Hasbro Inc (HAS) — Q2 2019 Earnings Call Transcript

Thank you, and good morning to 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. Before we begin, I would like to remind you that during this call in 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. These factors include those set forth in our Annual Report on Form 10-K, our most recent 10-Q, in 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 Hasbro team executed another good quarter, including revenue growth of 9% and operating profit gains of 47%. Revenues were up around our blueprint and across multiple regions, including growth in the U.S., Europe and Asia Pacific. Our commitment to creating the world's best play experiences through innovation and storytelling for our consumers, fans and audiences drove revenue gains of 6% and adjusted operating profit growth of 73% for the first six months of the year. Behind a retro release slate and continued strength in digital gaming, MAGIC: THE GATHERING delivered an outstanding quarter and first half of the year. The War of the Spark set was extremely well received by players across formats, driving robust quarterly growth in tabletop and digital. Player engagement expanded with the global increases in total unique players and new players. This in turn drove an incremental increase in MAGIC: THE GATHERING Arena games played with approximately 400 million played in the quarter and 1.1 billion since the game entered open beta in September of last year. In addition, the Modern Horizon set released during the second quarter exceeded expectations and contributed to higher tabletop revenues during the quarter. This release timing was earlier in 2019 versus last year, when a similar release occurred in the fourth quarter. Importantly, MAGIC's second quarter performance was driven by growing engagement and monetization of tabletop and arena and through special releases like Modern Horizons that are launched once per year, this year in the second quarter. The team also delivered initial shipments of the Core Set 2020 which launched on July 12th in store and on Arena, further contributing to the above planned second quarter. We're also investing to ensure the long-term success of MAGIC: THE GATHERING and Arena, with higher year-over-year spend to drive awareness and engagement and in support of an expanded event schedule. The team hosted a successful Mythic Championship played on Arena in June featuring 68 of the top MAGIC players who competed for a share of the $750,000 prize pool. Later this year, we are running several additional Mythic Championships for Arena and tabletop. We are also increasing our development investment in future digital games and expertise across multiple properties that will come to market over the next several years. This includes new games for MAGIC and for DUNGEONS & DRAGONS which also grew revenues this quarter. At retail, second quarter consumer takeaway was up mid-single-digits excluding Toys”R”Us. This in part reflected the shift of Easter into the second quarter, but we're also seeing overall positive point-of-sale trends. In the U.S. point-of-sale was up double-digits in the second quarter and up slightly through the first half. Global point-of-sale for the first half of the year declined mid-single digits primarily due to Europe. In Europe, POS has picked up in recent weeks, fueled by continued improvement in the underlying business, new initiatives such as NERF Fortnite and growth in Marvel and MONOPOLY. The U.S. team navigated a dynamic trade and inventory environment during the quarter. While no new material tariffs have been enacted on our products, we did incur incremental expenses to prepare for the potentiality of tariffs in the U.S. The team did an exhaustive amount of work and is extremely well prepared for what would be a very challenging and damaging impact if tariffs were implemented. Deb will speak in more detail about the implications. Importantly, following a challenging 2018, we are recapturing share across a broad range of retailers. E-commerce has accelerated substantially, with both omnichannel and pure-play retailers driving revenue and point-of-sale growth significantly above the rest of the business. Last week Hasbro brands delivered strong growth during Amazon's Prime Day event. In Amazon markets around the world, games PLAY-DOH and NERF were among the standout drivers. We're leveraging online and digital to engage directly with consumers, launching two new HasLab projects this month through Hasbro Pulse and delivering innovative new shopping and social media experiences across geographies. This past weekend at San Diego Comic-Con, we had a major show presence that we also shared with fans through social media live from the shelf floor with interviews, behind-the-scenes information, news around upcoming product and preorder launches. Fans could purchase limited edition products on site as well as through Hasbro Pulse and select retailers. Hasbro's investments in brand-driven storytelling uniquely positions us to monetize content to commerce experiences across online platforms. In addition to e-comm growth, new retailers for Hasbro entered the category or expanded their offering over the past year and we are supporting toys and games throughout the year. During the second quarter new channels including value, drug and grocery as well as fan retailers delivered higher revenues for Hasbro brands. Our overall retail inventory declined in the quarter as our mix of retailers and consumer purchasing behavior shift to channels, which carry less weeks of inventory. Omni-channel retailers are moving towards online e-comm best practices for their physical store businesses. Profitability and carrying lower inventories remains a top priority for our global retailers, and we anticipate this will be an increasingly important factor in their purchasing decisions. In Europe, our turnaround is well underway and we delivered growth in both revenue and profit in the quarter. Retail inventory is significantly improved and declined further. Despite ongoing economic uncertainty in the region, the team is successfully executing its plan and Europe revenues and profits are up over the first half of the year. With much of the year ahead of us, we continue to expect to stabilize revenues and improve profit for the full year 2019. Over the first half of the year global revenues increased for several Franchise Brands including PLAY-DOH, MONOPOLY and TRANSFORMERS. We also launched POWER RANGERS in North America with international markets to roll out through this year. Point of sale is up on these brands as well as for BABY ALIVE. NERF POS turned positive in the second quarter with the success of NERF Fortnite, which is now rolling out internationally and we have new NERF products hitting the market throughout the second half and in some geographies next year. Within our Partner Brand portfolio, Hasbro toys and games for Marvel's AVENGERS: END GAME and Spider-Man franchises along with innovation in Hasbro's preschool line of Marvel superhero adventurers and new MEGA MIGHTIES 10-inch figures delivered revenue growth in the quarter. As we look to the fourth quarter, retailers have strong plans for the October 4th launch of Hasbro product for both Frozen 2 and Star Wars: The Rise of Skywalker. Our team is ready for the most important quarters of the year. We are driving revenues around amazing innovation and storytelling and as this management team has done in the past, we're investing for future profitable growth. Following a strong first half, our view of the year has not changed and we believe we are well positioned to deliver profitable growth for the full year 2019.

Thank you, Brian, and good morning everyone. Our second quarter results reflect the outstanding execution of our entire global team, producing strong quarterly revenue and profit gains in a very dynamic environment. Revenue growth came from several brands, but was led by MAGIC: THE GATHERING. Given a robust release schedule, which was more heavily weighted to the first half of this year versus last and the positive momentum in the brand, we forecasted a strong first half for Magic and it came in ahead of our expectations. Magic's revenue growth was further supported by growth in other Franchise Brands, MONOPOLY and PLAY-DOH, the launch of POWER RANGERS and also Hasbro products from the MARVEL brand, notably in support of Avengers: End Game and Spider-Man: Far From Home. The quarter's higher revenues and favorable mix contributed to a 250 basis point increase in gross margin. Combined with our cost-saving activities and ongoing cost management, we delivered a 330 basis point increase in operating profit margin to 13%. During the quarter, we successfully settled our U.S. pension plan liability and recorded a pre-tax charge of $110.8 million within the other expense line. Due primarily to the performance of our investments prior to the settlement of this liability, this charge is less than the $140 million to $150 million estimate we provided at Toy Fair. The $0.11 per share we reported for the second quarter included a $0.68 per share charge for the pension settlement. Excluding the charge, adjusted EPS was $0.78 per share. After generating $741.5 million in operating cash flow over the trailing 12-month period, we ended the quarter with $1.2 billion in cash. Our inventory is in a good position, both in the quality and level of inventory, declining $45.5 million year-over-year. Within our segments, revenues in the U.S. and Canada segment increased 14%. Franchise Brand revenues increased, led by MAGIC: THE GATHERING along with PLAY-DOH, TRANSFORMERS and MONOPOLY. Partner Brands behind Marvel growth and Emerging Brands including the POWER RANGERS launch increased revenues, while Hasbro Gaming declined. Retail inventory at quarter end was down slightly and of good quality. As Brian spoke to, retailers are focused on running their business with less inventory than they've had in the past and we expect this will continue to influence retailers' buying decisions this holiday season. Operating profit for the segment increased 46% to $106.6 million. The increase was driven by revenue growth led by MAGIC: THE GATHERING and was only partially offset by higher intangible asset amortization expense associated with POWER RANGERS and higher warehousing expense. Warehousing expense included bringing more product into the country than planned, to position ourselves ahead of potential tariffs. As a result, our U.S. on-hand inventory also increased. As Brian mentioned, the team did a tremendous job this quarter assessing and acting on the potential implementation of tariffs. It is an extremely complex issue, with far-reaching implications within the business. While no tariffs on our products have been enacted in the U.S. at this point, I would like to review how this could impact the business, namely on the price of product, inventory, our tax rate, the cadence in revenues and manufacturing footprint. A tariff increases the price to bring our product into the country. This would be borne by the importer, which is primarily Hasbro. We would pass this increase on to the customer through higher prices on the tariffed items. We notified our retailers of this plan during the quarter. Given the status of tariff implementation, no price changes were enacted. Retailers have the option to take ownership of inventory in the U.S. or directly from our contract manufacturing location, known as direct import. In 2018, 35% of our U.S. and Canada revenues were delivered through direct import. Tariffs would essentially eliminate this program for items being produced in China. In fact, in the second quarter, some retailers briefly paused direct import orders, and all are watching it closely. As a result, we expect to see direct import orders decline as a percent of the total this year. While we can build other programs over time, in the near-term, Hasbro will be the primary importer. This increases shipping and warehousing costs and would impact the mix of income and expenses and ultimately our tax rate. This would also mean product ownership is passed to the retailer later, impacting the cadence of revenues between quarters. For example, in the fourth quarter, retailers place some direct import orders for first quarter on shelf dates. Instead, they would take this product in the U.S. during the first quarter itself. While this would level out over time, it would have an impact in the initial period on fourth quarter shipment. Finally, as we've discussed in the past, as part of our risk management program, we've been diversifying our manufacturing footprint for several years. During the quarter, we increased our resources invested in this program to accelerate our plans further and as a result, have taken on more costs. China will continue to be an important part of our global supply network. Last year, 67% of the products we sold in the U.S. came from China, and we believe we can get to approximately 50% by year-end 2020. We also sourced 20% of products sold in the U.S. from U.S. manufacturers. We've done the work and are prepared to address tariffs if they happen, but continue to believe they would be very disruptive to our business and consumers in the near term. Moving to the International segment. Revenues declined 1%, including a negative $20.1 million impact from foreign exchange. Excluding FX, revenues increased 5% in the segment behind growth in Europe and Asia Pacific. Latin America declined 1% excluding FX. Led by Europe, retail and on-hand inventories in this segment continue to decline. Revenues grew in Franchise Brands led by MAGIC: THE GATHERING and Emerging Brands behind POWER RANGERS. Partner Brand revenues were flat, but increased absent FX in the quarter with growth in Marvel. Hasbro Gaming revenues were down. The International segment increased operating profit to $14.6 million. The profit improvement resulted from favorable mix, driven by growth in MAGIC: THE GATHERING and our continued focus on cost management. Entertainment, Licensing and Digital segment revenues grew 28% to $96.5 million. Digital gaming, primarily Magic: The Gathering Arena and to a lesser extent, consumer product licensing drove the revenue growth. Operating profit in the segment declined to $7.9 million due to higher program production expense and increased investments in digital gaming marketing and future game development. As we have discussed, we continue investing in future gaming initiatives to drive long-term profitable revenue growth, particularly in our MAGIC: THE GATHERING and DUNGEONS & DRAGONS brands. We anticipate full year program production amortization to be in the range of 1% to 1.5% of total company revenue, down from the first half rate of 1.8%. Looking at the balance of the year for the segment, I'd remind you, we signed a multi-year digital streaming agreement for Hasbro television programming during the third quarter of 2018. Also, Arena entered open beta in September 2018 and we recorded our first meaningful revenues for the game in the fourth quarter of last year. Overall, Hasbro operating profit improved to $128.3 million or 13% of revenue. Higher revenues and the improved gross margin I spoke to earlier contributed to this improvement, along with the favorable impact of our cost-saving activity and a continued focus on cost management. This improvement was partially offset by factors I have already discussed, most notably investments in digital gaming, higher program production expense, and higher intangible asset amortization. Turning to our results below operating profit, other expense of $100.2 million includes the $110.8 million pretax charge for settling our U.S. pension plan liability. Excluding this charge, other income was $10.6 million and increased primarily due to foreign currency transaction gains this year versus loss last year. Our underlying tax rate for the quarter was 18.3% versus 17.4% last year. We believe the full year tax rate will trend to the middle to high end of our guided 17.5% to 19% range and could potentially go slightly above the high end due to our own response to potential tariffs. Our financial strength is evident in our strong balance sheet and cash flow including quarter end cash position of $1.2 billion, lower inventory, and DSOs flat to last year at 74 days. Brian and I have spoken today about the timing of revenues and expenses as we enter our largest revenue and profit quarters of the year. We recognize that our retailers are focused on increasing profit and carrying lower inventory levels, while driving their point-of-sale. We know and have communicated that we are investing and managing incremental expenses both planned and unplanned as discussed that we will be absorbing. This also includes higher planned incentive compensation given our outlook for this year versus a year ago. That being said, we continue to expect to return to profitable growth in 2019. Our teams have executed an excellent start to the year and we are excited to deliver on the many amazing brands and entertainment initiatives coming this holiday season, while continuing to invest for future growth. We will now open the call for questions.

Yes, couple of questions. First, Deb, I mean, you talked about last year in the third quarter you had, I believe it was your Netflix deal. Wondered if you could talk a little bit more about what's incremental and for new product shipments in 3Q this year versus 3Q last year?

Sure. Well, I'll talk a little bit about the streaming deal that we did last year, which is, as you recall, we just point out because of just from comparative issues, if we think about entertainment licensing in the third quarter of last year because we had delivered full season and live our content at the time of revenue recognition, it made a little bit of a bump that quarter, so that's why we really pointed it out. And of course, as we look to the fall or the third and fourth quarter, we have amazing product offerings in a lot of our new brands that we've talked about. And I know Brian can elaborate on some of those like some of the products we have coming out. And then in the fourth quarter, we're very excited for all the entertainment-driven initiatives in FROZEN and in STAR WARS in the fourth quarter. So we're really excited about the back half of the year. We just wanted to make sure we pointed out some of these little quirky things that would impact the comparability of our quarter's year-on-year.

Yeah. One of the more notable brands that's rolling out throughout the year, new innovation as the headline and digital engagement is certainly NERF. We saw the NERF POS go up in Q2. A few markets have the new NERF Fortnite product like the U.S. and a couple of countries around the world. But it's really expanding right now, so Q3 is where it takes hold in major markets around the world. We'll have more than 20 new NERF Fortnite items rolling out in new innovation also for elite, zombie, rival and mega. We also have this new high-performance value-oriented product that launches in the very near term, so that's third quarter. This is for the value shopper that really is looking for the NERF performance. We know the kids and young people really want to play with NERF. And we want to give them the opportunity to experience our kind of innovation and performance for that under $20 price point. So we certainly expect further NERF momentum in the second half with many of these new initiatives. You'll also see some new protectable innovation coming later this year. We've seen great momentum year-to-date and TRANSFORMERS is up, we have new initiatives in the fall there, and BABY ALIVE, our gaming initiatives. PLAY-DOH is up. And then as Deb said, we get into the fourth quarter and we add to that several new initiatives most notably Frozen 2 and Star Wars both are set on October the 4th and shelves around the world. But we also have a number of big new initiatives from MAGIC in the second half of the year. We'll have at least two more mythic championships for both arena and for tabletop this year, and they'll both occur in the third and then the fourth quarter. A number of new game releases and announcements coming, as well as continued momentum we believe for DUNGEONS & DRAGONS, so really a strong lineup as we hit third and fourth quarter.

Great. And then just as a follow-up Deb. So you had a significant increase in your programming cost amortization in 2Q, $23 million very sizable number, was there any big deliveries from that? Was that a function of Bumblebee movie profits and expensing associated with that?

Sure. Well, what you're seeing in the quarter is that some incremental expense associated with production content and primarily with Bumblebee. But our full year expectation on that line is up slightly from last year. But we are expecting the full year to be about 1% to 1.5% of company revenues. We actually anticipate our revenue share from film and home entertainment to begin in the second half of this year. And if you recall, we had thought, based on earlier estimates we received, it wouldn't come until very late in the year or in 2020. So we've already recorded meaningful revenue and profit from the merchandise and toys and games and Consumer Products and digital gaming associated with the film. And now, we'll start to see the revenue and the amortization. So we're very happy with the financial return on our investment. But also, more importantly, the longer-term benefits this film has brought to reset the franchise and all of its storytelling going forward.

Good morning. This is Ashley on for Steph. Thanks for taking our questions and congrats on the quarter. I think you guys hit almost all of our questions. But just on China.

Good morning.

Good morning. Just on China production exposure, what percent of U.S. goods are produced in China now? And what could it be by year-end?

Yes. We had said that, in China, right now, coming to the U.S. is just under two-thirds. We think by year-end 2020, it could be around 50%. And recall that 20% of our production for the U.S. takes place in the U.S. We use all third-party manufacturers. We're increasingly spreading our footprint and adding new geographies for production globally. That includes new production in India and Vietnam. So we feel very good about where we're going. And having said all that, we also want to reaffirm that China continues to be a high-quality, low-cost place to make toys and games and it will continue to be part of our global network in a major way.

All right. Thanks so much and congrats again on the quarter.

Thank you.

Hi. Good morning. Thank you very much for the question.

Good morning.

I just have one on MAGIC. Based on what we know about the total gaming growth and the E&L growth in the quarter, it seems like tabletop was a larger contributor to MAGIC. Is that the right way to think about it? And then, could you talk a little bit about whether War of the Spark or Modern Horizons was a bigger contributor to growth? I'm kind of surprised, you guys called out Modern Horizons as a big contributor, but I'm just trying to think about future momentum here? Thank you very much.

Overall, the MAGIC: THE GATHERING franchise experienced significant growth. The largest games this quarter came from tabletop. However, Arena also contributed to our second-highest growth for the quarter. We observed that in-store player growth increased by 12% year-over-year in terms of total unique players, and there was an 11% year-over-year increase in new player growth following the War of the Spark release, which was influenced by storytelling and gameplay. This is the culmination of a five-year story arc that integrates our Planeswalkers, driven by quality storytelling and animated trailers, alongside gameplay and social interactions. The Arena gameplay connects directly with this narrative, aligning their progress. MAGIC is currently available in 11 languages, most of which saw demand exceed our expectations, leading to additional reprints. The Modern Horizons set was released this quarter, receiving an excellent response, comparable to the set we launched in the previous fourth quarter. It's worth noting how storytelling unfolds at various moments throughout the year for MAGIC, and this set particularly resonated with our fans, making it an exciting release. We're witnessing genuine momentum and engagement in monetization with Magic: The Gathering Arena, and we continue to make progress there. Our Mythic Championships are ongoing, and late in the quarter, we began shipping the core set 2020, which will extend into Q3. We have numerous updates planned for the latter half of the year, including the official launch of Arena, anticipated in the next four months. I mentioned that we plan to hold additional Mythic Championships for both Arena and tabletop towards year-end. It's encouraging to see that our Mythic Championship III in June attracted 1.4 million viewer hours, making it the second most-watched property globally on Twitch, surpassing the earlier Mythic Championship this year. We're observing positive trends across all key performance indicators for MAGIC and Magic Arena, while also recognizing the success of the tabletop business.

Great. Thank you very much. And if I could just have a quick follow-up, what do you expect to be the key changes for Arena once it leaves open beta and goes into the official launch? Is it more marketing? More content? I just love to hear your plans there. Thank you.

Yeah. Well, they're continuing to offer new elements within the feature set and constantly updating the feature set based on player feedback. We really love hearing from our players. You're going to see more competition. We've got more of the esports elements that are beginning. You certainly will see, and we've talked about the discrete marketing that will hit the P&L during the time of the launch. And really, the way I'd look at it and illustrate the point is that right now the people that were engaged in MAGIC are aware of Magic Arena. And yet over the history of MAGIC to date, there have been 38 million players and not all of those players are currently playing. There’s a lot of latent and lapsed users and they need to be told about and marketed to, so that they are aware of the ability to go play Arena, go play MAGIC online and play that with their friends and neighbors all around the world. That's really an exciting element and I think that's going to be one of the biggest shifts you'll see as we go forward, the opportunity to ignite new fan engagement and latent and lapsed user player engagement.

Great. Thank you very much, Brian.

Hi, thank you very much, it was a great quarter. I have a question about your initial investment schedule for Arena for the second half of the year and into 2020. What parts of those marketing expenses will decrease going into next year? It appears that investments in Arena increased in Q2 compared to Q1. I would like to understand how that will flow through in the latter half of the year and your outlook for 2020.

Yeah. So Deb can comment on some of the key points on the P&L where Arena development, game development, game marketing hit, because they hit a couple of different points on the P&L. But I think the way to look at it is, we will see increased spend in marketing and esports engagement in Arena as we go to launch. And remember, that Arena as well as many of our new digital games that are coming as part of our new suite of games that we'll launch for MAGIC and then for D&D should be thought of as games as a service. So, it's ongoing, they're constantly being updated, new feature sets are being offered, new content is being offered, new adventures, new ways to play. So, we do expect to the point that our operating margin in eL&D will be superior to the rest of the company's average operating profit margin and in some instances by a long measure. We certainly see that in our Entertainment and Licensing area and we see that in Consumer Products as superior margins as well as with the Wizards of the Coast brands, our gaming business overall. So, that you will continue to see that we can create that higher operating margin and it will be that way. However, we are also spending at a higher level.

Right. So, you may see that margin be a bit lower on a percentage standpoint, but still as Brian said, superior to the rest of the company. And that's really due to the amortization, right? You think about the capitalization of the product and in launch, you've got amortization of it, some of which you see in product development, some of which you see in admin line, as well as the marketing we've talked about for the launch. And in addition to that, we're investing in future gaming. So, most importantly, as you know us right, we don't like to sit on our laurels, we're thinking multi-years out. And to create that future profitable growth for the business in the gaming side of the business, we are investing in that longer term larger game play. We've seen success in Arena in what we've done to date and we'd like to make sure that that success continues with other games and in other formats as well as we go forward. So, you'll see a bit of that in product development admin as well as the marketing.

Yes. We continue to see the opportunity to double the size of the Wizards of the Coast brands as we've done over the last five years, over the next five years, but we're really seeing digital take hold and our game players and gamers around the world are really enjoying the games we're offering.

Great. Thank you. That's really helpful. And then regarding ForEx, so I know there's nothing concrete yet in that regard, but given elevated risk, could you talk about the expense to which toymakers could pass on those costs given some retail price points that can't really change like $9.99 and $19.99 at retail? I guess what type of assistance do you expect to get from retailers?

That's a really good question, Arpiné. As you examine the situation, there are specific price points that, once exceeded, begin to affect the demand for the product. Our focus has always been on innovation and providing value in products that consumers are willing to purchase. However, if tariffs come into effect, consumers will ultimately experience the price pressure. While we often discuss reengineering products and reducing costs or shifting manufacturing to different regions, this process takes time. Depending on when tariffs are introduced, we may be able to pass those price increases onto our retailers, but we anticipate that retailers will also want to maintain their margins. Consequently, this would lead to increased prices for consumers.

Hi. Thank you. Deb can we just stay on this tariff topic for a moment and all the color that you gave us was really helpful. Just to be clear though regarding the direct orders and what's currently happening at retail regardless of the fact that there are currently no tariffs on toys, should we expect to see any impact this year in the fourth quarter with the direct orders? Or were you just giving us hypotheticals?

I think that if tariffs were to come into play, our expectation is we would see an impact. Right now, it's early. I mean, honestly, we've seen some of our retailers changed their ordering patterns. But it's early in the year, and we're really excited. We have so many great initiatives coming toward the end of this year. And we – as we – Brian and I have talked about we expect those to continue into 2020. So as we think about spring sets and reorders and things like that, I think a lot of it is dependent on what we'll actually see. But if tariffs were to come into play, we would expect an impact in the fourth quarter.

Okay. So it's more of a conditional, but you're not expecting anything yet?

Right.

Okay. And then just on the – moving on to the gross margins. Your gross margins were significantly better than we expected. And I'm just wondering were there any one-time items in there? Or is just the upside, the function of the better-than-expected revenues versus what the Street was expecting? I'm just wondering, again, if there was one-time items or perhaps increased in digital is changing the complexion of gross margins?

A bit, what really is impacting it is product mix and we talked about higher – even MAGIC: THE GATHERING performing higher than our expectations. So what you're really seeing is the impact of mix from entertainment, licensing and digital as well as the strong performance of Magic tabletop and we've talked about gaming tends to have higher margins overall for our business. And it was just the strength of the quarter.

Okay. So given what you know today and given kind of how you talked about your expectations at Toy Fair in terms of your overall margin, should we think about that differently?

No. I think from a expectation standpoint, I mean, we still expect full year profitable growth and we talked about that in our prepared remarks and we still expect that dependent on mix toward the end of the year. And whether we had tariffs or not that could impact our gross margin, but our beliefs are still the same.

Well, look I think the underlying growth and engagement in Magic Arena is really substantial. Having said that, there is that quarterly compare, it's Q4 2018 versus the second quarter this year and that's why we highlighted modern horizons. Look overall, Magic has been on a growth trajectory. We expect over time it compounds and continues to grow. It's part of our plan in expanding the reach and engagement of our Wizards of the Coast brands. I don't want to – really want to comment and forecast Magic Q-for-Q. But I would say that, overall we're very happy with the progress on MAGIC: THE GATHERING and it certainly is set up well for its launch later this year.

Thanks, Deb. Regarding your buyback, considering the strength of the stock, do you still intend to repurchase between $100 million and $150 million this year?

Yes. Well, as you know, we've always said we're opportunistic with our repurchases, just based on market conditions and other factors. So our level will fluctuate from quarter-to-quarter, but our expectation is still that we'll repurchase $100 million to $150 million this year.

Okay, great. Thank you so much.

Thanks.

Thank you. I would like to follow up on Felicia's question. Deb, could you remind us about the timing differences between Q3 and Q4 this year compared to last year? Additionally, regarding the warehousing expenses you mentioned and the timing of some revenues, has the timing between Q3 and Q4 changed? It seems you hinted at that earlier.

Yes. In terms of timing, we don't anticipate any comparable item this year related to the sale of our streaming content that occurred last year in the third quarter, as that was a multiyear deal we execute every few years. Additionally, as Brian mentioned regarding MAGIC, the timing of releases also plays a significant role for us this quarter. As long as tariffs do not come into effect, we are hopeful that there won't be any impact. This situation primarily concerns the timing between the fourth and first quarters, particularly regarding domestic shipping versus direct import and when retailers take ownership. Other than that, we don't foresee any significant changes. From an expense perspective, we are beginning to amortize the film as we expect revenue from BUMBLEBEE, projecting between 1% and 1.5% of revenue on program production and amortization. Product development will also continue regarding our upcoming gaming initiative in this quarter.

Yes. In the fourth quarter, we are very excited about October 4th, which is Triple Force Friday. We will support all aspects of the Star Wars program and launch. We have a fantastic range of new Star Wars products to support the film, the Fallen Order video game, and The Mandalorian, which starts on Disney Plus. Over the past weekend at Comic-Con, we saw strong sales of collector-focused and fan-oriented products through Hasbro Pulse and directly from Comic-Con. Star Wars items are consistently top sellers, and our fans really appreciate them. Our team excels at bringing innovation to these products. Year-to-date, in the second quarter, we're pleased to report that our new initiatives for our entire fashion doll lineup, particularly with our Disney brands like Princess and FROZEN, are performing well in the U.S. This momentum is driven by new product innovation, the support of Aladdin, and the comfy Princess segment we previously discussed, which presents our Princesses in a modern light. We're also very eager about Frozen 2, which will launch in the fourth quarter. Clearly, the fourth quarter will benefit from all these Disney initiatives, and we believe that 2020 will see a significant boost from them. We've observed Marvel's positive impact on our performance this quarter and year-to-date, and I think we've highlighted the key factors related to timing.

Okay. So the timing of MAGIC this year being skewed to the first half is one of the major differences and the other things that you just described?

Well, I think that certainly in tabletop, people had asked historically would tabletop be impacted negatively by Arena, and the answer is emphatically no. In fact, tabletop has probably shown more momentum as a result of all the engagement around Arena, around the tournament play and esports and the viewership on Twitch, and so the compare of Q2 this year being even bigger than Q4 last year and Modern Horizons, we just wanted to point that out. We certainly have seen the growth of MAGIC over time and MAGIC: THE GATHERING has doubled in size over the last number of years. We expect MAGIC and the Wizards of the Coast brands to continue to grow toward doubling and we said we could double those brands over time. D&D, DUNGEONS & DRAGONS we haven't even spoken about, but it was up in the quarter. It's showing some great momentum and we expect to talk more about digital gaming in that brand as well its coming. For both brands, we're also engaged in a lot of storytelling. You saw some of the announcements around the MAGIC: THE GATHERING animated series; it's coming to Netflix, headlined by the Russo brothers who are amazing creative stewards for that brand and working with our team at Wizards of the Coast and our studios team. And so we're very excited about activating storytelling across all forms and formats for those brands.

And then lastly if I may, the emerging markets, any comments or expectations in changes in LatAm? And then any comment on China in particular? And then any color on POWER RANGERS contribution during the quarter? Thank you.

Sure. Yeah. China was up a bit in the quarter. And if you take out ForEx, our emerging markets year-to-date are about flat up a little. We expect to continue to get back in momentum. If you take Latin America year-to-date, it's flat to up a bit. And again, we made a few on-the-ground changes in Mexico in supply chain that caused some timing shifts, but I don't see anything there that are long-term challenges to the region. The team has done a very good job there. And we have a lot of new initiatives that will hit in Latin America as well as in China. And so, we feel good about that. You had a second part of your question. POWER RANGERS. Thank you. Yeah. So on POWER RANGERS, it's really very early days. We've launched in North America. We've seen just a bit of revenue, literally just a bit of revenue in Europe. So it rolls out throughout the rest of the year. So, it's not a major contributor yet, although the early signs are quite positive. The ratings are top-ratings in its time period. Our partners broadcast or linear cable channels like Nickelodeon, we're seeing great engagement online. Our fans really love our new fan-oriented lightning collection. And again, early days, whether its consumer products, digital gaming, our toys and games or the show itself all signs are positive for POWER RANGERS.

Okay. Thank you and very good quarter.

Okay. Thanks, Tim.

Great. Thanks for taking my question. The retailers want less inventory comment. Is that a mix of retailer’s year-over-year or versus maybe even 2017 and prior changing with Toys“R”Us? Or is that more on a like-for-like basis? And then if it's more on a like-for-like basis, I guess, my question would be, why wouldn't retailers new to the toy category or growing in the toy category due to the lack of Toys“R”Us last year want to build deeper inventories now that they know what their customers want and better understand what products their customers want? Thanks.

Yes. So, it is a multi-variable sort of answer. You're right that we have new retailers as part of our expanded channel strategy and expanded channel footprint who are taking more inventory and are building inventory. You saw in the U.S., our inventories are up single-digits in the quarter partly around the potentiality of tariffs and partly around the sales of our brands. What we're really talking about are online retailers and omnichannel retailers who have the benefit of seeing the momentum and the major step-up we saw this past quarter in online sales trying to replicate the best practice they're taking from their online or omnichannel businesses and pairing weak supply and seeing what the opportunities are to continue to hone their inventories and to optimize inventories around maximizing sales. And so they do expect to continue to grow in sales. They do want us to continue to provide our top-selling brands and franchises. They want to make sure that they are well positioned for major launches around our story-led brands and our partner story-led brands. We're just commenting on the fact that overall they are operating with less weak supply in an omni or online world and with the goal or target to be more like that in their brick-and-mortar businesses.

Got it. And do you think that that initiative from retailers where they're in some cases even testing some products online and then bringing that to retail if they are really successful is a long-term benefit for you guys? Or something that's a bit of a challenge? I'd love to know if there's any longer term thoughts on what that means for your business?

Yes. No, look we really like our direct-to-consumer initiatives and direct-through-retailer initiatives that we're undertaking. We rebranded and relaunched our Hasbro toy shop to really focus on what we call Hasbro Pulse now, our fan-oriented content-to-commerce site. Our fans are really enjoying it, because they get to get unique content and unique products. We're also working with retailers in a similar fashion in a direct way. So, that not every product we launch is a mega volume product. It may be around a specific audience that's able to find that product now in a manner that they couldn't have found it before. In the second quarter, if I look at online sales momentum, which has, as I said, stepped up appreciably versus any percent gains we've seen in the past, we go from strength-to-strength where people are able to find our new NERF Fortnite products whether they can find them at retail, new DISNEY PRINCESS offerings, new PLAY-DOH offerings, new gaming offerings. So, whether or not people are able to find those products at their local stores, they're able to find those products associated with the digital engagement, social engagement, content engagement, or story-led engagement that they are experiencing in other venues and able to bring that play home, which we think is very good for our business. And we think we uniquely differentiated ourselves through our strategy and our execution.

Great. Thanks so much again.

Hi. Good morning. I just have one quick question on Europe. It seems to have sequentially stabilized. And I'm curious if there is – if that's just because we are lapping some of the noise around Toys“R”Us in Europe, or if there are some other factor you guys are seeing? And any commentary you have on consumer behavior in the region would be helpful? Thanks.

Sure. Well, in Europe revenues were up 1% or 6% absent FX. Inventories are down. Retail inventories are down by about a third across Europe. Our channel strategy both omni-channel and online channel strategy capabilities are really taking hold. And it really speaks to a new array of top or leading retailers for the region, ones that we haven't really had as top retailers prior including Amazon and Smith, that's EMEA in Russia. We're seeing good POS gains across many major markets. The one market where POS is a bit down and is hampering overall European POS is still the U.K.. We're really seeing growth in major Franchise Brands including BABY ALIVE, MONOPOLY and MAGIC: THE GATHERING really good progress on PLAY-DOH. The NERF Fortnite as I mentioned earlier that product is just beginning to have a presence in the region. Only a few markets have seen some inventory. And so we expect that to help continue to build momentum. The MARVEL franchises have made a really good contribution to growth. POWER RANGERS is just beginning to roll out in those markets. And year-to-date TRANSFORMERS is up and set for a really good 2019. Year-to-date Hasbro gaming is up in the region. DUNGEONS & DRAGONS is up and Magic is up – MAGIC: THE GATHERING is up. We also saw that Playskool and FurReal contributed. So overall, we feel good about where we are and what we've said before about Europe, which is we intend to stabilize the region in the area of revenues and we expect an improvement in profitability and that's what we saw in Q2. That's what you've seen thus far year-to-date and we feel we're set up well for the second half.

Okay. Thanks. Hey, guy. Good morning. Brian, I think you mentioned that POS has picked up recently for NERF. Can you update us on your expectations for the brand in 2019? Your prior commentary suggests the declines would moderate versus last year. I'm just wondering if there's any change there. And then separately, there are a couple of new SVOD services rolling out. Is there an opportunity for Hasbro to sell content to these platforms? Are you guys locked in with exclusives with your current partners? Thanks.

Yeah. So – on the SVOD front, we have about 50 different SVOD details globally. We are creating all kinds of new media windows for our new content launches whether it's on a linear channel like Cartoon Network, and then going online or streamed with another provider in a unique way or window ensuring that we also have YouTube content where appropriate in shorter form. And so we have some limitations as it relates to our linear joint venture with Discovery Family. But we also have opportunities for a lot of our content across any number of SVOD platforms, and we're really taking advantage of that. Plus, we have a number of new brands that are in development and new initiatives around brands that we're very excited about like our TRANSFORMERS fan-oriented content set for next year with Netflix, War for Cybertron Trilogy. So there are lots of ways to look at new media models and I think the team is exploring them and has done a really good job of bringing our brands to life in content and stream and linear platforms around the world. For NERF, I had mentioned that POS was up in Q2. Really, we've only seen the new NERF Fortnite product in a few markets. But where it has taken hold, like in the U.S., it's really shown tremendous momentum. And so, we do believe the new NERF Fortnite innovation, as well as our Alpha Strike innovation that's coming shortly and also new proprietary innovation, just sort of signals the next era of new product innovation and digital engagement for the brand. So our feeling about the brand earlier in the year, that if we could get these elements to work for us, as we have, the teams' done a very good job in marketing them. The feedback from fans has been tremendous. And yet, we've not yet rolled NERF Fortnite out to many markets around the world. We continue to believe that NERF will regain momentum and also revenues and sales throughout 2019.

Got it. Okay. Thanks, guys.

Hey, good morning. I have one balance sheet…

Good morning.

Hi. One balance sheet and two MAGIC questions. First on the balance sheet, you mentioned U.S. inventory higher to mitigate tariffs, as well as more domestic fulfillment. You have a couple of big 3Q programs, channel for Frozen 2 and Star Wars. So why is your inventory down 7.5%?

The focus is primarily on Europe and our international markets. A portion of the situation is related to foreign exchange, which we've not discussed in detail. There has been a notable negative impact from foreign exchange, which also decreased the balance sheet by the end of the quarter. However, the most significant drop observed in our overall held inventory, along with our retail inventory, is occurring in Europe. Additionally, our inventory in Latin America has also seen a considerable decline.

Okay. Good. Thank you. And on MAGIC. Can you tell us how much the early release of the MAGIC sets impacted the second quarter?

The early release is not the issue; it's just related to the timing of various story-led card releases. I mentioned that tabletop saw the largest gain this quarter, and digital was our second-highest growth area. We experienced a 12% increase in year-over-year in-store player growth for total unique players and an 11% increase in new player growth, driven by the War of the Spark release, which is influenced by storytelling and gameplay. This is part of a five-year story arc featuring our Planeswalkers, driven by storytelling and high-quality animated trailers, gameplay, and social factors. Additionally, MAGIC is available in 11 languages, with most experiencing demand above our plans, prompting us to proceed with reprints. The Modern Horizons set shipped this quarter and received an outstanding response, comparable to a set we released last fourth quarter. Storytelling plays a significant role at various points throughout the year for MAGIC, and this set resonated well with our fans, making it a very exciting release. We're seeing strong engagement and monetization momentum with Magic: The Gathering Arena. Our Mythic Championships are ongoing, and the core set 2020 began shipping late in the quarter, which will extend into Q3. We have many new developments lined up for the latter half of the year, including the official launch of Arena expected in the next four months. We also plan to host more Mythic Championships for both Arena and tabletop toward the year's end. Notably, our Mythic Championship III in June achieved 1.4 million viewer hours, ranking as the number two property globally on Twitch, surpassing earlier championship events this year. Overall, we're witnessing positive trends in all key performance indicators for MAGIC and Magic Arena, and we want to emphasize the success of the tabletop business as well.

Okay. And then, you did comment to the footnotes that Wizards of the Coast digital gaming revenue was about $11 million in 2Q 2018. So how did 2Q 2019 compare to that?

Well, as you know, it's now reported inside of entertainment licensing and digital. So while we also saw games in Consumer Products and some other areas like digital gaming, not related to Wizards gaming, it's in those numbers.

Right. We also mentioned that we didn't see the first significant revenue from Arena until the fourth quarter of 2018.

So that will be the first comp.

Right.

All right. Thank you, guys.

Thank you.

Thank you, Rob, and thank you everyone for joining the call today. The replay will be available on our website in approximately two hours. Management prepared remarks will also be posted on our website following this call. Our third quarter earnings release is tentatively scheduled for Tuesday, October 22nd. Thank you.