Hasbro Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to Hasbro Second Quarter 20 24 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. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Operator

At this time, I'd like to turn the call over to Kern Kapoor, Senior Vice President of 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 Goedter, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, then we will take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non GAAP adjustments and non GAAP financial measures.

Speaker 1

Our call today will discuss certain adjusted measures, which exclude these non GAAP adjustments. A reconciliation of GAAP to non GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question and answer session that follows, members of Hasbro Management may make forward looking statements concerning management's expectations, goals, objectives and similar matters. 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.

Speaker 1

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 other public disclosures. We undertake no obligation to update any forward looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cox. Chris?

Speaker 2

Thanks, Kieran, 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.

Speaker 2

1 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 mega hits like MONOPOLY GO demonstrate 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 and multiple categories. And as we look at the business of play, it's clear that digital is here to stay and a bigger factor than ever and how successful toy and game companies will grow and strengthen their brands.

Speaker 2

We're years ahead of our peers, having already spent 100 of 1,000,000,000 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 kidults. Hasbro has 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.

Speaker 2

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 details shortly and I'll first offer some business highlights across gaming, licensing and toys. We had another solid quarter from The Gathering on the back of this year's blockbuster set release Modern Horizons 3. Facing a high bar with last year's Lord of the Rings Universe's Beyond set Modern Horizons 3 has had a strong start becoming the fastest selling set in Magic's history. While we expect a tougher comp in the back half for Magic following the strong first half and as we lap a greater number of releases last year, we're seeing good early interest in our first ten pole sets, Bloomboro, releasing next week.

Speaker 2

And then in 2025, we anticipate a return to growth for Magic driven by 2 universes beyond sets for Final Fantasy and Marvel that fans are already eagerly anticipating. Within D and D we're seeing solid pre orders for the 2024 core rules book for the revised and expanded 5th edition. D and D also shows how we're increasing digitization across our portfolio. Digital revenue already accounts for over half of the mix due to the success of D and D Beyond. Next week at Gen Con fans can expect to see more of our 3 d Roleplaying sandbox experience built on Unreal Engine 5 bringing Flair's favorite franchises to life across PC, console and mobile.

Speaker 2

We look forward to getting it in gamers hands later this year. D and D Beyond already represents our largest direct to consumer platform with 18,000,000 registered users. Along with Pulse, our destinations are exclusive collectibles across fan favorite brands like GI Joe and Star Wars, we see an opportunity to unlock more value across our Hasbro Direct business. Licensing was another standout in the quarter. Momentum and Monopoly Go from our partners at Scopely continued into Q2, accelerating our revenue recognition beyond the minimum guarantees and driving healthy upside to both revenue and operating profit.

Speaker 2

Since launch, the game has grossed over $3,000,000,000 in revenue, making Hasbro the top licenser of video games over the past year according to Aldora. The team continues to have an active pipeline of licensing opportunities across PC, console, mobile and casino leveraging our rich IP. In Q2, we announced a new arcade style game for Power Rangers with our partners at Digital Eclipse. And just this month, we kicked off a Transformers Overwatch 2 crossover. As we continue to invest in our digital gaming efforts both through partnerships and self publishing through our own studios, I'm excited that John Hite, former SVP and GM of the Warcraft franchise for Blizzard Entertainment is joining Hasbro as President of Wizards of the Coast.

Speaker 2

John is the last lifelong Magic and D and D fan and embodies Hasbro's mission to bring people together through play. Within consumer products licensing, we saw growth in the quarter helped by our new partnership with Kayo Collectible Trading Cards, building on the resurgence of My Little Pony in China. And Littlest Touch Shop's international appeal continues to grow. Rank as the number 2 growth property in playsets dolls and collectibles across the G10 according to Serkanah. We also launched several partner led Hasbro branded properties including a new Peppa Pig theme park in Germany as well as the Game Room and Planet Play School in New Jersey combining for 60,000 square foot of games and STEM based play experiences.

Speaker 2

Finally, turning to toys. As a reminder, we began the year expecting the first half for consumer products to look similar to last year's second half. Through Q2, we've landed where we thought we would and I'm encouraged by several early reads notably Beyblade. After a strong launch in Japan, we've begun rolling out Beyblade X globally. We've seen positive early demand with fans liking the streamlined brand assembly and new accelerator rail stadium that creates epic collisions.

Speaker 2

And in this year of lighter entertainment content, Hasbro is well positioned with the biggest movie for toys coming to theaters this September, TRANSFORMERS 1 with our partners at Paramount. We have strong retail alignment and healthy early demand for our fans to celebrate the brand's 40th anniversary. You can expect renewed innovations in some of our core toy properties as we head into back to school. Play Doh has shown strength all year and we've gained valuable insights from our digital marketing efforts in the spring that we'll be applying to the fall. We're expanding play styles with new launches like the 1st ride on pizza delivery scooter and aging up with Play Doh marble action figures in partnership with the Walt Disney Company.

Speaker 2

This fall we'll also be ramping our latest N series for Nerf, which features a proprietary Nerf Dart. Retailer support has been strong since last month's launch. Our people and culture are critical to the successes I've highlighted during this call. And so before I wrap up, I want to also welcome back Holli Barbacovi, an HR powerhouse who is bringing her pragmatic approach to HR back to Hasbro as our new Chief People Officer. To recap, it was a good quarter with solid performance and profitability led by our strength in games and licensing.

Speaker 2

Toys came in as expected and we see a path to growth in Q4 driven by innovation and strong alignment with our retail partners. We still have most of the year left to go and we'll be watching back to school closely, but our team's work is starting to make a real difference and we feel confident in taking our guidance up for the full year. I'd like to now turn over the call to Gina to share more about our detailed results and updated outlook. Gina?

Speaker 3

Thanks, Chris, and good morning, everyone. In Q2, we made further progress building a healthier foundation for Hasbro as we delivered better profits, moderated the pace of our revenue decline and continued to up level our internal processes and systems. I'm pleased with our team's execution in the first half as we continue to drive operational rigor across the company. Similar to Q1, we once again saw outperformance in digital licensing led by a material step up in contribution from MONOPOLY GO as the game's momentum allowed us to exceed a minimum guarantee sooner than expected. This, along with healthy growth in consumer product licensing, growth in Magic and another strong quarter from our supply chain team drove significant operating margin expansion.

Speaker 3

And while we still have more than half of the year left from a revenue contribution standpoint, we're doing a lot of the right things and are confident from where we sit today to take up our full year guidance. Our turnaround in toys is well underway. Q2 declined similar to Q1 as we had anticipated. And while Q3 in the back to school selling season will be an important gauge, we're entering the second half with clean retail inventory and are seeing encouraging demand signals for our planned innovation. And by putting the right underlying demand and supply planning processes and systems in place, we've been able to bring aged inventory down to historic lows, while ensuring we have suitable inventory levels to support sell through for the holidays.

Speaker 3

We've also improved our end to end planning capabilities to better align where we source inventory with customer demand. In the first half of this year, we've already had some major wins from our supply chain team. And with that, I'd like to acknowledge Stephanie Beal, who has been instrumental to this transformation and congratulate her on becoming our new Chief Supply Chain Officer. Integrated Business Planning plays an important role as we transform Hasbro into a more profitable and operationally agile company. After the first couple of quarters of implementation, we're seeing greater information flow and faster decision making, which is starting to show up in our results.

Speaker 3

And just like we're focused on digitization across play patterns, we're also enhancing our digital operations to ensure we're running as efficiently as possible and is why I'm excited to welcome Dan Shull as our new Chief Digital Information Officer. Dan brings a wealth of Fortune 500 experience and will steer our digital and IT strategy using cutting edge technology to enhance collaboration, accelerate data analytics and modernize our infrastructure. Now moving on to Q2 financial results. Total Hasbro revenue was $995,000,000 down 18% versus Q2 of last year. If you exclude the impact of the E1 divestiture, total revenue was down 6%.

Speaker 3

Growth of 20% in our Wizards of the Coast segment, led by Magic and Licensed Digital Games, was more than offset by the 20% decline in consumer products driven by lower closeout volume, reduced entertainment slate and exited brands. The entertainment segment declined 90% due to the sale of the E1 film and TV business. Absent this impact, entertainment revenue decreased 30% driven by timing. Adjusted operating profit was $249,000,000 for an adjusted operating margin of 25%, up nearly 14 points year on year. This substantial improvement was driven by favorable business mix, lower royalty expense, supply chain productivity savings, the EveONE divestiture and about a 2.5 point benefit from lapping the D and D movie impairment.

Speaker 3

Q2 adjusted net earnings were $170,000,000 with diluted earnings per share of $1.22 up from $0.49 in the year ago period, driven by the items noted as well as reduced net interest expense and favorable timing within tax. We returned $97,000,000 to shareholders through the dividend and ended the period with $1,100,000,000 of cash and short term investments following May's completion of a $500,000,000 debt offering of notes. The proceeds from the issuance are expected to be used to repay our November 2024 bond maturity. Year to date, total Hasbro revenue was $1,750,000,000 down 21% versus the same period last year. If you exclude the impact of the E1 divestiture, total revenue was down 7% versus a year ago.

Speaker 3

Growth of 15% in our Wizards of the Code segment was more than offset by the 20% decline in Consumer Products and the 87% decline in the Entertainment segment due to the sale of the E1 Film and TV business. Absent Film and TV, the Entertainment segment is relatively flat. Year to date adjusted operating profit was $397,000,000 for an adjusted operating margin of 22.7 percent, up over 14 points year over year, mostly driven by cost savings from our operational excellence program as well as favorable business mix and the E1 divestiture. In aggregate, we were able to deliver significant margin improvement despite the ongoing volume deleverage across our toy business. Year to date adjusted net earnings were $255,000,000 with diluted earnings per share of $1.83 driven by the improvement in operating profit as well as favorability from a stock compensation adjustment and net interest expense reduction.

Speaker 3

Operating cash flow was $365,000,000 year to date, a $246,000,000 improvement year over year, driven by the profitability improvement, timing of digital licensing collections as well as the shift in timing of a transition tax payment to Q3. Now let's look at our 2 major segments in more detail, starting with Wizards of the Coast and Digital Gaming. Q2 revenue grew 20% year over year, largely behind strength in digital licensing led by MONOPOLY GO and to a lesser extent continued contribution from Baldur's Gate 3. Last quarter, we discussed there could be the ability to book above the minimum guarantee sooner than originally planned. Due to the game's momentum, we were able to earn approximately $35,000,000 above the minimum guarantee of $5,000,000 in the quarter.

Speaker 3

Segment revenue also benefited from growth in Magic Tabletop behind the successful release of Modern Horizons 3 as well as early shipments for next week's tent pole set, Loomboro, both of which more than offset last year's Q2 contribution from Lord of the Rings. Digital Gaming revenue also saw a roughly $20,000,000 non cash benefit from a publishing contract with an international partner. Operating margin for Wizards finished at 54.7%, up nearly 17 points versus last year, mainly driven by a richer digital mix, supply chain productivity gains and lower royalty expenses as we lap last year's Magic Lord of the Rings set. Turning to Consumer Products. Q2 revenue declined 20% year over year driven by reduced closeout volume, exited brands and lapping entertainment slate, including last year's Rise of the Beast.

Speaker 3

Consumer product licensing was a bright spot driven by our partnership with My Little Pony and Kayo Trading Cards. Furby and the continued momentum at Furblitz, GI Joe and Play Doh also performed well within toys, while NERF continued to see softness ahead of the back half innovation launch. Adjusted operating margin for Consumer Products came in roughly breakeven, down about 3.5 points compared to last year. Cost savings and the benefit from lower unprofitable closeouts were offset by product mix and volume deleverage. As anticipated, there was also approximately $10,000,000 of operating income attributed to the segment as we reallocated cost savings captured within the corporate segment back to CP.

Speaker 3

On a year to date basis, despite a revenue decline of 20%, segment operating margin declined by only 3 points year on year as we were able to significantly mitigate the deleverage impact by reducing our cost footprint across supply chain and within operating expenses. Now turning to our updated guidance for 2024. Given the strong performance in the first half, we are raising our guidance for the full year, and we now expect total Wizards revenue to be down 1% to 3%, up from our prior guidance of down 3% to 5%, driven by the first half outperformance in digital licensing. For the full year, MONOPOLY GO will generate roughly $105,000,000 in revenue. This outlook assumes a modest monthly gross revenue decay rate for the game and consistent marketing support.

Speaker 3

For Baldur's Gate III, we now anticipate roughly $30,000,000 for the full year with the bulk of that revenue having been recorded in the first half. With all of these puts and takes, digital licensing will be down in Q3 as we lap the launch of Baldur's Gate III, and we anticipate Q4 to be relatively flat versus last year. For Magic, we expect some contraction in the second half due to the timing of set releases. While Modern Horizons 3 successfully lapped the initial release of Lord of the Rings, it will not have a comparison launch for last year's holiday bundle. We now forecast Wizards operating margin to be approximately 42%, up from our prior guidance of 38% to 40%, driven by the increased mix of digital licensing revenue.

Speaker 3

For Consumer Products, keeping in mind that a big part of the year is ahead of us, we expect revenue will be down 7% to 11%, up slightly from our prior guidance range of down 7% to 12%. This narrowing is driven by encouraging early demand signals and retailer support for our back half product innovation, specifically Beyblade, PLAY DOH and TRANSFORMERS ahead of the major animated film TRANSFORMERS 1 in September. We are forecasting a low single digit decline in Q3 before flipping to growth in Q4 with the impact from our divested brands continuing to be a headwind. We maintain our adjusted operating margin guidance of 4% to 6% for consumer products. Margins in Q3 will be relatively flat versus last year, followed by significant expansion in Q4 as we lap the impact of the inventory cleanup.

Speaker 3

For Entertainment, adjusting for the impact of the E1 divestiture, we continue to expect revenue to be down approximately $15,000,000 versus last year and adjusted operating margin of roughly 60%. We remain on track towards our target of $750,000,000 of gross cost savings by 2025 and continue to expect $200,000,000 to $250,000,000 of net cost savings in 2024. Through the first half of the year, we have delivered $150,000,000 of gross cost savings and $90,000,000 of net savings. With the increased revenue outlook and greater profitability in Wizards, we now expect total Hasbro adjusted EBITDA in the range of $975,000,000 to 1.25 dollars up from our prior year guidance of $925,000,000 to $1,000,000,000 Given the improvement in our cash flow, we now expect 2024 ending cash to be at roughly similar levels versus 2023. And from a capital allocation standpoint, our priorities remain to 1st, invest behind the core business second, is to return cash to shareholders via the dividend and third, to continue progressing towards our long term leverage targets and pay down debt.

Speaker 3

And with that, we can open the line for questions.

Operator

Thank you. And at this time, we will be conducting a question and answer Our first question comes from the line of Eric Handler with ROTH Capital. Please proceed with your question.

Speaker 4

Good morning. Thanks for the question. Chris, what if you could talk a little bit big picture for Wizards, your recent hiring of John Hite to take over from Cynthia, obviously a huge video games background for him at Blizzard. You now have 4 people on your board with video games background. Can you talk about how you're thinking about internal development of video games and what you're willing to commit to capital for that business?

Speaker 2

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 and Conquer.

Speaker 2

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 hardcore 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 James Kirschen who was in charge of the Batman: Arkham series at Warner Brothers, James Olin who was the Head of Creative and Design at BioWare, responsible for the 1st Baldur's Gate, Neverwinter Nights, Mass Effect. We're going all in on becoming a digital play company. I think Gene has talked a lot about the kind of the capital that we've invested. I think roughly our capital envelope is about $250,000,000 a year, about half of that is going into digital games.

Speaker 2

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 or 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 lineup of licensed games, market or in development.

Speaker 2

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

Speaker 3

Hey, Eric, this is Janet. Eric, I just have one point of clarification just so that folks grab it as we talk about the capital. So that $250,000,000 number that Chris quoted is for the entire company. And as you said, about half of that is going against these games. That is probably the right run rate as we take it forward here.

Speaker 3

So I just I do want people to go online to the 250,000,000 dollars That's representative of the whole company.

Speaker 4

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 what's happening there and how the supply chain is working for shipping?

Speaker 3

Yes, great question. I would say, as we move through Q2, we saw very smooth shipments with our DI. We didn't really see any sort of volatility or bumps in movement of goods with DI. And we're not anticipating a significant impact as we move through Q3 and Q4. Obviously, we're watching the tightening that we're seeing in some of the spot markets, but again, we're contracted out.

Speaker 3

We feel really good about our ability to access inventory and we're feeling confident about our ability to get it on shelf in time for the holidays.

Operator

Thank you.

Speaker 2

You're welcome. Thanks, Eric.

Operator

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

Speaker 5

Hey, good morning. Thanks so much. I wanted to just dig into the guidance rates, if I could. So maybe a couple of part question and happy to repeat anything if it doesn't make sense. But you raised, I think, by call it $35,000,000 at the mid point, give or take.

Speaker 5

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, was 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 Q2. So if there's any way to quantify that and how that flows through to the guidance, that would be helpful as well.

Speaker 5

Thank you.

Speaker 3

Sure. Absolutely. Good morning, Megan. So as we think about the overall guide, I think you've got the simple way in terms of the upside from Monopoly Go really just translating all the way down to our EBITDA update. That's the primary driver of the raise.

Speaker 3

I mean, obviously, the margin is richer. We're feeling a little bit more bullish on the consumer product side, but that's the main headline. In terms Magic performance, specifically within the quarter, yes, it is doing better than we had expected. Really that Modern Horizons 3 has proven to be a fair comp against Lord of the Rings within the quarter. That was a positive.

Speaker 3

In terms of the contract, it was roughly $20,000,000 of benefit that came in. We're calling it out because it was $20,000,000 It's a normal course of business. We have those same kind of puts and takes. You just heard Chris talk about all of the number of deals and partnerships that we have in the works. So over the course of the year, it will prove to be immaterial.

Speaker 3

But for this quarter, it was a big revenue gain.

Speaker 5

Got it. Okay, that's helpful. And then maybe if I could just dig in on MonopolyGo a bit. Again, it seems like $5,000,000 minimum guarantee, you got $35,000,000 I think if I'm doing my math right, there's maybe $65,000,000 implied in the back half. So a little bit of a step down on a quarterly basis, but I think is in line with the way you were thinking about it to start the year.

Speaker 5

So it 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's marketing investment and how you're thinking about the second half and whether that's changed at all?

Speaker 3

Yes, good question. Yes, let's level set on the math. For the first half of the year, we had $45,000,000 of revenue book into our P and L. So $5,000,000 was just the minimum guarantee that came into Q1 and then we had $40,000,000 in Q2. So $35,000,000 was that over delivery and then $5,000,000 was the minimum guarantee.

Speaker 3

What's modeled in our back half then is $60,000,000 And to your point, it is a step down from what we saw play through in Q2. So as we thought about our modeling, in the back half, we're thinking of the decay rate, that monthly decay rate of, call it, 3% to 5% and consistent marketing is what I think I've said in my prepared remarks. That consistent marketing can range anywhere from, call it, 25% up to 35%. And to your point of what we have seen Scopely do as we move through the first half is kind of within that range. Obviously, those two pieces, the decay rate and the marketing are variables that we don't control.

Speaker 3

I mean, we kind of understand where Scopely is headed with marketing, but ultimately, it is their decision in terms of how much they spend and at what end of that range. But for us, as we thought about the modeling, we know that Monopoly Go is going to be a material contributor to our P and L this year and for many years to come. So as we thought about it, we just didn't really want to get out over our skis in terms of the forecast. I mean, all of you are looking at the same data that we are almost at the same time. And so as you what we're watching the Sensor Tower data play through in the last couple of months, it was a little bit bumpy when it came to the decay rate.

Speaker 3

So we absolutely kind of took that into consideration as we were modeling the back half of the year. So as we go, I mean, the thing that we'll remain committed on is being super transparent about the assumptions both around decay rate and marketing, so that we can all stay on the same page of what we're expecting for this year and as we head into 2025.

Speaker 2

Yes. I think the only thing I'd add, Megan, is seasonality. We don't quite understand yet on the game. So if we're being if we're erring 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.

Speaker 2

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.

Speaker 5

That's really helpful. Thanks so much.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from the line of Hartaj Kotharian with UBS. Please proceed with your question.

Speaker 2

Hi, Peter. Thanks for taking

Speaker 6

my question. Hi, good morning. Good morning.

Speaker 2

Good morning. Good

Speaker 6

morning. Congratulations. Thank you. Has anything changed in your outlook? And thank you for the answers to the initial questions that answered Punjabi question.

Speaker 6

So I was just wondering, has anything changed in your outlook for Magic: The Gathering underlying business if we were to exclude, obviously, the digital aspects of puts and takes for the back half? In terms of today's guidance revision, is there any change in the underlying outlook either towards better or slightly worse as it relates to the analog part of the business? And then I have a quick follow-up.

Speaker 2

No. I mean the analog part of the business is doing better than I think we would have expected. It was up around 5% for Wizards in the first half of the year. When you look at the toy category as a whole, it's really magic and Lego that I think are outperforming and really kind of driving the over performance in the category trading card games and building sets. And we don't see a reason for that to abate in the second half of the year.

Speaker 2

I think when we think about Magic, we think a little bit about what the release cadence looks like. It's going to be lighter this year than it was last year. And we look at the quality of the sets and we think those are very strong. If you just look at preorders for Bloomborough on Amazon dotcom and look at the new release chart of the top performers, it's one of the best performing sets we've seen for Magic in several years. So we're pretty bullish on that.

Speaker 2

I think the second half is going to be lighter this year than it was last year just because of the release cadence. But I think you're going to see a nice uptick in 2025 with a really stacked lineup that we have starting relatively early in the year with Final Fantasy and I think having a nice code into that with our first Marvel release.

Speaker 6

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 nuanced shift to kind of Hasbro being a games company that's making toys 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, right, due to the strength of that franchise that really essentially stand from a traditional toy. How does longer term kind of departure from traditional toys position Hasbro to continue to win in digital?

Speaker 6

I'm not sure if my question makes sense, but it's a very sort of long term big picture question.

Speaker 2

No, I think I get the crux of where you're going and Gina might want to opine as well. When I talk about games, IP and toys being the core of Hasbro, What I really mean is that's what I think a healthy, great modern toy company is ultimately going to become. So it's about skating to where the puck is going as opposed to where the puck has been. I think physical products, kids will always be important. But when you look at what the megatrends are inside of the business of play, play is aging up, play is going more international, It's going more digital.

Speaker 2

It's going more direct. And partners are becoming more and more important to be able to extend brands into additional aisles, whether that's the toy category or outside of the toy category and additional experiences. And I think our strategy is all in across each of those. We still have a bit of turnaround work to do on our core toy business. We've been losing some volume on that for the last couple of several quarters.

Speaker 2

But I feel good about how we're getting our arms wrapped around that, particularly the cost side. I think you're going to see that core toy business, start to get to growth in the later stages of Q3 and more decisively in Q4 and 2025. But when I look at the cards that Hasbro has and I look at where the megatrends are in terms of the business of play, I feel really good about how we're positioned and what the long term prospects for the company is.

Speaker 6

Thank you.

Speaker 3

Matt, can I add just to build, because I think that was an excellent setup? We all owe you a broader conversation about where we're headed and to come in the New Year will be an Investor Day where we'll sit down and talk through all of this, because our strategy is shifting, as you heard Per say, and it's following the growth trends, which follow the profit and the business models too. So I mean, you can see a play through in our results where we're headed is a much more profitable place as we're leaning into games and IP. And then all of the effort that we're making on the toy turnaround, our focus there is really on getting back to profitability and getting back to growing share in the categories with where we're competing. So I think our IP, our businesses, our brands are set up very well for where we're headed.

Speaker 6

Thank you both. Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Horvers with JPMorgan Chase and Company. Please proceed with your question.

Speaker 7

Thanks and good morning. So my first question is, can you talk about the headwind that the Trans performers Movie Lap presented here in the Q2 and also the exit in business headwind as we try to tease out what the underlying business trend is in the consumer products business? And then bridge that to your assumption for the inflection ahead in the 3rd Q4 and perhaps reconcile that back to what you're seeing on the POS side?

Speaker 2

Chris, I'll give like the I'll give the English major answer and then you'll get the quant answer from Gina Good morning by the way. So in second half, Q2 of last year, we had quite a number of releases both from our partners at Disney as well as the Transformers movie. And Transformers POS was up something like 90% in Q2 of 2023. It's down a bit this year. It's down like 5% or 6 percent through the first half of the year, which is remarkable because we haven't had a lot of content since that movie.

Speaker 2

So we see a surge in TRANSFORMERS POS likely starting in the August, September timeframe going into Q4 around the release of TRANSFORMERS 1. Every indication we have from early screenings and tracking is that that movie is going to be a real fan favorite with some nice legs into families. We think it will sell a lot of toys as Transformers movies tend to have done. And then we like also the back half of the year in terms of new content that we have for Beyblade. Deadpool and Wolverine is shaping up to be a nice big movie.

Speaker 2

I don't think we're going to be selling a lot of preschool product for that, but certainly there's a nice collectors business associated with it. And so when we think about Q3 and we think about growth, we see that entertainment window kind of popping up in the September timeframe and extending into Q4. And then a lot of the new resets that we did in Q2 for things like NERF and for things like Beyblade, you'll really start to see the impact of those in August September as the Fed start to roll out past like some initial quantities in 100 or a couple of 100 stores to several 1,000 stores.

Speaker 3

Got it. And now for the math answer, not being English,

Speaker 2

but good

Speaker 3

answer. Good morning. So as we think specifically about what's 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. Q1, they were down about 50%.

Speaker 3

Q2, we were down 57%. So, perch shipments helped margins. So that we're okay with that trade offs. And then the second piece that you asked about was the exited businesses. So that in the quarter represented about 3 points to 4 points of the decline.

Speaker 3

And that's going to carry with us into the back half of the year. So in aggregate, the whole year, think about 3 points to 4 points still coming from those divested businesses or exited businesses.

Speaker 7

So my good segue. So I'm trying to think about the underlying gross margin rate as the business as it currently looks today. Obviously, mix going forward in Magic and Digital Games could be additive to this. But if we just simply back out the effect of the Go step up, the $35,000,000 it looks like you're running a 73 ish kind of underlying gross margin rate. And obviously, there's more cost savings to come.

Speaker 7

So you maybe share any thoughts about where that is now and how that is that right and how that grows over time?

Speaker 3

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 kind of 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.

Speaker 3

And then as we move into 2025 and 26, we're going to have all of the benefit of kind of a refined mix plus a much, much healthier kind of below the line cost structure.

Speaker 7

Got it. Thank you very much.

Speaker 3

You're welcome.

Operator

Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question.

Speaker 8

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?

Speaker 8

Now what are the kind of impediments to achieving that stated target earlier?

Speaker 3

We were wondering who is going to ask that question. So Drew, you win, you win the gold star. Okay. So for your question on the year to go on Wizards, it all comes down to Baldur's Gate. That's really the single biggest driver of what we're lapping.

Speaker 3

Just think about the revenue contribution last year, it was very, very centralized in Q3. And while Monopoly Go is going to be a good contributor for us in the back half, it's not going to completely offset the impact from Baldur's Gate or as modeled as what's in our guidance today. So that's what causes the drag on margin in the back half for Wizards.

Speaker 2

And the Letter Magic schedule.

Speaker 3

Yes, Letter, yes. But the end of the really big one is going to be that Balters Gate. In terms of what getting to the 20%, I mean, we are within striking distance of getting there this year. I know that you can all do the math and see that. There's really 2 things as we think about crossing that threshold.

Speaker 3

One is Monopoly Go. So if that does contribute more than that $105,000,000 that will take us over. The other thing is CP. So we still have a range in margin on the CP and the range on the revenue. If we are able to kind of finish on the better end of both of those ranges, that will also help to get us there.

Speaker 3

But we are making really good progress. At this point, I'm not going to commit to any more cost savings. I feel like we've got the right cost savings number, net cost savings number for the year of that $200,000,000 to $250,000,000 But if Monopoly Go continues to be better than what we are modeling and is in our guidance now and CP performs a bit better, yes, we could absolutely get there before 2027.

Speaker 8

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?

Speaker 8

And if so, where do you see toy sales shaking out for the industry in 2024? Thanks.

Speaker 2

Sure. Good morning. Two things. So yes, toy sales are doing better in the first half of the year. That's really driven by building sets and trading card games.

Speaker 2

So I give a lot of credit to Lego and Magic: The Gathering frankly for really understanding their consumers and driving upside with what I think is the fastest growing segment inside of the business of play, which is consumers 13 plus and really 18 plus when you think about Magic and what Lego has been doing. When you look at the balance of the industry, it's roughly performing what I think us and a lot of the industry prognosticators and our peers in the industry thought. And we see that roughly carrying into the back half. So when we think about our guidance for toys, call it down high single digits when you kind of take the median of what we're saying. We're factoring in both the exited businesses, what we think will be a toy industry, which will be down kind of in that mid single digits range, but starting to hopefully improve a bit in the back half and the category tailwinds we saw in building blocks and TCG potentially growing a bit for more categories.

Speaker 2

A lot of ours is a lot of our guidance though isn't really based on the industry, it's based on our execution and the retailer support we have.

Speaker 8

Got it. Thanks guys.

Speaker 3

Thanks. Thank you.

Operator

Thank you. Our next question comes from the line of Alex Barry with Bank of America. Please proceed with your question.

Speaker 9

Hi, thanks for taking my questions and congrats on a great quarter here. I wanted 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 time 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? Thanks.

Speaker 2

Yes, sure. So Modern Horizons did get out the gates really fast. A lot of collector heavy sets like formats like Modern Horizons appeals do. And we think it will have a very, very long tail. When you looked at Modern Horizons 2, we were continuing to sell cards for that 30 months into its run.

Speaker 2

So we expect Modern Horizons 3 to if not be our best selling set of all time, which is currently held by Lord of the Rings to certainly be a contender for it. I think the difference with it is going to be the timeline. Lord of the Rings had a major set release in June and then kind of a minor photo to it in December, which allowed it to hit $200,000,000 really fast. Modern Horizons 3 has a big set release and then a bunch of reprints which will span out over a couple of years. So I don't think we're going to get the same oomph that we did from Lord of the Rings in Q4 from modern horizons like we did last year.

Speaker 2

But I think we'll have a nice fatter tail going into 20 25 and potentially 2026 from a product like that.

Speaker 3

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

Speaker 9

Incredibly helpful. Thanks for clarity there. And then just digging in on consumer products, I just wanted to ask sort of what signs of green shoots are most encouraging in consumer products? I guess what toys and properties are you most excited for in the back half? And can you give us any early reads on Beyblade specifically, sort of any channel commentary you're getting there?

Speaker 9

Thank you.

Speaker 2

Well, I think you stole my top green shoot with just mentioning Beyblade. Beyblade X is performing well in some early out in select markets. It's probably the best performing Beyblade release we've ever had in the UK. 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.

Speaker 2

S, it's selling out and selling out very quickly. Our belief is Beyblade X will be one of the top new toys or refresh toys of 2024 and could actually claim 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.

Speaker 2

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 and Q4 with Transformers 1. And then D and 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 and D refresh to the core rules of 5th edition is going out the gate strong. Preorders are breaking any records that we have.

Speaker 2

It's exceeding our forecast. Now that will help a bit in Q3 and Q4 when some of the products release, but some of those 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.

Speaker 3

And Alex, the one ad I'd have not brand and product related per se, but it is a positive that we continue to trend well on inventory, both our own inventory as well as retail inventory. So retail inventory was I think down again about 18%, 20% within the quarter. So we're sitting at super healthy levels as we head into the holidays.

Speaker 9

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

Speaker 3

Thanks. Thanks. Thanks. Back soon.

Operator

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

Speaker 10

Hey, guys. Good morning. Just to stick on the consumer products business. I know in the past you'd sort of hinted that that could reach 10% or double digit target that you've talked about in 4Q. I'm wondering if you could just give us an update on how realistic that is and maybe what the biggest swing factor is.

Speaker 10

Is it really POS? Is it a matter of maybe cost saves hitting sooner? What sort of gets you there or potentially gets you there?

Speaker 3

In Q4 specifically, Fred, is that your question?

Speaker 10

Yes. For 4Q this year. Yes.

Speaker 3

Got it. Yes. No, we do anticipate it getting to that 10% level in Q4. It really comes down to the leverage and the volume. So that right, as we've talked about, that's been the single biggest drag on the margin as we move to the front half of the year.

Speaker 3

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 it 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 than that 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 2025 and 2026, getting the entire year for CP to have 2 digits.

Speaker 10

Makes sense. And then given the momentum in digital, given the momentum with some of the lower cost price points you've talked about in consumer products, can you just give us an update on how you view some of the bigger licenses in the consumer space being a part of the Hasbro story going forward? Do you think that you still need to have some of these master licenses? Or do you feel like there's enough that you can sort of do outside of those bigger tent poles to get the consumer products business where you need it to be?

Speaker 2

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.

Speaker 2

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.

Speaker 10

Great. Thanks a lot.

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 line at this time. Thank you for your participation.

Remove Ads
Powered by Quartr
Earnings Conference Call
Hasbro Q2 2024
00:00 / 00:00
Remove Ads