Hasbro, Inc., a global play and entertainment company, reported financial results for the first 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 results are those of the combined company, and 2019 results referenced reflect the pro forma combined results.
Net revenues for the first quarter 2020 were $1.11 billion versus $1.20 billion pro forma revenues in 2019. Foreign exchange had an $11.7 million negative impact on first quarter 2020 revenues.
Net loss for the first quarter 2020 was $69.6 million, or $0.51 per diluted share, versus pro forma net earnings of $76.4 million, or $0.56 per diluted share in 2019. First quarter 2020 net loss included $127.5 million after tax of acquisition-related expenses and $19.9 million after tax of purchased intangible amortization associated with the eOne acquisition. Excluding these items, adjusted net earnings for the first quarter 2020 were $77.7 million, or $0.57 per diluted share. First quarter 2019 pro forma net earnings included $19.1 million after tax of purchased intangible amortization at eOne and $9.3 million associated with non-GAAP adjustments at eOne. Excluding these items, adjusted pro forma net earnings for the first quarter 2019 were $104.8 million, or $0.76 per diluted share.
“The first quarter highlights what truly differentiates Hasbro: A global team that meets challenges creatively and nimbly; a diverse brand portfolio and retailer base, including best in class ecomm and omni-channel execution; a strong financial foundation and balance sheet; and a commitment to our purpose of making the world a better place for children and their families,” said Brian Goldner, Hasbro’s chairman and chief executive officer. “During the quarter, families and friends connected through Hasbro’s robust portfolio of face-to-face games, created with PLAY-DOH and engaged in content and imaginative play with our brands and entertainment properties. Our teams worked tirelessly to ensure product could get to consumers while managing the health and safety of our employees and partners globally who are navigating a global supply chain and retail landscape impacted by COVID-19. Point of sale at retail was strong during the first quarter and continues to be up in April.
“We’ve undertaken extensive scenario planning across the business and geographies as we plan for a re-opening of the economies globally,” continued Goldner. “At the same time, we made significant progress on the integration of eOne and while near term much of the team’s production work has been delayed due to COVID-19, we are actively working together to unlock value from our brands and the eOne enterprise. Hasbro is creating play and entertainment experiences which are vital and desired by consumers and audiences this year and for the years to come.”
“Hasbro is operating from a solid financial position with substantial liquidity available in both cash on hand and a revolving credit facility,” said Deborah Thomas, Hasbro’s chief financial officer. “Upon closing the eOne acquisition, we drew down on a $1 billion term loan and left our cash on the balance sheet intact. This cash position increased to $1.2 billion at quarter end, and is further supported by access to a $1.5 billion revolving credit facility. The global team did a tremendous job navigating the challenges of the first quarter. Toward the end of the quarter, physical store closures and country-wide restrictions became more prevalent and entertainment productions shut down. As a result of COVID-19, we expect the second quarter to be more challenging than the first quarter of the year with revenues and earnings down versus pro forma 2019. We are taking prudent steps to lower expenses and preserve capital while positioning to meet the seasonal peak demand periods of the business in the second half of the year, including the holiday season. While the ultimate impact of COVID-19 will vary depending on how long it takes to reopen markets around the world, we are currently seeing healthy demand for our products and content.”
COVID-19 Business Update
- China: Third-party factories in China represent approximately 55% of the Company’s manufacturing production. After operating at lower than planned production levels during the first quarter due to COVID-19, these factories are currently operating at planned capacity for this time of year. China factories are making product across the business, including games. As production typically builds to peak levels during the summer months, the Company anticipates making up production lost in the first quarter in the second quarter and to be well positioned to meet holiday demand. These beliefs assume all production continues to operate in all material respects without further COVID-19 shutdowns.
- Outside of China: Manufacturing and warehouse partners outside of China operated at close to normal levels during much of the first quarter. Beginning in mid-March and through today, these locations are operating at varying levels of productivity depending on local government and safety considerations, with some markets operating at lower than normal production levels and other facilities have been closed for a period of time. Currently closed facilities include manufacturing in Massachusetts, Texas and Ireland, primarily for games, as well as manufacturing locations in India.
- The global Hasbro team is utilizing its diverse global supply chain to meet demand from open facilities, existing inventory and to rapidly make up lost production. The COVID-19 situation is very fluid and based on Hasbro’s understanding of local governments directions at this time, the Company expects closed facilities to reopen over the summer. Hasbro will be using its full complement of sourcing partners globally to ensure a quick recapture of any lost production on priority items.
- Hasbro brands are resonating as people spend more time at home, including games for families to play together and PLAY-DOH as kids engage in more creative play.
First Quarter Consumer Demand Up for Hasbro Brands, Led by Games
- Global consumer point of sale increased mid-single digits, led by double-digit gains in North America.
- Hasbro’s total gaming category revenues, including MAGIC: THE GATHERING, MONOPOLY and Hasbro Gaming, grew 40% and point of sale was up globally over 25% (note: point of sale does not include Wizards of the Coast brands).
- PLAY-DOH point of sale increased mid-single digits.
- Hasbro launched Bring Home the Fun, a global initiative created to further the Company’s purpose to make the world a better place for children and their families. The initiative provides parents and caregivers resources to help keep kids occupied and engaged during extended time at home and indoors.
- MAGIC: THE GATHERING revenues were up significantly in the first quarter, on strong sales of new card releases. Certain shipments were accelerated into the first quarter to ensure delivery to distributors. Ikoria: Lair of Behemoths, launched on schedule in Arena on April 16, but due to store closures the team delayed physical product releases until May 15 in most regions. The game trailer has been viewed close to 30 million times online. Players are taking advantage of new ways the Wizards team has launched to play MAGIC games while in person play events are not happening. Where possible, events have shifted to digital play via the Magic: The Gathering Arena platform.
Leveraging Digital-First Orientation Across Diverse Retail Network
- Hasbro is creatively finding ways to accelerate online, expand omni-channel and skip the shopping cart to get products into cars and homes.
- Ecomm revenues increased double digits in the first quarter, with meaningful point of sale gains. Mass/Hyper market retailers as well as drug and grocery channels also increased revenues during the quarter.
- Retailers and regions with developed ecomm businesses performed well, while retailers and countries which rely on physical stores, such as toy specialty retail, are experiencing greater difficulties.
- Global store closures increased toward the end of the first quarter, and are expected to more negatively impact the second quarter results than during the first quarter. Ecomm, continues to be strong, but this strength is not expected to offset declines at physical retail.
Entertainment Release Schedule Shifting; High Viewer Engagement
- In the first quarter, entertainment revenues were down due to planned later delivery timing for eOne content.
- Beginning late in the first quarter, production and delivery of television and film projects for Hasbro’s eOne TV and Film business have been delayed, negatively impacting the level and timing of revenues. The eOne team continues to develop new projects and work on animation production which can be done remotely. The team now expects to deliver finished episodes and film projects later in the year than planned.
- Several film release dates have moved to later in 2020, into 2021 and in some instances are going straight to video on demand/EST windows impacting the timing and level of anticipated revenues.
- As more people are home, content viewership is high which bodes well for long-term brand engagement
- Hasbro is in a good financial position and ended the first quarter with $1.2 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 $93.2 million in cash dividends to shareholders during the first quarter 2020. The next quarterly cash dividend payment of $0.68 per common share is scheduled for May 15, 2020 to shareholders of record at the close of business on May 1, 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 first quarter.
- Hasbro remains very focused on managing credit risk of its customers.
- The Company has identified areas to manage expenses and preserve cash in the near term, including managing variable costs and lowering content production cash spend, which is now expected in the range of approximately $500-$600 million due to production shutdowns. The Company spent $168.0 million in the first quarter 2020.
- The health and safety of Hasbro employees, stakeholders and communities are the Company’s top priority. Hasbro global offices, outside of China, were closed on March 16 and remain closed today. The timing of re-opening offices will be informed by local governmental, health and safety guidelines. The China offices reopened in March following shutdowns during the first quarter.
- Hasbro has committed additional support through global philanthropic initiatives that aim to bring relief to children and their families worldwide during this difficult time. Hasbro supports Save the Children and No Kid Hungry in their effort to address the most urgent needs of children, including providing nutritious meals and distributing books and learning resources to those children and families most in need. In addition to providing financial support, Hasbro donated thousands of toys and games to low-income communities to continue to inspire creativity and fun for vulnerable children during the COVID-19 pandemic.
- In partnership with Cartamundi, Hasbro-sourced manufacturing locations are producing personal protective equipment (PPE) for front-line medical workers, including 50,000 face shields per week for the next several weeks, to be donated to local hospitals.
- The Wizards of the Coast team is supporting its Wizards Play Network (WPN) member stores during this challenging time. The team launched a reprint of Mystery Booster and will be allocating these boosters to WPN member stores at no charge, for sale to consumers at a later date. As local game stores are closed, they may run tournaments on Magic: The Gathering Arena.
Withdrawing 2020 Guidance
Due to the uncertainty related to COVID-19 including its impact on the Company’s supply chain, global retailer operations, timing and production of entertainment and the global macroeconomic environment, the Company is withdrawing its 2020 Outlook issued at its Toy Fair presentation on February 21, 2020.
The combination of Hasbro’s extensive brand portfolio, product innovation and licensing capabilities with eOne’s story-led brand skills and proven content development and monetization expertise, creates a business that can deliver long-term value and growth to shareholders. The integration is progressing well and the Company remains on track to deliver planned synergies of $130 million by the end of 2022.
Family Brands – Resilience in Animated Content Offsets Lower Consumer Product Demand
- Strong demand for animated content across all platforms offset lower licensee shipments to consumer product retailers in the Family Brands business. 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’s shows on Netflix in the U.K. and U.S.
- Key opportunities for Family Brands include the RICKY ZOOM brand rollout, The World of Peppa Pig app in digital gaming and new PJ Masks content available on free-to-air platforms and on Disney+.
- Development continues on a number of new properties with greenlights for new shows expected in the coming months.
Television, Film & Music – Strong Demand for Content and an Active Development Pipeline
- Television and film development and writing teams remain very active and not materially impacted by COVID-19 issues during the quarter. However, ongoing production lockdowns and theatrical closures are now in place and likely to negatively impact revenues over the short term. The development slate is strong, currently with approximately 100 active development projects in television (15 from the Hasbro portfolio) and over 60 projects in the film pipeline (21 from the Hasbro portfolio).
- Television: Planned phasing of the delivery of television half hours were less first quarter weighted this year, reducing half hours of produced/acquired content from 339 in the prior year period to 276 in the current quarter. Before the impact of COVID-19, the half hours of produced/acquired content were anticipated to increase for the full year over the prior year, but are now expected to be down.
- Film: Box office performance was up and driven by the key release 1917, supported by award season success. An active development pipeline includes projects with Paramount and 21st Century Fox.
- Music: Mainly a digital business, with gains in recorded music and publishing more than offsetting declines in management and live shows.
- Strong demand for content provide ongoing revenue opportunities.