Hasbro Inc (HAS) — Q1 2020 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 an update on the company’s response to the COVID-19 pandemic. 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 I 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. These statements include, among others the impact of the coronavirus on our business, financial results and liquidity; our efforts to protect the health and well-being of our workforce, customers, consumers, manufacturers and suppliers; our efforts to ensure we have adequate liquidity; and our initiatives to support our communities, including our global workforce, children and their families during these difficult times. 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. Every day I'm inspired by the inventiveness and creativity of the global Hasbro team. We are finding new ingenious ways to get product from production into cars and homes, safely and efficiently. They're finding new ways to create and deliver content as this year continues to evolve. Our people are supporting each other from our homes around the world. They're adapting to an ever-changing environment as they work tirelessly to minimize the impacts of COVID-19 on our business and our people. We are focused on four critical areas. First, demand. Consumers want our products and experiences. They are looking for connections and engagement during this time. We're leveraging our extensive product portfolio and diverse retail network to connect global consumers with the products and experiences they want. We're offering compelling storytelling that continues to create strong viewership globally. Second, supply. The Hasbro team is working to utilize our diverse manufacturing and supply chain network to ensure product is available for customers and consumers. Third, liquidity. We have substantial liquidity and we are taking prudent steps to ensure Hasbro remains in a strong financial position by aligning expenses to today's environment and preserving cash, while paying our dividend, meeting our debt commitments and making essential investments for the long term. And finally, community. This is a top priority. We're making decisions to protect our employees and stakeholders, but also help where we can through this challenging time. I am so proud of the amazing work our teams have accomplished including supplying much-needed PPE for frontline medical workers by producing 50,000 face shields per week that will be donated to local hospitals in Massachusetts and Rhode Island. The Wizards team in Renton is supporting Wizards Play Network member stores through its Mystery Booster creative and several productions donated PPE to frontline workers at Toronto General Hospital, UCLA and others. These are just a few examples of our commitment to our communities. Our release today laid out extensive details in each of these areas. So my comments will focus on a few key topics. The Hasbro management team has been together for more than a decade. We’ve recently added new expertise and experience. Together, we are managing this new challenge, a challenge we are well equipped to successfully navigate. Over the past several years, we’ve invested to diversify our revenue and talent across play and entertainment, expanding our brand portfolio to reach more demographics and play patterns, while building new businesses in entertainment and digital gaming. We realigned our commercial efforts to reach more consumers and built best-in-class online and omnichannel execution, as well as new channels such as drug, grocery dollar, and value. These are strengths unique to Hasbro. Our first-quarter results were good, reflecting strong consumer demand and our ability to get product to customers and consumers. Global point-of-sale increased in the mid-single digits, led by double-digit gains in the U.S. E-commerce point-of-sale increased significantly, as shoppers turned to online and curbside pickup that meet their needs. While point-of-sale is positive in April, continuing these positive trends will likely become increasingly difficult, as more countries are practicing social distancing, including limiting production of product and entertainment, distribution activities, and shopping. We are leveraging our global sourcing network to get product made and delivered to consumers, but we expect the second quarter may be more challenging than the first. This is due to several factors, including that laid in the first quarter and the start of the second quarter, more stores in countries have shut down activities, entertainment properties where we are launching products that moved to later release dates in 2020 and into 2021. And some have gone straight to PVOD, and our own live-action in TV and film entertainment production is limited. We have done extensive scenario planning to understand these impacts to our business from multiple different periods, when the consumer economies could reopen. We are acting nimbly and creatively to address these factors throughout the business. Across our portfolio, we have innovative product and compelling entertainment to deliver a good second half of the year, including for the holiday. 2021 is also set up well, given the shift of several entertainment initiatives to next year, in addition to our established plans for the year. In the first quarter, consumers sought out several Hasbro brands and experiences. Games, PLAY-DOH, and content viewership were amongst the strongest. Face-to-face gaming demand stood out in many Hasbro Gaming brands. Demand is robust, and we are working to continue meeting consumer purchase interest, with games production from multiple locations, some of which have been closed in recent weeks, but we expect to reopen in the summer. First-quarter results for MAGIC: THE GATHERING were above trend, behind strong releases, but also due to steps we took. We adopted the physical release cadence of Ikoria: Lair of Behemoths, including pulling product shipments into the first quarter to support a rolling release plan with a global launch currently scheduled for most of the world on May 15th. The team canceled physical events and developed new initiatives to keep our organized play engines operational by transitioning to digital play arena with Friday Night Magic at Home and MagicFest Online. Despite a decline in organized in-person play events, this pivot drove an increase in new players across the brand. Upcoming expansions into Mobile, China, and Mac in 2020 will continue to expand the Arena audience. We are supporting Wizards Play Network stores through innovative programs to create revenue opportunities for the store owners in the absence of players physically in them. Importantly, this was our first quarter with eOne as part of Hasbro. Integration between Hasbro and eOne is on schedule, and the teams are actively engaged together, allowing us to create and uncover new revenue opportunities through entertainment and merchandise. We expect to deliver synergies in line with our plan for 2020 and are on track to deliver the $130 million in synergies we communicated by year-end 2022. We’ve transitioned eOne to lead our company-wide entertainment content efforts, and we’ve integrated the creative teams, including development on potential Hasbro brands for television and film. eOne’s first-quarter TV and film results reflected a difficult comparison to the first quarter of last year, when they delivered a high volume of programming. Revenue is tied to production deliveries, and these will vary in timing each year. In 2020, this was slated to be later and is being pushed further, as production activities have closed and the deliveries have been delayed. The team can do development work and virtual pitches, as well as animation production. Delivery of programs will happen just later than initially planned. First-quarter licensing revenues for PEPPA PIG, PJ MASKS include holiday 2019 sales. Strong demand for content across all platforms was offset by lower licensee shipments to retailers. PEPPA PIG is now the most viewed preschool show in the world on the YouTube platform and PJ MASKS is one of the most streamed children shows on Netflix in the UK and U.S. We have aligned the consumer products efforts for these brands, along with RICKY ZOOM, under Hasbro’s consumer products team and are identifying opportunities for expansion. However, certain consumer products categories, in particular, soft goods like apparel, are showing weakness within the industry, and we expect this will be a challenging period for license categories. Our teams have reacted creatively and constructively to identify a successful path forward during this unprecedented global pandemic. The underlying drivers for our business are sound, and with great innovation, brands, and storytelling, we are well positioned to successfully execute in 2020 and beyond. The North Star of our company has not changed. Hasbro is creating play and entertainment experiences which are vital and desired by consumers and audiences this year and for years to come, delivering value for our stakeholders. I will now turn the call over to Deb. Deb?

Thank you, Brian, and good morning everyone. Hasbro is in a good financial position. Consumers and audiences are engaging with our brands and content. We are profitable. We have substantial liquidity, and we continue to take the necessary steps to align our expenses and cash spend with the current environment. We completed the eOne acquisition in early fiscal 2020 and performed our first quarter close as a combined company remotely. Globally, our combined finance and accounting team did outstanding work, and we provided 2019 quarterly historical results in accordance with U.S. GAAP for eOne in today’s earnings release. We have booked opening amounts, and as we complete our valuations in purchase accounting over the coming year, there may be further items impacting our results, which we will highlight as we progress through 2020. We continue to target synergies of $130 million by year-end 2022. We slowed the pace of certain activities early in the year to reflect the current environment, but we remain on track to achieve the targets we have set, including 2020 cost savings of approximately $20 million before one-time expenses. My discussion today will be versus pro forma adjusted 2019 earnings, and exclude eOne acquisition-related expenses and amortization. In our reported numbers, we reflected $147 million after tax of one-time expenses and acquisition amortization or an impact of $1.07 per share. As Brian highlighted, our organization is focused on four things. I’ll start with our top priority, community. Our teams around the world have showcased tremendous ingenuity and resilience during 2020. Their health, safety, and well-being guide our every decision. I’d like to reiterate what Brian said, I am tremendously proud of the work our teams are doing to support not only each other but the communities in which we’re operating. It’s a testament to their belief in our purpose of making the world a better place for children and their families. Moving to liquidity, we ended the quarter with $1.2 billion in cash on the balance sheet. We have $1.5 billion available through our revolving credit facility and are well within our financial covenants. As a reminder, our low cash period traditionally occurs in the fourth quarter, in the October and November timeframe. We have significant cash and liquidity and have also identified opportunities to reduce our expenses and our cash spend. These include, pausing planned headcount additions and broad-scale merit increases, reducing future travel expenses, and moving planned live events to virtual. These are just a few of the actions we are taking. Our next major debt maturity of $300 million is due in May of 2021. The Board remains committed to our dividend, and in February, we paid the first dividend of the year, with the next payment already declared for May. As Brian discussed, entertainment production at eOne is shutdown for most areas of their business. This is driving a lower-than-planned cash spend for content in 2020. Assuming an early third-quarter return to production, we expect to spend approximately $150 million less this year than originally planned and within a range of $500 million to $600 million for the year. We’ve also closely reviewed capital expenditures. About half of our capital spending is related to tooling for our product for future periods, and the timing of that spend is weighted to the second half of the year. We’ve reviewed IT projects and facility renovations, as well as investments in digital gaming development, and reduced our 2020 spend expectations to $145 million to $155 million. Moving to the balance sheet; inventories declined overall, and include approximately $7 million from eOne. Accounts receivable increased $325 million, approximately $223 million of which relates to eOne. For the remainder, much of the increase is coming from the U.S. and is driven by the timing of sales in the quarter, and the shift to more domestic revenues versus direct imports that we were seeing at the end of 2019. When we compare the March 2020 DSO to the comparable pro forma measure in 2019, we’ve increased DSO of two days. We are closely monitoring credit for our customers. However, we should recognize our three largest customers remain Walmart, Target and Amazon. Next, let’s discuss demand. For the first quarter, revenues declined 7%, absent FX. 20% growth in the U.S. and Canada segment including growth in gaming such as MAGIC: THE GATHERING, MONOPOLY, DUNGEONS AND DRAGONS, THE GAME OF LIFE, JENGA, CONNECT 4 and others, and our product for Disney’s Frozen 2, along with 8% growth in Europe was more than offset by the declines in eOne, including a slate which was planned for later deliveries this year versus last; and Asia-Pacific, which was impacted by COVID-19 during the quarter; and Latin America, which is working through excess retail inventory. We currently expect the impact of COVID-19 to be more significant in the second quarter, due to retail store closures, supply chain disruption, live-action production shutdowns, and changing theatrical release schedules. However, consumer demand through April has continued to be up, and we’re working aggressively and creatively to meet that demand. As Brian highlighted, we’ve seen high viewership for our content, which is driving brand engagement. Finally, supply. The global operations team is working to ensure we can make and deliver the product our customers and consumers are looking for. About 55% of our production is currently done in China and has returned to normal levels. In other states and countries, we have varying levels of supply chain operations, including some closed warehouses and factories. As outlined in our release, we expect to catch up on production over the coming months and be positioned to meet holiday demand. Should the facility closures last longer than anticipated, this could be more challenging. We’ve also recorded incremental shipping costs to support the movement of product across our global supply chain network. For the eOne business, TV and film production teams are able to perform development and animation work, as well as pitch ideas. They are being incredibly creative on how to get work done, but the majority of production is not happening. As I mentioned earlier, our plans currently have us resuming live-action production early in the third quarter. Finally, let me touch on a few expense items on a pro forma basis. Gross profit margin, including both cost of sales and program production cost amortization, increased 110 basis points, aided by favorable mix due to strong gaming, including MAGIC: THE GATHERING, and lower program amortization. Cost of sales decreased 4%, due to the favorable product mix mentioned, partially offset by higher air freight costs associated with moving product out of China, once the factories reopen. Program production cost amortization declined 21% on a pro forma basis, on the lower entertainment deliveries in the quarter. On the advertising line, the year-over-year rate was higher due to aligning eOne and Hasbro’s accounting policies. We are reducing advertising levels, while adjusting campaigns and their timing to reflect the current environment. This is one of our most variable line items, and we are appropriately aligning the spends to both deliver top-line and lower our cash outlay, and we will be well prepared to drive demand for the third and fourth quarters. SG&A increased 2%. We’re implementing cost-saving activities related to compensation and hiring, as well as professional services, travel and other discretionary areas, such as shipping live events to virtual ones. In the quarter, we aligned accounting policies on cost capitalization, stock compensation, which resulted in higher admin costs for eOne. We also experienced higher shipping expense, due to the unplanned significant increase in game sales, which offset savings from a decline in warehousing expense. We’ve done extensive scenario planning to understand the impact of COVID-19 on our business, mapping out the implications for various returns to more normalized activities, as well as the impact of operating in a global recession. Despite having a good understanding of the factors and how to manage them, the outcomes vary widely, and that drove our decision to withdraw our full-year 2020 guidance. As we move toward reopening economies, we are planning for a good holiday season, with great innovation and entertainment across our portfolio. We have confidence in the strategic advantages of our business model, as a global play and entertainment company to both navigate the near term and to drive long-term profitable growth. Now, Brian and I are happy to take your questions.

Thanks. Good morning everyone and hope everyone is staying well. Brian, the first question is for you. If you could just help us contextualize your scope, your directional comments on Q2. Clearly POS up quarter-to-date, but I think you signaled you're not anticipating that strength to persist. How should we think about the relativity of Q2 versus Q1?

Yes. Good morning Steph. Well, I think that for us the greatest lever that's driving our thought process around Q2 is just the path to the consumer. And as we've seen major retail store closures around the world, as we've seen warehousing in certain areas of our business close, and as we look at certain factories, for example, in Massachusetts that are presently closed that we expect to reopen shortly as part of the phased reopening, we just recognize that the path to the consumer is more challenging, while we are also seeing in April so far very good growth in our POS. In fact, I think this is a story this year where e-comm and omnichannel really are stepping up and we're seeing growth in e-comm and omnichannel in the United States have more than 60% growth and our games business is growing as well. So there's a multivariable math going on, where we're just looking at how we move through many closed retailers, how we look at our licensees who are trying to sell products, not only from the biggest retailers that remain open and are executing incredibly well but also smaller retailers where they are closed and are planning openings for later in Q2 and Q3. As we get more clarity and as we engage with more administrations in the United States and around the world, we're starting to see a path toward these reopenings and we're starting to see that phased reopening schedule come to light. And I think that will help us as we get through the remainder of Q2. But Q2 will be a more challenging quarter than any quarter of this year. We have very robust plans that have continued throughout this quarter. Bring Home the Fun campaign, our brands and across the board in gaming, which we can talk more about are all doing quite well. But out of abundance of caution and as we see where the levers are and the path to the consumer through our customers, that's really our caution on Q2.

Okay. Thank you. And Deb, can I just ask one clarification question. At the very end of your prepared remarks, you talked about aligning policies across eOne and Hasbro from an accounting perspective, including advertising and stock comp. Is that a one-time reconciliation event or do we see that over the course of 2020 each quarter until you anniversary the acquisition?

Good morning, Steph. Yes, I think we will see that across each quarter, if you look at the pro forma numbers that we included in today's release and we wanted to make sure we included those so everyone would have those for modeling purposes. If you look at the pro forma and back out those one-time expenses that we tried to highlight from last year and add those to Hasbro's with any one-time expenses we did call out during the year and that will give you a sense of adding the companies together for the full year. But as we look at that, that total amount if you think about it kind of in the 10-ish million between the two line items per quarter, it's not the most significant number. And again, it's not in the underlying business. It's just aligning accounting policies, U.S. GAAP, everything else. So you won't see it again in 2021.

Hi. Good morning. Thank you so much. Brian, you had just talked about the factories. You said that you're expecting Massachusetts to open soon. So I was just wondering what that roadmap looks like in the U.S.? Also just in the meantime, have you been able to go to shift any of that manufacturing elsewhere? And more importantly, has this whole situation given you the opportunity to take a look at your supply chain and implement further improvements in the future?

Good morning. We've used a variety of sources around the world and I think the strategic sourcing footprint that we had put in place is really benefiting us. We're getting about 55% of our products today out of China and that supply chain is up and running, it’s robust. And we'll catch up on our new initiatives that we were producing for later this quarter Q3 and Q4 in just the next couple of weeks to months. And we have a number of big new launches that are coming including around NERF Ultra as we roll that out around the world. We’re also clearly working through some of the warehousing closures that have occurred in parts of the country. It's part of the reason why, in addition to the demand for MAGIC: THE GATHERING tabletop game cards, we also moved up some shipments of MAGIC: THE GATHERING in Q1. We began a rolling release calendar for Ikoria: Lair of Behemoths. So we started with the launch on Arena mid-April and then we'll have the official launch by mid-May. But we made cards available earlier. We also produced Mystery card boosters earlier and got those out to our Wizards Play Network stores, so that they would have those cards free of charge. And they could keep the proceeds of the sales of those cards to help support those small store owners that are part of our Play Network longer term. So it's a variety of levers that we're pulling. The team is doing an incredible job. We're seeing a continued growth in POS. In April we saw a very strong growth throughout Easter but really, week-on-week very, very strong growth and trade off here is really very strong growth in online and e-comm. And of course, with less store traffic, less footfall we're seeing a decline in the brick and mortar POS offset by tremendous increases in e-comm and omnichannel executions.

That's helpful. And it helps me segue to my next question, could you just talk a bit about the MAGIC. And so I was just wondering if you could just talk a minute about the transition from the physical games to Arena, given the social distancing environment? You mentioned that in your prepared remarks. Just wondering how sticky do you think that'll be in the future? And how much of Arena revenues really benefited from that, almost force transition? And could you see this as a permanent change?

Yes, we see this as a chance for a lasting improvement. More people are discovering our games. Research indicates that it’s not only fans of our various games, including our face-to-face games and MAGIC, who are engaging with our games but also a broader audience as gaming continues to grow globally. We're witnessing an increase in interest, with more individuals eager to connect and play a diverse range of our games. Our game sales are penetrating deeper into our portfolio, covering everything from preschool to adult games. Now, regarding MAGIC, during the quarter, we observed developments with our team in Seattle, Washington, as they adapted our organized play to digital formats. Engagement has been high, including new growth on Arena and an increase in new players this quarter. We launched Ikoria: Lair of Behemoths earlier, which is part of our rolling release plan expected to achieve full global rollout by mid-May. The team has successfully transitioned to digital Friday Night Magic at Home, which has proven to be very effective, alongside MagicFest Online. We continue to support hobby stores, and it’s important to note that Magic’s tabletop segment saw substantial growth this quarter, starting from our January release of Theros Beyond Death with several releases following in the first quarter. We have more trading card game releases planned for the remainder of the year, which will bolster our storytelling throughout the year. On Arena, we’ve recorded 2.1 billion games played, with players spending more time on the platform than ever—averaging nine hours per week, which is up from eight hours. Player engagement and satisfaction are at high levels, particularly among those who engage with both tabletop and Arena. This has contributed to an increase in new players across the brand, thanks to quick adaptations made by the team. Looking ahead, we’re excited to announce that Magic Arena will be available on mobile this year for both iOS and Android, and we’re partnering with Tencent in China, as well as launching on Mac. This has been a very strong period for Arena, with the past month being the most successful since its launch, and we’re seeing impressive growth. Preorders for Ikoria are the strongest compared to all previous Arena sets, and we've introduced new features as well.

I was just wondering if you could elaborate a little bit more on what's happening with eOne. Specifically in the press release you guys talked about TV deliveries being down and some licensing agency transitions that affected PEPPA PIG, as well as the retail inventory issue for PJ MASKS. How much that changed the revenue trajectory from the 1.2 billion that you guys realized in 2019?

Yes, Mike, good morning. So overall, our plan for the year, as we laid it out for you earlier this year was that eOne was going to deliver more half hours than in 2019; and in fact, probably about 20% more. In the first quarter, it was always planned that we were going to deliver less half hours than the prior year and then that was exacerbated by the fact that we were unable to finish certain episodes within the quarter as the editorial houses were shutting down along with production. So, we expect to deliver episodes that were to be finished in the first quarter later. It’s around really high-rated shows like The Rookie, for example, where delivering those episodes produces very strong revenues for the company. The plan for the year was always a little more back half loaded. And we continue to believe it will be obviously offset by now considering the fact that in the Q2 period we’re unable to go back into productions, obviously productions are shut down, editorial shut down. Having said that, the animation side of the business is very vibrant up and running and people are able to create animation, produce animation and render animation all during this period. So the family brand size is very healthy, and they're continuing to produce a product for legacy eOne brands, as well as continuing to work on MY LITTLE PONY feature film which we intend to bring out in CG next year. So overall, the key questions become one where when we can get back to production, and the timing of that. Obviously our team is working along with a whole group of producers and studios to determine how to reopen production and to do so safely, and to do that as an industry. Our expectation right now is that we begin to reopen and get back to productions in the third quarter. Also the team is being very inventive, our unscripted team has figured out how to create production in a box, where they literally are delivering production studio to people that they want to interview or put as part of their unscripted shows and delivering that box to doorsteps and producing shows and then taking those boxes back. So the team is being very thoughtful about how to get productions done, and yet the major productions will have to be waiting until we get more of the production capabilities up and running, as we move through the different phases of reopening economies.

Brian, games has historically been very weighted to Q4 and I think 60% or so derived in the U.S. How do you see that shifting, given what you experienced in Q1 and given the current backdrop? And then separately, how do you think about the sales foregone, given the absence of the theatrical window for product that's tied to entertainment properties, understanding that production could resume later this year, but not sure if anyone is going to be trafficking, frequenting theaters anytime soon. So how does that impact your toy sales on a go-forward basis? Thanks.

We've done extensive analysis, and the games team has examined the demand trends from the first quarter and their implications for our overall games business. Their key finding, which we've discussed before, is that the gaming market has seen a significant increase in engagement. We're welcoming many new customers who are purchasing our games more frequently. However, while the growth in the first quarter has been impressive, it doesn't match the levels we typically observe in the third and fourth quarters during the holiday season. We remain confident that games will continue to perform well, both in physical stores and online. The innovations slated for the second half of the year are encouraging, showcasing the team's creativity and commitment to advancing our games. Every brand will feature new ways to engage with our titles, such as Operation PET Scan, Cluedo Liars, and various Monopoly editions, including the 85th anniversary version. We view the first half as a strong foundation, with the emotional resonance of our games enabling social connections across a wide range of audiences, spanning from MAGIC: THE GATHERING to MONOPOLY to CHUTES AND LADDERS. On the theatrical side, we anticipate fewer movie releases this year compared to 2021. In fact, 2021 looks to be a strong year for us, with over six films in our pipeline. We are excited about the innovations planned for the latter half of the year. The positive response and growth we've experienced with Frozen and STAR WARS in the first quarter are promising. We'll also have the home entertainment release for Trolls later this year, which will help us promote that brand in collaboration with Universal. Although people may not return to theaters at the same pace, we don't have many theatrical initiatives planned for the remainder of this year, with a stronger focus on 2021.

Hi. Thank you very much. Good morning. Could you go over what percentage of your retail doors remain open today, and how many you expect to remain open in Q2? It seems top three customers are up and running, that's probably around 40% of your sales, what else is open right now and how you expect that to change into Q1?

We're seeing clearly our top customers are open, but also other stores that sell essential goods are also open and drug and value stores are open, Dollar Stores, many of them are open. Around the world, hypermarkets are open. Back in Asia, stores are reopening. In the Pacific, we saw very strong growth of our business around the big mass retailers, and online continues to grow globally. Clearly, toy specialists are not open, and they are selling online where they have those capabilities. We have a sense that probably 25% to 35% of our retail doors are closed right now. But then again, it varies so much by geography, as to what's going on, because of course, markets like Italy have been completely closed and Spain have been completely closed, as is the UK. So that's not a place where we were to give you a figure, because in fact, we're down to just the stores selling essential goods for groceries, and very little footfall inside of stores, where people are buying online. I'd say overall, that's why we've tried to give you some guidance around Q2, and yet as we look at the reopening plans, which are now really starting to accelerate and geographies are starting to make thoughtful plans around the science and bringing people back out into the world, we would expect that economies start to get going and people will come back into stores, albeit through protocols designated by different geographies around the world.

Going back to eOne, I understand there has been a production disruption this year, extending into the latter half of 2020 and into 2021. However, has there been any reduction in the production schedule overall? Before this disruption, certain projects were planned, but now they may not seem worth the investment. Has there been any actual decrease in eOne's production schedule as a result?

No, we look at what's heartening about eOne and that team, is their expertise in creating amazing entertainment. And they've been one of the top independent producers and studios for several years. We've seen their strength. They have more than 100 projects in development. We already have more than 15 Hasbro projects in development. The teams have done an incredible job of coming together, albeit virtually over the past six, seven weeks. The inculcation in Hasbro brands, the development and moving forward on Hasbro brands has really been quite heartening and people are really embracing the opportunity to work together. So our expectation for the year was that the number of half hours we'd grow and it just matters, how many of those episodes we can deliver in the back half of the year, and that's why in addition to other levers, we've just said, it's hard to predict if those predictive models change a little bit, it changes the outcome. And so, we don't believe there is a loss of demand. We just believe it's a shift of timing and that we will deliver all of these episodes and all of these new initiatives. And there are several that are continuing to come forward. And just a few weeks ago, there was a new series on HBO that was produced by eOne called Run. I encourage you to watch it. It was really fantastic. So we're seeing new series come from eOne. It's just a matter of when we're able to deliver those series, and whether that's all in 2020 or some of that moves to 2021, we will have to see.

So my first question is, did you see a benefit to April POS, as stimulus checks hit consumers' bank accounts? Or was the April strength uniform throughout the month?

It's a great question and good morning. We've observed consistent growth in point of sale. In North America, our overall point of sale in the U.S. has increased by double digits across both brick and mortar and online channels. Online point of sale continues to perform exceptionally well, both during and after the Easter period, with strong results largely driven by our gaming portfolio, including PLAY-DOH and NERF Ultra, along with other brands that are performing well. Our partners' brands like Frozen and STAR WARS, as well as BEYBLADE, are also showing good performance. We didn't notice any significant change when stimulus checks were issued; instead, we have seen overall strong and positive point of sale and demand for our products.

Got it. That's super helpful and my follow-up is, since you're pulling back content production expenses this year to $500 million to $600 million, do you still expect production cost amortization to be 9% to 10% of revenues this year?

As we look at the content that we're able to deliver, as Brian said, we may or may not be able to deliver the full amount that we had originally planned to, but we would expect that to change, commensurate with revenue, as we went forward. So if we're not able to deliver product and air it, then we won't start amortizing it. So that's really where the impact will come.

Does the current situation impact how you're thinking about potential asset sales at Entertainment One?

Look, not really. We are in our fourth month together. As a team, we're really focused on our four areas of our business. As people work distantly, we've always said to break it down into what really matters, and that every person at Hasbro is able to contribute to one or more of the four key tenets of our business. Obviously, the most important of those is, in addition to focusing on our community and supporting our communities to create demand for our great products and our great entertainment, to ensure that we continue to build the supply of our toys and games, as well as the supply of entertainment everywhere we can. And then of course, underlying all of that is the liquidity of our business. And finishing the first quarter with $1.2 billion on our balance sheet, our access to our revolver, all speaks to the fact that we're managing cash very well, and Deb and her team have been amazing, as they've really navigated the current environment. We haven't really focused on asset sales and nor do we have to. We are liking the fact that the music business grew in the first quarter. Clearly, it's a digital business, with great artists and also our audio networks contributing. And we'll see where we go from here. We have the opportunity with an amazing array of brands. Some of those brands are already licensed out to third-party toy and game companies. So TONKA is being produced primarily by another company. Micro Machines is being relaunched by another smaller company. And so we have that flexibility to license our toys and games to other companies, where we see the opportunity to do that, and to focusing on our top priorities of a very expansive, unique in the industry portfolio.

And then, most people tend to think of toys as a recession-resistant category. Can you just remind us what the biggest two or three lessons were coming out of the last recession? And then, how you guys think you can utilize those in today's environment?

Sure. Well, if we go back to 2008-2009 timeframe, you'll see coming out of 2008, we actually grew in 2009, and it's about the storytelling, the content and when you talk about the industry being really recession-resistant, it is. People tend, whether it's parent or a grandparent, a caregiver, a relative, they tend to stop spending on their children last, right. So they'll go without themselves before they go without spending on their children. And so, when you look at that, you do see the industry is fairly recession-resistant and we were very fortunate, we have a very solid balance sheet. As Brian said, we've got great cash on our balance sheet. We have terrific liquidity to kind of see us through a recession, and we feel pretty good about coming out the other side, and we also have great content that's in demand. So when you have that storytelling around it and that content, we think that we are well positioned because of the diversity of all the pieces of our business, now more so than even kind of coming out of the 2008 recession, that we saw, yeah.

The other thing that's interesting as we work with Darren and Steve Bertram and Olivier Dumont, and the eOne team, we went back and looked at how they had performed during fiscal years in that period and in fiscal year '09 and '10, they also had very strong years with lots of demand for content, increases in revenues. And we are seeing clearly a change in consumer behavior that benefits many of our categories of business, whether it'd be our digital business, our gaming business, our entertainment business, the content business, the PLAY-DOH business. And we just want to work our way through Q2, which will be a challenging period, mostly because of our access to global consumers, as people are rightfully spending time in homes and many of the retail doors have been shut.

A couple of questions for you. First Deb, when I look at or try to figure out what 2Q '19 pro forma looks like for you guys, on a revenue basis, it looks like it should be pretty easy to figure out, like $1.2 billion. But I wondered on an adjusted operating income and adjusted EPS basis, if you could maybe help us navigate what those numbers should look like?

Sure. If you examine the 2019 eOne mentioned in today's release along with the one-time items identified as non-GAAP, which are included in that schedule, and exclude those since they won't be recurring and do not reflect the core business. Additionally, to my recollection, there were no one-time non-GAAP adjustments in Q2 of 2019. Just focus on our results, combine both sets of results, and note that we're estimating around $25 million a quarter for amortization related to the acquisition, which we will exclude, as we did this quarter and as mentioned at the start of the year. Considering that, it will give you an idea of what the combined operating profit should look like. Regarding revenue, we believe the second quarter will be the most challenging of the year. We previously discussed shifting some game sales to Q1 to meet demand and ensure they were in the right location for consumers instead of being stuck in a warehouse. This has had some impact, along with challenges related to production under our initial assumptions. We have instructed the teams to prepare for the possibility of up to 25% of retail being closed in the second quarter, though the situation is still uncertain, and we are monitoring it. As Brian mentioned, while we still have a strong e-commerce channel to deliver products, the second quarter is anticipated to be our toughest quarter.

Great. Also Brian, you talked about some excess inventory that you're working through in Latin America, can you just remind us what some of the issues were in Latin America, and how long those have been going on and how long you think it takes to work through those issues?

Yes, look, we have an incredible sales team led by Michael Hogg, and if you go back a few years, each of our regions have been reinvented and are now performing at great levels, every time Michael and his team have gone in to look at how the business is being disintermediated and how we operate going forward. So five or six years ago it was the U.S. business and then the European business, which is now performing well. And in Latin America, we don't have the same access to e-comm. E-comm's penetration is in the single digits. So we've had to work through retail stores. There has been a lot of social unrest and consumers changing their shopping behavior, reduction in consumer shopping during the holiday. So we're just working through what was some carryover product from the holiday period, places like Brazil and in Mexico, our two biggest markets. We also are seeing some of that in some of the smaller markets like Chile and Peru, and it's just a matter of a bit of time. I figure that we'll work our way through that this year. And as we get into 2021, we will be back in a better place. Again recognizing that we don't have the levers of e-comm or as much of omni-channel as we have in other markets, clearly WALMEX and Walmart are present in several countries down there and we clearly work with them across several different formats. But there are other retailers who are struggling more than a big retailer like Walmart, given the changes in consumer behavior and shopping patterns.

Great, thanks for taking my question. How much are you willing to flex advertising? Is this just commensurate with a reduction in sales or is this a reduction as a percentage of sales? And then on that overall, if you could be a little bit more helpful in 2Q on the downside, if trends continue sort of at this overall rate and there is no big surprises, is it likely that you'll be profitable in the second quarter?

Yes. So know, why don't we have Deb talk about the first part or the second part of that, and then I'll come back to the first part?

Yes, if current trends continue and retail sales decline significantly, we may struggle to meet our production goals due to timing issues. We are actively taking steps to cut expenses across the company. While we have already implemented some measures, there is a possibility that our profitability may be impacted in the second quarter. Nevertheless, we anticipate a successful holiday season overall. We believe that demand will remain strong during the holiday period. We are also focused on innovation. Looking at our full-year variable costs, approximately 40% of our brand costs are variable, and we are closely managing all those costs. I will allow Brian to discuss advertising, but we are adjusting our advertising expenditures to align with the periods when we expect to drive the most demand, while also being cautious about expenses and cash flow.

There has been significant creativity in our advertising approach. We are collaborating more effectively with our online and omnichannel retailers to create content that drives commerce, which integrates into our retail strategy. Our teams are increasingly leveraging digital and social media, which not only reduces overall advertising costs but also allows us to target specific audiences more effectively. A prime example of this during the first quarter and the holiday season is our NERF initiative. We developed a project called NERF House, which features short-form content delivered on social platforms and includes performances by several NFL stars in a 90s sitcom format, showcasing our new NERF products like Ultra One and Ultra Two. This campaign is far less expensive to produce than traditional television advertising. Moving forward, we anticipate a shift from linear TV advertising to more digital and social channels, yielding both cost savings and improved effectiveness. As Deb mentioned, we are aligned with our forecasts, expecting healthy revenues in the third and fourth quarters. As consumers regain access and economies reopen, based on research indicating how resilient our games and preschool business are, we foresee a strong second half of the year. Furthermore, 2021 is shaping up to surpass our initial expectations, with over six theatrical releases planned for that period.

Got it. Thanks for the answer. And one last one for me. On Trolls, you mentioned it briefly, and I know it's a small piece of your business, but could you give us a sense of what you're seeing retailers saying on Trolls and what consumers are reacting to on Trolls, given the change in their distribution strategy, as a result of COVID-19, and what that could mean for you and the industry long-term? Thanks.

I believe there are distinctions between making a last-minute switch to PVOD and delivering content meant for streaming. We successfully launched Trolls, although we planned to primarily execute our strategy through physical retail. We also have inventory available for e-commerce and omnichannel distribution. When you're anticipating a theatrical release, you create an event around that with retailers to draw in customers across various product categories, including toys and games. We're encouraged that there will still be a home entertainment window for Trolls, which we expect will be very effective in continuing to promote the Trolls brand, as we have successfully done in the past. Kids and families enjoy watching the movie repeatedly. The PVOD window was quite short, allowing limited access for viewers for a few days, and we'll continue to market the property in comparison to The Mandalorian, which we approached as a streaming series from the start, enabling us to promote it digitally. We are eager to launch our first range of Baby Yoda products in May, and our more interactive animatronic product is slated for release in the fourth quarter this year with strong pre-sales. These represent two different aspects of a similar strategy, and our teams have excelled in both cases with ongoing collaboration throughout the year. We are also looking forward to the launch of the second season of The Mandalorian in the fall, expected around October.

Most of my questions have been answered. I just had a quick one on eOne and the content sales pipeline. You mentioned your team is still actively pitching development ideas, so I was wondering if you could give us a little more color on the demand patterns here. Are you seeing your network and platform customers still ordering new shows, at relatively normal levels? Or has there been a change in trend there? And then just in terms of content sales mix, have there been any notable shifts in demand by content type? For example, is there an opportunity to ramp up reality sales to back-fill the gap most networks are going to face, given the longer lead-times associated with scripted content productions? We appreciate any color you could provide. Thanks.

Yes, that's an excellent question. First, our teams are actively engaging various buyers and witnessing strong demand for our new original intellectual properties. As we initiate more Hasbro projects, interest is significantly increasing. We are currently working on over 15 Hasbro IP projects across various categories and platforms. Secondly, there is a notable demand for our library and library productions. As studios face challenges in producing original content, we are seeing a solid need for high-quality library content that hasn't been utilized in some regions. This presents a new opportunity for us throughout the year. Lastly, discussions with colleagues and observations of the marketplace reveal a growing interest among buyers, streamers, and other platforms for IP that is fantasy-oriented and family-friendly, which fosters enjoyment. Other genres may experience a decline in interest in the coming years. We believe we have a strong collection of branded IP that aligns well with the market needs and provides opportunities for development, not just for this year but for years ahead, catering to services, platforms, and importantly, audiences and consumers globally.

Brian, I wanted to follow up on a couple of previous questions. It seems like this has been developing over the past year, and COVID may be accelerating this trend. From your partners and your experience in the industry, how has COVID changed the way studios think about movie distribution through theaters, given that they typically earn more per view in theaters compared to PVOD or streaming? Additionally, how does this impact the short-term intellectual property related to that? In the long-term, could it create a smoother, more consistent situation? We've observed these changes, but how might they accelerate, particularly regarding 2020 and 2021 compared to your thoughts from Toy Fair?

I believe we will continue to see studios producing content specifically for theaters. Based on both kitchen research and broader studies, it's clear that most people don't only want to watch content at home, even though we do enjoy many home-viewing experiences with friends and family. The communal experience of going to a movie theater is a significant aspect of life globally. It aligns with a middle-class lifestyle, and many people, including our friends and family, genuinely miss the experience of watching movies in theaters. This sentiment is likely felt by audiences worldwide. It's important to note that some studios found themselves navigating a challenging transition from an open market to one focused on social distancing. They had invested heavily in marketing for theatrical releases, which is valuable, and this may have led to decisions to pivot towards direct-to-consumer approaches during that time. However, audiences are quite deliberate in their viewing choices. For instance, Disney and Disney+ have already outlined their plans for theatrical releases versus streaming content for the coming years, and other studios are following suit. Hasbro is also committed to producing quality branded content for theaters, including new Transformers films, the upcoming Snake Eyes release, and a MY LITTLE PONY movie. In addition, we will see excellent streaming content because the key to success has been engaging audiences with characters and stories on these platforms. This engagement drives interest in merchandise and gaming, as evidenced by the popularity of The Mandalorian and other streaming properties.

And so really a little bit of changes in plans, but broadly, not a lot of changes from what you're seeing over the last few months?

I wouldn't describe it quite the way you have. There will be significant changes in the near future as people figure out how to safely and securely reopen theaters. However, in the long run, we all miss the experience of going to a movie theater, enjoying a show together, and experiencing audience reactions that can't be replicated at home. That said, we will continue to consume more content than ever. Every time a new platform is launched, people end up viewing more content. Young audiences are engaging with multiple formats of content simultaneously. We've discussed this over the past few years and expect this trend to persist.

Yes, we have clearly observed growth in Europe and Asia-Pacific when we look at overall global POS by region, while there has been a decline in Latin America, which aligns with what we’ve mentioned. Analyzing global e-commerce, Europe performed very well, particularly among our top e-commerce customers who have successfully implemented more effective omni-channel strategies. We mentioned how our team has redefined the business in Europe, adapting to the emerging disintermediated e-commerce and omni-channel framework that shapes the way consumers access products. In Asia, the e-commerce business is thriving, and in the Pacific region, including Australia and New Zealand, we experienced significant growth in the first quarter, thanks to the excellent efforts of our team there. However, there are other markets with lower e-commerce penetration, and those areas are currently facing more substantial challenges.

Thank you, Rob, and thanks everyone for joining the call today. The replay will be available on our website in approximately two hours and management's prepared remarks will be posted on our website following this call as well. Thank you.