Good morning and welcome to the Hasbro second quarter 2020 earnings conference call. At this time, all parties will be in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad.

Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I’d like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead..

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 we begin, I would like to remind you that during this call and the question and answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives and similar matters.

These statements include, among others, the impact of the coronavirus on our business, financial results and liquidity, our efforts to protect the health and wellbeing 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, and today’s press release and in our other public disclosures.

We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Brian Goldner.

Brian?.

THE GATHERING Arena to mobile and into China. Moving to supply, our supply chain is now in good position. We have returned to production in our third party factories. China factories were caught up in early second quarter and we anticipate catching up on demand in other locations by the latter half of this quarter.

Our global operations team has worked diligently to maximize our global footprint, shifting production to other locations where feasible, and have re-forecasted the year based on the changes to mix and timing. Next, liquidity. Hasbro is in a strong financial position and we ended the quarter with just over $1 billion in cash on our balance sheet.

Our revolving credit line of $1.5 billion remains available and accessible. As the shutdowns have continued, we have taken cost out of the business in areas where we cannot currently operate, including making difficult decisions to furlough some employees and to simplify our commercial organization.

On the content side, E1 production is gradually returning. As a result of being unable to produce to our plan, our cash spend on content for 2020 is now projected to be approximately $450 million to $550 million. We’ll complete and deliver this content this year, but our slate and some revenues will also shift into 2021.

Demand for E1 content is strong and the team is doing good work executing a successful virtual Cannes and developing over 100 film and 60 new TV projects, including Hasbro IP and new IP.

We launched a new animated series on Netflix, Alien TV, and continued to develop and produce new content for Peppa Pig, PJ Mask, and the My Little Pony 2021 feature film.

We have made great progress integrating our businesses, including combining our consumer products and entertainment teams, and remain on track to deliver the $130 million in synergies by year end 2022.

Importantly, we are working to unlock the long term value of the organization as we develop new entertainment and commercial opportunities around Hasbro IP. Finally, community. 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 belief to children and their families worldwide during this crisis by providing meals, as well as learning materials to those most in need.

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. We’ve applied this belief to the ongoing dialog across our company around racial injustice, listening and looking within ourselves and our organization critically and honestly.

While we don’t have all the answers, we have never been more committed to fostering a culture of inclusion and using our brands, our entertainment and our influence to make a difference in the world. At Hasbro, we are in a unique position to help shape minds and hearts from the earliest age.

We have the privilege of being part of childhood, fandom and inter-generational play and entertainment globally. With that privilege comes a responsibility to foster inclusion and to help teach the next generation that everyone is equal and everyone is worthy. Making a difference in the world is our purpose and our legacy.

We want every kid to feel like a hero, to see themselves on the screen and in their toys and games, to feel they belong and that they matter, irrespective of the color of their skin. I believe we have strengthened Hasbro this year by rethinking how we’ve done things in the past and we’ve changed our approach going forward.

We’ve remained invested in areas of high consumer consumption and interest in innovation, content, digital gaming and consumer products. We’ve strengthened our path to the consumer, leveraging our digital-first multi-channel strategy and our global retail footprint.

We’ve increased our agility and speed to market, adapting Hasbro plans as initiatives shifted to next year, and we are set to execute and deliver a strong 2021 across a robust line-up of entertainment and innovation with entertainment from E1 and our partners, new gaming launches and digital and table top, and new play initiatives across our brands.

I’d now like to turn the call over to Deb.

Deb?.

THE GATHERING Arena. In the E1 segment, while content demand by consumers remains high, revenue is hampered by the limits on live action production and delivery, along with lower consumer product sales, advertising revenues and live events.

Operating profit in this segment increased due to lower program amortization, royalties, and advertising expense this year versus last. Third, let’s look at supply.

As we outlined last quarter, production shutdowns in our factories during the second quarter impacted our in-stock levels, most notably in games, and delayed the delivery of certain second half 2020 launches.

While factories in China, which represent 55% of or our production were open, factories in the U.S., Ireland, and India were closed for much of the quarter. Production is back and operating, and the teams are targeting the latter part of the third quarter to be caught back up.

This depends on being able to ensure production can continue and staffing is at adequate levels. One area to note is the cost of air freight is up substantially this year versus last. Should we air freight product to meet demand during the holiday period, this will increase costs.

As we close with community, we remain focused on our team’s safety, health and wellbeing, and we recognize what a tremendous job our teams continue to do during what is a very challenging and uncertain period.

They are showing great resolve and ingenuity to chart our path forward and provide support for each other and for the communities in which we’re operating. There are learnings from this experience which will help define our company and how we operate for years to come.

Before we open for questions, let me touch on a few expense items on a pro forma basis. Gross margin increased 160 basis points, including both cost of sales and program production cost amortization driven by product mix, including delivery of higher margin content and a reduction in program amortizations, somewhat offset by higher sales allowances.

The decrease in advertising was driven by lower promotional spend at E1 due to the lack of theatrical releases combined with savings across all of our commercial businesses.

We’ve aligned our advertising to reflect the current demand environment but also shifted the timing of spending and have meaningful promotional plans to drive consumer demand for the holiday. SD&A was down $26 million, reflecting the cost savings initiatives we’ve undertaken across the business as well as lower freight and warehousing.

Bad debt expense was up about $5 million within the commercial regions, reflecting the current environment. As in the first quarter, the alignment of accounting policies on cost capitalization and stock compensation resulted in higher admin costs for E1.

Within SD&A, approximately 80% of our dollars are fixed, resulting in a fluctuation as a percentage of revenue. In closing, while we continue to see the year developing as we anticipated, there remains a great deal of uncertainty in the global marketplace that underlies this expectation.

What has been consistent is the robust demand for our brands and content and the strong execution by our global teams. We are positioning ourselves to execute a good holiday season and to drive our business in 2021 and beyond. Now Brian and I are happy to take your questions..

[Operator instructions] Our first question is from the line of Arpiné Kocharyan with UBS..

Hi, thank you very much. You indicated in the release that you expect revenue from shipments to brick and mortar and delivery of content to continue to be impacted by shutdowns, and I know you also mentioned consumer license revenue in your prepared remarks.

Could you perhaps clarify the extent of that impact, I guess on the E1 side? I understand there could still be tied to partial resumption of production, but on the legacy toy business, it sounds like a majority of retail footprint is open, perhaps single digit in terms of percentage of total.

Could you just clarify what that means and what implication that has for the back half?.

THE GATHERING and DUNGEONS & DRAGONS for Q3, and then moving into very good holiday season with lots of new initiatives..

That’s helpful, thank you.

Then on E1, it sounds like cash spend in terms of content production for the year is lower a further 9%, and in Q1 it was down about 23% on a full year basis, and you also mentioned some slight revenue shifts, so is it fair to say that revenue on the media side of things from E1 is down more than 30% for the year?.

What we’re looking at is the restarting of production, and E1 has a number of shows that had been sold around the world to different platforms, so now it’s just a matter of commencing production.

Some of the difference of whether the revenue will fall in 2020 or 2021 just has to do with how many episodes we’re able to deliver this calendar year, which is our fiscal, or whether those episodes get delivered in the 2021 period, and then of course we recognize the revenues when we deliver the episodes primarily.

Deb, I don’t know if you want to comment further?.

Yes, exactly Brian. The cash spend is down because we are just seeing a bit of a slower return in certain markets to be able to actually complete that production. As we look at that, it’s really a delay in delivering the episodes.

Particularly think about the live action - it’s just a delay and the revenue may transfer into 2021 as to when we’re actually able to complete it..

Thank you very much..

Our next question is from the line of Stephanie Wissink with Jefferies. Please proceed with your question..

Thanks, good morning everyone. We have two questions. One is a housekeeping question. Brian, you mentioned LatAm has a significant under-indexing in ecomm. I’m wondering if you can just march us around the world and talk about ecomm as a percentage of the total mix in the big regions, just so we can understand the scope of penetration.

Then my bigger picture question is just as you think about maybe what you have missed in opportunity in the first half of the year.

How much should we think about the ability to recoup some of that in the back half in both E1 and on the toy side in terms of demand? I think, Brian, you mentioned seven weeks of supply in channel - that’s pretty low, so curious about how much you think you can recover and build back into channel-level inventory over the course of the next 12 to 15 weeks.

Thank you..

Yes, thanks Steph. We built a great ecomm capability globally, so if you go around the world by region, the U.S. business is tracking right now about a third of our business is coming from ecomm and omnichannel. In Europe, it’s about 30%, and in Asia it’s about 30% as well.

In Latin America, we’ve grown it substantially in an effort to try to get business done in ecomm, but yet the channel still only represents about 12% of total revenues, and that’s up about 10 percentage points versus a year ago, so the team has done a very good job of trying to make hay there, but recognize that the predominance of that retail is done in stores.

That’s where we are with ecomm.

As we go toward the third and fourth quarter, as is typical, we expect ecomm to continue to be a high--that high proportion of our sales; in fact, could increase even further, and the teams are prepared for that as we go into third and fourth quarter As we look for the second half of the year around our products and initiatives, we have very strong demand.

Our games business is in very high demand with very strong sell-throughs, but we’ve also seen very strong sell-throughs in our Nerf business over the last six to eight weeks. We’ve seen double-digit POS increases, particularly in the U.S.

and Europe, and we have retail inventory down there further than just the average 17% that we saw in overall retail inventory decline. Play Doh is down similarly.

I’d say that we are taking advantage of every opportunity that we have, but recognize that some of the stores and retailers view their year as really a reopening at this point, and so they are reopening stores, we know that our major customers have been open throughout as they sold essential goods, and I think that’s particularly why we performed even better in the U.S.

as our top three retailers represent about 60% of our total revenues around the world. Those top retailers represent closer to just under 40%, and so I’d say that some retailers are just reopening, particularly toy specialists.

We’re seeing good momentum particularly in Europe and in Asia Pacific as they reopen - very strong recent point of sale in places like China, Australia, the U.K., France and other markets, and we are rebuilding our inventories to the extent that we are launching a lot of new initiatives.

It really isn’t about shipping what was available in the first half of the year but rather teeing up what the new initiatives are for the second half.

We have a very robust line-up for a brand like NERF, for example, where the Ultra line-up will come out around the world, a brand new ELITE product to RIVAL product, and that’s true across our businesses where we’re really lining up to satisfy and exceed consumer demand around the world..

Thank you..

Our next question is coming from the line of Michael Ng with Goldman Sachs. Please proceed with your questions..

Thanks. I just have two. First, I just wanted to ask for some clarification around your comments about catching up on missed production by late 3Q.

How much was the supply chain headwind in the second quarter, and do you feel like you have better visibility into the third quarter because there are written orders that have yet to be fulfilled? Then I have a quick follow-up..

Yes, it’s exactly right. We are really seeing the strong demand across a number of brands for our business, very strong demand and lots of new initiatives launching in Hasbro gaming, lots of new products across Hasbro gaming, a brand-new addition CLUE LIARS. We’ve got a brand new DUNGEONS & DRAGONS game coming for a starter set, the Adventure Begins.

We’ve got DEER PONG, OPERATION PET SCAN, a whole line-up of new Monopoly games coming for the second half. Similarly, brand new Star Wars.

Star Wars has been performing quite well, but in the second half of the year we have the second season of The Mandalorian and the Child product, but also very strong collector sales there, the Nerf line-up that I described, including launching NERF ULTRA and other brand new initiatives.

So we have good visibility to consumer demand and our retailer plans are quite robust as we go through Q3 and into Q4..

Great, and my second question was on Magic. I can appreciate there were difficult year-ago comps and there was the pull forward to 1Q that you guys had spoken about. It seemed like table top was probably down meaningfully year-over-year in the quarter.

Could you just talk about some of the unique things that are impacting table top, particularly the hobby store closures? Are those stores reopening as well in the back half, and are you seeing renewed demand as those hobby stores reopen? Thank you..

Lair of Behemoths, which was the early spring set where we moved more of the revenues into Q1, is actually going down as the bestselling spring set of all time, and we’re also seeing very good early interest and very high demand and strong sell-in for the core set 2021 that launched just a couple weeks ago.

The rest of 2020 is filled with other yet to be announced releases for table top and for all players and all of their different play styles. Also, would mention that Magic Arena was up in the quarter even though we had less releases in the period.

Remember, everything is tied to the storytelling about the brand, and we did see over 2.5 billion games played in total as we look at Magic Arena, which is up from 2.1 billion at the end of Q1.

Magic Arena players are still spending about nine hours a week on average, and Arena is coming to mobile, which of course is the most played global platform and is also launching in China in partnership with Tencent. So again, we feel very good about the Magic business. It’s tracking quite well.

We’d always described Q2 as a major headwind; in fact, last point, Q2 last year was the biggest quarter for Magic, so the headwinds were substantial..

Great, thank you Brian..

Our next question is from the line of Felicia Hendrix with Barclays. Please proceed with your questions..

Hi, thank you so much, and good morning. Brian, you’ve kind of already walked us through a lot of things and you seem to feel better about the second half than the first.

Just parsing through the quarter, wondering if you could just help us understand how much of that 30% decline was attributable to store closures and supply chain issues, and then also just trying to understand what the different areas that were affected by product shortages were..

THE GATHERING that I just described, DUNGEONS & DRAGONS but also remember a year ago was Avengers Endgame in second quarter last year. We were also gearing up for Spiderman’s movie, which came in July last year.

I know that there’s been a lot of conversation about COVID, which is appropriate, but also a headwind there on the Marvel business, and we are seeing good progress on Star Wars and Frozen, but Marvel was quite substantial last Q2. We are very happy now that our domestic factories and warehouses are open, also India is back up and producing.

There have been some short-term shutdowns and restrictions, but we feel very good that we’ll be able to get those products into the marketplace. Demand has remained incredibly strong. If you look at POS globally, it’s up high single digits. That’s consistent with the industry growth rates that we’ve seen from NPD.

Hasbro is holding its share around the world year to date, and our franchise brands’ POS globally were up in the quarter as well. Of course, global games were up by more than 50%. The demand for--consumer demand for products is quite encouraging.

As we get to second half of the year, while we may not make up all of what was missed in Q2 for reason we described, the fact is Q3 will be meaningfully better than Q2 and we expect to have a very good holiday season..

Great, that’s super helpful.

Then just moving to Peppa and the family brands in the quarter, can you just walk us through in a little bit more detail what happened there in relation to YouTube and advertising, and was that a surprise for you?.

Yes, what we saw really--a couple things around family brands. First, Peppa Pig in Q1 in China had very strong licensing programs, and remember we receive our licensing revenues in arrears, so it’s always recorded the quarter after.

As we compare what was going on last year in China, the consumer product licensees that are in China, which is several, had a more challenging year this year in the first quarter in China as the market is just now reopening. They did add a lot of new content deals in China, which was positive.

We did see a reduction in consumer products for PJ Masks, which was coming off of holiday 2019, and we’ve seen some challenges there. Then on YouTube, what happened is they changed the algorithm and the way that advertising was to be presented. We saw some reductions in advertising.

The team is now seeing some recent bright spots there and our team internally manages all of our YouTube, including now all of the Hasbro brands IP YouTube features, but Peppa is still the number one viewed preschool property on YouTube with billions of views, so again there’s been some puts and takes there, but down primarily due again to closures and consumer products challenges in different regions around the world due to COVID closures..

Great, thank you so much..

Thank you. Our next question is from the line of David Beckel with Berenberg. Please proceed with your questions..

Hey, thanks so much for the questions. I have two, if I could. The first, I just want to touch on a question that’s been asked a few times slightly differently. With factories up and running now, retailing and tooling is very low.

I’m wondering if you can help us characterize what shipped in or sales might be for the second half, assuming POS is a certain level. For example, would it be higher, the same, or lower in POS, and what are some of the salient puts and takes to that? Then I have a follow-up..

THE GATHERING, I just described, DUNGEONS & DRAGONS as well has a very robust third quarter, as does the rest of our games line-up. We’re looking at a business for Q3 where we need to catch up on certain availability like games, Play Doh and Nerf, we have certain other new initiatives that are coming to market.

I’m not going to comment on whether we think Q3 is up or down, but remember that, again, the weeks’ supply that came out, the 17% reduction in retail inventories in seven weeks, we don’t view that as a long-term challenge to satisfy consumer demand, so our goal is not just restocking shelves, our goal is continuing to satisfy consumer demand, which we believe we can do, and we’re doing that very effectively.

The team has really been amazing at what they’ve been able to accomplish with the very strong POS that we’ve seen. Then as we get into Q4, we expect to have a good holiday season. We have very robust plans, lots of new initiatives, and really good marketing coming from the teams across the business..

That’s really helpful, thanks. My follow-up just relates to toys driven by content and some of your partner release timing, as well as your own. Could you update us on what partners have conveyed to you with respect to certain movie timings, notably Disney, and then your own plans for GI Joe this year? Thank you..

Yes, so for the most part, people are continuing to hope that the theatrical business reopens sometime soon, but really hasn’t yet. Many of our partners’ initiatives have already been announced and moved to 2021 - in fact, 2021 is lining up to be an incredibly strong year for our IP and content, as well as our partners’ IP.

We expect that those should be in the first quarter next year, could be three movies including The Eternals, GhostBusters, and Raya and the Last Dragon. In Q2 next year, you’ll have another Marvel movie, or two.

MY LITTLE PONY movie, the animated feature will come next fall, and our expectation is that GI JOE will move into a slot in 2021 and we’re working out the specifics right now with Paramount.

But again as we look at the opportunity to maximize our connection to global audiences and also to global retail, it will likely move into a spot and we’re working out the specifics in 2021..

Thanks so much..

Our next question comes from the line of Jaime Katz with Morningstar. Please proceed with your questions..

Hi, good morning. Thanks for taking my questions. I’m curious if you’d be willing to unpack the gross margin performance a little bit more. I know part of it is mix related or the composition of revenues, but were there any puts and takes worth noting that might help us think about how that might look over the second half of the year? Thanks..

Sure. Our gross margin is strong, and if you think about it, the impact of Magic and the releases in the quarter actually had a slightly negative impact on that number. However, overall the Hasbro piece of the margin is strong. We don’t see a significant change to that. The one thing we did talk about is airfreight.

Should we have to airfreight more, just the cost of it is up now, as you can appreciate, with fewer flights running and the ability to actually airfreight, so if we have to air freight a lot for some reason, we could see that having an impact on it.

But the rest of the business from a pricing standpoint is good, and our costs remain in good shape as well. You know, about three quarters of our exposure for the year is hedged so we don’t have a lot of variability in FX rates that are coming into those product purchases, so that’s a good factor as well.

If we think about the program production amortization, originally at the beginning of the year, we did pull all of our guidance, but I know it’s hard to model this without some level of estimate. So kind of where our heads are at right now is we originally said it would be between 9 and 10% - I think we’re around 9% for the quarter.

Given what we can actually get done and delivered, I think that we may see it run a bit below that for the rest of the year as we think about the program production part of the gross margin.

But overall, we expect it to remain strong, and looking at the different components, the biggest thing that could impact it at this point is really that air freight I referenced..

That’s really helpful. Then as we think about advertising as a percentage of sales, it sounds like it should likely be up in the second half of the year, but I’m wondering if you’re finding different efficiencies in the advertising channel that may not make it as wide a change in the percentage of sales. Can you help us think about that? Thanks..

Yes, I think you’re right. It’s not really about the percentage of sales. I think that the kinds of programs that the team puts together, the way that we work with online and omnichannel retailers, some of the buckets of spending go to other places, other than just the advertising line.

Obviously content creation and storytelling are different lines on the P&L, as well some of our gaming development, which is also part of storytelling and effectively marketing for our brands.

So you’re right - I don’t see the overall advertising line increasing as much as overall marketing, and advertising is planned to be robust for the second half across a number of dimensions..

Our next question comes from the line of Tami Zakaria with JP Morgan. Please proceed with your questions..

Hi, thanks so much for taking my questions.

My first question is do you expect the $130 million of E1 synergies [indiscernible] savings by end of 2022 to be more back-end loaded now, given your revenues have taken a hit, and my assumption was that a lot of the synergies are tied to bringing E1 related tour revenues in-house, so is it going to be more back-end loaded, is the question?.

Hi Tami, good morning. I think that we still believe we’re on track.

Obviously the business has changed because of COVID for all of us, right, and we still think we’re on track to achieve $20 million of cost synergies before the expense associated with it this year, and we’re still on track for next year and we’re still on track for the $130 million by 2022.

There may be some things moving around, but honestly the teams are working great together. The one thing that you can do really well over video is collaborate on future projects, and that’s the exciting thing. This year, we’re all dealing with the situation, but we are squarely working on the future.

The integration is going well, and we still expect that $130 million in synergies by 2022..

Got it, that’s super helpful. My follow-up is we have been hearing that media production costs may see an increase of 10 to 20%, given the new COVID-19 protocols.

Do you think you can pass along those costs to networks, or is it not likely given the contracts are already in place for the pricing of the shows to be delivered?.

I think that there will be ongoing dialog. I think that it won’t be just one answer there. Clearly there’s a lot of partnership that goes on between us and a lot of our streamers, broadcast partners, and linear partners, and it’s an ongoing dialog.

The most important priority there is the safety of the crews and the cast and the people that are making the production, and there are meaningful steps that the team has been taking, protocols that are being set, and there are ways to look at budgets overall to try to mitigate overall costs and to incorporate the cost of strong protocols and the safety of the teams making the productions while executing.

There’s not a one-size-fits-all solution, and the dialog is going on and I feel like the teams are making very good progress there..

Understood. Thank you so much, and best of luck..

Thank you..

The next question is from the line of Drew Crum with Stifel. Please proceed with your questions..

Okay, thanks. Hey guys, good morning.

Brian, when would you expect to have TV and film production up and running and fully operational? Deb, as you look at 2021, do you think you’re at that $675 million to $750 million range you originally forecasted for this year, or should you be above or below that threshold?.

Given the current plans and what the team is prepping for production, our expectation is we’d be back in production in full in September across all of our productions. As I said, we are already in production across a number of scripted shows, not just unscripted which we’ve done incredibly well throughout the pandemic.

The teams have used a lot of novel tech to keep those unscripted productions going, but the scripted shows have started again in regions in Canada, they’ve started again in the U.K. as film is beginning, and then really for the U.S., we expect that by September we should be up and running on the remainder..

With respect to the actual production spend, we would expect to go back to next year’s levels if we can be in full production on every--or the same level if we can be in production for everything.

Now, it might fluctuate a little bit because we have some things we’re catching up on, but right now our expectation is that we would spend about that same level..

Okay, and then for my follow-up, I know there’s been a lot of discussion on ecommerce, nearly 30% of POS.

We keep hearing the demand is strong across the industry, so given that, what are your expectations for bricks and mortar floor space or shelf space for the category or for your business, however you want to answer it, for the second half? Should it be up, down, or unchanged versus last year?.

We have a lot of robust plans we’re already putting together with our retailers, and they’re building plans for both ecomm or omni as well as for brick and mortar. The teams have done a very good job.

We have more new initiatives coming for Q4 this year than prior year, and certainly believe that we have a lot of new innovation that’s worthy of expanded floor space, and working on all that. I do want to comment that I think that the way promotions will be laid out this year is very different than some prior years.

The goal for a lot of our retailers as we’re starting to see it unfold is not to bring all the customers into a store on a given day, for obvious reasons, but rather think about programs that can go on for a period of time to give more customers access to hot selling product over a longer period, to give people the opportunity to buy online or pick up curbside, and use all the different growing modalities of retailing that have been so effective so far and year-to-date.

Our teams are really ready across BOPIS or pick-up curbside, straight ecomm and omni, but also our retail merchandisers we expect to be in stores, stocking shelves in the fourth quarter, and we are looking at really robust plans. To your point about ecomm, our ecomm POS, we have the best data for the U.S.

- it was up more than 100% in Q2, and our franchise brands on ecomm were up 84% across franchise brands, very strong with Nerf up 55% and Play Doh was up 166%.

Our partner brands were up more than 100%, emerging brands were up more than 100%, and games were up the same, so that step-up that we’re seeing from the consumer, we don’t expect it to retrench, we expect it to continue to expand as people get the opportunity to buy the product they want, find the product they want, more searches originating online for the brands and products their families, kids or fans desire, and then satisfying that either through curbside pick-up, in-store pick-up, or shopping with a cart at these stores..

Got it, okay. Thanks guys..

Thank you. Our next question is from the line of Eric Handler with MKM Partners. Please proceed with your questions..

Yes, thank you very much. Wonder if you could talk a little bit more about POS. I believe you said U.S. in 2Q was up in the high teens. Wonder if you could give that number by region for international, what overall international was, and also wondering if you might be able to give some perspective on POS for July..

Sure, so first, global POS we said was up high single digits, and North America was up in Q2 16%, Europe was down low single digits but with recent POS up quite substantially, so as we exit June and into July, we’re seeing very good growth across a number of markets - U.K., France, and others in Europe.

Latin American POS was challenged, and we’ve talked about that marketplace, it was down less than revenues but about 30%. Asia Pacific was up double digits, similar to the North American POS at plus-16%, very strong POS growth as China has come back online.

We’ve seen good growth in China, we’ve seen very strong growth in Australia, and the rest of the Pacific region. Then by brand category, I mentioned that our franchise brands were up in Q2 in POS. In the U.S., if you look at our POS overall for the U.S. in Q2, it was up 18%, and our toy business was up high single digits.

Franchise brands were up double digits, partner brands were up high single digits. Gaming was up nearly--well, about 70% actually, slightly over 70%, so again very strong demand. We’ll be selling down retail and then [indiscernible] even now our opportunity to launch new initiatives into Q3 and Q4..

THE GATHERING Arena launch, as well as when you expect to start testing for the spinoff game, Spell Slingers..

Yes, so Spell Slingers is already in development and in test market. That game is continuing to be honed and likely will launch early 2021. We want to have Magic on mobile first. We haven’t given a specific date, but it’s actively in development and it will launch second half this year.

It will also be in China with our partnership with Tencent this year. They’ve announced the key set releases through September. They haven’t announced the fourth quarter set releases yet. We always like to bring our gamers and fans along.

We don’t want to ruin all the surprises, but there are four releases that have been announced that I can remind you of. The core set was July 3, the jumpstart that had moved from second quarter due to production shortages is now--was July 17.

The double master set which I said was comparable to the modern masters from Q2 last year is August 7, and Zendikar Rising will be September 25, so we have a very robust line-up for Q3 and expect great momentum in the brand there. Then for DUNGEONS & DRAGONS, the digital gaming development has also continued.

That brand has performed quite well, grew in Q2, and has a very robust release calendar for the remainder of 2020..

Thank you very much..

Thank you. The next question is from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your questions..

relative to, one, your pre-COVID plan, and then two, your post-COVID plan after it was announced that they’d be released streaming at home?.

Yes, so the plan is really on multiple dimensions.

In the U.S., there was a switch late after having done a lot of movie marketing to the PVOD, and remember that it’s hard to know just how much of the impact was the move to PVOD versus the fact that our merchandising was all being set in April as retail stores were being closed across the U.S., so that was the merchandising window for the movie and the movie marketing, so clearly was impacted there, was not in that period as strong.

But again, we’re making plans and working with Universal to drive every opportunity across the brand as it moves from PVOD to home entertainment.

Now, around the world there will be some theatrical launches - some of those have not taken place yet, and that will still have the ESP and home entertainment windows, so I’d say very solid start, albeit because of COVID more staged around the world, rather than just being at once.

What we really are seeing is that as brands are available in streamed environments, they are generating lots of interest and sales, just look at The Mandalorian and other products.

Clearly we are seeing very good demand for Trolls and are selling Trolls product, but that was a switch that happened as we had already had retail plans set up for theatrical..

Okay, yes, so a lot of noise there, hard to discern.

Another question here, of the programming that has so far been delayed, what are you expecting will be completed as planned? Could there be some cancelled, postponed indefinitely or dropped, any maybe percent that you expect to be completed as planned?.

Yes, so right now we have a number of series that are set for production. There aren’t any number of substantial or even meaningful cancellations that we’ve seen at this point, it’s just really about getting some of our big network shows produced to the extent that we can in Q4 this year, or whether some of those revenues move into 2021.

Deb, I don’t know if you want to comment further?.

No, I agree Brian. I think it really is--if you look at the blend of what we have outstanding right now and what we’re expecting to complete, no cancellations, really, that we’re aware of that are meaningful. It’s just a matter of getting it done..

Okay. By the way, on the first quarter, you mentioned that you had 36 projects around Hasbro IP in production or in some form thereof. Now you say it’s over 30.

Is the number still 36, or did that change?.

Actually if I was specific, the number is 40..

Okay..

So it’s 40 projects, around 32 Hasbro IPs, so there’s multiple projects around certain brands like DUNGEONS & DRAGONS..

Okay, got you. Great, thank you guys..

Thank you. The next question is from the line of Priya Ohri-Gupta with Barclays. Please proceed with your questions..

Great, thank you so much for taking the question and your comments earlier around liquidity, as well as your financial covenants.

Was just hoping you could give us an update on any recent conversations you’ve had with the ratings agencies, specifically with regards to any pressure points we should be mindful of around the IG rating as we’re thinking out over the next two quarters and into ’21, just given some of the moving pieces with the business. Thank you..

Great, thanks. You know, obviously we have an ongoing dialog with all three of our rating agencies. We don’t control their assessment, final assessment of which rating, but we are talking to them constantly and sharing what our updated forecasts are with them.

If we look at what a potential impact could be, if for some reason we were downgraded by two of the three, that would have an impact on our interest expense for the year, but--you know, we maintain the dialog. We look at the forecasts that we set out on a long term basis with them, and again we have those conversations with them all the time as well.

This year has been unusual for everyone, right, but I think it’s safe to say to everybody on this call that when you look out beyond this year, our plans haven’t changed. Our integration plans haven’t changed.

Brian’s talked about the teams are working together and identifying more brands that we can take out and leverage around our blueprint, so having time to sit on video calls with everyone has been very good in a lot of ways for creating those long-term revenue opportunities.

As we look at our longer term plans, our plans really haven’t changed, they’ve just gotten delayed a bit by this anomaly of 2020 and what we’re all experiencing together right now..

If I could just ask one follow-up to that, given the delay and lack of change in the longer term perspective, is that something that they agencies have indicated they understand and are willing to provide flexibility for?.

As I said--.

Well look--oh, sorry. Deb, you should comment--sorry, modern technology.

Look, I think the plans, as I look at the strategic plans that we’ve put together, as Deb says, as we get beyond these [indiscernible] figures and we move through the second half of this year, already we’re seeing the opportunity [indiscernible] of the objectives we set for our 2020 plan.

As we got into 2021, we’ve got a very robust line-up and we’re incredibly excited about the plans we have there. The longer term plans are things that we share with our agencies so they can see what we see, and the progress is really there and quite extensive.

I don’t know if you want to comment further, Deb?.

That’s exactly what I was going to say..

Great, thank you so much..

Thank you. The next question is from the line of Greg Badishkanian with Wolfe Research. Please proceed with your questions..

Hey guys, good morning. It’s actually Fred Wightman on for Greg. If we just go back and look at the back half of last year, there was some impact from tariffs and what that did to your direct import business in the third quarter specifically.

As we’re thinking about modeling this year, how should we think about or plan for the 3Q, 4Q split, just given that prior year compare, sort of the higher ecommerce mix you’re seeing this year and then where you guys are in terms of ramping production currently?.

Yes, unfortunately as we all looked at the year, early this year we took away whatever broad guidance we would normally provide, but what I can tell you is that as we look at domestic to import split, it’s gotten even more oriented towards domestic. The teams are very capable now of getting product in through ecomm and omnichannel retail.

If ecomm were to accelerate further and be a greater proportion of total sales, we can achieve our objectives even through that mix shift. The number of new initiatives that we have for the second half of the year helps us understand, along with the retail plans we have, that Q4 can be a very good holiday. Look - Q3 is road to recovery.

We opened manufacturing that was closed in 45% of our production for two months.

We are catching up on demand across an enormous slate of brands that have performed quite well from a consumer sales standpoint, although the retail inventories have declined and our fill rates have declined, so I would say Q3 is about recovering but meaningfully better than Q2, and Q4 is about executing a good holiday season..

Okay, thank you..

The next question is from the line of Devin Brisco with Bank of America. Please proceed with your question..

Hi, thank you for taking my question. You mentioned some higher costs related to air freight but also that you’re able to take some costs out of the business from simplifying your commercial organization in the quarter.

Could you talk some more about some of the cost efficiencies that you’re currently seeing and how we should think about cost management opportunities going forward into the second half of the year and into 2021?.

Sure. Well, as we look at our product, we’ve not had to take pricing on much product. We talked about at the end of last year, we had to take a little bit of pricing because of the List 4A tariffs in some of our gaming, and that’s how.

We’ve obviously had some input cost increases just because of shortages, but not a lot, and most of our product cost is hedged, as I talked about.

As we think about that, we’ve got great contracts that really help secure moving our product cost to the U.S., and then we’re actually seeing great efficiencies from our contract that we entered into to move our product to our retailers once it gets into the various locations, so we’ve been able to achieve that.

But we’re seeing the cost savings that we talked about from our cost savings activities from last year, and really what we’re trying to do is simplify how we go to market.

In this changed time, we’re trying to make sure that we align all of our regions so we’re able to get the most efficiency possible out of our moving product to our various warehouses.

We’ve increased our ability to service ecomm and increased our ability to do flex warehousing so we can deliver a lot quicker within Europe, so that will be helpful as well as we look forward with this increase in ecomm, and also as we just look at some of the costs that we’re all taking out of our business, we’ve taken quite a bit of travel costs out and other costs out.

We think we’ll continue to do that as we move forward, and over time as we start expanding more of our product and things get a bit back to where they were on the revenue side and introducing some more of our digital games that we have in development right now, we see that’s where the margin expansion will come in over time.

But we are very focused on cost, both from a cash and an expense standpoint as well..

Great, thank you..

Thank you. The next question is from the line of Brett Andress from Keybanc Capital Markets. Please proceed with your questions..

Hey, good morning. Can you give some detail on the cadence of shipments during the quarter? I guess if we exclude Latin America, did shipments turn positive year-over-year into June or July? Just trying to understand the magnitude of the improvement you’ve been alluding to..

Yes, so again, if you think about it, Massachusetts, Ireland and Indian factories were closed throughout mid-May--to mid-May from mid-March, and so as those have reopened, clearly the manufacturing of games, third party manufacturing of games as well as Play Doh comes from Massachusetts, and so the team has been rushing to expand our capacity and get those games and Play Doh out the marketplace.

That’s similar for Ireland - it’s about a similar type of factory for our Irish business.

In addition, we manufacture in another half dozen locations or so across the U.S., trading card games for Wizards of the Coast, and other products, and so again the team saw production disruptions in Q2 and chose to move the jumpstart booster out to Q3, so now they’re able to execute that.

So I’d say what we’re really seeing as we enter Q3 is access now to our products, increasing access to the Nerf products coming out of India, we moved that launch just one month later to ensure we had enough of our Ultra product, which by the way is selling incredibly well.

This is the product that shoots 120 feet in high performance and is really well liked and high ratings that we’re seeing from fans. So I would say that by the second half of Q3, we’re really fully caught up and shipping to meet what is strong consumer demand..

Thank you..

Thank you. Our final question is from the line of Tim Conder with Wells Fargo. Please proceed with your questions..

Thank you. Brian, Deb, thanks for all the color. I wanted to circle back on the ecomm. Clearly there has been a substantial focus by yourselves, the industry and partners to ramp that up.

Theoretically if we would hit a bad situation where a lot of brick and mortar is shut down in the back half of the year, is there any way to quantify the increased ecomm bandwidth to offset that in the back half of the year? Then I have a follow-up..

Sure Tim, it’s a great question. It’s something that we ourselves were planning and talking about as we look at the step-up. I mean, hypothetically - underline that - if all of demand for the holidays were to shift from brick and mortar to online, we could satisfy that demand.

We obviously don’t expect it to entirely shift, but the teams have built enormous capability in the way we warehouse product now, the way we work with our ecomm and omnichannel partners.

It’s really improved so dramatically over the last few years as we continue to build our capabilities and the way we market within an online environment with content to commerce and other techniques, and working on the algorithms.

So I would say we have the ability if there were to be a major shift toward additional ecomm that we could satisfy that demand, and that we would shift our products to meet that mix shift..

So Brian, would that basically be everywhere except LatAm? Would that be a fair way to interpret what you’re saying there?.

That’s exactly right. Latin America, it’s still such a small percentage of the business, and the COVID situation there is so--unfortunately just so challenged.

I’d say that’s a business that won’t resolve immediately and it’s going to take a little bit more time, and we don’t have the benefit of ecomm or omni beyond about--we see about 12% of the business currently being done there, and that’s been through a lot of effort from the team and moving up from single digits a year ago..

Okay.

Then my follow-up would be, it was alluded to earlier and kind of danced around here, and with the Trolls, the move that Universal made there, hard question maybe to answer, but from what you see now and what you can comment on, how are the studios in general, including what you’re doing with Paramount, looking at releasing product going forward? It would seem that the channel shift from the traditional theaters, you know, if at all possible, you’ll still do that, but how are you thinking about maybe diversifying that channel shift or the industry diversifying that, given what’s happened, and just on a go-forward, maybe permanent shift basis?.

Look, I think that people are very desirous of a theatrical experience. We all want to get back into movie theaters as soon as we can and enjoy the big screen, along with everyone else.

There’s nothing like having hundreds of people together laugh at something or ooh and ahh on some kind of big action, something that’s going on in a movie, so we all want to get back there.

I think the studios are being very purposeful, as is the E1 team, looking at the opportunity for theatrical releases, clearly wanting to still have that global theatrical audience.

There’s nothing like the opportunity to go around the world in a semi-simultaneous way to build that talk value and demand for people to go to theaters, so we don’t see that going away.

I just think it’s a matter of when it really comes fully back, and we obviously have to be in a position where people feel safe and we can abide by protocols and get those theaters reopened.

I think the important thing that everyone is looking at is being very thoughtful, planful and strategic about which of these initiatives will go directly into a streamed environment versus which ones will go to theatrical.

Clearly we continue to partner with Universal and will make the most out of Trolls that we can make, but that was a switch that happened because of unfortunate timing around COVID coming, theaters closing, movie marketing having already been in the marketplace retail, already stocked shelves being set, so I wouldn’t use that as really the kind of purposeful strategy that we could be looking at in the future.

You just look at what The Mandalorian has been able to create, or you look at what Stranger Things has been able to create in our games business as 150 million people, or Disney Plus with the collection of princess movies has been able to create, or Frozen, and that home entertainment window there on Disney Plus, it’s been very strong for us.

I think that’s more the norm, and I think that studios and IP owners are going to be thoughtful about how they lay out those strategies go forward..

Okay, great. Thank you..

Thank you. At this time, we’ve reached the end of our question and answer session, and I’ll turn the call over to Debbie Hancock for closing remarks..

Operator:.

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

Thank you. Everyone, this concludes today’s conference. You may disconnect your lines at this time..