Categories Consumer, Earnings Call Transcripts

Hasbro Inc. (HAS) Q2 2020 Earnings Call Transcript

HAS Earnings Call - Final Transcript

Hasbro Inc. (NASDAQ: HAS) Q2 2020 earnings call dated July 27, 2020

Corporate Participants:

Debbie Hancock — Vice President, Investor Relations

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

Analysts:

Arpine Kocharyan — UBS — Analyst

Stephanie Wissink — Jefferies — Analyst

Michael Ng — Goldman Sachs — Analyst

Felicia Hendrix — Barclays — Analyst

David Beckel — Berenberg — Analyst

Jaime Katz — Morningstar — Analyst

Tami Zakaria — JP Morgan — Analyst

Drew Crum — Stifel — Analyst

Eric Handler — MKM Partners — Analyst

Gerrick Johnson — BMO Capital Markets — Analyst

Priya Ohri-Gupta — Barclays — Analyst

Fred Wightman — Wolfe Research — Analyst

Devin Brisco — Bank of America — Analyst

Brett Andress — Keybanc Capital Markets — Analyst

Timothy Conder — Wells Fargo — Analyst

Presentation:

Operator

Good morning and welcome to the Hasbro Second Quarter 2020 Earnings Conference Call. [Operator Instructions].

At this time, I’d like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

Debbie Hancock — Vice President, Investor Relations

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 and most recent 10-Q, in today’s press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call.

I would now like to introduce Brian Goldner. Brian?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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 experienced 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 enter the third quarter across an even broader array of our brands. Engagement in our content is in several cases at record levels. In recent months, the number of retail stores open has increased dramatically. We began the second quarter with approximately 30% or more of stores, where we are doing business closed globally. Foot traffic was down in certain European countries by as much as 50% at the peak. Today, we are below 10% of retail close 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, ecomm 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, ecomm’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 pure play and omnichannel ecomm, 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 Sentinel. It hit our funding threshold in 24 hours, and after 10 days has more than 11,000 backers for a $350 collectible item. While Pulse is still a relatively small revenue number, this connection with our fans is powerful, and will grow over time.

Demand remained 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 have shifted about a month later, due to the limited supply is coming out of India.

In addition, as retailers move to a digital model and stores were closed, their retail inventory requirements declined. In the U.S., retail inventories were 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 ecomm 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, Entertainment [Phonetic], as well as Disney’s Frozen 2 and Lucas film Star Wars, where the properties have seen great consumer demand and have strong new lines, including the retail arrival of featuring the child from the Disney+ 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 [Technical Issues] 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. Our 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, eOne 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 eOne content is strong, and the team is doing good work, executing successful virtual content, and developing over 100 film and 60 new TV projects, including Hasbro IP and new IP.

We launched the new animated series on Netflix, Alien TV and continue to develop and produce new content for PEPPA PIG, PJ MASKS and the MY LITTLE PONY 2021 feature film. We have made great progress integrating our businesses, including combining our consumer products and entertainment teams and remain on track to deliver the $130 million in synergies by year-end 2022. Importantly, we are working to unlock the long-term value of the organization, as we develop new entertainment and commercial opportunities around Hasbro IP.

Finally community, our focus on our purpose to make the world a better place for all children and all families has never been more important. Hasbro has continued to support global philanthropic initiatives that bring relief to children and their families worldwide during this crisis, by providing meals as well as learning materials to those most in need. we remain deeply committed to using our brands, our resources and our expertise to help make a difference in our local communities, and around the world.

We’ve applied this belief to the ongoing dialog across our company around racial injustice, listening and looking within ourselves and our organization critically and honestly. While we don’t have all the answers, we have never been more committed to fostering a culture of inclusion and using our brands, our entertainment and our influence to make a difference in the world.

At Hasbro, we are in a unique position to help shape minds and hearts from the earlier stage. We have the privilege of being part of childhood, fandom, and inter-generational play and entertainment globally. With that privilege comes a responsibility to foster inclusion, and to help teach the next generation that everyone is equal and everyone is worthy, making a difference in the world is our purpose and our legacy. We want every kid to feel like a hero, 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 multichannel strategy and our global retail footprint. We’ve increased our agility and speed to market, adapting Hasbro plans as initiatives shifted to next year, and we are set to execute and deliver a strong 2021, across a robust line-up of entertainment and innovation, where the entertainment from eOne 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?

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

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 teams’ 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 eOne acquisition related expenses, severance, and amortization. In our reported numbers, we reflected $26.5 million after-tax of one-time acquisition expenses and amortization or an impact of $0.19 per share and $10.1 million after tax or $0.07 per share of severance expense associated with simplifying our go-to-market approach and our film and TV businesses, where operations have not returned.

Our integration with eOne 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 eOne business, like the overall Hasbro business, is not operating to our original plan due to COVID-19. These synergies are planned to increase in 2021, as we begin to in-source toys and games for eOne properties, and recognize more of the benefit of cost savings.

We continue to focus our organization around demand, supply, liquidity and community. I will begin with liquidity. We have substantial liquidity, ending the quarter with over $1 billion in cash on the balance sheet, and $1.5 billion available through 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 close 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 eOne. 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 million to $550 million, which is approximately $200 million below our initial expectations for the year. This reflects a delay in spend, not in elimination, and we are 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 million 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 eOne. 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 omnichannel ecomm 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 ecomm. 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 ecomm revenues were up meaningfully. The international segment reported an operating loss versus operating profit last year, as a result of 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 ecomm 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 Backflip Studios and the additional launch period advertising for MAGIC: THE GATHERING arena.

In the eOne segment while content demand by consumers remains high, revenue was 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 U.S., Ireland and India were closed for much of the quarter. Production is back and operating, and the teams are targeting the latter part of the third quarter to be caught back up. This depends on being able to ensure production can continue and staffing is at adequate levels. One area to note is that 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.

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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 result 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 eOne, 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.

SG&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 eOne. Within SG&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.

Questions and Answers:

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Thank you. And our first question is from the line of Arpine Kocharyan with UBS.

Arpine Kocharyan — UBS — Analyst

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 eOne side, I understand there could still be tied to sort of partial resumption of production. But on the legacy toy business, it sounds like the majority of retail footprint is open, I mean, perhaps, single-digit in terms of — as a percent of total. Could you just clarify what that means and what implication that has for the back half?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Sure. Good morning. First on eOne, 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 in other areas of 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 close to about 25%, which gets us to about that below 10% globally. Clearly, Latin America has had more of an impact from COVID-19 and less ecommerce business. In fact, ecommerce, there is about the 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 wanted to ship more for our second half initiatives. And clearly coming out of India, where we have a lot of our NERF production and some new items, we were not able to get that in for Q2, and so that will come in as part of Q3. We’re also catching up in the U.S., if you think about the Massachusetts factory, where many of our games and PLAY-DOH are made as well as the Irish factory that was closed from about mid-March to about mid-May, and so again, there is a catch-up period. But overall we feel very good about the continued strong POS that continues to expand across a broader array of products, and very strong plan from Wizards of the Coast and MAGIC: THE GATHERING and Dungeons & Dragons for Q3. And then moving into a very good holiday season, with lots of new initiatives.

Arpine Kocharyan — UBS — Analyst

That’s helpful. Thank you. The on eOne, it sounds like cash spend in terms of content production for the year is lower to further 9% and in Q1, it was down about sort of 23% on full-year basis. And you also mentioned some slight revenue shift. So is it fair to say that revenue on the media side of things from eOne is down more than 30% for the year?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

What we’re looking at is, the restarting of production and eOne 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 that 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?

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

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.

Arpine Kocharyan — UBS — Analyst

Thank you very much.

Operator

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

Stephanie Wissink — Jefferies — Analyst

Thanks. Good morning everyone. We have two questions, one is a housekeeping question. Brian, you mentioned LatAm has a significant under indexing in ecomm, I’m wondering if you can just — markets around the world and talk about ecomm as a percentage of the total mix in the big regions, just so we can understand the scope of penetration? And then my bigger picture question is just on — do 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 eOne and on the toy side in terms of demand? I think Brian you mentioned seven weeks of supply in channel, that’s pretty low. So curious about how much you think you can recover and build back into channel level inventory over the course of the next 12 to 15 weeks? Thank you.

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yeah. Thanks Steph. So we have built a great ecomm capability globally. So if you go around the world by region, the U.S. business is tracking — right now about a third of our business is coming from ecomm and omnichannel. In Europe, it’s about 30% and in Asia, it’s about 30% as well. In Latin America, we’ve grown it substantially in an effort to try to get business done in ecomm, but yet the channel still only represents about 12% of total revenues and that’s up about 10 percentage points versus a year ago. So the team has done a very good job of trying to make hay there, but recognize that the predominance of that retail is done in stores. And so, that’s where we are with ecomm. As we go to toward the third and fourth quarter as is typical, we expect the economy 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 businesses 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 been retail inventory down there further than just the average 17% that we saw in overall retail inventory decline. PLAY-DOH is down similarly. Look, I would say that we are taking advantage of every opportunity that we have, but recognize that some of the stores and retailers view their year as really a reopening at this point, and so they are reopening stores. We note that our major customers have been open throughout, as they’ve sold essential goods. I think it’s particularly why we performed even better in the U.S. as our top three retailers represent about 60% of our total revenues around the world. Those top retailers represent closer to just under 40%.

And so I’d say that, some retailers are just reopening, particularly toy specialists. We’re seeing good momentum, particularly in Europe and in Asia-Pacific as they reopened very strong recent point-of-sale in places like China, Australia, the U.K., France and other markets, and where you 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 start by 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 viable product. And that’s true across our businesses, where we’re really lining up to satisfy and exceed consumer demand around the world.

Stephanie Wissink — Jefferies — Analyst

Thank you.

Operator

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

Michael Ng — Goldman Sachs — Analyst

Thanks. I just have two. First, I just want to ask for some clarification around your comments about catching up on missed production by late 3Q. How much was the supply chain headwind in the second quarter and do you feel like you have better visibility into the third quarter, because there are kind of written orders that have yet to be fulfilled? And I have quick follow-up.

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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 at Hasbro Gaming, lots of new products across Hasbro Gaming. A brand new addition Clue Liars. We’ve got a brand mew Dungeons & Dragons game coming up for a Starter Set, Adventure Begins, we’ve got Beer Pong, Operation PET Scan, a whole lineup of new monopoly games coming through 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 on retail, our plans are quite robust as we go through Q3 and into Q4.

Michael Ng — Goldman Sachs — Analyst

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 the 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.

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

You know, the engagement with Magic has been quite strong. The headwinds were really about shipments in the quarter, and that Magic’s full-year 2020 plans are still very much in line with our plan and belief that over this five year period from 2018 to 2023, 2024, 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 stores expanded by double-digits in the quarter, so we’re seeing more stores reopening.

In Q3, we have a core set in coming — and that was just launched in early July. We have a jumpstart set that’s going to be launched later in July, and that was a set that was originally planned for 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 Horizon 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 despite the challenging Q2 situation, Magic plays very strong. In fact Ikoria: Lair of Behemoths, which was the early spring set, where we move 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 selling for the core set 2021 that launched just a couple of weeks ago. The rest of 2020 is filled with other yet to be announced leases for tabletop, and for all players and all of their different play styles.

Also would mention that Magic Arena was up in the quarter, even though we had less releases in the period. Remember everything is tied to the storytelling around the brand, and we did see over 2.5 billion games played in in total, as we look at Magic Arena, which is up from 2.1 billion at the end of Q1. Magic Arena players are still spending about nine hours a week on average and Arena is coming to mobile, which of course is the most played global platform and is also launching in China, in partnership with Tencent. So again, we feel very good about the Magic business.It’s tracking quite well. We’d always described Q2 as a major headwind in fact — last point; Q2 last year was the biggest quarter for Magic, so the headwinds were substantial.

Michael Ng — Goldman Sachs — Analyst

Thank you, Brian.

Operator

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

Felicia Hendrix — Barclays — Analyst

Hi, thank you so much and good morning. So Brian, you’re kind of already walked us through a lot of things and you seem to feel better about the second half than the first. Just parsing through the quarter, wondering if you could just help us understand how much of that 30% decline was attributable to store closures and supply chain issues? And then also just trying to understand what the biggest areas that were affected by product shortages were?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yeah so the most important factor for Q2 is of course related to COVID and our number one priority during that time, was to focus on the teams that are doing excellent work, we want to make sure they remain safe and operate safely. During the time of 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 — witnessed 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 in 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 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.

Felicia Hendrix — Barclays — Analyst

Great, that’s super helpful. And then just moving to PEPPA 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?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

What we saw really, a couple of 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 arrear, so it’s always recorded sort of the quarter after. So as we compare what was going on last year in China, the consumer product licensees that are in China, which is several, had a more challenging year this year in the first quarter in China, as the market is just now reopening. They did add a lot of new content deals in China, which was positive. We did see a reduction in consumer products for PJ MASKS which was coming off of holiday 201 and we’ve seen some challenges.

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Now on YouTube, what happens is they changed the algorithm in the way that advertising was to be presented. We saw some reductions in advertising. The team is now seeing some recent bright spots there and our team internally manages all of our YouTube, including now all of the Hasbro brands IP YouTube features, but PEPPA is still the number one viewed preschool property on YouTube, with billions of views. So again there has 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 closings.

Felicia Hendrix — Barclays — Analyst

Great, thank you so much.

Operator

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

David Beckel — Berenberg — Analyst

Hey, thanks so much for the questions. I have two if I could. The first, I just want to touch on, of course in which you’ve been asked a few times slightly differently is, with factories up and running now, retail inventories 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 is 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?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yeah. So I think there are couple of ships that are going on, that are quite good for our business as the team has such expertise in ecomm. Remember that ecomm retail and omnichannel retail runs with less week supply and average brick and mortar. So it’s more of a mix shift happens towards ecomm, we need less week 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 as our — rest of our games lineup. And we were looking at a business for Q3, where we need to catch up on certain availability like games, PLAY-DOH and NERF. We have certain other new initiatives that are coming to the market. I’m not going to comment on whether we think Q3 is up or down, but remember that, again the week 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.

David Beckel — Berenberg — Analyst

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 GI Joe this year? Thank you.

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

David Beckel — Berenberg — Analyst

Thanks so much.

Operator

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

Jaime Katz — Morningstar — Analyst

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.

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

Sure. Our gross margin is strong, and if you think about it, the impact of Magic and the releases in the quarter actually had a slightly negative impact on that number. However, overall the Hasbro piece of the margin is strong. We don’t see a significant change to that. The one thing we did talk about is air freight. Should we have to air freight more, just the cost of it is up now, as you can appreciate, with fewer flights running and 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, about three quarters of our exposure for the year is hedged so we don’t have a lot of variability in FX rates that are coming into those product purchases, so that’s a good factor as well.

If we think about the program production amortization, originally at the beginning of the year, we did pull all of our guidance, but I know it’s hard to model this without some level of estimate. Clearly 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 the program production part of the gross margin. But overall, we expect it to remain strong, and looking at the different components, the biggest thing that could impact it at this point is really that air freight I referenced.

Jaime Katz — Morningstar — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yes, I think you’re right. It’s not really about the percentage of sales. I think that the kinds of programs that the team puts together, the way that we work with online and omnichannel retailers, some of the buckets of spending go to other places, other than just the advertising line. Obviously content creation and storytelling are different lines on the P&L, as well some of our gaming development, which is also part of storytelling and effectively marketing for our brands.

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

Operator

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

Tami Zakaria — JP Morgan — Analyst

Hi, thanks so much for taking my questions. So my first question is do you expect the $130 million of eOne synergies [Indecipherable]] 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 eOne related tour revenues in-house, so is it going to be more back-end loaded, is the question?

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

Hi Tami, good morning. I think that we still believe we’re on track. Obviously the business has changed because of COVID for all of us, right, and we still think we’re on track to achieve $20 million of cost synergies before the expense associated with it this year, and we’re still on track for next year and we’re still on track for the $130 million by 2022. There may be some things moving around, but honestly the teams are working great together.

The one thing that you can do really well over video is collaborate on future projects, and that’s the exciting thing. This year, we’re all dealing with the situation, but we are squarely working on the future. The integration is going well, and we still expect that $130 million in synergies by 2022.

Tami Zakaria — JP Morgan — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

Tami Zakaria — JP Morgan — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

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

Drew Crum — Stifel — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Given the current plans and what the team is prepping for production, our expectation is we’d be back in production in full in September across all of our productions. As I said, we are already in production across a number of scripted shows, not just unscripted which we’ve done incredibly well throughout the pandemic. The teams have used a lot of novel tech to keep those unscripted productions going, but the scripted shows have started again in regions in Canada, they’ve started again in the U.K. as film is beginning, and then really for the U.S., we expect that by September we should be up and running on the remainder.

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

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

Drew Crum — Stifel — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

We have a lot of robust plans we’re already putting together with our retailers, and they’re building plans for both ecomm or omni as well as for brick and mortar. The teams have done a very good job. We have more new initiatives coming for Q4 this year than prior year, and certainly believe that we have a lot of new innovation that’s worthy of expanded floor space, and working on all that.

I do want to comment that I think that the way promotions will be laid out this year is very different than some prior years. The goal for a lot of our retailers as we’re starting to see it unfold is not to bring all the customers into a store on a given day, for obvious reasons, but rather think about programs that can go on for a period of time to give more customers access to hot selling product over a longer period, to give people the opportunity to buy online or pick up curbside, and use all the different growing modalities of retailing that have been so effective so far and year-to-date. Our teams are really ready across BOPIS or pick-up curbside, straight ecomm and omni, but also our retail merchandisers we expect to be in stores, stocking shelves in the fourth quarter, and we are looking at really robust plans.

To your point about ecomm, our ecomm POS, we have the best data for the U.S. — it was up more than 100% in Q2, and our franchise brands on ecomm were up 84% across franchise brands, very strong with NERF up 55% and PLAY-DOH was up 166%. Our partner brands were up more than 100%, emerging brands were up more than 100%, and games were up the same, so that step-up that we’re seeing from the consumer, we don’t expect it to retrench, we expect it to continue to expand as people get the opportunity to buy the product they want, find the product they want, more searches originating online for the brands and products their families, kids or fans desire, and then satisfying that either through curbside pick-up, in-store pick-up, or shopping with a cart at these stores.

Drew Crum — Stifel — Analyst

Got it, okay. Thanks guys.

Operator

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

Eric Handler — MKM Partners — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Sure, so first, global POS we said was up high single digits, and North America was up in Q2 16%, Europe was down low single digits but with recent POS up quite substantially, so as we exit June and into July, we’re seeing very good growth across a number of markets — U.K., France, and others in Europe. Latin American POS was challenged, and we’ve talked about that marketplace, it was down less than revenues but about 30%. Asia Pacific was up double digits, similar to the North American POS at plus-16%, very strong POS growth as China has come back online. We’ve seen good growth in China, we’ve seen very strong growth in Australia, and the rest of the Pacific region.

Then by brand category, I mentioned that our franchise brands were up in Q2 in POS. In the U.S., if you look at our POS overall for the U.S. in Q2, it was up 18%, and our toy business was up high single digits. Franchise brands were up double digits, partner brands were up high single digits. Gaming was up nearly–well, about 70% actually, slightly over 70%, so again very strong demand. We’ll be selling down retail and then [Indecipherable] even now our opportunity to launch new initiatives into Q3 and Q4.

Eric Handler — MKM Partners — Analyst

Great, and then just quickly with MAGIC: THE GATHERING, 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, Spell Slingers.

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

They’ve announced the key set releases through September. They haven’t announced the fourth quarter set releases yet. We always like to bring our gamers and fans along. We don’t want to ruin all the surprises, but there are four releases that have been announced that I can remind you of. The core set was July 3, the jumpstart that had moved from second quarter due to production shortages is now–was July 17. The double master set which I said was comparable to the modern masters from Q2 last year is August 7, and Zendikar Rising will be September 25, so we have a very robust line-up for Q3 and expect great momentum in the brand there.

Then for Dungeons & Dragons, the digital gaming development has also continued. That brand has performed quite well, grew in Q2, and has a very robust release calendar for the remainder of 2020.

Eric Handler — MKM Partners — Analyst

Thank you very much.

Operator

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

Gerrick Johnson — BMO Capital Markets — Analyst

All right, thank you. Good morning. I wanted 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 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?

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Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yes, so the plan is really on multiple dimensions. In the U.S., there was a switch late after having done a lot of movie marketing to the PVOD, and remember that it’s hard to know just how much of the impact was the move to PVOD versus the fact that our merchandising was all being set in April as retail stores were being closed across the U.S., so that was the merchandising window for the movie and the movie marketing, so clearly was impacted there, was not in that period as strong. But again, we’re making plans and working with Universal to drive every opportunity across the brand as it moves from PVOD to home entertainment.

Now, around the world there will be some theatrical launches — some of those have not taken place yet, and that will still have the ESP and home entertainment windows, so I’d say very solid start, albeit because of COVID more staged around the world, rather than just being at once. What we really are seeing is that as brands are available in streamed environments, they are generating lots of interest and sales, just look at The Mandalorian and other products. Clearly we are seeing very good demand for Trolls and are selling Trolls product, but that was a switch that happened as we had already had retail plans set up for theatrical.

Gerrick Johnson — BMO Capital Markets — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

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

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

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

Gerrick Johnson — BMO Capital Markets — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Actually if I was specific, the number is 40.

Gerrick Johnson — BMO Capital Markets — Analyst

Okay.

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

Gerrick Johnson — BMO Capital Markets — Analyst

Okay, got you. Great, thank you guys.

Operator

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

Priya Ohri-Gupta — Barclays — Analyst

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

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

Great, thanks. You know, obviously we have an ongoing dialog with all three of our rating agencies. We don’t control their assessment, final assessment of which rating, but we are talking to them constantly and sharing what our updated forecasts are with them. If we look at what a potential impact could be, if for some reason we were downgraded by two of the three, that would have an impact on our interest expense for the year, but — you know, we maintain the dialog.

We look at the forecasts that we set out on a long term basis with them, and again we have those conversations with them all the time as well. This year has been unusual for everyone, right, but I think it’s safe to say to everybody on this call that when you look out beyond this year, our plans haven’t changed. Our integration plans haven’t changed. Brian’s talked about the teams are working together and identifying more brands that we can take out and leverage around our blueprint, so having time to sit on video calls with everyone has been very good in a lot of ways for creating those long-term revenue opportunities. As we look at our longer term plans, our plans really haven’t changed, they’ve just gotten delayed a bit by this anomaly of 2020 and what we’re all experiencing together right now.

Priya Ohri-Gupta — Barclays — Analyst

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

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

As I said…

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Well look — oh, sorry. Deb, you should comment — sorry, modern technology. Look, I think the plans, as I look at the strategic plans that we’ve put together, as Deb says, as we get beyond these [Indecipherable] figures and we move through the second half of this year, already we’re seeing the opportunity [Indecipherable] of the objectives we set for our 2020 plan. As we got into 2021, we’ve got a very robust line-up and we’re incredibly excited about the plans we have there. The longer term plans are things that we share with our agencies so they can see what we see, and the progress is really there and quite extensive.

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

Debbie Hancock — Vice President, Investor Relations

That’s exactly what I was going to say.

Priya Ohri-Gupta — Barclays — Analyst

Great, thank you so much.

Operator

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

Fred Wightman — Wolfe Research — Analyst

Hey guys, good morning. It’s actually Fred Wightman on for Greg. If we just go back and look at the back half of last year, there was some impact from tariffs and what that did to your direct import business in the third quarter specifically. As we’re thinking about modeling this year, how should we think about or plan for the 3Q, 4Q split, just given that prior year compare, sort of the higher ecommerce mix you’re seeing this year and then where you guys are in terms of ramping production currently?

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yes, unfortunately as we all looked at the year, early this year we took away whatever broad guidance we would normally provide, but what I can tell you is that as we look at domestic to import split, it’s gotten even more oriented towards domestic. The teams are very capable now of getting product in through ecomm and omnichannel retail. If ecomm were to accelerate further and be a greater proportion of total sales, we can achieve our objectives even through that mix shift. The number of new initiatives that we have for the second half of the year helps us understand, along with the retail plans we have, that Q4 can be a very good holiday.

Look — Q3 is road to recovery. We opened manufacturing that was closed in 45% of our production for two months. We are catching up on demand across an enormous slate of brands that have performed quite well from a consumer sales standpoint, although the retail inventories have declined and our fill rates have declined, so I would say Q3 is about recovering but meaningfully better than Q2, and Q4 is about executing a good holiday season.

Fred Wightman — Wolfe Research — Analyst

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

Devin Brisco — Bank of America — Analyst

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?

Deborah M. Thomas — Executive Vice President & Chief Financial Officer

Sure. Well, as we look at our product, we’ve not had to take pricing on much product. We talked about at the end of last year, we had to take a little bit of pricing because of the List 4A tariffs in some of our gaming, and that’s how. We’ve obviously had some input cost increases just because of shortages, but not a lot, and most of our product cost is hedged, as I talked about. As we think about that, we’ve got great contracts that really help secure moving our product cost to the U.S., and then we’re actually seeing great efficiencies from our contract that we entered into to move our product to our retailers once it gets into the various locations, so we’ve been able to achieve that.

But we’re seeing the cost savings that we talked about from our cost savings activities from last year, and really what we’re trying to do is simplify how we go to market. In this changed time, we’re trying to make sure that we align all of our regions so we’re able to get the most efficiency possible out of our moving product to our various warehouses.

We’ve increased our ability to service ecomm and increased our ability to do flex warehousing so we can deliver a lot quicker within Europe, so that will be helpful as well as we look forward with this increase in ecomm, and also as we just look at some of the costs that we’re all taking out of our business, we’ve taken quite a bit of travel costs out and other costs out. We think we’ll continue to do that as we move forward, and over time as we start expanding more of our product and things get a bit back to where they were on the revenue side and introducing some more of our digital games that we have in development right now, we see that’s where the margin expansion will come in over time. But we are very focused on cost, both from a cash and an expense standpoint as well.

Devin Brisco — Bank of America — Analyst

Great, thank you.

Operator

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

Brett Andress — Keybanc Capital Markets — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Yes, so again, if you think about it, Massachusetts, Ireland and Indian factories were closed throughout mid-May — to mid-May from mid-March, and so as those have reopened, clearly the manufacturing of games, third party manufacturing of games as well as PLAY-DOH comes from Massachusetts, and so the team has been rushing to expand our capacity and get those games and PLAY-DOH out the marketplace. That’s similar for Ireland — it’s about a similar type of factory for our Irish business.

In addition, we manufacture in another half dozen locations or so across the U.S., trading card games for Wizards of the Coast, and other products, and so again the team saw production disruptions in Q2 and chose to move the jumpstart booster out to Q3, so now they’re able to execute that. So I’d say what we’re really seeing as we enter Q3 is access now to our products, increasing access to the NERF products coming out of India, we moved that launch just one month later to ensure we had enough of our Ultra product, which by the way is selling incredibly well. This is the product that shoots 120 feet in high performance and is really well liked and high ratings that we’re seeing from fans. So I would say that by the second half of Q3, we’re really fully caught up and shipping to meet what is strong consumer demand.

Brett Andress — Keybanc Capital Markets — Analyst

Thank you.

Operator

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

Timothy Conder — Wells Fargo — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

Timothy Conder — Wells Fargo — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

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

Timothy Conder — Wells Fargo — Analyst

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

Brian D. Goldner — Chairman of the Board and Chief Executive Officer

Look, I think that people are very desirous of a theatrical experience. We all want to get back into movie theaters as soon as we can and enjoy the big screen, along with everyone else. There’s nothing like having hundreds of people together laugh at something or ooh and ahh at some kind of big action, something that’s going on in a movie, so we all want to get back there.

I think the studios are being very purposeful, as is the eOne team, looking at the opportunity for theatrical releases, clearly wanting to still have that global theatrical audience. There’s nothing like the opportunity to go around the world in a semi-simultaneous way to build that talk value and demand for people to go to theaters, so we don’t see that going away. I just think it’s a matter of when it really comes fully back, and we obviously have to be in a position where people feel safe and we can abide by protocols and get those theaters reopened.

I think the important thing that everyone is looking at is being very thoughtful, planful and strategic about which of these initiatives will go directly into a streamed environment versus which ones will go to theatrical. Clearly we continue to partner with Universal and will make the most out of Trolls that we can make, but that was a switch that happened because of unfortunate timing around COVID coming, theaters closing, movie marketing having already been in the marketplace retail, already stocked shelves being set, so I wouldn’t use that as really the kind of purposeful strategy that we could be looking at in the future.

You just look at what The Mandalorian has been able to create, or you look at what Stranger Things has been able to create in our games business as 150 million people, or Disney Plus with the collection of princess movies has been able to create, or Frozen, and that home entertainment window there on Disney Plus, it’s been very strong for us. I think that’s more the norm, and I think that studios and IP owners are going to be thoughtful about how they lay out those strategies go forward.

Timothy Conder — Wells Fargo — Analyst

Okay, great. Thank you.

Operator

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.

Debbie Hancock — Vice President, Investor Relations

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.

Operator

[Operator Closing Remarks]

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