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

Good morning. This is Tami Zakaria, leisure and broadlines/hardlines retailing analyst at JPMorgan. It is my pleasure to welcome everyone to this fireside chat, with Hasbro's Chairman and CEO, Brian Goldner; CFO, Deb Thomas; and CEO of eOne, Darren Throop. We have this amazing team for the next 35 minutes with us. The last 10 minutes, we will field questions from investors. So if you wish to ask a question, please use the blue Q&A button on your screen to submit, and I will pose questions on your behalf during the Q&A session. With that, I welcome Brian, Deb and Thomas (sic) [ Darren ].

Nice to see you.

To kick it off with the first question to you, Brian, it's been over a year since the eOne acquisition, and you've navigated an unprecedented global pandemic. So looking back, what are some of the key milestones and strategic initiatives you'd highlight of the past 1 year since the merger?

Yes. So on the eOne front, I would say, because of the pandemic, we use technology to bring the teams together even more substantially than we may have been able to do were they all in the different locations where brand leadership takes place around the company. So in Renton, Washington, Seattle, Washington, we have our MAGIC: THE GATHERING and DUNGEONS & DRAGONS team and they engage with the eOne team to begin the creative development process. We have in Rhode Island a number of brand leadership teams for every brand from MY LITTLE PONY to TRANSFORMERS to POWER RANGERS, and they too also engage with the eOne team. And so in fact, today, we have more than 30 Hasbro IP projects up on their feet and being developed by the eOne team. It's been a real tailwind to our business that the teams have been able to be engaged so substantially. And then in the eOne business, the Family Brands business located in London and run by Olivier Dumont between PEPPA PIG and PJ MASKS, we're very excited that this fall, we'll launch our online Hasbro toys and games that will be out in the marketplace, which begins to really drive our cost synergies as we originally had outlined them and also the development of new preschool properties that we're well underway. So again, that's been a real change during this pandemic. Beyond eOne, I would say that our gaming business headlined by Wizards of the Coast in our digital gaming business is seeing great acceleration and new gamers coming to brands like MAGIC: THE GATHERING and DUNGEONS & DRAGONS, and that, of course, very strong consumer products demand for our games business, for our toy business, our PLAY-DOH business, and then more recently, a real reacceleration in the action bigger categories as entertainment is returning to the marketplace.

That's perfect. Very impressive initiatives there. Staying along with same line of questions. With the rise of streaming platforms, what do you think are the opportunities for Hasbro looking ahead as your media initiatives are now powered by eOne's assets?

Yes. Well, we've really seen, as people have watched streaming shows, merchandising has really taken hold, and you just have to look at properties like our own TRANSFORMERS or for Cybertron or The Mandalorian on Disney+, which has really reinvigorated the entire Star Wars brand. But I'll let Darren comment as he looks at the marketplace. You're on mute.

Sorry. The rapid rise of streaming has certainly changed the industry to a degree. And then, of course, the pandemic kind of exacerbated a shift, I think, you could call it a shift from which was a very traditional windowing system of theatrical release waited by 90 days for a DVD release, waited by 9 more months for the first run television, et cetera, et cetera, which worked and worked well. We are suddenly in a world where we've got additional options, additional opportunities. And I'll use the real-time example of MY LITTLE PONY, which is a feature film, animated feature film relaunch of the PONY brands with some new ponies coming out in September of 23 -- of this year, September 23, which was always scheduled to come out of that time frame, but we, as a management team, sat down and thought about theatrical release or streaming release. And we really came to the conclusion that for this brand at this moment in this time, based on some of the successes we have seen from some of the brands that Brian was talking about that our optionality, which is 100% in all instances, in this instance, we should take the opportunity, which is Netflix at 200 million subs and release that movie there. So we're really into an interesting time where we, as content owners and producers have choice on how to get to market. And that will be very specific to brand, but it's fair to say that from an eOne standpoint and Hasbro standpoint, it's a content everywhere strategy. So for MY LITTLE PONY, yes, it will be a -- it won't be a theatrical release, it will be a Netflix global release supported by a theatrical-esque like marketing campaign followed up with specials on Netflix and then 2 series on Netflix and with all kinds of new original content on places like YouTube. So that the fan can engage with the brand a lot more holistically and with a lot more opportunity than they have in the past. So it's been a good -- it's a really interesting time to be especially with -- and to Brian's point, what they're looking for from a Netflix standpoint or an Amazon standpoint or a Disney or any of these is brands that resonate with consumers, and we clearly have them. So good opportunity for us.

Great. Thanks, Darren, for that elaborate answer. I think staying on the same line of questioning, you've already covered some of it already. But you have a number of Hasbro IP-driven projects in the pipeline that eOne is working on. So can you talk about those a little bit and when we will be able to see and experience the first few of those in the coming months?

Sure. You see -- and we've already gone over the MY LITTLE PONY thing, so that will come out in the fall. The next one that is a very, very big opportunity for the group and one that we're working on in multiple channels comes from the Wizards of the Coast, which is Dungeons & Dragons. And you'll have read that we have greenlit a new Dungeons & Dragons Movie with a fantastic cast that actually went into production in May in Ireland this month, and it's going fine with all the COVID protocols in place, but they have big cast, big feature. And that is a theatrical movie that we're doing in conjunction with our partners at Paramount. So that will be the -- that's one that's in production right now. It's fair to say that behind the scenes, while we've got that theatrical movie up and we know what the storyline is and the direction of the movie itself, there's a lot of activity right now currently running on the scripted TV side, where we think there's an opportunity, a big opportunity to give fans an opportunity to engage with DUNGEONS & DRAGONS in the scripted world of television. And we're working with some of the biggest partners in the world to bring that to life and really trying to -- I use the word road map, and I think I got it from Hasbro, but it created a Hasbro or a brand blueprint road map for DUNGEONS & DRAGONS the same way that MY LITTLE PONY is there. So that's another big one. Another one that's going to the production very soon is TRANSFORMERS 7, which the scripts are in great shape, casting. It's all in preproduction. Another one that will be going -- we're working on is the TRANSFORMERS animated. There's Transformers War for Cybertron, to Brian's earlier statement. And then you get further in POWER RANGERS is being worked on now with a creative steward and a big streaming partner. We haven't brought that to announcement stage yet, but it's fair to say that if you look across all of the priority brands of Hasbro developing in the last year during the pandemic is a road map, where we can specifically get to market with high-quality IP in many different channels. Some of that's theatrical, some of it is pure streaming, some of it is YouTube, some of its animated content. It goes around the entire content world. But it's fair to say that there's activity in each and every one of those brands. Some more developed than others. And then you get into things where we haven't even talked about like scripted television, which you will likely see by the end of this year on brands like NERF and PLAY-DOH and EASY-BAKE. And I mean there's just so many different things going on. Brian said before, we've got over 30. We've got well over 30, probably 40 different properties are some of the same properties, as I told you about TRANSFORMERS or about MY LITTLE PONY, but a lot of things in development, and that development is starting to get to the point where it's being taken out to buyers and we're getting commitments on those shows.

Great. Thank you. And with the demand for content higher than probably ever before, we've heard how the budget for 1 hour and half-hour shows have shot up significantly. Are you seeing broadcasters and streaming platforms willing to acquire content with the larger price tags? And what does that imply for your projected content spend for Hasbro in the coming years?

Yes. We -- there is some price creep for sure from a talent standpoint because there's so much demand for content right now. We've always, from an eOne standpoint, have had a pretty disciplined approach, a very disciplined approach to the way that we make content, and we usually do it in conjunction with a partner. And by partner, I mean broadcast partner. That could be a linear cable partner. It could be an SVOD platform. And what we do is we do the development internally to the point where we think that we have a show that resonates with an audience. And we'll usually try to develop with an audience in mind, frankly. When we get it to that shape that we think it's ready to go, we will then approach the buyer that we've always had in mind while we're developing, and we will get a commitment from that buyer before we go into production, which means we're mitigating our production risk. And the buyer is committing to paying the kind of the rate, the going rate for that production itself. So a very, very disciplined approach to development, but indeed to production, and that production doesn't really happen until we've got a commitment from a broadcast partner who sees the value in the IP and what value that can bring their platform by having that IP on their platform. So there might be price increases, but it kind of gets -- it doesn't get passed on particularly, but the buyers want that high-quality IP. And if they're signed on to the development and they understand what the budget is, we continue to get the pricing for it.

Yes. And the other thing I'll tell you is Darren and his team are producing different kinds of content at different price points, an unscripted show that technically engage out that's going to be a different lower cost per episode. An animated series, that's a different cost. Certainly, as Darren and his team are producing big broadcast shows like The Rookie, those might be higher price points. But certainly, there's a variety of price points within our Hasbro IP and frankly, the broader IP that eOne is developing.

Perfect. I do want to remind investors one more time that if you want to ask a question, please submit via the blue Q&A button on your screen, and I will pose your question during the last 10 minutes of this session. So Brian, switching gears to toys and games. The toy industry seems to have fared very well during the pandemic from a demand perspective. What are you seeing now as life seems to be going back to normal?

Yes. So we continue to see quite strong demand for our brands. And I think some of the brands that were particularly in demand last year remained in good demand. Although I will remind investors that during the second quarter last year, the demand was so high that our retailers were looking through all of their available inventories and selling everything that they had on hand, but Hasbro was less capable of actually shipping product during that time with about 40% of our supply chain impacted at any point in time during the second quarter. So you're going to see some funny comparisons in the sell-through versus the shipments within Q2 where some of the POS numbers may be more muted because, of course, we're up against big comparisons a year ago, but our ability to supply product and the ongoing demand that we're seeing for product in multitude of categories is quite good. And in fact, new categories or categories that were less robust during the year ago period are becoming more robust because we're back into having entertainment. And therefore, you're seeing more action figure type content coming in games and toys. Now you're seeing more new movies coming to theaters. You're seeing more new stream content coming out of the platforms that are all related to some of our favorite characters. And so in fact, I'd say you're getting a broader array of product categories that are selling well right now and people have really enjoyed playing games. They had enjoyed to rediscovering with Discovery PLAY-DOH and our surveying, our research indicates that people remain committed to wanting to play games with themselves as adults or with their families as one of the behaviors that they found so satisfied during COVID that they really don't want to lose sign up because they really got reconnected with kids and family in a way that will remain a behavior within families around the world.

Perfect. What are you expecting from the upcoming holiday season? Anything different versus last year?

Look, I think you're going to see global retailers taking advantage of the strong demand in the category and the number of new innovations that companies like Hasbro we're bringing across a multitude of brands, whether it's NERF or PLAY-DOH or MY LITTLE PONY movie that Darren mentioned is coming in the fall. I think you're going to see more promotional windows happening earlier and more significantly throughout the midyear fall and holiday season to keep encouraging consumption of great innovative products for a myriad of different demographics and psychographics. But Deb, I don't know if you want to comment from the team's perspective.

Yes. So absolutely, I think that one of the things that we did see in the holiday season that I think we'll continue to see as some of the shopping behaviors, right? So -- which is exciting about the season, but I think that it just opens up a whole new market for us. And the opportunity to deliver to the consumer directly through our own e-com site, through our customers' e-com site, through buy online, pickup curbside or pick up on store, I think it's just going to be fantastic. And we've been working hard to get the product, too. So you're hearing about cost increases and freight delays and things like that, and our teams were working very hard to ensure that we have the right channel to have the right product in place for the holiday season based on what we know our consumers are going to want to see.

Great. Talking about the gaming category, the gaming category itself is coming off of a very strong year in terms of revenue and margin growth. So how do you feel about the business this year now that it's against a very elevated comparison of last year? What's the strategy around gaming for this year?

So our company has a vast array of incredible brands within the gaming portfolio. And some of those brands will play face-to-face in more of a traditional manner. We're continuing to see very good demand there and a lot of new initiatives and new launches coming for those games. The team just launched the new Monopoly game with the new community chest cards, and they're always coming up with a new product. It's really incredibly satisfying and offers a new way to play games. So we still see that traditional face-to-face gaming business is performing quite well this year. And then you have the Wizards of the Coast brands, which have been accelerating, adding both analog and digital, gameplay, adding new content to those brands and new releases that are coming. The move from our Magic: Arena to mobile has been very strong, and we're seeing millions of downloads of the game in a mobile setting and hours, 9 hours a week on average of gameplay for Magic. There's an additional tailwind there as that game increasingly has played in a reopening marketplace face-to-face, the analog game, which really hasn't been able to happen over the last year and now hobby shops can get back into holding local tournaments and getting people together for Friday Night Magic around the world, and so that's really exciting for us. And so I'd say gaming for us is one of the cornerstones of our business. We have the brands. We have the innovation and the teams. And the consumer enjoys the category in such a meaningful way, it's very, very heartening to see.

Great. Let's talk about video games. I think that's a very exciting part of your business. We know you've been investing heavily in your own games development. So talk about your plans to monetize some of these initiatives like MAGIC: THE GATHERING Arena or Dark Alliances that's launching, I believe, this summer, this June.

Yes. So Dark Alliance is launching in June, and we're very excited about that. You'll see major platforms promoting that. We have some major partnerships with some of the major console platforms, one in particular that will get announced shortly. And Dark Alliance is a great game, plays incredibly well. It's truly consistent with the gameplay of D&D. And then you'll see lighter playing games that will come like Spellslingers later in the year. Magic: Arena, as I mentioned, has moved from PC-based to mobile very effectively in both iOS and on Google. And the number of gameplays or players is beyond even our early expectation. So we're very excited about that. And then, Deb, you want to talk about future gaming and our investments?

Sure, absolutely. So we have been investing. We've said over the last 5 years, we've invested over $200 million in developing games. And as you think about going forward, we've not taken our foot off the gas in this pandemic period and developing games that you're not going to see for until 2 to 3 years out, and we'll continue to develop those. We've got some gaming capitalized that we'll see being expensed this year as we start to release some of the games that Brian just spoke about. Going forward, we're really excited about the investments that we're making around DUNGEONS & DRAGONS, MAGIC: THE GATHERING, these wonderful brands, other games that are based on brands in the Hasbro portfolio by this really terrific team at Wizards of the Coast. In addition to that, we have other brands that we recognize. There are world-class partners that we work with, that they are better at leveraging those brands. So for example, there are great games out there around SCRABBLE or Monopoly, that our world-class partners will do very well on a licensing basis.

Great. Once again, to our participants, if you want to ask a question, please submit via the blue Q&A button on your screen, and I will pose your question. Our Q&A session will start in about 5 minutes. So Deb, a question to you. There's a lot of talk around raw materials and freight cost inflation has recently announced price increases coming in the back half of the year. Historically, can you talk about what kind of demand elasticity you've experienced in times of price increases and how we should think about that this time around? And along the same lines, can the toy industry offset the cost headwinds fully in the near term? What's the usual adjustment time frame to mitigate these costs entirely?

Certainly, Tami. Well, I think, unfortunately, we're all seeing price increases everywhere right now. And the global cost of product, just to move product or create product has really gone up for everyone for many reasons. So we're seeing increases in resins, which are impacting certainly the creation of some of our product. We're seeing costs increases in freight. We're seeing challenges in making sure we can secure the freight lines as well. So the team has been working really hard, as I had mentioned earlier, to ensure that we have the appropriate transportation for our products to get to where they need to be for the holiday season and create them. Typically, we will start 12 to 18 months in advance when we think about our product. But sometimes when we see very rapid escalation in pricing like we've seen now, it does force us to take a price increase to offset the costs that we're incurring in real time, even though it's much sooner that we'll be launching that product to take it. So we did announce we'd be taking prices -- price increases a bit later this year. So far, we've communicated that to our retailers, and most of them have not been surprised at that. They are seeing it from other companies as well. In the toy industry, you want to make sure that you're pricing a product that the consumer still believes that they're getting value. So we're very careful to do that. And right now, in fact, as we think about product that will come out around the 2022 holiday season, we're looking at how do we reengineer some of that product line, how do we try to take some cost out in certain ways to alleviate some of the pressure on cost increases that we're seeing in that product, but still really create that value to the consumer.

Great. I do want to ask one more question and then we can jump into the Q&A. One of the key assets you acquired through eOne is the Family Brands portfolio, especially PEPPA PIG and PJ MASKS. So Talk to us about how you plan to win this preschool category where Hasbro has historically been sort of underpenetrated?

Yes. So historically, you're right, we've been a smaller player in that category. With the addition of PEPPA and PJ, we become a top player in that category and with PJ being the #1 or PEPPA being the #1 streamed show around the world for kids on platforms like YouTube and most viewed, we're very excited about that. We are well on track to achieve the $130 million in cost synergies, and about 2/3 of those costs come from our own in-sourcing of a product line, and we'll launch PEPPA and PJ product lines for this back half of the year for the holidays. I'm very excited about that and that will only accelerate as we get into 2022. We have new properties coming from the Family Brands team. We had mentioned in our Investor Day a property known as Kia, and that's coming. And there are other new properties that are in development. So we imagine over the next few years, a few new additional properties as we continue to grow PJ and PEPPA as our cornerstones, and then add a brand like Kia and some other new IP. And it's very exciting to see what that team is really helping us to achieve, including the reimagination of brands like MY LITTLE PONY.

Perfect. I think we can jump into some questions that investors sent us. So the first question is, how is MAGIC: THE GATHERING Arena Mobile performing versus your expectations? What is the net impact you expect on MAGIC sales across physical and digital as stores begin to reopen?

Yes. So I mentioned this earlier, but I'll get into it more specifically. So MAGIC had been only available in PC up until this year. And by the end of March, we were able to move to mobile. We're seeing millions of downloads, and those downloads are even ahead of our expectation. The satisfaction numbers and engagement numbers we're seeing for Magic: Arena in Mobile is quite strong. On average, people are playing about 9 hours a week. So it's remained very robust in terms of gameplay. And it has really been complementary to the analog gameplay. In many ways, it's both a mechanism for people to play at a distance to people to play more frequently and also a great marketing tool to get people to play and to perhaps even try the analog gameplay. For the pandemic period, we help to get a lot of our local hobby shops that number are nearly 7,000 around the world to move to more of a virtual model. Only about 40% of them had any e-com capability before the pandemic. Today, more than 80% have a capability of virtual gameplay or virtual sales. And that's really been a leg up during this period for Magic. But having said that, we're seeing as markets are reopening and people are able to get back together again, face-to-face, it's only accelerating the gameplay. Those local tournaments that we run all over the world are beginning to come back into calendars and people are getting together. And we imagine that as more of the global marketplace opens, you'll see more global local tournament play, and that should be a tailwind for that business as we go forward. A very robust cadence for our release schedule. We'd said second quarter would be one of our strongest quarters, if not the strongest quarter of the year, and that's turning out to be the case. And so people are really enjoying the release and the storytelling that's coming from the brand and the ability to play in multiple formats.

Perfect. I think we have one more question. Can you scope the digital/media dollar value opportunity via eOne plays of the core Hasbro brands?

Sure, we can. And we certainly have built a strategic plan that does just that. But Darren, maybe you comment and then I'll comment on the consumer products basis?

Could you ask that question again, Tami?

Absolutely. So he's basically asking, can you scope the digital/media dollar value opportunity via eOne plays of the core Hasbro brands.

Via eOne plays of the core Hasbro brands?

Yes. I think he's asking what's the sort of, can you size the market opportunity of the media revenues that core eOne brands can bring in.

Core eOne brands?

Sorry, core Hasbro brands.

Hasbro brands. Yes. Yes. I mean, that's a great question. It's a very difficult question to answer because they have so many brands. I mean to put a number on it. I've never really thought about that before, Brian or Deb, I apologize. But the opportunity is massive. If you just look at something like D&D, for instance, where there's a great big feature in production, whether it's a scripted universe that we're trying to build and will build around D&D itself that has so many realms and so many different directions. Just that one property from a revenue standpoint, the opportunity is massive, like massive. I wouldn't want to say a huge, huge number, but it would have a lot of zeros behind it. If you can execute that properly, and that's what we intend to do. And then you just layer in all the rest of the brands, both -- and digital is a difficult world as well because is it SVOD or is it YouTube or is it -- everything is virtually digital now as far as I'm concerned. So big opportunity is all I can say there, Brian, I don't...

Yes. I'll give you a bit of a historical perspective. So back, if you go back to -- through 2006 before TRANSFORMERS was a theatrical brand, let's call the value of that brand during that time, 1x. And once we went into the world of theatrical storytelling that brand, on average in any given year, probably went to 3x value. And that brand's 3x value has been sustainable since the first movie in 2007. Now in big theatrical years, like we have a D&D theatrical coming in 2023, it could be even bigger than that in that given year. But then as we go to stream content, it could be a bit smaller, but it always will be elevated versus what the value of that brand was before it was activated around entertainment. And so the way we look at it is on a sustainable basis, if you can have a D&D that runs for a decades-long period at a 3x versus 1x, if you can add a MY LITTLE PONY and the reimagination of that brand that was sorely needed, and you go from a 1x to a multiples of 2 or 3x on a sustainable basis, as we have our animated feature film and then our specials and our new animated television, that's all going to be laid out and exhibited with 200 million subscribers in Netflix. While we have 1,500 brands, all you need to have is if you had a handful of brands that were all activated to that level, it really changes the complexion of the company fundamentally. And that was our intention. That was the thesis behind coming together with eOne is that you could build that kind of brand value. And the teams are already actively underway in building very robust consumer products plans, both our own products as well as our licensing business for the D&D movie, as I said, it comes out in the first quarter 2023. eOne is shepherding a TRANSFORMERS film that goes into production for summer of 2022. There's a new animated feature film coming from TRANSFORMERS that should also be quite valuable that will come in the years that follow. And so that's the way we look at it. You activate these brands and you add hundreds of millions of dollars in sustainable economic value to the blueprint of the film.

Perfect. I think we do have a couple of more minutes, so I do want to ask squeeze in one more. How do you feel about the medium and long-term algo in terms of revenue growth and margin growth potential for Hasbro now that eOne is within the portfolio?

Yes. So what we've said, and I'll let Deb comment on the longer term, but what we've said for this year is we expect double-digit revenue growth for eOne and double-digit revenue growth for Wizards and that we should be able to achieve at least mid-single-digit or higher growth for our toy business, typically either in line with industry growth or ahead of industry growth given our capabilities. And so that would lead us to double-digit revenue growth for this year. And a very solid growth trajectory in years that follow. We should be able to achieve mid- to high single-digit growth as a company. And our operating margins, we believe can go north of our historical highs, which were about 15.5% to 15.7% and get into the 16-plus percent range over time. But Deb, you want to comment more on the long-range strategic plan.

Sure. No, absolutely. I think as Brian said and the perfect question right before this the opportunity for revenue growth, right? We talk about that $130 million. That didn't include all those revenue synergies that Brian and Darren spoke about. So when we look at the revenue growth over the long term, as Brian just mentioned, and we look at the profitability, as eOne is back up and running is back up and able to deliver now. And think about it to the long term. There's no reason why we see the company can achieve operating profit margins over 16% and get back to those $1 billion cash flow -- operating cash flow levels that we saw a year ago.

Perfect I think we have one more minute, so I'll squeeze in one last quick one. So how do you -- what are your plans to better monetize the content library of eOne that was valued at $2 billion before the acquisition?

Darren, do you want to talk about that?

Sure. Yes. There's -- we've got more opportunity than ever before. I think one thing to frame is that part of that content library, of course, PEPPA and PJ and we will monetize those brands better than we ever have in the past, with the machine that is Hasbro behind us and guidance on those brands. So that's kind of an easy one. The -- and it's easy to identify and easy to understand the library of both film and television that we have, we sell on a bespoke and agnostic kind of approach. So we sell to hundreds of different buyers around the world using the international sales team that we have and that we have had for a long period of time. The good part about the -- or one of the great parts about the Hasbro acquisition is because we now have bigger IP to stand up like a TRANSFORMERS or a POWER RANGERS or just the affiliation with Hasbro gives us a bigger seat at the table with the international buyers, and it gives us the ability to start to package things in different ways, to put different packages together and sell library and catalog product in different -- in the same way that we have in the past, but with perhaps a little bit more clout and a little bigger seat at the table. So we'll just continue to monetize the way we have in the past. And to the earlier -- some of the earlier comments on this fireside, there's a big, big demand for content, new original IP but also quality IP like The Rookie or Private Eyes or Cardinal or all the shows Designated Survivor, all the ones that we've produced in the past that we now get new opportunity to resell again because their licensing terms are up.

Great. With that, we have come to the end of our session. I do want to thank Brian, Deb and Darren, one more time for spending this time with us and sharing the exciting strategies of Hasbro. Thank you, and we hope to have you here in the future as well. Thanks, everyone, for joining, and have a great rest of the day.

Thank you.