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?

Thank you Debbie. Good morning everyone and thank you for joining us today. Our global teams continue to execute well working at distance and across businesses that are rapidly evolving. They are leveraging our experience, data, insights and capabilities to address the ways in which this global pandemic has challenged us, and we are making significant progress in this third quarter while we’re headed toward a good holiday season. Our belief in the opportunity for Hasbro over the next few years has also intensified as we see this team in action during this challenging year. While there is a great deal of unpredictability, the year so far is unfolding in line with the expectations we shared with you last quarter. The second quarter is expected to be our most difficult as we experience closures in many of our third party factories, at retail, and in entertainment production, which negatively impacted revenues. We believe the third quarter will improve from the second quarter and we expect to make progress, but there are evolving situations that exist around the world. Finally, we are executing strong marketing campaigns and launching innovative new products to support what we believe can be a successful holiday season. As a grounding principle, we remain focused on the four key areas we shared with you in April: demand, supply, liquidity, and community. Looking at demand, consumers continue to seek out Hasbro brands and our content at high levels. Global point-of-sale increased in the high single digits and has continued to be strong as we enter the third quarter across an even broader array of our brands. Engagement in our content is in several cases at record levels. In recent months, the number of retail stores open has increased dramatically. We began the second quarter with approximately 30% or more of stores where we are doing business closed globally. Foot traffic was down in certain European countries by as much as 50% at the peak. Today, we are below 10% of retail closed globally with the greatest impact in Latin America, where approximately 25% of stores remain closed. These percentages are changing based on the ability to reopen economies and keep them open. We expect Latin America will be a difficult region for us in 2020 given the impact of COVID-19 and the small percentage of business executed online. Globally e-commerce grew rapidly as it represents where the consumer has the broadest access to the Hasbro brands they want. At nearly 30% of our toy and game revenue in the quarter, e-commerce’s share of revenue expanded by nearly 13 percentage points. Our teams were ready to capitalize on this shift as we have been investing in building a digital-first organization for many years. During this time, we furthered our capabilities and exhibited great creativity and flexibility to meet the consumer where they want to shop. In addition to strong results from pure play and omnichannel e-commerce, Hasbro Pulse, our D2C channel had a record quarter and implemented successful campaigns, including Fan First Friday which brings fans something new and exciting each and every week about the brands they love. Earlier this quarter, we launched what is now our most successful HasWeb project ever, the X-Men Legends Marvel Sentinel. It hit our funding threshold in 24 hours and after 10 days has more than 11,000 backers for a $350 collectible item. While Pulse is still a relatively small revenue number, this connection with our fans is powerful and will grow over time. Demand remains strong for our games and Play-Doh, but the production shutdowns we discussed last quarter, which began mid-March and lasted till about mid-May, impacted our ability to fully meet demand during the quarter. In-stock levels for games and Play-Doh were below our normal thresholds and we expect to be caught up later this quarter and ready for the holiday. Production disruption also impacted certain product timing for delivery in the second half of the year...

Thank you Brian, and good morning everyone. As Brian said, our global teams have come together in 2020 and we’re operating from a position of strength. As we forecasted and shared last quarter, the second quarter was extremely challenging, but we are reassured by the strong demand for our products and our content, by our ability to reduce expenses and manage our cash, and by our team’s creativity and agility during these times. We shared with you last quarter that up to 25% of retail could be closed during the second quarter, live action entertainment production would not return until the third quarter, MAGIC: THE GATHERING would have a difficult quarter due to tough comparisons based on release cadence a year ago and revenue timing, and that profitability would be challenging. We saw those realities come to fruition. Going forward as stores reopen, entertainment production begins to return, Magic has meaningful launches in analog and digital, and we execute our marketing plans for the back half of the year, we believe the third quarter is the beginning of the road to recovery and performance should meaningfully improve from the second quarter. We expect to be positioned for a good holiday season. The ability for economies to continue reopening stores and production of both product and entertainment and keep them open will be important factors in the year’s ultimate outcome. My discussion today will be versus pro forma adjusted 2019 earnings and exclude E1 acquisition-related expenses, severance and amortization. In our reported numbers, we reflected $26.5 million after tax of one-time acquisition expenses and amortization, or an impact of $0.19 per share, and $10.1 million after tax or $0.07 per share of severance expense associated with simplifying our go-to-market approach and our film and TV businesses where operations have not returned. Our integration with E1 remains on track and we continue to target synergies of $130 million by year end 2022. This includes 2020 cost savings of approximately $20 million before one-time expenses, recognizing the E1 business like the overall Hasbro business is not operating to our original plan due to COVID-19. These synergies are planned to increase in 2021 as we begin to in-source toys and games for E1 properties and recognize more of the benefit of cost savings. We continue to focus our organization around demand, supply, liquidity and community. I will begin with liquidity. We have substantial liquidity, ending the quarter with over $1 billion in cash on the balance sheet and $1.5 billion available through our revolving credit facility. We are well within our financial covenants. Our peak working capital period remains ahead, coming in the October-November time frame. Since last quarter, we have reduced our expenses and we’re closely managing our cash, including our customer collections. Throughout the second quarter in certain markets and channels, some customers remain closed and the collection of certain receivables is delayed. We are seeing improvement as stores reopen and we’re working closely with these customers to successfully navigate this period...

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?

Sure, good morning. First on E1, you’re right - we’ve begun to commence productions again, particularly focused on the Canadian market where we’re able to produce and in the U.K., and we’re waiting to be able to start production here in the United States, particularly in the Los Angeles area and other areas of the U.S. As we look at the plan for the year, we just want to highlight the fact that Latin American retailers will remain somewhat closed, to about 25%, which gets us to about that below 10% globally. Clearly Latin America has had more of an impact from COVID-19 and less ecommerce business - in fact, ecommerce there is about a third of the size of the percent of the business than the rest of our global business, we’re executing quite well globally, so we wanted to highlight that as well. Then just wanted to make it clear, clearly in Q2 we were starting to ship, or wanting to ship more for our second half initiatives, and clearly coming out of India where we have a lot of our Nerf production and some new items, we were not able to get that in for Q2 and so that will come in as part of Q3. We’re also catching up in the U.S. If you think about the Massachusetts factory, where many of our games and Play-Doh are made as well as the Irish factory, that was closed from about mid-March to about mid-May, and so again there’s a catch-up period, but overall we feel very good about continued strong POS, that continues to expand across a broad array of products and very strong plan from Wizards of the Coast and MAGIC: THE GATHERING and DUNGEONS & DRAGONS for Q3, and then moving into very good holiday season with lots of new initiatives.

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.

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.

Thank you, Steph. We've developed a robust e-commerce capability globally. In the U.S., approximately one-third of our business is currently generated from e-commerce and omnichannel sales. Europe is around 30%, and Asia is also at about 30%. In Latin America, we have significantly increased our e-commerce efforts, although it still accounts for about 12% of total revenues, which is up around 10 percentage points compared to last year. The team has done excellent work in advancing this channel, but we recognize that the majority of retail sales are still happening in physical stores. Looking ahead to the third and fourth quarters, we anticipate e-commerce will maintain, if not increase, its share of our sales, and the teams are ready for that increase. As we consider the second half of the year regarding our products and initiatives, we see very strong demand. Our games are in high demand with excellent sell-through rates, and we've also experienced strong sales in our Nerf business over the past six to eight weeks.

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.

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.

Yes, so the most important factor for Q2 is, of course, related to COVID, and our number one priority during that time was to focus on the teams that are doing excellent work. We wanted to make sure they remained safe and operating safely. During the time of Q2, we had 30% of retail closed and we had Irish, Massachusetts and India factories closed, as well as warehouses around the U.S. closed from mid-March to mid-May, so that’s the biggest impact in the quarter by far. Then as we looked, we have headwinds with MAGIC: 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...

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.

Yes, so I think there are a couple shifts that are going on that are quite good for our business as the team has such expertise in ecomm. Remember that ecomm retail and omnichannel retail runs with less weeks supply than average brick and mortar, so as more of the mix shift happens towards ecomm, we need less weeks’ supply there and still can fulfill consumer demand and drive our business. Then as we look of the reopening of retail, we have new initiatives that are coming - MAGIC: THE GATHERING, I just described, DUNGEONS & DRAGONS as well as 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.

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.

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

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.

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.

Thank you.

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