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

Before we start, we're required to make certain disclosures in public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosure relates to investment banking relationships, compensation received of 1% or more ownership. We're prepared to read aloud these disclosures for any issuer upon request, but these disclosures are available to you as our clients on our firm portals. With that said, thank you, everyone, for joining today's fireside chat with Hasbro's Chairman and CEO, Brian Goldner; and CFO, Deb Thomas. During our conversation today, we're going to talk about Hasbro's strategy for growth, including its brand blueprint and its acquisition of eOne. And the current state of the toy and toy retail industry, and we're also going to do a deep dive on Hasbro's brand portfolio. My name is Mike Ng. I'm Goldman's toys and video game analyst covering Hasbro, and I have the privilege of moderating this discussion with Brian and Deb. Thank you both for making yourselves available.

Maybe just to kick off, early on, Hasbro made a deliberate decision, embracing content and storytelling to help drive demand for all types of consumer products, including toys. Could you talk a little bit about what led you to pursue the brand blueprint and how you see your strategy for growth today?

Yes. Good morning, Mike, and thank you, everyone, for being here today. I'll just remind you, we'll make some forward-looking statements, and please look at our SEC filings as far as our investor website. So more than 15 years ago, we began to redevelop our brands having really focused on other people's properties through the 1990s. And what we saw was an opportunity to tap into consumer insights, not just those from syndicated research from third-party research, but to develop proprietary insights around our brands so that we understood where our consumers were going from a behavior standpoint, from a consumption of content standpoint and from a play standpoint. And so we could see the trend toward engaging with brands that had great story and character that were beginning to be presented in more of a digital format through the '07, '08 period as Facebook and the iPhone began to be more prevalent. And so we developed a strategy that would enable us, again, to put our brands in the center of everything we do to surround them with proprietary consumer insights and then to begin to execute them certainly in our core historical strength of toys and games, but also consumer products. As you tell more stories around your brands, you're able to license the rights to those brands to consumer products licensees, to really accelerate our digital gaming efforts, particularly headlined by MAGIC: THE GATHERING and Dungeons & Dragons and to begin our storytelling journey because we recognize that whether it's short-form content online, or a long-form content in television and film, that consumers will travel with the brand that they love across multiple forms and formats. They'll play and engage and enjoy a brand in multiple ways. And so we saw the opportunity to begin to regrow our brands that were incredibly small back in the 2000 period to be multi-hundred million dollar brands particularly focused on our franchise brands, our gaming business, our partner brands and then an array of challenger brands that were looking for their lighthouse identity.

Great. That's a really fantastic overview, Brian. At the beginning of the year, Hasbro closed on its acquisition of eOne. It was obviously a big push into content. Can you talk about what attracted you to eOne? And what do you see as the long-term opportunities of that acquisition?

Sure. We've had some successes in developing storytelling, but we felt that we could scale that effort. And in fact, as we saw the trends that were out there in the industry, as we saw more live-action stream content, engaging with consumers, we saw the real opportunity with eOne on a couple of fronts. First and foremost, they have an array of great preschool brands, but also the capability to build new brands in the future, and we were able to see the brands that were in development that have yet to be launched and just how salient they were and merchandisable they were potentially. So we're today focused on PEPPA and PJ MASKS and Ricky Zoom that are in the marketplace, but there is a whole host of brands that are in development. In addition, we saw the opportunity for the eOne family brands team to take on our brands like My Little Pony and LITTLEST PET SHOP and Pound Puppies. And so there's a real opportunity there. They've already embraced and taken on My Little Pony. We'll have our first CGI fully rendered animated feature film coming out next fall. So there's a big step-up in opportunity for us on that side. On the second side, the live-action film and television business, there's a real opportunity there as well. And what we saw was that as big studios, we're reclaiming their IP rights for their own streaming services, we saw an opportunity, and we were getting lots of inbound interest for our big IPs and brands and yet we didn't have the capability to really present those IPs in the most creative manner, in the most compelling manner and do so globally. And so we see an opportunity headlined by brands like MAGIC: THE GATHERING and Dungeons & Dragons, Transformers, G.I. Joe, Risk and other brands like MONOPOLY, as an opportunity to story-tell in a live-action space in addition to animation and also to continue at a greater pace in our feature film business, but recognize that the proportionality is more focused on television than even film. And the third area, had to do with the capabilities and expertise, the business model that eOne is executing. So heretofore, Hasbro would execute a story-led strategy and our efforts there were more marketing oriented, meaning we might make a bit of money or we might not make a bit of money. We'd look at it as a marketing cost in order to get the rest of the blueprint activated in a flywheel spinning. And in the case of eOne, they have a great robust business model where they are making profitable content, getting paid for it with good operating margins across an array of brands, very strong operating margins in the family brands business and really good solid operating margins in TV and film. And the way they off-lay or layoff some of the risk and mitigate the risk around productions was really compelling for us as well, an opportunity to make entertainment and storytelling profitable as well as driving the performance of the overall company.

Great. And I'd love to dive into each of those things in turn. Maybe just starting out, when Hasbro made the acquisition, they guided to $130 million of cost synergies by year-end 2022. Could you just talk a little bit about what's encompassed in that $130 million and how those initial integration and synergy efforts have been pacing since?

Sure. I'm going to comment a little bit on the teams coming together, and then I'll let Deb talk about where we are and the progress that we're making, and it's really evident. I think this environment has given us the opportunity to move even more at pace. I mean the fact that we are all together connected in a Zoom or Teams environment has enabled the teams to really look at the revenue synergy side, meaning new initiatives, new IP stood up in a creative manner, executed around the blueprint, and that planning has really gone on in a robust way. So it's really exciting to see. Now none of those revenue synergies were included in that $130 million. I'll let Deb outline for you what was included and then how we see the progress that we're making there.

Sure. And as Brian said, Mike, it's fantastic because we were able to have the opportunity to work on these revenue synergies, things that we had not anticipated, which is fantastic. But the $130 million, we remain on track for that. About 2/3 of that was actually related to product and sourcing. So we'll start to see the beginnings of that in 2021. But we're on track this year. We've got cost synergies of about $20 million, but by far, the biggest piece was the revenue synergies. And we're on track, but we'll see the bigger piece of realizing those synergies in 2022 as we take on more of the properties in the product development.

Great. So with PEPPA PIG, PJ MASKS, and Ricky Zoom, Hasbro is getting a few global premier preschool brands and a studio that has proven experience in launching those brands. Could you describe some of the initiatives, marketing initiatives, production initiatives that you're using to grow these brands? And what other opportunities do you see for these brands on the content side?

Sure. So as Deb outlined, the team is fully embraced developing toys and games that are within Hasbro's wheelhouse. And yet the CP team that has now come together, we've already fully integrated the Hasbro and eOne CP team, the consumer products team. So that's underway. We'll continue to have licensees, robust licensing around PEPPA and PJ. So Hasbro will focus on its wheelhouse categories in toys and role play and gaming but we'll continue to have great licensees out there as well. We begin that process fall '21, and we'll get a full year in '22. The other interesting thing, the opportunity is we look at, let's say, PJ MASKS for example. We obviously work in incredible partnership with The Walt Disney Company. In fact, PJ airs on many of the Disney channel platforms around the world and is now airing on Disney+. So we'll continue to enhance its presence, the prominence of the brand. Obviously, short-form content on YouTube and other formats. PJ -- PEPPA PIG, we're into production on subsequent seasons as we are on PJ MASKS. And we really see these brands as being able to be developed more fully. And with Hasbro is both the licensor as well as a toy and game keystone provider of content and innovation and product, it's going to enable our retailers to do far more business on these brands as we go out around the world.

Great. Let's talk a little bit about the live-action content side, which you mentioned earlier. How does the acquisition of eOne really better positioned some of Hasbro's brands when you try to present them to studios to produce live-action content? And which Hasbro properties do you think are the most suitable for that type of content? And does having eOne position you better to produce that live-action content outright or better position you for coproductions?

Yes. What's been great, and it was clear to us as we look at our audience and consumer, you go back to consumer insights and you look at the brands and how they're resonating like Dungeons & Dragons and MAGIC: THE GATHERING. The fact that we are out to double the size of the Wizards of the Coast gaming business, and we're on track to accomplish that. And yet the can in the mythology, the published materials around D&D, Dungeons & Dragons, and MAGIC: THE GATHERING is robust. In fact, it's probably even more substantial than a brand like Transformers that's already shown its success in storytelling and the ability to activate around the blueprint or incremental value for our fans as well as for our shareholders. So we are underway in developing Dungeons & Dragons, both in film and in television, MAGIC: THE GATHERING in both film and in television. You'll see efforts from G.I. Joe. Our film comes next fall now, redated for next fall. But you would imagine that, that's a brand that's really right for live-action storytelling. And then there's a whole host of additional brands, where what's so interesting is everyone loves our brands and that we're getting great creative stewardship, people who are writers and showrunners and directors. We also added great talent to eOne. Michael Lombardo came on from HBO. He's running our television business. He really understands the space. And obviously, strong IP is very valued by streamers and other linear and terrestrial platforms around the world. And so the interest is there. The desire is there. We're developing those creative pitches and takes and that capability that eOne brings, the understanding of the business and the know-how of how to bring great world premier or world-class content is also very helpful. And I think you'll see from us just over the next number of months, a number of initiatives that we will announce and be engaged in for not just 2021, but really in stride for 2022 and '23 and really paying off the promise of this opportunity.

Fantastic. And could you just give us an update on the current state of affairs of eOne? eOne was probably impacted by shelter-in-place measures, just like other film and TV production studios. When is eOne going to return to production? And how are you thinking about how state home measures have impacted production? And how will that impact 2020 -- the rest of 2020 and 2021?

Yes, I'll just make one comment, and I'll let Deb outline for you the return to production. But it's really -- while, obviously, we're all very focused on continuing to be safe and follow science, the fact is we begin to turn the page and reopen production around the world. But I'll let Deb outline for you what the team is doing.

Right. So in addition to what Brian mentioned earlier, we were talking about creating these new production modalities where for -- you can do an interview by sending a camera to someone and doing it remotely, as we're all used to doing right now. But in addition to that, we're back in production in places like the U.K. and Canada and certain other European countries. And our expectation is to be back in production at the end of this month in California on some of the television programming as well. So things are coming back. There are different practices that we're having to go through as we return to that. But we are getting back into production, which is really great. And as we see those productions being completed, as we say, the orders are there, everybody is excited about getting the content, there's such a demand for content right now, especially new content, and if it doesn't hit this year, it will hit next year. So we are excited to be back in production almost everywhere now.

Okay. And let's switch gears a little bit. Moving on to a discussion around partner brands while staying on the topic of content, movie theaters domestically have been closed since mid-March, and there's been some changes in the theatrical calendar because of that. Brian, you mentioned G.I. Joe. Could you just describe how some of the film shifts have affected toy demand and marketing, if at all? TROLLS would be a good example that might be helpful to speak to you.

Sure. Let me talk to sort of 2 parts to this. One is -- what I would say is that as studios are moving more toward streaming in a, I'll call it, a premeditated way, those are initiatives that we can really get behind and we can make incredibly successful. We'd always believed as we entered into the eOne acquisition, that streamed content would hit an inflection point, where it not only would be consumed by large numbers of audiences around the world, but it would also create meaningful merchandising success. And we've seen that with The Mandalorian. In fact, this past summer, we saw that with Transformers. We created War for Cybertron animation, which is focused on a fan audience. In fact, War for Cybertron in August according to the top 30 metrics for Netflix was a top 30 show across the entire platform. That's how well it was viewed and also created incredible success at retail. So there's a real opportunity as studios, including eOne and Hasbro, think about a premeditated or a predictive strategy where we work with retailers far in advance to outline what the streamed content is coming and how we build the grounds well for interest across the entire blueprint. Where studios have had to make the shift in this COVID environment where at the last minute, we're shifting from theatrical marketing and theatrical retailing to PVOD windows, it's a challenge for everyone. Now we've made the best of it, and I think we've seen good results, solid results, but clearly, not the same as thinking far in advance where we're able to say to a retailer, here's the merchandising, here is the way we're going to execute content to commerce and an e-commerce environment. Here's the exclusives and here the in line products, here are the innovations and hear the promotions. Where that's all laid out years in advance for many of the major entertainment initiatives. We're out 18 months to 24 months in advance for many of those. So when we've laid that out, and we've got a plan and we're executing at retail, and then we shift to, I'll call it, more of a algorithm-based service window or a PVOD window that narrows the audience initially for that content, it's a bit more challenging, but I do think there's an opportunity go forward for stream content to have a meaningful impact on merchandising. But I also will say, we believe people will go back to theaters. We've seen a lot of evidence that people are desirous of a theatrical experience. And we just need to get to a place where people can feel comfortable not only going themselves but bringing their kids for our big 4 quadrant movies. And we would expect that certainly, by fall '21, as we have Snake Eyes coming, we have our first CGI animated theatrical from My Little Pony coming next fall, we would expect that people will be in a position to go back, enjoy the movie experience, bring their kids and enjoy our IP, along with many of our partners' IP that are planned throughout 2021.

Great. That's a really helpful overview. Could you just talk about some of the key properties, entertainment properties that will be in toy drivers for you guys, whether that's theatrically or on streaming services like Disney+?

Sure. Well, I'll talk a little bit about this fall a couple of things, and I'm going to let Deb walk you through some of that new major initiatives for 2021. So this fall, we're incredibly excited that in about a month's time, Mandalorian season 2 comes out. Clearly, there's been incredible interest and our presales have been very, very strong around The Mandalorian product, not just Baby Yoda, you may see over one of my shoulders in the screen. He's in strong demand, and our animatronic product is fully interactive product with our capability will be out for the holidays, but also a lot of the collector-oriented product, we call the Black Series product for Star Wars. Around The Mandalorian is also in very strong and high demand. So that's this year's initiative. And then we'll get into 2021 a number of theatricals coming from partners like Disney as well as other studios. Deb, I'll turn it to you.

Sure. Well, we're very excited about our own My Little Pony, which comes out in the early fall of next year as well, as Brian mentioned earlier, Snake Eyes has been moved. So in addition to those 2 properties, we have several from Disney coming, The Eternals. From Marvel, we've got new Spider-Man coming from Sony and several -- Ghostbusters, we have in the middle of the year. So it's really shaping up to be a very full entertainment year with theatrical releases next year. We're very excited about it.

So let's switch gears to what I think is one of your premier content-driven companies -- or properties rather, MAGIC: THE GATHERING. I think MAGIC is a brand that has had a tremendous amount of momentum in the last few years, and I think you guys have mentioned the opportunity for Wizards of the Coast to double over the next 5 years. With all the initiatives in tabletop, Arena, video content with the new Netflix deal, could you just expand in those initiatives a little bit and talk about the key drivers for MAGIC growth over the next several years?

Sure. Well, I think one of the most important things about MAGIC: THE GATHERING and uniquely positions us in the gaming -- in the video gaming space is the fact that we have this incredibly robust face-to-face gaming business. While that shouldn't be viewed as antiquated, it actually should be viewed as very modern. Because in this environment, people are very desirous of connecting. We've seen it with the takeaway, the sell-through of our games business. We've seen it in new user engagement and current fan engagement in analog. The team has used very smart techniques to let local hobby shops engage with their local communities online in an environment where those hobby shops were closed and are now reopening. We're running, on average, about 1 million MAGIC: THE GATHERING tournaments a year. Now some of those are those community-based tournaments based on a hobby shop on a Friday night. Some of them are the regional events, and then we just had a mythic invitational that was just executed from September 10 to 14, where we have the top 100 players in the world playing for $250,000 in prize money. And so an incredible engagement on Twitch for that. This is a brand that is uniquely positioned. The players really enjoy the immersive nature of the game. And then the Magic Arena, which is the online game opportunity and the way that people can play online and play not only with friends down the block, but friends that are at distance, that brand lines up around the release cadence. So the way we tell stories around Magic is through the release of card sets. And those card sets are characters, their places, their story, their creatures. And it's all of the opportunity to enhance the players' capability of conjuring spells and competing head-to-head bracket style with their friends and competitors. And that's really the nature of Magic and makes it such a compelling game. So as we go forward, you're going to see a greater release cadence in Q3. We've talked about that. In certain quarters, we have less of a release cadence like Q2 this past year where we say the headwinds were there. But overall, the trajectory for MAGIC is one of doubling in size over the next 5 years, beginning in 2018. We've seen that in '19, and we continue to believe that we'll see that in 2020. Clearly, it comes differently by quarter depending on that release cadence. But overall, we have seen that growth in that brand. We've doubled it in size for the 5 years prior to 2018, and we believe we can do it again. And then as we go forward, you'll see Spellslingers as a casual game that will come for the brand. We're porting the game Magic Arena from only PC-based to be mobile. That's coming over the next few months. And then we're also moving MAGIC into China in partnership with Tencent, we'll publish the game in China. So great growth opportunity, incredible opportunity for additional penetration. And also, we think we're in a really good space as more and more people, hundreds of millions of people are now playing games at the youngest age with brands like Fortnite. It's this great opportunity as an on-ramp for games like MAGIC that are more complex and an opportunity for people to graduate from that immersive game play that they love to find new games as they want to expand their menu of game playing, and we're seeing that.

Wizards of the Coast also publishes the Dungeon & Dragons games. So let's talk a little bit about that. I think at one point, as we already said that, D&D should have at least 1 digital game released each year for the next 5 years. Can you talk a little bit about what Hasbro is doing with D&D and what the D&D pipeline looks like? And how are you going to extract value or unlock value in the D&D franchise?