Hasbro Inc (HAS) — Q1 2019 Earnings Call Transcript

Thank you, and good morning, everyone. Joining me this morning are Brian Goldner, Hasbro's Chairman and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Brian and Deb providing commentary on the company's performance, and then we will take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. During the first quarter, we realigned our segments and began reporting the digital gaming revenue associated with our Wizards of the Coast brand, including Magic: The Gathering Arena and several other games and the renamed Entertainment, Licensing, and Digital segment. As a result, for the first quarter of 2018, $10.4 million of digital gaming revenues and $3.2 million of operating profit were reclassified from the U.S. and Canada segment to the Entertainment, Licensing, and Digital segment. The full year 2018 revenue reclassification is expected to be approximately $58 million. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Those factors include those set forth in our annual report on Form 10-K, our most recent 10-Q and today's press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Brian Goldner. Brian?

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. The global Hasbro team delivered a good quarter and start to the year. Revenues increased 2%, and absent a negative $24.3 million impact of foreign exchange, grew 6%. New initiatives and innovation overcame tough comparisons with last year's first quarter. Our long-term investments in growth opportunities provided a meaningful contribution from our digital and e-sports initiative, Magic: The Gathering Arena as well as growth in Magic: The Gathering tabletop revenues. Additional gains came from several other brands including Franchise Brands, PLAY-DOH, TRANSFORMERS, and MONOPOLY. We are beginning to see improvement in our commercial markets, notably in the U.S. and Europe. In Europe, revenues grew 8%, absent the impact of foreign exchange. For the full year, we continue to expect revenue stabilization as well as profit improvement for the region, and the first quarter is in line with this plan. Point-of-sale comparisons will remain challenged through the first half of the year as Toys 'R' Us moved into liquidation in the U.S. during week 11 late in the first quarter of last year. In addition, Easter was later this year shifting from the first quarter into the second quarter. Absent Toys 'R' Us, global point-of-sale for the quarter was down approximately 10% and in line with our expectations. As consumers began Easter shopping and new initiatives came on shelf, including NERF Fortnite and Hasbro's line for Marvel Avengers: Endgame, point-of-sale improved posting positive Easter-to-Easter comparisons in the U.S. Retail inventories are of good quality and good levels, increasing in certain markets and brands as retailers prepared for Easter and new launches in April, including several entertainment initiatives as well as Hasbro's POWER RANGERS line launch in North America. Throughout the quarter, the global team did an excellent job managing expenses, and we began to see the benefit of our cost savings initiatives. We delivered operating profit in the quarter and EPS of $0.21 per share. While most of the year is ahead of us, we remain on track to deliver profitable growth for the full year 2019. Our outlook is anchored in innovation and execution around higher margin growth opportunities in key brand initiatives, many of which launch later in the year. We are leveraging our expertise and brand portfolio to drive unique gaming experiences. This kicked off with great success at our premier Magic: The Gathering Mythic Invitational at PAX East in March. John, Deb and I were on hand to see the team lead a tremendous event, which generated 2.7 million viewer hours on Twitch and paid out a $1 million prize pool. Engagement with Magic: The Gathering is growing in both digital gaming and analog tabletop. In-store player growth increased double digits and grew at an even higher rate for new players. The latest Magic card set, War of the Spark, was unveiled at PAX East and drove over 10 million views of the trailer, shattering the previous record. In stores, in early May, War of the Spark is currently available for digital pre-order in Magic: The Gathering Arena and launches this week. Magic: The Gathering Arena is performing well with over 700 million games played to date during the Open Beta, with the average player spending 8 hours per week in the game. We'll be further supporting the game with additional tournaments and marketing support as the year progresses. As discussed at Toy Fair, we're also expanding the Magic: The Gathering franchise to reach a broader audience through an entirely new game designed for mobile. The team launched this game, Valor’s Reach, into test markets during the first quarter. In our face-to-face gaming portfolio, MONOPOLY is coming off a record year and continued to deliver growth based on insight-driven innovation and on-trend additions. MONOPOLY Cheaters Edition and MONOPOLY: Fortnite are performing well. MONOPOLY for millennials is rolling out globally building off its success in the U.S., and we recently launched our Game of Thrones Edition, which is off to a good start as the hit HBO show enters its final season. In addition to our unparalleled gaming portfolio, we're building on the growing popularity of gaming across all formats around the world. This includes leveraging our industry-leading position with NERF for our gamer series. We launched NERF Fortnite late in the first quarter, and it is off to a very strong start at retail. This new line joins NERF Overwatch within our new gamer initiatives this spring. Throughout the year, the NERF team has incredibly innovative lines across price points backed by compelling digital-first marketing and campaigns. NERF Fortnite launched exclusively on HasbroPulse with preorders in February and then rolled out to retailers. HasbroPulse is a one-stop destination to engage directly with our target consumers and deliver social media engagement, product development initiatives, content, and commerce for fans. To further our digital-first consumer approach, we added a strategic position during the first quarter with the appointment of Jamie Gutfreund to the newly-created role of Chief Consumer Experience Officer or CXO. Reporting to John Frascotti, Hasbro's President and COO, Jamie will oversee global marketing with the directive to further build deep connections between Hasbro's brands and global consumers. Jamie joined us last week from Wunderman Thompson where she served as Global CMO and helped establish the firm's reputation as a dynamic global digital organization. Our investment in digital-first innovation and storytelling has kept us as the #1 toy and game company in the U.S. and Canada on Amazon according to Edge Market Share. A recent example of how we leveraged our social channels to deliver content to commerce programs comes from Star Wars Celebration where we drove strong preorders for our exclusive Emperor Palpatine Black Series figure and The Black Series Luke Skywalker Electronic X-Wing Pilot Helmet. Star Wars: The Rise of Skywalker is coming to theaters on December 20, and with the first STAR WARS live-action series, The Mandalorian, premiering on Disney+ on November 12, and The Galaxy of Adventures animation for kids on multiple platforms, we will be supporting Star Wars extensively with new Hasbro products on shelf from October 4 as part of Triple Force Friday. While our Partner Brands revenue was down in the quarter, robust entertainment for these brands builds throughout this year. In addition to STAR WARS, Marvel's upcoming 2019 theatrical lineup includes the highly anticipated Avengers: Endgame later this week and Columbia Pictures' Spider-Man: Far from Home in July. We're also very excited about Marvel's entertainment initiatives in support of kids and fans across key platforms like Disney+, Disney XD, and MARVEL HQ on YouTube. For DISNEY PRINCESS, we have an all-new line at retail based on the new look from Ralph Breaks the Internet as well as Aladdin product supporting the upcoming May film. In addition, Hasbro's expansive line for the highly anticipated Frozen 2 will be on shelves October 4 for the November film. Also within the Partner Brand portfolio, BEYBLADE continued to perform well leveraging new innovation and episodic programming to deliver another quarter of revenue and point-of-sale growth. Storytelling across platforms is essential to building immersive brands. Bumblebee, currently available in home entertainment, along with our preschool kids and fan-oriented content, is driving revenue and point-of-sale growth for the TRANSFORMERS brand. Equally important, it is successfully introducing TRANSFORMERS to a new generation of kids and re-engaging our core fans around the world. As we look ahead to the remainder of 2019, there is a lot of work to be done. Our teams are engaged and focused to deliver on our plan for profitable growth this year. Now, I'd like to turn the call over to Deb. Deb?

Thank you, Brian, and good morning, everyone. The team turned in a good start to the year, delivering revenue growth against a difficult comparison with last year and executing to deliver operating profit in the quarter. Hasbro is in a strong financial position with the ability to invest in our business for long-term growth while managing costs and delivering on our planned net cost savings of $50 million to $55 million for the year. We ended the quarter with $1.2 billion in cash while returning $128.5 million to our shareholders through our dividend and share repurchases. An 8% increase in the quarterly dividend takes effect for our next payment in May. Within our segments, revenues in the U.S. and Canada segment increased 1% behind growth in Franchise Brands including PLAY-DOH, Magic: The Gathering, TRANSFORMERS, and MONOPOLY as well as growth in Hasbro Gaming and Emerging Brands. This growth was partially offset by declines in the Partner Brand category. We ended the quarter with good levels and good quality of inventory at retail. It's still early in the year, but we're encouraged by the positive signs in the business. Segment operating profit for the quarter was $13.5 million. Last year's first quarter included $52.3 million of expenses associated with Toys 'R' Us, which was primarily bad debt, and we reported a loss of $26.6 million. Adjusted operating cost at last year was $25.7 million. The segment's operating profit in 2019 was adversely impacted by product mix, higher intangible amortization associated with POWER RANGERS and start-up expenses in opening a new U.S. warehouse as well as investing in the Wizards of the Coast gaming brands. International segment revenues declined 2% including a negative $23.4 million impact of foreign exchange. Excluding FX, revenues in the segment increased 6% and were up in Europe, Latin America, and Asia-Pacific. Hasbro Gaming and Emerging Brand revenues increased. Franchise Brand revenues were flat as reported, but increased excluding foreign exchange. Partner Brand revenues declined in the quarter. The International segment reported an operating loss of $30.4 million compared to a $56.1 million operating loss last year, which included $11.2 million of expense associated with Toys 'R' Us. The adjusted operating loss for last year's first quarter was $44.9 million. The smaller operating loss per share was driven by higher sales volumes, the benefit of cost savings, lower royalties, and beneficial cost translation rates. This was partially offset by higher intangible amortization. Finally, as Debbie mentioned earlier, we have renamed our Entertainment and Licensing segment as Entertainment, Licensing, and Digital. We reclassified revenues of $10.4 million and operating profit of $3.2 million from the U.S. and Canada segment related to 2018. Reflecting this, segment revenues grew 24% this quarter. This was driven by revenues from Magic: The Gathering Arena as well as consumer product licensing. Operating profit increased to $30 million or 32.6% of revenues driven by the higher revenue and lower amortization for film and television. This was partially offset by continued investments in the business including in digital gaming initiatives for Magic: The Gathering. Overall, Hasbro's operating profit improved to $36.1 million or 4.9% reflecting higher revenue, a favorable contribution from our cost-saving activities, lower stock compensation, and good expense management. Several of our expense categories were essentially in line with last year. However, royalty expense declined to 8.2% of revenues versus 9.7% last year. As a reminder, we incurred accelerated expense associated with Toys 'R' Us in this line during the first quarter last year, and the adjusted rate was 8.7%. The decline in royalties reflects lower Partner Brand revenues in the quarter. Intangible amortization increased to $11.8 million as forecasted reflecting the POWER RANGERS acquisition. Program amortization declined as we amortized less television and film expense this year versus last year, which included MY LITTLE PONY, the movie production expense. Advertising increased to 10.5% of revenues versus 9.5% last year. We forecasted amortizing to increase for the full year behind the launch of digital gaming initiatives including substantial marketing and e-sports expense throughout the year. We continue to expect full year advertising expense in the 10% range. Last year, we recorded $59.1 million of bad debt expense related to Toys 'R' Us in SG&A. Excluding this expense, SG&A declined approximately $25 million reflecting the early benefit of cost savings, lower stock compensation expense, good cost management by our teams and a favorable impact from foreign exchange. At the same time, we have start-up costs for new U.S. warehouse and invested in our Wizards of the Coast business. Turning to our results for low operating profit, other income increased slightly primarily due to a larger gain on foreign currency transactions and higher interest income. Our underlying tax rate for the quarter was 18.5% versus 16.5% last year. The rate reflects a mix of jurisdictions where we earned profits and the impact of tax reform and is in the range of our full year underlying guidance of 17.5% to 19%. Including discrete items, the first quarter's effective tax rate was 9.7%. We have recognized one-time events over the past 2 years that have provided considerable benefits to substantially lower our effective tax rate. Based on what we know today, we do not expect the impact of discrete events to be as significant as they were in 2018. For the first quarter, earnings per share was $0.21. Our balance sheet is strong, and we ended the quarter with $1.2 billion in cash. We returned $79.3 million in dividend payments and $49.2 million in share repurchases. During the quarter, as outlined in our POWER RANGERS acquisition agreement, we paid $87.5 million to Saban Properties, $12.5 million remains in escrow and will be paid out during the second quarter. Receivables increased 4% and day sales outstanding were 79 days, up 1 day from 78 days last year. Inventories decreased 5% and were essentially flat with the year ago, absent the impact of foreign exchange. The quality of our inventory both on hand at Hasbro and at our retailers is good. Retail inventory in certain brands and markets increased in the first quarter ahead of Easter and several new initiatives launching during the second quarter. Finally, effective January 1 of this year, we adopted the new lease accounting standard. As a result, we recorded operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheet as of March 31, 2019. The adoption of this standard did not have an impact on our consolidated statement of operations or consolidated statement of cash flows for the quarter. In closing, we're pleased with the start to the year. The team did a fantastic job driving revenue growth and managing costs. We will remain focused on both throughout the year as we support the new entertainment and brand initiatives coming to market over the course of the coming quarters. We will now open up the call for questions.

Nice start to the year. A question for you, Brian, really on the cadence of the quarter when we were together at Toys Fair, I think your outlook for the quarter was maybe a bit more muted versus what you delivered, so can you talk a little bit about the areas that exceeded your plans, how you motivated the team to really take advantage of some of the opportunities? And then how should we think about the momentum in the business? Is this the start, or are you coming in a bit better than what you had expected, so we should think about the first half as being a bit more lateral? If you can just help us with the quarterly progression, that would be great.

Sure. We did have a number of headwinds going into the year that we had spoken about, including $26 million in Toys 'R' Us shipments for the first quarter of last year, a shift of Easter to the second quarter, and of course, last year, Black Panther had performed incredibly well during the first quarter. Having said that, the team has done a very good job of growing our brands in the quarter. We saw growth in the Franchise Brands and Gaming and Emerging Brands, and we expect to see our Partner Brands begin to accelerate as we enter the second quarter. We've already seen Avengers performing well over-the-counter as we head to the movie this week later in the year, and early in the third quarter, we'll have the Spider-Man movie, and so again, entertainment progresses throughout the year and we're supporting our entertainment brands across a number of dimensions. We've also seen some really good progress in Europe, but I would encourage you to again think about our full year belief about getting back to profitable growth, and we'll see more new initiatives coming throughout the year. This is always a small quarter for us. We're very encouraged by what we're seeing. It's a bit more revenue than we'd expected, and we are seeing the early signs of that acceleration in Magic: The Gathering in both Arena as well as tabletop revenues, both being up in the quarter. We're seeing a number of new in-store players as well as new players, and so that also bodes well for that brand for the year and beyond. As we look at POS and we take year-to-date POS through both years and to date, we're seeing that overall POS is down in the low-single digits, so we did see an acceleration of POS. Easter-to-Easter POS was up in the mid-single digits. And so, again, the progress is really starting to take hold in the second quarter. So, we think the cadence of our business is as we described it earlier in the year. We are very committed to returning to profitable growth, and we think we're off to a very good start. The team has done a very good job around the world.

Deb, could I throw in one more? Just on the $58 million of reclassification, are you willing to give us that by quarters, just for our models so we can adjust the revenue lines?

The team is currently working on that, and we will share the information once it's ready. For context, it was approximately $10 million in the first quarter, which we mentioned we reclassified, and it would total $58 million for the entire year. The business may not be as cyclical as the rest of our operations, but in the first quarter, it significantly impacted our results simply because it is a low revenue quarter.

So Entertainment and Licensing revenue was quite strong. Would you be able to break down what was Consumer Product licensing contribution for the quarter and maybe take a chance to kind of run through a quick kind of how lumpy this revenue stream can be and how we should think about quarter-to-quarter cadence?

The lumpiness we normally would see in that quarter would be in the areas of film and television as we get paid for certain streaming income and certain streaming revenues as we deliver episodes typically. The rest follows cadence of the entertainment. We've talked before about Consumer Products licensing, revenues coming after entertainment initiatives by the company as we collect royalties and can count royalty income that comes into the company. And we did see good progress in Consumer Products this quarter. We've obviously had some great entertainment that's come over the last few quarters and notably in Bumblebee and other brands. And then, as we go forward, we expect that the new digital delineation will be important as the brands around Wizards of the Coast continue to grow. We've talked about a number of initiatives that the brands intend to execute over time, not just Arena. We have a new game in test market in the first quarter that's more of a casual mobile game, Valor's Reach, and we expect to continue to see revenues in that area. We're not going to break out the revenues by each area but suffice it to say that digital gaming was up Consumer Products, and of course, we talked about the first time we're reporting Arena and other games from Wizards of the Coast separately and ELB.

Great. And then in terms of the Magic: The Gathering transitioning out of beta mode, do you have any updates on the timing of that? I think you've said before by end of Q2 or potentially in the first half, which today means, I guess, end of sort of Q2. Is there any update to that?

No. There's no real update thus far. We were very happy to see our Mythic Invitational at PAX East perform so incredibly well, and the momentum around the game is palpable. It was great to see the fans enjoying the tournament and also to see the response to War of the Spark and the new storytelling that comes in Q2 this year both in cards as well as on Arena. And I think the lineup and how they've synchronized the storytelling between the two platforms is really helping us as we do engage more players in tabletop as well as in the Arena game. And so, I’m really looking forward to quarters to come and years to come around Magic: The Gathering, both Arena and tabletop.

And then one quick clarification, Brian. You mentioned a low-single-digit increase in POS. Was that excluding Toys 'R' Us or including Toys 'R' Us?

Excluding Toys 'R' Us.

So Brian, you indicated you're starting to see some improvement in your commercial markets including Europe, and that's usually reflected in the first quarter results, but doesn't seem to be suggested in your commentary for sales performance for the year. So maybe you could discuss that further. And was Europe profitable during the quarter?

Okay. Europe has seen profit improvement in the quarter in a substantial way. We've seen a number of markets perform above a year ago, and we're seeing a lot of progress in markets like France, Germany, Russia, and Spain, re-engaging consumers with new initiatives and the performance there is quite good. The reason we continue to talk about stabilization is the fact that revenues did grow 8% in the quarter but were down 1% as reported. Obviously, FX will have an impact throughout the year as we've seen in the first quarter. Also, I know it is limited data; it's only the first couple of months, but thus far, according to NPD, Europe is down and also the U.K. is down even more sizably. So we want to continue to see progress in those markets. We've seen progress in the U.K. We're clearly seeing great progress across the European business. The team's doing a great job in onboarding new capabilities and engaging across a growing array of retail footprint and new retailers, which is fantastic. We're seeing that around the world as we continue to expand the retail footprint, and we're seeing growth in new retail channels as well as growth with some of our mass-market partners and online. But again, it's early days, and we feel that we're making the kind of progress we expected to make, and the team is doing a great job.

Okay. Got it. And then just one other quick one, Deb. $49 million of share repurchases during the quarter seems to be pacing well ahead of your guidance for the year. Is there any change in terms of what you expect to repurchase in 2019?

Yes, we still expect to repurchase between $100 million and $150 million, subject to market conditions. We have a grid in place for repurchases, and we have reached that amount within the grid. There is no change to our guidance for the full year.

I just wanted to return to Steph's question that was asked at the beginning. And Brian, you highlighted the various drivers to the quarter in your answer, but I think what a lot of us are just wanting to understand better is what was the biggest surprise in the quarter because you were pretty clear at Toy Fair that you'd be down for the reasons you reiterated. But what was the biggest delta between your budget and actual? Was it basically the strength in Europe or was it different products entering domestically? Just can you help us understand that?

Yes, sure. While we've seen really good momentum in TRANSFORMERS and we saw growth in the quarter, we've also seen a re-engagement of our fans and as well engaging kids. The home entertainment has been very strong for the brand, and we're seeing great progress there. Overall, our Franchise Brands grew quite substantially and PLAY-DOH was off to a good start. MONOPOLY continues to perform at a high level. And then, of course, Magic and Magic Arena is doing really well and early days, and that's certainly a strong contributor to growth in the quarter. And yes, we had expected to have advertising, marketing, and additional spending around e-sports come later in the year. So our expectation was some more of those revenues might come around more of those types of initiatives once we get broader and we launch and go from open beta. We've just seen great progress and great engagement with the game, and I think that those are some of the key drivers. And then there are brands underneath those brands that are also growing some growth in games and other key brands across the portfolio. But I think that's clearly been one of the key drivers as the growth of Franchise Brands. Europe has made good progress, and we're very pleased with what the team has accomplished there. And yet, it's still early days. And so our expectation for the year continues to be profitable growth, and certain brands are ahead of our expectations.

We also saw some earlier benefit from cost savings than we had expected and just good expense management by the team. They are all very focused on the fact that the first quarter is a small quarter, and slight differences can have an impact. Some of our expenses, as Brian mentioned, shifted out. And overall, on a full year basis, we still think that the guidance that we gave at Toy Fair is still in line with the full year. It's just in a small quarter when you're focused on having some of those things, they can make a difference even to go from a loss to a profit.

Yes, and it is good to see the progress the team is making against the loss of Toys 'R' Us.

I want to address that in a moment. But if you had to evaluate everything you mentioned, would you say that Magic was the biggest surprise, or is it just one of several surprises you noted?

Yes. I think it's great to start the year with the growth of Franchise Brands and Magic. One of the conversations we've had is about Arena's rise and what that means for tabletop. It's encouraging to see the engagement the team is fostering in stores and with new players. The new card releases, alongside story-driven launches like War of the Spark, are effectively engaging players in-store and providing an easier way to learn the game. This approach is really taking off. It's also exciting to see TRANSFORMERS not only achieving great box office numbers and performing strongly in China but also excelling in home entertainment. Our business is thriving across various dimensions, with both our kid-focused content and fan-oriented offerings driving engagement in that brand. We're introducing a new approach to PLAY-DOH that blends online, social, and entertainment elements, which has gained traction along with some fresh innovations. Our wheel segment is focusing on grassroots efforts, and PLAY-DOH is off to a strong start, introducing new ways to engage with the brand. Throughout the year, you can expect to see more innovations. It's fantastic to witness the early momentum the team is building.

That's really helpful. Now, regarding the retail landscape, we're clearly beyond the holiday season, and both Walmart and Target have reduced their shelf space for toys. We are still observing toys in alternative retail channels, but as Walmart and Target move towards a more normalized assortment of toys in their stores and with Toys 'R' Us no longer in the market, could you explain where you are compensating for that difference during the non-holiday periods?

Sure. Well first, we're seeing continued growth in online revenues. They were increased in high single digits in the quarter. Both pure-play e-commerce is up, and our Amazon business continues to be up, but we're also seeing growth in sales around Walmart and Target and others. In Q1, we also saw the fan grocery, drug, club, department stores, and convenience channels posting revenue growth. And then what's also interesting is we talked about that Toys 'R' Us was no longer in the U.S., but around the world toy specialty had taken hold. And if you exclude Toys 'R' Us, toy specialty was also up in the quarter. And if so, whether it's Smyths Toys in Europe or new Toys 'R' Us ownership in certain regions, we are seeing momentum there. I mean there are a couple of areas where we're yet to see that momentum. In the Pacific markets like Australia, we're still not seeing the growth in that market according to NPD because of the loss of Toys 'R' Us. And there are a few other markets like the U.K. that still are down across the industry, but we're making good progress there to recapture share. And so I think, we talked about the objective of share recapture last year. We'd said we'd seen more share shifts through the holiday period versus share recapture. Now we're starting to see that share recapture that we'd intended to create. We're seeing a lot of merchandising for our products around our Franchise Brands and gaming as well as our Partner Brands coming into the year. And so more linear footage from nontraditional areas, but certainly great core partnerships as we go forward with retailers and it's really great to see.

My first one is just on the TRANSFORMERS strength. You guys have had 2 consecutive quarters of growth now. Do you think we could get growth in the overall TRANSFORMERS brand in 2019 despite not having a movie this year?

You know the team has created lots of demand around that brand in new and different ways. Going forward, we're breaking ground on new media models and partnership with people like Netflix where we'll have a whole new entertainment initiative coming next year. The streams of content that we have have really enabled our brand to step forward. And I'm not going to comment on one year versus another, but I do think that the way we're approaching TRANSFORMERS is really benefiting us. Our fan business is quite strong. This is where our initiative like HasbroPulse is also taking hold, and we've seen really good early results there where we've offered either first-to-market or exclusive product really engaging our fan. We do believe that the fan economy is quite strong. So TRANSFORMERS is one of our biggest fan-oriented brands in the company, and we continue to want to drive fan business behind TRANSFORMERS and STAR WARS and MARVEL and PRINCESS and even MY LITTLE PONY. But for TRANSFORMERS, it's clearly benefiting the brand. So as we go forward, we're starting to work on the next movie, but there's plenty of content coming for that brand over time.

Okay. And then just on the MTG digital gaming revenue classification. It seems to imply a lot of that reclass comes later in the year. Is it right to describe the first 9 months of that MTG digital revenue in 2018 mostly or exclusively non-Arena products? And then all the Arena revenue was really just in the fourth quarter?

Yes. I think we've had Magic online for quite a while. If you go back just within a material part of the segment, as we reclassified it, I think you'll see most of the revenue from 2018 coming from other digital products rather than Arena.

Right. And then Arena was only in the fourth quarter, right?

We started to pick up a bit of revenue from Arena in the fourth quarter, but don't forget we went into open beta kind of...

Thank you for the information provided so far. I wanted to ask if your timeline for returning to your 2016 operating earnings margins is still on track. While you've indicated that it's still early in the year and that a small quarter can lead to noticeable fluctuations, any updates on that timeline given the early successes in various areas?

Yes. We've said that if we had a number of things break right for us, we felt that 2020 could be like 2017, and we continue to believe that. Again we're making good progress. It's great to see the momentum coming out of the first quarter. I think many people have asked and wondered whether the company would grow absent Toys 'R' Us or how it would grow, and so if you want to demonstrate that we're going to grow this year in a profitable manner. And then the team has done a great job in finding new retailers and new points of distribution and new modalities to sell around the world. And it's great to see many of the new capabilities and approach in Europe taking hold as well. So again, early days, but we believe that 2020 can look like 2017 as a few things break right for us.

Okay. You've mentioned Europe and other international regions, but I wanted to ask about Latin America. How has it been trending? There have been some fluctuations over the past year, so how does that look at this early stage?

Yes, Latin America has performed well overall. It has shown better growth excluding foreign exchange impacts. Point of Sale was up, and the market experienced less negative effects from the changes at Toys 'R' Us. We also have a toy specialty presence in that market. Our business in emerging markets, including Brazil, showed an increase during the quarter without considering foreign exchange. We're making progress; although Brazil is not completely out of the woods, we are seeing significant improvements compared to a year ago. Mexico has performed exceptionally well, with other markets showing mixed results during the quarter.

Two questions for you. First, wonder if you could dig in a little bit more on Magic: The Gathering. You saw a pretty sizable spike in viewers on Twitch during the tournament during PAX East. It has since settled down. I think we've got a new pack release coming up in the next week or so. How do you sort of look to shape your marketing over the next couple of quarters to sort of keep demand or at least interest in the game elevated?

It's encouraging to note that over 700 million games have been played so far in the open beta, with players averaging around 8 hours per week. In the first quarter, we more than doubled the viewer hours on Twitch for the Magic brand, and currently, Magic Arena ranks as a top 10 e-sports brand, specifically at number 8. It even reached the top 3 during the Mythic Invitational event weekend. Our key performance indicators are showing progress in retention, engagement, and monetization as we prepare for the game's official launch later this year. We recently held a $1 million tournament and have committed to a $10 million prize pool this year, indicating that we still have significant funds to allocate for the remainder of the year, including advertising and marketing efforts to attract new fans. Our goal is to develop this into a highly watchable and engaging brand appealing to gamers of all ages. It's still early days, but the outlook is exciting.

Okay. Secondly, can you discuss the relationship between a movie's licensing revenue and toy sales? For example, with Avengers potentially reaching an $800 million global opening weekend and possibly over $2 billion in box office revenue, how do you expect that to affect toy sales? Additionally, regarding China, where Bumblebee performed well earlier this year and now Avengers is projected to have a $200 million plus opening, how do you expect the Chinese market to compare this year to last year?

Yes, China saw growth in the first quarter, which is encouraging for the company, and the point of sale is looking positive. We're very excited about Avengers, although it's still early in the process. As you may remember, last year we started merchandising Avengers: Infinity War a few weeks earlier in early March, while this year it has shifted to later in the month. Therefore, we are experiencing a 3-4 week difference in timing, but the past two to three weeks have shown strong performance. Historically, Marvel has been a significant part of our business, and we are fully supporting it across all segments from kids to fans and families. We are also concentrating on the preschool market, where our Mega Mighties initiative is off to a strong start. We believe Marvel and Avengers will have a major year, and you are correct that China is a key factor in that. Regarding Bumblebee, our focus extends beyond the movie to the entire TRANSFORMERS franchise, which is one of the most cherished brands in China. We are pleased to partner with CCTV for a television episodic program set to air later this year in prime time, titled Transformers Nezha. This unique blend of TRANSFORMERS and Chinese mythology is generating excitement, leading broadcasters worldwide to consider its global potential. We are thrilled to continue strengthening our partnership with CCTV and our collaborations with Tencent, particularly in relation to the funding of the Bumblebee movie. There are great opportunities in China, and it's still early in our journey after several years.

How are initial shipments of POWER RANGERS product performing? And how would you characterize the performance of Beast Morphers so far? And then if you could also give us an update on NERF and any innovation in the pipeline that we didn't see at Toy Fair that you can give us on NERF at this point?

Sure. Well, the launch of POWER RANGERS is starting in North America. The line launch there. We had some products ship in Q1, but limited. It will roll out in the subsequent quarters, both in North America and around the world. I'm very pleased with the ratings of the new show. It's a ratings leader in its time slot. It's offering a very strong lead out. And Nickelodeon's been a very good partner in helping us to market the new series. The team has done a great job in producing this transition from Saban to our own studio has been seamless, and I give the team a lot of credit for producing such a high-quality show that's really beloved by kids and improved in a number of ways from the last production. So we're, obviously, very excited about POWER RANGERS, not only for this year, 9 months, but for 2020 as we'll have a full year impact. So very good there.

The follow-up was on NERF. And if you could give us on an update on NERF and then any innovation in the pipeline that you couldn't give us at Toy Fair?

Sure. Sorry. On NERF, really excited to see the take rate on Fortnite. That initiative now is rolling out around the world, but in the U.S. over the last 3 weeks and then going into Europe, it's been very strong. So it's great to be able to play the game in real life, and I think people are really responding to all of the marketing and content that's being created around that by us and by fans. Later this year, the team has an array of new initiatives and innovations coming. We've talked about covering multiple price points and providing innovation and high quality products at every price point, and you'll see that, and that's about all I'll say at this point. But stay tuned; it's a very exciting lineup for NERF not only for '19 but 2020 and beyond.

Just on the cost side, I believe you said the SG&A expense was down $25 million year-over-year. Is there any way you can quantify how much of that is just the headcount reduction initiative? And then I know you've got other initiatives as part of your cost-cutting. Can you just touch on, did any of those make an effect in the quarter, or are those things later to come? And then my second question is, just as Toy Story 4 hits soon, are you doing any of the categories for that in terms of the licensee? And do you expect the demand for those toys to impact any of your different product lines?

Sure, I'll address the cost savings first, and then Brian can follow up. We're seeing our cost savings align with our expectations, even slightly better in expense management. There has been some expense shifting out of the quarter, but we are still on track for net savings of $50 million to $55 million this year. It's important to note that these savings are still phasing in; we anticipate a higher amount in 2020 as we achieve annualized savings. The phasing will continue through the first and second quarters, with the full net savings expected by the fourth quarter depending on timing. Regarding other items, we've mentioned some ongoing expense adjustments, such as lower compensation expenses compared to last year and travel-related expenses. However, this is somewhat balanced by expenses associated with ramping up our U.S. warehouse, which we discussed at year-end. We don’t expect those startup costs to remain at the same levels for the rest of the year. Additionally, we are continuing our investment in our Wizards of the Coast gaming brand, which includes administrative costs. Overall, we are achieving good cost savings, and the entire team remains focused on managing expenses effectively. Brian, would you like to add anything?

The team has put together an impressive lineup for Toy Story, especially featuring Mr. and Mrs. Potato Head. As you know, they have been part of the movie's cast historically, and it's exciting to see them in the trailers we've seen so far. You can expect initiatives from us focused on key characters and the brand.

So retailers increased space during the holiday to bring more product and head more doors. Did that continue your first quarter, or did they compress back to their original layouts?

Yes, we saw incremental space in the first quarter. We've also seen it beyond our top retailers where we have performed quite well and they've had space. A lot of those initiatives are also increasing as we get into this early second quarter recognized at Easter was in the second quarter. The boys' action isle, for example, a major retailer gets set closer to the Avengers movie. We said Avengers at the end of March around the world. So we are seeing incremental space there, but also as we go out, we talked about these new channels. We've seen great support around the new channels of retail in this first half of the year. And it's indicative of the momentum we're seeing Easter-to-Easter where we said we're up mid-single digits and year-to-date, we're just down a couple of percent if we take year versus year recognizing we're still up against some Toys 'R' Us headwinds for the first half of the year.

Okay. Then going into the second quarter, when we compare to last year, do you think these retailers under-ordered last year knowing they were facing the Toys 'R' Us liquidation competition?

I think a number of things. I think that given the liquidation, it had us changing strategy at that point, we thought we have far more new initiatives coming in the second quarter this year than we had a year ago, whether it's NERF Fortnite or the Avengers lineup followed by Spider-Man. We're also seeing really good momentum in BABY ALIVE and some new initiatives there. So I think it had to do with all of us trying to understand the market impact a year ago versus going back to our focus on innovation and insights in storytelling for this year and demonstrating that we can grow absent Toys 'R' Us.

Okay. Then Bumblebee, as it looks now, can you attempt to quantify the profit contribution from this one or perhaps the return on investment?

Yes. Overall, we're currently in the home entertainment period, which is performing better than we initially anticipated, which is encouraging. We will soon have estimates from the studio regarding our projections. As Deb mentioned, the financial implications associated with the movie will be available later this year. The sales performance of Bumblebee has been robust, positively impacting the brand. We have introduced several G1 or Generation 1 product lines with various retailers that echo our '80s products due to the celebration of that decade related to the movie. This influence has affected both our toys and games business and our mobile gaming sector, as TRANSFORMERS: EARTH WARS has incorporated Bumblebee-related content, contributing to growth in our Consumer Products division, which is one of the reasons you're seeing that segment expand this quarter.

Okay. And I'm going to throw one more, and then I'll save the rest for later on. The obvious follow-up to Felicia's question. Could there have been anything that was perhaps pulled into the quarter that could surprise to the downside in the second quarter?

No, there weren't really any pull-ins. The only brand that shipped a few million dollars in the first quarter, intended for initiatives starting in the second quarter, was POWER RANGERS. We couldn't place the product on the shelf until the very end of the first quarter, which is what we did, and it was only in North America.

And it was a small number...

And with that said, there was a ...

I think we did see some shifting of expenses till later in the year, but again, I'll go back to what I said earlier; full year guidance remains the same.

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately 2 hours. Additionally, management's prepared remarks will be posted on our website following this call. Hasbro's second quarter earnings release is tentatively scheduled for Tuesday, July 23. Thank you.