Hasbro, Inc. (HAS) Q4 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Hasbro Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] 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, Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning everyone. Joining me today 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 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 and will be versus pro forma adjusted 2019 results. 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. 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, 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?

Thank you, Debbie. Good morning, everyone and thank you for joining us today. The Hasbro team met the distinct and unique challenges of 2020 with tremendous resilience and excellence. They leveraged the breadth of our portfolio, the global footprint of our business, and the diverse and amazing talent in our company to lead our organization through the year. I cannot say enough about the quality of the people that I have the honor to work with everyday. As consumers of all ages found themselves at home, they sought ways to connect and find joy. Hasbro is uniquely qualified to meet this need for every demographic. Our brands, toys, games, and content are valuable as they bring happiness and enjoyment to so many in this unprecedented global environment. After a very challenging June quarter, our performance improved in the second half of the year. Throughout the year, we advanced our commercial and retailer programs and supply chain capabilities to meet consumer demand while managing expenses and cash. We grew Hasbro’s operating profit margin and finished the year with $1.45 billion in cash on our balance sheet. We finished 2020 with growth in revenues and adjusted operating profit in the fourth quarter despite tough comparison with the successful theatrical releases a year ago. The 2020 holiday season was extended, starting earlier with strong consumer demand in October and November, but seeing some challenges for key weeks in December. The period then ended with strong point-of-sale growth, and this momentum has continued and accelerated into January. The comparison with Frozen was extremely challenging due to our success in December 2019. If we exclude Frozen from the data, Hasbro’s POS grew 4% for the fourth quarter across the G11. We also gained share and recorded the fastest point-of-sale growth on Amazon in the toy and game market in the U.S. and top European markets during the fourth quarter. For the full year, we delivered $1.8 billion in gaming revenue, an increase of 15%. Franchise Brands; Magic: The Gathering and Monopoly each had their best year ever. Dungeons & Dragons did as well and classic games like Jenga, Operation, and Connect 4, to name a few of many had stellar years. Our gaming business grew in all regions, but Latin America. The result reflects the ability of our supply chain, marketing, and commercial teams to pivot and meet the demand of consumers as they change their behaviors at pace. Gaming has long been a priority investment category for Hasbro. Our brands and our teams lead this market, and we have clear growth plans in both face-to-face and digital gaming for the coming years. You will hear more from Chris Cox, President of Wizards of the Coast; and Eric Nyman, Chief Consumer Officer at our virtual investor event on February 25. To meet the high consumer demand in gaming and other categories, we leveraged our global retail network and investments in new channels. By year end, the team drove more than $1 billion in e-comm revenues and a 43% increase from last year and representing just under 30% of our global revenues. This translated to close to a 10-percentage-point increase. Pure-play and omni-channel retailers led this growth and omni-channel made significant strides to double their e-comm revenue for the year. Our teams worked closely with retailers to expand their online offerings as many added click and collect to their capabilities during the year. With channel support and innovative tailored product, Hasbro also grew revenues with the fan channel last year. We augmented this with our own D2C capabilities leveraging Hasbro Pulse to create authentic fan experiences. While Pulse is a small, but growing piece of our revenue today, it is a unique experience that we are leveraging for continued growth and unmatched connections with the important fan community. In addition to our global retail network, our global supply chain capabilities, and our evolving geographic manufacturing supplier base were essential to meeting demand. Due to COVID and changing consumer behaviors, we had disruptions from production to logistics, but the team worked tirelessly to meet the demand and successfully executed the year. We added new e-comm capabilities and identified opportunities to further enhance these going forward. We continued to diversify our manufacturing, reducing our reliance on any one country, ending 2020 with approximately 55% of production in China. To support new brand development and deeper brand engagement, we on-boarded the eOne team and their expansive capabilities and brands in storytelling. While live action TV and film production were limited much of the year, we made substantial progress developing Hasbro IP for entertainment that we expect will lead to enhanced revenues and earnings power across multiple income streams. After returning to live action production in the third quarter, eOne revenues and profit increased versus 2019 for the last quarter of the year as deliveries resumed to our broadcast partners. Over the course of 2020, we completed production on 59 series across scripted and unscripted television and 5 feature films. With COVID-19 protocols in place, production continues around the world. While the near-term theatrical landscape remains uncertain, we see a path to its return and the opportunities in streaming and linear now and into the future are clear and compelling for both viewership and merchandise. The combination of Hasbro’s portfolio and eOne’s expertise is unlocking opportunity to expand our brands and launch new ones. This takes time and investment, but we have established a robust and deep slate and a roadmap to drive growth in our business for years to come. Our teams are also on track to launch Hasbro-developed, marketed, and distributed toy and game lines for the leading pre-school brands, Peppa Pig and PJ Masks later this year. To further support our portfolio, we have fully integrated our consumer products organizations to drive immersive brand experiences across categories. With Hasbro’s global retailer reach and brand category expertise as well as retailers in the licensed consumer products space reopening and operating, we are expanding these brands. This is further enhanced by Hasbro IP like My Little Pony, which has been reinvented under the eOne family brand’s team leadership and is re-launching later this year. The eOne team will share more on our progress and plans at our event on February 25. 2020 showcased how story and character executed via streaming platforms drives merchandise. Hasbro’s Star Wars product revenues grew nearly 70% last year, despite it being a first year without a theatrical release since 2014. This growth was driven by the strength of the Disney+ global rollout of The Mandalorian. All regions grew versus prior year with the strongest growth in Europe, North America and Australia. The Child products were a significant driver of the business, including The Child Animatronic Edition, our signature holiday item and the number one item in the Plush category in North America and several other markets in the fourth quarter according to NPD. The success of this line helped Hasbro achieve the number one position in the Plush supercategory across the G11 for 2020. Even without The Child items, Hasbro’s Star Wars lines grew significantly behind increasing fan engagement globally in black series and the vintage collection, a reemergence of our kids business, fueled by light sabers and our new vehicle line mission fleet and a resurgence in casual pop culture fans in Star Wars overall. Hasbro’s commercial and brand teams are executing meaningful global merchandise programs for streaming properties and supporting significant future partner brand initiatives, including with Disney+ for Star Wars, Marvel and Disney Princess and Frozen as well as Hasbro-led streaming initiatives for our portfolio from children through adults. At the center of everything we did last year and in every year is our community of Hasbro employees and stakeholders. 2020 reminded us that living our purpose and values is imperative to continuing our legacy as a responsible corporate citizen. To drive this forward, we recently appointed Kathrin Belliveau, a longstanding Hasbro leader in our CSR practice, as our first Chief Purpose Officer. I strongly believe Hasbro has both the opportunity and responsibility to lead as a corporate citizen across all aspects of our business. As we look to the coming year, we continue to see consumers and retailers turning to our categories and Hasbro. We have amazing new lines coupled with planned increases in theatrical, television and streaming entertainment to drive the business. Investments in innovation and new growth drivers, including digital gaming and entertainment, will come to market. We believe we will grow in 2021 as we continue navigating through COVID-19 while leveraging our unparalleled portfolio of brands and capabilities in consumer products, gaming and entertainment. I will now turn the call over to Deb. Deb?

Thank you, Brian and good morning everyone. The Hasbro team did amazing work in 2020, delivering a good year, prioritizing the health and safety of our employees and our communities while navigating retail and supply chain disruptions. The team never lost focus on strengthening an already solid balance sheet, while managing the business for profit and cash generation in the near-term and investing for future growth. On a full year revenue decline of 8%, operating profit declined only 1% and operating profit margin increased 110 basis points to 15.1%. A strong fourth quarter aided this full year result as operating profit margin grew 480 basis points on 4% revenue growth in the final period of the year. I am particularly proud of the work we did to manage working capital. Hasbro generated $976 million in operating cash flow last year, ending 2020 with $1.45 billion in cash. We paid part of our term loan earlier than anticipated and reduced $123 million of this long-term debt. We are progressing and paying down our debt and remain headed toward returning to our targeted 2x to 2.5x debt to EBITDA. We also returned $373 million in quarterly dividends during the year. Combined with today’s notice of the May dividend payment, the Board has already declared the first two quarterly payments for this year. Throughout 2020, our treasury and commercial teams worked hand-in-hand, supporting global retailers as their businesses changed without warning, in some instances, to meet rising demand and others, to manage shutdowns. DSOs declined 17 days on a pro forma basis to 74, reflecting both strong collections and a geographic shift in customer base to those with shorter terms. Consumer demand and inventory management drove inventory down 11% with lower positions in all regions led by the U.S. Days sales and inventory were down 38 days year-over-year. Retail inventory at year end was of good quality and level increasing slightly in the U.S. as supply continued to improve, while declining in most of the markets. Importantly, retailers were well positioned to meet the strong uptick in demand this January in major markets like the U.S. and Europe. With live-action TV and film production limited, this activity returned during the third quarter. As a result, our full year 2020 cash spend on content was $439 million, slightly below the expected low end. As production has returned and we managed COVID-19 protocols to safely keep them up and running, our cash spend on content across scripted and unscripted live action, animated TV and film in 2021 is planned to be in the range of $675 million to $750 million. While managing a rapidly changing business environment, the Hasbro and eOne teams made significant progress toward both the business and financial goals of our integration. Brian spoke to much of the business progress, which contributed to approximately $30 million of cost savings. This is ahead of the plan we shared at Toy Fair last year and puts us well on our way to our goal of $130 million in synergies by the end of 2022. This is just the beginning of unlocking incremental revenue and profit from the acquisition as we further develop existing brands and launch new ones to extend the reach and value of our consumer products, gaming and entertainment initiatives. Looking at our performance, our fourth quarter revenue and operating profit growth is discussed in our earnings release and presentation today. I will focus my commentary on the full year 2020 and provide an outlook for certain items for 2021. In the U.S. and Canada segment, revenues grew 4% and operating profit increased 30% or 420 basis points due to gains in Franchise Brands led by Magic: The Gathering and Hasbro Gaming. Operating profit increased on favorable product mix, partially offset by higher freight costs for increased domestic shipments in the U.S. and higher product development and other costs at Wizards of the Coast to support future game launches. At our investor event, Chris Cox will share more details about Wizards’ plans in this area. International segment revenue and operating profit declined primarily due to declines in Latin America and Asia. European revenues were flat. Hasbro Gaming revenue increased as did Magic: The Gathering. The international segment operating profit declined as a result of lower revenues partially offset by lower spending, most notably in advertising and marketing as well as lower royalties. As we discussed throughout the year, Latin America was challenging. The toy and game market declined. Retailers were closed. E-comm is underdeveloped. And we reduced our inventory at retail. This impacted 2020 revenue and margins and we are now better positioned to stabilize the business and drive profit improvement this year. Entertainment, licensing and digital segment revenue declined led by entertainment as compared to 2019, which included the Transformers Bumblebee film revenue as well as declines in licensed consumer products. Operating profit increased behind growth in higher margin licensed digital gaming and cost savings. eOne segment revenue declined from pro forma 2019 due to both lower TV and film revenue from COVID-19 related live action production and theater shutdowns as well as lower family brand revenue from retail disruption. Operating profit for the eOne segment decreased due to the decline in revenues partially offset by lower advertising and royalty expense. For Hasbro overall, gross margin, including cost of sales and program amortization increased 140 basis points. Product mix led by Wizards of the Coast and gaming, resulted in a slightly lower cost of sales as a percentage of revenue. This, combined with the reduction in program amortization, drove the improvement. To better help you understand the components of cost of sales we included the 2020 breakdown in our earnings presentation today. The improvements were partially offset by additional markdowns in Latin America and Asia to reduce inventory levels at retail. For 2021, we anticipate cost of sales to decline as a percentage of revenue, but this is expected to be more than offset by a return to more normal levels of program amortization in the 9% to 10% range. Royalties were down slightly as a percentage of revenue, reflecting mix. We anticipate several theatrical launches, in addition to streaming content and innovation across our lines, to support our Partner Brand portfolio. But in 2021, it’s expected to decrease slightly as a percentage of the total. Advertising in 2020 was lower than historical levels, reflecting both the decision to not advertise during periods when consumers were unable to shop and lower theatrical and entertainment events, which would traditionally have P&A support from eOne. In 2021, we anticipate more normal levels of activity and ad spend to be in the 8% to 9% of revenue range. Intangible amortization, excluding acquisition amortization for eOne, came in at the forecasted $47 million and is planned to decline to approximately $32 million in the coming year as certain property rights are now fully amortized. For 2020, SG&A totaled 22.8% of revenues, up from 21%. We took aggressive cost saving actions, which lowered spending meaningfully, but this overall decline was offset by higher costs, in part resulting from the pandemic, namely in freight and bad debt as well as depreciation and investments at Wizards for gaming development. In 2021, some of the spending will return. SG&A dollars should increase, but is expected to decrease slightly as a percentage of revenue. We are closely watching the freight environment, which impacts both cost of sales and SG&A. We have been able to meet demand despite challenges in shipping and port congestion, but the cost of doing so is increasing and does not appear to be reversing at least not in the next few months. As we pay down debt, including the $300 million note due in May, interest expense should decline to approximately $188 million from $201 million. For 2020, our underlying tax rate, absent intangible amortization associated with the eOne acquisition, one-time charges and ordinary discrete items, is 21%. The fourth quarter underlying tax rate was 18%, which includes ordinary discrete tax benefits of roughly 6%. The discrete benefit in the quarter was primarily due to tax planning associated with the eOne integration and other ongoing planning. Based on currently enacted tax law, we expect our underlying tax rate for 2021 to be approximately 21%, excluding expected further integration charges and the amortization of the eOne acquisition intangible. As we look ahead, the last year has reinforced the core tenets of Hasbro’s advantage, the value of brands in play, of connecting and competing through gaming, the enjoyment from watching and sharing a story and our desire to make everyone’s life better in all that we do. The investments we made to drive these businesses in innovation, in digital gaming, talent and development, in our entertainment studio, in e-comm and our supply chain were instrumental in our ability to operate. We shared with you today a view to 2021, but it’s important to recognize that we continue to operate through a pandemic, where things are at times unpredictable and don’t develop as we expect. We have great confidence in our teams and our brands, our gaming launches and in our entertainment plan for the coming year to grow revenue and earnings. We are looking forward to sharing more about our long-term plans at our investor event on February 25. And Brian and I are now happy to take your questions.

Thank you. [Operator Instructions] Thank you. And our first question is coming from the line of Eric Handler with MKM Partners. Please proceed with your questions.

Good morning and thanks for the question. Brian, I wonder if you could talk a bit about your Marvel business? With Disney+, we are now getting five or six different TV shows this year. Hopefully, in the back end of the year, there will be another five or so feature films, but as you look at the combination of TV plus film, it seems like this is almost a year-round business. How are you sort of planning for this and will you be fully taking advantage of all the TV content?

Exactly. Well, Eric, you are absolutely right. Marvel has been a perennial strength in the portfolio. The teams have been working on major innovation in product. And yes, we will be taking advantage of in partnership with all the work Disney has done to put certain content on the streaming platform and Disney+. I hope you saw some of the trailers last night in the big game, and then also the theatrical launches. What’s really great is that we have hit a tipping point that we had believed would occur around this time where enough people are watching a streamed show over a given period, where we are able to eventize [ph] that effort and then get our retailers on board for major merchandising, promotions, and linear footage in store as well as actually more importantly, the e-commerce play between our content to commerce with short-form content, leading to purchases and all kinds of virtual feature shop. So yes, Marvel has been a perennial strength. The business held up very well last year, although we didn’t see growth and we believe that we have the opportunity. If you look at a business like Star Wars, where we’ve benefited from just stream content, it’s been the business that’s the size of a business back to a day when we had theatrical and yet we have no theatrical and has grown substantially behind The Mandalorian, and it’s not just The Child product, we have dozens of other products for Black Series, the kids business is up, our vehicle business behind mission fleet is up. If we look at our own experience with Transformers and War for Cybertron, which is our animated series on Netflix dedicated to more of a older kid in the fan community, it’s driven that business in a major way with Transformers results quite strong, POS good and really linking all of that to our e-comm and omni-channel effort. So yes, we have a major play this year and we are very excited about the combination of stream content as well as film content.

Great. And just one follow-up, Magic: The Gathering mobile game launch got pushed into 2021, you made note of that last quarter. Wondering at what point we might be able to see this gain? Is that a first half of the year event?

Yes. So we have – it’s actually on like a pre-release access on Android now and it will go to a full launch just a bit later this year, and the iOS format will also launch. So yes, it’s in 2021 and it’s a number of months from now and the team is well on its way to create the formatting, and it’s very, very playable and people really like the game. So, we are really excited about getting to the broader audience frankly in gaming that are playing mobile versus playing on their PCs.

Thank you.

Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your questions.

Thank you. Good morning everyone. We have a two-part question related to eOne. Brian, maybe this is best for you and then Deb definitely jump in as well, but we are trying to understand a little bit about the backlog. So with the business up in the fourth quarter, it sounds like off to a decent start for the year, how much of the committed programming that you had planned to do in ‘20 can you recoup in 2021? And then related, as you in-house the Peppa and PJ Masks business, can you just help us think through the mechanics of the graveyarding of your existing licensees and the rollout of your product in the channel? As we get to the fourth quarter, what’s the proportionality, what percentage of the product on shelf will be Hasbro at that point versus what will be your legacy licensees? Thank you.

Yes, great. So, as we look at the business, of the Peppa and PJ, and then I’ll let Deb talk a bit about first question. On Peppa and PJ, the teams have marketed and developed product lines. They’ve worked hand in glove with the eOne team that has led the creative on Peppa and PJ. We are in the ninth season on Peppa. It is the most watched YouTube show for preschoolers. We have the show distributed everywhere and new content coming that lines up really well with the product line. For PJ, we are in the fourth season, and we are already developing and we will have this season, and again a really robust product line. Order of magnitude for both of those, Steph, we are probably looking at 50 developed products for each Peppa and PJ that will come in the fourth quarter. But it’s really important to note there are lot of categories that our licensees also create in that product line – in those product lines that are really valuable and bring new play and play experiences to kids, consumers, and fans all around the world. And so, there will continue to be licensees on those businesses. In fact, the combined consumer products team between eOne and Hasbro are building even more robust consumer products programs given that Hasbro has much bigger global footprint than some of our core toy and game licensees have had over time. So, we are really looking at this financially. We get the benefit of bringing in and in-housing major parts of, but not the entirety of the license business for Peppa and PJ. We are then driving the retail connectivity to enable our consumer products licensees to do even a better job as we go around the world. We have seen those smaller license type product shops with kids apparel and backpacks and back-to-school and bedding and footwear reopening, because remember not all of the product is just sold at the essential stores or the hypermarkets or the omni-channel mass market stores in this category around the world. And so, the reopening has also helped. Last point I make is over the fourth quarter, we have seen some great results for both brands and particularly for PJ, coming out of the holiday, our licensees were able to work with more reopened stores. We have seen great takeaway for both brands and PJ is coming out quite strongly, so is Peppa and we feel very good then about the financial opportunity over the years to build a very robust PJ and Peppa business, but even more importantly to have a much bigger foothold in a category where Hasbro didn’t compete as broadly in preschool. And so the team is also working on – we will talk more about it, new properties and new IP that they will also launch using their immense expertise and storytelling. And Deb, you want to do the first one?

Sure. Thanks, Brian and good morning, Steph. Yes, as we think about like the carry-forward from what has been going on at eOne, as we know, animation could continue and it was largely uninterrupted with maybe some hiccups as we first all went remote to try to get things up and running where they could. But animation has largely been able to continue. So you are actually seeing that in what we have been progressing to-date so far. So, it really is that live-action film and TV. And as we got into the end of the third quarter, we started to be able to get the productions up and running in most markets. And that’s why indeed we saw growth in Entertainment One in the fourth quarter and we are on track to get that done. If we look at the full year content spend that we are projecting for 2021, just a very small percent of that relates to the 2020 carryover, but we expect to be able to finish and deliver that production in 2020. But we have gotten the question in the past does that mean you are going to have to spend twice as much? A lot of it has moved forward and a lot of it comes on during the year. A lot of it’s unscripted. Brian talked about all the progress that’s being made on other brands, but there is also progress being made on other production as well. So we do expect that we will be able to finish that ongoing programming in 2021 and deliver it.

Yes. Steph, the only thing I would add just to frame out for you our expectation for 2021 for eOne, we fully expect that given the way the team has developed new IP, the way they are working on Hasbro IP, the receptivity to new world-class branded IP and eOne’s historical strength, we probably could look at revenues this year, certainly, revenues growth from eOne and probably commensurate we saw back in 2019 for that business. So some real good growth that we expect and increasingly mix shifting into Hasbro IP over time, beginning with unscripted where it’s easier to produce, followed by some theatricals and scripted television.

Okay, thank you very much.

Our next question is from the line of Arpine Kocharyan with UBS. Please proceed with your question.

Thank you and good morning. I know you gave different components to build to operating margin, but in terms of sort of eOne growth, an incremental toy business that you are bringing under Hasbro under brands like Peppa Pig and PJ Masks in your underlying toy growth. Could you help us understand, what is a reasonable range of operating margin we should be thinking for this year versus 2020?

Certainly, certainly. So – and Brian it’s good that’s a follow-up. So thanks for that. It was perfect from the last question because in the near-term, when you think about just the entertainment component of what we have brought in, there is some pressure on profit, because if you think about all the costs that we are incurring ourselves as businesses with COVID-19 protocols and everything else to keep people up and safe and do things the right way, there is some cost pressure in the near term. We see that profitability expanding over time, but in the near-term that is going to add some cost pressure. And as we get up and ready to launch in the latter half of the year, our product around PJ and Peppa, we have got a – there is additional tooling expense and things like that, that ramp up and we want to make it really successful as well as advertising around those brands now. They are such terrific brands as they are and that continued relationship we are having with licensees. So, we see that profitability in the near-term being impacted a bit by some of these initial costs, but over time, certainly growing into a range of what you would expect to see on the toy and game and sourcing side from the more traditional Hasbro business of the past. And we see that entertainment profitability growing over time as well once we are able to incorporate some of these costs and as Brian said earlier, actually incorporate the Hasbro IP because that helps to make it even more profitable over time.

Okay. That’s helpful. In terms of breakdown of entertainment and licensing revenue this quarter and perhaps you could share your views on 2021 as well, understandably, you have Bumblebee comps. But there is a lot going on in that line item, maybe you could parse out the drivers of what drove growth and what was offset in terms of decline for the quarter and while we are at it, could you comment on MTG Arena and what do you expect to see from that business this year? Thank you.

Sure. If you look at consumer products in that category, licensing and digital, our digital gaming business was up quite considerably during that period, digital gaming. Playing was up for global gamers over the year. As you know, it was a tailwind and we are seeing a lot of new third-party games that are being quite successful. We also see some perennial games like Yahtzee with Buddies that continues to perform at a very high level from Scopely. So, that’s a category that has done quite well. We have talked about before that in consumer products, the closure of a lot of the smaller retailers over a period during 2020, where you are selling children’s apparel or other types of children’s products, clearly put a challenge against those revenues in the short-term, but we are seeing those retailers reopening. And as I indicated in the fourth quarter, we are starting to see some momentum back into those businesses as well as in the toy business that are being sold there as well as at major mass-market retailers. So consumer products, we believe has an opportunity for growth as we go forward as we add more Hasbro IP certainly in 2021. We are building an event around the new My Little Pony animated feature film, which we are all very excited about and that should be a very robust program both for Hasbro-developed product as well as consumer products and we kind of march forward from – we will march forward from there. Deb, I don’t know if you want to comment further about the profit profile?

Yes. The only other thing I would add is as you think about the digital games coming out under Wizards of the Coast brand, so we’ve had Arena in the past. And Brian mentioned earlier, we’ve got a few games launching this year, a few digital gaming launches this year. Those carry a bit of initial depreciation around them that we wouldn’t have seen as much of that this year because we’ve been working on it. We capitalize those costs. We’ll give some more color to that on the 25 at our Investor Day to try to size that out from everyone. But from a profitability standpoint, as Brian said, as those retailers that handle our license business come up and running, that’s a fairly high profit margin business. And as they’re able to to get back on their feet and get back out there that and digital gaming, we see that impacting profitability favorably as we move forward.

Thank you.

The next question is from the line of David Beckel with Berenberg Capital Markets. Please proceed with your questions.

Great. Thanks for the question. I have two. First one for Brian, I was hoping you could comment a bit. I know you’re probably loath to give specific guidance here. But just on the outlook for the toy industry this year, given sort of the idiosyncratic nature of what took place last year, clearly, extremely strong growth through retail channels, e-commerce picking up. I was hoping you could sort of frame what you expect for the industry as a whole this year and also maybe put some context around your expectation for growth, which is pretty broad-based for Hasbro as the year unfolds? And then I have a follow-up. Thanks.

Sure. Yes. So look, I think you saw some very robust growth from the toy industry in 2020. And I think that NPD and other sources are kind of reevaluating what they think growth should look like for 2021. There has been some more modest expectations presented by some of the third parties. Our belief is that we should be able to grow in line or ahead of the toy industry numbers for the year 2021 for a number of reasons. We have great innovations. If I look at the way we finished the year where we had great product, we didn’t have product rolled out everywhere. But if you take the U.S. business, for example, in the fourth quarter, it grew 16% with 30% growth in Franchise Brands. Every one of our Franchise Brands was up with the exception of My Little Pony, and we’ve already talked about how we’re restating that this year. We saw double-digit growth for all our Franchise Brands except for Transformers. So we really exit the year in a major market where we had all the inventory, where NERF was growing and other brands were growing. We have entered 2021, Dave, and through January, our POS is up nearly 30%, 28%. And so again, it’s not a holiday size sales, but it is that growth in POS. The consumer demand continues around games category and toy and game categories. Many of the categories that we’re selling last year are selling again this year. At the tail end of last year, we were out of stock in certain games. I mean, we just couldn’t keep Operation Pet Scan in stock. We couldn’t keep The Child, the Bop It! product in stock and some Monopoly products in stock. So we’re again, getting back into inventory, but seeing very robust growth and for that reason, because of our innovation, because of our e-comm capabilities and clearly seeing e-comm running way ahead of brick-and-mortar. I mean our e-comm POS in the full year last year was up 33%, and then the fourth quarter was up 19%. So brand for brand, I think we’ll grow ahead of industry in toy and game. I think consumer products over time should grow faster as we mix shift into more Hasbro IP. The margin expands as we get more from Wizards of the Coast, and also as digital gaming goes beyond those early days where we do have depreciation and marketing expense. But launching those games, I expect to become more profitable over time. And then, of course, eOne is enabling us to create profitable entertainment versus where Hasbro was historically where entertainment with some level of a marketing expense. And we viewed the sales of products as the reward for the investments in the entertainment. So I would say that’s how the year we look at setting up. And really, think of it as 3 very clear business units, all with different profit and revenue profiles between consumer products with toy and game, our Wizards business with digital and our entertainment business obviously led by eOne.

That’s super helpful. Thank you. And one for Deb. Operating cash flow, obviously, significantly outperformed your sort of medium-term guidance. It sounds like at least some of that was due to the delay of production cost. But I am wondering if you can help us think about how your learnings, particularly as it relates to working capital, this year might translate into higher operating cash flow expectations going forward, if you agree without statement? Thanks.

Sure. Well, we – I have to say, and I said it earlier in my prepared remarks, I’m just so proud and impressed with what our team was able to do with working capital. I mean I think you had every single employee at Hasbro rally around let’s keep the balance sheet strong and collect as much cash as we can. I don’t anticipate us being able to have that kind of a working capital benefit again in 2021. But as we see each piece of our business performing, we do expect that our operating cash flow can average about $600 million to $750 million in the near-term, falling someplace within that range as we are investing more in launch costs than investing a bit more in content than what we talked about in the past. But also, we are able to get things out there and get revenue from it as well. And we see that moving over time back to levels that we saw certainly in 2020. But in the near-term, we expect our operating cash flow to be in the $600 million to $750 million range.

Great. Thank you so much.

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

Hey, good morning. Thank you very much for the question. My first question is just on eOne and the toy sales. My understanding is that historically, those toys sales were kind for as net royalty revenue. As Hasbro brings these licenses in, I think that Hasbro account for that in wholesale toy revenue. Is that the correct way to think about it? And if so, how big could that revenue uplift be on a like-for-like business – like-for-like basis, appreciating that this doesn’t include any potential synergies from executing those toy licenses better? Thank you.

Sure. Well, let me deal with the mechanics, and I’ll let Brian talk to the growth opportunity. So you’re 100% correct. You would have seen that coming in as royalty revenue in the past. There will be some costs against that, but mostly it would flow through and impact the gross margin. When you see it coming into the Hasbro revenue, it will come in like wholesale revenue like the rest of our business, and we’ll have additional cost of sales applied against it. So the gross margin will look a bit different than it would if it was pure royalty revenue coming through, and we’ll have some additional costs. In the near-term, from a profitability standpoint, as we’ve invested in the start-up launch costs and start-up tooling and things like that, you’re going to see profitability not be that far off, but not see that growth potential that it has in the future as we drive revenue growth in the brands. Brian, do you want to talk about the revenue growth opportunity?

Yes. Thank you, Deb. Appreciate it. So as we look at the business, Mike, there is a several-fold elements that we’re really bringing to bear here. Number one, we’re actually – because we are behind these products now and we’re developing bespoke Hasbro product lines that are expansive, as I mentioned dozens of new items, very well received already by global retailers and an expectation of great distribution and support, our consumer products program will actually expand. We’ll have some of our core licensees, who were doing certain parts of our toy business, expand into other categories that they are quite expert in. We’ll have our other parts of our consumer products business expand as well as the geographic footprint, now that we have a team that’s married up between Hasbro experts and historical eOne experts and some new blood as well. I think we get a much more robust consumer products program. We are also seeing incredible new eOne content. As Deb mentioned, the animation had continued over the COVID period. We’re able to produce animation at distance. And so you’re going to see a lot of new content that is really, really engaging for our audience where the Peppa Pig example is a top viewed show on almost every format, including YouTube. And they’re bringing bespoke new content that ties directly to the play patterns that are being expressed in our products as well as our consumer products. And over time, beyond the holiday, this holiday period, we will have Hasbro products in the market for this holiday period as well as new consumer products that will come in for the fall. So, both of those things happen. So we will add considerable revenues as an opportunity. The opportunity, of course, is to go beyond that a few fold and then several fold. And really, one of the pieces of opportunity that we saw from the very beginning as we began to talk to eOne was a growth in preschool, particularly around character and story and Hasbro’s opportunity to be a major player in the preschool arena around the great storytelling, great character and great innovation tied altogether. And we are seeing that. And then in addition, eOne has also been fully in development and has great support for some new IP that I won’t talk about now, let them talk about later, where we will have new IP from these storytellers in the preschool and lifestyle space. And that should grow our presence across the dimensions I’ve just discussed as we go forward.

Great. Thank you, Brian and Deb for all that detail. That’s really helpful.

The next question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your questions.

Hi. Thank you so much for taking my questions. So my first question is around eOne, I think media you mentioned eOne could generate revenues in the 2019 range it saw before COVID happened. So I think – correct me if I’m wrong, but I think at that time, in 2019, media, TV-related revenues from eOne were about $1 billion, excluding the family brands. So is sort of – is that the right benchmark to think about in terms of revenues for eOne in 2021?

So yes, I think that you are probably looking at – if you took all of eOne into 2019, it was about $1.2 billion. And you’re right, there’s a family brand component. But we say, as we look at the total eOne effort, including family brands as well as their – because what they get for content in family brands as well as what they’re able to deliver in television and film, we think that $1.2 billion is a pretty good marker for 2019 – from 2019 to be compared with what we expect we could achieve for 2021.

Got it. So that’s including the family brands revenue as well?

Correct. Remember, Family Brands, the revenue comes in, in a couple of different places. One is we get paid for the content. So that is expressed within eOne’s revenues. We then are taking on board some of the toy lines. Those toy line revenues will get expressed within the consumer products or toy and game part of the business as they become toy lines for the company. But yes, there’s an eOne revenue. Deb, do you want to comment?

Yes. I just wanted to point out, Tami, it was actually in today’s press release, we did have the pro forma breakdown for 2019 if that might be helpful to refer back to. I think it’s on the very last page. You might not have quite gotten there.

Got it.

It’s a long release. It was a long release.

Got it. Thank you so much. And then my second question is I think the guidance bucket, the margin buckets you provided in the call, it seems like EBITDA may see some slight de-leverage in 2021. So can you help us unpack that and comment on how much of that is actually transitory related to COVID and other stuff, and you might actually get back in 2022?

Yes. I think we’re going to give some more color to all the different components of EBITDA. But as we look at adjusted, we did say we expect revenue and earnings to grow on an adjusted basis in 2021 from 2020 levels. And there are some components that hit – as we continue to invest in digital gaming for the long-term and the revenues that, that can bring with us. We’ll see depreciation, but we also see ongoing product development costs associated with that, ongoing product development with respect to creating innovative play things that Brian talked about where we think the consumer product, toy and game business will be for 2021 in comparison to the market. So we see ongoing cost with that. But on a top and bottom line basis, we do expect growth in 2021 from 2020. And we will get into some more of the detailed components that we haven’t talked about today in our meeting on the 25.

Got it. Super helpful. Thank you so much.

Our next question is from the line of Fred Wightman with Wolfe Research. Please proceed with your questions.

Hey, guys. Good morning. You had called out some challenges during key weeks in December in the prepared remarks. I’m wondering if you could just touch on what exactly happened and whether that’s corrected as we head into the first quarter?

Sure. Really, it was just an interesting observation. As we look at the holiday, we’ve probably had a more intense longer holiday than we’ve had in prior years because, of course, the holiday kicked off in October as we all discussed around third quarter earnings. And there was a ton of promotion and lots of toy orientation, toy and game orientation during that time. And our POS was incredibly strong in October, November and even into December. As we got into just 2 weeks right before December, and I’ve seen this expressed in other consumer products categories as well, there was a bit of a pause that we saw in some of our businesses. I think that it had a bit to do if I read some of the macro experts talking on the economic side, the consumer waiting to see if there were some additional checks and support that was going to be coming during that period of time. We saw, frankly, a dwindling down of some inventories around some of our brands during that time for a few of our key games like I talked about The Child products and Monopoly and also in Bop It!, Operation and some other brands where our fill rates did fall during those couple of weeks as we were really right ahead of Christmas. And on NERF, we’ve seen great growth in NERF. NERF was up in the U.S., and NERF was up on the fourth quarter and for the full year in the U.S. But we didn’t have enough products to make NERF grow everywhere. We expect NERF to grow in 2021 because we see the compilation of all of the NERF initiatives. But again, I just think there were a few places where we had a bit of tempering a little bit from the consumer and then a little bit on a few of our product categories, not a lot, but a few. Then if you take the comp during that time, most importantly, the comp during that time, our POS is slightly down if you exclude Frozen. Remember, a year ago, we told you, Frozen was the largest headwind for the fourth quarter for Hasbro, up against an incredible success in 2019. If you took Frozen out, our POS actually goes up to mid-single digits in growth globally during the fourth quarter. So that’s just, again, in that period of time. So that’s why we just described that. Then what happened is Christmas week was very strong. Weeks following Christmas have been incredibly strong. And in January, we are actually seeing an acceleration. I think as people get gift cards and as people who weren’t together for the holidays, and sends presents and other gifting, gift cards and other formats, we’re just seeing an immense amount of consumption of Hasbro brands and products, lots of strong launches coming as we move our way through the first quarter. So that’s why I say it’s a broader, longer holiday season. And clearly given COVID and openings and closures, just it demands some additional description.

That makes sense. And then just quickly on the eOne synergies, I think you guys called out $30 million last year. The number that we had previously was $35 million to $40 million by the end of ‘21. So was it just a pull-forward of cost savings or is there actually some incremental upside to that $130 million target that you guys have talked about in the past?

I think we look at that $130 million target by the end of 2022. And still, that’s our target right now. But we were able to accelerate some of the cost savings if you – into 2020 just because we were all working remotely. We could get things – some of the things done a little bit faster. I mean, like Brian mentioned earlier, we were able to fully integrate our consumer products licensing teams. However, there is still some other groups that we haven’t been able to fully integrate yet. We’re working on – We just – it was not in our original timing. But two-thirds of that was actually coming from product in-sourcing. So that timing hasn’t really changed yet. We are beginning to in-source that product for this fall for this holiday season. So we will have a better insight to whether to grow that number or not as we progress through 2021 but it was a bit of an acceleration.

Yes. But if you look at 2021, then we’re going to have a much sizable number than your expectation of $30 million in 2021. That wasn’t – that’s not our expectation for 2021. It’s big – it’s far bigger than that because, again, the in-sourcing begins for the toy and game products. And we’ll size that for you probably a bit more in our investor call.

Great. Thank you.

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

Thanks for taking my questions. Just another one on eOne, across the industry, both early and later, TV and film windows are increasingly being monetized and consolidated on DTC platforms. As more Hasbro IP begins to make its way through the eOne content engine, how are you thinking about the various distribution channels and windowing strategies that you can utilize in order to sort of optimize your return on investment for both film and TV ultimates and the consumer product piece as this trend continues?

Yes. Well, look, we have said all along that we thought we were entering an era that would be right for opportunity for us as we came together with eOne, and we’re seeing that. Clearly, as many studios have also launched their streaming platforms, they need great content, and they’re using their own brands and IP to service their own streaming platforms, which leads a lot of world-class streamers and other platforms open for business and looking for world-class IP from people like – or companies like Hasbro. And eOne is expert at developing IP for a global group of broadcasters, streamers, linear and terrestrial. So we see a real opportunity. It marries directly to the fact that we have the broadest portfolio in our business. We have brands that stretch from kids and fans and families, certainly, but we also have brands that stretch into great adult gaming and lifestyle gaming. So we’re busy developing Dungeons & Dragons across a number of dimensions. We’ll have future iterations of Transformers in a number of different places. We have new creative stewardship that will add or have the great new storytelling in Power Rangers and several other big Hasbro IP areas. I’m going to let the team talk more about that later this month. But we see the opportunity to go through multiple windows. We still see the opportunity to have a theatrical followed by a stream window or a simultaneous window between streaming and a theatrical – a shorter theatrical window. I think a lot of the nomenclature and conversation around all of those windows are shifting and changing as we speak. And our team is expert at ensuring that around the world, we’ll get the opportunity to eventize our properties and programming with streamers and theatrically and then move through the waterfall of opportunities and windows so that we’re able to maximize the return on the entertainment investment while also driving ubiquity for the story and character and the play patterns that will be reflected in the consumer products and the gaming that we’re executing in support of those initiatives.

Great. And could you provide an update on where production stands today relative to normalized levels? And how we should think about the cadence of the $675 million to $750 million in cash content spend for 2021?

Sure. Well, we are working in production now in most territories. Actually, all territories were up and running. Some things may get delayed depending on what’s happening on the set, but everything is up and running now. One of the things that’s really important to remember, I’m glad you asked about cadence, because you think about before the world changed in March of last year, we actually had a great hit in 1917 from eOne. So that really drove a big impact to the first quarter of last year when you kind of think about the theatrical still being open. So now as we look at the cadence, we see it progressing throughout the year? And as you know, I know, Devin, the entertainment and revenue recognition could be a little, I use my favorite accounting term, Brian, when I say this, just a little lumpier than what you might see in a traditional toy business, but we just look at the fourth quarter when eOne was able to get up and get into production and have those deliveries being made, they were able to grow revenue. So we see that with an impact in the near-term because of something like 1917 in theatrical distribution. But as Brian said, we’re excited about being able to take advantage of theatrical as well as streaming by providing this great content over time.

Thank you.

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

Hey, good morning. I like going last. So thank you very much. How many questions do I get, Brian?

I wouldn’t be certain you are last, Gerrick and good morning.

Okay. I have got quite a few. I will see how brief I can be here. First, just the outlook for 2021 for the toy industry, David asked that before. I don’t think you gave an answer for the industry itself. So how about like in two numbers, international and – or actually worldwide and U.S.?

Well, look, I think that number is shifting around. We saw an early number from NPD that, frankly, we didn’t understand as well. We’re hoping that they’ll clarify. I think that according to my team, they’re working on going back and relooking at that number because I thought it was a bit too low. And I think they’re kind of reconsidering, given what we’re already seeing in the January window and the fact that consumers are continuing to be very interested in the toy and game industry. So that’s why I didn’t give you a number is because of kind of waiting for the combination of NPD and Euromonitor to reevaluate where they think the market is. What I will tell you is we believe we can grow our toy business over time in line with or ahead of the industry because of our capabilities, the fact that we’ve built such robust capabilities in e-comm and content and storytelling and innovation and the orchestration between all the different operating elements that we should be able to be in line or better than the industry. And I’ve also said that over time, we believe that should be in a tough year, low, but in a good year, mid-single digits growth.

So what was the NPD number that was put out earlier that you’re not sure is correct?

I’m not going to – I need to let them comment because I’m not sure whether they published it out or it was out to subscribers. But they were having conversations with my team about some early estimates that the team felt that they should go back and reevaluate. And I think they are, given the fact that we’re seeing such robust growth early in the year. I think they’re considering or out as a projection for the full year.

Alright. Regardless of what they say, what do you think? What are you planning for this year? And again, in January, I don’t know if I’d extrapolate January all the way through because it’s a very easy comp and a lot of gift cards. So...

Of course.

What are you planning for ‘21?

Look, I said, we think in a year where we have great innovation and we have the unlock, we expect to grow our toy and game business this year. And we believe we’ll be...

This year?

This year, and we believe we’ll be in line with or ahead of the industry depending on where they land. But again, I’ve said around mid single-digits is in a good, robust year is where we should be able to deliver toys and games growth.

Okay. Okay. Fair enough. Moving on to entertainment, but third-party entertainment product you do for others. I have 10 movies baked into my model for you here in 2021. Not sure how many of those are going to happen. I have $300 million plus in incremental revenue from those 10 movies. So I’d like to know what movies do you think will actually happen? There are some big ones like Snake Eyes, Spider-Man, Venom, Micronauts, Cruella, Shang-Chi, Raya, Ghostbusters, what’s happening this year? Do you know what’s going to happen or does anyone know what’s going to happen in movies this year?

Well, look, I think that the big considerations, it’s not surprising to hear the big considerations will be what happens particularly during the first half of the year. And I think that people feel there’ll fall where more moviegoers will be back into theaters. Having said that, we are working in partnership with our partners at Disney, they are actively looking at all the windowing. I think you’ve started to see, like last night, hopefully, on the football game. You saw the trailer for Raya and the Last Dragon, I think it was great, and we’re very excited about that. In May, movie, Black Widow we will be supporting. Ghostbusters comes in June. We’ve got Venom later in June. Shang-Chi is right now scheduled for July. We’ve got our own My Little Pony movie coming in the September Window. Snake Eyes is slated for October, and then you have Eternals and Spider-Man that will be in the fourth quarter. And the team is actively working on a regular basis. Some of those may be more shorter theatrical windows. We talked about the fact that, that works, particularly work on a premeditated basis where the strategy can be put out up in front, and we can work with our retailers. And then, Gerrick, I’ll also mentioned that there’s a lot of streaming content that will be coming – that we also feel has a great opportunity, particularly we were talking earlier, just about the robust nature of the Marvel brands and business. And so Raya is also a stream piece of content that will come in March, WandaVision, the Falcon and the Winter Soldier, that was a great trailer. And then you have a couple of different new Star Wars initiatives coming from streaming in the back half of 2021. So the team is around all of that. They have been building great innovative products for full exploitation there as well as for Hasbro IP like My Little Pony and for Snake Eyes. And we just constantly are working in partnership with our studio brethren to ensure that we understand the way they want to execute their programs. And frankly, we’re doing the exact same thing with My Little Pony and with Snake Eyes. We want to make sure we’re maximizing the opportunity, given where we believe audiences will be at that point in the year. And I think at that – at this point, I’m getting the high sign that we need to wrap things up. Maybe there’s one last question you might have.

Okay. Hopefully, we can see the movies in the theaters, I’m particularly looking forward to Micronauts as you know. Okay. If I have one more, let me go back to something Steph and Mike both asked on Peppa and PJ. What’s the synergy on an annual run rate? Let’s talk like ‘22 or something like that. With those brands in-house, what kind of synergies to the bottom line can you get from bringing those 2 in-house?

So we said that we expect $130 million of synergies, which include bringing Peppa and PJ in-house as well. Two-thirds of our cost synergies were made up from product in-sourcing. That, of course, doesn’t impact the opportunity that we see from a revenue side as we create more innovative product and drive revenue around other consumer product streams around that. But that is – that number does include Peppa and PJ, so...

Okay, okay. Alright. Thanks guys. Talk to you later. Thank you.

Thanks.

Yes.

I’ll now turn the call back to Debbie Hancock for closing comments.

Thank you, Rob and thank you everyone. We appreciate everyone joining the call today. The replay will be available on our website in approximately 2 hours. Additionally, management’s prepared remarks will be posted on our website following this call. We hope you will be able to join us on February 25 for our virtual investor event. Thank you.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.