Hasbro, Inc.

Good morning, and welcome to the Hasbro second quarter 2020 earnings conference call. At this time, all parties will be in 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'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 well-being 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, 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. 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're 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 entered 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, eCom 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, eCom's share of revenue expanded by nearly 13 percentage points. Our teams were ready to capitalize on this shift as we've been investing in building a digital-first organization for many years. During this time, We further our capabilities and exhibited great creativity and flexibility to meet the consumer where they want to shop. In addition to strong results from PurePlay and Omnichannel Ecom, 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 HasLab project ever, the X-Men Legends Marvel Central. 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. NERF saw growth in second quarter global POS as we quickly pivoted our strategy to capitalize on consumers looking for fun ways to get the family outside and active. In the U.S. and Europe, POS for the past several weeks increased double digits, but some of our second half launches had shifted about a month later due to the limited supply coming out of India. In addition, as retailers moved to a digital model and stores were closed, their retail inventory requirements declined. In the U.S., retail inventories reduced in the high teens, which represented about seven weeks of inventory. Similar shifts occurred in other markets. We believe the digital-led model will continue, with e-com today forecasted to be about 30% or more of our full-year revenues. We also believe some retailers may exhibit caution as they gauge the rate at which markets reopen and shoppers return to stores. The industry continues to undergo a shift to fulfilling consumer demand versus filling stores, and we are very well positioned. Throughout this year, our retailers and our consumers have supported the toy and game category, and our joint plans with retail partners give us confidence in our ability to deliver a good holiday season. We have all new initiatives, many more than I can cover here, including new products for brands with good momentum in gaming and nerf, as well as Disney's Frozen 2 and Lucasfilm's Star Wars, where the properties have seen great consumer demand and have strong new lines, including the retail arrival of products featuring the child from the Disney Plus series, The Mandalorian, and the much-anticipated animatronic edition arrives for the holidays. Magic the Gathering revenues were down in the quarter as forecasted, The brand is performing well overall and set up for a good second half of the year in both analog and digital play behind new card releases and the expansion of Magic the Gathering Arena to mobile and into China. Moving to supply, our supply chain is now in good position. We have returned to production in our third-party factories. China factories were caught up in early second quarter, and we anticipate catching up on demand in other locations by the latter half of this quarter. Our global operations team has worked diligently to maximize our global footprint, shifting production to other locations where feasible, and have reforecasted the year based on the changes to mix and timing. Next, liquidity. Hasbro is in a strong financial position, and we ended the quarter with just over $1 billion in cash on our balance sheet. A revolving credit line of $1.5 billion remains available and accessible. As the shutdowns have continued, we have taken costs out of the business in areas where we cannot currently operate, including making difficult decisions to furlough some employees and to simplify our commercial organization. On the content side, E1 production is gradually returning. As a result of being unable to produce to our plan, our cash spend on content for 2020 is now projected to be approximately $450 million to $550 million. We'll complete and deliver this content this year, but our slate and some revenues will also shift into 2021. Demand for E1 content is strong, and the team is doing good work executing a successful virtual con and developing over 100 film and 60 new TV projects, including Hasbro IP and new IP. We launched a new animated series on Netflix, Alien TV, and continued to develop and produce new content for Peppa Pig, PJ Mask, and the My Little Pony 2021 feature film. We have made great progress integrating our businesses, including combining our consumer products and entertainment teams, and remain on track to deliver the $130 million in synergies by year-end 2022. Importantly, we are working to unlock the long-term value of the organization as we develop new entertainment and commercial opportunities around Hasbro IP. Finally, communities. Our focus on our purpose to make the world a better place for all children and all families has never been more important. Hasbro has continued to support global philanthropic initiatives that bring belief to children and their families worldwide during this crisis by providing meals as well as learning materials to those most in need. We remain deeply committed to using our brands, our resources, and our expertise to help make a difference in our local communities and around the world. We've applied this belief to the ongoing dialogue across our company around racial injustice, listening and looking within ourselves and our organization critically and honestly. While we don't have all the answers, we have never been more committed to fostering a culture of inclusion and using our brands, our entertainment, and our influence to make a difference in the world. At Hasbro, we are in a unique position to help shape minds and hearts from the earliest age. We have the privilege of being part of childhood, fandom, and intergenerational play and entertainment globally. With that privilege comes a responsibility to foster inclusion and to help teach the next generation that everyone is equal and everyone is worthy. Making a difference in the world is our purpose and our legacy. We want every kid to feel like a hero, to see themselves on the screen and in their toys and games, to feel they belong and that they matter irrespective of the color of their skin. I believe we have strengthened Hasbro this year by rethinking how we've done things in the past and we've changed our approach going forward. We've remained invested in areas of high consumer consumption and interest in innovation, content, digital gaming, and consumer products. We've strengthened our path to the consumer, leveraging our digital-first multi-channel strategy and our global retail footprint. We've increased our agility and speed to market, adapting Hasbro plans as initiatives shifted to next year, and we are set to execute and deliver a strong 2021 across a robust lineup of entertainment and innovation. With entertainment from E1 and our partners, new gaming launches in digital and tabletop, and new play initiatives across our brands. I'd now like to turn the call over to Deb. Deb?

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 19 cents per share, and 10.1 million after tax, or 7 cents 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 insource 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 a billion dollars in cash on the balance sheet and one and a half billion available through a revolving credit facility. We are well within our financial covenants. Our peak working capital period remains ahead coming in the October-November timeframe. Since last quarter, We've 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. As a result, DSO in the period increased to 96 days from 84 days on a pro forma basis last year. Second quarter 2020 receivables include approximately $207 million associated with E1. Our cash spend on content this year has been reduced as production is limited due to COVID-19. For the full year, we plan to spend within a range of $450 to $550 million which is approximately $200 million below our initial expectations for the year. This reflects a delay in spend, not an elimination, and we'll be making these investments to develop content and drive revenues as we reschedule productions in 2020 and into 2021. Our capital expenditures are expected to be approximately $145 to $155 million this year, in line with our first quarter update. and we've spent $64 million in the first half of the year. Tooling for our products remains the largest item and is timed to the back half of the year. This amount also reflects the capitalization of digital gaming development expenses related to games to be launched in future years. Inventory is essentially flat year over year, including a small contribution from E1. On a constant dollar basis, Inventories were up approximately 5%. Our next focus is demand. I'll build on Brian's commentary. For the second quarter, revenues declined 28%, absent FX. In the U.S. and Canada segment, U.S. point-of-sale growth in the high teens did not translate to revenue growth due to temporary store closures, product shortages, and lower retail inventories. Both pure play and omni-channel e-com retail grew rapidly. Hasbro gaming revenue increased more than 20%, and certain partner brands, notably Star Wars and Frozen 2, also grew. Despite lower expenses, operating profit declined on the lower revenues, including a negative mix impact from lower Magic the Gathering revenue. International segment revenues declined as well. Revenues were down in each region, with Latin America declining the most meaningfully as the region started the year with higher retail inventory and has a very low penetration of e-com. Similar to the U.S. and Canada segment, temporary store closures, product shortages, and lower retail inventory impacted shipments in the quarter. Select gaming and partner brands were up in the segment, and e-com revenues were up meaningfully. The international segment reported an operating loss versus operating profit last year as a result of the lower revenues, partially offset by lower expenses. In the entertainment licensing and digital segment, revenues declined due to the closure of Backflip Studios in late 2019 and lower consumer product revenues. In consumer products, we estimate as many as 60% of retailers were closed during the quarter. Many of these retailers continue to be impacted, and not all our licensees have access to e-comm and the supply chain that we do. We expect this part of the business will also be impacted in Q3. Profit improved in the quarter due to lower program production expense and lower expenses due in part to last year's closure of BackClip Studios and the additional launch period advertising for Magic the Gathering Arena. In the E1 segment, while content demand by consumers remains high, revenue is hampered by the limits on live action production and delivery, along with lower consumer product sales, advertising revenues, and live events. Operating profit in the segment increased due to lower program amortization, royalties, and advertising expense this year versus last. Third, let's look at supply. As we outlined last quarter, production shutdowns in our factories during the second quarter impacted our in-stock levels, most notably in games, and delayed the delivery of certain second half 2020 launches. While factories in China, which represent 55% of our production, were open, factories in the US, Ireland, and India were closed for much of the quarter. Production is back and operating, and the teams are targeting the latter part of the third quarter to be caught back up. This depends on being able to ensure production can continue and staffing is at adequate levels. One area to note is the cost of air freight is up substantially this year versus last. Should we air freight product to meet demand during the holiday period, this will increase costs. As we close with community, we remain focused on our team's safety, health, and well-being, and we recognize what a tremendous job our teams continue to do during what is a very challenging and uncertain period. They are showing great resolve and ingenuity to chart our path forward and provide support for each other and for the communities in which we're operating. There are learnings from this experience which will help define our company and how we operate for years to come. Before we open for questions, let me touch on a few expense items on a pro forma basis. Gross margin increased 160 basis points, including both cost of sales and program production cost amortization driven by product mix, including delivery of higher margin content and a reduction in program amortization somewhat offset by higher sales allowances. The decrease in advertising was driven by lower promotional spend at E1 due to the lack of theatrical releases combined with savings across all of our commercial businesses. We've aligned our advertising to reflect the current demand environment, but also shifted the timing of spending and have meaningful promotional plans to drive consumer demand for the holiday. SD&A was down $26 million, reflecting the cost savings initiatives we've undertaken across the business, as well as lower freight and warehousing. Bad debt expense was up about $5 million within the commercial regions, reflecting the current environment. As in the first quarter, the alignment of accounting policies on cost capitalization and stock compensation resulted in higher admin costs for E1. Within SD&A, approximately 80% of our dollars are fixed, resulting in a fluctuation as a percentage of revenue. In closing, while we continue to see the year developing as we anticipated, there remains a great deal of uncertainty in the global marketplace that underlies this expectation. What has been consistent is the robust demand for our brands and content. and the strong execution by our global teams. We are positioning ourselves to execute a good holiday season and to drive our business in 2021 and beyond. Now, Brian and I are happy to take your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions from as many participants as possible, we ask you to limit yourself to one question and one follow-up. Thank you, and our first question is from the line of Arpine Cocharian with UBS.

Hi, thank you very much. You indicated in the release that you expect revenue from shipment 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 sort of partial resumption of production. But on the legacy toy business, it sounds like majority of retail footprint is open. perhaps single digits in terms of the percentage of total. Could you just clarify what that means and what implication that has for the back cost?

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. Really, Latin America has had more of an impact from COVID-19 and less e-commerce business In fact, e-commerce 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. And 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 on 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 in Plato 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 broader array of products, a very strong plan from Wizards of the Coast and Magic the Gathering and Dungeons and Dragons for Q3, and then moving into a very good holiday season with lots of new initiatives.

Fantastic. Thank you. One on E1. It sounds like cash spend in terms of content production for the year has lowered a further 9%. In Q1, it was down about 23% on a four-year basis. And you also mentioned some slight revenue shifts. So is it fair to say that revenue on the media side of things from E1 is down more than 30% for the year?

What we're looking at is the restarting of production. And E1 has a number of shows that have been sold around the world to different platforms. And so now it's just a matter of commencing production. And some of the difference of whether the revenue will fall in 2020 or 2021 just has to do with how many episodes we're able to deliver this calendar year, which is our fiscal, or whether those episodes get delivered in the 2021 period. And then, of course, we recognize the revenues when we deliver the episodes primarily. Deb, I don't know if you want to comment further.

Yes, exactly, Brian. It's 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. So as we look at that, it's really a delay in delivering the episodes. And you particularly think about the live action. It's just a delay. And the revenue may transfer into 2021 as to when we're actually able to complete it.

Thank you very much.

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

Thanks. Good morning, everyone. We have two questions. One is a housekeeping question. Brian, you mentioned LATAM has a significant under-indexing in e-comm. I'm wondering if you can just march us around the world and talk about e-comm as a percentage of the total mix in the big regions, just so we can understand the scope of penetration. And 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 your ability to recoup some of that in the back half in both E1 and on the choice 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.

Yeah, so thanks, Steph. We have built a great e-com capability globally. So if you go around the world by region, the U.S. business is tracking right now about a third of our businesses coming from e-com and omnichannel. In Europe, it's about 30%, and in Asia, it's about 30% as well. In Latin America, we've grown it substantially in an effort to try to get business done in e-com, but yet The channel still only represents about 12% of total revenues, and that's up about 10 percentage points versus a year ago. So the team has done a very good job of trying to make hay there, but recognize that the predominance of that retail is done in stores. So that's where we are with e-commerce. The third and fourth quarter, as is typical, we expect e-com to continue to be that high proportion of our sales, in fact, could increase even further, and the teams are prepared for that as we go into third and fourth quarter. As we look for the second half of the year around our products and initiatives, we have very strong demand. Our games business is in very high demand with very strong sell-throughs, but we've also seen very strong sell-throughs In our NERF business, over the last six to eight weeks, we've seen double-digit POS increases, particularly in the U.S. and Europe. And we have retail inventory down there further than just the average 17% that we saw at overall retail inventory decline. Play-Doh is down similarly. Look, I'd say that we're taking advantage of every opportunity that we have, but recognizing that some of the stores and retailers view their year as really a reopening at this point. And so they are reopening stores. We know that our major customers have been open throughout as they've sold essential goods. I think it's particularly why we've performed even better in the U.S. as our top three retailers represent about 60% of our total revenues around the world. Those top retailers represent closer to just under 40%. And so I'd say that some retailers are just reopening, particularly toy specialists. We're seeing good momentum, particularly in Europe and in Asia Pacific as they reopen. Very strong recent point of sale in places like China, Australia, the UK, France, and other markets. And we are rebuilding our inventories to the extent that we are launching a lot of new initiatives It really isn't about shipping what was available in the first half of the year, but rather teeing up what the new initiatives are for the second half. We have a very robust lineup for a brand like Nerf, for example, where the ultra lineup will come out around the world, a brand new elite product, a rival product, and that's true across our businesses where we're really lining up to satisfy and exceed consumer demand around the world.

Thank you. Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Thanks. I just have two. First, I just wanted to ask for some clarification around your comments about catching up on misproduction 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, you know, kind of written orders that have yet to be fulfilled? And then I have a quick follow-up.

Yeah, 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 up for a starter set, Adventure Begins. We've got Fear Pong, Operation Petscan, a whole lineup 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 lineup that I described, including launch of Nerf Ultra and other brand new initiatives. So we have good visibility to consumer demand and our retailer plans are quite robust as we go through Q3 and into Q4.

Great. And my second question was on Magic. I can appreciate there were difficult year ago comps and there was the pull forward to 1Q that you guys had spoken about. It seemed like tabletop was probably down meaningfully year over year in the quarter. Could you just talk about some of the unique things that are impacting tabletop, particularly the hobby store closures? Are those stores reopening as well in the back half, and are you seeing renewed demand as those hobby stores reopen? Thank you.

Yeah. You know, the engagement with Magic has been quite strong. The headwinds were really about, you know, shipments in the quarter, and that Magic's full year 2020 plans are still very much in line with our plan and beliefs. that over this five-year period from 2018 to 2023-24, we can double the size of the Wizards business. While the card release cadence was less in Q2, we did make plans early in the year to drive more in Q1. We have a big plan for Q3 and for Q4. The Wizards Play Network store is expanded by double digits in the quarter, so we're seeing more stores reopening. In Q3... We have a core set coming, and that was just launched in early July. We have a Jumpstart set that's going to be launched later July, and that was a set that was originally planned for a June release, but we postponed the Jumpstart booster to July 17th due to the production challenges that we saw. In 2019, we had the Modern Horizons set that launched in Q2, and that was a very big set for us. The comparable set in 2020 is scheduled for August 7th in Q3. So, you know, despite the challenging Q2 situation, magic play is very strong. In fact, Ikoria, a layer of behemoths, which was the early spring set where we moved more of the revenues into Q1, is actually going down as the best-selling spring set of all time. And we're also seeing very good early interest and very high demand and strong sell-in for the core set 2021 that launched just a couple weeks ago. The rest of 2020 is filled with other yet-to-be-announced releases for tabletop and for all players and all of their different play styles. I also would mention that Magic Arena was up in the quarter, even though we had less releases in the period. Remember, everything is tied to the storytelling around the brand. And we did see over 2.5 billion games played. In total, as we look at Magic Arena, which is up from $2.1 billion at the end of Q1, Magic Arena players are still spending about nine hours a week on average. And Arena is coming to mobile, which of course is the most played global platform and is also launching in China in partnership with Tencent. So again, we feel very good about the Magic business. It's tracking quite well. we'd always describe Q2 as a major headwind. In fact, last point, Q2 last year was the biggest quarter for Magic, so the headwinds were substantial.

Great. Thank you, Brian. Our next question is from the line of Felicia Hendricks with Barclays. Please proceed with your questions.

Hi. Thank you so much, and good morning. So, Brian, you've kind of already walked us through a lot of things and things 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 biggest areas that were affected by product shortages were.

Yeah, so the most important factor for Q2 is, of course, related to COVID, and our number one priority during that time is to focus on the teams that are doing excellent work. We want to make sure they remain safe and operate safely. During the time at Q2, we had 30% of retail closed, and we had Irish, Massachusetts, and Indian 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 look, we have headwinds with Magic the Gathering that I just described. But also, remember, a year ago was Avengers Endgame in second quarter last year. We were also gearing up for Spider-Man's movie, which came in July last year. So I know that there's been a lot of conversation about COVID, which is appropriate, but also a headwind there on the Marvel business. And we are seeing good progress on Star Wars and Frozen, but Marvel was quite substantial last Q2. So we are very happy now that our domestic factories and warehouses are open. Also, India is back up and producing. There have been some short-term shutdowns and restrictions, but we feel very good that we'll be able to get those products into the marketplace And demand has remained incredibly strong. If you look at our POS globally, it was up high single digits. That's consistent with the industry growth rates that we've seen from NPD. Hasbro is holding its share around the world year-to-date. And our franchise brands POS globally were up in the quarter as well. Of course, global games were up by more than 50%. So the demand for – consumer demand for products is – quite encouraging. And as we get to the second half of the year, while we may not make up all of what was missed in Q2 for reasons we described, the fact is Q3 will be meaningfully better than Q2, and we expect to have a very good holiday season.

Great. That's super helpful. And then just moving to PEPA and the family brands in the quarter, can you just Walk us through a little bit more detail, what happened there in relation to YouTube and advertising, and was that a surprise for you?

Yeah, what we saw, really, a couple things around family brands. So first, Peppa Pig in Q1 in China had very strong licensing programs. And remember, we receive our licensing revenues in a year, so it's always recorded sort of the quarter after that. So as we compare what was going on last year in China, the consumer product licensees there in China, which is several, had a more challenging year this year in the first quarter in China as the market's just now reopening. They did add a lot of new content deals in China, which was positive. We did see a reduction in consumer products for PJ Masks, which was coming off of holiday 2019, and we've seen some challenges there. And then on YouTube, what happens is they changed the algorithm and the way that advertising was to be presented. We saw some reductions in advertising. The team is now seeing some recent bright spots there, and our team internally manages all of our YouTube ads. including now all of the Hasbro Brands IP YouTube features. But Peppa is still the number one viewed preschool property on YouTube with billions of views. So, again, there's been some puts and takes there, but down primarily due, again, to closures and consumer products challenges in different regions around the world due to the COVID closures.

Great. Thank you so much.

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

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 is with factories up and running now, retail inventory is very low. I'm wondering if you can help us sort of characterize what ship in or sales might be for the second half, assuming POS at a certain level? For example, would it be higher, the same, or lower than POS? And what are some of the salient puts and takes to that? And then I have a follow-up.

Yeah, 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 e-com. But remember that e-com retail and omnichannel retail runs with less weak supply than average brick and mortar. So as more of the mixed shift happens toward e-com, We need less weak supply there and still can fulfill consumer demand and drive our business. Then as we look at the reopening of retail, we have new initiatives that are coming. Magic the Gathering I just described, Dungeons & Dragons as well has a very robust third quarter as does the rest of our games lineup. And we're looking at a business for Q3 where we need to catch up on certain 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 weak supply that came out, the 17% reduction in retail inventory in seven weeks, We don't view that as a long-term challenge to satisfy consumer demand. So our goal is not just restocking shelves. Our goal is continuing to satisfy consumer demand, which we believe we can do. And we're doing that very effectively. The team has really been amazing at what they've been able to accomplish with the very strong POS that we've seen. And then as we get into Q4, we expect to have a good holiday season. We have very robust plans. lots of new initiatives, and really good marketing coming from the teams across the board.

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

Yeah. Yeah. So, you know, for the most part, people are continuing to hope that the theatrical business reopens sometime soon, but really hasn't yet. Many of our partners have already been announced and moved to 2021. In fact, 2021 is winding up to be an incredibly strong year for our IP industry. and content as well as our partners IP. We expect that there should be in the first quarter next year, could be three movies including The Eternals, Ghostbusters, and Raya and the Last Dragon. In Q2 next year, you'll have another Marvel movie or two. My Little Pony movie, the animated feature will come next fall. And our expectation is that G.I. Joe will move into a slot in 2021, and we're working out the specifics right now with Paramount. But, again, as we look at the opportunity to maximize our connection to global audiences and also to global retail, we'll likely move into a spot, and we're working out the specifics in 2021. Got it.

Thanks so much. Our next question comes from the line of Jamie Katz with Morningstar. Please proceed with your questions.

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

Sure. Well, our gross margin is strong. And if you think about it, the impact of magic, you know, and the releases in the quarter actually had a slightly negative impact on that number. However, you know, overall, the Hasbro piece of the margin was strong. We don't see a significant change to that. The one thing we did talk about is air freight. You know, should we have to air freight more? Just the cost of it is up now, as you can appreciate with with fewer flights running and, you know, the ability to actually air freight. 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, we're about three-quarters of our exposure for the year is hedged, so we don't have a lot of variability and FX rates that are kind of coming into those product purchases. So... that's a good factor as well. If we think about the program production amortization, originally at the beginning of the year, we did pull all of our guidance, but I know it's hard to model this without some level of estimate. So kind of where our head's at right now is we originally said it would be between 9% and 10%. I think we're around 9% for the quarter. Given what we can actually get done and delivered, I think that we may see it run a bit below that for the rest of the year as we think about that program production part of the gross margin. But overall, we expect it to remain strong, and looking at the different components, the biggest thing that could impact it at this point is really that air freight number.

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

Yeah, I think you're right. It's not really about the percentage of sales. I think that the kinds of programs that the team puts together, the way that we work with online and omni-channel retailers, Some of the buckets of spending go to other places other than just the advertising line. Obviously, content creation and storytelling are in different lines on the P&L as well as some of our gaming development, which is also part of storytelling and effectively marketing for our brands. So you're right. I don't see the overall advertising line increasing as much as overall marketing and advertising is planned to be robust for the second half across a number of dimensions.

Our next question comes from the line of Tammy Sicaria with JP Morgan. Nice to see you with your question.

Hi, thanks so much for taking my questions. So my first question is, do you expect the $130 million of E1 Synergy savings by end of 2022 to be more back-end loaded now, given your revenues have taken a hit? And my assumption was that a lot of the synergies are tied to bringing E1-related toy revenues in-house. So it's got to be more back-end loaded is the question.

Hi, Tammy. Good morning. I think that, you know, we still believe we're on track. Obviously, the business has changed because of COVID for all of us, right? And, you know, we still think we're on track to achieve $20 million of cost synergies before, you know, 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 the 2022. There may be some things moving around, but honestly, the teams are working great together. The one thing that you can do really well over video is collaborate on future projects, and that's the exciting thing. This year, we're all dealing with the situation, but we are squarely working on the future. The integration is going well. and we still expect that $130 million in synergies by 2022.

Got it. That's super helpful. And my follow-up is, so we've been hearing that media production costs may see an increase of 10% to 20% given the new COVID-19 protocols. So do you think you can pass along those costs to networks, or is it that it's not likely given the contracts are already in place for the pricing of the shows to be delivered?

I think that there'll be ongoing dialogue. I think there won't be just one answer there. Clearly, there's a lot of partnership that goes on between us and a lot of our streamers, broadcast partners, and linear partners, and it's an ongoing dialogue. The most important priority there is the safety of the crews and the cast and the people that are making the production, and there are meaningful steps that the team has been taking, protocols that are being set, and there are ways to look at budgets overall to try to mitigate overall costs and to incorporate the costs of strong protocols and the safety of the teams making the productions while executing. So there's not a one-size-fits-all solution, and the dialogue's going on. I feel like the teams are making very good progress there.

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

Thank you.

The next question is from the line of Drew Crum with Seafull.

Please proceed with your question. Okay, thanks. Hey, guys. Good morning. Brian, when would you expect to have TV and film production up and running and fully operational? And, Deb, as you look at 2021, do you think you're at that $675 million to $750 million range you originally forecasted for this year, or should you be above or below that threshold?

Yeah, given the current plans and what the team is prepping for production, our expectation is we'd be back in production in fall, in September, across all of our production. And, you know, as I said, we're already in production across a number of scripted shows, not just unscripted, which we've done incredibly well throughout the pandemic. The teams have used a lot of novel techniques. those unscripted collections going. But the scripted shows have started again in regions in Canada. They've started again in UK. And as film is beginning, and then really for the U.S., we expect that by September we should be up and running on the remainder.

And with respect to the actual production spend, we would expect to go back to next year's levels if we can be in full production or the same level if we can be in production. for everything. Now, it might fluctuate a little bit because we have some things we're catching up on, but right now our expectation is that we would spend about that same level.

Okay. And then for my follow-up, I know there's been a lot of discussion on e-commerce with nearly 30% of POS. We keep hearing that demand is strong across the industry. So given that, what are your expectations for bricks and mortar floor space or shelf space for the category of or for your business, however you want to answer it, for the second half? Should it be up, down, or unchanged versus last year?

Well, we have a lot of robust plans we're already putting together with our retailers, and they're building plans for both e-com or Omni as well as for brick and mortar. The teams have done a very good job. We have more new initiatives coming for Q4 projects, this year than prior year and certainly believe that we have a lot of new innovation that's worthy of expanded floor space and working on all that. I do want to comment that I think that the way promotions will be laid out this year is very different than some prior years. I mean, the goal for a lot of our retailers, as we're starting to see it unfold, is not to bring all the customers into a store on a given day for obvious reasons. but rather think about programs that can go on for a period of time to get more customers access, hot-selling product over a longer period, give people the opportunity to buy online or pick up curbside, and use all the different growing modalities of retailing that have been so effective so far and year-to-date. Our teams are really ready across Opus or pick up curbside, straight each ECOM and Omni, but also our retail merchandisers. We expect to be in-store stocking shelves in the fourth quarter. And we are looking at really robust plans. And to your point about ECOM, our ECOM POS, we have the best data for the U.S. It was up more than 100% in Q2. And our franchise brands on ECOM were up 84%. Cross franchise brands very strong with nerf up 55% and play those up 166% Partner brands were up more than a hundred percent Our merging brands were up more than a hundred percent games were up the same So, you know that step up that we're seeing from the consumer. We don't expect it to retrench we expect it to continue to expand as people get the opportunity to buy the product they want to find the product they want more searches and originating online for the brands and products their families, kids, or fans desire, and then satisfying that either through curbside pickup, in-store pickup, or shopping with a cart in-store. Got it. Okay.

Thanks, guys.

Thank you. The next question is from the line of Eric Hand with MKM Partners. Please proceed with your question.

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

Sure.

So first, global POS, we said, was up high single digits. and North America was up in Q2 16%. Europe was down low single digits, but with recent POS up quite substantially. So as we exit June and into July, we're seeing very good growth across a number of markets, UK, France, and others, and Europe. Latin American POS was challenged, and we've talked about that marketplace. It was down about less than revenues last, but about 30%. Asia Pacific was up double digits, similar to the North American POS at plus 16%. Very strong POS growth as China's come back online. We've seen good growth in China. We've seen very strong growth in Australia and the rest of the Pacific region. And then, you know, by brand category, I mentioned that, you know, our franchise brands were up Q2 in POS. In the U.S., If you look at our POS overall for the U.S. in Q2, it was up 18%, and our toy business was up high single digits. Franchise brands were up double digits. Partner brands were up high single digits. Gaming was up nearly, well, about 70%, actually slightly over 70%. So, again, very strong demand. really selling down retail inventories and now our opportunity to launch new initiatives in their Q3 and Q4.

Great. And then just quickly with Magic the Gathering, I wondered if you have dates, are they likely to fall in 3Q or 4Q for the mobile Magic the Gathering Arena launch as well as when you expect to start testing for the spinoff game Spellslingers?

Yeah, so Spellslingers is already in development and is kind of in test market. That game is continuing to be honed and likely will launch early 2021. We want to have Magic on mobile first. We haven't given a specific date, but it's actively in development and it will launch second half this year. It will also be in China with our partnership with Tencent this year. They've announced the key set releases through September. They haven't announced the fourth quarter set releases yet. We always like to bring our gamers and fans along. We don't want to ruin all the surprises, but there are four releases that have been announced that I can remind you of. The core set was July 3rd. The jumpstart that had moved from second quarter due to production shortages is now July 17th. The Double Masters set, which I said was comparable to the Modern Masters from Q2 last year, is August 7th. And Zendikar Rising will be September 25th. So we have a very robust lineup for Q3 and expect great momentum in the brand there. And then for Dungeons & Dragons, you know, their digital gaming development has also continued. That brand has performed quite well, grew in Q2. And... has a very robust release calendar for the remainder of 2020. Thank you very much.

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

All right. Thank you. Good morning. Hey, I want to ask you about trolls. Who knows when we're going back to the movies again and the trolls release via streaming could be something that we see more of. How did the toy product perform relative to two things, relative to, one, your pre-COVID plan, and then, two, your post-COVID plan after it was announced that they'd be released streaming at home?

Yeah, so the plan is really multiple dimensions. So in the U.S., there was a switch late after having done a lot of movie marketing to the PBRD. And remember that it's hard to note just how much of the impact was the move to PVOD versus the fact that our merchandising was all being set in April as retail stores were being closed across the U.S. So that was the merchandising window for the movie and the movie marketing. So clearly it was impacted there. It was not in that period as strong. But again, we're making progress. and making plans and working with Universal to drive every opportunity across the brand as it moves from PVOD to home entertainment. Now, around the world, there will be some theatrical launches. Some of those have not taken place yet, and they will still have the EST and home entertainment windows. So I'd say a very solid start, albeit because of COVID, you know, more opportunities staged around the world rather than just being at once. And, you know, what we really are seeing is that as brands are available in streamed environments, they are generating lots of interest in sales. Just look at the Mandalorian and other products. Clearly, we are seeing very good demand for Trolls and are selling Trolls product. But that was a switch that happened as we had already had retail plans set up for theatricals.

Okay, okay, yeah, so a lot of noise there, hard to discern. Hey, other question here. Of the programming that has so far been delayed, what are you expecting will be completed as planned? Could there be some canceled, postponed indefinitely, or dropped? Any maybe percent that you expect to be completed as planned?

Yeah, so right now we have a number of series that are set for production. There aren't – any number of substantial or even meaningful cancellations that we've seen at this point. It's just really about getting some of our big network shows produced to the extent that we can in Q4 this year or whether some of those revenues move into 2021. Deb, I don't know if you want to comment further.

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

Okay, okay. Hey, by the way, on the first quarter, you mentioned that you had 36 projects around Hasbro IP and production or in some form thereof. Now you say it's over 30. Is the number still 36, or did that change?

Actually, if I was specific, the number is 40. Okay. So it's closer. It's 40 projects around 32 Hasbro IPs. So there's multiple projects around certain brands like Dungeons & Dragons.

Okay, gotcha. Okay, great. Thank you, guys.

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

Great. Thank you so much for taking the question and your comments earlier around liquidity as well as your financial covenants. I was just hoping you could give us an update on any recent conversations you've had with the ratings agencies, specifically with regards to any sort of pressure points we should be mindful of around the IG rating as we're thinking out sort of over the next two quarters into 21, just given some of the moving pieces with the business. Thank you. Great. Well, thanks.

Obviously, we have an ongoing dialogue with all three of our rating agencies. We don't control their assessment, final assessment of which rating, but we are talking to them constantly and sharing what our updated forecasts are with them. So if we look at what a potential impact could be, if for some reason we were downgraded by two of the three, that would have an impact on our interest expense for the year. You know, we maintain the dialogue. We look at the forecasts that we set out on a long-term basis with them. And again, we have those conversations with them all the time as well. And this year has been unusual for everyone, right? But I think that's safe to say to everybody on this call. But when you look out beyond this year, our plans haven't changed. Our integration plans haven't changed. You know, Brian's talked about The teams are working together and identifying more brands that we can take out and leverage around our blueprint. So having time to sit on video calls with everyone has been very, very good in a lot of ways for creating those long-term revenue opportunities. So as we look at our longer-term plans, our plans really haven't changed. They've just gotten delayed a bit by this anomaly of 2020 and what we're all experiencing together right now.

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

Well, look, I think... Oh, sorry. I think that... Sorry. Modern technology. No, look, I think that... plans, as I look at the strategic plans that we put together, as Deb says, as we get beyond these closures and we move to the second half of this year already, we're seeing the opportunity of the objectives we set for our 2020 plan. As we go into 2021, we've got a very robust lineup and we're incredibly excited about the plans we have there. The longer-term plans are things that we share with our agencies and So they can see what we see and the progress is really there and quite extensive. I don't know if you want to comment further then.

That's exactly what I was going to say.

Great, thank you so much.

Thank you. The next question is from the line of Greg Badgekanyan with Wolf Research. Please proceed with your questions. Hey guys, good morning.

It's actually Fred Whiteman for Greg. if we just go back and look at the back half of last year, there was some impact from tariffs and what that did to your direct import business in the third quarter specifically. I mean, as we're thinking about modeling this year, how should we think about or plan for the 3Q, 4Q split, just given that prior year compare, sort of the higher e-commerce mix you're seeing this year and then where you guys are in terms of ramping production currently?

Yeah, look, I'm Unfortunately, as we all looked at the year, early this year we took away whatever broad guidance we would normally provide. But what I can tell you is that as we look at domestic to import split, it's gotten even more oriented toward domestic. The teams are very capable now. of getting product in through e-comm and omni-channel retail. If e-comm were to accelerate further and be a greater proportion of total sales, we can achieve our objectives even through that mixed shift. And the number of new initiatives we have for the second half of the year helps us understand, along with the retail plans we have, that Q4 can be a very good holiday. You know, look, Q3 is a road to recovery. We've reopened manufacturing that was closed in 45% of our production for two months. We are catching up on demand across an enormous slate of brands that have performed quite well from a consumer sales standpoint, although the retail inventories have declined and our fill rates have declined. So I would say Q3 is about recovering, but meaningfully better than Q2. And Q4 is about executing a good holiday season.

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

Hi. Thank you for taking my question. You mentioned some higher costs related to air freight, but also that you're able to take some costs out of the business from simplifying your commercial organization in the quarter. Could you talk some more about some of the cost efficiencies that you're currently seeing and how we should think about cost management opportunities going forward into the second half of the year and into 2021?

Sure. Well, as we look at our product, you know, 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 for a tariff on some of our gaming, and that's hell. 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. So as we think about that, we've got great contracts that really help customers secure our moving our product costs 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. And in this change time, we're trying to make sure that we align all of our regions so we're able to get the most efficiency possible out of our moving product to our various warehouses. We've increased our ability to service e-comm and increased our ability to do flex warehousing so we can deliver a lot quicker within Europe. So that'll be helpful as well as we look forward with this increase in e-comm. And also, as we just look at some of the costs that we're all taking out of our business, we've taken quite a bit of travel costs out and other costs out. We think we'll continue to do that as we move forward. And over time, as we start expanding more of our product and things get a bit back to where they were on the revenue side and introducing some more of our digital games that we have in development right now, We see that's where the margin expansion will come in over time. But we are very focused on cost, both from a cash and expense standpoint as well.

Great. Thank you. Thank you.

The next question is from the line of Brett Andrus with KeyBank Capital Markets. Please receive your questions. Hey.

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

Yeah, so, you know, again, if you think about it, Massachusetts, Ireland, and Indian factories were closed throughout mid-May, to mid-May, for mid-March. And so... As those have reopened, clearly the manufacturing of games, third-party manufacturing of games, as well as Play-Doh comes from Massachusetts. And so the team has been rushing to expand our capacity and get those games and Play-Doh out to the marketplace. But that's similar for Ireland. It's about a similar type of factory for our Irish business. In addition, we manufacture another half dozen locations or so across the U.S., trading card games for Wizards of the Coast and other products. And so, again, the team saw production disruptions in Q2 and chose to move the Jumpstart booster out to Q3. So now they're able to execute that. So I'd say What we're really seeing as we enter Q3 is access now to our products, increasing access to the NERF products coming out of India. We moved out launch just one month later to ensure we had enough of our ultra product, which, by the way, is selling incredibly well. This is the product that shoots 120 feet in high performance and is really well-liked in high ratings that we're seeing from fans. So I would say that by the second half of Q3, we're really fully caught up and shipping to meet what is strong consumer demand.

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

Thank you. Brian, Deb, thanks for all the color presentations. I wanted to circle back on the e-com. Clearly, there's been a substantial focus by yourselves, the industry, and partners to ramp that up. So I guess, theoretically, if we would hit a bad situation where a lot of brick and mortar is shut down in the back half of the year, is there any way to quantify the increased e-com bandwidth to offset that in the back half of the year? And then I have a follow-up.

Sure. Tim, it's a great question. It's something that we ourselves were planning and talking about as we look at the step up. I mean, hypothetically, to underline that, if all of demand for the holidays were to shift from brick and mortar to online, we could satisfy that demand. We obviously don't expect it to entirely shift, but the teams have built enormous capability and And the way we warehouse product now, the way we work with our e-com and omnichannel partners, it's really improved so dramatically over the last few years as we continue to build our capabilities and the way we market within an online environment with content to commerce and other techniques and working on the algorithms. So I would say we have the ability, if there were to be a major shift toward additional e-coms, that we could satisfy that demand and that we would shift our products to meet that mix shift.

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

That's exactly right. That's exactly right. You know, Latin America, it's still such a small percentage of the business, and the COVID situation there is so, unfortunately, just so challenging. I'd say that's a business that won't resolve immediately and it's going to take a little bit more time. We don't have the benefit of e-com or Omni beyond about, we see about 12% of the business currently being done there, and that's been through a lot of effort from the team to move it up from single digits a year ago.

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

Yeah, look, I think that people are very desirous of a theatrical experience. We all want to get back into movie theaters as soon as we can and enjoy the big screen along with everyone else. There's nothing like having hundreds of people together, you know, laugh at something or ooh and ah at some kind of big action movie. something that's going on in a movie, so we all want to get back there. Look, I think that the studios are being very purposeful, as is the E1 team, looking at the opportunity for theatrical releases, clearly wanting to still have that global theatrical audience. There's nothing like the opportunity to go around the world in a semi-simultaneous way to build that talk value and the demand for people to go to theater. So we don't see that going away. I just think it's a matter of when it really comes fully back. And we obviously have to be in a position where people feel safe and we can abide by protocols and get those theaters reopened. I think the important thing that everyone's looking at is being very thoughtful, planful, and strategic about which of these initiatives will go you know directly into a streamed environment versus which ones will go to theatrical clearly um you know we continue to partner with universal we'll make the most out of trolls that we can make but that was a switch that happened because of unfortunate timing around cove incoming theaters closing movie marketing having been already uh in the marketplace retail already stuff shelves being set so that i wouldn't view that as really the kind of purposeful strategy that we could be looking at in the future. You just look at what The Mandalorian has been able to create or you look at what Stranger Things has been able to create in our games business. As 150 million people or Disney Plus with their collection of princess movies has been able to create or Frozen and home entertainment window there on Disney Plus, it's been very strong for us. I think that's more the norm, and I think that studios and IT owners are going to be thoughtful about how they lay out those strategies to go forward.

Okay, great. Thank you.

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

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

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time.