Hasbro Second quarter revenues down 29% on a pro forma basis

Hasbro - Juli 2020

Provides Business Update Related to COVID-19

Second quarter 2020 revenues were $860.3 million, down 29% on a pro forma basis
- Strong consumer demand for Hasbro products hampered by temporary store closures, product shortages in fast growing categories and lower retail inventory
- High-single digit global point of sale growth in Q2, remains strong entering Q3 and broadening across the portfolio
- Hasbro Gaming revenues up 11%
- eOne entertainment revenue negatively impacted by live action production shutdowns
Factories and warehouses now open in nearly all markets and positioned to meet full-year product demand requirements
Digital-first orientation delivering significant revenue and point of sale ecomm growth
Net loss of $33.9 million or $0.25 per diluted share; excluding eOne acquisition-related expenses, severance and purchased intangible amortization, adjusted net earnings were $2.7 million, or $0.02 per diluted share
Substantial liquidity and access to cash, including quarter ending cash of $1.0 billion; operating cash flow of $258.3 million; and availability of $1.5 billion under revolving credit facility

Hasbro, Inc. (NASDAQ: HAS), a global play and entertainment company, today reported financial results for the second quarter 2020 and provided a business update on COVID-19 related matters. Hasbro completed its acquisition of Entertainment One Ltd. (eOne) at the beginning of the first quarter 2020. 2020 results are those of the combined company, and 2019 results referenced herein reflect the pro forma combined results. See the financial tables accompanying this press release for a reconciliation of as reported to pro forma and adjusted results.

Net revenues for the second quarter 2020 were $860.3 million versus $1.2 billion pro forma revenues in 2019, a decline of 29%. Foreign exchange had a $15.8 million negative impact on second quarter 2020 revenues.

Net loss for the second quarter 2020 was $33.9 million, or $0.25 per diluted share, versus pro forma net loss of $42.6 million, or $0.31 per diluted share, in 2019. Second quarter 2020 net loss included $8.5 million after tax of acquisition-related expenses, $10.1 million after tax of severance charges associated with cost-savings initiatives within the Company's commercial and TV and Film businesses and $17.9 million after tax of purchased intangible amortization associated with the eOne acquisition. Excluding these items, adjusted net earnings for the second quarter 2020 were $2.7 million, or $0.02 per diluted share. Second quarter 2019 pro forma net loss included charges of $19.1 million after tax of purchased intangible amortization at eOne, $12.4 million after tax associated with non-GAAP adjustments at eOne and $85.9 million after tax from the settlement of Hasbro's U.S. pension plan liability. Excluding these items, adjusted pro forma net earnings for the second quarter 2019 were $74.7 million, or $0.54 per diluted share.

"The global Hasbro team is executing our playbook amidst a dynamic and challenging environment. They are doing so with creativity and agility, identifying new and efficient ways to operate, capitalizing on our investments in creating a digital-first orientation while keeping our innovation engines moving and leveraging the expertise of a management team that has led through challenges in the past," said Brian Goldner, Hasbro’s chairman and chief executive officer. "The second quarter was much as we expected: strong point of sale for Hasbro brands countered by a very challenging revenue period due to global closures in our supply chain, across retailers as well as in entertainment production. We believe the outlook improves from here. Consumers - children, families, fans and audiences - are relying on Hasbro brands and stories to connect and entertain themselves throughout this period. While the full-year COVID-19 impact geographically remains unpredictable, as stores reopen and we begin to return to production for entertainment we expect the environment to improve in the third quarter and set us up to execute a good holiday season."

"Over the next few years, we are positioned to benefit from the investments we have made in ecomm, entertainment and digital gaming," continued Goldner. "We have a strong entertainment lineup for 2021, through internally developed as well as third-party entertainment. We will also begin to see a greater benefit of synergies from the acquisition of eOne as we remain on track to deliver against our plan of $130 million in synergies by year-end 2022."

"Hasbro remains in a strong financial position, with over $1 billion in cash on our balance sheet and a $1.5 billion revolving credit facility available to us, should we need it," said Deborah Thomas, Hasbro’s chief financial officer. "Our team is executing well and we are reducing expenses, including in our commercial business where we are simplifying our go to market approach, and our TV and Film businesses where certain operations have not resumed. In some markets and channels, our customers remained closed throughout the second quarter and with certain customers cash collections have been extended. We continue to see improvement as stores reopen, and we are working closely with our customers to successfully navigate this period. Working capital needs increase in the second half of the year, with early fourth quarter the peak period and we are positioned to support our plans for a good holiday season."

COVID-19 Business Update

Demand

Consumers continue to seek out Hasbro brands and content at high levels, resulting in strong point of sale gains, a dramatic shift to ecomm and high viewership engagement with eOne stories. Revenue from shipments to brick and mortar customers and delivery of content to meet demand will continue to be impacted by COVID-19 closures.

Second Quarter Consumer Demand Up for Hasbro Brands, Led by Games

Global consumer point of sale increased high-single digits, including double-digit gains in the U.S., U.K., France, Italy and Australia. Led by strength in ecomm where consumers have broad access to Hasbro brands.
Retail inventories declined reflecting the shift to ecomm, temporary store closures and retailers' management of inventory and cash levels.
Hasbro's Gaming revenues grew 11% and gaming point of sale was up globally over 50% (Note: Point of sale does not include Wizards of the Coast brands). JENGA, CONNECT 4, BATTLESHIP, MOUSETRAP and TWISTER were among the top revenue increases in the quarter. Supply chain disruption led to in stock levels below normal thresholds and limited shipments in the quarter.
Shipments and point of sale remained strong for Hasbro's products for Disney's Frozen 2 and Lucasfilm's Star Wars.
Several other brands, including PLAY-DOH and NERF, had positive point of sale for the quarter.
MAGIC: THE GATHERING revenues declined as expected in the quarter, reflecting a difficult comparison with a major release in the second quarter of 2019 and the previously disclosed accelerated shipments into Q1 2020 to minimize disruption from COVID-19. Digital revenues for MAGIC: THE GATHERING, including Arena, increased slightly in the quarter. Strong analog and digital releases are expected to support the brand in the second half of 2020.

Leveraging Digital-First Orientation

Hasbro successfully executed amidst a rapid shift to ecomm, with nearly 30% of global toy and game revenues being transacted online in the second quarter.
Retailers and regions with developed ecomm businesses were better able to meet consumer demand, while retailers and countries which rely on physical stores, such as toy specialty retail and in Latin America, experienced greater difficulties.
As stores began to reopen late in the second quarter, shipments and point of sale improved. A trend which has continued into July.
Latin America revenues and point of sale declined in the second quarter and is expected to be remain challenged in the second half of the year given the low penetration of ecomm and the impact of COVID-19 on its markets and economies and high levels of retail inventory to start the year.

Entertainment Release Schedule Shifting; High Viewer Engagement

Viewership and demand for content were high in the second quarter.
Live action production in the TV and Film space was shutdown throughout the second quarter, delaying the completion and delivery of productions and timing of revenues to both later in 2020 and into 2021.
Live action TV and Film production is returning gradually, beginning this quarter. This varies by location and certain projects will resume sooner than others.
Animation production has continued, including for PEPPA PIG, PJ MASKS and the 2021 MY LITTLE PONY animated feature film.
The team is supporting a robust 2021 entertainment slate for eOne productions and from our Partner Brands.

Supply Chain

Nearly all of Hasbro's partner factories and warehouses are currently open and operating.
China: Third-party factories in China represent approximately 55% of the Company's manufacturing production. These factories have been operating at normal levels since early in the second quarter, are caught up on missed production and are picking up capacity from other locations closed during the second quarter.
Outside of China: From mid-March to mid-May, manufacturing production outside of China, namely in the U.S., Ireland and India, was shutdown. These locations are operating and anticipate catching up on missed production by the latter part of the third quarter 2020, assuming no major future shutdowns in production. India production is continuing but there have been further lockdowns within the country in recent weeks.

Liquidity

Hasbro ended the second quarter with $1.0 billion in cash.
The Company's $1.5 billion revolving credit facility is also available.
The Company remains well within its financial covenants for its $1 billion term loan and revolving credit facility.
The next major debt maturity is $300 million in May 2021.
The Board remains committed to the dividend. Hasbro paid $93.1 million in cash dividends to shareholders during the second quarter 2020. The next quarterly cash dividend payment of $0.68 per common share is scheduled for August 17, 2020 to shareholders of record at the close of business on August 3, 2020.
The Company had previously suspended its share repurchase program as it prioritizes deleveraging.
Walmart, Target and Amazon were the Company's largest customers in the second quarter.
Hasbro remains very focused on managing credit risk of its customers.
The Company has reduced expenses and taken steps to preserve cash, including managing variable costs and rightsizing the organization.
Given the timing of when content production is expected to resume, the Company now expects 2020 content production cash spend to be in the range of approximately $450-$550 million. The Company spent $220.4 million on content production in the first half 2020.

Community

Our global teams are focused on supporting our people, health and safety workplace protocols and supporting work-at-home arrangements.
Our focus on our purpose to make the world a better place for all children and all families has never been more important. Hasbro has continued to support global philanthropic initiatives that bring relief to children and their families worldwide during this crisis by providing meals as well as learning resources to those most in need. We’ve also donated thousands of toys and games to children around the globe during the pandemic. We remain deeply committed to using our brands, our resources and our expertise to help make a difference in our local communities and around the world.
During the past several months, the teams have successfully executed global events virtually and redeveloped innovation processes for executing in a virtual world. There has been significant progress in the integration of Hasbro and eOne, including integration the licensed consumer products and entertainment teams.
The team is managing the business to navigate through this difficult environment and remain nimble as the impacts of the pandemic remain. This includes simplifying our organization and reducing costs in areas of the business that are shutdown.

_{1 Both periods above are as reported, with 2019 including the pro forma results from eOne. eOne incurred certain Non-GAAP adjustments in both periods, which are discussed below. A reconciliation is included the attached schedule under the heading “Reconciliation of As Reported to Pro Forma Adjusted Operating Results.”
2 Hasbro's total gaming category, including all gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, totaled $319.0 million and $659.5 million for the quarter and six months ended June 28, 2020, respectively, down 19% and up 4%, respectively, from revenues of $393.4 million and $636.8 million for the quarter and six months ended June 30, 2019, respectively. Hasbro believes its gaming portfolio is a competitive differentiator and views it in its entirety.
3 Emerging Brands portfolio includes revenues from eOne brands PEPPA PIG, PJ MASKS and RICKY ZOOM as of first quarter 2020. For comparability, Q2 2019 includes the pro forma revenues for those brands, which amounted to $35.7 million.
4 TV/Film/Entertainment represents the remaining eOne revenues. For comparability, Q2 2019 includes the pro forma revenues.}

U.S. and Canada segment revenue and operating profit declined due to temporary store closures, product shortages and lower retail inventories as a result of COVID-19. Both pure play and omni-channel ecomm retail grew rapidly. Operating profit declined as a result of lower revenues, including lower MAGIC: THE GATHERING revenues, partially offset by lower expenses.
International segment revenues and operating profit declined. Revenues declined in the European, Asia Pacific and Latin American regions, with the Latin American decline the most meaningful. Similar to the U.S. and Canada segment, temporary store closures, product shortages and lower retail inventories impacted shipments in the quarter. The International segment reported an operating loss versus operating profit last year as a result of the lower revenues partially offset by lower expenses.
Entertainment, Licensing and Digital segment revenues declined on lower consumer products revenues and lower digital gaming revenues from the closure of Backflip Studios in late 2019. Operating profit increased due to lower program production expense as well as lower advertising and development expenses due to the closure of Backflip Studios.
eOne pro forma revenues declined in the quarter. Within TV and Film, COVID-19 shut down live action productions and theaters globally. There is high demand and engagement in stories and content and the development slate is strong, currently with over 100 active development projects in television and over 60 projects in the film pipeline, including projects around more than 30 Hasbro IPs. Within television, produced/acquired content half hours increased, driven by unscripted programming. Within film, box office revenues were not meaningful given theater closures. An active development pipeline is further supported by a successful virtual Cannes film festival. In music, revenue was negatively impacted by the loss of live events and associated artist promotions, as well as lower royalties from licensed and publishing music rights. Engagement in animated content for PEPPA PIG and PJ MASKS is extremely strong, but revenues declined on lower consumer products sales and lower advertising from the YouTube platform. Animation work has continued including for the 2021 MY LITTLE PONY feature film and development continues on a number of new properties with greenlights for new shows expected in the coming months.

Second quarter 2020 operating loss includes $22.6 million of purchased intangible amortization associated with the fair value of acquired intangible assets. Second quarter 2019 pro forma operating profit includes prior restructuring and other costs of $16.0 million and purchased intangible amortization of $24.6 million. Adjusted pro forma operating profit increased due to lower program production amortization, royalties and advertising expense.

Conference Call Webcast
Hasbro will webcast its second quarter 2020 earnings conference call at 8:30 a.m. Eastern Time today. To listen to the live webcast and access the accompanying presentation slides, please go to investor.hasbro.com. The replay of the call will be available on Hasbro’s web site approximately 2 hours following completion of the call.