Hasbro Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 12 speakers on the call.

Operator

Welcome to Hasbro Third Quarter 2023 Earnings Conference Call. At this time, all participants will be in listen only mode. 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.

Operator

Debbie Hancock, Senior Vice President, Investor Relations, please go ahead.

Speaker 1

Thank you, and good morning, everyone. Joining me today are Chris Cox, Hasbro's Chief Executive Officer And Gina Geder, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non GAAP adjustments and non GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non GAAP adjustments.

Speaker 1

A reconciliation of GAAP to non GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call And the question and answer session that follows, members of Hasbro management may make forward looking statements concerning management's expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward looking statements. These factors include those set forth in our annual report on Form 10 ks, Our most recent 10 Q, in today's press release and in our other public disclosures.

Speaker 1

Today's guidance assumes we retain the Non core entertainment film and TV business, notwithstanding our recently announced agreement with Lionsgate to sell this business. That transaction is subject to customary closing conditions. We undertake no obligation to update any forward looking statements made today to reflect events or circumstances that create after the date of this call. I would now like to introduce Chris Cox. Chris?

Speaker 2

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.

Speaker 2

The goal of this plan, Blueprint 2.0 was a more focused, profitable and higher growth Hasbro, Builds 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 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.

Speaker 2

The sale of E1 Film and TV, which continues to be on track for an end of year close, We'll simplify our operating model and refocus Hasbro on our core mission. Moving forward, our entertainment efforts will be franchise 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 IP development like our new YouTube series, Odd Paws. The margin and simplification benefits Refocusing on play will grow over time as our teams build innovative next generation toy and games reinforced by cost effective 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 150,000,000 This year, we anticipate total gross savings of approximately $200,000,000 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.

Speaker 2

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 $100,000,000 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.

Speaker 2

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 of these initiatives has not materialized as quickly as anticipated.

Speaker 2

So we plan to accelerate our efforts heading into 2024. We expect to achieve our 2025 goal of $250,000,000 to $300,000,000 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 and Digital Gaming is up 11% year to date.

Speaker 2

Magic: The Gathering is delighting tens of millions of fans with new concepts like Universe is Beyond, which combine magic with fan favorite IP Like Lord of the Rings and Doctor. Who. Universe is Beyond is a long term multi property strategy that is already delivering collector excitement and new player growth. And on Monday, we expanded our partnership with The Walt Disney Company with the announcement of a multi set Magic and Marvel collaboration. Expect more exciting news and previews in the quarters to come.

Speaker 2

D and D is expanding into a digitally driven multimedia franchise. Baldur's Gate 3, the new video game from Larian Studios based on D and D's 5th edition is one of the best selling games of 2023 And one of the highest rated video games of all time with metacritic reviews equivalent to mega franchises like Grand Theft Auto and The Legend of Zelda. Our success in digital isn't just contains the world of core gaming. Monopoly GO from our partners at Scopely From these two properties this year with a multi year long tail anticipated. These were long term thoughtful partnerships.

Speaker 2

Each game was signed pre-twenty 18 and we have several more of these kinds of projects in the pipeline, including new games from our own internal studios, which we'll be sharing more about in the coming months. Our direct to consumer business is up 57% year to date. Hasbro Pulse is a modest sized platform today, but it's scaling rapidly, giving us a new avenue to delight bands and learn from our consumers. We're excited to continue to grow our direct initiatives behind brands like Star Wars, Marvel, Transformers, Magic, GI Joe, D and D and Power Rangers, One of the best lineups of IP in the collectibles space. And we continue to scale our industry leading licensing business Across an array of brands and categories from Peppa Pig to transformers, education to location based entertainment.

Speaker 2

Next, growing share in key categories. In Q3, we grew share in 4 of 5 of our key categories: Preschool, Action, Blasters and Arts and Crafts. Driving this, we have several brands that are performing well. In gaming, Magic and D and D are having record years. Monopoly is back to growth, recently reclaiming the title of the top selling board game brand.

Speaker 2

New innovation like Twister Air is driving genre expansion in board games. Transformers point of sale is up over 30% year over year And PLAY DOH is also showing solid gains. GI Joe continues to be a fan favorite and growth driver for our Pulse business. Particularly in our consumer products business. Let's now turn to how we return this key segment back to growth.

Speaker 2

We went into 2023 expecting a toy category down low single digits for the year. We expected Hasbro performance to However, market performance has been more challenging than planned. Our internal POS system shows total point of down negative 8% through Q3, roughly equivalent to our view of the total toy market or negative 4% When accounting for exited licenses, we saw the category soften during Q3 to negative 10%, again roughly equivalent to our view of the market or negative five Our work on operational efficiency means our performance versus market is the best it's been in several years, but we are facing headwinds. In any market scenario, we think this holiday will be late breaking and heavily deal reliant. So we're taking the necessary steps to position our portfolio for continued share growth, Exiting the year with momentum for our brands and assuring our inventory health is back to historical norms.

Speaker 2

Our guidance is based on a cautious outlook, but we are prepared to take advantage of any opportunities presented. We are investing in Q4 to drive continued share momentum, including maintaining our advertising and promotion budgets at competitive levels and working with retail partners to excite consumers with compelling deals. We are accelerating our cost savings initiatives to reduce overhead and see near term flow through in operating margins. And we continue to invest in product innovation Behind a new leadership team in toy that will expand us into new play patterns, price points and market opportunities in the months ahead. Our long term capital priorities guide our decision making for these near term decisions.

Speaker 2

Invest to grow the business, Pay down our debt, maintain a healthy balance sheet and return cash to shareholders via our category leading dividend. Consistent with these priorities, we are investing to ensure our toy business exits the year with healthy inventories, continued share momentum and a clear runway for new product introductions in 2024. Wrapping up, our results in Q3 show we are making progress Asbury's strength is the diversity of our brands across both toy and game. Our Wizards and Digital business continues to demonstrate impressive growth With SmartVets coming to fruition this year and lots to be excited about in the years to come. We are likewise investing in toy like to now turn over the call to Gina Goetter, our Chief Financial Officer to share more about our detailed results and an update on guidance.

Speaker 3

Gina? Thanks, Chris, and good morning, everyone. The Hasbro team continues to make progress in transforming our company, building a world class gaming business, Streamlining and improving the profitability of our consumer products and strengthening our balance sheet. Our 3rd quarter results Demonstrate the growth potential across our diversified gaming portfolio, offset by the tough macro environment across toys and entertainment. Despite market headwinds, we are growing share in the categories where we compete and are beginning to see the benefits of our cost savings initiatives play through the P and L.

Speaker 3

Total Hasbro revenue of $1,500,000,000 was down 10% versus last year. Wizards of the Coast and digital gaming revenue increased 40% behind strong contribution from Baldur's Gate 3, MONOPOLY GO And Magic: The Gathering. Consumer Products declined 18% due to macro category trends and planned business exits. Excluding these exits, the segment finished down 12%. The Entertainment segment declined 42% due to the rider and actor strike impact.

Speaker 3

Adjusted operating profit of $343,000,000 increased 27% versus last year. The increase was the result of favorable product mix, most notably high margin digital game Increased 15% versus last year, reflecting the higher operating profit, partially offset by incremental interest expense in an unfavorable tax rate impact. The adjusted results exclude $512,000,000 of cumulative pre tax Impacts associated with the loss on assets held for sale and to a lesser extent one time charges for the operational excellence program. Looking at our brand performance, our franchise brands grew 8% in the quarter and were flat year to date. These brands represent our biggest and most profitable brands and are just over 60% of our revenue.

Speaker 3

Within Franchise Brands, we delivered significant Q3 revenue growth across gaming, including Dungeons and Dragons, Hasbro Gaming and Magic. Partner brands declined year over year after strong performance from Marvel and Star Wars in 2022. Partnerships like we have with The Walt Disney Company remain a key priority for us, and we expect results to improve in the quarters ahead as we expand our partner brand lines and categories like our just announced collaboration with Marvel and Magic. Turning to operating margin. 3rd quarter adjusted operating margin of 22.8% was 6.7 margin points higher than last year.

Speaker 3

The profit impact from the volume decline in consumer products was offset by favorable mix growth in licensed digital gaming and Magic. Supply chain cost savings outpaced inflation and delivered 1.9 points of margin growth. Operating expenses also contributed 1.4 points behind labor and lower royalty expense for exited licenses. Lower advertising spend contributed 1.7 margin points of improvement as we align spend to current demand. That said, we will continue to invest in advertising and marketing to drive sales this holiday season.

Speaker 3

Finally, lower entertainment deliveries resulted in a decline in program amortization expense that contributed 1.5 points margin. The cost base for the company and the savings are helping us navigate a softer toy market. Year to date, we have accumulated $62,000,000 of gross savings within supply chain and an additional $92,000,000 of gross savings within operating expense. The combined $154,000,000 of gross cost savings this year are more than offsetting supply chain cost inflation and allowing us to reinvest in the business and partially defray the higher cost to move through inventory. Cumulatively, since we began the savings program last year, we have reduced our cost base and delivered gross savings of $174,000,000 This progress puts us on track to meet our long term gross savings goals earlier than expected, and we will be doubling down as we continue to focus on streamlining operations and improving the profitability within toys.

Speaker 3

We continue to make progress in lowering inventory levels. We've reduced total owned inventory 27% versus prior year, primarily driven by a 34% reduction in the Consumer Products segment inventory. From a retail inventory perspective, their inventory was down 18% year over year, but up sequentially versus last quarter as they set both in owned and retail inventory levels, and we'll continue remaining agile and taking actions to stay in sync with broader category momentum. Looking more closely at segment performance within the quarter, Wizards segment revenue increased 40% versus last year. 23 points to growth was led by licensed digital gaming revenue from BG3 and to a lesser extent, MONOPOLY GO.

Speaker 3

The revenue for Baldur's Gate is realized along with unit sales, whereas in the near term, MonopolyGO has a straight line revenue recognition based on the total multi year contract minimum guarantee. Tabletop revenue, which includes both Magic and D and D Added 14 points of growth, driven by timing releases, including an incremental Magic release in this quarter versus last year. The growth in high margin licensed digital gaming drove a 99% increase in total segment operating profit versus last year and expanded operating profit margin by 14.3 percentage points. Turning to the Consumer Products segment. The overall toy category was down 8% in the quarter according to Surcana versus 6% through the 1st part of the year.

Speaker 3

Despite the category headwinds, we gained share in 4 of our 5 key categories, including action figures, arson cramps, preschool and blasters. Overall, Consumer Products segment revenue was down 18% versus last Looking at the key drivers for the quarter, 6 points of the revenue decline was driven by planned license exits. Another 12 points of decline was driven by toy and game volume given the broad category trends. Two points of decline came from pricing and mix driven by additional closeout costs as we work through higher inventory levels. FX had a favorable 2 point impact on the segment.

Speaker 3

The segment adjusted operating margin declined 1.4 margin points, primarily driven by unfavorable mix And higher inventory obsolescence and closeout costs. Turning to the Entertainment segment. In the quarter, revenue declined 42%, primarily as a result of the writers and actors strikes. Partially offsetting this was 53% revenue growth in Family Brands, driven by content sales primarily for Peppa Pig and Power Rangers. Adjusted operating profit increased 37% and margin expanded 3.8 margin points to 6.6% due to the exited businesses, lower program amortization and operating expenses.

Speaker 3

The E1 film and TV asset Full year earnings are expected to be breakeven to a modest loss. We've received the expected regulatory approvals for the sale of E1 Film and TV and remain on track to close the deal by the end of the year. Wrapping up with Hasbro Inc, we delivered $335,000,000 of operating cash year to date, which is $73,000,000 ahead of last year, driven by working capital improvements led by the reduction in inventory, combined with lower production costs within the Entertainment segment. Our cash and cash equivalents of $186,000,000 Does not include approximately $70,000,000 of cash recorded in assets held for sale, the substantial majority of which we expect to stay with upon the close of the transaction. Including this, it brings our cash on hand to approximately $250,000,000 up from $217,000,000 in Q2 2023.

Speaker 3

Through Q3, we repaid $107,000,000 of long term debt And spent $160,000,000 on capital expenditures led by investments in Wizards of the Coast for future digital gaming releases. And we've returned $291,000,000 of capital to our shareholders via dividends. In the quarter, we booked a 23.2% adjusted underlying tax rate, which compares to 19.9% last year. The higher rate continues to be the result of our film and TV losses and a shift in the geographical mix of income. Turning to our 2023 guidance.

Speaker 3

The impact of the broader toy category declines has had a change in our consumer products and total Hasbro outlook. Based on this, we now expect total Hasbro Inc. Revenue to be down 13% to 15%. As we look at the 3 primary segments, this guidance now assumes that the consumer products business will be down mid to high teens. Based on the category trend in Q3, we are planning for modest improvement in Q4 as we begin to lap the market declines from last year.

Speaker 3

We believe that retailers will remain cautious with their inventory positions, which will have an impact on typical holiday order patterns. We continue to expect that Wizards of the Coast will deliver high single digit revenue growth, the heightened strong performance within digital games And solid performance on Magic. The majority of the revenue from BG3 was realized in Q3. We expect a modest positive contribution to revenue from the game in Q4 as it will continue to be recorded in line with unit sales. Monopoly GO Q4 revenue will be consistent with Q3 given the accounting methodology.

Speaker 3

As Chris In total, we expect the aggregate contribution from these 2 licensed games to be more than $90,000,000 for the full year. And finally, for entertainment, we continue to expect revenue declines of 25% to 30%, which incorporates the impact of the writers and actors strikes on production deliveries in the back half of the year. Minus these assets held for sale, we expect total company revenue declines of 8% to 11 This guidance reflects the impact of the CP revenue call down and includes additional one time cost to clear aged inventory on Hasbro's balance sheet, continue share momentum and reset the foundation heading into next year. This margin guidance includes a step up In the in year gross cost savings from our transformation efforts to $200,000,000 and as we look to 2024, we to continue accelerating our savings efforts to improve the profitability across toys and games. Given the revenue call down, we now expect dollars of operating cash flow.

Speaker 3

From a capital allocation standpoint, our priorities are to invest behind the business, Pay down debt and return excess cash to shareholders via dividends. We remain committed to our dividend strategy and advancing our progress towards As I said earlier, we are making good progress on our transformation And the work we've done to date has us positioned to build on our gaming leadership and strengthen our toy business. We believe the toy market will stabilize and return to growth. Our near term focus is on executing the holiday season, resetting the cost base, removing complexity

Operator

Thank you.

Speaker 4

At this

Operator

time, we'll be conducting a question and answer session. Thank you. And our first question comes from the line of Eric Handler with ROTH MKM. Please proceed with your questions.

Speaker 5

Good morning and thanks for the question. With regards to Wizards, so 3rd quarter Exceeded expectations, at least relative to consensus. You kept the full year guidance for Wizards intact, which Would mean people have to lower their 4th quarter numbers, but everything seems to be going well there. Is this just a matter of Maybe Baldur's Gate 3 being more front end loaded than expected? Or is there something else that you're being a little bit more conservative on?

Speaker 2

Hey, Eric. Good morning. Yes, Q3 met our expectations. We had the great fortune of being able to play Baldur's 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 models indicated.

Speaker 2

That said, We see a long tail associated with Baldur's Gate and likewise a very lucrative and long tail for Monopolygo as well. So it will be a nice annuity for us.

Speaker 3

Okay. This is Gina. The only thing I'd add as color is when In our prepared remarks, we talked a bit about the revenue recognition. So for VG3, it's getting that revenue is getting recognized As those units are being delivered. So as Chris said, heavy in Q3, just given what kind of the overall launch of the game and then as we move through Q4 and into next year, there'll be a tail.

Speaker 5

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?

Speaker 2

We can't go into a huge amount of detail on the deal. However, the deal is structured such that Scopely is Incentivized to spend on marketing for it. So typically for the 1st year or 2 of a major mobile release, You spend a lot on marketing, you scale the game, the game gets to a steady state, and then the marketing as a percentage of total sales The net of store participation and a fairly high percentage of marketing, so for the 1st couple of years, you're basically dealing with minimum guarantees. And as the game starts to get to maturity, and those marketing Performing now, it could be a dramatic improvement as well.

Speaker 5

Thank you very much.

Operator

The next question is from the line of Jamie Katz with Morningstar. Please proceed with your question.

Speaker 6

Hey, good morning. Can you guys talk a little bit about the products that you are keeping and not pruning in the A roadmap of what you expect for turnaround time in that CP category as we work through some of these changes? Thanks.

Speaker 2

Good morning, Jamie. Thanks for the question. Well, our franchise brands are pretty core to the company And they kind of are tied to each of our key categories. So in action figures, you have transformers, secondarily Power Rangers. In outdoor and blasters, you certainly have Nerf in creativity and arts and crafts.

Speaker 2

You have Plato, in preschool, we have Peppa Pig and then in games, we have a pretty Substantial portfolio across Monopoly, Clue, Magic: The Gathering and D and D. And that's in addition to all the wonderful partner brands we have, like our partnership with Walt Disney across Marvel and Star Wars, And then of course with Takara Tomy on Beyblade, which is another important partner product for us as well. In terms of what's I think it's really a case study on how to do movie and product integration really, really well. That brand is up 30 price value and product innovation and it's driving share for us in creativity. I think our games portfolio is second to none And it's really broad based across genres and player demographics.

Speaker 2

I think where we need to see more improvement, frankly is in Nerf. We're up in share in the blaster category, but we need to do a better job bringing innovation and price value into that category. And then likewise, I think we say outdoor and blasters for a reason. We need to expand NERF beyond just thinking about a DART. We need to think about more ways that we can engage kids and families in active play across more scenarios and I think you'll be seeing more from that for us.

Speaker 2

And then our partner brands, I think we're having a little bit of a retrenchment this year after a record year for Marvel last year and a really strong year for Star Wars. I think we have a lot of plans with Disney to expand categories like our just announced Partnership on Marvel and Magic. And then likewise, we have a new version of Beyblade that's coming out next year that we're pretty bullish on, particularly based on The initial sales that they've seen in the launch in Japan.

Speaker 6

And as far as Sort of remedying that category and

Speaker 3

returning to growth, do you

Speaker 6

see that as a First half twenty twenty four phenomenon, second half twenty twenty four phenomenon or is there some more work that really needs to be Addressed before we see that.

Speaker 2

Well, Tim Kopin came on board about 5 or 6 months ago to lead Toy for us. He's a 40 year toy veteran who's helped champion and found multiple $1,000,000,000 categories and led some of the biggest franchises in toys. I think typically a new leader needs 18 to 24 months to make a big impact on the product line. I think they can do more tactically in terms of what we do with our partners and how we go about going to market. So I think you'll see the Tim and his new leadership team kind of flow out through 2024 and expand as we go into 2025.

Speaker 2

And then, I think the market is another factor inside of that as well. Certainly, we've been seeing headwinds in the toy category year to date, And we're expecting a relatively unpredictable market going into Q4. But consider us long term bulls on toy. We see this market going back to kind of its historical growth rate of 2% to 3%. We see a very high demand for play.

Speaker 2

And we think Hasbro is well positioned as the most diversified toy and game company in the industry. And so regardless of which way the market goes, I think that diversification will play well for us.

Speaker 3

Jamie, when I build on the timeline 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 is going to be kind of a very focused view on profitability and how do we quickly reset the profitability of that business 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.

Speaker 3

That's how you should think about just the cadence is really reset. We're going to get after profitability in 2024 and get ready for a sharper innovation pipeline in 2025.

Speaker 6

Thanks.

Operator

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

Speaker 4

Hey, thanks. Hey, guys. Good morning. Chris, can you remind us what the content roadmap looks like for Magic in 4Q? And How you grow the franchise in 2024 as you lap what appears to be some tougher comps?

Speaker 4

And then I have a follow-up.

Speaker 2

Yes, sure. So for Wizards in the Q4, we have another Lord of the Rings set that will be coming out. We think that will be a bit smaller than what we had in Q2, but pretty solid. We also have a new premier That caused the lost caverns of Exelon and we just had another Universe is Beyond kind of the Commander release for Doctor. Who.

Speaker 2

As we think about 2024, yes, I mean Magic had a great year, another record year in 2023. We've been having record years from 13 out of the last 14 years on Magic. And as I would think about 2024, I certainly think we'll have some more universes beyond releases. As we said, we were surprised on the upside in terms of the initial demand and And reaction to fallout, which should come into Q1. In Q2, I think we have that comp With Lord of the Rings, but we'll have another set coming out called Modern Horizons 3.

Speaker 2

And we've had 2 sets in the Magic that have done $200,000,000 Lord of the Rings, which officially passed $200,000,000 earlier this week And Modern Horizons 2, which was our previous $200,000,000 set. So we feel pretty good about Modern Horizons 3. And think it also should be noted, given that's not royalty bearing and tends to be more of a collector's product, it also is a pretty nice operating profit And then the back half of the year, we have other sets that we haven't yet announced yet. So, I don't want the Wizards team to get mad at me. But generally speaking, we have about 6 to 7 Premier sets per year and we'll be lapping that in 2024.

Speaker 4

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 as it approaches its renewal? Thanks.

Operator

Well, I

Speaker 2

can certainly talk from our side. Walt Disney is our most valuable partnership. It's something that we meet with regularly. We put a lot of product innovation. We put a lot of marketing.

Speaker 2

We put some of our best people against it. And we're expanding that relationship aggressively across more categories, across more brands, whether they Our standalone brands like we do for Star Wars and the Avengers or co brands like we're doing with Magic and Marvel. So it's certainly something that we value and are leaning into. And I think you'll see growth from for us over the mid and long term.

Speaker 4

Thanks, Chris.

Operator

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

Speaker 7

Hey, good morning and thanks for taking my questions.

Operator

So I just want to check some of

Speaker 7

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 $90,000,000 from both Monopoly Go and Baldur's Gate 3. And you saw, I think it was $63,000,000 In 3Q, so that implies maybe $30,000,000 or so comes in 4Q, which would be I'm getting like maybe like an 8 or 9 percentage point Hailwind 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?

Speaker 7

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, it would be helpful.

Speaker 2

I'll start really fast and then I'll turn it over to Gina. We see broad based growth in Wizards for the Q4. So If in kind of doing math camp on the numbers, I think you can get a general tone of cautiousness in our outlook Just given the unpredictability of the near term market. In terms of your detailed questions, Jason, I'll turn it over to Gina to take you through kind of how we're thinking about it?

Speaker 3

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 Q4. What isn't right is how you're thinking about Magic. So as Chris said, from a overall Wizards will be growing, Magic will be growing as well in the Q4.

Speaker 3

I think The pieces that you're probably not thinking through are some of the other businesses that are rolling up through. So D and D, I think, is down a tick in the 4th quarter. But overall, how you're modeling Baldur's Gate and Monopolygo is correct.

Speaker 7

Got it. Thank you. And then as a follow-up question, are you able to size up how much headwind you saw from destocking this year, in the consumer products business? And my thought there is just as we think about our models for next year, is there an embedded uplift to revenue in 2024, as you lap over some of this destocking? Or was the destocking that we saw Just a reflection of more of a return to normalcy because there was restocking in the first half or so of last year.

Speaker 7

Any color on that would be helpful.

Speaker 3

Yes, good question. And I think there's a little bit of both that We will talk just from a modeling standpoint. The one time, you're going to see a lot in Q4 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 one time 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 costs. So call that roughly a $50,000,000 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 offset all of that as we kind of reset into 2024, That's $50,000,000 I would call out as one time in nature for this

Speaker 7

year. Got it. And that sounds like that's on the cost side. Is there was there a revenue headwind from the destocking or we should we think about it more it really impacted on

Speaker 3

the call. Yes. I'm putting that somewhat in that $50,000,000 number. Yes.

Speaker 7

Okay. All right. That's helpful. Thank you.

Operator

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

Speaker 8

Yes. I guess maybe just a follow-up on that on the top line. So my given that quick math would suggest Maybe from that toy and game volume piece, it's a low double digit decline this year and similarly in the 4th quarter. So segment was changed as it relates to inventory destocking. And I know it's early, but how you're thinking about the puts and takes for That segment in terms of sales next year, presumably you get the planned exits back.

Speaker 8

Hopefully, we're not seeing any more inventory Management into next year. And so the wild card seems to be that toy and game volume line. So can you just help us understand maybe a little of how 4Q changed and what you get back next year?

Speaker 3

Sure. What we get back next year, I'm going to go back to the previous answer. $50,000,000 is really the number that I would put in your model of One time 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.

Speaker 3

So from a like Pure revenue standpoint, I would say, call it, 3 to 4 points of that is this acceleration. On the bottom line, it's $50,000,000

Speaker 8

Right. And 3 to 4 points is relative to the prior guide?

Speaker 3

No, to our updated guide.

Speaker 8

Right. Okay. Okay. That makes sense. And then for the cost savings, dollars 200,000,000 this year, I think you implied you could get to $300,000,000 next year.

Speaker 8

How much of that from a net perspective is flowing through to the bottom line this year? And what should we expect for next year?

Speaker 3

Well, I have to be too cheeky about it, but I think that in short, none of it is flowing to the bottom line this year, just given that it's all going to And move through the kind of the inventory line. So I would say there's 0 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. That's 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.

Speaker 3

But I mean, this year, it's all going to inventory.

Speaker 9

Okay.

Speaker 3

And we have I shouldn't I should also elaborate to say we are making investments in our growth initiatives. So some of it didn't go to invest behind 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. Yes,

Speaker 2

I would say it's about path for long term, path for short term. And Megan, I think as you think about it for next year, we'll be leaning in more and we actively are now. And I think you'll start seeing the flow through that probably in the later part of Q1 and building into Q2 and Q3.

Speaker 8

Okay, awesome. Really helpful. Thank you, both.

Operator

Our next questions come from the line of Steven Lasek with Goldman Sachs.

Speaker 9

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 Better progress. And if there's any potential upside to the $300,000,000 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.

Speaker 2

Sure. I'll defer to Gina first and then

Operator

I'll follow-up with digital. Okay.

Speaker 3

So on the cost saving side, I think we're making really good progress across our 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 of the 300, I'm not going to commit To a number right now in 2024, but I will commit to bullishness and our ability to kind of deliver and over deliver 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.

Speaker 3

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 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 flow in the early part of 2024.

Speaker 2

Yes. And Stephen on digital, a couple of things to note. So definitely there will be a long tail on And a multiyear long tail monopoly go. I think those 2 versus the $90,000,000 this year, we'll take a step back, but It's nowhere near 100% step back. You're probably talking maybe a 40% haircut on what we achieved this year, but Tailed out across 4 quarters.

Speaker 2

And then we have new deals in development all the time. So I consider digital licensing a very bullish case for Hasbro. There's a lot of demand for our IP And it's everything from integrations with Roblox and Minecraft to a variety of new mobile games and And then I think as you think about beyond 2024 into 2025 and beyond, I definitely think what Monopoly Go and D and D with Baldur's Gate has showed is there is a very, very demand from our fans for new digital content. We are seeing that in terms of our own internal studios and in the collaborations that we have. So Baldur's Gate 3 is not going to be a one off.

Speaker 2

There will be more great D and D style content And MONOPOLY GO, if it scales the way that I think it's scaling right now, that is going to be a very long lived And lucrative game for Scopely and Hasbro.

Speaker 9

Got it. And just to make sure I got the 2020 from this year. Is that correct?

Speaker 2

Yes, rough and tough. That would be a decent one to have.

Speaker 9

Okay, great. Thank you.

Operator

Our next questions are from the line of Arpine Kocharian with UBS. Please proceed with your question.

Speaker 10

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 Q4 and your consumer product 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.

Speaker 10

Does that imply Lower industry POS than the 10% we've seen so far, maybe a little bit worse into October. But

Operator

How

Speaker 10

are you taking share against that? That means the industry is 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.

Speaker 2

Well, I would say short term, we have a cautious outlook on the holiday. And I think anyone who says they know how the holiday is going to go, they must have a crystal ball Because this has been a tough one to predict. And that said, we're long term bullish on where toy is going to go. It's a resilient category And we definitely think it's going to come back. For the short term, given the unpredictability, we're taking a cautious outlook On our view of the market and in our view of our execution.

Speaker 2

We're leaning in. We're going to take advantage of opportunities as they present themselves. And we think we're going to build share as a result of that. But I don't think we have a real solid view on where the market is going to go other than It's going to be late breaking and heavily deal focused. And the nature of it being late breaking, I think is going to change the relationship between So I think replan is going to be on the later side of the holiday and likely if the holiday does better Then maybe what our cautious outlook says, that'll be a tailwind for Q1.

Speaker 10

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%.

Speaker 10

Could you talk through maybe 2024 margin puts and takes As we think over the next 12 months really?

Speaker 2

Yes, I'll give you a quick 22nd overview and then turn it over to Gino for the details. We see a pretty near term Snap back for our margins, given some of the short term investments we're making in the holiday to drive share and keep momentum going And some very solid benefits of both our operational excellence program in terms of our cost structure And simplification of exiting the majority of entertainment. So I think we maintain bullishness on our

Speaker 3

That come back to us next year. We also have the D and D impairment that if you remember, we took that in Q2 of last year. That was a material one time item that comes back to us. So there's just some kind of I would put that in the camp of accounting 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 it being laser focused on improving Profitability on toy, the kind of all the work on complexity, all of the work on the cost structure on overhead, etcetera, will

Operator

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

Speaker 11

Hey, thanks for taking my question.

Operator

Chris, I guess this question is probably for you because

Speaker 11

I think you were here when the game started. Licensing games from toys and movies isn't really anything new, but it feels like we're seeing bigger and better successes today. Just curious why you think that is and like what is Hasbro doing to enabling that? Thank you.

Speaker 2

Yes. No worries, Andrew. Yes, Baldur's Gate 3 was my first deal at Wizards of the Coast. I think I went out to Ghent and Had dinner with Sven at Larian 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.

Speaker 2

That's nice to see when you make a long term bet.

Operator

I

Speaker 2

Number 1 mobile game release of 2023, Baldur's Gate III, which I think is sitting at a 96 Metacritic 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. Turkana came up with a report that showed the biggest demographic of video gamers today Isn't sub-twenty 2 year olds. It's people 45 years and older.

Speaker 2

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.

Speaker 11

And then just as a follow-up, and I appreciate that answer. How do you how will you balance or try to balance You're well versed in games. These things aren't necessarily like the toy cycle, where it takes a lot longer and time and money. How do you kind of balance that with the traditional nature of Hasbro, which is trying to get everything ready for a particular holiday season?

Speaker 2

Well, I mean, we have 2 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.

Speaker 2

We're being realistic about it. We're investing so that we can create a runway for

Operator

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

Speaker 1

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately 2 hours and management's prepared remarks will also be posted on the Investor Relations portion of our website following this Thank you.

Operator

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

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Earnings Conference Call
Hasbro Q3 2023
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