Q3 2022 Hasbro Inc Earnings Call

Speaker 1: great expansion across new categories of product where, you know, Cynthia has done with, you know, along with the Wizards team, a terrific job in the publishing genre. But we're really excited about expanding D&D behind the theatrical launch into action figures. We have a terrific line that the team's put together. We have a line of Nerf products that we're very proud of, as well as core games. So you'll see D&D go into more of a board game genre for the first time with Hasbro. So we do feel really positive about the category expansion and with that geographic expansion. So as you can imagine, the teams around the globe are very motivated to make sure that we have a positive win on the board with D&D and Q1 next year. Cynthia, do you want to add anything to that? Yeah, the one thing I would add is when you think about Dungeons & Dragons Beyond and it being the premier digital toolset for D&D, it gives us a great opportunity to expand both internationally, but also the tools and capabilities we give all of our players. It's going to give us a wonderful opportunity to monetize more of our player base than the Dungeon Masters that we are monetizing today. Great, thank you very much. Our next question comes from the line of our P&A coach, Yarian, with UPS. Please review your question. Hi, good morning. Thanks for taking my question. I have a quick clarification maybe. The guidance for full year before today implied Q4 could be down 3% to up 6%, which at midpoint would imply some growth in Q4 and today revenue guidance is flat year over year. Did something actually change in your outlook?

Speaker 1: versus what you said on analyst day, or there's actually no change how you were seeing 2.4 to play out, how to look at it from where we sit. And I have a quick follow up. No problem. Good morning, Arpina. Thanks for the question. Yeah, our outlook has not changed since our investor day. You know, we continue to feel like there's a lot of green shoots in the portfolio. There's some exciting innovation coming out across Nerf, across games, a ton of innovation coming out on Magic the Gathering, our first million dollar brand.

Speaker 1: you know, our approximately flat guidance just looks at kind of all factors put together, inclusive of what the macroeconomic environment looks like and what the state of the consumer looks like.

Speaker 1: Thank you. Thank you. And then in the slides you noted expectations of North America POS improvement. Does that mean you've started seeing some improvement outside of those two days of prime day? Overall, or expect Q4 to record overall improvement when all said and done versus Q3? Because to finish inventory up low single digits, say up 2%, would mean...

Speaker 1: positive POS in Q4. Am I actually calculating that correctly? Am I thinking about it correctly that you need to see POS come close to positive in Q4?

Speaker 1: Yeah, so there's two components to inventory. There's Wizards of the Coast and digital, which we have a lot of set releases coming out. So there'll be some decline in inventory there that should be fairly significant. And then there's what our consumer products team is doing. I'm gonna turn it over to Eric to talk about recent POS trends that we're seeing across the G5 markets in North America. Yeah, thanks Chris. Thanks Arpine. Yeah, with regards to POS and market share, we talked...

Speaker 2: quite a bit at investor day about how Q4 was really our focus and we're back up loaded with regards to innovation. We're seeing, as Chris mentioned, good green shoots at this point, in addition to just Amazon and the Prime Day early access sale. So for example, across the EU5, Australia, our market share and POS trends are improving flat to slightly up over the last month and we're also seeing the same level or different levels but positive improvement in the US over the past several weeks. And, you know, we're seeing a lot of growth in the US over the past several

Speaker 3: super helpful. Thanks.

Speaker 4: Sure.

Speaker 5: questions in the line of true chrome would see full this is your questions

Speaker 6: Okay, thanks. Hey guys, good morning. So I have two questions on wizards. Maybe to start, you know, last quarter you suggested the segment would perform at the upper end of your guidance range, which was low double digits growth. Today you're suggesting high single digits growth.

Speaker 6: You know, what is change versus the previous commentary? Is this a business that's seeing any sensitivity around price that you alluded to earlier?

Speaker 6: And then I have a follow up.

Speaker 2: Yeah, so I'll take that and Cynthia, feel free to fill in anything that I might not cover. You know, we're continuing to see the Wizards of the Coast business performing well. You know, particularly the Magic business, which you know, year to date is up 5%, whereas the general games category are down as low as much as negative 8%, depending on which source you look at. So Magic is a great fan base, very resilient.

Speaker 2: and we find the fans in the Magic segment and in our overall collector's segment, they have a great personal balance sheet and a capacity to spend when they're motivated and driving something that they really enjoy. And so that's kind of like underscoring the bullishness on our outlook on Magic moving forward. Our digital business has been a little softer year over year in line with the rest of the digital gaming category. Dungeons & Dragons has performed well, but again, we don't have a comp of the premium game that we launched.

Speaker 1: kicking off with this we have Warhammer 40k from our universes beyond Brothers Wars coming up two strong secret layers one featuring the platinum selling music artist Post Malone the other being a 30th anniversary countdown kit and of course we've got the high-end collectible magic 30th anniversary edition which was inspired by magic's beta set and includes some of magic's really iconic cards like black Lotus and finally I'd say all five tentpole releases we've had this year

Speaker 7: have all done more than $100 million in revenue.

Speaker 3: And this is the first year that's happened.

Speaker 6: Okay, thanks, very helpful. And then my follow-up is more longer-term focus. The goal of the category has been pretty challenged over the last 18 months.

Speaker 6: You know, is he think about the next several years? Is this going to be a focal point for investment spend across the segment? Thanks.

Speaker 2: Well, you know, as we talked at our investor day, we have a plan to double the size of the Wizards and Coast and digital segment over the next five years. You know, by 2027, that growth will be powered by continued resilience in our tabletop business and brands like magic and D&D. But we're planning to double the percentage of the segment that's driven digitally. And you know, we have a fairly balanced approach to how we think about where our digital investments are. State large and grow.

Speaker 2: forward to sharing more about over the coming quarters. So, you know, while the digital games market might have its ups or downs in any given quarter or any given year, I think the trend is decisively in the direction that interactive entertainment is the future of entertainment. And I like how we're positioned as a company.

Speaker 4: Got it. Thanks, Chris.

Speaker 8: Thank you. The next question comes in the line of Megan Alexander with JP Morgan. Please receive your question. Hi. Thanks for taking our question. I wanted to spend some time on consumer products and maybe how you're thinking about it beyond Torque. You expect inventory upload single digits. Previously, you would expect it flat. You do talk about a lot of entertainment and innovation coming next year. But how do you think about the risk of retailer de-stocking, especially in the first half as you're lobbying?

Speaker 2: And it's a big reason why we pushed inventory into the Q2 period to make sure that we didn't have that again, so that we could promote aggressively in Q4 like our plan is today. I think the other thing to note is we have a lot of new innovation that's very on trend that's coming out in Q4, that we think will comp very favorably in the first half of next year. And then last but not least, I think whatever happens on the macroeconomic front, we have seven blockbuster films and 20 TV shows coming up.

Speaker 2: are always very interested in supporting and promoting our great entertainment and our partners great entertainment. So, you know, at risk of repeating, when you have a lineup like ours next spring, you know, which starts with the Mandalorian 3 from our partners on Disney Plus, we then have all those movies that Chris talked about from Ant-Man and the Wasp, Quantum Mania, D&D, which we talked about already, Honor Among Thieves, Guardians of the Galaxy, Volume 3, Across the Spider-Verse in June , Transformers later in June .

Speaker 8: Awesome. So I guess just to tie that all together, is it fair to expect that you believe consumer products can be up next year despite exiting some of the brands that you've talked about?

Speaker 2: Yeah, I think that's it. I think that's right, Megan, when you look at what we're what we're doing as a business, what we do, what we certainly expect is that we're going to see some, you know, good growth, particularly across our action brands next year, which is really the predominance of what I just highlighted. And I also want to point out that a big reason for what we're doing from a strategic standpoint is to improve our profit story. So certainly from a consumer product standpoint, we not only expect to have that improvement that you asked about with regards to net revenue,

Speaker 9: but we expect and will continue to focus on that operating margin expansion, which you will see from the consumer products unit next year as we exit businesses, but also work on our operational excellence program that both Chris and Deb mentioned in their opening remarks.

Speaker 8: Awesome, thank you. And maybe a quick follow-up for Deb. The guide implies 4Q operating margin above 3, which isn't usually typical for your business. Is that all mixed to WZRD and then the cost savings you've talked about, or are there some additional drivers of improvement? I guess maybe more specifically, how should we think about what's built into the guide from a cost of sales perspective in terms of are you confident the inventory actions you've taken in 3Q are sufficient, or is there further risk in 4Q?

Speaker 10: So thanks, Megan. No, you know, as we talked about, we have a very strong mix of revenue. Much of that inventory we have on hand now coming from our different groups. We are actually seeing reduced distribution costs. So we're seeing some things come down now on the distribution side. I think all supply chain is easing up a bit. The one exception I would say is still paper, which is still a bit of a challenge. We've...

Speaker 10: stocked up on paper so we can make sure we have supplies. So you're seeing some of that in our inventory balance as well. So between mix, our cost savings, we'll start to see the benefit of cost savings. In fact, we've said we're gonna see about 20 million of that impact predominantly coming in the fourth quarter. And a big piece of that is actually coming in consumer products as well. So between mix, we'll start to see the benefit of cost savings.

Speaker 10: cost savings actions we've taken to date to make sure we have product on stock. That's how we look at our margin for the fourth quarter and why we remain confident in the fact that we can hit 16% on a full year basis.

Speaker 11: Thank you.

Speaker 5: Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed with your question.

Speaker 6: Hey, good morning. Thank you for the question. I just have two. First, I want to follow up on Eric's question and just ask about some of the commentary around closeouts and allowances and promotional activity. Was that concentrated in any particular brand or category or was this an industry-wide toy issue that other players may have seen? And then second, I was just wondering if you could talk a little bit about the Disney Princess impact to

Speaker 6: revenue margins within consumer products? Is that a product that is effectively winding down and approaching zero? Is that the right way to think about it for the fourth quarter? Thank you!

Speaker 9: Sure. Thanks, Mike. It's Eric. Good morning from all of us here at Hasbro. I'll answer in order and if I forget anything, you can jump in again, Mike. But your first question was about closeouts, allowances, and promotional activity. I'd say we pride ourselves on making sure that we continue to stay ahead of our inventory situation. As we work through Q3, as Chris already mentioned, we brought in some inventory in Q2 and we wanted to make sure that we started early activations with our retail partners, which we did.

Speaker 9: I expect Q4 to be in line with where we've been and we'll work through our inventory again to finish the year in that load and mid single digit area that we talked about. And that's what is built into our story that we've already discussed this morning. I think with regards to businesses we're exiting, which is the second part of your question, we do expect that as we exit those businesses both this year in Q4 as well as throughout next year that we'll manage that decline.

Speaker 9: through the growth and other brands focused on our franchise brands. We talked a lot at our investor day on fewer and bigger as our strategy and that's not going to change. So you're gonna see us with that growth and those franchise brands and the partner brands that we're going to stay behind like Star Wars and Marvel, and we're gonna exit some others. And as we exit some of those other brands, as I already mentioned to a prior question, you'll see an increase in operating margin. So I think it's an excellent thesis to invest in for Hasbro.

Speaker 6: Thank you for the thoughts, Eric.

Speaker 4: Thanks Mike.

Speaker 5: Our next question is from the line of Fred Whiteman with Wolf Research. Please proceed with your questions.

Speaker 5: Hey guys, good morning. I just wanted to follow up on sort of Chris and Eric's comments about the price sensitivity and maybe dig into what that means for how you guys are thinking about price in the CPG business. Eric, you sort of gave some color on 23, but then you guys also have this midterm target about 15% within that CPG business. So given some of that software consumer backdrop, is price still a lever you guys feel confident about? Or is it more mix and cost saves to get you there?

Speaker 2: Yeah, well hey, thanks for the question. No, I think it's a couple things. So as we look at price, we look at a couple different factors. First we look at consumer segmentation. And so you know, you have the mass consumer and then you have the collector and the fan segment. Collector and the fan segment tends to be very price inelastic. It's very resilient segment that's very passion driven. And you know, as long as you build a great product and a great play system and continue to invest behind it.

Speaker 2: We find our fans stick with us and that's been a major driver of growth for us. Our two fastest growing businesses this year are our Pulse business and Magic the Gathering. And you know those are very high margin businesses and very lucrative segments for us that will continue to lean in in the years to come. On our mass side of the business you know at our investor day we talked about this concept of play systems and play system based innovation. And really that's a high low strategy of product development where you have great opening price points.

Speaker 2: and you pair that with ladder up opportunities for great giftable items and great kind of stretch items for fans of all ages. And I think what you're going to see is us investing more and more in both sides of those segments and we think that will be on trend with where we see the market going.

Speaker 9: I think if I could add to that, Fred, I think the other thing that you're seeing in the industry right now is that brands are more resilient and private label is not. In fact, we've seen a lot of noise in the industry over the last quarter where retailers are closing out a lot of private label, shifting that private label to close out shops around the country and around the world. So I think for us, we're clearly a branded house and we have some very strong brands at Hasbro.

Speaker 9: we're seeing pricing sticking and being able to be stronger through this environment. And as Chris mentioned, a lot of that is due to the consumer and the way that we segment our consumers.

Speaker 5: Makes sense. And then just a quick follow up, the mid double digit POS that you guys touched on for Prime Day, is that on a year-over-year basis? Are you comparing that to prior Prime Days? What exactly is that?

Speaker 5: the mid double digit POS that you guys touched on for Prime Day, is that on a year-over-year basis are you comparing that to prior Prime Days? What exactly is the comparison there?

Speaker 4: Yeah, prior prime days. Okay, thank you.

Speaker 12: Thank you.

Speaker 5: Our next question comes from the line of Linda Volton-Weiser with DA-Davidson. Please proceed with your questions.

Speaker 13: Yes, hi. My question is on the entertainment segment and the projection or outlook for fourth quarter. Sorry if you explained it already, but it looks to me like the film and TV segment has just as hard, even a harder comparison in the fourth quarter. So then can you just reiterate again, what are the specific things that are going to happen in the fourth quarter to make the decline smaller against a harder comparison?

Speaker 13: And then the second thing is the shifting of certain things into the first quarter of 2023. What causes that shifting? Is that just production delays or personnel issues or what is that exactly? And is there anything you can do to rectify that phenomenon in the future? Thanks.

Speaker 2: Thanks, Linda. Yeah, so our entertainment segment has a very strong lineup in Q4, particularly in TV productions. Now, the nature of TV productions often has with what's the dating with the network. And so we're seeing a little bit of slippage on when things are being dated inside of the streamers, or the various networks that we're working with that affect payment timings and delivery timings of the content. And that's what I think you see going on in Q4 of this year. You know, that said, we see our entertainment segment x

Speaker 2: music being down about mid single digits, maybe high, low, maybe low single digits.

Speaker 2: But, you know, a lot of that is just deferred revenue that goes from Q4 into Q1 and points to continued growth and good prospects in 2023.

Speaker 13: Okay, thank you very much.

Speaker 5: Our next question comes from the line of Garak Johnson with BMO Capital Markets. This is you with your questions.

Speaker 5: Hey, good morning. I have a couple here. First, I just wanted to clarify what you're saying on inventory because sometimes I'm confused as to whether you're talking about company inventory or channel inventory. So what's the channel inventory situation look like right now or at the end of the quarter? And where do you expect that to be at the end of the year? Is that what's supposed to be up low to mid single digits?

Speaker 2: So, Garak, when we talk about inventory, we talk about company inventory, and we talk about it across our CP and wizard segments. So as Eric mentioned, we see the CP inventory up either low single digits or mid single digits. And we see our wizard's inventory likely down in Q4, which contributes to up low single digits for a company as a whole. I'll turn it over to Deb to talk about where we see the broader mix.

Speaker 10: of inventory across our channel partners. Right, so retail inventory is up, as we said, at the end of the quarter, but it's of good quality, and we have a lot of promotional activity planned for the fourth quarter. So our specific guidance was on our inventory, exactly as Chris said, but retail inventory, you know, we're working with our retailers on promotional activity, and much of it was setting for a lot of this new innovation that we're having in the fourth quarter.

Speaker 14: Okay, thank you, and I'll...

Speaker 14: Add on to what Mike was asking about closeouts and obsolescence, perhaps you could pinpoint exactly where those issues were and also perhaps sales allowances as a percent of consumer product sales this year compared to last year. How did that look?

Speaker 10: So, sure, well, let me take the sales allowance question, and then I can answer some of the closeout question and then Eric can as well. But we are seeing price allowances a bit higher, all sales allowances, period, right, whether priced or not, a bit higher this year than last year. And the reason for that is, if you think about it, we couldn't even get stock last year. So our retailers were selling what they could get for, you know, less promotional activity with the consumer, and that was the consumer takeaway.

Speaker 9: been in various places in Europe and in certain territories, particularly in the Pacific region. Yeah, and also just to add, Derek, that we have some Q4 elements that we didn't have from a comp last year. So not only are we comping a fairly non-traditional comp, as Deb mentioned, we were in chase mode significantly last year, but we also have a big theatrical movie this fourth quarter with Wakanda Forever from Disney.

Speaker 9: And that's something that we didn't have in Q4 last year, as well as some new brands. You know, last year we were really at the very early stages of our E1 integration of Peppa Pig and PJ Masks. And now we have really good flow for that inventory. So, you know, we're feeling good again about where we are. And I think as Deb mentioned, it will be a traditional sales and allowances cadence as we work through inventory this fourth quarter.

Speaker 4: Okay, great. Thank you.

Speaker 4: Thanks, Garak. Thanks, Garak. Thanks, Garak.

Speaker 5: Thank you. Our final question is coming from the line of Jason Haas with Bank of America. Please proceed with your questions.

Speaker 15: Hey, good morning. Thanks for taking my questions. First of all, I'm curious if you could provide some outlook by segment for next year. I think at your recent analyst day, you talked about consumer products being up low single digits, wizards high single digits to low double digits, and then I think entertainment was up low single digits. So is that a good framework to use? I know that was a multiyear target. Is that a good framework to use for next year?

Speaker 2: Jason, we haven't shared a specific by segment guidance for next year. We only shared kind of longer term 2025 to 2027 guidance. That said, we feel really good about where we're positioned for consumer products, both on the innovation we have coming out this Q4 and how that comps into the first half of next year, a stacked entertainment lineup which creates a lot of

Speaker 2: a lot of tailwinds for us that I think more than compensates for the business exits that we have. And then, you know, we can continue to believe in our game segment, and as we just talked, entertainment's going to have some revenue that moves out from Q4 into Q1, which certainly represents, you know, at least a modest tailwind helping that business as well.

Speaker 9: Yeah, I'd also just add Jason, as you think about the future, you know, we, I do want to mention since we haven't talked much about it, our operational excellence program, and just note that, you know, we, we believe we'll be a stronger, more disciplined, more profitable company going forward. And we have the 250 to $300 million cost savings plan in that mid, you know, mid to longer term outlook that we feel very confident in as well.

Speaker 15: As a follow-up, there's been some investor concern that there's maybe been too many magic releases in a short timeframe. There's some talk of wallet fatigue among the players out there. We've seen the secondary market prices come down a bit. I'm curious, what's your response to that concern that there's just a lot of magic product coming all at once?

Speaker 2: Well, we've had a great growth for Magic the Gathering. Since I started back in 2016, the business has almost tripled. And as I said, we're up through the first nine months of this year by 5%. And the general gaming category is down by most measures close to double digits. And we think that Magic will be up double digits by the end of the year. Cynthia, I don't know if you want to talk a little bit more about this, particularly what we have coming in Q4, but we remain bullish on the product.

Speaker 7: A couple of things I would say is we did have one of our products slip out a little bit into Q3 which was Unsinity. That was a supply chain issue. Other than that, our releases that are coming up for this year with Brothers War, with our Secret Lair drops which are direct to consumer, our Magic 30th edition is also direct to consumer.

Speaker 7: So I would say that within the channel, you've got the same number of sets happening in a year in the hobby channel. We've just shifted a little bit in timing due to some supply chain issues.

Speaker 2: And I'd say, you know, just one last thought as you think about Wizards. Magic has been incredibly important to the growth of Wizards, but D&D, you know, as much as Magic has grown, D&D since the release of 5th edition back in 2014, gosh, it's probably 10x the size it was back then. And we have an amazing roadmap ahead for D&D with AAA films, some exciting TV projects that we are going to announce shortly.

Speaker 2: AAA video games, big partnerships, huge merchandising and licensing efforts. And so, you know, I really think that Wizards of the Coast is positioned to become a two-foundation business over the next several months. That just will get better and better driving our blueprint over time.

Speaker 15: It's great to hear. Thank you.

Speaker 4: Thanks.

Speaker 5: Thank you. At this time, I will turn the floor back to Debbie.

Speaker 5: Thank you. At this time, I will turn the floor back to Debbie Hancock for closing remarks.

Speaker 10: 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 prepared remarks will be posted following this call. Thank you.

Speaker 5: This will conclude today's conference. Let me disconnect your lines at this time. Thank you for your participation.

Speaker 12: you

Speaker 12: you

Speaker 5: Welcome to the Hasbro Third Quarter 2022 Earnings Conference Call.

Speaker 5: At this time all parties will be in listen-only mode.

Speaker 9: A brief question and answer session will follow the formal presentation.

Speaker 9: If anyone should acquire operator assistance during the conference, please press star 0 from your telephone keypad.

Speaker 5: Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Speaker 9: At this time, I'd like to turn the call over to Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead.

Speaker 10: Thank you and good morning everyone. Joining me today are Chris Cox, 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. And we will take your questions.

Speaker 10: Eric Neiman, Hasbro's President and Chief Operating Officer, Cynthia Williams, President of Wizards of the Coast and Digital Gaming, Darren Troup, President and CEO of E1, and Steve Bertram, President E1 Film and TV, will join for the Q&A portion of the call. 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 10: 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.

Speaker 10: 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 10: 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. 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? Chris Cox, Fighters Director of Printable

Speaker 2: Thank you, Debbie, and good morning. We expected Q3 to be our most challenging quarter of 2022 based on product release and ship timings in our consumer product segment, as well as release cadences in our games and entertainment businesses.

Speaker 2: Revenue for the quarter was 1.68 billion, down 12% in constant currency, and down 15% at actual rates versus 2021.

Speaker 2: Adjusted operating profit was $271 million or a 16.1% OP margin.

Speaker 2: down 31%.

Speaker 2: Revenues were impacted due to innovation timing, including later product releases in nerfs and games this year versus last.

Speaker 2: accelerated direct import shipments in our consumer product segment, which shifted revenues from Q3 to Q2, and a release calendar more heavily Q2 and Q4-weighted for our wizards in digital gaming and entertainment businesses.

Speaker 2: We've also seen the average consumer become increasingly price sensitive as the year has impacted point of sales trends.

Speaker 2: Promotions and entertainment field demand have become increasingly important and will be key in the quarters ahead.

Speaker 2: For instance, our most recent Prime Day last week saw Hasbro volume increase mid-double digits year over year, among the top toy and game performances.

Speaker 2: The ongoing growth of key brands like Peppa Pig and My Little Pony speak to the power of driving great entertainment to reach audiences and inspire demand.

Speaker 2: In Q4, we will be kicking off an unprecedented lineup of entertainment.

Speaker 2: starting with Marvel Studios, Black Panther Wakanda Forever, and extending well into 2023.

Speaker 2: Operating profit margins were impacted by a combination of more aggressive closeout actions in consumer products, and the shift and mix of deliveries in our Wizards and Digital Gaming and Entertainment segments.

Speaker 2: For Q4, we are projecting Hasbro's revenue to be approximately flat on a constant currency basis.

Speaker 2: buoyed by growth in My Little Pony, Peppa Pig, Marvel, Starting Lineup, and key gaming brands. In particular, our Wizards in Digital Gaming segment, behind one of our best Q4 Magic Slates ever, as we kick off the brand's 30th anniversary and celebrate Hasbro's first ever $1 billion dollar brand.

Speaker 2: Fourth quarter adjusted operating profit for the company is expected to improve by mid-double digits year over year, driven by a more favorable product mix, improvements in distribution, disposal of low-profit, non-core businesses, and the impact of our new Operational Excellence program we announced at our Investor Day on October 4th.

Speaker 2: For the year, we are expecting revenues for Hasbro to be flat to slightly down on a constant currency basis.

Speaker 2: We continue to expect adjusted operating profit margin to increase 50 basis points to 16%.

Speaker 2: We also expect inventory levels to be up low single digits year over year.

Speaker 2: We have a strong balance sheet and a plan that accelerates cash generation going forward.

Speaker 2: Deb will speak to this in more detail shortly.

Speaker 2: At our investor day, we introduced our new strategic approach to our blueprint, Blueprint 2.0, which positions us to accelerate growth with a focus on games, digital and direct, and demonstrates our commitment to deliver superior shareholder return with a plan to grow adjusted operating profit by 50% by year-end 2025.

Speaker 2: This profit improvement will be driven by a focus on fewer, bigger brands with billion-dollar potential.

Speaker 2: growing our high-profit games and licensing businesses.

Speaker 2: driving significant savings via our Operational Excellence Program.

Speaker 2: This initiative will help us drive 250 to 300 million of annual run rate savings by year-end 2025, including a $50 million run rate level already achieved in 2022 that is helping to fuel our bottom line growth in Q4.

Speaker 2: This management team isn't satisfied with our performance in Q3. Our new plan has already begun and will gather momentum over the coming quarters.

Speaker 2: Our high margin games business is on track for growth in Q4, anchored by a must-have Magic lineup, including the first time our fans can buy the iconic card, the Black Lotus, in over 25 years.

Speaker 2: We added the viral sensation, Wirtle the Party Game, for fans of all ages, to our industry-leading games portfolio for this holiday.

Speaker 2: We are innovating in key brands like Nerf with our new Gelfire Blasters for fans 14 and older.

Speaker 2: We will extend our growing leadership in high-margin, high-potential categories like preschool, with leading brands including Peppa Pig, and our products for Marvel's Spidey and his Amazing Friends.

Speaker 2: well as creativity with Play-Doh.

Speaker 2: Brands where we have revenue and POS momentum like the already hot selling Play-Doh ice cream truck.

Speaker 2: And we will drive a multi-quarter flywheel of momentum with one of our best entertainment lineups ever. Starting this November with Marvel Studios' Black Panther Wakanda Forever and extending into 2023 with six more blockbuster films and 20 scripted and unscripted shows we are merchandising behind, including the upcoming Hasbro event films Dungeons & Dragons, Honor Among Thieves in March,

Speaker 2: and Transformers Rise of the Beast in June . The plan we laid out earlier this month has us on path to drive growth and accelerated profits through focus and scale and enhanced operational excellence.

Speaker 2: We are concentrating on the brands that give us the biggest growth potential and where we can truly lead and innovate in the category.

Speaker 2: We will license out brands where we can make a greater return through a partner model. In some cases, extracting value from dormant assets.

Speaker 2: and we will exit businesses that don't drive branded entertainment through our Blueprint 2.0.

Speaker 2: We will pair this operational discipline and entertainment-fueled innovation with a continued emphasis on returning cash to shareholders and driving superior long-term shareholder returns.

Speaker 2: Hasbro's commitment to our category leading dividend is rock solid. And when paired with the potential of our brands, the growing impact of our operational excellence program, and an outstanding entertainment lineup, we believe it positions Hasbro as an exceptional value for shareholders with strong near and long term potential returns.

Speaker 2: With that, I will turn it over to our Chief Financial Officer, Deb Thomas. Deb? couldn't hear you.

Speaker 10: Good morning, everyone.

Speaker 10: The third quarter results reflect the timing shifts we've forecasted since early in the year.

Speaker 10: These include release timing for Magic the Gathering card sets, entertainment deliveries, and several product launches and key brands happening in early fourth quarter, as well as a shift in retail promotional period.

Speaker 10: Foreign exchange has negatively impacted revenue by $104 million year to date, with $54 million of that impact in the third quarter.

Speaker 10: And, as we have projected, the macro environment for the consumer has been challenging, increasingly so as the year has progressed.

Speaker 10: As we shared earlier this month, we've set an aggressive and achievable plan to drive profitable growth over both the near and long term.

Speaker 10: We're focusing on fewer brands where we see the biggest potential.

Speaker 10: Essential in the delivery of this plan is an operational excellence program to deliver $250 to $300 million in annualized run rate cost savings by year end 2025.

Speaker 10: We recorded a $55.3 million charge this quarter associated with the implementation of this program.

Speaker 10: primarily from the impairment of assets from non-core businesses were exiting within the entertainment segment, as well as severance and employee related costs.

Speaker 10: We continue to believe we can deliver a 16% adjusted operating profit margin for this year. This reflects the favorable mix of revenue and leaning into above average margin businesses like Wizards and Digital Gaming, including the continued activation of D&D Beyond, which is expected to be earnings accretive in Q4. We coupled this with the heightened focus on bottom line discipline, including the operational excellence savings we're driving across our business.

Speaker 10: Our balance sheet remains strong and is well positioned to meet demand in the fourth quarter.

Speaker 10: Our early commitment to inventory has impacted our cash generation in the near term.

Speaker 10: The quarter-end cash balance was $551.6 million compared to $1.2 billion in last year's third quarter, with operating cash flows year-to-date of $262.2 million.

Speaker 10: Cash is at a lower than historical level and this is typically the low point in our cash balances during the year.

Speaker 10: We expect a lower cash balance this year and 2021 as we have returned $125 million to shareholders through share repurchase.

Speaker 10: Paid $289 million in dividends thus far.

Speaker 10: bolstered our digital strategy with the $146 million acquisition of D&D Beyond, and repaid $73 million of long-term debt.

Speaker 10: Incremental year-over-year promotional activity is occurring behind our key holiday toy and game items to drive our newest innovation while also reducing inventory on hand at Hasbro and at retail.

Speaker 10: Overall, our inventory continues to be of high quality, but our goal is to work down the balance by year end, and you'll see that in our outlook and results.

Speaker 10: While cash at year end is projected to be below historical levels, our go-forward plan accelerates our cash generation with a high-end target of $1 billion in operating cash flow next year, increasing annually off that level as we move forward toward our 2027 targets. We remain committed to de-levering our balance sheet, maintaining our investment grade rating and are on track to meet our debt-to-EBITDA target of $2 billion.

Speaker 10: to two and a half times next year. We continue to return cash to you, our shareholders, through our dividend program and anticipate increasing share repurchase in future years.

Speaker 10: Looking more closely at the quarter, operating profit declined in dollars and is a percentage of revenue from the same period last year.

Speaker 10: This primarily reflects lower gross margin and lower revenue.

Speaker 10: This is largely in our consumer products business, which incurred a greater amount of sales allowances in the third quarter of this year versus last, lowering net revenues, and higher product cost

Speaker 10: Additionally, we increased provisions on some slower moving inventory in certain markets.

Speaker 10: The impact of foreign exchange had a pass-through effect of negative 3% on gross margin due to translation.

Speaker 10: These factors are reflected in a 380 basis point increase in cost of sales to revenue that was partially offset by lower program amortization on lower entertainment deliveries.

Speaker 10: Lower entertainment deliveries in the quarter also resulted in lower royalties.

Speaker 10: Product development increases reflect investment in key talents, particularly within Wizards of the Coast and digital gaming.

Speaker 10: Advertising was down versus Q3 of last year, which included spend behind the My Little Pony movie, and we shifted our consumer product advertising spend closer to the holiday and closer to retailers planned promotional period.

Speaker 10: Adjusted intangible amortization increase reflecting the D&D beyond acquisition.

Speaker 10: This added $1.7 million in the quarter and is forecasted to be $7.5 million next year.

Speaker 10: SD&A dollars declined in the quarter on an adjusted basis but increased as a percentage of revenue.

Speaker 10: Below operating profit, non-operating income was $13.2 million, up from an expense of $1.2 million last year.

Speaker 10: This was primarily the result of a favorable net gain on foreign exchange, which we do not expect to repeat in Q4.

Speaker 10: Last year's third quarter, we had a $9.1 million cost from the early repayment of debt.

Speaker 10: The underlying adjusted tax rate, excluding discrete items, was 19.9% versus 23.4% last year, and we expect the full year underlying rate in a range of 20.5% to 21.5%.

Speaker 10: Looking at our segments, Wizards of the Coast and digital gaming revenues declined 13% in constant currency. Tabletop revenues declined 9% as a result of release timing, but are up 5% through the first nine months of the year.

Speaker 10: As Cynthia said earlier this month, we're forecasting double digit growth for Magic the Gathering this year, led by strong growth in tabletop.

Speaker 10: Digital and licensed gaming declined 37% based on release timing and reflecting the difficult comparison with the launch of the premium game Dark Alliance and the tail end of the launch impact from Magic the Gathering Arena Mobile last year.

Speaker 10: We continue to invest in digital gaming initiatives and talent to support long-term growth in the segment.

Speaker 10: Operating profit of $102.2 million was down 36%. This reflects the revenue decline, higher cost in paper and freight, and incremental royalty expense with new universes beyond sets like Warhammer 40k.

Speaker 10: We've also added the amortization of D&D Beyond I spoke to earlier.

Speaker 10: These costs were partially offset by lower launch-related product development, advertising, and depreciation associated with Dark Alliance that released in 2021.

Speaker 10: For the full year, on a constant currency basis, we expect high single-digit revenue growth with operating profit margin over 40%, down from 42.5% for full year 2021 as we continue investing for long-term growth in these valuable brands.

Speaker 10: Consumer product segment revenues decreased 6%, excluding a negative $40 million impact of foreign exchange, 31.1 million of which was in Europe .

Speaker 10: Latin America grew 15% and Asia Pacific was up 10%. But this growth was more than offset by a 14% decline in North America and an 11% decline in the European region, which was flat absent foreign exchange.

Speaker 10: As a reminder, for the full year 2021, our revenue in Russia was $115 million, with approximately 70% earned in the second half of the year. We do not have this revenue in associated operating profit in 2022.

Speaker 10: The segment's 31% decline in adjusted operating profit is the result of lower revenue, higher allowances, price adjustments related to closeouts, and obsolescence expense associated with moving higher inventory levels.

Speaker 10: For the full year, revenue is expected to decline low single digits from full year 2021 constant currency, with operating profit margin down slightly from 2021's 10.1%.

Speaker 10: From a brand perspective, each brand portfolio category in the segment, franchise brands, partner brands, Hasbro gaming, and emerging brands declined in the quarter.

Speaker 10: Key growth franchises, Peppa Pig and Play-Doh, were up, growing revenue and point of sale.

Speaker 10: My Little Pony consumer product revenue at POS grew a year after the movie debuted. Hasbro products for Marvel and Star Wars positively contributed to revenue and POS in the quarter.

Speaker 10: Where we've had our most challenging comps are Nerf and Hasbro Gaming, two important areas where we have long-term growth plans.

Speaker 10: Chris spoke to several important new initiatives in these brands for the holiday, and the team shared longer term plans earlier this month at our investor day.

Speaker 10: Entertainment segment revenues reflected the anticipated timing of deliveries and were down 34% in constant currency.

Speaker 10: Film and TV revenue declined 26%. Last year we released films Come From Away and Finch direct to streaming and did not have any comparable films this year. Also, Yellow Jackets is later this year versus last.

Speaker 10: Family Brands revenue declined 78%, primarily due to the delivery of My Little Pony and New Generation in the third quarter 2021, which did not have a comparable film release this year. We have significant fourth quarter entertainment revenue for scripted TV, including The Rookie, The Rookie Fed, Yellow Jackets, and Cool Summer, and the launch of Transformers Earthspark on Nickelodeon and Paramount+, as well as continued animation from My Little Pony, and single episode.

Speaker 10: Peppa Pig, and PJ Masks. Adjusted operating profit decreased 86% on the lower revenues in the mix of content. This was partially offset by reductions in program amortization expense, lower advertising versus the My Little Pony movie release, and lower royalty expense.

Speaker 10: For the full year on a constant currency basis and excluding music, we expect revenue to decline in the mid single digits as we divest of certain non-core businesses and certain deliveries of scripted TV and film releases move to the first quarter of 2023.

Speaker 10: Adjusted operating profit is expected to be in line with or slightly up from last year's adjusted operating profit margin absent music of 7.8%.

Speaker 10: In closing, we're focused on driving our business in the fourth quarter to meet consumer demand, end the year with clean inventories, and to achieve our run rate cost savings. We expect full year revenue to be flat to down slightly in constant currency and to expand adjusted operating profit margin by 50 basis points to 16%.

Speaker 10: This also sets us up for growth. We're planning in 2023 and beyond.

Speaker 10: We have a plan that builds on our strengths in branded entertainment, in gaming, and in our direct-to-consumer relationships. We have the brands, the team, and the strategy to successfully execute this plan.

Speaker 10: Now turn it back to Chris.

Speaker 4: to Chris. Thanks Deb.

Speaker 2: Before we turn to Q&A, let me take a minute to recognize Darren Troup.

Speaker 2: Today is Darren's last earnings call as he's leaving Hasbro at the end of the year.

Speaker 2: Darren grew E1 into an accomplished studio with strong talent, a rich library of content, and production capabilities across mediums.

Speaker 2: Over the past few years, he has served an invaluable role in the integration of E1 with Hasbro during an unprecedented environment.

Speaker 2: The D&D film next year and the robust pipeline in development is the direct result of his hard work. Thank you, Darren, for your leadership, and we wish you tremendous success in the future. Now we will take your questions.

Speaker 5: Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question at this time, please press star 1 from your telephone keypad and a confirmation tone to indicate your line in the question queue.

Speaker 9: You may press star 2 if you would like to remove your question from the queue.

Speaker 9: For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker 9: consider using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you.

Speaker 4: Our first question today comes from the line of Eric Handler with MKM Partners. Please receive your questions.

Speaker 14: Good morning. Thanks for the question. I guess start with Eric.

Speaker 14: I wonder if you could talk a little bit about the state of retail right now. Last quarter we had a bunch of pull forwards with direct shipment. This quarter we're talking about higher allowances and promotional activity. Are a lot of the issues just isolated with Nerf and gaming or is there some sort of broader macro situation going on here?

Speaker 2: Well, Eric, hey, first off, thanks for the question and good morning. I will turn it over to Eric as you asked. Generally speaking, we're seeing a great partnership with our retail partners. We have a very high percentage of our promotions and advertising budget focused on Q4 with our new innovation coming out. And so we remain optimistic about what our prospects look like for that new innovation and what sets us up for 2023 and beyond.

Speaker 9: Eric, I'll turn it over to you for the balance. Sure. Thanks, Eric, for the question. Maybe just to build on what Chris is saying, Eric, as we roll into Q4, we've talked about how specifically for Hasbro, our big innovations were back half loaded. We feel very positive about the innovations that we recently launched. If you look at retail right now, we started off quarter four with the big promotion with Amazon, where they did their Prime Day early access sale.

Speaker 9: and Hasbro performed very strongly. So, you know, I think you will see a promotional environment in Q4. We've built excellent programs around the world with all of our retail partners, and I expect that we'll continue to see POS momentum as we go forward. Great. And then just as a follow-up going on...

Speaker 14: a completely different topic. As we look to next year and the opportunities for growth for Dungeons and Dragons, you know,

Speaker 16: today DMD

Speaker 14: directly from Ron, you know, has been mainly a North American driven product. We'll have a global movie launch for the brand. I wonder if you could talk about some of your international growth strategies and how, where you think you can attack best and sort of expanding the adjustable market for the game.

Speaker 2: Yeah, we're certainly bullish about D&D's prospects. The film has had a fantastic introduction at Comic-Con. I think it's one of the highest viewed trailers that Paramount has ever released. There's a nice buzz about it, both at Comic-Con and on the general internet and among fans. And so we think that's going to be a great launching platform for international expansion and category expansion across licensing, merchandising, digital games, as well as driving the core business.

Speaker 9: I think I'll turn this one over to Eric and then Cynthia, if you have anything to add, feel free about the international dimension to Eric's question. Sure. Yeah, Eric, you know, I think we talked a bit at investor day how we see this event, you know, the scale to be determined, but similar to how we saw Transformers when we launched Theatrical behind that brand in 2007, we have a great expansion across new categories of product where, you know, Cynthia has done, you know, along with the Wizards team, a terrific job in the publishing genre.

Speaker 9: But we're really excited about expanding D&D behind this theatrical launch into action figures. We have a terrific line that the teams put together. We have a line of Nerf products that we're very proud of, as well as core games. So you'll see D&D go into more of a board game genre for the first time with Hasbro. So we do feel really positive about the category expansion and with that geographic expansion. So as you can imagine, the teams around the globe are very motivated to make sure that we have a positive win on the board with D&D in Q1 and next year.

Speaker 7: Cynthia, do you want to add anything to that? The one thing I would add is when you think about Dungeons & Dragons Beyond and it being the premier digital toolset, it gives us a great opportunity to expand both internationally but also the tools and capabilities we give all of our players. It's going to give us a wonderful opportunity to monetize more of our player base than the Dungeon Masters that we are monetizing today.

Speaker 4: Great, thank you very much. Our next question comes from the line of our P&A co-chair with UPS. Please receive your questions.

Speaker 1: Hi, good morning. Thanks for taking my question. I have a quick clarification, maybe. The guidance for full year before today implied Q4 could be down 3% to up 6%, which at midpoint would imply some growth in Q4, and today revenue guidance is flat year over year. Did something actually change in your outlook versus what you said on Analyst Day, or there's actually no change how you were seeing Q4 to play out, how to look at it from where we sit, and I have a quick follow-up.

Speaker 2: No problem. Good morning, RPNA. Thanks for the question. Yeah, our outlook has not changed since our investor day. You know, we continue to feel like there's a lot of green shoots in the portfolio. There's some exciting innovation coming out across Nerf, across games, a ton of innovation coming out on Magic the Gathering, our first billion dollar brand. You know, our approximately flat guidance just looks at kind of all factors put together, inclusive of.

Speaker 1: what the macroeconomic environment looks like and what the state of the consumer looks like. Thank you. Thank you. And then in the slides, you noted expectations of North America POS improvement. Does that mean you've started seeing some improvement outside of those two days of Prime Day? Overall, or expect Q4 to record overall improvement when all said and done versus Q3? Because, you know, to finish inventory up...

Speaker 17: low single digits, say up 2%, would mean positive POS in Q4. Am I actually calculating that correctly? Am I thinking about it correctly that you need to see POS come close to positive in Q4?

Speaker 2: Yeah, so there's two components to inventory. There's Wizards of the Coast and digital, which we have a lot of set releases coming out. So there'll be some decline in inventory there that should be fairly significant. And then there's what our consumer products team is doing. I'm gonna turn it over to Eric to talk about recent POS trends that we're seeing across the G5 markets in North America. Yeah, thanks Chris. Thanks, Arpine. Yeah, with regards to POS and market share, we talked quite a bit at investor day about how Q4 was...

Speaker 9: really our focus and we're back half loaded with regards to innovation. We're seeing, as Chris mentioned, good green shoots at this point, in addition to just Amazon and the Prime Day early access sale. So for example, across the EU5, Australia, our market share and POS trends are improving, flat to slightly up over the last month. And we're also seeing the same level, or different levels, but positive improvement in the US over the past several weeks. And...

Speaker 2: that's something that we're obviously motivated to continue to build on. And it should be noted, 67% of our advertising and promotional budget is in the remaining, what, 12 weeks left of the year. And so we've seen a highly promotional sensitive environment. Actually, the markets where we're seeing the best share trends are where we started a little earlier on that promotion. Thank you very much. This is super helpful. Thank you very much.

Speaker 4: My next question is from the line of Drew Krome with CIFIL.

Speaker 5: Okay thanks, hey guys good morning. So I have two questions on wizards. Maybe to start, you know last quarter you suggested the segment would perform at the upper end of your guidance range which was low double digits growth. Today you're suggesting high single digits growth.

Speaker 5: You know, what is change versus the previous commentary? Is this a business that's seeing any sensitivity around price that you alluded to earlier?

Speaker 18: versus the previous commentary. Is this a business that's seeing any sensitivity around price that you alluded to earlier? And then I have a follow-up.

Speaker 2: Yeah, so I'll take that and Cynthia, feel free to fill in anything that I might not cover. You know, we're continuing to see the Wizards of the Coast business performing well. You know, particularly the Magic business, which you know, year to date is up 5%, whereas the general games category are down as low as much as negative 8%, depending on which source you look at. So Magic is a great fanbase, very resilient.

Speaker 2: and we find the fans in the Magic segment and in our overall collector's segment, they have a great personal balance sheet and a capacity to spend when they are motivated and driving something that they really enjoy. And so that's kind of like underscoring the bullishness on our outlook on Magic moving forward. Our digital business has been a little softer year over year in line with the rest of the digital gaming category.

Speaker 2: Dungeons & Dragons has performed well, but again, we don't have a comp of the premium game that we launched with Dark Alliance next year. And we continue to have a little bit of play in logistics around kind of access of card stock and production, because the general trading card market, whether it's sports collectibles or playable trading cards, remains a hot and very resilient category. Cynthia, anything to add on the outlook?

Speaker 7: You know, I think the other thing I'd say is just what a great lineup we have for Q4. Kicking off with this, we have Warhammer 40k from our universes beyond, Brothers Wars coming up, two strong secret layers, one featuring the platinum selling music artist Post Malone, the other being a 30th anniversary countdown kit. And of course, we've got the high end collectible magic 30th anniversary edition, which was inspired by Magic's beta set.

Speaker 7: and include some of Magic's really iconic cards like Black Lotus. Finally, I'd say all five tent pole releases we've had this year have all done more than $100 million in revenue.

Speaker 18: And this is the first year that's happened. OK, thanks. Very helpful. And then my follow up is more longer term focus. Mobile as a category has been pretty challenged over the last 18 months. As you think about the next several years, is this going to be a focal point for investment to expand across the segment?

Speaker 2: Thanks. Well, you know, as we talked at our investor day, we have a plan to double the size of the Wizards & Coast and digital segment over the next five years, you know, by 2027. That growth will be powered by continued resilience in our tabletop business and brands like Magic and D&D. But we're planning to double the percentage of the segment that's driven digitally.

Speaker 2: And you know, we have a fairly balanced approach to how we think about where our digital investments are. We have a large and growing licensed business where the majority of our mobile products are done. We work with some of the best names in the business, Scopely being one very big one. And then we are leaning in a lot into games as a service, or game platforms as a service like we have with D&D Beyond, as well as a bunch of really high caliber studio.

Speaker 8: Thank you. The next question comes from Megan Alexander with JP Morgan. Hi, thanks for taking our question. I wanted to spend some time on consumer products and maybe how you're thinking about it beyond Torque. You expect inventory upload single digits. Previously you would expect it flat. You do talk about a lot of entertainment and innovation coming next year. But how do you think about the risk of retailer de-stocking, especially in the first half as you're lobbying?

Speaker 2: inventory into the Q2 period to make sure that we didn't have that again so that we could promote aggressively in Q4 like our plan is today. I think the other thing to note is we have a lot of new innovation that's very on trend that's coming out in Q4 that we think will comp very favorably in the first half of next year. And then last but not least, I think whatever happens on the macroeconomic front, we have seven blockbuster films and 20 TV shows coming out that are very front half loaded.

Speaker 2: that are giving us a tremendous amount of tailwinds to be able to handle whatever curve balls that the economy might throw our way.

Speaker 9: Eric? Yeah, I think excellent points. And, you know, I think if you look at the trends that we've seen, we, you know, Megan, we continue to believe in our lineup for 2023. You know, retailers, regardless of macro trends, are, you know, are always very interested in supporting and promoting our great entertainment and our partners great entertainment. So, you know, at risk of repeating when you have a lineup like ours next.

Speaker 9: Spring, you know, which starts with the Mandalorian 3 from our partners on Disney Plus. We then have all those movies that Chris talked about from Ant-Man and the Wasp, Quantum Mania, D&D, which we talked about already, Honor Among Thieves, Guardians of the Galaxy, Volume 3, Across the Spider-Verse in June , Transformers later in June , Indiana Jones at the end of the month in June , turning into July , and then the Marvels, which was recently announced, you know, on Disney Plus Day by the Disney folks. That's a heck of a lineup, and we have products and great programs supporting all of them.

Speaker 9: So we do expect that we'll have a really nice start to retail going through Q1 and Q2 in that midterm period that you asked about going to next year.

Speaker 8: Awesome. So I guess just to tie that all together, is it fair to expect that you believe consumer products can be up next year despite exiting some of the brands that you've talked about?

Speaker 9: Yeah, I think that's it. I think that's right, Megan, when you look at what we're what we're doing as a business, what we do, what we certainly expect is that we're going to see some, you know, good growth, particularly across our action brands next year, which is really the predominance of what I just highlighted. And I also want to point out that a big reason for what we're doing from a strategic standpoint is to improve our profit story. So certainly from a consumer product standpoint, we not only expect to have that improvement that you asked about with regards to net revenue, but also to improve our profit story.

Speaker 9: what we expect and will continue to focus on that operating margin expansion, which you will see from the consumer products unit next year as we exit businesses, but also work on our operational excellence program that both Chris and Deb mentioned in their opening remarks.

Speaker 8: Awesome, thank you. And maybe a quick follow-up for Deb. You know, the guide implies 4Q operating margin above 3, which isn't usually typical for your business. Is that all mixed to WZRD and then the cost savings you've talked about or are there some additional drivers of improvement? I guess maybe more specifically, like how should we think about what's built into the guide from a cost of sales perspective in terms of, you know, are you confident the inventory actions you've taken in 3Q are sufficient or is there further risk in 4Q?

Speaker 10: So thanks, Megan. You know, as we talked about, we have a very strong mix of revenue. Much of that inventory we have on hand now, coming from our different groups. We are actually seeing reduced distribution costs, so we're seeing some things come down now on the distribution side. I think all supply chain is easing up a bit. The one exception I would say is still paper, which is still a bit of a challenge, and we've stocked up on paper so we can make sure we have supply.

Speaker 10: You're seeing some of that in our inventory balance as well. So between mix, our cost savings, we'll start to see the benefit of cost savings. In fact, we've said we're going to see about 20 million of that impact predominantly coming in the fourth quarter. And a big piece of that is actually coming in consumer products as well. So between mix and consumer products, we'll start to see the benefit of cost savings as well as the benefit of cost savings as well as the cost savings as well. So between mix and consumer products,

Speaker 10: cost savings, actions we've taken to date to make sure we have product on stock. That's how we look at our margin for the fourth quarter and why we remain confident in the fact that we can hit 16% on a full year basis.

Speaker 10: actions we've taken to date to make sure we have product on stock. That's how we look at our margin for the fourth quarter and why we remain confident in the fact that we can hit 16% on a full year basis. Thank you.

Speaker 4: Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed with your question.

Speaker 6: Hey, good morning. Thank you for the question. I just have two. First, I want to follow up on Eric's question and just ask about some of the commentary around close outs and allowances and promotional activity. Was that concentrated in any particular brand or category or was this an industry-wide toy issue that other players may have seen? And then second, I was just wondering if you could talk a little bit about the Disney Princess impact to

Speaker 6: revenue and margins within consumer products? Is that a product that is effectively winding down and approaching zero? Is that the right way to think about it for the fourth quarter? Thank you.

Speaker 9: Sure. Thanks, Mike. It's Eric. Good morning from all of us here at Hasbro. I'll answer in order and if I forget anything, you can jump in again, Mike. But your first question was about closeouts, allowances and promotional activity. You know, I'd say we pride ourselves on making sure that we continue to stay ahead of our inventory situation. And as we work through Q3, as Chris already mentioned, we brought in some inventory in Q2 and we wanted to make sure that we started early activations with our retail partners, which we did.

Speaker 9: I expect Q4 to be in line with where we've been and we'll work through our inventory again to finish the year in that load and mid single digit area that we talked about. And that's what is built into our story that we've already discussed this morning. I think with regards to businesses we're exiting, which is the second part of your question, we do expect that as we exit those businesses both this year in Q4 as well as throughout next year that we'll manage that decline.

Speaker 9: through the growth and other brands focused on our franchise brands. We talked a lot at our investor day on fewer and bigger as our strategy and that's not going to change. So you're gonna see us with that growth and those franchise brands and the partner brands that we're going to stay behind like Star Wars and Marvel, and we're gonna exit some others. And as we exit some of those other brands, as I already mentioned to a prior question, you'll see an increase in operating margin. So I think it's an excellent thesis to invest in for Hasbro.

Speaker 6: Great. Thank you for the thoughts, Eric. Thanks, Mike.

Speaker 4: Our next question is from the line of Fred Whiteman with Wolf Research. Please proceed with your questions.

Speaker 5: Hey guys, good morning. I just wanted to follow up on sort of Chris and Eric's comments about the price sensitivity and maybe dig into what that means for how you guys are thinking about price in the CPG business. Eric, you sort of gave some color on 23, but then you guys also have this midterm target about 15% within that CPG business. So, given some of that software consumer backdrop, is price still a lever you guys feel confident about? Or is it more mix and cost saves to get you there?

Speaker 2: Yeah, well hey, thanks for the question. You know, I think it's a couple things. So as we look at price, we look at a couple different factors. First we look at consumer segmentation. And so you know, you have the mass consumer and then you have the collector and the fan segment. Collector and the fan segment tends to be very price inelastic. It's very resilient segment that's very passion driven. And you know, as long as you build a great product and a great play system and continue to invest behind it.

Speaker 2: we find our fans stick with us and that's been a major driver of growth for us. Our two fastest growing businesses this year are our Pulse business and Magic the Gathering. And you know those are very high margin businesses and very lucrative segments for us that will continue to lean in in the years to come. On our mass side of the business you know at our investor day we talked about this concept of play systems and play system based innovation. And really that's a high low strategy of product development where you have great opening price points and you pair that with ladder up opportunities for great giftable items and great.

Speaker 9: where retailers are closing out a lot of private label, shifting that private label to close out shops around the country and around the world. So, you know, I think for us, we're clearly a branded house and we have some very strong brands at Hasbro and we're seeing, you know, pricing sticking and being able to be stronger through this environment. And as Chris mentioned, a lot of that is due to the consumer and the way that we segment our consumers. Makes sense. And then just a quick follow up, the mid double digit POS that you guys touched on for Prime Day, is that on a year?

Speaker 13: to me like the film and TV segment has just as hard almost even a harder comparison in the fourth quarter so then can you just reiterate again what are the specific things that are going to happen in the fourth quarter to make the decline smaller against a harder comparison and then the second thing is the shifting of certain things into the first quarter of 2023 what what causes that shifting is that just production delays or personnel issues or

Speaker 2: or the various networks that we're working with that affect payment timings and delivery timings of the content. And that's what I think you see going on in Q4 of this year. You know, that said, we see our entertainment segment X music being down about mid single digits, maybe high, low, maybe low single digits. But, you know, a lot of that is just deferred revenue that goes from Q4 into Q1.

Speaker 2: and points to continued growth and good prospects in 2023. Okay, thank you very much.

Speaker 4: Our next question comes from the line of Garak Johnson with BMO Capital Markets. This is you with your questions.

Speaker 14: Hey, good morning. I have a couple here. First, I just wanted to clarify what you're saying on inventory because sometimes I'm confused as to whether you're talking about company inventory or channel inventory. So what's the channel inventory situation look like right now or at the end of the quarter? And where do you expect that to be at the end of the year? Is that what's supposed to be up low to mid single digits?

Speaker 2: So, Garak, when we talk about inventory, we talk about company inventory, and we talk about it across our CP and wizard segments. So as Eric mentioned, we see the CP inventory up either low single digits or mid single digits. And we see our wizard's inventory likely down in Q4, which contributes to up low single digits for a company as a whole. I'll turn it over to Deb to talk about where we see the broader mix.

Speaker 10: of inventory across our channel partners. Right, so retail inventory is up, as we said, at the end of the quarter, but it's of good quality, and we have a lot of promotional activity planned for the fourth quarter. So our specific guidance was on our inventory, exactly as Chris said, but retail inventory, you know, we're working with our retailers on promotional activity, and much of it was setting for a lot of this new innovation that we're having in the fourth quarter.

Speaker 14: Okay, thank you, and I'll add on to what Mike was asking about closeouts and obsolescence. Perhaps you could pinpoint exactly where those issues were and also, Deb, perhaps sales allowances as a percent of consumer product sales this year compared to last year. How did that look?

Speaker 10: So, sure. Well, let me take the sales allowance question, and then I can answer some of the closeout question and then Eric can as well. But we are seeing price allowances a bit higher, all sales allowances period, right? Whether priced or not, a bit higher this year than last year. And the reason for that is, if you think about it, we couldn't even get stock last year. So our retailers were selling what they could get for less promotional activity with the consumer, and that was the consumer takeaway line.

Speaker 9: and in various places in Europe and in certain territories, particularly in the Pacific region. Yeah, and also just to add, Derek, that we have some Q4 elements that we didn't have from a comp last year. So not only are we comping a fairly non-traditional comp, as Deb mentioned, we were in chase mode significantly last year, but we also have a big theatrical movie this fourth quarter with Wakanda Forever from Disney. And that's something that we didn't have in Q4 last year, as well as...

Speaker 15: Thank you. Our final question is coming from the line of Jason Haas with Bank of America. Please just see with your questions. Hey, good morning. I should take my questions. First of all, I'm curious if you could provide some outlook by segment for next year. I think at your recent analyst day, you talked about consumer products being up. You know, with low single digits, wizards, high single digits to load up a digit, and then I think entertainment was low single digits. So is that a good framework to use? I know that was a multi-year target. I think that's a good framework to use for next year. I think that's a good framework to use for next year.

Speaker 2: Jason, we haven't shared a specific by segment guidance for next year. We only shared kind of longer term 2025 to 2027 guidance. That said, we feel really good about where we're positioned for consumer products, both on the innovation we have coming out this Q4 and how that comps into the first half of next year. A stacked entertainment lineup, which creates a lot of tailwinds for us that I think more than compensates.

Speaker 2: for the business exits that we have. And then we can continue to believe in our game segment. And as we just talked, entertainment's gonna have some revenue that moves out from Q4 into Q1, which certainly represents at least a modest tailwind helping that business as well. Yeah, I'd also just add, Jason, as you think about the future, I do wanna mention, since we haven't talked much about it, our Operational Excellence Program. And just note that we believe we'll be a stronger, more disciplined, more profitable company going forward. And we have the 250...

Speaker 2: Well, we've had a great growth for Magic the Gathering. You know, since I started back in 2016, the business is almost tripled. And as I said, you know, we're up through the first nine months of this year by 5%. And you know, the general gaming category is down by most measures, close to double digits. And, you know, we think that Magic will be up double digits by the end of the year. Cynthia, I don't know if you want to talk a little bit more about this, particularly what we have coming in Q4, but you know, we remain bullish on the product.

Speaker 7: A couple of things I would say is we did have one of our products slip out a little bit into Q3 which was Infinity. That was a supply chain issue. But other than that, our releases that are coming up for this year with Brothers War, with our Secret Lair drops which are direct to consumer, our Magic 30th edition is also direct to consumer. I would say that within the channel you have the same number of sets.

Speaker 7: happening in a year in the hobby channel, they've just shifted a little bit in timing due to some supply chain issues.

Speaker 2: And I'd say, you know, just one last thought as you think about Wizards. Magic has been incredibly important to the growth of Wizards, but D&D, you know, as much as Magic has grown, D&D since the release of 5th edition back in 2014, gosh, it's probably 10x the size it was back then. And we have an amazing roadmap ahead for D&D with AAA films, some exciting TV projects that we are going to announce shortly, AAA video games, big partnerships.

Speaker 2: huge merchandising and licensing efforts. And so, you know, I really think that Wizards of the Coast is positioned to become a two foundation business over the next several months. That just will get better and better driving our blueprint over time. It's great to hear, thank you. Thanks. Thank you. At this time, I will turn the floor back to Debbie Hancock for closing remarks. Thank you, Rob, and thank you everyone for joining the call today.

Speaker 10: The replay will be available on our website in approximately two hours, and management prepared remarks will be posted following this call. Thank you.

Speaker 19: This will conclude today's conference. Let me disconnect your lines at this time. Thank you for your participation.

The morning lcometo. The has third courar thousand 22 earning conference call. The time parties will be only MO question answer session will follow the formal presentation ending which car oper turn the conferen for stars year or from your to P the offferenages being recorded. If you objections, disconnect this time the sent turn the call place. President of ations. Please and thank you the morning every one joining me. Today our Chris Co has bro chiefexpectut of offit and to has Chief Financial office there. Today we will begagain with Chris providing comment ary on the companyies performanment. Then we will take your question. nine ment has bro President and Chief Operating off the willillion. President of Wizards of the Co and digital gaming President e one President e one T V will in for the Q? A courortion of the call. Our earning RE presentation 5, four today call our St Ed on our V? We site, the press LY increpresentation include information regarding non gap jojustment and non-GAAP financial measures. Our call today will thir adjusted measure which excluded the non gap justment. A RE biliation of gap on GAAP measure is included in the P? Le and presentation no that whenever we earning for share or e? P we are refer earning de share four we begagain. I would like to remind you that during the call and the, the ans session that follow, members of has management may make four looking statement concerning manage expectation go of ject and the our matter Med factors that actual resu or events to jurly from the the P RE or other expect.ation four looking statement. The factor include four and repfour 4, 10-K. our most RE 10-Q today press LY and and our other public dis closuures. We underent take no oliglegation update any four looking statement today reflect events or C sent the cur after the D call. Now, like interrodu Chris cock thank and morning. We expected Q3 to the, our most challenging quarter of two thousand and 22, based on product release ship timings in our consumer product segment as well as release cenes in our games and entertainment businesses. Revenue for the quarter was one point 6, eight bmillion down welve percent in constanting currency and down 15% actual rates versus two thousand and 20: one adjusted operating profit with two hundred seventy one million or a 16 point 1% P margin down thirty 1%. Revenues were impacted due innovation timing, including later product releases, and Ames. This year versus last, accelerated direct court shipments in our consumer product segment which shipif Ed reues from Q3 to Q2 and release counallender more heav LY Q2 and Q4 waed for Wizards, digital gaming and entertainment businesses. We also seen theaverage consumer become increasingly price sentive as the year progress impacting point of Sal friends promtions and enter Al demand have become increasingly important and will be key in the courarters a head. For instance, our most recent Prime Day last week, has rO volume increase mid double digits year over year among the top to Y and gme performaninesses. The ongoing growth of key brands like pepper PIG and my little ony speak to the power of driing great entertainment to RE audenes and by or demand. In Q4 we be kicking off and President lineup. The entertainment starting with Marvel studios, Black pand or con foreever and extending well into two thousand and 20: three operating profit margions were impacted by a combination of more aggressive close out actions in consumer products and the shift and iX of deliveres in our wiz, ards digital gaming and entertainment segments. For Q4 weare projecting has rO revenue to be a prox flat on a constant currency bases, Bo by growth in my little ony, Pep per PIG, Marvel starting lineup and Y gaming brands in particularer our Wizards digital gaming segment behind one of our best Q4 magic lates ever as we kick off the Ands thirty three and selerate has rO first ever one billion dollar brand. Fourth courarter, adjusted operating profit for the company is expected to improve by mid double digits year over year, driven by a more favorable product, MX improvement and disribution disposal, low profit non court businesses and the impact of our new operational excellence program. We noun that our Investor Day on our octo over four for the year. We are expecting revenues for has road to the flat to slightly down on a constant currency bases. We continue to expect adjusted operating profit margin two increase, 50 basis pointing, 2- 16%. We also expect inventoryy levels to be up low single digits year over year. We have a strong balallance sheets and a plan that accelerates cash generation going fourward. De will speak to this in more TA short LY. Our Investor Day. We intinterroduced our new strategic proach to our blue print, Blue two point ero, with which positions to excelerate growth with the focus on games, digital and direct and Demon rates. Our commitment to deliver superior shareholder return with thea plan grow adjusted operating profit by 50% by year and two thousand and 20: five this profit improvement will bedriven by a focus on fe, big brands with billion dollar potential, growing our high profit games and licensing businesses and driving significant sav.ings, the our operational excellence program. This initiative will help the drive two hundred 50 to three hundred million of andnual run rate savings by year and two thousand and 20, five including a 50 million dollar run rate level. allalready ieved in two thousand and 20. that is helping the our tto line growth in Q4. This management team is satisfied with our performance in Q3. Our new plan is already bebegun and will gather momentum over the coming quarers. Our high margin Ames businesses on track for growth in Q4 and red by a must AB magic lineup, including the first time our fanss in by the I con card, the Black LO in over 20, five years we added the byal and ation were the party gamme for fanss all ages to our industry leading Ames four B? O for this holid day. We are innovating in key brands, like with our new five lastters for fanss 14 and old. We will extend our growing leader ship in high margin, high potential categories, like three school with leading brands including Pep per PIG and our products for Marvel by and a amazing friends as well as cretivity with plate? O brands where we have revenue and P's momentum, like the already T selling playate ICE cream truck. And we will drive a moulti courarter fly will momentum with one of our best and entertainment lineup ever, starting this November with marve studios, Black Pan or will con foreever and extending into two thousand and 20, three we with six more Black W films and 20 courcripted and UN cripted shows. We are marchand izing behind including the upcoming has ofevent films, dunions and drags on or among fe in March and trans fourers rise of the in June . The plan we laid out earlyer this month has on PA to drive growth and excelerated profits, focus Al and hands operation excellence. We are concentrating on the brands that give us the biggest growth potential and where we truly lead and innovate in the category. We will licen out brands where we can make a great return through a partner model, in some cases extracting value from DOR assets, and we will ex businesses drive branded entertainment through Blue PR two point ER. We will pred this operational disci and entertainment fewel innovation with a UE emphases on returning cash to shareholders and driving superior long term shareholdter returns. Has rose commitment to category leading dividend is CK soled and when pared with the potential of our brands, the growing impact of our operational excellence program and standing entertainment lineup, we believe that positions has rO as an exceptptional value for shareholders with strong year and long term potential returns. With that I will turned over to our Chief Financial officeer B to inis Deb the moreninging every one the third courarter results flect the timing ship four cast early in the year. The include release timing for magic the gathering C and ER tainment delivery and several product oneunch in key brands happening and early four courarter andas well as the shift and retail PR? omtional Perry four change negatively impacted revenue by a hundred four million dollars year to date, with 50, four million of that impact in the third courarter and, as we projected, the Mt row and by ment for the consumers challenging increasingly as a year has proress. As we shared early this month we sent a addressress of chieveable plan drive profitable growth over both the the year and long term. Focusing on few brands, we we see the biggest potential central. The delivery of this planans is an operational, excellent program to deliver two hundred fif to three hundred million dollars in andnual ized run rate cost saving. By year end two thousand and 20, five we recordted a 50, five point three million dollar charg. This courarter C ated with the implementation of this program. primeim LY from the IR? ment of afterse from non court businesses were ex today with in the ent? Er tainment segment, as well as seven and ploy related cost. We continue to believe we can deliver 16 perpresent adjusted operating profit margin for this year. This reflects the favorable MX of revenue and leaning to ove average margin. Business like Wizards digital.