Hasbro, Inc.
Q2 2016 Earnings Call Transcript

Published: 19 Jul 2016

[Operator:]

Good morning and welcome to the Hasbro second quarter 2016 earnings conference call. At this time all parties will be in a listen-only mode. The 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 would like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead.

[Debbie Hancock:]

Thank you and good morning everyone, joining me this morning are Brian Goldner, Hasbro’s Chairman, President, and Chief Executive Officer; and Deb Thomas, Hasbro’s Chief Financial Officer. Today we will begin with Brian and Deb providing commentary on the company’s performance and then we will take your questions. Our second quarter earnings release was issued this morning, and is available on our website. Additionally, presentation slides containing information covered in today’s earnings release and call are also available on our site. The press release and presentation include information regarding non-GAAP financial measures. 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. There are many factors that could cause actual results or other events to differ materially from the anticipated results, or other expectations expressed in these forward-looking statements. Some of those factors are 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?

[Brian Goldner:]

Thank you. Debbie. Good morning everyone, and thank you for joining us today. Through the execution of our brand blueprint, the Hasbro team is building brands across toy and games, digital gaming, storytelling, entertainment and consumer products. These efforts support our mission of creating the world’s best play experiences, and are delivering growth in our business. Second quarter revenues increased 10% and operating profit grew 12%. Each major segment grew revenues and operating profit. All four product categories increased revenues. Consumer takeaway continued to grow, and we are making investments to enhance our talent and capabilities around the brand blueprint. Last week we significantly enhanced our animation capabilities with the acquisition of Boulder Media. Boulder is a leading animation studio based in Dublin, Ireland. This 150 person-team is creating award-winning content for networks around the world. We are very excited to Boulder join Hasbro, as we build a world-class team in storytelling and content-creation. The acquisition is not expected to have material impact on our 2016 financial results, but strategically it reflects our mindset of investing in capabilities around the brand blueprint. Hasbro franchise brands increased 3% overall, or 5% absent FX, with double-digit growth from both NERF and PLAY-DOH. Revenues from our partner’s brands increased 15%, led by STAR WARS and the addition of DISNEY PRINCESS and DISNEY’S FROZEN. These brands and future launches, including the introduction of Furby Connect, Dreamworks Trolls, and products supporting the December release of Lucasfilm’s ROGUE 1, A STAR WARS Story, position us well heading into the fall and holiday season. For the quarter we grew across geographies, with 11% net revenue gains in both the U.S. and Canada segment and the international segment. Emerging market revenues increased 5% as reported, and 13% absented FX. Europe grew 23% in the quarter, including a 25% or greater increase from the U.K., France, Germany, Italy, Spain and Russia. While the UK BREXIT vote has created some near-term uncertainty, and negatively impacted its currency, we have positive momentum in both the U.K. and in Europe heading into the second half of the year. To date, we have not seen a negative impact on our business. Overall, global point of sale increased 6% in the quarter, with growth in the girls, boys, and games categories. For the first 6 months of the year, POS is up 17%. According to industry and Hasbro estimates, with data available through May, we continued to gain share in nearly every available market. In total, we increased our share by approximately 1.2 percentage points. Our portfolio is well-positioned for the remainder of 2016 and future years. NERF and PLAY-DOH have continued to deliver strong growth. Several other Hasbro brands contributed to the gains, including Baby Alive, FurReal Friends, and Easy Bake, as well as several games brands, including Pie Face, YAHTZEE and Bop-It. MY LITTLE PONY declined slightly in the quarter, as we transition elements of our toy line. Over the past five years, content and innovation has propelled this brand, in both games and toys and consumer products. MY LITTLE PONY

[Deb Thomas:]

Thank you, Brian, and good morning, everyone. The Hasbro team continued to drive strong results for the second quarter, including double-digit revenue growth and margin expansion. We expanded our storytelling capabilities through our investment in Boulder Media and our balance sheet remains strong. We returned $179 million in cash to shareholders this year and remain committed to investing in our business, returning excess cash, and maintaining our investment-grade rating. For the second quarter 2016, revenues in the U.S. and Canada segment increased 11%. The boys, girls, and games categories posted revenue growth, more than offsetting a decline in the preschool category. Hasbro franchise brand revenues are flat. NERF, MONOPOLY and PLAY-DOH increases were primarily offset by a decline in TRANSFORMERS. Partner Brand revenues were up in the segment. U.S. point of sale increased in the high single digits for the quarter and more than 20% in the first half of the year. Retail inventory continued to be of very good quality. Operating profit in the U.S. and Canada segment increased 23% to $58 million, or 13.6% of net revenues, reflecting higher sales only partially offset by higher expense levels as leverage improved in the quarter. International segment revenues grew 11%. Excluding the negative $17 million impact from foreign exchange, international segment revenues increased 15%. The boys, girls, and preschool categories posted growth in the quarter, while the games category was down slightly. Franchise brand revenues increased with growth in PLAY-DOH, NERF, MY LITTLE PONY and MAGIC

[Operator:]

Thank you. At this time we’ll be conducting the question-and-answer session. (Operator instructions.) One moment, please, while we poll for questions. Thank you. Our first question is coming from the line of Arpine Kocharyan with UBS. Please go ahead with your question.

[Arpine Kocharyan:]

Hi, good morning, thank you. I have a bigger-picture question, but to just get this one out of the way, could you perhaps break down the $6 million of other income? Were there in FX one-time gains? I know that earnings from joint venture are going to that line, but if you could just break down, because it was about $0.04 in EPS in the quarter. And then I have a follow-up. Thank you.

[Deb Thomas:]

Sure, this is Deb, good morning, Arpine. The other income and experience line item includes lots of different things. There’s no one-time FX gains in there. As a matter of fact, our impact from FX losses are fairly similar to what they were last quarter, in what we talked about versus last year, where currency is not quite moving in the same direction. We did have a gain from the sale of an investment in that line item and that was pretty much the only unusual thing that happened in the quarter.

[Arpine Kocharyan:]

Okay. Helpful. And then, Brian, you are probably at peak production currently. Could you perhaps talk about the visibility you have on the second half of this year in terms how your largest customers are thinking about the toy category? And then I noticed, and thank you for that color, you broke down the inventory increase as a percentage of sales. It was highest over the past ten-plus years in terms of inventory and balance sheet as a percentage of sales. Maybe you could give a little bit of color on that.

[Brian Goldner:]

Sure. If you look around the world, the industry is growing at quite a good rate. In most markets around the world it’s growing from mid to high single digits. In a few markets it’s growing as high as double digits, including Spain, Italy, Russia, and Mexico. Our business continues to grow around the world. We’ve gained market share in 10 of the 11 markets that we measure and have measurement in the quarter, and very strong market share gains. We’re also obviously seeing overall revenues growth above market growth strong double-digit growth for the company. And as we look out to the second half of the year, we have great momentum in our business, great POS momentum as well as momentum across both franchise and Partner Brands. Our retailers have clearly made plans that involve many of our brands. In fact, if you look at just the quarter and look at revenue contributors to the quarter, seven of the top ten revenue contributors in the quarter were Hasbro brands and the remainder were our Partner Brands, so a great balanced portfolio of our owned and operated brands plus our Partner Brands. And both NERF and PLAY-DOH were the top two brands in terms of overall revenues. So you’re clearly seeing a number of strength in our product portfolio. They are in categories of business within the NPD categories that are also growing double digits, including action figures, dolls. Arts and Crafts is down a bit, but our business is up. And then outdoor sports and games. So, again, I say good visibility not only to the rest of the year, but as we go into 2017 and 2018 we have as good of visibility as we have ever had for multi-year plans for growth.

[Arpine Kocharyan:]

That’s helpful. Thank you. Everyone is focused on STAR WARS, and I know you mentioned seven of your ten top brands are franchise brands. It seems like franchise brands came in around 3% for the quarter, partner brands grew five times that rate. As you look out for the full year, do you still expect franchise brands to grow at a higher rate versus partner brands?

[Brian Goldner:]

Yeah, so I’m not going to guide on growth rates, one versus the other, but the one thing that did impact our franchise brands in the quarter was certainly TRANSFORMERS, and that is because a year ago, we were still selling plenty of TRANSFORMERS movie-related product, because we were coming off of movie four the prior summer, and the carryover was quite strong. Reassuringly, if you look at the product line that’s associated with our television series Robots in Disguise in the quarter it was up significantly, but overall the brand was down, and that had an impact on our overall franchise brands growth rate. Despite, or if you took that out, obviously you would see stronger growth underlying for our franchise brands, particularly incredibly strong growth for NERF and PLAY-DOH.

[Arpine Kocharyan:]

Right. Double-digit, that’s helpful, and then could you talk about the cadence of STAR WARS shipments this year? We know that STAR WARS was over indexed last year, but you had the movie going into home entertainment in the first half. And there is some industry chatter about Force Friday being a month later this year, I don’t know if you can comment on that. You probably can’t comment on that. But are you still expecting STAR WARS sales roughly flat to last year’s, and the percentage of sort of total, what percentage you expect to come from Force awakens versus Rogue One in terms of when we think about that 500 million? Thank you.

[Brian Goldner:]

We continue to believe that STAR WARS year should be roughly equal to last year. Every indication, the brand is off to a great start for calendar year 2016. We continue to see both strong shipments, but equally importantly, strong take away. A number of our product initiatives are selling incredibly well, and Hasbro’s share of the STAR WARS business has improved as well. As you look quarter by quarter, I would remind you that -- that you are right, that -- if you look last year, Force Friday was September 4th, the merchandising date for Rogue One product is about a month later, at the end of September, and, you know, if you look overall quarter by quarter, there have been shifts. Obviously the first couple of quarters, we have been up significantly versus a year ago, but as I said for the full year, we would expect to achieve around the $500 million we saw last year.

[Arpine Kocharyan:]

Thank you very much.

[Operator:]

Our next question comes from the line of Eric Handler with MKM Partners. Please go ahead with your question.

[Eric Handler:]

Yes, thanks for taking my question. Just a quick question on YO-KAI WATCH, seems to be building some momentum in the U.S. Just curious how you are thinking about the product launch- how many markets is it out this year, versus last year, and also, you know, how do you think about this property as sort of like a multi-year -- on a multi-year trajectory?

[Brian Goldner:]

Yeah, you know, you are right. The TV placement continues to expand across a number of markets. It’s in a handful of markets through 2016 and will roll out to more markets in 2017. And it’s in Australia, European markets have just begun in May and will continue to roll out over the next month, and then the Latin American markets are really planned for late summer and early fall. We see it as a multi-year opportunity. It has been a multi-year strong brand in Asia, again we’re sort of in the early days, although it is certainly a contributor to the quarter to year-to-date.

[Eric Handler:]

Okay. Thanks.

[Operator:]

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

[Felicia Hendrix:]

Hi, good morning, and thank you. Thanks for all of the color, and your comments on DISNEY PRINCESS and FROZEN were nice to hear. Obviously you’re seeing strength there, just wondering how DISNEY PRINCESS and DISNEY FROZEN is selling versus your expectation.

[Brian Goldner:]

DISNEY PRINCESS and FROZEN are selling quite well. In fact our approach to all 11 princesses has worked incredibly well. The consumer take away is strong. And we’re seeing great strength versus predecessor product. We expect that the markets have -- are clearing, and we’ll see a clearer view as we go through the remainder of the year. Also in the small dolls -- what we call our Little Kingdom, the small dolls offering for both PRINCESS and FROZEN are doing quite well, and we continue to make great progress on that brand, and over time we expect we’ll make progress. We’re already seeing progress on the profitability. It will take a bit of time there, but again it’s building momentum both in terms of shipments, but, again, very important to terms of sell-through. We’re seeing great response to our product offerings.

[Felicia Hendrix:]

So in line with kind of how your plans and expectations?

[Brian Goldner:]

Actually it is ahead -- it is ahead of our plans.

[Felicia Hendrix:]

Okay. Great. And with the profitability just to help us as we model -- I know you don’t give guidance, but how should we think about that?

[Brian Goldner:]

Think about it as profitability approaching company average operating profit for a partner brand, which as you know is a bit lower than the company average, over the next two years.

[Felicia Hendrix:]

Okay. Great.

[Brian Goldner:]

And just scale that out. As I said, our teams in development and creation and product development have done a very good job in identifying opportunities to continue to get our profitability on track toward our partner brand average over the next two years.

[Felicia Hendrix:]

Super, and since you said it several times, I think it begs the question, how much is TRANSFORMERS down year-over-year?

[Brian Goldner:]

TRANSFORMERS is down less than the boys’ average one would expect in a movie year. It’s down by, you know, around 20%, and again, it’s as we mix out of the movie-related product and we get into the TV-oriented product, so this quarter has that impact. The biggest impact to the boys’ category overall is JURASSIC PARK, and JURASSIC WORLD product is down significantly versus a year ago, and that also impacts our preschool lineup, because of Playskool Heroes, where we had preschool JURASSIC PARK product.

[Felicia Hendrix:]

That’s helpful. Just a final one, in the slide deck, for the -- for your international business, it said in the second half POS was up, but in the little box for the second quarter it didn’t mention anything about POS for the second quarter. So I was wondering internationally if anything changed in the quarter.

[Brian Goldner:]

Yeah, if you look at POS, in the quarter, POS was up globally 6%. In Europe POS was up high single digits, Latin America mid-single digits Asia Pacific double digits.

[Felicia Hendrix:]

In the quarter?

[Brian Goldner:]

In the quarter.

[Felicia Hendrix:]

Okay. So nothing to read into there. Great. Thanks.

[Operator:]

Our next question comes from the line of Stephanie Wissink with Piper Jaffray. Please proceed with your questions.

[Steph Wissink:]

Thank you. Good morning, everyone

[Brian Goldner:]

Good morning.

[Steph Wissink:]

Two questions for you Deb, the first is on the product mix. I know you cited that as favorable in the quarter, and Pony and Transformers were down, so should we expect that trend to continue through the second half and then start to reverse in the early part of 2017 as Transformers and Ponies come back online? And then second question related to Boulder, I know it’s not expected to have a material impact this year, but as we look out over the next couple of years there is a third-party revenue stream in that business, is that going to flow through the entertainment and licensing line, or how should we think about that within the context of the P&L? Thank you.

[Deb Thomas:]

Sure as for product mix, we expect in the latter half of the year as Magic, and Brian talked about it earlier in his prepared remarks, our product mix will continue to be favorable throughout the year. As our MAGIC

[Steph Wissink:]

Thank you.

[Operator:]

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

[Jaime Katz:]

Good morning, guys, thanks for taking my questions. I’m curious what is motivating consumers in preschool. I think you guys had mentioned that it was weak in North America, or maybe I misheard that. And how are you thinking about facilitating sales going forward maybe in that category specifically?

[Brian Goldner:]

Yes, actually if you look at the preschool business, particularly our Play-Doh business was up significant double digits, and the one area of weakness was really that we could talk about -- considerable weakness was the -- in Playskool Heroes, which is our preschool lineup of figures. And Jurassic World’s business was down significantly in that segment, down much higher than the typical -- we would see for a boys’ action property. And that was true as well in our boys’ business as well. And so that’s -- that was the area of weakness there, and then the growth was in the Play-Doh business.

[Jaime Katz:]

Okay. And then for Boulder Media, how do you think about that in the -- sort of under the umbrella with Allspark the Discovery Family relationship, and maybe do you think about how to organize them to get the best sort of synergies or allocate the best opportunities to each silo within that content angle?

[Brian Goldner:]

Yeah, what we have been doing is running Hasbro Studios as a virtual studio. We bring on animators and professionals internally to help us to create the initial content, and then we’re rendering and developing our content around the world in geographies, eight or nine geographies around the world, where there’s an opportunity in great teams to develop content. They also, in many places have tax advantages oriented toward creating animation in those geographies, and we’ll continue to work with those teams over the next period of time. We have lots of shows in production. We have our animated feature film in production. But we also see the opportunity to build the Boulder business and to scale, in fact if you look at the kind of animation they create, it’s world class and theatrical-quality animation. They are working for many different networks around the world and making shows for them. And we see an opportunity as we are developing new brands, as well as new stories within our franchise brands, an opportunity to expand Boulder’s capabilities and to continue to build our content capabilities as a company. So it’s a matter of balancing between different resources, and continuing into looking at how we scale Boulder’s operations, because they do provide incredible animation content at a great price point.

[Jaime Katz:]

Thank you.

[Operator:]

Our next question comes from the line of Tim Conder with Wells Fargo Securities. Please go ahead with your questions.

[Tim Conder:]

Thank you. And Brian, congrats to you and the whole team again for your ongoing execution here, it’s great. Just a couple here, if I may. I don’t want to belabor the inventory point, but a little more color if you could, I know you mentioned it was STAR WARS and it was the DISNEY PRINCESS, which all makes sense. Can you kind of bucket it? If you put those two in one bucket versus everything else of the percentage increase, how much those two collectively versus the other drove the increase?

[Brian Goldner:]

Yeah, Tim, if you look at our overall inventory increase, 80% of the inventory increase were associated with best-selling brands as well as new business. So that would include princess and FROZEN. It would include increments in STAR WARS, NERF and PLAY-DOH and several other brands that are selling quite well, in fact. Baby Alive is up significantly in the quarter, and for the year we’re seeing growth in FURREAL FRIENDS. So there’s a number of brands that would be part of that. So we feel like the inventory is in very good shape. It’s just consistent with our forecast, and it’s well balanced between regions, about 40% of the incremental inventory in the quarter was up in the U.S. and 60% outside of the U.S. and international markets. But we feel like we are well positioned with inventory, and it’s associated with brands that are selling quite well, and/or are new to the company.

[Tim Conder:]

Okay. Helpful. Very helpful. And then as it relates to -- circle back to some previous questions on STAR WARS. You have us given good color about how you expect ‘15 and 16 to be rather balanced in the total revenues from STAR WARS. Anything you can say given ROGUE ONE is a spinoff, it would seem that that may not be quite as big so -- as we think about that in the latter part of the year here, and then carrying over into next year, ahead of episode eight coming at the end of ‘17, how should we kind of the about the balance if you look at the main episodes versus the spin off, if you can kind of look at them that way, as far as scale?

[Brian Goldner:]

Yeah, we’re incredibly excited about ROGUE ONE, and from the materials that have been out there I think you can see by now, that it’s really around a classic story that everybody in the world knows of the Death Star and the plans around the Death Star. It’s got a lot of great classic play patterns in it. We’re very excited about the product opportunities and we’ll have a robust line that’s launching in late September. And we see it as a great compliment to the Trilogy story that’s being told. And, as I said, for the full year, we expect STAR WARS to be similarly sized. That’s obviously really contributed to our Boys business as has NERF contributed to the Boys business, and SUPER SOAKER. I think the one headwind to think about for the remainder of the year certainly is JURASSIC WORLD that was down significantly and above the Boys action average for the second quarter. We still have about half of the revenues. If you compare it in a movie year, Jurassic does about $100 million. So we have about half of that to do to compare to 2015, and we have made the decision at the end of 2017 we will no longer handle JURASSIC PARK. We had a many year relationship with Universal. We’ll no longer handle JURASSIC PARK because we were unable to arrive at a mutually beneficial financial arrangement on that brand. So, again it’s about $100 million in a movie year, it was a significant Q2 headwind and it will be a bit of a head wind for Q’s 3 and 4. So as you think about the full year, and getting to your questions about how to think about gaiting around the Boys business and STAR WARS, I think that’s a factor to consider.

[Tim Conder:]

Okay. And then lastly, any color you with talk about the POKÉMON GO? It’s only been out there since the early part of July, but how that made headwind a little bit of maybe a brand or two within your portfolio? Or maybe even indirectly give a little bit of boost? Any color you could provide there?

[Brian Goldner:]

Well, we have been developing our mobile gaming business for some time and we love that mobile games are really coming to the floor and the ability to use all of the capabilities of the smartphone in engaging a mobile gaming player is great. So we’ve not seen any negative impact on our business, nor would we expect to. But we certainly believe in the mobile gaming genre, it’s a wonderful way to contribute to storytelling as well as to get monetization of games through a premium model. And our brands in the quarter performed at a very high level around mobile gaming, and we continue to like the category, and we’ll continue to build our business there. We love that mobile gaming is something that people are focused on.

[Tim Conder:]

Great. Thank you.

[Operator:]

Our next question is from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead with your questions.

[Gerrick Johnson:]

Good morning, two questions. First, Europe. What drove Europe to basically double the domestic growth for their shipments of certain categories that happened there in the second quarter that might not have happened in the first? And the second question is on BEYBLADE. When does that launch? What are your expectations for BEYBLADE? Thank you.

[Brian Goldner:]

Yeah, Europe just has seen great growth in its business across a number of dimensions. There are similar brands and brand portfolio lineup, we have had-- we talked about the fact that brands like MY LITTLE PONY grew internationally, particularly grew in Europe for us this quarter, although it didn’t grow in the U.S. We expect MY LITTLE PONY to continue to perform at a high level. But the lineup is very strong

[Gerrick Johnson:]

Great. Thank you, Brian.

[Operator:]

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

[Drew Crum:]

Okay, thanks. Good morning, everyone. Deb, you mentioned the operating profit margin in the first half was up 140 basis points. I think you said you expect gross margin for the year to be kind of flattish. How are you thinking about the EBIT margin for the second half. I know you don’t like to guide, but any swing factors that could move that either direction that we should be thinking about? And then just to follow-up on the boys’ business Brian. No mention of Marvel in the quarter. How did that business perform for you in the quarter? Thanks.

[Brian Goldner:]

Sure. I’ll take Marvel and let Deb take your other questions. Marvel performed at a very high level, it was one of our top brands for the quarter. It was off a bit versus year ago, but much lower than any Boys average decline one would see in a non-movie year because they just have done such a great job in entertainment. So you just, again, a major contributor the company in the quarter. They have great plans go forward. Obviously CAPTAIN AMERICA and some of the Marvel legends product were great contributors and obviously we’re down a bit versus AVENGERS in the year ago. But again, very strong contributor overall and off just a bit. As I said, the biggest impact of the Boys category in the quarter as headwind was Jurassic.

[Deb Thomas:]

And as far as our margins, we don’t have anything that changes our estimates from what we talked about at toy fair last quarter, significantly. So we expect revenue to continue to drive expense leverage. We will continue to make investments for the long-term growth of our business. You have seen us do that consistently while growing our margins. And I think the estimates that we talked about, with the exception of FX, which we tried to say will be a little bit below where we thought it would be in February from a percentage and point of revenue, we’re still looking at the same -- roughly the same estimates as then.

[Drew Crum:]

Okay. Thanks, guys.

[Brian Goldner:]

Thank you.

[Operator:]

Thank you. At this time, I’ll turn the floor back to Ms. Debbie Hancock for closing remarks.

[Debbie Hancock:]

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately two hours. Additionally, management’s prepared remarks will be posted on our website following this call. Our third quarter 2016 earnings release is tentatively scheduled for Monday October 17th. Thank you.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.