that's taking place at that brand? What are your expectations for the second half of the year as Ultra rolls out around the world?

Yes. NERF is an incredibly robust brand with incredible NERF NATION consumers all around the world engaged with that brand in play and also in social online. And the team has done a great job in raising the game again in innovation. The NERF Ultra line that you mentioned, Devin, is a line where a product now allows the players to shoot more than 120 feet with great accuracy. It's a brand and a launch that's already had incredible response in the United States, and we're now rolling it out around the world. It's one of the brands we talked about having been a bit tied up in the supply chain issues that had occurred in the second quarter as a result of shipment challenges coming out of India and other affected geographies based on where COVID had impacted. But now we're seeing the momentum. We've said we would launch it in the third quarter and we will. And between the Ultra line, which is the high and halo line that has the highest performance, a reimagined elite line, which is our distance 80 feet to 100 feet of shooting as well as a completely reimagined line for the consumer. And then our rival line, which are the circular projectile intended for an audience of 14-plus year old, it's sort of paintball without the pain or the paint and the 14-plus year olds, the teenagers really love that line. We have new innovations coming for all 3 of those segments. And we're very excited about getting the launch beyond just the U.S. POS has been quite positive, particularly in the U.S. and Europe as we begin to roll out this product. And we think that NERF has regained its momentum with new innovation. Also part of the reason the brand had been challenged more recently is some other competitors had come in at the low end, a low price range of product that didn't have nearly the performance but had the right price points. And so we've developed a line of NERF product that enables a player to get in at those more affordable price points, but get the benefit of the NERF performance, which is far superior to other products. So again, between all the innovation and incredible social marketing campaign where we're using professional athletes who are all bunking together in the NERF house -- NERF house and these are professional quarterbacks, running backs, linebackers, all playing NERF together. It's been quite a social media sensation for our fans and a way of driving marketing and engagement. So we feel like NERF is on a great trajectory, and it bodes really well for 2021 as we get beyond the major impacts of COVID as we head into the holidays and then into 2021.

So I want to get back to some of the more strategic opportunities for Hasbro, especially related to the integration of eOne. But before that, could you provide an update on how much of your retail footprint is closed today? Is it still under 10%? And what does that look like in LATAM?

Yes. I mean you're right to highlight Latin America. We've said that Latin America, because it's now the third largest region in the world for COVID outbreak, and it has less of a benefit, in fact, very small benefit from e-comm. Only around 10% of that market is e-comm oriented, whereas the rest of our business globally is more like 30% or more. And so therefore, consumers have had more challenges in buying the product. There have been restrictions on the number of hours retailers can be open, and we're starting to see retailers reopen in markets like Brazil and Mexico. But again, it's been highly impacted by the COVID virus and the health care challenges in that marketplace. Having said that, around the world, we're still on average, right around 10% of closures. So lots of retailers have reopened. We're seeing great momentum in Europe, certainly in North America and have also seen great POS increases in the Pacific region like Australia and New Zealand. I will say, just over the last week or 2, we saw some light closures in Auckland and in Melbourne, just as a result of local ordinances. But again, we feel like we turned the corner from where we were in Q2. We said we would make a meaningful improvement in our business in Q3 and into a good holiday period, and we're doing that. So we feel very good about the holiday. We feel incredibly good about 2021 as we continue to build momentum around several brands. But you're right, right now, we're operating with still about 10% of retail closed, particularly focused on a couple of regions. And a reminder that Latin America for us historically has been high single digits to about 10% of our revenues.

So you touched on some POS trends in different geographic regions. Could you maybe touch on that a little bit more and talk about where the pockets of strength are? And what can be done to offset some of the headwinds in the lower e-comm markets like LATAM?

Yes. So let me comment, and then Deb should also talk about kind of where we are with retailers and how we're engaging with them because I think that our team has done a fantastic job in ensuring that customers are not only engaged with us, but paying us and we're getting good collections, things like that. So look, in North America, we're seeing very good POS takeaway, in Europe similarly, in Asia Pac strong and solid in Pacific as well, we are really seeing growth in takeaway for our games segment for NERF, for our PLAY-DOH business and our preschool business. There are a lot of categories that have been quite strong throughout the year and remain strong as we speak to you today. In fact, as we're able to supply more product, our POS benefits from that. Clearly, in the second quarter, we had about 40% of our supply chain impacted by closures in different geographies, whether it was Massachusetts or Ireland, where our board games are made for those regions. And in India, I mentioned earlier, where we're making a lot of our new NERF products, those were challenges. About 55% of our product is still produced in China. We've been moving our strategic sourcing footprint to be more spread and [Technical Difficulty] 10 years ago, it was more like 95% of our product. So again, making great inroads and working our way through what was a second quarter into third quarter impact. But we said [Technical Difficulty] get demand married up with supply by the end of Q3, and we are on track to achieve that objective. But Deb, do you want to talk about retail and customers and collections and things?

Sure. Absolutely. And I would also add to the product lineup which has been great that despite the tough comps from last year, Frozen and Star Wars, engagement with those brands continues to be really strong as well. And as we see our retailers reopening, we talk about every place being right around that 10% mark now that still left closed, we see the customers that have requested extended payment terms from us or just to spread these out a bit, actually paying us or our collections have been good and our experience has been quite good with those that we extended. As we look at the hobby shops reopening, we're so fortunate that we're able to support them in game rights that we talked about the MAGIC game rights to Arena. It's been a great benefit to the shops around the world. And as we look at retail, when we look at, we remain very excited about this holiday season.

So in terms of product mix, gaming trends have been robust so far this year. How much of that do you think is sustainable versus onetime in nature? And what other products will be key drivers this holiday season in your view?

Well, look, I think that we have seen gaming really playing out throughout the year, such strong demand, and we're seeing it across every category of gaming from preschool gaming, to kids gaming, family gaming as well as adult gaming. Everybody want to make connection through game play, and it's really been substantial. We did some research because we wanted to understand, as we always do, proprietary consumer insights around our categories, cause that lots of new consumers coming into the games category that consumers are discovering games for the first time, but this is an advancing of demand from later in the year. This is really about people engaging, developmental milestones and preschool games are really part and parcel of the game play, whether it's Candy Land or Chutes and Ladders or a MONOPOLY JUNIOR. And then as we have turned the [Technical Difficulty] the holidays, we have more than a dozen new games titles. So it's not just selling the games that we were selling earlier in the year, but more than a dozen new games titles that are coming for the holiday period, and that includes a Super Electronic Banking that's already off to a very strong start. We have a Mario Bros., MONOPOLY game that's again off to a great start. Product in gaming around The Mandalorian, which, as you know, is the Disney+ television series that has its second season beginning in just a few weeks in October. And speaking of that, our partner brands, Star Wars has been performing incredibly well, Frozen incredibly well throughout the year, as Deb mentioned. In fact, we just launched an array of products really tied into the zeitgeist. With a major U.S. retailer, we're seeing incredible uptake on presale lead to our launch. This is product around the Galaxy's Edge experience that we have at the theme parks at Disney. So the Star Wars: Galaxy Edge theme park attraction has actually allowed us to develop product for retail and consumers are incredibly excited. We're seeing that in our Black Series fan-oriented product as well as product for The Mandalorian, as we mentioned, with season 2 coming. Frozen has performed incredibly well. So for the holidays, we expect to continue to sell Frozen. I'll remind you that we were still selling Frozen product 6 years after the last movie. And so that's been highly sustainable. And then in addition to that, several other product categories. Maybe, Deb, you want to talk about some of the other big innovations the team is bringing for the holiday?

Sure. Well, we talked a lot about Europe earlier. We've done a lot around the gaming category. And in addition to that, it's not just games that are associated evokes -- with just The Mandalorian, which is going to be great, The Child Monopoly is going to be a lot of fun. We've got great games coming out with respect to operation. And the team forward as a great -- lots of innovation for the holiday.

And heading into this holiday season, with e-commerce expected to be 30% or more sales mix, how should we think about that on a quarterly basis compared to last year? And how can you bridge POS trends to shipments as e-commerce becomes a larger portion of mix?

Yes. We really do continue to see the momentum in e-comm. And remember, with e-commerce, it's also omnichannel commerce. So if a consumer buys something online and picks it up in the store, and adds to their shopping basket as part of that trip, that's e-comm. If a consumer has a discovered curbside pickup, buys online and then pulls up at their local Walmart or Target and opens their trunk and takes curbside pickup, that's e-commerce. And I think what we are really seeing is a major step-up in consumer behavior around e-commerce and omnichannel. And we don't see that going back. We see that moving forward. Frankly, in a prescient way, our team has been [Technical Difficulty] digital capabilities, content to commerce capabilities based on our incredible storytelling capability tied to our ability to manage the algorithms of online e-comm to ensure that our products are really presented incredibly well with lots of immersive media, entertainment and digital engagement. And so we're very happy to see the trends that are out there to work with our omnichannel retailers and continue to still work in a way with our brick-and-mortar retailers. We think that retail for the holidays will be executed differently than in years prior because, of course, retailers don't want to drive all their consumers in a given day. That's not consistent with the distancing protocols. So it actually gives us an opportunity as a major owner of a vast portfolio of brands to promote brands throughout this entire period, throughout this entire season to activate brands as deals of the day for every day from here to the end of the year to have virtual merchandising as well as real in-store merchandising encaps linear footage all around the products that consumers are looking for. But we do see the season as being earlier and more frequent opportunities for promotion.

So could you talk about sort of how that in-store merchandising -- how the strategies from your brick-and-mortar retailers are changing just for Black Friday and promotional plans in general to sort of spread out foot traffic?