Operator:

Good morning, and welcome to Hasbro's Second Quarter 2024 Earnings Conference Call. At this time, all parties will be in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. 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 Kern Kapoor, Senior Vice President of Investor Relations. Please go ahead.

Chris Cocks:

Thanks, Kern, and good morning. Q2 was another good quarter. We saw strength in gaming and digital licensing and landed where we expected within consumer products, while increasing operating margin and maintaining healthy inventory. It's nice to come into calls like this and not only deliver what we said, but to start making it a habit. Across games, IP and toys, Hasbro is emerging a more profitable, agile and operationally excellent company, one dedicated to delighting fans of all ages through the MAGIC play. Our licensing and IP business continues to be a differentiator for us. In digital, we're seeing megahits like Monopoly Go! demonstrates staying power. We have over 35 entertainment projects in development and our team continues to drive our IP within consumer products through partners spanning the globe in multiple categories. And as we look at the business of play, it's clear that digital is here to stay in a bigger factor than ever and how successful toy and game companies will grow and strengthen their brands. We're years ahead of our peers, having already spent hundreds of millions of dollars building out our own studio capacity and expanding our brands through digital partnerships, games like Baldur's Gate 3 show us what the future looks like. And while we're still in the middle of the ballgame on our turnaround efforts in toys, we're seeing signs our innovation is working, particularly where we have a big head start versus the competition. Many companies in the toy and games industry are waking up to the power of fans and the importance of "kid oats" [ph]. Hasbro's long appreciated this audience, driving over 60% of our revenue from consumers 13 and older and we'll continue to lean in here as we think about innovation across our product portfolio. Looking at the business with the first half of the year in the books, our team delivered, and we're raising our full year guidance as a result. Gina will share more detail shortly, and I'll first offer some business highlights across gaming, licensing and toys. We had another solid quarter from MAGIC

Operator:

Thank you. [Operator Instructions]. Our first question comes from the line of Eric Handler with ROTH Capital. Please proceed with your question.

Chris Cocks:

Sure thing. Good morning, Eric. Thanks for the question. Yes, John, I think, is a luminary hire. He's had a major hand in a bunch of my favorite gaming franchises, whether it's Warcraft, Hearthstone, God of War and even going way back to Command & Conquer. He's worked on some great stuff, which I think is perfectly on point with what Wizards of the Coast is all about and what our digital gaming strategy is all about which is extending a bunch of great mid-core and hard-core brands and an expertise in designing for those kinds of audiences and helping us digitize what those brands can do. I think between our Board moves and between talent that we brought on Board, most recently with John, but even before that, studio leaders we have like Ames Kirshen, who was in charge of Batman Arkham series of Warner Bros, James Ohlen, who was the Head of Creative Design at BioWare, responsible for the first Baldur's Gate, Neverwinter Nights, Mass Effect. We're going all in on becoming a digital play company. I think Gina has talked a lot about the kind of the capital that we've invested. I think our -- roughly our capital envelope is about $250 million a year. About half of that is going into digital games. We think that's roughly around a steady state for us. Our goal is to be shipping 1 to 2 new games per year starting as early as late 2025, potentially early 2026. And I think we have a balanced approach to that. When you look at our game, when you look at our portfolio of investments in games, whether they're partnerships or JVs that we're doing or just fully internal investments. And then you look at our whole line up of licensed games, we have 150 projects that are either active in the market or in development. I think it's important for us to have a hand as a publisher to guide our franchises and to work on the areas and the audiences that we think are hyper important. But I also think it's important for us to work with the best partners in the business and extend those franchises in areas where either we don't have the expertise or we don't have the platform. And I think we've been doing a good job of it. It's no accident why I think we're the number one licensor in the space. And I think we're going to be a top publisher eventually in the space, and we're going to take our time and do it right.

Eric Handler:

Okay. That's helpful. And then as a follow-up, 3Q in your consumer products business in toys tends to be a very strong quarter for direct imports. Can you talk about what's happening there and how the supply chain is working for shipping?

Eric Handler:

Thank you.

Chris Cocks:

Thanks, Eric.

Megan Alexander:

Hi, good morning. Thank so much. I wanted to just dig into the guidance raise, if I could. So maybe a couple part question and happy to repeat anything if it doesn't make sense. But you raised, I think, by, call it, 35 million at the midpoint, give or take. I think that's also what you said you exceeded from the Monopoly Go! minimum guarantee relative to your expectations. So I guess just to clarify, as the guidance raised just for the fact that Monopoly Go! came in better in 2Q and then the second part is it does seem related to that, like MAGIC is perhaps doing better than you expected. You did call out some benefit from an international publishing deal in the second quarter. So if there's any way to quantify that and how that flows through to the guidance, that would be helpful as well? Thank you.

Megan Alexander:

Got it. Okay. That's helpful. And then maybe if I could just stay down Monopoly Go! a bit. Again, it seems like minimum guarantee, you got 35 million. I think if I'm doing my math right, there's maybe 65 million implied in the back half. So a little bit of step down on a quarterly basis, but I think it's in line with the way you were thinking about it to start the year. So would be helpful if you could just talk about kind of what you're seeing -- what you saw over the quarter from a revenue perspective and Scopely it’s marketing investment and how you're thinking about the second half and whether that's changed at all?

Chris Cocks:

Yes. I think the only thing I'd add Megan is the seasonality, we don't quite understand yet on the game. So if we're airing on the side of caution a little bit, it's because we don't quite get the seasonality yet. However, where I do think we have some bullishness is on the mid and long term for the game. When you look at games that reach this hyperscale like Monopoly Go! has and you look at just like the sensor tower data for North America and Europe, 10 of the 20 best performing games have been out for 5 or more years. So this is a game that's going to be a really strong and positive annuity for us for a long time to come. We're still learning a little bit quarter-to-quarter what the contribution will be.

Gina Goetter:

Thank you.

Arpine Kocharyan:

Hi, thank you for taking my question. Has anything changed in your outlook and thank you for the answers to the initial question that answered some of my questions? So I was just wondering, has anything changed in your outlook for MAGIC

Arpine Kocharyan:

That's very helpful. Thank you. And then Chris I had a bit of a bigger picture or rather a very long-term question related to the Nuance shift to kind of Hasbro being a games company that's making choice from toys and games company before. If you think about the success of Monopoly Go! and upside from that franchise that was primarily sort of due to lower customer acquisition costs to do the strength of that franchise that really essentially stand from a traditional toy. How does longer term kind of departure from traditional toys physician Hasbro to continue to win in digital? I'm not sure if my question makes sense, but it's a very sort of long-term big picture question?

Arpine Kocharyan:

Yes. Great. Thank you.

Arpine Kocharyan:

Thank you both. Very helpful.

Christopher Horvers:

Thanks and good morning. So my first question is, can you talk about the headwind that the Transformers movie lab presented here in the second quarter and also the exited business headwind as we try to tease out what the underlying business trends in the consumer products business and then bridge that to your assumption for the inflection ahead in the third and fourth quarter and perhaps reconcile that back to what you're seeing on the POS side?

Gina Goetter:

Got it. And now for the math answer, not the English one. Good answer. Good morning. So as we think specifically about what is happening within our shipments in the quarter, besides TRANSFORMERS, which absolutely was an impact, closeouts were down materially again. So we talked about closeouts in Q1, we were down about 50%. Q2, we were down 57%. So hurt shipments health margins, so that we're okay with that trade-off. And then the second piece that you asked about was the exited businesses. So that in the quarter represented about three to four points of the decline and that's going to carry with us into the back half of the year. So in aggregate, a whole year, I think about three to four points still coming from those divested businesses or exited businesses.

Gina Goetter:

Yes. I think that's generally right. And as we continue to see that mix shift towards digital, that's going to be a big driver of the continued growth. As we think about the back half of the year and what's going to carry with us, we still have a fair amount of cost saves within our purchase expenses and our people cost savings. So all of the actions that we put in place at the end of last year that will continue to increase in terms of magnitude as we move through the back half of the year. And then as we move to '25 and '26, we're going to have all of the benefit of a refined mix plus a much, much healthier below-the-line cost structure.

Gina Goetter:

You’re welcome.

Drew Crum :

Okay, thanks. Hey, guys, good morning. Maybe just sticking with margins. Can you remind us what the major margin headwinds are for the Wizards business in the second half? It looks like the implied margin is in the mid-30s range versus 48% for the first half. And I guess, more broadly speaking, why would you not be able to reach a 20% EBIT margin before 2027? What are the impediments to achieving that stated target earlier?

Chris Cocks:

And the latter MAGIC schedule.

Drew Crum:

Got it. Okay. Very helpful. And then maybe, Chris, a competitor earlier this week suggested toy sales outperformed during the first half and raised their market forecast for the year. Do you share that view? And if so, where do you see toy sales shaking out for the industry in '24?

Drew Crum:

Got it. Thanks, guys.

Alex Perry:

Hi, thanks for taking my questions and Congrats on a great quarter here. I wanted to drill down a little bit more on the MAGIC business. Can you just talk about the performance of Modern Horizons 3 and how big of a contribution that could be versus Lord of the Rings given you said that it's the fastest selling set of all times so far, which would imply that it's sort of off to a quicker start than Lord of the Rings. And then maybe just remind us of the contribution of Lord of the Rings and sort of how you think Modern Horizons 3 could stack up against that?

Gina Goetter:

Yes. Alex, my only add, as you look at the quarter, specifically within the quarter, Modern Horizons 3 actually outperformed Lord of the Rings. But to Chris' point, as you look over the full year because we won't have that holiday set, that's where kind of the overall lodge will be a little bit short.

Chris Cocks:

Well, I think you're still my top green shoot with just mentioning Beyblade. Beyblade is performing well in some early out in select markets. It's probably the best performing Beyblade release we've ever had in the U.K. It usually does really well in France. And again, it's doing well in France. And in the select spots that it's available in the U.S. It's selling out very quickly. Our belief is Beyblade will be one of the top new toys or refresh toys of 2024 and could actually clean the top spot very similar to what we did with Furby last year. Furby continues to do well. We like how Furblets are really driving the right price point and extending that franchise. We've seen a lot of nice momentum with Peppa Pig. I think after a couple of years of owning that franchise, not only are we hitting the right notes on the entertainment, but we're starting to hit the right notes on the toys, particularly the price points and kind of the wow moments that we have Transformers, I think, is shaping up to be a really nice Q3 in Q4 with Transformers One. And then D&D, I also really like -- I think you just asked maybe about consumer products, but I'm going to talk about the whole portfolio. The D&D refresh to the core rules of fifth edition is going out the gate strong. Pre-orders are breaking any records that we have, it's exceeding our forecast. Now that will help a bit in Q3 and Q4 when some of the products released, but some of those products don't release until Q1 and Q2 of next year. So again, I think we have a nice kind of healthy midterm projection on the businesses as well.

Alex Perry:

Perfect. That's really helpful. Best of luck going forward.

Operator:

Thank you. Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.

Gina Goetter:

In Q4 specifically, Fred, is that your question?

Gina Goetter:

Yes. No, we do anticipate it getting to that 10% level in Q4. It really comes down to the leverage in the volume. So right, as we've talked about, that's been the single biggest drag on the margin as we move through the front half of the year. So as you put all the revenue in Q3, Q4, both of those quarters tend to be at that 10%, 11% mark, and that's what we're planning for. I think our goal is to have that 10%, 11%, not just be in the back half of the year, but we're working towards having that be for the entire year, which would then say that the front half of the year is around that 10%, 11% or maybe a little less and then in the back half of the year is in the low teens, leveraging or kind of moving with revenue. So all of the work that we're doing this year to get that profitability right, all of the work we're doing on pricing and on mix and then getting the product design in the right way. All of that will contribute as we move into '25 and '26 getting the entire year for CP to have two digits.

Chris Cocks:

Absolutely. We've been in business with Takara Tomy, who's the licensor for Beyblade for decades. They're super important for us. And we've been in business with the Walt Disney Company since 1954. And if anything, I think you're going to see us doubling down on our partnership with them and expanding where it could go, whether it's toys, games, or trading cards and role play, they're going to be a big part of our story for years to come.

Operator:

Thank you. And we have reached the end of the question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning, and welcome to the Hasbro First Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Kern Kapoor, Senior Vice President of Investor Relations. Please go ahead.

MAGIC:

THE GATHERING saw a healthy growth in Q1, driven by timing of sales for our latest release Outlaws of Thunder Junction and strong demand for Fallout Commander. Q2 is an important quarter for MAGIC, with the releases of both Outlaws and Modern Horizons 3, what we expect to be our biggest set of the year. While we expect MAGIC to be down for the year after a record 2023, we maintain our long-term bullishness on the brand based on the continued robust fan engagement and a killer lineup of new universes beyond collaborations, including upcoming sets in 2025 for Final Fantasy and Marvel. And stay tuned for more exciting innovation from our D&D team as we continue to scale D&D Beyond and expand the richness of table top gameplay to digital. We expect to connect to an even wider audience while delighting our existing fans as D&D celebrates its 50th anniversary.

We continue to see momentum with FURBY, one of last year's top new toys, including our latest best seller, Furblets. According to [ Serkan ], these fuzzy Lil Friends were the top-selling item in the special feature plush category in the U.S. And earlier this week, we announced glow in the dark Furby Galaxy coming this summer. We've also seen encouraging POS trends from Transformers as we celebrate the brand's 40th anniversary. While we're lapping last year's successful film Transformers:

Rise of the Beasts in Q2, we look forward to sales rebounding in the back half as we gear up for Transformers 1.

Gina Goetter:

Thanks, Chris, and good morning, everyone. In February, I outlined our strategy to build on the foundation we put in place last year after resetting the business and the necessary steps we're taking to reinvigorate innovation across the portfolio while continuing to drive operational rigor. I am pleased with how we executed in the first quarter with our strength in digital licensing and MAGIC contributing to a more profitable business mix while our turnaround efforts in toys started to take shape. We continue to deliver supply chain productivity ahead of inflation, and we made meaningful progress on reducing operating expense.

As Chris mentioned, we saw some bright spots with the recent launch of Furblets as well as with PLAY-DOH and Hasbro Gaming. And conversely, we had continued softness in the blaster category, which negatively impacted NERF as well as action figures due to the light entertainment slates and lapping last year's successful launch of Transformers:

Rise of the Beasts. Operating margin for Consumer Products came in at negative 9.2%, which is down roughly 2 margin points compared to last year. As expected, we saw a material impact from deleverage associated with the volume decline which was partially offset with supply chain productivity gains, managed expense savings and improved gross to net selling rate due to lower closeout volume. It's important to note that the CP gross margins grew by over 5 margin points demonstrating the improvement in the underlying profitability of the business despite the negative impact from deleverage. Turning to guidance for 2024.

Operator:

[Operator Instructions] Our first question comes from the line of Eric Handler with ROTH MKM.

Gina Goetter:

So we are not -- we don't give EPS guidance specifically. We've been through the models. I would say analysts are coming up pretty close to kind of our internal math. I think the one thing to keep in mind for the quarter that just finished here is that we had about $0.10 of favorability from a stock adjustment -- stock compensation adjustment that will carry forward through into the year -- into your model. But we're not getting specific EPS guidance at this point.

Chris Cocks:

Eric, thanks for the question. Yes. So Arena was down a bit in Q1. Mostly that was due to not lapping a remastered set that we did last year for Shadows Over Innistrad. Barring that, it would have been roughly in line with the overall property, which was up about 4% on tabletop. So we continue to invest in Arena. We continue to mimic all the card sets that are inside of it. And we're also investing over the long term to refresh the platform. So you'll be hearing more about that over the coming couple of years because it's going to be a long-term digital project. But when you look at MAGIC and where our growth has been, a lot of that growth has been in social-based play like Commander and in collectibility. So certainly, we'll be investing in those areas on the digital platform over the long term.

Megan Christine Alexander:

One is -- kind of a 2-part question. You just did almost a 20% operating margin in what's typically your smallest quarter of the year from a sales perspective. In the slides, you did reiterate that 20% full year target by 2027. So I guess first question, why wouldn't you be able to get to that 20% number this year, if not higher than that? And maybe second part, was there something in that 1Q operating profit performance that won't repeat. The corporate segment, in particular, did stand out to us. Maybe you can just clarify what's in there and how we should kind of think about the run rate of that segment going forward?

Chris Cocks:

Well, I think when you look at Q1, January and February and our results were pretty heavily impacted based on 2 factors

Gina Goetter:

And then the only other added, I mean, on your closeout comment. So, you're right, it's typically heavy in Q1. But given what we were going through last year and trying to clear out all of the inventory, it was a factor in all 4 of our quarters. And so that is -- that will be the huge reduction that we took in inventory last year, the fact that we don't have that overhang that will be a positive contributor every quarter that we go. We'll continue to see that close up volume being down. So I should say a positive contributor on the margin side and negative contributor on the revenue side in every quarter.

Andrew Crum:

So Gina, just going back to Consumer Products, you discussed improved underlying performance and benefits from operational excellence, but you still saw adjusted OI down and some margin compression. If the volume decline headwind is moderating as you progress through the year, when should we start to see positive bottom line comps for that business?

Andrew Crum:

Got it. Okay. And then Chris, you had some comments on the Universe Beyond sets. Can you address the performance of Fallout Commander? I know it's still early, but has that changed your view on Magic revenue for the year? Does it have any impact on segment margin? And then just wanted to get a sense as to how you're sizing up or thinking about Final Fantasy and Marvel sets next year, how those compare to Lord of the Rings.

Arpine Kocharyan:

Just to clarify on POS, you mentioned down for the quarter. Have your expectations changed at all regarding full year industry retail trends? And then I have a quick follow-up.

Arpine Kocharyan:

And then margin is clearly the highlight for your results today, and I think it's going to be the same for the year as well. Could you maybe talk about cadence for margins for the rest of the year. I mean Q2, we'll obviously have strong Wizard, I think, so that helps flow through and you have closeout sales sort of easing or the impact of that easing. What are other big inputs you would highlight for Q2 and as we think about the back half as far as margins go?

Gina Goetter:

And when you kind of [ lateral ] that up with how it will play out by quarter. So if you kind of look at the pieces in Q1, that mix and that as we continue to shift into gaming and into digital is going to continue to be a tailwind for us as we move through the balance of the year. The fact that supply chain productivity is going to more than offset inflation. That trend is going to continue as we move throughout the year. And then operating expenses and all of the work that we're doing on purchase cost reduction, people cost reduction that, that benefit will continue to impact us as we move throughout the year. So the one quarter that we'll just have to watch is Q3 because of how strong it was in Q3 of '23. So it's still going to be a very healthy margin, but there was just so much positivity last year at that time that there could be a slight dip year-over-year, but all of the underpinnings of the cost structure that is going to hold and carry with us for the year.

Gina Goetter:

Correct. And the MONOPOLY GO! started to hit -- the minimum guarantee started to hit for MONOPOLY GO!.

Gina Goetter:

Yes. I mean the short answer is it's just really too early in the year to call it out. But to your point, the trends are favorable if they continue to play out in the way that everyone is watching and some of the other variables that are out of our control kind of break our way and become positive contributors. We absolutely did see that there could be upside. We just want to watch and play out here as we move through Q2 before we officially take guidance up for it.

Operator:

Our next question comes from the line of Christopher Horvers with JPMorgan.

Gina Goetter:

Yes. It's a material amount of money. Yes, the other half is all due to the operational excellence program. And I would think of it as a timing element of where it sits. So it's real money. It's purchase cost savings, it's people cost savings. And sometimes within the quarters in the year, it just settles out in corporate. As we move through the balance of the year, that's going to be allocated back. That favorability will be allocated back to the 2 segments of CP and Wizard. So that will kind of flush its way through. It's just a timing element of where it sat at the end of Q1. Last year, in the corporate P&L, I believe it was roughly $20 million annually of operating profit. I would expect maybe a little bit more just given that stock comp adjustment, but that's how you should think about Q1. Half of it was the stock comp, half of it was just some timing stuff that will get flushed back through the segments.

Gina Goetter:

No, it's about $0.10 of earnings per share. Yes, it was right about that.

Christopher Horvers:

Okay. Okay. I got it. And I guess to try to build on that last question. I guess if you -- like if MONOPOLY GO! does continue at the current pacing, correct me if I'm wrong, but I think you're looking at like maybe $50 million to $70 million in the back half from MONOPOLY GO!, sort of any comments on what it could be if what you see today continues? Could it be 2x that?

Operator:

Our next question comes from the line of Stephen Laszczyk with Goldman Sachs.

Chris Cocks:

Well, I think it's a pretty simple rubric that we're using, which is spend where we can measure, which is primarily digital. We have traditionally been a little traditional in our media planning. It's worked, but we haven't been able to really refine it down to the SKU level and down to the partner level. So we're spending a lot more in digital. We're spending a lot more with our retail partners near the point of sale or near the point of decision. And we're seeing a significant multiple effect in terms of the effectiveness of the spend. Still early in the year, and we still have to scale it, but certainly positive for us. I would say the majority of that will go to top line inside of CP if it continues to work like what we're hoping. And I think that's part of the thesis that we have for our Q3 and Q4 projections. And then that top line, particularly given the cost structure efficiencies we're driving and supply chain efficiencies we're driving, that will have a nice flow through to bottom line results, which again, I think kind of goes to the margin comment that Gina made earlier.

Gina Goetter:

Yes. Good question. For us, every kind of the whole the Red Sea, all of that is really been immaterial on our business. I think in the P&L in Q1, it was less than a couple of hundred thousand dollars of impact and even since then, our team has been doing a good job of navigating around and finding productivity to offset. So it is not a factor that I would call out as impacting our business right now. Overall, what we're seeing across freight is some moderation capacity is opening up. We're seeing rates come down. So that is absolutely benefiting the P&L part of our guidance. We said that there was going to be 2 points of inflation in the year. So it's playing within that but the environment is much more rational for us this year. And our team has done a really nice job renegotiating rates, renegotiating our contracts and then getting after our network in a way that benefits the P&L.

Operator:

Our next question comes from the line of Alex Perry with Bank of America.

Gina Goetter:

For Wizards in Q2 is going to be probably pretty favorable from a top line standpoint and a bottom line, so it's going to look pretty consistent, just given the release schedule that we have on the top line. So we expect there to be another kind of growing quarter. And then on the bottom line, again, just given the mix that we're seeing within the business and the shift towards digital, we'll see consistent trends there. I would say, for both businesses, for both CP and WotC, we've got the benefit from operating expenses that will continue to flow in as well throughout the quarter.

Alexander Perry:

Perfect. And then just my follow-up is on MAGIC, actually. So can you talk about any timing shifts that may have supported the quarter and how we should think about sort of phasing of growth there as we move through the year?

Operator:

Our next question comes from the line of James Hardiman with Citi.

Gina Goetter:

Yes. Good question. I know it's confusing to just given some of the timing components. Last year in '23, it was roughly $20 million. When all kind of get settled out, it was roughly $20 million. I would say we'll probably be around that plus or minus a bit just given that we have this stock comp adjustment sitting in there. It's really held as a lot of our corporate costs sit within there. It's trying to represent kind of that corporate overhead structure, but then much of it gets allocated back as we go throughout the year. And all of that just given all of the work that we're doing in that area is a little bit as you can imagine, it's moving. It's agile this year as we make all those changes. So I would say, call it, $20 million, $30 million by the end of the year [ in terms ] of profit.

Gina Goetter:

I would say in Q2 and -- Q2 to Q3, you're not going to have that $20 million adjustment for the stock comp in there. And so then you're looking kind of plus or minus a few million dollars moving in and out. So it really becomes an immaterial impact as we move through the next few quarters.

Gina Goetter:

Got it. Yes. I think we feel based on what we delivered in Q1, really good about our ability to deliver that 4% to 6% guidance range. And to your point, a big drag that we saw in Q1 was the [ eOne ] And as we kind of push past that and move into growth in Q4. You're going to see some nice underlying profitability within the business. As we move then into 2025, we've publicly said that. Our goal is to get this as close to double digits as we can through 2025. And it's going to be some of the same levers that you're hearing us talk about, continued focus on cost structure, continuing to refine our supply chain, getting really smart with our product mix and how we're pricing in markets.

James Hardiman:

Is it crazy to say that we're going to be pretty close to that double-digit rate sort of implied in second half or fourth quarter?

Operator:

Our next question comes from the line of Fred Wightman with Wolfe Research.

Gina Goetter:

Good question. Yes, we wouldn't call it deflation per se. So we are seeing a couple of points of inflation. The 3 areas I'd call it, one is labor. That's our biggest cost in the P&L. We're continuing to see that inflate a few points. The second, then when you think about our largest kind of ingredient that we're purchasing in Horizon, that also is inflationary in the year. But those are kind of the big 2, I would say. I mean, our logistics cost there's pluses and minuses. Overall, we're managing logistics pretty well. For the year, in the quarter, we saw about 2 points of inflation. That's what we think that is going to play through the rest of the year, about 2 points of inflation.

Frederick Wightman:

Yes, that makes sense. And maybe another one for you, Chris. You talked about the traction from the LITTLEST PET SHOP license. You also talked about the deal for Power Rangers. Does the early success that you're seeing with some of these licensing decisions change how you're thinking about the need to own versus license some of these CP brands going forward?

Operator:

Our final question comes from the line of Kylie Cohu with Jefferies.

Chris Cocks:

Yes. Easter gave a modest lift in the quarter, maybe, call it, 1 or 2 points based on it being earlier. Finally, though we're seeing April kind of continue to positive trends even barring kind of like what's going on with Easter. I think we were up in the last week our total global POS in the last week of April that we measured, we were up 7% without our divested brands included and up about 4% when you even include those divested brands. So while we think Easter would help in Q1, it wasn't really a decisive help.

Chris Cocks:

Yes, about 50% or so of our...

Chris Cocks:

About 40% of our total volume is built in China today. But only 5% or 10% of our total profit is sourced out of China.

Operator:

Good Morning. And welcome to Hasbro Fourth Quarter Full Year 2023 Earnings Conference Call. At this time, all parties will be in listen-only mode. [Operator instructions] 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 Kern Kapoor, Senior Vice President of Investor Relations. Please go ahead.

Chris Cocks:

Thanks, Kern, and good morning, everyone. For more than a year now, you've heard me outline Hasbro's strategy to refocus on play behind a philosophy of Fewer, Bigger, Better. Fewer SKU’s that drive higher impact. Bigger investment behind winning brands in more focused categories. And Better innovation driven by a renewed leadership team and a focus on kids, parents, and fans, our consumers, the lifeblood of Hasbro. We laid out a blueprint for a more focused and profitable company with a number of growth initiatives built on a diverse portfolio of some of the most iconic brands in the toy and game industry. While business transformations take time, I'm pleased with how much we accomplished in 2023, setting the table for a 2024 punctuated by strong profit growth and momentum in renewing Hasbro's innovation engine. We're entering 2024 with a healthier balance sheet, a leaner cost structure, and an operational rigor that will maintain and build on these improvements in the quarters ahead. In 2023, we took substantial action to bolster our balance sheet. At the end of the year, we closed our deal with Lionsgate on eOne Film and TV, allowing us to focus our investments on higher return, play-focused initiatives across toys, games, and digital. Proceeds from the deal allowed us to reduce our debt by approximately $400 million. As we shipped our entertainment strategy to an asset light and partner-led model, we took a $1 billion impairment, a noncash item in Q4, which reflects the sale of eOne, and a change in outlook for the balance of our own and operated production efforts. This shift frees up more capital for us to reinvest in toys, games, and particularly our digital future. Between hard work from our sales and operations teams and some of the financial actions we took at the end of the quarter, we entered 2024 with inventories down over 50% year-over-year, which is well below 2019 levels. We also took steps to improve our structural profitability, exiting a number of low or negative profit businesses that we have shifted to a licensed-out model. Finally, we are driving better than expected cost savings through our operational excellence work. Unlocking crucial investment capacity as we seek to connect with fans of all ages and across all play patterns. Previously, we communicated $350 million to $400 million in annual run rate savings. We're updating our target to $750 million of gross savings by the end of 2025, with half of it dropping to the bottom line. This allows us to reinvest in our business, meaningfully improve our cash flows, and return cash to our shareholders, which we are committed to continuing through our category-leading dividend. Since I became CEO in 2022, Hasbro's returned almost $1 billion to shareholders and paid down over $0.5 billion in debt. While 2023 was challenging and we still expect the toy industry to face near-term headwinds, we believe we're taking the necessary steps to turn around our consumer products business. Wizards and Digital Gaming is coming off a banner year led by MAGIC, Universes Beyond, the success of Baldur's Gate III from our partners at Larian, and Monopoly Go! from Scopely. 2024 is about returning consumer products to profitability, investing for long-term momentum in games, and driving significant improvements in Hasbro's bottom line, fueled by operational discipline and renewed product innovation. In short, we're putting all the right pieces together to keep investing in our growth initiatives while expanding the ways our franchises reach fans through digital games. We expect the next year we'll likely see continued headwinds in the toy category. We're exiting 2023 with our retail inventory down around 20%. While we think Hasbro's retail inventory is in a healthy position, across the industry a lot of older discounted inventory still remains in the market. The consumer remains value conscious and we anticipate entertainment will be less of a tailwind in the year ahead, behind a reduced box office slate. Anticipating these headwinds, we made necessary choices to get our cost structure and inventory positions healthy. Accelerating a number of cost savings initiatives by several quarters. Since I became CEO, we have significantly enhanced our consumer insights capabilities and upgraded our design and toy leadership. In 2024, we'll see more and more of the resulting innovation improvements as these capability upgrades come to market across our portfolio. As such, we believe we're in a good position to at least pace the industry this year with innovation and share trends accelerating to ahead of market as we head into 2025. Turning around a product pipeline is key, with the right people and the right insights. At the end of the day, it's all about great product. In the back half of 2023, we started to see the first evidence of our new team and products working. Take FURBY, for example. This was a product we took our time testing and iterating based on consumer insights. It paid off as FURBY was one of the top new toy introductions in 2023. We continued the FURBY craze in December with the launch of Furblets, another hit introduction, and we're excited to continue building this franchise in 2024. 2023 was also a strong year for our TRANSFORMERS franchise. On the back of the hit movie, Transformers Rise of the Beasts from our partners in Paramount, driving point of sale growth of 35%. We have some exciting activations planned as we celebrate the brand's 40th anniversary in 2024, as well as the star-studded animated movie, Transformers One, coming this summer along with fresh merchandise. This year also marks PEPPA PIG’s 20th birthday. We'll be celebrating with new, innovative products and an entertainment special featuring A-list talent Katy Perry and Orlando Bloom. After gaining share in the arts and crafts category in 2023, with another strong year including our ultimate ice cream truck, the Play-Doh team continues to innovate, expect more creative surprises and new cross-brand collaborations in the year ahead. In action figures, we are leaning into our category-leading collaboration with The Walt Disney Company for their Marvel Superheroes Assemble marketing campaign, featuring new price points and products across our lines, including all new preschool fun with Spidey and His Amazing Friends. For Star Wars, we're excited to expand our best-selling Lightsaber Forge Kyber Core series and introduce our new $7.99 Epic Series 4-inch action figures. We saw an incredibly strong launch from Beyblade X last year in Japan from our partners at Takara Tomy and are eagerly anticipating the U.S. launch this summer, What we believe will be one of the hottest new toys of 2024. It's an exciting product that we think long-time collectors and kids fresh to the franchise will be thrilled with. The blaster category continues to be under pressure, but we also continue to believe this is a strong and enduring play pattern for fans of all ages. This year we'll be introducing new innovation into the category, featuring a new performance start technology, pop off-the-shelf design and attractive pricing up and down the range. Board Games continues to be a leading category for us, and one we anticipate will grow in the year ahead. Twister Air was a number one new game across the G-10 markets in 2023, according to Sircano. Thanks to an innovative new augmented reality experience. You're going to see a renewed focus on expanding genres, leveraging our reach and distribution strength to introduce more cool new games than ever, and working with some of the brightest designers in the industry to give their games a platform they deserve. Whether it's adult party games, family card games, casual strategy, or extending mega hits like Monopoly, 2024 will be a big year for gaming from Hasbro. Speaking of games, Wizards and Digital outperformed our guidance in 2023, driven by a series of blockbuster hits. MAGIC had another record year in ‘23 with a string of amazing new sets, including our best-selling set of all time, The Lord of the Rings

Chris Cocks:

Thanks, Gina. Turnarounds take time. And for our toy business, we are still in the early innings. While we're likely to face some near-term industry headwinds in 2024. And we're comping a better than planned 2023 for Wizards. The work we've done under the hood to strengthen our balance sheet, upgrade our planning and right size our inventory is a strong foundation to build from. I want to thank the teams at Hasbro for driving this and putting our fans first. This year is all about execution. As we build on that foundation, drive our profitability, and reinvigorate our innovation pipeline for category share gains in 2024, and renewed top-line growth in 2025 and beyond. We'll now pause to take your questions.

Eric Handler:

Good morning. And thanks for the question. A lot to digest here. I wonder if you could talk about what the retail situation and your cost structure look like international versus North America?

Gina Goetter:

No, Eric, the second part of your question about the profitability between North America and our international markets. I mean, North America is our highest margin market. Within international, a couple of things that draw that margin profile down. One is within the allowances and just how we intersect or interact with the retailers. That is a bit more costly than what we have in the US. And the second piece is really within our overhead structure to support the international business. Both of those pieces we are working to address. So through our initiatives of revenue growth management, that is squarely focused on all of that cost that's sitting between post revenue and net revenue. And then the second piece on overhead, all of the cost savings initiatives that we've put into motion will start to attack the cost structure of rather North America as well as the international.

Chris Cocks:

Yes, for sure. So last year, we were fortunate in that both MAGIC and D&D were growers for us. The MAGIC tabletop business was up probably in the 3% to 5% range. We had a little bit of attrition on digital, but still the business was up low single digits. And D&D was up over 75% on a total brand basis. I think the contributors for D&D's growth last year will be very similar to what they'll be moving forward. We continue to think D&D Beyond was an excellent acquisition. It really is the way increasingly people are playing tabletop role-playing games. I think it's an excellent platform for us to build upon and expand the ways that people can play, the ways that people can experience theater of the mind. And also for us to distribute and showcase a more diverse set of content, whether that's Universes Beyond style content, like we do with MAGIC, or our major creators content or user-generated content. So I think you'll see more from that on the tabletop side. We continue to have a robust entertainment slate on D&D that we're working with several partners behind, notably the new streaming series from Paramount that we're partnering with them on. And then video games will clearly be a huge leg up on the D&D business. Baldur's Gate III is one of the seminal role-playing games of all time. It's won multiple games of the year awards. Our partners at Larian really knocked it out of the park with that and were fantastic to work with. Baldur's Gate III is just the first of several new video games that will be coming out over the next 5 to 10 years that I think will continue to power that franchise. And really, I think the three combined, continued innovation on tabletop, powered by D&D Beyond, targeted entertainment, working through partners in an asset-light model, and then great video game content through licensees and through our own internal studios. I think the future is bright for that brand.

Christopher Horvers:

Thanks and good morning. So, first a clarification. Did you say you expect consumer products to be flat in 3Q and then up in 4Q in that mix? How are you thinking about NERF growing again? And to what extent are you taking in a shorter holiday calendar next year? And as a part of that, fourth quarter question, could you mention what the specific lift in 4Q ‘23 was from clearance sales?

Chris Cocks:

As you think about the back half, Chris, I'd be really looking at Beyblade X as a huge launch for us. It did many orders of magnitude larger in the launch in Japan last year versus Beyblade Burst from 2016. We're expecting it to be quite a runner and the early feedback from the toy fairs is our retailers are getting behind it as well. We have some really cool innovation across price points for Play-Doh that I think will continue to the run on that brand, both building share and building point of sale and sell-in. And then we have quite a lineup of board games that will be coming out throughout the year. But generally speaking, we have a good Q4 for our board games and we think this year will be no exception.

Chris Cocks:

Sure. So last year, we did six premier sets per year, which is like large sets that go across formats. I think last year five of our six premier sets eclipsed $100 million. I don't think we have a specific forecast for each of the premier sets this year, but we will have six sets this year. We think actually we'll have probably slightly less kind of secondary sets or secondary SKUs associated with MAGIC. And so we're projecting flat to slightly down for the brand. So I think you can do the math and say it's roughly about the number of equivalent sets that are hitting that $100 million bogey. As you think about Universes Beyond, last year we had our first what we would call premier set for Universes Beyond that was Magic Lord of the Rings. That did over $200 million in under six months. This year we have some smaller Universes Beyond sets. The first one's going to be fallout, which will come up in March. That won't be at the same scale or size, but we'll do better than what a typical commander set would do. But starting in 2025, we're going to have two premier Universes Beyond sets as part of our mix. And we believe the brands that will be shipping in 2025 have the same kind of carrying power as the Lord of the Rings. The one that we've announced will be in the front half of the year, and that's Final Fantasy, which is just a juggernaut in role-playing games. We've announced partnerships with a host of other brands, Marvel being one of the last ones that we kind of talked about. There'll be multiple sets associated with that. So for ‘25 going forward, you should expect to see as part of our six premier sets per year, two of them will be Universes Beyond branded. And we think we'll have a similar uplift to what we experienced with Lord of the Rings. And so that's underlaying a lot of our bullishness on the growth for MAGIC.

Arpine Kocharyan:

Hi, thanks for taking my question. So EBITDA finished the year at around $700 million, and you expect around $250 million of incremental cost base in 2024, but then you're probably annualizing cost base from 2023 with some kind of underlying decline in EBITDA. Could you just maybe bridge to the puts and takes of 2024 EBITDA guides for the year for us, because there's also cost to those cost savings, as I understand, if you could just go through the puts and takes. And then I have a quick follow up for Chris.

Arpine Kocharyan:

Great. Thank you. And then, Chris, you have talked about $500 million of D&D business over a three-four-year period. I was wondering if that's still the guidance for D&D. I know you addressed some of that earlier, but if you could just go over kind of the long-term growth prospects for that business in terms of sizing it for us, similar to how you guys communicated in October Analyst Day. So kind of, I know you're not ready to update that guidance, but just sort of, is that $500 million still the right numbers to think about? Thanks.

Gina Goetter:

I think like I control the baby.

Chris Cocks:

We always appreciate it when people make customers.

Chris Cocks:

I would say that guidance holds. The D&D brand and our games portfolio overall is trucking along at a similar pace as we expected. That guidance was more of a 2027-ish timeframe. I think a little bit will depend on certain calendars associated with certain video games and there's a certain amount of schedule slippage that you get with that. But generally speaking we feel good about the trajectory of the brand and as I mentioned in Eric's question kind of like the three core pillars that underlie it.

Megan Alexander:

Hi, thanks very much and thanks for all the detail. It's really helpful. I was wondering, Gina, if maybe we could unpack the revenue guidance for consumer products just a bit more. You cited those four points from exiting the licensing. Maybe you can help us understand what's implied from an industry POS expectation and I guess is the comment that retail inventory is not a headwind or a tailwind. Should we assume that you're just kind of shipping in line with POS?

Megan Alexander:

Okay. And then could you maybe quantify the net cost savings that are embedded in the guide? I think for your slides you're going to get to kind of $500 million of gross cost savings by the end of this year. You've kind of said you haven't really seen any last year. So on that call it net, $250 million if you can reinvest 50%. What's embedded this year? And I know you talked about some cost inflation. Is that freight? Are you still seeing, product inflation, whether it's things like resin? Can you just maybe quantify what is actually embedded in the guide?

Megan Alexander:

Great. And just to clarify that, that $200 million to $250 million is, that's a net tail end verse ‘23 and that's kind of should be independent of whether the top line's kind of above or below or at the high end of the low end of your guide.

Operator:

Our next question is from the line of Andrew Uerkwitz with Jefferies.

Chris Cocks:

Hey, Andrew. Yes, I would say for starting in 2026, we'll probably have one major new digital game that we'll publish. And then ‘27 to ‘30, it'll be anywhere between one to two, depending on how the schedules kind of shake out. From a licensing perspective, I think you should generally see our licensing business after taking maybe a little bit of a step back this year, just given the Baldur's Gate III launch bulge. Take a little bit of step back this year, but then it will grow sequentially every year as we just expand the number of licensors and games like Monopoly Go! continue to mature and become more profitable for us. We're constantly adding new licensors to the mix, so it's a little difficult to give you a lot of precise guidance about kind of like the mix between mobile or kind of like some of like the casino gambling that we that we also licensed to or PC and console. But generally speaking, our license mix tends to be more mobile and casino gambling than it would be PC and console because that's where we're going to tend to focus our publishing efforts.

Chris Cocks:

Well, I think it's generally speaking all the above. However, I think the special emphasis for Universes Beyond is new player growth. The Lord of the Rings was by far and away the most successful product at bringing in new players into the franchise that we've ever released. We would anticipate that would be the same or potentially even greater for IPs like Lord of the Rings or Marvel or some of the future things that we have in store. So, it's a great way for us to kind of expand the base of users and grow kind of like future sets over time.

Jaime Katz:

Thanks. I'd be interested to hear how you guys feel, you have completed the brand pruning process is that largely done, is it still underway, I'm just trying to think about what other headwinds we might have in the future.

Jaime Katz:

That’s helpful.

Jaime Katz:

Okay. And then Gina, I don't think it's been delineated what portion of the cost savings are coming out of cost of goods sold relative to SG&A, my suspicion is most of it's out of that SG&A line. But do you have that bifurcated and an easy way to digest? Thanks.

Operator:

Our next question is from the line of Jason Haas with Bank of America.

Chris Cocks:

Yes, hey, good morning, Jason. In Q4, we were down around 12% or 13% on our internal point of sale measurements. When you factor out some of the exited licenses that we didn't comp, it was more down around negative 9% in the quarter, which roughly tracks around what the industry did. We think the industry did between negative 9% and negative 10%. For the full fiscal year, we were down negative 10% to negative 11% based on our internal point of sale tracking and kind of exited brands. We were down about negative 6%, which again, roughly tracks with kind of what our feeling is for the industry. In terms of our call for industry trends moving forward, I think generally speaking, we think the prevailing trends that existed in the back half of 2023 are likely going to persist into at least the first half of 2024 and probably into the second half of 2024. We still have a little bit of a correction from pre-COVID kind of toy share of wallet that we think we're experiencing in markets like the U.S. We do see growth in places like Latin America and Southeast Asia. And we generally are kind of thinking that once we get through 2024, we're largely past that kind of post-COVID correction and we start getting back into a toy market, which from our planning purposes, we're basically projecting to be around flat and that based on our innovation and the marketing that we're putting together and just the general kind of fundamental health of the business that we're reinjecting into it, that we can grow at that level or likely ahead of that level and build some share, particularly in the categories we're focused on.

Gina Goetter:

As we move through 2024, yes. For Monopoly Go! in Q4, it was just the minimum guarantee that we booked in from a revenue standpoint. And Baldur's Gate had another healthy quarter, I think for the year in totality, Baldur's Gate was around $90 million of revenue. So now that you turn the corner into 2024, the front half of the year, you're still going to have the tail from Baldur's GateI II. That's going to stay with us all year. Obviously, not at the same extent that we saw played During Q3 and Q4, but we'll still be selling units and making revenue and profit off of that product. From Monopoly Go! what gets interesting is that based on our forecast, based on how well the game is doing, as we get into the back half of the year, we believe we'll be able to start booking revenue and profit ahead of our minimum guarantee. We don't get into the terms of the contracts and kind of what that royalty rate is, but suffice it to say, as we think about the comp that we're up against and Monopoly Go! in the back half, Monopoly Go! is going to almost get there. Not quite get there, but almost get there and kind of offset the headwind that we have from Baldur's Gate.

Gina Goetter:

Yes. I think you're saying that right.

Linda Weiser:

Yes, hi. So I guess I took from your comment that you said that cash balance would be down in the end of 2024 versus 2023. I take that to mean that operating cash flow minus CapEx minus dividends will be negative. Am I reading that correctly? Do you have a guidance number or range for operating cash flow like you usually give, for 2024?

Linda Weiser:

So can you help me understand the change in cash taxes paid and also the change in outflow related to cash restructuring in 2024 versus 2023?

Linda Weiser:

Okay. That would be for cash restructuring, things like severance and other cash costs.

Linda Weiser:

Okay. And then, I know that you really want to protect and continue to pay the dividend, but one might argue that Mattel's turnaround really started when they cut the dividend because it gave them, a little bit of flexibility to work down the debt. You really didn't state any leverage targets for 2024 or 2025. Your stock is trading as if the dividend is not safe. So, one might argue that it would really benefit shareholders to at least reduce the dividend so that you could work down the debt a little bit faster. Can you just respond to that idea?

Linda Weiser:

And then, just my next question is just more operational. I guess one of the things that kind of went wrong, I guess you could say, in 2023 is that the industry POS slowed a lot in the second half, or it wasn't what you would have thought, and that was the same for Mattel. So is there anything about 2024 that if the industry actually gets worse, versus what you're projecting, is there any flexibility or levers that you can use to better reach your financial goals in 2024, even if the industry ends up being different than you thought?

Operator:

Our final question is from the line of Stephen Laszczyk with Goldman Sachs.

Gina Goetter:

Got it. Okay. Good question, Stephen. And so on margins, overall for the company, we remain committed to getting to that 20% midterm target that I think we put out there at our last Investor Day. As you break down the CP number, we have a lot of momentum on the margin side as we head into this year. I believe as we turn into ‘25 and ‘26, we're continuing to refine, what's happening within our supply chain, what's happening within our cost structure, so that will provide some up list on the margin. But the single biggest thing that's going to help us keep moving to the 10s, to the teens and beyond, on toy, is really volume in our -- in getting back to growth, putting innovation in market that is actually growing our business. That leverage benefit will have the kind of the single biggest impact on that margin line. So I think we have a good line of sight to the margin targets that we put out there for this year. For next, we are anticipating that our margin is going to grow again. The speed with which we move up that scale will really be dependent on how fast we can get over the growth count. In terms of CapEx, that step up that we are seeing this year really is being driven by our investment in digital games. If you think about that breakdown of $225 million, there is roughly half of it goes into our Wizards business. Another I would say, half of that half then is going back into our toy business with the remaining piece that is going into our broad infrastructure. So we are continuing to build capabilities both within just kind of the underpinning of the organization when you think about IT and systems as well as within our broader supply chain.

Operator:

Thank you. This will conclude our question and answer session and also conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time. And have a wonderful day.

Operator:

Greetings. Welcome to Hasbro’s Third Quarter 2023 Earnings Conference Call. This time, all participants will be in listen-only mode. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Ms. Debbie Hancock, Senior Vice President, Investor Relations. Please go ahead.

Chris Cocks:

Thanks, Debbie, and good morning. A year ago, we outlined a strategy to grow share in key categories with our core toy and game franchises. We called it fewer, bigger, better, drive savings and investment capacity through operational excellence, and build new growth for the company across games, direct-to-consumer and licensing. We also announced our intention to refocus on what has traditionally made us great, the business of play. This required making tough choices, including some significant divestitures. The goal of this plan, Blueprint 2.0 was a more focused, profitable and higher growth Hasbro built on a portfolio of some of the most valuable brands in the toy and games industry. We've made progress against this framework, including impressive growth in Wizards and Digital, continued momentum in direct-to-consumer and share gains in key categories. But as our Q3 results show, particularly in our Consumer Products segment, more needs to be done. This morning, we will talk about progress on each pillar and add a special emphasis on a key part of our plan, returning consumer products to growth. Let's start with refocusing on Play. Play is what makes our brands great and our company healthy. The sale of one film and TV, which continues to be on track for an end of year close, will simplify our operating model and refocus Hasbro on our core mission. Moving forward, our entertainment efforts will be franchise-led and asset-light, focused on driving toy and game sales with support from world-class content partners. We have over 30 projects in development from blockbuster movies like the upcoming Transformers 1 with Paramount to an animated Magic series with Netflix to digital-first IT development like our new YouTube series odd pause. The margin and simplification benefits of refocusing on Play will grow over time as our teams build innovative next-generation toy games reinforced by cost-effective and partner-led content. Next, operational excellence, where we are making solid progress, but need to accelerate flow through. Our cost savings initiatives have already exceeded our 2023 savings targets of $150 million. This year, we anticipate total gross savings of approximately $200 million, dollars we are using to fund short-term inventory reductions and product promotions in a toy market facing headwinds and to invest long-term in new consumer insight capabilities and our growth initiatives. Importantly, our supply chain team is reinventing itself. In a time where inflation is up over 4%, our logistics and production costs are down mid-single digits. Supply chain alone is driving approximately $100 million of the full year's expected savings, and we see more opportunities ahead to enhance our gross margins while improving the quality and competitiveness of our toys and games. For instance, we'll be releasing a new version of Jenga, it will be of comparable quality but lower cost and higher margin, all based on a fresh design for cost model. We are replicating this up and down our line. Our revamped supply chain is helping us get smarter on inventory management. Through Q3, Hasbro's total inventory is down 27% year-over-year, with a 34% reduction in our CP business. We anticipate we'll end the year with inventories 20% to 25% below 2022 levels. This should enable us to improve cash flow and lower our allowances in the quarters to come. Given the headwinds facing our Consumer Products segment, the flow-through to the bottom line on these initiatives has not materialized as quickly as anticipated. So we plan to accelerate our efforts heading into 2024. We expect to achieve our 2025 goal of $250 million to $300 million in gross cost savings earlier than expected, and we'll use these incremental savings and healthier inventory position to flow more cash directly to the bottom line, particularly in CP. Next, our growth initiatives, which are broadly on track. Wizards of the Coast in digital gaming is up 11% year-to-date. MAGIC

Operator:

Thank you. At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Eric Handler from ROTH MKM. Please proceed with your question.

Chris Cocks:

Eric. Good morning. Yes, Q3 met our expectations. We had the great fortune of being able to play Baldur's Gate for a while now and had a pretty good high expectations about its performance. I think relative to how the analyst community was modeling it, I think you all put it a little more back loaded and it's going to be a little bit more front loaded than I think the model has indicated. That said, we see a long tail associated with Baldur's Gate and likewise a very lucrative and long tail for MONOPOLY GO! as well. So it will be a nice annuity for us.

Eric Handler:

Got it. And then just as a follow-up, with MONOPOLY GO! , it's the number one revenue-generating mobile game in the world right now. I would assume it's doing well ahead of what expectations are. So what needs to happen for minimums to be exceeded?

Eric Handler:

Thank you very much.

Jaime Katz:

Hey, good morning. Can you guys talk a little bit about the products that you are keeping and not pruning in the consumer products category that maybe didn't perform up to expectations? And then maybe give us a road map of what you expect for turnaround time in that CP category as we work through some of these changes? Thanks.

Jaime Katz:

And as far as sort of remedying that category and returning to growth, do you see that as a first half 2024 phenomenon, second half 2024 phenomenon, or is there some more work that really needs to be addressed before we see that?

Gina Goetter:

What I build on the time line there as you think about the steps in a turnaround, what we're doing this quarter in the call for the year is we’re really cleaning up and resetting the foundation for toy. As we head into 2024, there's going to be a kind to be kind of a very focused view on profitability and how do we quickly reset the profitability of that business, while we're going through and kind of reducing complexity, as Chris said, kind of clearing the decks and getting ready for new and sharper innovation as we move to the back end of next year and into 2025. So taking the market out of it and the unpredictability of the market, in our categories where we compete, we are going to do that. We're going to remain aggressive. We're going to compete, and we're going to work to grow share. That's how you should think about just the cadence is really resets. We're going to get after profitability in 2024 and get ready for a sharper innovation pipeline and 2025.

Drew Crum:

Thanks. Hey, guys. Good morning. Chris. Can you remind us what the content road map looks like for MAGIC in 4Q? And how you grow the franchise in 2024 as you lap appears to be some tougher comps? And then I have a follow-up.

Drew Crum:

Got it. Okay. Very helpful. And then as a follow-up, just curious if you could update us on the status of the Marvel license. It was good to hear the partnership with Disney and MAGIC. But can you address the company's commitment to retaining this license approach as its renewal? Thanks.

Drew Crum:

Thanks, Chris.

Jason Haas:

Good morning and thanks for taking my questions. So I just want to check some of the math on MONOPOLY GO! and Baldur's Gate 3 and what it implies for 4Q. So I think you said that for the full year, you're expecting over $90 million from both MONOPOLY GO! and Baldur's Gate 3. And you saw, I think it was $63 million in 3Q. So that implies maybe $30 million or so comes in 4Q, which would be -- I'm getting like maybe like an 8 or 9 percentage point tailwind to Wizards revenue in 4Q. Then your guidance -- you left the guidance for high single-digit growth. So that would imply that ex those two licenses, you would see Wizards revenue down like 8% or 9% in 4Q. So one, do I have those numbers right? And if that's correct, why are we seeing that decline in 4Q? Is it a function of timing of the releases or something else? Is it just conservatism? If you could help explain that would be helpful.

Gina Goetter:

Yes, Jason, good question. And you've got the math generally right on how to think about Baldur's Gate and MONOPOLY GO! in the fourth quarter. What isn't right is how you're thinking about MAGIC. So as Chris said, from overall, Wizards will be growing, MAGIC will be growing as well in the fourth quarter. I think the pieces that you're probably not thinking through some of the other businesses that are rolling up through. So D&D, I think it's down a tick in the fourth quarter. But overall, how you're modeling Baldur's Gate and MONOPOLY GO! is correct.

Gina Goetter:

Yes, good question. And I think there's a little bit of both that we will talk to from a modeling standpoint. The one-time you're going to see a lot in fourth quarter, and that was what was embedded in our updated margin guide here. And I would put that at roughly, call it, $50-ish million of onetime cost that is -- that we're putting in either move through inventory at the retailer level, extra marketing to move through the inventory, extra obsolescence cost. So call that roughly a $50 million headwind this year that I would expect as we turn the corner into 2024 becomes a tailwind for us. And to your point, there's always going to be some level of kind of promotion and obsolete all of that as we kind of reset into 2024, but that's $50 million, I would call out as one-time in nature for this year.

Gina Goetter:

I'm putting that all -- yes, I'm putting that somewhat in that $50 million number. Yes.

Operator:

Thank you. Our next questions are from the line of Megan Alexander with Morgan Stanley. Please proceed with your question.

Gina Goetter:

Sure. What we get back next year, I'm going to go back to the previous answer, $50 million is really the number that I would put in your model of onetime costs that we're not expecting to repeat, we're using that to try to get as clean as we can for 2024. As we think about the revenue decline when we said mid- to high teens for the toy business for the year for the CP segment for the year, there's probably 3 or 4 points that decline that are associated with just us accelerating some of this move through of inventory from like a pure revenue standpoint, I would say, call it, 3 to 4 points of that is this acceleration. On the bottom line, it's $50 million.

Gina Goetter:

No, to our updated guide.

Gina Goetter:

Well, perhaps too cheeky about it. But I think in short, none of it is flowing to the bottom line this year just given that it's all going to move through the kind of the inventory line. So I would say there's zero kind of margin impact from the cost saves next year. And one of our big focus areas internally is moving us from talking about gross savings to talking about net savings, as a key area of focus as we move into 2024. Next year will be the year where you'll start to see real margin acceleration from all of those cost savings initiatives. But I mean, this year, it's all going to inventory. And we have -- so I should also elaborate to say we are making investments in our growth initiatives. So some of it didn't go to invest buying digital games. Some of it went to invest behind new capabilities that were aligned with strategies such as like analytics that we had talked about earlier in the year, but anything else is going against the inventory line.

Megan Alexander:

Okay. Awesome. Very helpful. Thank you both.

Stephen Laszczyk:

Hey, great. Thank you. Maybe just a follow-up on cost efficiencies for Gina. You're making some good progress on that front. Could you maybe talk a little bit more about the areas of the cost structures where you feel like you're particularly making progress? And if there's any potential upside to the $300 million as we go through the course of next year? And then maybe one for Chris, on digital, away from Baldur's Gate and MONOPOLY GO!, could you talk a little bit more about the pipeline or momentum you're seeing in other games that could potentially make an outsized contribution to growth in the digital segment over the next few quarters? Thank you.

Gina Goetter:

Okay. So on the cost savings side, I think we're making really good progress across our supply chain, particularly this year in 2023. Our focus has been within logistics. So the majority of the cost saves within supply chain have come through that logistics space. As we look at 2024 and potential upside to the $300 million, I'm not going to commit to a number right now in 2024, but I will commit to bullishness and our ability to deliver and overdeliver that number. There's a few areas of focus for us as we move into next year. So within the supply chain, this year was logistics. Next year, it's going to be more about procurement and manufacturing. So that's -- there's some low-hanging fruit there that we'll continue to drive after within the supply chain. Also on complexity and just getting complexity out of the network, really focusing on our most profitable and kind of effective and efficient SKUs, taking cost out of the products as we think about designing our product and designing to value that is going to generate some good savings for us and really improve the profitability of our toy business. And then lastly, on the corporate overhead, we have made some progress on that in 2023, reducing the overall overhead structure. There is more to do there. And we will see that slow in the early part of 2024.

Stephen Laszczyk:

Got it. And just to make sure I got the 2024 math on Baldur's Gate, MONOPOLY GO!, correct, it sounds like maybe $10 million a quarter in tailwind from those 2 properties, 40% of the 9-year, 300 million from this year. Is that correct?

Stephen Laszczyk:

Okay. Great. Thank you.

Arpine Kocharyan:

Hi, good morning. Thanks for taking my question. Going back to a little bit near term for a second. You mentioned taking share in key categories you're in for Q4 and your consumer products business is down something like 17% implied for Q4 based on the guidance today. And even when you remove exited licenses, that's still down double digit in underlying in terms of shipments. Does that imply lower industry POS than the 10% we've seen so far, maybe a little bit worse into October. But how are you taking share against that? That means the industry's probably a little bit worse versus what you're doing. Could you just talk to that for a second? I have a quick follow-up.

Arpine Kocharyan:

Okay. Thank you, Chris. And then a quick follow-up in terms of operating profit structure for 2024, you're exiting, obviously, a very low margin business with entertainment at the same time base just came down quite a bit for 2023, and you have long-term target that's far above that 13%. Could you talk through maybe 2024 margin puts and takes as we think over the next 12 months, really?

Gina Goetter:

Yes, the additional color I'd add to -- I keep coming back to the $50 million number. That's a couple of margin points that come back to us next year. We also have the D&D impairment that if you remember, we took that in Q2 of last year, that was a material onetime item that comes back to us. So there's just some kind of -- I would put that in the camp of accounting good guys or is that bad guys this year that become good guys for us next year that help us on the margin front? And then as we think about toy and being laser focused on improving the profitability on toy, the kind of all the work on complexity, all of the work on the cost structure on overhead, et cetera, will kind of accelerate our efforts on the margin front through the first part of next year.

Operator:

Thank you. Our final question is from the line of Andrew Uerkwitz with Jefferies. Please proceed with your question.

Chris Cocks:

Yes. Hey, no worries Andrew. Yes, Baldur's Gate 3 was my first deal at Wizards of the Coast. I think I went out to get had dinner with spent at Larian [ph] like in the fall of 2016, and we inked a deal in 2017. So I'm pretty proud about how everything kind of turned out. That's nice to see when you make a long-term bet. I think what you saw this year with video games and mobile games and movies whether on the video game side, it's a MONOPOLY GO!, which is the number one mobile game release of 2023, Baldur's Gate 3, which I think is sitting at a 96 Metacritic [ph] score on PC and console or in movies, whether it's the ongoing success of Transformers, the Barbie movie, Mario, is that there's a high demand for play-based brands and play-based brands are really becoming the dominant brands about how people engage and what people love. I was a shocking stack that I should have known better because it just mimics my lifestyle. Sakana came up with a report that showed the biggest demographic of video gamers today isn't sub 22-year-old. It's people 45 years and older. And it's also the fastest-growing demographic of gamers in the world. So I'm pretty bullish on the industry of play on the strength of brand portfolios that are based on play. And I think Hasbro has a deck of cards in terms of our brands and our capabilities that I wouldn't trade with anyone. I think that's a long-term bull case for the company and for the industry as a whole.

Chris Cocks:

Well, I mean, we have two separate business units that have 2 very different go-to-markets. But when combined together under one roof creates a very well-diversified portfolio. That can help us weather ups and downs in any given category or any given set of market conditions. So I think especially with something like this holiday, where the market remains rather unpredictable. It's great to have diversification, and it's a real strength of the company. We're fortunate in that Wizards of the Coast is a very margin-rich business that's highly cash generative effectively based on Wizards of the Coast and our digital licensing revenue, we can self-fund a fairly significant set of long-term capital investments and we've diversified that risk pretty effectively between licensing, Games as a Services, our tabletop business and our own internal publishing build-out. And that business gives us a nice cushion to help us with restructuring and turning around of the toy business, which we remain long-term bolt-on. We think that IP portfolio is fantastic and we really like the team that we've set up there. So our Q4 numbers weren't what we wanted, but we're taking -- we're looking at the market, we're being realistic about it. we're investing so that we can create a runway for that team to be successful in 2024 and beyond.

Chris Cocks:

Thanks.

Debbie Hancock:

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

Operator:

Good morning and welcome to Hasbro’s Second Quarter 2023 Earnings Conference Call. At this time all parties will be in listen-only mode. [Operator Instructions]. 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. Kristen Levy, Senior Manager, Investor Relations. Please go ahead.

Chris Cocks:

Thanks, Kristen and good morning. Today I am pleased to announce that Hasbro has entered into a definitive agreement to sell our eOne Film and TV business to Lionsgate for approximately $500 million, consisting of cash of $375 million and the assumption of production financing loans. This purchase will include a team of talented employees, a content library of nearly 6,500 titles, active productions for non-Hasbro owned IP like The Rookie, Yellowjackets and Naked and Afraid franchises, eOne’s Canadian Film & TV operations, and the eOne unscripted business, which will include rights for producing Hasbro-based shows like Play-Doh Squished. We expect the transaction to complete by the end of 2023. Hasbro will use the proceeds to retire a minimum of $400 million of floating rate debt by the end of the year and for other general corporate purposes. Hasbro Entertainment will be the new marquis for our ongoing entertainment efforts after the sale closes, under the leadership of Olivier Dumont, the current Head of eOne Family Brands. Hasbro Entertainment’s mission is to develop finance and produce entertainment based on the rich vault of Hasbro-owned brands. We’ll bring to life new original ideas designed to fuel all areas of Hasbro’s blueprint, including toys, publishing, gaming, licensed consumer products, and location based entertainment. We will retain a focused team of creative development and business affairs experts to shepherd the 30 plus Hasbro-based projects in development, working with the best studios and distribution platforms in Hollywood, including ongoing development of the TRANSFORMERS and GI JOE franchises, PLAY-DOH, D&D, MAGIC

Chris Cocks:

Thanks Gina. While our overall guidance is down for the year, the puts and takes are contained in a segment that we have found a better home for and a company adept at driving value. Our core business is making tangible progress, and while the next six months will present entertainment-related headwinds, we will emerge a more focused, more profitable and more predictable business. This will enable us to continue to fund our category-leading dividend, improve our balance sheet health and drive value for our shareholders, partners and fans of all ages. We’ll now pause to take questions.

Andrew Uerkwitz:

Hey, great. Thank you. Good luck joining Gina. Its great to have you onboard. The increase in guidance around WotC, could you go through the puts and takes there? Is that driven largely by Magic? Better expectations on Baldur’s Gate and now that it launches today or Monopoly Go, if you just could walk through some of the changes there.

Gina Goetter:

Good morning, Andrew. Thanks for the welcome. I didn't know that I have additional color to add. I do think that our performance in the first part of the year overall for WotC in the digital segment has been on our expectation. We're seeing some good progress with Lord of the Rings. We're really excited about that launch and that came out in June, so the bulk of the revenue gain will be a pick-up here in Q3. And as Chris said, the launches that we've got scheduled for the back half of the year, we’re feeling really good about.

Andrew Uerkwitz:

Got it. That's super helpful and great color. I appreciate it. Just kind of thinking about the digital strategy going forward that sits within Wizard of the Coast, could you give us an update on your thoughts there. eOne’s gone now. We can kind of start focusing on the video games and segments. You have some internal studio. So could you just kind of give us an update on where everything stands and what the primary driver is going to be there, you know one year out, three years out maybe?

Andrew Uerkwitz:

Got it. That's really helpful. I appreciate it. Thanks Chris.

Operator:

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

Gina Goetter:

No, Arpiné good morning. This is Gina. I think you've got it – our margin guide down. We were a little bit more bullish starting the year at 30 to 60 bips and now we're saying 20 to 50. And that is really all about the impairment that we took within D&D and what is happening within the Film and TV segment itself or the broader entertainment itself. When we look at our core business, our toys business, our games business, that margin profile is healthy and actually a little bit better than what we expected it to be. We're seeing some nice momentum in our cost savings initiatives and you can see that in the margin bridges that we provided. You can see that starting to pull through the P&L and that really starts to accelerate as we look to the back half of the year. So the call down in margin, all about Entertainment, all about what happened with the D&D impairment and our core businesses that we are keeping are doing quite well.

Gina Goetter:

Sure. I will try my best to answer that math question. Our guidance that we originally had given was 445 to 455 and what we communicated was that two dates, so through the first six months, we've had a $0.50 headwind by the entertainment segment. And what we anticipate in the back half of the year is that's going to be another $0.20. So all in, our earnings per share guidance, if we were continuing to give guidance, would come down by $0.70, all in the Film and TV, all in the entertainment segment. Again, our core business, Toy & Game, and the digital part of our business, that is actually performing ahead of expectation. There's some puts and takes within tax and interest expense, so that kind of nets against that, but the call down in earnings per share, all in entertainment.

Chris Cocks:

Yes.

Jaime Katz :

Hey, good morning. I know you guys are not really guiding on the sale of eOne, but I'm hoping that you can frame the size of what will be left after these assets are sold. Will it be 10% of the entertainment business? And then, with that sale, is there any reason that cost of goods sold and program production costs wouldn't go back closer to 2019 levels, just as we think through sort of the math of how that segment has impacted the overall P&L? Thanks.

Chris Cocks:

We'll be up versus 2019, simply because we continue to invest in some co-productions with Paramount like we're doing with Transformers One, which is a new animated film that will come out next year. And then we're also doing production for things like a D&D TV series. Now that is a cost-plus model that Paramount is fully funding, so we get the production margin from that plus like a licensing fee for being an IP owner on something like that. And then also we're retaining the eOne Family Brands portion of the purchase, which is a big value portion of the purchase with big brands like PEPPA PIG. And so that's incremental to 2019 as well. But as Gina states, it's far lower than the run rate we've been on for the last several years.

Chris Cocks:

Yes. We won't name them by name, but certainly, it's nice to have clean inventories and inventories reduced. If you look at like our top three or four retailers, I feel pretty good about where we're going with them. Some of them are taking still a pretty aggressive stance on inventory management, and so we're working with them. But others are really leaning in and seeing an opportunity to build, share and have great kind of on-shelf availability. And e-commerce continues to gallop forward and consume share in the category. We just had a great Amazon Prime Day. We have had really good discussions with our major retailers around top toys for the holiday. So, I'm cautiously optimistic that you're going to see Hasbro gain share in terms of what our key retailers announced. And we're already starting to talk to them about 2024 and 2025. And with our new management team, I think we've tightened up the innovation muscle quite a bit, and we'll have some momentum going into that year, particularly if we see what folks like Tim Kilpin, who's our new leader of our toy team, has up the sleeve in terms of new product innovation.

Operator:

Our next question is from the line of Eric Handler with ROTH MKM. Please proceed with your question.

Chris Cocks:

Yes, sure. And good morning, Eric. Nice to talk. So Hasbro Pulse, as we talked about back in October at our Investor Day, direct-to-consumer is important to us. It's a great way for us to learn from our consumers, see how they shop, see what they want. And our initial efforts are very focused on kind of like that dedicated fan segment. Both what we do for Secret Lair with what we do at Wizards of the Coast, what we do with kind of the D&D fan, the D&D Beyond in terms digital goods, and then Hasbro Pulse is more about kind of like that fan economy segment and that's performed super well. It's a great partnership with, our Disney, business. There's a lot of Star Wars that goes through there. There's a lot of Marvel. There's a lot of super high-end Transformers and Hasbro owned items like the Robosen Auto Transforming Optimus Prime that we released last year, and an Auto Transforming Grimlock that we just recently announced, and a great opportunity for us to sell high-end items. You know, I would scope the business right now in the kind of the $100 million to $200 million range. I think we see significant upside for that. Call it potentially a TAM or a TAM opportunity for double, maybe 2.5x that over the next couple years. And as we start to build critical mass and capabilities in that segment, I think you'll also see us evolve our perspective on what we could do there. We'll start with fan focus and then we'll evolve that and hopefully start going out in concentric circles over time. Respecting the fact that we have a lot of great third-party retail relationships and making sure that we model kind of the mix of products appropriately.

Chris Cocks:

Well, I think it depends on the retailer. We have a couple retailers who are really leaning in and see a shared building opportunity. We have a retailer too who are taking a cautious view towards consumer discretionary as a whole and aggressively managing their inventory. And, I think a little bit of an over under on our guidance moving forward and why we're not raising our guidance and consumer products, it's just making sure that we understand where those retailers are ultimately going to position. I definitely think Q4 is going to be a more traditional Q4 kind of a 2018, 2019. It's going to be very end of the quarter focused. I think Black Friday is going to be important. I think the lead up and the drum beat into Christmas is going to be important. And then also, I think a array of bullishness that we have in the quarter is we have basically an extra couple days is shopping prior to Christmas. And then for our fiscal year, we have an extra week, because we ended our fiscal year last year I think on December 26. So we have a full extra week of potential shopping, which is probably about $60 million to $70 million of incremental POS.

Operator:

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

Chris Cocks:

No, I mean. Good morning, Fred. I would say, the underlying thesis of our D&D business was all about digital. To me, entertainment's a kicker. It helps to enable broader audiences' exposure to what's traditionally a mid-core to hardcore gaming brand. And what digital allows us to do is kind of take that tabletop role-playing game, TAM, that we have in the world, which is probably about $80 million people who participate in those hobbies and frequent that kind of channel, and take our brand like D&D to 800 million people who play role-playing games. And so, I think Baldur's Gate 3 is just the first of several new digital initiatives you're going to see from us, that span how we can try to transform tabletop role-playing gaming to an even richer kind of theater-of-the-mind experience to more traditional video games from us and partners like Larian.

Gina Goetter:

Sure. Good morning, Fred. I would say we're making really good progress within the supply chain. I know that the company has talked about that in previous quarters. This quarter, especially you can see the benefits starting to flow through within logistics. So a lot of the focus from the team has been around our logistics network, how we're planning for inventory, kind of our order patterns, working with our retailers all around inventory and in order management and you can start to see that really play through with the cost savings. We expect that to continue to accelerate as we move into the back half of the year. The overall logistics environment is continuing to moderate, so that will help us as well. So not only do we have a lot of efforts underway in that space, but the overall environment is much more calm than it has been compared to the previous two years. I think our focus moving forward will be there, as well as working with all of our partners and getting a little bit closer to the operation with all of our manufacturers. That will provide another opportunity for us, more so in 2024 than in 2023.

Operator:

Our next question is from the line of Jason Haas with Bank of America. Please proceed with your questions.

Chris Cocks:

Yes, so I don't have a specific number to quantify the $135 million, but our retailer inventory is down 16% year-over-year. I think we feel like our retailer inventory is at a pretty productive level. I would say that through the balance of the year, our retailer inventory will end the year down, but probably not 16% down. Our own inventory, we still are a little bit elevated versus what we would typically be, but we are down quite a bit versus 2021, about 24% or so. And I think we'll end the year at around that level, both for consumer products and for Wizards of the Coast. And that'll get us to something that's more consistent to like what we ended at 2021 and within range of a more traditional level.

Chris Cocks:

Yes. If you look at our POS for the first half of the year, we are down high single digits in POS. But when you take out those exited licenses, we're down low single digits. And as we get into the back half of the year, the impact of those licenses lessened because we were – our sell-in was a little heavier as a percentage in the front half of the year. And as we were getting ready to exit them and our retailers were kind of taking their inventory positions down to prepare for other master story licenses to enter. It just makes sense that way.

Jason Haas :

That's great. Thank you.

Stephen Laszczyk:

Hey, great. Thank you. Maybe for Gina, with this being your first earnings call since getting settled in, I was wondering if you could maybe talk a little bit more about your framework for thinking through leveraging capital allocation on the go forward, especially with eOne – the sale of eOne now behind us. In particular, I'd be curious if you see any incremental opportunities on the investment or capital returns front over the next few years. Thank you.

Stephen Laszczyk:

Got it. And then for Chris, I'm not sure if you've given this metric before, but since you mentioned it around Baldur’s Gate, I was wondering if you could remind us how much money you've made in film licensing over the last five or 10 years? Any approximate sizing would be helpful.

Stephen Laszczyk:

Understood. Thank you.

Kristen Levy :

Thank you for joining the call today. The replay will be available on our website in approximately two hours. Additionally, management's prepared remarks will be posted on our website following this call. Hasbro Management will be participating in the Goldman Sachs Communacopia and Technology Conference on September 6. Hope to see you there.

Operator:

Good morning and welcome to Hasbro’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

Chris Cocks:

Thanks, Debbie and good morning. 6 months ago, we unveiled our strategy for Hasbro, highlighting three priorities

Chris Cocks:

Thanks, Deb. Before we turn it over to Q&A, I’d like to spend a minute thanking Deb Thomas for her 25 years of leadership at Hasbro. I started this company 7 years ago as the fresh-faced leader of an under-the-radar subsidiary called Wizards of the Coast. From my first day on the job, there was no bigger supporter of Wizards than Deb. She got it, and was always there for Rookie, helping me navigate the broader company and giving me and the team at Wizards the support we needed to turbocharge that business. My story is the same story thousands of people across the company have about Deb. She is the true definition of a servant leader

Andrew Uerkwitz:

Hey, thank you so much. I guess a question on MAGIC. Could you just kind of help us understand like the audience segmentation with The Lord of the Rings set coming, who are you targeting? And it looks like the strategy around that set is a little different than what we’ve seen. Thank you.

Andrew Uerkwitz:

Got it. That’s helpful. Thank you. And then just my one follow-up. Could you kind of just give us an update? You have Baldur’s Gate launching, I think, in Q3. Could you give us an update on expectations, how that will monetize through the income statement? And then just broadly an update on the video game strategy. Thank you.

Andrew Uerkwitz:

Got it. Thank you so much. Appreciate the updates.

Operator:

Our next question is from Eric Handler with ROTH MKM. Please proceed.

Chris Cocks:

No. I think we’re seeing some underlying momentum in the business across the board. Certainly, Wizards of the Coast came in ahead of expectations. Our latest release based on Phyrexia did very, very well. And we continue to be bullish on what Wizards has in store, particularly The Lord of the Rings set in late Q2. On Consumer Products, I think our POS came in a bit better than planned. It’s still not where we want it to be, but I think we are making steady progress. And just to give some perspective on it, based on our own internal numbers, and this doesn’t include kind of discounting, we were down about 12% in Q4. We cut that roughly in half in Q1. We were down about 7% year-over-year. And when you take out some of our exited businesses, particularly Disney Princess and Frozen, we were down less than 4%, which by our math is likely at or ahead of market. We are not satisfied with that, but that was ahead of what we planned. But I think it augurs well for what’s going to happen in Q2, Q3 and Q4, where we add like our disciplined execution that we’ve been doing with our retailers. We add new products, and we add what we think is a pretty killer content slate from both ourselves with TRANSFORMERS and our partners, particularly at Disney.

Chris Cocks:

Yes. I mean we are very enthused by the critical response and the fan response to the movie. It is by far the best reviewed movie in Hasbro’s history. And so we think it’s going to have a very long life, and it’s going to perform particularly well in post theatrical sales and streaming. And that’s important for us, because D&D is a very strong brand in North America. It’s well known in Europe and Asia, but not highly engaged or highly penetrated in those markets. And so like a great reviewed movie that has a lot of fan enthusiasm, is a perfect opportunity and a perfect entry point into the brand. And then I think the way that we will expand upon that over time is we are lowering the barriers to entry for the core games by initiatives that we have digitally, particularly the investments we are making in DUNGEONS & DRAGONS and beyond, and kind of what we call a virtual table top, which is kind of like a video game like experience for being able to play the game. And then we have a very aggressive lineup of new digital content and video games coming out, starting with Baldur’s Gate 3 this year, but then continuing on with other licenses that we haven’t yet announced as well as owned content that we have in production at Wizards Studios. And so I think really that kind of one-two punch of have entertainment, which makes the brand broadly accessible. And then add on to that low barrier entry digital experiences is really going to be kind of the flywheel that drives the brand’s growth over the next couple of years.

Operator:

Our next question is from Drew Crum with Stifel. Please proceed.

Chris Cocks:

Yes. So, in Q1 we predicted that about $75 million of that $300 million would manifest, and that’s the case. We are not operating in Russia. We are not doing Disney Princess or Trolls or Sesame Street, and we are starting to out-license some of our secondary properties. We anticipate about 60% or so of that $300 million will manifest in the first half of the year. And really what we are seeing is, I think better-than-anticipated strength in our overall gaming portfolio, particularly MAGIC and D&D. And then we are starting to see some impacts around improved execution at retail, and across our marketing teams, particularly in our franchise brands that saw some decent POS across TRANSFORMERS. We see some momentum in core NERF. We see momentum in core Hasbro Gaming, PEPPA PIG and PLAY-DOH as well.

Chris Cocks:

I would say high-30s is what we are targeting in the mid-term, for sure. We are investing pretty significantly in building out our digital capacity. Some of that is capitalized, but not all of it. And so I think as we start to launch those games, you will start to see kind of like the realization of those capitalized costs, which will impact kind of like the mid-term outlook for our margins. And then as we expand MAGIC in particular with things like Universes Beyond, it’s a great opportunity to bring in new players, but that’s going to be a little bit of a margin impact, both in terms of the royalties we spend as well as the development costs because those tend to be a little bit more intensive when you involve a second party. Now that said, we feel like that’s a really wise investment. When we attract a new MAGIC player, they typically stick around for 5 years to 7 years and they have an average revenue per user over that time in the $500 to $1,000 range. So, giving up a little bit of margin upfront to attract highly engaged, highly profitable fan segment, we think it’s a nice trade-off that helps us and helps our shareholders win over the long-term.

Chris Cocks:

Thanks.

Jason Haas:

Hi. Good morning. Thanks for taking my questions. And I would also like to say congratulations to Deb as well on your retirement, and best of luck on your future endeavors. In terms of my questions, I was curious for consumer products. Are you expecting POS improvement through the remainder of the year to get to down mid-single digit guidance? And can you just talk about what the drivers are in the rest of the year?

Jason Haas:

That’s great. And then can you just walk through the releases for MAGIC for 2Q versus 2Q last year, because I thought it was – I know you have said you are expecting to be down, I know that was the initial expectation for 2Q. But I just think we have loaded the range, which seems to be off to a good start. And then what’s that up against? Was that Kamigawa last year? Can you just kind of help frame up what causes the difficult compare?

Jason Haas:

Helpful. Thank you.

Fred Wightman:

Hey guys. I just wanted to follow-up on the retail inventory performance. It sounded like in the prepared remarks you expected that to be sort of cleaned up by the end of the first half. And then Chris, I thought you just made a comment that it could continue into 3Q. So, when do you sort of think that will be normalized? And is it a little bit sooner than you would have thought exiting last quarter?

Fred Wightman:

Makes sense. So, if we think about the timing that you just touched on for the retail inventories and we think about sort of the year-over-year changes in some of the MAGIC releases, can you just help us think about the mix for the back half of the year as far as 3Q versus 4Q, like how do you sort of see that shaking out versus historical patterns? And how do you sort of see the back half of the year progressing versus that first half guide that you gave us?

Deb Thomas:

Sure. So, historically the back half of the year has always been like in the high 60% range, and we expect it to get back to that this year. As far as the mix, as we talked about, we expect Q3 to be the biggest quarter for MAGIC this year. We have got very strong releases. Chris talked about the timing. And you will certainly see more sell-through. We shipped Lord of the Rings late in Q2, but the sell-through comes in Q3. So, when you think about the mix, we do expect the consumer to come back. We talked about that. It’s just a function of the timing. But we do expect a bigger quarter for MAGIC, just looking at timing and releases. But overall, we expect it to get back to that normalized rate in the back half of the year.

Operator:

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Debbie for closing comments.

Operator:

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and have a wonderful day.

Operator:

Good morning, and welcome to the Hasbro Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, 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.

Chris Cocks :

Thank you, Debbie, and good morning. In October, we laid out our new strategic plan for Hasbro, Blueprint 2.0, built on fewer, bigger, more profitable brands; a sharpened focus on the categories where Hasbro can be best-in-class; an Operational Excellence program to speed our agility and improve our cost competitiveness; and growth initiatives in digital games, Hasbro content, direct-to-consumer and licensing. While Q4 proved to be a disappointment, particularly in our traditional toys and games segment, we made progress under the hood that meaningfully improved our bottom line and sets us up for margin expansion in 2023 despite what we anticipate will be a continued challenging consumer environment. Our transformation efforts are positioning Hasbro for success. In 2022, we identified $50 million in run rate cost savings that improved our Q4 earnings by over $20 million. In 2023, we anticipate our operational transformation will generate $150 million in run rate savings, money we are using to both reinvest in the business and improve our profit profile. We are also undertaking a significant organizational redesign that streamlines decision-making, puts the consumer at the center of everything we do and aligns the company behind core competencies in games and toys. Within our growth initiatives, our direct business comprised of MAGIC

Operator:

[Operator Instructions] Our first questions come from the line of Arpine Kocharyan with UBS.

Chris Cocks :

No worries. Yes. So we look at the first half, we look at a couple of different factors. The first is we see -- we saw a difficult Q4 in the consumer discretionary sector as a whole and in toys and games, in particular. We would anticipate that, that's going to continue in Q1 and Q2 and potentially roll into at least part of Q3 as well before starting to normalize in Q4 back to a more traditional growth level. So that's one set of headwinds that we factored in. The other one that we're looking at is 2021 had historically an unusual sales pattern with it. Retailers were buying much earlier in the year. We were playing catch-up from 2020, particularly in Q1, in terms of fulfilling orders, and we don't see that happening this time. Actually, we see retail inventory not unhealthy but still having a little bit of an overhang given the slowing consumer demand that we saw in Q4. So we see kind of demand starting to normalize, I think something like -- we were something like 57% of our sales for second half last year. And this year, we probably see that in the 60% to 65% range, which is more historically normal for 2019 and before. So that has something at play. And then we just look at our overall release calendar across Wizards of the Coast, across our entertainment segment and across consumer products. And we have a pretty exciting Q3 in terms of new products across all of them and a lot of entertainment that's going to be coming out in Q2 and having a nice kind of halo effect into Q3 and Q4. So that's kind of what informed our overall quarterly mix and half mix and some of the assumptions we made in it. Deb, do you have anything to add?

Chris Cocks :

Great. Arpine, you had a follow-up.

Chris Cocks :

Yes. So I think as we've reported in the past, the average that we experienced over the last several years on Disney Princesses was about $250 million of revenue with the peak in around 2019 with blast Frozen movie. Last year, we were well off that peak as we were starting to exit that business and it transitioned to another company. So that would be how I would think about in modeling that. And then, yes, we see about $135 million of inventory overhang at retail. And then we have a little bit less than that in terms of inventory that we're holding on to as well. We think that will take the full year to kind of move through, but I think we'll move through a good hunk of that and our fair share in the first two quarters of the year. And then when we look at kind of what the growth vectors are, we have a strategy where we want to grow in five focus categories, and we have a plan for each of those categories. In outdoor action, which is helmed by NERF, we have an exciting lineup of new gel blasters that go after older consumers. We launched that in fall of last year, and the Mythic was our #1 item and I think one of the #1 items in the category after that launch. We're going to be building out that category. And then on the opposite side of the market for kids 5 to 7, we have an all-new lineup of NERF junior products. That expands the markets down to lower age ranges with greater economics and I think really strong consumer insights associated with that. And then we're also doing some fairly aggressive pricing actions to make sure that we have compelling products at every winning price point from $10 to $20 to $30 on up. On action, we have a very robust entertainment slate. Between six blockbuster films and a host of new streaming series and kids animation supporting it, it's fair to say, you could quote me, that I think we have a stack lineup. And that's going to help us in Q2. It's not going to fully offset some of the headwinds that we see in Q2, but it's going to help. And I think that's going to have dividends in Q3 and Q4. Then in creativity, PLAY-DOH was one of our top-performing growth brands last year. It grew share inside of the creativity space. We have new compounds. I think we have some best sellers that we're going to be annualizing this year and expanding distribution on. So we feel pretty good about where PLAY-DOH is going to go. On preschool, PEPPA PIG continues to be one of the top entertainment brands for little kids of any stripe and we continue to feel good about that product line. And our partnership in Disney has never been stronger. Spidey and His Amazing Friends was one of the top new properties in preschool. And we feel really bullish on Star Wars

Operator:

Our next questions come from the line of Eric Handler with ROTH MKM.

Chris Cocks :

Sure. Eric, yes, I think the question was will it grow in 2023. It grew pretty well in 2022. Yes, we expect MAGIC to grow. I think the growth will be a bit moderated versus what we saw in prior years. We're taking some of the feedback to heart. We had some supply chain issues last year, which forced us to compress our release schedules, particularly in October of this year due to a couple of releases slipping from April and August into October along with our regularly scheduled releases. We're going to be spacing those out in a more even basis. We think we've got to handle on all the supply chain issues that we had with paper stock and local paper production. So that will change the nature of what our revenue distribution is by quarter. In general, I think we expect MAGIC and Wizards to have a good Q1. Q2 is actually our toughest comp of the year, and we think that will actually be down just given the nature of moving some releases around. Q3 should be a very strong quarter. And actually, we think Q4 will be a pretty solid quarter as well when you look across the Wizards business.

Chris Cocks :

Well, MAGIC is arguably one of our most innovative product and design teams. I would never discount their ability to figure out new ways to engage players and delight our fans. They've had a pretty good track record. We've grown that brand for 13 out of the last 14 years. And I think the one year, it was down, it was down maybe 2% or 3%. That was actually my first year on the business. We turned that around pretty significantly, I think, over the last five years. So as we think about growing MAGIC, we always think about, okay, how can we engage our existing players more, how can we find new fans and then how can we attract lapsed fans. And I think that's going to be the magic formula for this year as well. I think we have some exciting new initiatives. I think one of -- the one I'm most looking forward to, and I think we've seen some early success is Universes Beyond. Our Warhammer set that we released in October of last year, we couldn't keep in stock. That's on its third reprint. It's doing very, very well. I think our hobby shops and our retail partners are thrilled by it. And as big of an IP as Warhammer is, we're going to be going out with the OG of fantasy with Lord of the Rings come this June. We think that's a big fan base. It's a very ripe adjacency for MAGIC

Megan Alexander :

Maybe just ask Arpine's question in a little bit of a different way. So is the $300 million that you cited in brand exits and market exits, is that all in Consumer Products? And if so, the excess inventory and that $300 million would represent a 12-point headwind which would suggest you expect core growth maybe in that high single-digit range in the context of the overall consumer products guide. So first, is that right? And then if so, can you maybe tell us how that compares to what those brands the core brands did in 2022? And what drives your expectation for such strong share gains relative to your expectation for the industry to be flat to down?

Megan Alexander :

Okay. And maybe a follow-up for Deb. When you look at the expected margin improvement, can you just talk through some of the puts and takes? It seems like from what you said, you should have SG&A deleverage, advertising, deleverage, so the improvements coming mostly from cost of sales and royalties? And can you maybe give any more color on the phasing or timing of that improvement considering the retail overhang and your owned inventory being a bit higher?

Megan Alexander :

Okay. So just to put a fine point on that, it doesn't sound like you -- the profit improvement is as heavily weighted to the second half as the revenue is. Is that fair?

Operator:

Our next questions come from the line of Gerrick Johnson with BMO Capital Markets.

Deb Thomas :

Of the $300 million this year, it would be slightly -- it would be -- maybe about -- it will be less than 1/3. Think about the timing of it. So we said, over time, we expect that revenue to be about $250 million. You're 100% right. If I look at that impact from '21, it would be about $100 million. This year, it would be -- from 2022, it would be less than that. And the reason why is we're providing an orderly transition to a license model. That's what's helping our operating profit as well. So we are losing revenue on that. We still will have some in 2022, but you'll see us transition out of that over time, and it will be a lower revenue number but a more profitable revenue number for us.

Deb Thomas :

Right.

Chris Cocks :

For instance, Fur Real Friends would be a handoff that would happen throughout the year and a couple of the ones that we haven't announced yet would be a handoff throughout the year with the full transition by 2024.

Chris Cocks :

Well, we can. I think it's just a choice of how do we maximize the asset and maximize the returns for it. So our view is by being a bit more parsimonious about how we dole it out quarter-over-quarter, we'll be able to maximize the margin return that we have on the inventory.

Jaime Katz :

I have a couple of clarifications actually. I think during the prepared comments, you guys had noted that Q4 POS turns had slowed, but I don't know if you delineated whether that meant they went negative or if they were still positive at retail. So would you be able to clarify that?

Jaime Katz :

Okay. And then I think there was a comment that EBIT could be higher than 20%. And I want to make sure that's not contingent on the sale or divestiture of that entertainment business that, that comment was made sort of as the business as is. But theoretically, if you guys did divest that entertainment business, that cost structure or profit structure would actually have more upside opportunity if I'm thinking about that right.

Operator:

Our next questions come from the line of Linda Bolton-Weiser with D.A. Davidson.

Chris Cocks :

No problem. Linda, thanks for joining the call. for entertainment, it really just had to do with timing of deliveries that our partners, our network partners wanted. And to a certain degree, we're a vendor working on their behalf, and they have a fair degree of flexibility about when they'll accept deliveries on products. We had assumptions that we would be able to achieve by end of December some of these deliveries. And some of them got moved out not just by a couple of weeks but by several quarters as they're managing their own P&Ls. And so that's what really drove the material difference.

Chris Cocks :

Well, I think on the top line, when you're looking at a market that's flat to potentially down for a year, it's a share gain. So we need to execute against our five focus categories and deliver the right pricing, the right promotion at retail and make sure we get our product in there and well assorted. We missed our marks on that in 2022 in too many areas. We grew in 2. We grew in creativity and preschool, but we need to grow more fulsomely across all of them. . And so when we look at our product road map, when we look at the quantitative testing we've been doing and we look at the promotions we have in place, both pricing as well as what we're doing just to drive kind of availability of product, we feel better positioned for that for 2023. I think the second thing we have to do to drive the top line is responsibly manage down our inventory. And we'll be doing a good hunk of that in Q1 and Q2, but I think that also gets back to your bottom line question, which is, hey, we need to do that responsibly and not just make a fire sale because that's not going to help our bottom line and ultimately not help our capacity to be able to fund our growth initiatives. And then the last thing I think you really need to look at for bottom line, last two things, internally, this wouldn't be as available to you, but it's a big area of focus for us. It's making sure we have really robust demand planning and supply chain management in place. I feel really good about the team that we're building around that, but that's going to be something that we need to improve our marks on and then driving our savings goals. We have $150 million gross savings goal for this year. We'll be reporting on that every quarter in terms of progress. And that's going to be a meaningful bucket of money that will drive both bottom line performance and help to fund increases in our advertising and promotion budget and our ability to be price competitive.

Jason Haas :

I had one follow-up on -- I think the question was asked on the cadence of Wizards of the Coast segment revenue. I think you said -- or I think the guidance is for mid-single-digit revenue. It sounds like, last year, there were some releases that got pushed to the second half of the year. So I was just curious is the expectation that Wizards will again have sort of a back half weighted year? Or is that mid-single digits is sort of a fair run rate to use in each of the quarters? Just trying to get a sense of the cadence there.

Jason Haas :

That's helpful. And then you mentioned -- I think you described it as a misfiring on some of the proposed changes for the OGL. Was there any sort of financial impact to that in the first quarter? I think that, I guess, the controversy is kind of behind us at this point, but just curious if there's anything to look out for in 1Q.

Operator:

Our next questions come from the line of Matthew Catton with Jefferies.

Chris Cocks :

Matt, thanks for joining. Yes, I think the biggest thing on arena is going to be the release on Steam in, I think, we're targeting Q3. the reason for the time line to get to Q3 is we're reinventing what the new player experience is as we start to expand that so that it's an easier onboarding and a more fun way to learn how to play what is a super deep but can be a difficult learning curve game. . So we think Steam is going to help open up the game to more users. Obviously, we think there will be some decent revenue growth associated with that. Over the midterm, we continue to evaluate consoles, particularly Xbox and PlayStation platforms. And I think that will be an interesting opportunity for us but likely in 2024 and beyond. And then we continue to invest in figuring out new ways in which we can express MAGIC digitally. I mean if you think about the success of MAGIC over the last five years, the success really has been driving like this, what we call, a segmentation strategy where we are offering bespoke products to new segments of consumers that we either were underserving before or not serving it all before. And there's formats like Commander, which is a four-player version of the game that's highly social. I'm enthused, as I know Cynthia and the team is, figuring out how we can get like a true multiplayer experience beyond two players for MAGIC digitally. And then I think we're still intrigued by digital collectibility. I don't think you'll find us kind of going after the passing fad at the minute. But we do think digital collectibility is going to be a thing, and it's going to stick. And so we continue to invest R&D about what the right approach is for that, whether doing it ourselves or doing it through a partner.

Debbie Hancock :

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

Operator:

Good morning and welcome to the Hasbro’s Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I’d like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead.

Chris Cocks:

Thank you, Debbie and good morning. We expected Q3 to be our most challenging quarter of 2022 based on product release and ship timings in our Consumer Products segment as well as release cadences in our Games and Entertainment businesses. Revenue for the quarter was $1.68 billion, down 12% in constant currency and down 15% at actual rates versus 2021. Adjusted operating profit was $271 million or a 16.1% OP margin, down 31%. Revenues were impacted due to innovation timing, including later product releases in NERF and games this year versus last, accelerated direct import shipments in our Consumer Products segment, which shifted revenues from Q3 to Q2 and release calendar more heavily Q2 and Q4 weighted for our Wizards and Digital Gaming and Entertainment businesses. We have also seen the average consumer become increasingly price-sensitive as the year has progressed, impacting point of sales trends. Promotions and entertainment field demand have become increasingly important and will be key in the quarters ahead. For instance, our most recent Prime Day last week saw Hasbro volume increased mid double-digits year-over-year, among the top toy and game performances. The ongoing growth of key brands like Peppa Pig and My Little Pony speak to the power of driving great entertainment to reach audiences and inspire demand. In Q4, we will be kicking off an unprecedented lineup of entertainment, starting with Marvel Studios’ Black Panther

Chris Cocks:

Thanks, Deb. Before we turn to Q&A, let me take a minute to recognize Darren Throop. Today is Darren’s last earnings call as he is leaving Hasbro at the end of the year. Darren grew eOne into an accomplished studio with strong talent, a rich library of content and production capabilities across mediums. Over the past few years, he has served an invaluable role in the integration of eOne with Hasbro during an unprecedented environment. The D&D film next year and the robust pipeline in development is the direct result of his hard work. Thank you, Darren, for your leadership, and we wish you tremendous success in the future. Now we will take your questions.

Eric Handler:

Good morning. Thanks for the question. I guess start with Eric. Wonder if you could talk a little bit about the state of retail right now. Last quarter, we had a bunch of pull forwards with direct shipment. This quarter, we’re talking about higher allowances and promotional activity. Are a lot of the issues just isolated with NERF and gaming or is there some sort of broader macro situation going on here?

Eric Nyman:

Sure. Thanks, Eric, for the question. Maybe just to build on what Chris is saying, Eric, as we roll into Q4, we talked about how specifically for Hasbro our big innovations were back half loaded. We feel very positive about the innovations that we’ve recently launched. And if you look at retail right now, we started off quarter four with the big promotion with Amazon where they did their Prime Day early access sale, and Hasbro performed very strongly. So I think you will see a promotional environment in Q4. We built excellent programs around the world with all of our retail partners. And I expect that we’ll continue to see POS momentum as we go forward.

Chris Cocks:

Yes. We’re certainly bullish about D&D’s prospects. The film has had a fantastic introduction at Comic-Con. I think it’s one of the highest viewed trailers that Paramount has ever released. There’s a nice buzz about it, both at Comic-Con and on the general Internet and among fans. And so we think that’s going to be a great launching platform for international expansion and category expansion across licensing, merchandising, digital games as well as driving the core business. I think I’ll turn this one over to Eric. And then, Cynthia, if you have anything to add, feel free about the international dimension to Eric’s question.

Cynthia Williams:

Yes. The one thing I would add is when you think about DUNGEONS & DRAGONS Beyond and being the premier digital toolset for [indiscernible], it gives us a great opportunity to expand both internationally, but also the tools and capabilities we give all of our players, it’s going to give us a wonderful opportunity to monetize more of our player base than the Dungeon masters that we are monetizing today.

Operator:

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

Chris Cocks:

No problem. Good morning, Arpine. Thanks for the question. Yes, our outlook has not changed since our Investor Day. We continue to feel like there’s a lot of green shoots in the portfolio. There’s some exciting innovation coming out across NERF, across games, a ton of innovation coming out on Magic

Chris Cocks:

Yes. So there’s two components to inventory. There’s Wizards of the Coast and Digital, which we have a lot of set releases coming out. So there will be some decline in inventory there that should be fairly significant. And then there’s what our Consumer Products team is doing. I’m going to turn it over to Eric to talk about recent POS trends that we’re seeing across the G5 markets and North America.

Chris Cocks:

And it should be noted, 67% of our advertising and promotional budget is in the remaining, what, 12 weeks left of the year.

Chris Cocks:

And so we’ve seen a highly promotional sensitive environment. Actually, the markets where we’re seeing the best share trends are where we started a little earlier on that promotion.

Chris Cocks:

Sure.

Drew Crum:

Okay, thanks. Hi, guys. Good morning. So I have two questions on Wizards. Maybe to start, last quarter, you suggested the segment would perform at the upper end of your guidance range, which was low double digits growth. Today, you’re suggesting high single digits growth. What has changed versus the previous commentary? Is this a business that’s seeing any sensitivity around price that you alluded to earlier? And then I have a follow-up.

Cynthia Williams:

I think the other thing I’d say is just what a great lineup we have for Q4, kicking off with this – we have Warhammer 40,000 from our universes beyond, Brothers Wars coming up, two strong secret layers, one featuring the platinum selling music artist Post Malone, the other being a 30th anniversary countdown kit. And of course, we’ve got the high-end collectible Magic 30th Anniversary Edition, which was inspired by Magic’s beta set and includes some of Magic’s really iconic cards like Black Lotus. And finally, I’d say all five tentpole releases we’ve had this year have all done more than $100 million in revenue. And this is the first year that’s happened.

Chris Cocks:

Well, as we talked at our Investor Day, we have a plan to double the size of the Wizards of the Coast and Digital segment over the next 5 years by 2027. That growth will be powered by continued resilience in our tabletop business and brands like MAGIC and D&D. But we’re planning to double the percentage of the segment that’s driven digitally. And we have a fairly balanced approach to how we think about where our digital investments are. We have a large and growing license business, where the majority of our mobile products are done. We work with some of the best names in the business, Scopely being one very big one. And then we’re leaning in a lot into games as a service or game platforms as a service like we have with D&D Beyond as well as a bunch of really high-caliber studios that are building some great AAA games that we’re looking forward to sharing more about over the coming quarters. So while the digital games market might have its ups or downs in any given quarter or any given year, I think the trend is decisively in the direction that interactive entertainment is the future of entertainment. And I like how we’re positioned as a company.

Operator:

Thank you. The next question comes from the line of Megan Alexander with JPMorgan. Please proceed with your question.

Chris Cocks:

Yes. So a couple of things. I’ll start and then turn it over to Eric. And thanks, by the way, for the question, Megan. First off, in the beginning of the year, we and the entire industry were chasing inventory at retail after a difficult holiday season. It’s a big reason why we pushed inventory into the Q2 period to make sure that we didn’t have that again so that we could promote aggressively in Q4 like our plan is today. I think the other thing to note is we have a lot of new innovation that’s very on trend that’s coming out in Q4 that we think will comp very favorably in the first half of next year. And then last but not least, I think whatever happens on the macroeconomic front, we have seven blockbuster films and 20 TV shows coming out that are very front half loaded that are giving us a tremendous amount of tailwinds to be able to handle whatever curve balls that the economy might throw our way. Eric?

Megan Alexander:

Awesome. So, I guess just to tie that all together, is it fair to expect that you believe consumer products can be up next year despite exiting some of the brands that you have talked about?

Megan Alexander:

Awesome. Thank you. And then maybe a quick follow-up for Deb, the guide implies 4Q operating margin above 3, which is usually typical for your business. Is that all mix to Wizards and then the cost savings you have talked about, or are there some additional drivers of improvement? I guess maybe more specifically, like how should we think about what’s built into the guide from a cost of sales perspective in terms of are you confident the inventory actions you have taken in 3Q are sufficient, or is there further risk in 4Q?

Megan Alexander:

Thank you.

Mike Ng:

Hey, good morning. Thank you for the question. I just have two. First, I want to follow-up on Eric’s question and just ask about some of the commentary around closeouts and allowances and promotional activity. Was that concentrated in any particular brand or category, or was this an industry-wide toy issue that other players may have seen? And then second, I was just wondering if you could talk a little bit about the Disney Princess impact to revenue and margins within consumer products. Is that a product that is effectively winding down and approaching zero? And is that the right way to think about it for the fourth quarter? Thank you.

Mike Ng:

Great. Thank you for the thought.

Operator:

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

Chris Cocks:

Yes. Well. Hi. Thanks for the question. No, I think it’s a couple of things. So, as we look at price, we look at a couple of different factors. First, we look at consumer segmentation. And so you have the mass consumer, and then you have the collector and the fan segment. Collector and the fans segment tends to be very price inelastic. It’s a very resilient segment that’s very passion-driven. And as long as you build a great product and a great play system and continue to invest behind it, we find our fans stick with us. And that’s been a major driver of growth for us. Our two fastest-growing businesses this year are our pulse business and Magic

Fred Wightman:

Makes sense. And then just a quick follow-up, the mid double-digit POS that you guys touched on for Prime Day, is that on a year-over-year basis? Are you comparing that to prior Prime Days? What exactly is the comparison there?

Fred Wightman:

Okay. Thank you.

Linda Bolton-Weiser:

Yes. Hi. My question is on the Entertainment segment and the projection or outlook for fourth quarter. Sorry if you explained it already, but it looks to me like the Film and TV segment has just as hard, even a harder comparison in the fourth quarter. So, then can you just reiterate again what are the specific things that are going to happen in the fourth quarter to make the decline smaller against a harder comparison? And then the second thing is the shifting of certain things into the first quarter of 2023, what causes that shifting? Is that just production delays or personnel issues or what is that exactly? And is there anything you can do to rectify that phenomenon in the future? Thanks.

Linda Bolton-Weiser:

Okay. Thank you very much.

Gerrick Johnson:

Hi. Good morning. I have a couple here. First, I just wanted to clarify what you are saying on inventory because sometimes I am confused as to whether you are talking about company inventory or channel inventory. So, what’s the channel inventory situation look like right now or at the end of the quarter? And where do you expect that to be at the end of the year? Is that what’s supposed to be up low to mid single-digits?

Deb Thomas:

Right. So, retail inventory is up, as we said at the end of the quarter, but it’s of good quality. And we have a lot of promotional activity planned for the fourth quarter. So, our specific guidance was on our inventory is exactly as Chris said. But retail inventory, we are working with our retailers on promotional activity, and much of it was setting for a lot of this new innovation that we are having in the fourth quarter.

Deb Thomas:

Sure. Well, let me take the sales allowance question. And then I can answer some of the closeout question, and then Eric can as well. But we are seeing price allowances a bit higher, all sales allowances period, right, whether price or not a bit higher this year than last year. And the reason for that is if you think about it, we couldn’t even get stock last year. So, our retailers were selling what they could get for less promotional activity with the consumer, and that was the consumer takeaway last year. So, this year I would say we are returning to a more normal level of sales allowances. Nothing unusually high, but last year was unusually low. And we talked about that and the benefit from that. With respect to just certain territories, we have had some high levels of inventory in pockets that just weren’t working that well. So, as we look around the globe, we have moved some of that inventory. Some of it’s been in the U.S., but some of it’s been in various places in Europe and in certain territories, particularly in the Pacific region.

Gerrick Johnson:

Okay, great. Thank you.

Eric Nyman:

Thanks Gerrick.

Jason Haas:

Hi. Good morning. Thanks for taking my questions. First, I am curious if you could provide some outlook by segment for next year. I think at your recent Analyst Day, you talked about consumer products being up low-single digits, Wizards high-single digits to low-double digits, and then I think entertainment was up low-single digits. So, is that a good framework to use? I know that was a multiyear target. Is that a good framework to use for next year?

Eric Nyman:

Yes. I would also just add, Jason, as you think about the future, I do want to mention, since we haven’t talked much about it, our operational excellence program and just note that we believe we will be a stronger, more disciplined, more profitable company going forward. And we have the $250 million to $300 million cost savings plan in that mid to longer term outlook that we feel very confident in as well.

Chris Cocks:

Well, we have had a great growth for Magic

Chris Cocks:

And I would say just one last thought as you think about Wizards. Magic has been incredibly important to the growth of Wizards, but D&D – as much as Magic has grown, D&D since the release of fifth edition back in 2014, gosh, it’s probably 10x the size it was back then. And we have an amazing roadmap ahead for D&D with AAA films, some exciting TV projects that we are going to announce shortly, AAA video games, big partnerships, huge merchandising and licensing efforts. And so I really think that Wizards of the Coast is positioned to become a two foundation business over the next several months. That just will get better and better, driving our blueprint over time.

Chris Cocks:

Thanks.

Operator:

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

Operator:

Good morning, and welcome to the Hasbro Second Quarter 2022 Earnings Conference Call. At this time, all parties will be listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

Chris Cocks:

Thank you, Debbie, and good morning. Since our first quarter earnings call, the executive leadership team and I have been undergoing a multi-month strategic review of the business. While the review is still in process, it's already clear we're an organization with a bright future. Led by an unmatched brand portfolio that spans fans of all ages; an industry-leading gaming business, which is a top investment priority for us; a growing direct-to-consumer business and unique assets and entertainment creation all knitted together by talented global teams working with a clear sense of purpose and value creation. We see big opportunities to scale our Franchise Brands, drive all new play platform innovation and transform our operations to improve our agility, focus and profitability. Games, digital, expanding the age ranges of our portfolio and harnessing direct connections with our consumers are all compelling growth opportunities for Hasbro. We'll share more about our plans in October at our Investor Day, but I'm energized with what we have accomplished to date as we focus on driving long-term profitable growth and environmentally responsible, sustainable business and superior shareholder returns. While we've been advancing our long-term strategic work, our teams have been busy delivering a strong second quarter with 4% revenue growth absent FX, 14% adjusted operating profit growth and 200 basis points of margin expansion, adjusted earnings per share of $1.15 and 6% growth in adjusted EBITDA. Deb Thomas will speak to our results in more detail, but let me share a few highlights. Revenues grew for Consumer Products and the Wizards and Digital Gaming segments. Entertainment segment revenue was down in the quarter mostly due to the timing of deliveries, but is up year-to-date absent the Music business we sold last year. As we projected in our Q1 earnings call, Wizards delivered its biggest quarter ever in Q2, successfully comping last year's Q2, our prior record. Tabletop revenues grew 15%. MAGIC

Operator:

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Thank you and our first question is from the line of Eric Handler with MKM Partners. Please proceed with your question.

Chris Cocks:

Hey, Eric, thanks for the question. Yes, we see fan -- the fan economy, in general, as a huge growth area for us. It's one of our fastest-growing categories overall. And I really think you can think of the segment as multiple segments put together. There's kind of classic fan collectibles like plastic figurines and action figures. There's sports memorabilia, and then there's a very wide trading card industry that deals with both playable trading card games like MAGIC as well as sports card trading games. Over the last couple of years, this has been probably our fastest-growing segment of the Company, and we continue to be very bullish on the sector. It's a highly resilient sector in terms of down economic times or up economic times. It tends to be focused and concentrated on a target consumer with a very high discretionary income. And it's a passion-driven industry. So people are very engaged in it. On your specific question on kind of like sizing, I'm going to turn that over to Eric a little bit to give you kind of a little bit of a sense of where we see it going and what we think our key initiatives are. Eric?

Operator:

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

Chris Cocks:

Great. Thanks for the questions. Yes, I mean, Wizards of the Coast is an important and vital business for us. It's been a major growth driver for the Company. And we've had a great first half of the year for the Wizards business overall. For the first half of the year, we see it up 5%, and we're continuing to project at the high end of our range of upper single digits to lower double digits growth for the entire year. In terms of the composition of that business, Wizards tends to be very MAGIC-heavy. MAGIC is probably about 70% to 80% of that business overall. And we tend to be -- between the D&D brand and the MAGIC brand, it tends to be very North American-centric. About 75% of our overall sales take place in the U.S., Canada and Mexico. So we see a lot of growth vectors for both of those opportunities. We see -- Europe has been one of our key growth drivers for the MAGIC brand. We just started localizing D&D product internationally just this past year. We see a huge opportunity for products like D&D Beyond to go beyond North America. Over 85% of the registered users for D&D Beyond, for instance, right now are based in the U.S. or Canada. We see a big growth opportunity there. And when we look moving forward, we continue to see the tabletop industry as being very vital and robust. I think you can see that in the 15% growth that we saw in our tabletop revenues in Q2. And we see a big opportunity to open up these brands over time as we really start to leverage our Brand Blueprint assets. If you just look at what we're going to do with DUNGEONS & DRAGONS in 2023, we have an only blockbuster movie that will be coming out in March of next year. We're going to be previewing that in Comic-Con later this week in a sold out Hall H preview. We'll even have like a little bit of an interactive tavern that people can go to and experience the world of D&D firsthand. And then we're going to be complementing that blockbuster entertainment with follow-on streaming entertainment, a huge consumer products push, all-new tabletop games and some really cool new video game innovation that will be coming out shortly following the film. So I think the Wizards business and the future for that business continues to be bright. And I see both MAGIC and D&D growing and maybe even D&D picking up some share inside of the overall Wizards business in terms of its future and its potential.

Operator:

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

Chris Cocks:

I don't see anything that was different in Q2 than what you should expect for the balance of the year. Eric, any comments?

Chris Cocks:

I think the biggest difference between Q2 this year and Q2 last year, Arpine, was we leaned into two rather large digital launches with Magic

Chris Cocks:

Yes. I'm going to turn most of this answer over to Cynthia if you want to opine, Cynthia. It's relatively small for the balance of the year. We -- and it was certainly very small for the quarter. But we do see it being material as we get into 2023 and beyond on the top line and bottom line basis. But a lot of that's going to have to do with the revenue synergies that we see with the business as we start to integrate it, which is still relatively early days. Cynthia, anything to add from the Wizards vantage point?

Deb Thomas:

And just to add, looking at our financials overall, we do expect it to be dilutive for the full year. However, it will be accretive to next year.

Michael Ng:

I just have two. First, I was wondering if you could just help begin what the 3Q revenue could look like. It sounds like there's an implication that it should be down year-over-year just given the direct import revenue shift and the slowing growth or slower growth in Wizards of the Coast. But I was just wondering if you could talk a little bit about that? And then secondly, I was just wondering if you could just give us a little bit more detail around Wizard margins in the quarter, obviously, a record high. Was that simply operating leverage because of the record revenues? Or were there any mix benefits? And what's driving the drag on margins for the remainder of the year in Wizards relative to the second quarter? Thank you.

Deb Thomas:

Right. And we did talk a bit about entertainment as well, some of the deliveries that we have in Q4 versus Q3 a year ago. Interestingly, and we tried to highlight this in our release, when we release movies directly to streaming, revenue recognition just has us take it right at that point in time. And we have more releases that are actual theatrical coming in the third quarter, which will have that same revenue. It just gets spread out over the period with all of the ultimates and the library value that comes to that as well. So we're very excited about what's coming up in entertainment, but our delivery timing is a bit more Q4 from a revenue recognition standpoint and beyond than it was in Q3 a year ago. We also had the MY LITTLE PONY movie as well. So when you think about all those things, it really is just a timing issue. And the only thing I would add to what Chris said is as we look at our retailers and what they're expecting over the holiday period, they're looking to have more holiday promotions this year. And we're actually seeing that. You're seeing people actually going into shops more. Well, we're very excited about direct-to-consumer. And Eric talked earlier about pulse in the market that we have there and how excited we are about all that innovation. I think we're going to see more holiday promotions at retail. And we are well positioned this year with the inventory to meet that demand, whereas last year, we were short and retailers were short.

Operator:

Our next question comes from the line of Megan Alexander with JPMorgan. Please proceed with your question.

Chris Cocks:

Yes. Certainly, having a Prime Day shift from June to July did have an impact, and we're very pleased with the results of Prime Day this year, 20% increase in sell-through, felt pretty good to us and was generally on track with what we're looking for. In terms of our overall POS, we have long guided that our product innovation is back half of the year weighted. That's like we have some great new products coming out. Eric talked about Selfie series. We just announced Wordle

Megan Alexander:

Got it. That's really helpful. And then maybe as a follow-up, again, on the Wizards margin, it had very strong performance in 2Q. And it does seem like you raised the top line guide a bit for that segment. You talked about potential to reach low double-digit, now you are including that in the guide. So that would imply just higher operating margin on mix in the back half, but you did keep the overall profit outlook unchanged. So are you just seeing higher costs in other areas of the business? And are you still thinking about COGS being around 30% of sales for the year?

Operator:

Thank you. Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.

Chris Cocks:

Yes. Certainly, we came into the year feeling like there is a mix of headwinds and tailwinds for the consumer. We were very cognizant of the inflationary environment we were operating in, both from a consumer takeaway as well as its impact on our supply chain. I think net new headwinds that emerged through the year has been the Russia conflict and the effects of that and then the currency dynamics with the strengthening dollar, which particularly affects our CP segment in markets like EMEA and our Wizard segment with a very strong dollar versus the Japanese yen. So as we look at our segments moving forward, I think what we feel fortunate as, as a company is that we have very resilient segments across toys, games and entertainment. These tend to be small luxuries that consumers value pretty highly. Our CP segment in prior economic downturns has done relatively well. It has been affected, but not nearly as much as those economic downturns would affect the macro economy. The games business tends to be very resilient. MAGIC

Chris Cocks:

Eric, anything to add?

Operator:

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

Chris Cocks:

Well, I would say at a top level, and then I'll turn it over to Deb and/or Cynthia if they'd like to chime in. We continue to invest behind the Wizards business and our games business as a whole. Digital will be an area of focus for us. I think we will at least maintain our production spending on digital. I think over the next couple of years, you'll see us announcing more products and introducing new innovation. I think games as a service is going to be a big area of focus inside of that digital business with what we call digital tabletop, what are we doing and where are we taking platforms like Magic

Deb Thomas:

Really just that you're seeing the reflection of our preorders on the inventory and the operating cash flow number. From an investing standpoint, we just -- which is part of our free cash flow. We did make that very strategic acquisition of D&D Beyond, which we're very excited about the future for that, as Chris just said, for the platform for many things that we have in our view going forward. So as we look at that, we do expect the inventory to turn, but in the back half of the year, we expect our cash flow generation to actually improve in the back half of the year.

Linda Bolton-Weiser:

I was wondering if you could comment on what you're seeing like on the toy side of the business in terms of raw material input costs. I know that for the toys being produced for this Christmas, the costs are up, but we're seeing like spot prices for some things like plastic resin are starting to roll over. So can you just kind of comment on kind of like what you're seeing on a longer-term basis? And do you think next year kind of bodes well in terms of cost comparisons on the raw material side? Thank you.

Eric Nyman:

Thanks, Chris. So a couple of things to hit with regards to your question, Linda. The first was with regards to input costs. We do see those rising, and both Deb and Chris talked about them in our prepared remarks a bit. We have taken pricing to cover that, and we feel comfortable that we continue to make the right decisions with regards to pricing to cover those input cost increases. And we're working with our partners as we look go forward to continue to manage and mitigate some of those headwinds. With regards to transit, which is kind of the other big piece that we've talked about in the past, we are seeing some of the transit times and transit costs easing a bit. And we expect that trend to continue as well as we go into the fall. So I think some puts and takes across the board there, but we feel like we have our hands wrapped around it, and the teams are managing it well.

Eric Nyman:

Sure. I'll just continue on that one. Clearly, Toys "R" Us is making another comeback. And we're always excited when we see toy space and toy merchandising increase in retail footprints around the world. We're certainly encouraged by what we're seeing as Toys "R" Us partners up with Macy's. And we saw the announcements, obviously, that you did. And we clearly have been in conversations with them for quite some time that they're going to expand that footprint for this Q3 and Q4. They're good partners of ours. And -- but when I say they, I'll talk about Macy's because it's really a footprint store within a store concept, and we'll continue to supply them as needed. I don't expect it to be significantly material for this year. But we are excited that we're continuing to see the toy footprint expanding. And we think that any time you have the chance to put more toys and games in the hands of consumers around the world at holiday, it's a good thing.

Gerrick Johnson:

Great. I have one follow-up. First, on Wizards, there's a lot of noise in the Wizard segment this quarter. Can you please talk about the performance of the core Magic Arena on its own excluding mobile launches and DUNGEONS & DRAGONS, et cetera? Thank you.

Cynthia Williams:

Yes, I think you covered most of it. The only other thing I would say is we will continue to listen to our customers and the community as we are working on that road map for innovation. We're super excited about how Arena will continue to contribute to the overall MAGIC ecosystem.

Gerrick Johnson:

Yes, I did. On a consolidated basis, you guys have commented over and over that you're maintaining guidance. But the fact of it is, you've lowered revenue outlook because of FX, right? It's in constant currency now. Before, it's just in dollars. Your operating margin guidance is maintained. So is it FX hedges below the operating line or share buyback or lower interest? What is it that gets you to maintaining guidance?

Operator:

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

Operator:

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

Operator:

Good morning and welcome to the Hasbro First Quarter 2022 Earnings Conference Call. At this time, all parties will be listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. And at this time, I’d like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

Chris Cocks:

Good morning. I'm happy to be joining you today to discuss Hasbro's first quarter results and share the efforts our leadership team are undertaking to assess the business and strategic direction of Hasbro. Deb Thomas will speak shortly in detail about our quarterly performance that supports our view of growth for the year. In Q1, our Hasbro teams executed well, growing revenue to $1.16 billion, a 4% year-over-year increase and 7% absent our music business, which we sold last year at the beginning of Q3. Revenues grew in each segment. One of the standout performers for the quarter was our latest MAGIC

Operator:

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question will be coming from the line of Eric Handler with MKM Partners. Please proceed with your questions.

Chris Cocks:

Good morning, Eric. Hey, this is Chris. I'm going to turn this one over to Eric, who can take you through the supply chain situation that we have overall in the first quarter and what we look at for the outlook for the balance of the year. Eric?

Eric Handler:

Great. And then just a quick follow-up for Darren, if possible. Darren, so congratulations on the Rookie getting renewed for a fifth season. That should give you close to 100 episodes at the end of next year, which should put us in a good position to sell into the syndicated -- syndication market for TV. I know you're on Hulu, but wondering if you could talk about maybe some off-network syndication, how that market is shaping up and where you are with that process?

Eric Handler:

Okay. Thank you.

Arpiné Kocharyan:

Hi. Thank you very much. I have two quick ones. So for operating profit margin, it seems like outlook is better overall, kind of, higher than previously communicated, which is impressive given what we know about supply chain and everything that's going on. It seems like Wizard margin is slightly lower. I was wondering if you could talk about what is better to offset that such that your overall margin outlook is better?

Debbie Hancock:

Just to add a bit more detail, Arpiné, just as well. As you look at the business and the cost pressures, we said we would have cost pressures in our gross margins for the first quarter, and we did. Price increases in CP start to hit in the second quarter. Actually, they've already started, and we'll see those to offset some of those higher costs as well as our first price increase in MAGIC

Chris Cocks:

Well, it's still a little early for a full POS readout on the first quarter. What we can say is, traditionally, the Q1 is one of our smallest quarters. We have a fantastic lineup coming up in following quarters, along with a great entertainment lineup. And we exited the quarter with POS on the positive upswing. We like what the trends are and we see that improving as the year goes.

Operator:

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

Chris Cocks:

Sure. I will give a very quick answer, and then I'll turn it over to Cynthia Williams, our new President of our Wizards and digital segment. When we look at Wizards, we look at a combination of MAGIC, both tabletop and digital and D&D and the balance of the portfolio. And in Q1, and throughout the rest of the year, we see strength across each of those. And so that's kind of what we're looking at as we look at the mix. We see our tabletop revenues being pretty buoyant and actually growing above our expectations, and we continue to invest heavily in digital. Now that said, as Deb mentioned during her upfront, we have a couple of headwinds on digital in terms of comps. We had a very successful release of Arena Mobile last year, which has kind of settled into a more of a mature kind of growth rate. And we also had Dark Alliance, which was a new video game for D&D that came out in late June last year. We're not going to be comping those. So we think our digital growth is going to be a little bit more muted. But on balance, when we look at the two, we feel good about where the Wizard segment is going. Cynthia, I'll turn it over to you on any further color or commentary to add.

Chris Cocks:

And I'd certainly say that Kamigawa

Chris Cocks:

Yes. So I would say for this year, we see a fairly stable mix, if not table actually being a slightly higher mix than it was last year, given some of the comps that we have. And over the mid to long term, we see both robust growth in tabletop and digital, with digital as a growing portion of the mix for our Wizards and Digital segment over time. We don't have a specific goal around what that percentage mix should be. Both segments are highly profitable gross margin segments. And so, we like growth in both.

Operator:

Our next question comes from the line of Megan Alexander with JPMorgan. Please proceed with your questions.

Chris Cocks:

Well, I would say, in Q1, we actually executed ahead of our plan. And so, we feel pretty good about where we're going into for Q2, Q3 and Q4, which is why we're maintaining our guidance, despite some market headwinds that we and we think the whole industry are seeing. We believe that the path to great market -- great performance and great growth is through superior execution and great products. And as Eric mentioned, we think that inventory is filled with great products, and it's going to have a lot of fantastic story-based execution, both from us and our partners at eOne, as well as our license partners like Disney, which has just a stacked lineup of entertainment in the second half of this year. Eric, any further color to add?

Megan Alexander:

That's really helpful. And maybe just a quick one for Deb. You saw some nice leverage in 1Q on royalties and advertising. Both came in a little bit better than where the Street was modeling. How should we think about those two lines for the full year?

Megan Alexander:

Awesome. Thank you.

Drew Crum:

Okay, thanks. Hey guys, good morning. I just want to go back to the margin question. Maybe looking ahead to next year, can you comment on your expectations there? You recently suggested 16%-plus was the goal. Given that you're targeting 16% this year, is there any change to your view for next year? And then I have a follow-up.