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

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

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro’s Chief Executive Officer; and Gina Goetter, Hasbro’s Chief Financial Officer. Today, we will begin with Chris and Gina providing commentary on the company’s performance. And 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 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 occurring after the date of this call. I would now like to introduce Chris Cocks.

Chris?.

preschool, action, blasters and arts and crafts. Driving this, we have several brands that are going well. In gaming, Magic and D&D are having record years. MONOPOLY is back to growth, recently reclaiming the title of the top-selling board game brand. New innovation like TWISTER AIR is driving genre expansion and 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, and FURBY is off to a strong start, one of the hottest new toy interruptions of the holiday.

But we have challenges and other brands that weigh on our results, particularly in our Consumer Products business. Let's now turn to how we return this key segment back to growth. We went into 2023, expecting a toy category down low single-digits for the year.

We expected Hasbro performance to be broadly in line with market, minus our exited licenses and business. Year-to-date, our point of sale is roughly in line with category. However, market performance has been more challenging than planned.

Our internal POS system shows total point of sale 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 market or negative 5% when accounting for discontinued licenses.

Our share is up in our core categories. 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 the 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 ensuring our inventory health is back to historical norms. 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 promotions 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 this 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, 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 across many of our key initiatives, but that we also have more to do, particularly in returning consumer products to growth.

Hasbro strength is the diversity of our brands across both toy and game, our Wizards and Digital business continues to demonstrate impressive growth with smart bed coming to fruition this year and lots to be excited about in the years to come. We are likewise investing in toy to strengthen this business for the long-term.

A healthy toy business is a healthy Hasbro. I'd 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.

Gina?.

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. Adjusted operating profit of $343 million increased 27% versus last year.

The increase was the result of favorable product mix, most notably high-margin digital game revenues as well as lower royalty and operating expenses. Adjusted earnings per share of $1.64 increased 15% versus last year, reflecting the higher operating profit, partially offset by incremental interest expense and an unfavorable tax rate impact.

The adjusted results exclude $512 million of cumulative pre-tax impact 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. Within Franchise Brands, we delivered significant Q3 revenue growth across gaming, including DUNGEONS & 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.

Third quarter adjusted operating margin of 22.8% was 6.7 margin points higher than last year. The profit impact from the volume decline and 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.

Finally, lower entertainment deliveries resulted in a decline in program amortization expense that contributed 1.5 points margin. Our transformation activities are delivering real savings in our P&L.

Having begun these programs last year, we have a strong start on resetting the cost base for the company, and the savings are helping us navigate a softer toy market. Year-to-date, we have accumulated $62 million of gross cost savings within supply chain and an additional $92 million of gross savings within operating expense.

The combined $154 million 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 million.

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 our operations and improving the profitability within toys. 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 through the holiday season.

As we look to the balance of the year, we remain focused on ensuring we have a clean start to 2024, both in owned and retail inventory levels and we'll continue remaining agile in taking actions to stay in sync with broader category momentum. Looking more closely at segment performance within the quarter.

Wizard segment revenue increased 40% versus last year.

23 points the growth was led by licensed digital gaming revenue from BG3 and to a lesser extent, MONOPOLY GO! The revenue for Baldur's Gate is realized along with unit sales whereas in the near term, MONOPOLY GO! has a straight-line revenue recognition based on the total multiyear contract minimum guarantee.

Cable top revenue, which includes both MAGIC and D&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 license 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 segments. The overall toy category was down 8% in the quarter, according to Sakana versus 6% through the first part of the year.

Despite the category headwinds, we gained share in four of our five key categories, including action figures, arts and crafts, preschool and blasters. Overall, Consumer Products segment rev was down 18% versus last year. 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. 2 points of decline came from pricing and mix, driven by additional closeout costs as we've worked through higher inventory levels. FX had a favorable 2-point impact in the segment.

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.

The E1 film and TV assets to be sold has delivered approximately $400 million of revenue year-to-date, which is down approximately 20% versus last year. 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 million of operating cash year-to-date, which is $73 million 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 million does not include approximately $70 million of cash recorded in assets held for sale, the substantial majority of which we expect to stay with Hasbro upon the close of the transaction. Including this, it brings our cash on hand to approximately $250 million, up from $217 million in Q2 2023.

Through Q3, we repaid $107 million of long-term debt and spent $160 million on capital expenditures led by investments in Wizards of the Coast for future digital gaming releases. And we've returned $291 million 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.

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 three 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. 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 behind the 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.

As Chris said, in total, we expect the aggregate contribution from these two licensed games to be more than $90 million 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 section deliveries in the back half of the year.

Minus these assets held for sale, we expect total company revenue declines of 8% to 11% for the year. Adjusted operating margin is now expected to be between 13% and 13.5%.

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, continued 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 million.

And as we look to 2024, we expect to continue accelerating our savings efforts to improve the profitability across toys and games. Given the revenue call down, we now expect 2023 adjusted EBITDA of $900 million to $950 million. And based on this current forecast, we expect to generate $500 million to $600 million of operating cash flow.

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 achieving an overall two and 2.5 times long-term leverage target.

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, moving complexity and sharpening the innovation pipeline for 2024 and 2025. Chris and I will now take your questions..

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

Good morning and thanks for the question. With regards to Wizards. So third 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 fourth quarter numbers, but everything is 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?.

Eric. Good morning. Yes, Q3 met our expectations. We had the great fortune of being able to play Baldur's Gate for a while now and had a pretty good high expectations about its performance.

I think relative to how the analyst community was modeling it, I think you all put it a little more back loaded and it's going to be a little bit more front loaded than I think the model has indicated. That said, we see a long tail associated with Baldur's Gate and likewise a very lucrative and long tail for MONOPOLY GO! as well.

So it will be a nice annuity for us..

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 BG3, it -- 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 will be a tail..

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?.

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 first year or two 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 goes down to something more sustainable. And that's basically what's happening here. So effectively think about our royalties as the net of store participation and a fairly high percentage of marketing.

So for the first couple of years, you're basically dealing with minimum guarantees. And as the game starts to get to maturity and those marketing and the marketing kind of goes down to a more normalized level, your participation as a licensor goes up.

And if the game performs like we all hope it's going to perform and that it's performing now, it could be a dramatic improvement as well..

Thank you very much..

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

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

THE GATHERING and D&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 Cartomi [ph] on BEYBLADE, which is another important partner product for us as well. In terms of what's performing well, I think we covered that in the comments.

We have several winners that are helping us drive category share. Transformers, I think is having a fantastic year. And I think it's really a case study on how to do movie and product integration really, really well. That brand is up 30% year-over-year. And during the movie window, was up over 90%.

PLAY-DOH continues to drive great kind of price value and product innovation and is driving share for us in creativity. I think our games portfolio is second to none and is really broad-based across genres and player demographics, 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. 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..

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

Well, Tim Kilpin came on board about five or six months ago to lead toy for us. He's a 40-year toy veteran, who's helped to champion and found multiple billion-dollar 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 impact of Tim and his new leadership team kind of slow out through 2024 and expand as we go into 2025. 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 the historical growth rate of 2% to 3%. We see a very high demand for play.

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..

What I build on the time line there as you think about the steps in a turnaround, what we're doing this quarter in the call for the year is we’re really cleaning up and resetting the foundation for toy.

As we head into 2024, there's going to be a kind to be kind of a very focused view on profitability and how do we quickly reset the profitability of that business, while we're going through and kind of reducing complexity, as Chris said, kind of clearing the decks and getting ready for new and sharper innovation as we move to the back end of next year and into 2025.

So taking the market out of it and the unpredictability of the market, in our categories where we compete, we are going to do that. We're going to remain aggressive. We're going to compete, and we're going to work to grow share. That's how you should think about just the cadence is really resets.

We're going to get after profitability in 2024 and get ready for a sharper innovation pipeline and 2025..

Next question is coming from the line of Drew Crum with Stifel. Please proceed with your questions..

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

Yes, sure. So for Wizards in the fourth quarter, we have another Lord of the Ring 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 set called The Lost Caverns of Ixalan, and we just had another universe beyond kind of commander release for Doctor Who.

As we think about 2024, yeah, I mean, MAGIC had a great year, another record year in 2023. But we've been having record years for 13 out of the last 14 years on MAGIC. 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 fan reaction to fall out, 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 Horizon 3.

And we had key sets in the history of MAGIC that have done $200 million, Lord of the Rings which officially passed $200 million earlier this week and Modern Horizons 2, which was our previous $200 million set.

So we feel pretty good about Modern Horizons 3 and I think it also should be noted, you know, given that's not royalty bearing and tends to be more of a collector's product. It also is a pretty nice operating profit opportunity for us as well.

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, you know, we have about six to seven premier sets per year and we'll be lapping that in 2024..

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

Well, I can certainly talk from our side. We -- 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. We put some of our best people against it.

And we're expanding that relationship aggressively across more categories, across more brands, whether they are 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..

Thanks, Chris..

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

Good morning and thanks for taking my questions. So I just want to check some of the math on MONOPOLY GO! and Baldur's Gate 3 and what it implies for 4Q. So I think you said that for the full year, you're expecting over $90 million from both MONOPOLY GO! and Baldur's Gate 3. And you saw, I think it was $63 million in 3Q.

So that implies maybe $30 million or so comes in 4Q, which would be -- I'm getting like maybe like an 8 or 9 percentage point tailwind to Wizards revenue in 4Q. Then your guidance -- you left the guidance for high single-digit growth. So that would imply that ex those two licenses, you would see Wizards revenue down like 8% or 9% in 4Q.

So one, do I have those numbers right? And if that's correct, why are we seeing that decline in 4Q? Is it a function of timing of the releases or something else? Is it just conservatism? If you could help explain that would be helpful..

I'll start really fast and then I'll turn it over to Gina. We see broad-based growth in Wizards for the fourth quarter. 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..

Yes, Jason, good question. And you've got the math generally right on how to think about Baldur's Gate and MONOPOLY GO! in the fourth quarter. What isn't right is how you're thinking about MAGIC. So as Chris said, from overall, Wizards will be growing, MAGIC will be growing as well in the fourth quarter.

I think the pieces that you're probably not thinking through some of the other businesses that are rolling up through. So D&D, I think it's down a tick in the fourth quarter. But overall, how you're modeling Baldur's Gate and MONOPOLY GO! is correct..

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? Any color on that would be helpful..

Yes, good question. And I think there's a little bit of both that we will talk to from a modeling standpoint. The one-time you're going to see a lot in fourth quarter, and that was what was embedded in our updated margin guide here.

And I would put that at roughly, call it, $50-ish million of onetime cost that is -- that we're putting in either move through inventory at the retailer level, extra marketing to move through the inventory, extra obsolescence cost.

So call that roughly a $50 million headwind this year that I would expect as we turn the corner into 2024 becomes a tailwind for us. And to your point, there's always going to be some level of kind of promotion and obsolete all of that as we kind of reset into 2024, but that's $50 million, I would call out as one-time in nature for this year..

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

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

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

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

Yes. I guess maybe just a follow-up on that on the top line. So 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 fourth quarter.

So from a top line perspective, can you just maybe put a finer point on how the outlet of Consumer Products 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, hopefully, we're not seeing any more inventory management into next year. And so the wildcard seems to be that toy and game volume line.

So can you just help us understand maybe a little bit of how 4Q changed and what you get back next year?.

Sure. What we get back next year, I'm going to go back to the previous answer, $50 million is really the number that I would put in your model of onetime costs that we're not expecting to repeat, we're using that to try to get as clean as we can for 2024.

As we think about the revenue decline when we said mid- to high teens for the toy business for the year for the CP segment for the year, there's probably 3 or 4 points that decline that are associated with just us accelerating some of this move through of inventory from like a pure revenue standpoint, I would say, call it, 3 to 4 points of that is this acceleration.

On the bottom line, it's $50 million..

Right.

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

No, to our updated guide..

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

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?.

Well, perhaps too cheeky about it. But I think in short, none of it is flowing to the bottom line this year just given that it's all going to move through the kind of the inventory line. So I would say there's zero kind of margin impact from the cost saves next year.

And one of our big focus areas internally is moving us from talking about gross savings to talking about net savings, as a key area of focus as we move into 2024. Next year will be the year where you'll start to see real margin acceleration from all of those cost savings initiatives. But I mean, this year, it's all going to inventory.

And we have -- so I should also elaborate to say we are making investments in our growth initiatives. So some of it didn't go to invest buying digital games.

Some of it went to invest behind new capabilities that were aligned with strategies such as like analytics that we had talked about earlier in the year, but anything else is going against the inventory line..

Yes, I would say it's about half for long-term, half 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 of that probably in the later part of Q1 and building into Q2 and Q3..

Okay. Awesome. Very helpful. Thank you both..

Our question comes from the line of Stephen Laszczyk with Goldman Sachs. Please proceed with your question..

Hey, great. Thank you. Maybe just a follow-up on cost efficiencies for Gina. You're making some good progress on that front.

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

Thank you. I’ll refer to Gina first and then I'll follow up with digital..

Okay. So on the cost savings side, I think we're making really good progress across our supply chain, particularly this year in 2023. Our focus has been within logistics. So the majority of the cost saves within supply chain have come through that logistics space.

As we look at 2024 and potential upside to the $300 million, I'm not going to commit to a number right now in 2024, but I will commit to bullishness and our ability to deliver and overdeliver that number. There's a few areas of focus for us as we move into next year. So within the supply chain, this year was logistics.

Next year, it's going to be more about procurement and manufacturing. So that's -- there's some low-hanging fruit there that we'll continue to drive after within the supply chain.

Also on complexity and just getting complexity out of the network, really focusing on our most profitable and kind of effective and efficient SKUs, taking cost out of the products as we think about designing our product and designing to value that is going to generate some good savings for us and really improve the profitability of our toy business.

And then lastly, on the corporate overhead, we have made some progress on that in 2023, reducing the overall overhead structure. There is more to do there. And we will see that slow in the early part of 2024..

Yes. And Stephen, on digital, a couple of things to note.

So definitely, there will be a long tail on Baldur's Gate 3 and a multiyear long tail on MONOPOLY GO!. I think those two versus the $90 million this year will 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 four quarters.

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 PC and console games.

And then I think as you think about beyond 2024 into 2025 and beyond, I definitely think what MONOPOLY Go and D&D with Baldur's Gate 3 showed is there is a very, very high 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. There will be more great D&D style content and MONOPOLY GO! if it scales the way that I think it's coming right now, that is going to be a very long-lived and lucrative game for Scopely and Hasbro..

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

Is that correct?.

Yes, rep and tough, that would be a decent one to have..

Okay. Great. Thank you..

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

Hi, good morning. Thanks for taking my question. Going back to a little bit near term for a second. You mentioned taking share in key categories you're in for Q4 and your consumer products business is down something like 17% implied for Q4 based on the guidance today.

And even when you remove exited licenses, that's still down double digit in underlying in terms of shipments. Does that imply lower industry POS than the 10% we've seen so far, maybe a little bit worse into October. But how are you taking share against that? That means the industry's probably a little bit worse versus what you're doing.

Could you just talk to that for a second? I have a quick follow-up..

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. That said, we're long-term goals on where 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. 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 is 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 sell-in and sell-through. So I think replan is going to be on the later side of the holiday.

And likely, if the holiday does better than maybe what our cautious outlook does, that will be a tailwind for Q1..

Okay. Thank you, Chris. And then a quick follow-up in terms of operating profit structure for 2024, you're exiting, obviously, a very low margin business with entertainment at the same time base just came down quite a bit for 2023, and you have long-term target that's far above that 13%.

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

Yes. I'll give you a quick 20-second overview and then turn it over to Gina for the details.

We see a pretty near-term snapback 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 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 ability to achieve our long-term margin targets..

Yes, the additional color I'd add to -- I keep coming back to the $50 million number. That's a couple of margin points that come back to us next year. We also have the D&D impairment that if you remember, we took that in Q2 of last year, that was a material onetime item that comes back to us.

So there's just some kind of -- I would put that in the camp of accounting good guys or is that bad guys this year that become good guys for us next year that help us on the margin front? And then as we think about toy and being laser focused on improving the profitability on toy, the kind of all the work on complexity, all of the work on the cost structure on overhead, et cetera, will kind of accelerate our efforts on the margin front through the first part of next year..

Thank you..

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

Hey, thanks for taking my question. Chris, I guess this question is probably for you because 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..

Yes. Hey, no worries Andrew. Yes, Baldur's Gate 3 was my first deal at Wizards of the Coast. I think I went out to get had dinner with spent at Larian [ph] like in the fall of 2016, and we inked a deal in 2017. So I'm pretty proud about how everything kind of turned out. That's nice to see when you make a long-term bet.

I think what you saw this year with video games and mobile games and movies whether on the video game side, it's a MONOPOLY GO!, which is the number one mobile game release of 2023, Baldur's Gate 3, which I think is sitting at a 96 Metacritic [ph] score on PC and console or in movies, whether it's the ongoing success of Transformers, the Barbie movie, Mario, is that there's a high demand for play-based brands and play-based brands are really becoming the dominant brands about how people engage and what people love.

I was a shocking stack that I should have known better because it just mimics my lifestyle. Sakana came up with a report that showed the biggest demographic of video gamers today isn't sub 22-year-old. It's people 45 years and older. And it's also the fastest-growing demographic of gamers in the world.

So I'm pretty bullish on the industry of play on the strength of brand portfolios that are based on play. And I think Hasbro has a deck of cards in terms of our brands and our capabilities that I wouldn't trade with anyone. I think that's a long-term bull case for the company and for the industry as a whole..

And then just as a follow-up, and I appreciate that answer. How do you -- how will you balance or try to balance the -- your well versing 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?.

Well, I mean, we have two separate business units that have 2 very different go-to-markets. But when combined together under one roof creates a very well-diversified portfolio. That can help us weather ups and downs in any given category or any given set of market conditions.

So I think especially with something like this holiday, where the market remains rather unpredictable. It's great to have diversification, and it's a real strength of the company.

We're fortunate in that Wizards of the Coast is a very margin-rich business that's highly cash generative effectively based on Wizards of the Coast and our digital licensing revenue, we can self-fund a fairly significant set of long-term capital investments and we've diversified that risk pretty effectively between licensing, Games as a Services, our tabletop business and our own internal publishing build-out.

And that business gives us a nice cushion to help us with restructuring and turning around of the toy business, which we remain long-term bolt-on. We think that IP portfolio is fantastic and we really like the team that we've set up there.

So our Q4 numbers weren't what we wanted, but we're taking -- we're looking at the market, we're being realistic about it. we're investing so that we can create a runway for that team to be successful in 2024 and beyond..

Got it. I appreciate that. And congrats on that Baldur's Gate 3 game. That's great..

Thanks..

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

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

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