Good morning, and welcome to the Hasbro Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations.

Please go ahead..

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Deb 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. 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. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures.

Today's guidance assumes we retain the noncore entertainment, Film & TV business, notwithstanding the current marketing process. While there is no guarantee of such an outcome, if this process results in a sale, we will update our guidance.

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 Cocks.

Chris?.

Honor Among Thieves; and AAA video game, Baldur's Gate 3, from our partners at Larian later this year. Over the next 12 months, we will share more about some of the innovation we have coming to market in 2024 and beyond.

To give you a sense of a few, in creativity, we see an amazing opportunity to grow that market and maintain audiences as they age up with new, innovative, character-centric and story-based play.

In video games, we are excited to reveal an all-new sci-fi IP from Archetype Studios in Austin that we believe will be one of Hasbro's biggest in over 20 years.

Selfie Series, our new custom action figure line gives a glimpse of the possible and Hasbro's early leadership investments in high-fidelity custom 3D printing, which has a long-term potential to introduce the concept of mass customization for toys and collectibles.

In traditional role play, we see exciting possibilities in all new virtual table tops that unlock new consumer value choices, bring imaginations to life, taps into the scale effects of user-generated content and create seamless remote and in-play play possibilities across phones, PCs and tablets with AAA graphics and intuitive controls.

And last but not least, we have some fun new twists on old favorites that will delight new generations of fans and introduce amazing new low price points supported by magical play innovation.

As we think beyond 2023, our focus remains on growing more of our franchise brands to $1 billion businesses, extending our blueprints through partnerships, content and new digital experiences and driving significant bottom line and margin growth through a more focused, agile and leaner organization.

In the near term, we will execute our focus category and inventory reduction plans to grow share, transform our organization and cost structure to drive innovation and improve margins and continue to invest in new categories, competencies and partnerships to set up Hasbro for robust long-term growth as we celebrate our 100th anniversary in 2023.

I'll now turn the call over to Deb Thomas, Hasbro's Chief Financial Officer.

Deb?.

Honor Among Thieves premiers in March. We co-funded this film with Paramount and will participate in the box office and associated entertainment revenues. Based on our share of box office, we expect entertainment revenue to begin being recognized in late Q3 and Q4 of this year. We expect the majority of the related cash receipts to occur in 2024.

As we look ahead, the sales process for select Film & TV entertainment assets is ongoing. And the outcome will inform our long-term financials. We continue to anticipate growing revenue at a mid-single-digit CAGR and improving operating margins to 20% and potentially greater level in 2027.

I couldn't be prouder of the work and dedication our teams have put into the business this past year. In the past several years, it's been dynamic, but they never shy away from a challenge.

And while the year didn't end as we had planned, the Blueprint 2.0 strategy is in place, our teams are aligned behind us, and we're well along the path of executing that plan. Before I close, since we last spoke in October, I announced my plans to retire from Hasbro.

I remain committed to this company and team and will stay until my successor is in place and there's an orderly transition. During my time at Hasbro, we've accomplished more than I could have imagined. And I know this company has even more amazing accomplishments ahead of it. Thank you for your partnership and support of Hasbro all these years.

It's a hard decision, but I am confident that Hasbro is in good hands. We are now happy to take your questions..

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

So down 20% in the first half means that back half needs to be up mid-single digits for the year -- for the second half. I guess, what visibility do you have on that 5% to 6% growth in the second half? And does that include any assumption for a recession or not particularly sort of steady-state macro picture? And then I have a quick follow-up..

No worries. Yes. So we look at the first half, we look at a couple of different factors. The first is we see -- we saw a difficult Q4 in the consumer discretionary sector as a whole and in toys and games, in particular.

We would anticipate that, that's going to continue in Q1 and Q2 and potentially roll into at least part of Q3 as well before starting to normalize in Q4 back to a more traditional growth level. So that's one set of headwinds that we factored in. The other one that we're looking at is 2021 had historically an unusual sales pattern with it.

Retailers were buying much earlier in the year. We were playing catch-up from 2020, particularly in Q1, in terms of fulfilling orders, and we don't see that happening this time. Actually, we see retail inventory not unhealthy but still having a little bit of an overhang given the slowing consumer demand that we saw in Q4.

So we see kind of demand starting to normalize, I think something like -- we were something like 57% of our sales for second half last year. And this year, we probably see that in the 60% to 65% range, which is more historically normal for 2019 and before. So that has something at play.

And then we just look at our overall release calendar across Wizards of the Coast, across our entertainment segment and across consumer products. And we have a pretty exciting Q3 in terms of new products across all of them and a lot of entertainment that's going to be coming out in Q2 and having a nice kind of halo effect into Q3 and Q4.

So that's kind of what informed our overall quarterly mix and half mix and some of the assumptions we made in it.

Deb, do you have anything to add?.

Yes. No, I would just agree, Chris. I think we see 2022 was a bit of an anomaly in the order pattern early in the year. And we do expect to get back to those historical shipment patterns. We think retailers will closer to the holiday season, that's typical, and we also see that in our business. And with all the entertainment, we're really excited. .

Great. Arpine, you had a follow-up..

Yes. This is super helpful, perhaps partially answers my second question, but I'm still going to ask this because I've been getting a lot of feedback from investors as well on this sort of math.

So I'm calculating about 5 percentage points of revenue headwind from just giving up the Disney Princess and Frozen license for the consumer product mix, plus you have about 3 points to 4 points of inventory overhang. And you're guiding to that segment, Consumer Products business, to be down mid-single digit.

Could you just walk us through what is growing to offset that 4 points of overhang? I think you had a good rundown on some of the TRANSFORMERS stuff, obviously, D&D.

And also while we are added, could you give us a sense where the D&D merchandise is going to be reported? Is this going to be -- is there anything in Consumer Products? Or all of that is going to be within the Wizard segment?.

Young Jedi Adventures. We think that's going to be an amazing show and a super compelling product line that will come out later this year. In games, when you look at our games portfolio, we feel pretty good about the innovation we have there.

We just came back from Nuremberg Toy Fair, got great feedback on Twister Air, a really strong feedback on CLUE and kind of the balance of the line. So we're feeling good about the innovation there. And then certainly, Wizards of the Coast, continues to crank out really strong products.

Phyrexia, our latest Phyrexia set is doing quite well out of the gates. Early on in Q1, Dominaria Remastered was our January set release and that sold very, very well. So we feel good about the fundamentals of MAGIC.

D&D continues to grow at pace, and we have a fantastic entertainment lineup there and really starting to build out the four quadrant nature of our products across that lineup.

And then we have several new products that we've talked about in certain toy fairs and with retailers that we haven't yet had a chance to announce yet, but I think people will be pretty pleased with those. And the retailer reaction that we're getting I think, indicates some incremental growth vectors that we'll talk about more later this year.

Deb, anything to add?.

Yes. I would just -- just to comment on the D&D. We will see some revenue coming through our Consumer Products division as well as Wizards of the Coast.

And as I commented earlier, from an entertainment standpoint, based on when the movie is released and our share of the box office, we expect to see that later in the year, maybe some in the third quarter, probably more in the fourth quarter. And the cash that's associated with that will come really in 2024 in a meaningful way.

But we're very excited about that release. So Arpine, that's the first thing you're going to see traveling through the Blueprint.

And well, it's a great brand, and we're very excited, and we're looking forward to bringing more fans into this brand who can really enjoy it for years to come because it is a great brand that can be enjoyed by people of all ages..

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

First, with regards to Wizards of the Coast, do you expect MAGIC to grow in 2022? And then as we think about the cadence, I imagine it will look a little bit different than Consumer Products, I would think your toughest comp for MAGIC is in the fourth quarter, your easiest comp is in the third quarter.

I'm not sure how to think about the first half of the year..

Sure. Eric, yes, I think the question was will it grow in 2023. It grew pretty well in 2022. Yes, we expect MAGIC to grow. I think the growth will be a bit moderated versus what we saw in prior years. We're taking some of the feedback to heart.

We had some supply chain issues last year, which forced us to compress our release schedules, particularly in October of this year due to a couple of releases slipping from April and August into October along with our regularly scheduled releases. We're going to be spacing those out in a more even basis.

We think we've got to handle on all the supply chain issues that we had with paper stock and local paper production. So that will change the nature of what our revenue distribution is by quarter. In general, I think we expect MAGIC and Wizards to have a good Q1.

Q2 is actually our toughest comp of the year, and we think that will actually be down just given the nature of moving some releases around. Q3 should be a very strong quarter. And actually, we think Q4 will be a pretty solid quarter as well when you look across the Wizards business..

Great. And then just as a follow-up to that. When you look at MAGIC and the vectors for growth, you have a very full release slate, you pulled a lot of levers there.

So is the growth for MAGIC now pretty much just predicated on expanding the player base? And what do you do to keep that player base growing?.

THE GATHERING. And we think it's a great opportunity for Lord of The Rings to introduce them to our fan base and help kind of grow their business. And an awesome opportunity to introduce Lord of the Rings fans who love Fantasy into a deep strategic game like MAGIC.

So I think that will be both an opportunity to attract new fans and also add some collector surprises as well for our existing fans..

Our next questions come from the line of Megan Alexander with JPMorgan..

Maybe just ask Arpine's question in a little bit of a different way.

So is the $300 million that you cited in brand exits and market exits, is that all in Consumer Products? And if so, the excess inventory and that $300 million would represent a 12-point headwind which would suggest you expect core growth maybe in that high single-digit range in the context of the overall consumer products guide.

So first, is that right? And then if so, can you maybe tell us how that compares to what those brands the core brands did in 2022? And what drives your expectation for such strong share gains relative to your expectation for the industry to be flat to down?.

Sure. Megan, good talking with you. If you -- in our investor deck, we have a waterfall, which walks through our expectations of $300 million of headwinds in the -- on the slide that says 2023 outlook, just in case you want to take a look at it after the call.

We do see that $300 million headwind spread across business, but it is concentrated in Consumer Products. We're exiting several rather significant licenses this year like Disney Princesses and Sesame Street and Trolls. Those were pretty low margin businesses for us.

Frankly, they were negative margin businesses for us in aggregate, but it does have a top line effect. We've transitioned several of our in-house brands like EASY-BAKE Oven, Littlest Pet Shop into an out-licensing model.

So we think that will be accretive on a bottom line basis, but it will impact our top line because some of those brands drive meaningful revenue. And we'd likely have a few more planned that we have yet to announce.

FX is certainly a continued headwind that we're anticipating certainly in the first half of the year, more notably than the second half as we comp FX, and that will affect all of our businesses. But CP tends to be our most internationally exposed. We exited a couple of entertainment businesses last year.

One that's called secret location, had meaningful top line, not so meaningful bottom line, that was a location-based business, and then a couple of digital businesses and also some theatrical distribution that will impact entertainment. And then, of course, Russia, we exited Russia in March of last year. And so that comp will be most difficult in Q1.

So when we add all that together, it adds up to about $300 million of total revenue headwinds. We see about 60% of that hitting in the first half of the year and the balance in the second half.

But then when we look at kind of like our release calendar for entertainment, for Wizards and for our Consumer Products business, we look at kind of the retail promotions we have lined up, the feedback we're getting and the volumetric testing that we're doing on the items because we've expanded that basically threefold this year versus what we did for 2022, we feel like the second half of the year, when you combine that with what we anticipate will be improving macroeconomic conditions, should yield the growth that we have projected..

Okay. And maybe a follow-up for Deb.

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

THE GATHERING and making sure we have paper on stock to print because that was in shortage -- short supply last year. . So as we look at that, the closeouts that are in our own inventory, we see sending -- selling those out at the right time for both us and for retailers to maximize the profit on that.

So you see the impact on our gross margin won't be as significant as it was in 2022 and all of the sales allowances. I mean it was important for us to reduce our inventory on hand at retail from where it's at in the third quarter. And we did have a lot of sales allowances in 2022 associated with that.

So when you look at the reduction in sales allowances, you look at maximizing our closeouts go forward and, honestly, our cost savings. And we have a slide on this as well in our presentation. I think it's on Page 24.

We continue to expect a very large percentage of our cost savings initiatives as part of our Operational Excellence program to come out of our cost of sales line. So it's -- that’s the piece that -- and I'm sorry, I apologize if we're getting some feedback. It seems to be me. That's not -- that gets -- it gets a fuzzy sound, but that's okay.

As we look at that, we do see a significant portion of our cost savings coming out of our cost of sales line. So we expect cost of sales to be much more normalized as a percent of revenue in 2023 than we did in 2022 because of all those actions we took to make sure that we are being better positioned for 2023 as well as retail..

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

Is that fair?.

I think the challenge -- we expect to get the profit improvement throughout the year. I will say, based on some of the actions we've taken in connection with our Operational Excellence program, you will see more of the savings in the back half of the year. And that was really the comment we were trying to make on SG&A and admin.

We'll see that impact in product development and in SG&A. However, we do have some headwinds in those lines, too. Overall, the first half of the year is a smaller part of the year for us. So the impacts are a bit greater when you look at the overall revenue..

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

I wanted to pick apart the $300 million revenue headwind just a little bit more. In particular, the brands that you're out-licensing to other toy partners.

What portion of that $300 million is that? Because I thought you said on your Analyst Day that it will be about $250 million to $300 million or somewhere in that range or $200 million to $250 million maybe.

So what will it be this year of that $300 million?.

Of the $300 million this year, it would be slightly -- it would be -- maybe about -- it will be less than 1/3. Think about the timing of it. So we said, over time, we expect that revenue to be about $250 million. You're 100% right. If I look at that impact from '21, it would be about $100 million.

This year, it would be -- from 2022, it would be less than that. And the reason why is we're providing an orderly transition to a license model. That's what's helping our operating profit as well. So we are losing revenue on that.

We still will have some in 2022, but you'll see us transition out of that over time, and it will be a lower revenue number but a more profitable revenue number for us. .

For instance, FurReal would be a handoff throughout the year. .

Right..

Sorry, what was that, Chris?.

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

Right, right. It's going to take them a little while. I got it. Okay. Then my second question would be on the inventory number, the $676 million of inventory.

Also your channel inventory why couldn't you be more aggressive in liquidating your owned inventory? Why couldn't you be more aggressive in in-store promotions to get rid of the inventory at retail? It just didn't seem like you were very aggressive in in-store promotions..

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

Our next questions come from the line of Jamie Katz with Morningstar..

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

So would you be able to clarify that?.

Yes. Our POS was down in toys and games last year by the mid-teens kind of mark overall, which was slower than what we saw for the balance of the year. So that's kind of where that comment was generated. Wizards of the Coast saw strong turns, but that's not captured in our POS tracking, at least the public POS tracking.

And our direct business and our licensors saw healthy gains as well. .

Okay. And then I think there was a comment that EBIT could be higher than 20%. And I want to make sure that's not contingent on the sale or divestiture of that entertainment business that, that comment was made sort of as the business as is.

But theoretically, if you guys did divest that entertainment business, that cost structure or profit structure would actually have more upside opportunity if I'm thinking about that right..

Yes. So I think all of our forward guidance is on an as-is basis, where it's assumed that entertainment stays with us. Now obviously, we're in a sales process, and that's pretty far advanced. So we feel like, by midyear, we'll be able to have a significant update on where we see that going.

The comment that Deb made was we're still targeting 2027 for a 20% operating profit margin. We might be able to beat that by a couple of quarters. But right now, we're maintaining 2027 as a target. Assuming a sale happens as the majority of the noncore TV and film assets, I think we could accelerate that target quite significantly..

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

I got on a little bit late. So sorry if like I missed this. But I think the thing that was surprising the most about the fourth quarter results we all understand what was going on with toys. But the miss on the entertainment revenue, to me, that's something that was projectable because you have deliveries, et cetera.

So can you -- sorry, again, if I missed it, but what are the key reasons that you had trouble projecting what the revenue would be for entertainment in the fourth quarter?.

No problem. Linda, thanks for joining the call. for entertainment, it really just had to do with timing of deliveries that our partners, our network partners wanted. And to a certain degree, we're a vendor working on their behalf, and they have a fair degree of flexibility about when they'll accept deliveries on products.

We had assumptions that we would be able to achieve by end of December some of these deliveries. And some of them got moved out not just by a couple of weeks but by several quarters as they're managing their own P&Ls. And so that's what really drove the material difference..

Okay. And then just -- there's just so many things going on here in 2023.

But if you had to just boil it down to maybe the one or two key things that you have to execute in order to drive the top line and then the same question on the margin performance, like what would be the key thing in your mind out of all these different things you need to do are the most critical to succeed at?.

Well, I think on the top line, when you're looking at a market that's flat to potentially down for a year, it's a share gain. So we need to execute against our five focus categories and deliver the right pricing, the right promotion at retail and make sure we get our product in there and well assorted.

We missed our marks on that in 2022 in too many areas. We grew in 2. We grew in creativity and preschool, but we need to grow more fulsomely across all of them. .

And so when we look at our product road map, when we look at the quantitative testing we've been doing and we look at the promotions we have in place, both pricing as well as what we're doing just to drive kind of availability of product, we feel better positioned for that for 2023.

I think the second thing we have to do to drive the top line is responsibly manage down our inventory.

And we'll be doing a good hunk of that in Q1 and Q2, but I think that also gets back to your bottom line question, which is, hey, we need to do that responsibly and not just make a fire sale because that's not going to help our bottom line and ultimately not help our capacity to be able to fund our growth initiatives.

And then the last thing I think you really need to look at for bottom line, last two things, internally, this wouldn't be as available to you, but it's a big area of focus for us. It's making sure we have really robust demand planning and supply chain management in place.

I feel really good about the team that we're building around that, but that's going to be something that we need to improve our marks on and then driving our savings goals. We have $150 million gross savings goal for this year. We'll be reporting on that every quarter in terms of progress.

And that's going to be a meaningful bucket of money that will drive both bottom line performance and help to fund increases in our advertising and promotion budget and our ability to be price competitive..

Our next questions come from the line of Jason Haas with Bank of America..

I had one follow-up on -- I think the question was asked on the cadence of Wizards of the Coast segment revenue. I think you said -- or I think the guidance is for mid-single-digit revenue. It sounds like, last year, there were some releases that got pushed to the second half of the year.

So I was just curious is the expectation that Wizards will again have sort of a back half weighted year? Or is that mid-single digits is sort of a fair run rate to use in each of the quarters? Just trying to get a sense of the cadence there..

Yes. So on Wizards of the Coast and MAGIC in particular, as I talked in Eric's question, I think you should expect in up Q1 down Q2, a significant up Q3 and then a fair up in Q4. And that's just based on release timing.

Last year, we had an April release that had to push by about six months into October, and we had an August release that had to push about two months into October. We don't feel like we're going to have that issue again. We feel like we're pretty well ahead of our supply chain issues, and the capacity of our vendors is pretty good.

But that's generally how I think about it. Wizards doesn't have the seasonality of the overall Consumer Products business. It's more release-driven. So that's how I would look at it. MAGIC is going to be a pretty big component of their revenue for this year.

The other thing I'd note -- the only other thing I'd note is there is quite a big D&D component that will happen in Q3 and Q4 with the release of Baldur's Gate 3. Even though that's a licensed product, it's a pretty -- we have fair sized expectations about what that product is going to do.

It was one of the most successful early access products in history on Steam. And that will have meaningful revenue impact starting in Q3 and even more so in Q4 for D&D..

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

Yes. I mean we had some subscription cancellations, but they were comparatively minor in the totality of both the D&D P&L and the Wizards P&L. Of course, we take anything like that seriously. We're in contact with the people who canceled. And in general, what we're finding is a lot of them are very open to restarting their subscriptions.

D&D Beyond is a great platform. It's a really good value. And it's something that's been a good growth vector for us. We find it -- we feel about eight months into owning the asset, it's been a really good purchase for us. It was EPS accretive within six months of joining the company.

And we had over 20% user growth through the end of 2022, and the revenue growth was roughly commensurate with the user growth as well. So I think D&D should be on pace for a healthy 2023 with everything we have going on. ..

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

THE GATHERING Arena on mobile and PC during 2023? Or are some of those initiatives further out in the out years?.

Matt, thanks for joining. Yes, I think the biggest thing on arena is going to be the release on Steam in, I think, we're targeting Q3.

the reason for the time line to get to Q3 is we're reinventing what the new player experience is as we start to expand that so that it's an easier onboarding and a more fun way to learn how to play what is a super deep but can be a difficult learning curve game. . So we think Steam is going to help open up the game to more users.

Obviously, we think there will be some decent revenue growth associated with that. Over the midterm, we continue to evaluate consoles, particularly Xbox and PlayStation platforms. And I think that will be an interesting opportunity for us but likely in 2024 and beyond.

And then we continue to invest in figuring out new ways in which we can express MAGIC digitally.

I mean if you think about the success of MAGIC over the last five years, the success really has been driving like this, what we call, a segmentation strategy where we are offering bespoke products to new segments of consumers that we either were underserving before or not serving it all before.

And there's formats like Commander, which is a four-player version of the game that's highly social. I'm enthused, as I know Cynthia and the team is, figuring out how we can get like a true multiplayer experience beyond two players for MAGIC digitally. And then I think we're still intrigued by digital collectibility.

I don't think you'll find us kind of going after the passing fad at the minute. But we do think digital collectibility is going to be a thing, and it's going to stick. And so we continue to invest R&D about what the right approach is for that, whether doing it ourselves or doing it through a partner..

We have reached the end of our question-and-answer session. I would now like to hand the call back over to Debbie Hancock for any closing comments..

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

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day..