Q4 2022 Hasbro Inc Earnings Call

February 16, 2023

Okay.

Good morning, and welcome to the Hasbro's fourth quarter and full year 2022 earnings conference call.

At this time, all parties will be in a listen only mode.

A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, today's conference is being recorded.

Any objections you may disconnect at this time.

At this time I'd like to turn the call over to MS. Debbie Hancock Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone.

Joining me today are Chris Cox, Hasbro's, Chief Executive Officer, and Deb, Thomas Hasbro's, Chief Financial Officer.

Today, we will begin with Chris and Dan providing commentary on the company's performance.

And we will take your questions.

Our earnings release and presentation slides for today's call are posted on our Investor website.

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 were 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.

Salt 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.

<unk> guidance assume through retained the noncore entertainment film and TV business notwithstanding the current marketing process. While there is no guarantee of such an outcome. If this process results in a sale we will update our guidance. We undertake no obligation to update any forward looking statements made today to reflect events or circumstances occurring after.

The date of this call I would now like to introduce Chris Cox.

Right.

Thank you Debbie and good morning.

In October we laid out our new strategic plan for Hasbro blueprint to point out built on fewer bigger more profitable brands, a sharpened focus on the categories, where Hasbro can be best in class.

And operational excellence program to speed, our agility and improve our cost competitiveness and growth initiatives and digital games, Hasbro content direct to consumer and licensing.

While Q4 proved to be a disappointment, particularly in our traditional toys and games segment, we made progress under the hood that meaningfully improved our bottomline and sets us up for margin expansion in 2023, despite what we anticipate will be a continued challenging consumer environment.

Our transformation efforts are positioning Hasbro for success.

In 2022, we identified $50 million in run rate cost savings that improved our Q4 earnings by over $20 million.

In 2023, we anticipate our operational transformation, we will generate a $150 million in run rate savings money, we are using to both reinvest in the business and improve our profit profile.

We are also undertaking a significant organizational redesign that streamlines decision, making puts the consumer at the center of everything we do and aligns the company behind core competencies in games and toys.

Within our growth initiatives, our direct business comprised of Magic Arena Dean D beyond Hasbro pulse and Magic Secret Lair was up 15% in 2022.

Hasbro pulse was our fastest growing channel increasing 70% on robust fan demand across premier industry Entertainment properties Deanna.

Deanne D beyond delivered user growth in excess of 20% since we acquired the service in May of 2022, and as forecasted was EPS accretive in Q4.

Wizards of the coast and digital gaming grew 5% in constant currency outperforming the games market that by most measurements was flat to down.

Magic tabletop, leading the growth.

Importantly, we celebrated our first billion dollar brand in magic the gathering a huge milestone not just for Hasbro.

Thousands of hobby shops are most important and fastest growing channel for the brand and millions of fans, who make both magic and <unk> more than just games, but vibrant global communities.

Our growth in Wizards was not without challenges, we navigated significant supply chain disruptions that while resolved for 2023 compressors that release schedules in 2022, particularly in Q4.

We were too aggressive in some of our pricing assumptions, notably our 13th anniversary edition of Magic and pulled back on available supply impacting Q4 results.

Lastly on DMD.

We misfired on updating our open game license a key vehicle for traders to share or commercialize their DND inspired content.

Our best practice is to work collaboratively with our community gather feedback and build experiences that inspire players and creators alike is how we make our games among the best in the industry.

We have since of course corrected and are delivering a strong outcome for the community and game.

Our licensing business was up 5% for the year over the past several months, we've announced multiple strategic licensing partnerships and we're excited to have top partners, taking on iconic brands like for real friends Littlest pet shop, and easy bake oven to name just a few.

Our teams are focused on growing market share in the categories, where we can lead we had success in preschool with Peppa pig creativity with play Doh and action with strong growth in hasbro's products from partner brands, Marvel, which had a record year and Star Wars.

Our focus on content is centering around Hasbro IP for the long term our sales process for the majority of E. One film and TV is well underway with strong interest in these valuable assets.

We expect to have an update in the second quarter.

Our content pipeline for Hasbro IP is set for growth in 2023 with the upcoming release of the feature films Dungeons and Dragons honor among thieves and Transformers rise of the bees and a host of new and continuing preschool and kids shows from Transformers, They're a spark to the new seasons of my little Pony and <unk>.

The big to the new <unk> and the <unk> heroes on Disney Junior and Disney plus.

Looking ahead, we are excited about the recently announced <unk> live action series and for next year. The animated Transformers feature film with our partners at Paramount.

For 2023, we expect the toy and game market to continue the trends of Q4 into the first two to three quarters of the year, given the lingering effects of consumer inflation.

We also see approximately $300 million of revenue headwinds from foreign exchange and exiting low profit brands licensing businesses as part of the fewer bigger better pillar of our strategy.

As a result, we anticipate revenue for the company to be down low single digits for the year with consumer products down mid single digits Wizards of the coast and digital games up mid single digits and entertainment up low single digits.

The progress, we're making on our cost savings operational excellence and focusing on key brands initiatives is expected to drive continued operating margin expansion of 50 to 70 basis points.

We made progress on both our owned and retail inventory in the fourth quarter, but have more work to do the.

The teams are focused on clearing inventory in addition to supporting our innovation.

This will impact our growth rates in profits most notably during the first two quarters of the year, which Deb will provide detailed comments on.

We ended the year with $513 million in cash as we sell through inventory and drive profit expansion, our cash flow is projected to grow during the year.

As we announced earlier this week, we are maintaining our current category leading dividend.

We continue to prioritize investing to grow de levering the balance sheet and returning cash to shareholders.

Given a challenging market context, our focus this year will be on increasing our operating profit margins and growing share and our focus categories.

In outdoor we are taking targeted pricing actions under competed every price points expanding the market with the introduction of Nerf Junior kid's five to seven and winning share in the fast growing gel segment with all new innovation, starting at a segment LOE of $19 99.

Inaction, we have one of our strongest content lineups in a decade, including six blockbuster films.

A new streaming series and some of the strongest new product innovation for Transformers in years set against the launch of the rise of the Bes feature film in June .

In preschool, we are excited by the continued global appeal of Peppa pig and our new line based on the upcoming hit series Young Jedi Adventures from Lucas film.

In creativity play Doh is growing share and we are adding new compounds like Nickelodeon slime, and bringing best selling innovation like our play Doh ice cream truck into the new year.

And in games, we are adding all new innovation like the casual game Twister Air.

Building on the best selling clue escape room series, extending our audiences and magic with our newest universes beyond set based on Jr. Tokens Lord of the rings series sales have been.

Growing our distribution for Magic arena with our upcoming launch on steam and reaching all new global audience scale for DMD with our new blockbuster movie Dungeons and Dragons honor among thieves and AAA videogame Baldur's gate three from our partners at Larian later this year.

Over the next 12 months, we will share more about some of the innovation, we have coming to market in 2024 and beyond.

To give you a sense of a few.

Creativity, we see an amazing opportunity to grow that market and maintain audiences as they age up with new innovative character centric and story based play.

And video games, we are excited to reveal an all new SIFI IP from archetype studios in Austin that we believe will be one of hasbro's biggest in over 20 years.

<unk> series, our new custom action figure line gives a glimpse of the possible and Hasbro's early leadership investments and high fidelity custom three D printing, which has the long term potential to introduce the concept of mass customization for toys and collectibles.

In traditional role play, we see exciting possibilities and only virtual tabletops that unlocked new consumer value choices bring imaginations to life taps into the scale effects of user generated content and create seamless remote and in play play possibilities across phones Pcs and tablets.

With AAA graphics, and intuitive controls and.

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

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

In the near term, we will execute our focused category and inventory reduction plans to grow share.

Transform our organization and cost structure to drive innovation and improve margins and continue to invest in new categories competencies and partnerships to setup Hasbro for robust long term growth as we celebrate our 100th anniversary in 2023.

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

Thanks, <unk> morning, everyone.

Over the course of 2020.

We will progress.

By completing a strategy review.

Railing.

Thank you pointed out.

Taking a significant transformation project to streamline our organization or clarity.

While the end of 2022 did not.

Wholesale.

Okay fine.

Sure.

Thanks Omar.

Future improved operating profit margins in a challenging environment.

Let me start with the balance sheet and our focus on disciplined possible.

More sales with alcohol prior inventory.

At year end.

Our own.

Inventory levels.

Yes.

The third quarter.

125 level.

Year or two.

Hello.

This is driven by last year's revenue.

Early retailer.

And our thoughts and plans.

<unk>.

The timing of magical leases early in 2023.

Increase in paper Staffer award also contributed to the growth.

Our retail.

Inventories were up low single digits for clarify top global market.

In Q4.

Okay.

And Paul.

As a result.

<unk> approximately 135 million of debt.

Hawaii will look like at retail.

Given our higher level of opening retail inventory as well as that from others in the industry.

The negative impact on first half retail order.

When you combine that with the fact that 60% of our approximately 100 no revenue at all or in the first half of this year and the early timing of retail order checkbook glass <unk> Harlan.

We anticipate our first half revenue will be down approximately 20% compared to the first half of 2022.

With Q1 revenue down approximately 25.

Operating cash flow.

No.

We're forecasting 2020 free operating cash flow.

700 <unk>.

We continue to believe will reach a $1 billion for operating cash flow level.

Now most likely 2025 or more.

We have sufficient cash to operate our business and meet our capex flow, including investing for growth.

Funding our dividend.

We continue to target debt to EBITDA of two.

<unk>.

For 2023, we expect to make progress.

Yes.

Pending the outcome of the sale of non core.

We plan to prioritize.

Paying down debt.

We remain committed to low holding our investment framework.

At the same time, we're intensely focus for fall.

Paul.

Origin.

Last year, we increased adjusted operating profit margin by 30 basis points and we believe we have the potential to add an additional 50 to 70 basis points. This year.

We achieved approximately $50 million run rate possible.

<unk> $20 million in 2012.

This was partially offset due to the volume decline in April .

Right.

We remain on track for 150 million of annualized run rate savings by year end.

Great.

This progress keeps us on the path to reach our targeted 20% operating profit margin in 2027.

Our floor, while also growing.

Moving to net earnings and earnings.

Share over that period.

As Chris mentioned earlier, the process Youre selling our noncore entertainment focus remains on track.

We plan to update our guidance for our control following the close of the transaction.

What is the portion of our portfolio, we're continuing to invest in our core initiative.

Innovation.

Sure.

Yes.

Right.

We're focusing on higher margin brands moving out of low return businesses.

Our organization.

We're in the middle of this transition and as a result recorded charges last year patrol photo fill activity unfolding.

Great.

Our software impairment.

In the fourth quarter.

Included in impairment operator.

The impairment was triggered by our focused strategic approach to prioritize other brands, Inc. Film development in the near term.

Although the impairment charge.

Our brands continue to generate value and remains an important part of our brand.

Hello interest revenue grew last year is celebrating its 40th anniversary this year will move Epsilon.

The third and final theory and continues to go up.

Scripted series with.

Lighter show Allergenic fine and Jonathan.

Looking at our adjusted results for full year 2020 for revenue profit and earnings were impacted by lower than expected sales.

Foreign exchange had a negative $166 million impact on full year revenue.

Cost of sales was up 240 basis points due to higher product costs.

These very obsolescence.

Sales allowance.

The outflow for a loan product.

We benefited from higher product prices are on the water and lower freight expense as we move through 2022.

We anticipate improvement in cost to revenue share driven by our low transformation effort.

Oh man amortization declined on lower entertainment deliveries from award.

Royalty expense declined on lower partner brand and entertainment revenue.

At year end 2022.

Several third party licenses.

This will lower partner brand revenue and our loyal Swappable solutia, while benefiting operating margin.

We spent less on average probably the last year aligned with our focus on core brands and lower film advertising in our entertainment segment as we can.

Comps for my Little Pony movie in 2021 and supported.

2024.

The team increased advertising support of our key brands and categories for 2023.

Creasing the overall.

But with a much more targeted approach.

SG&A declined in dollars in line with revenue, primarily due to lower bonus and equity compensation expense.

Given the outcome of the year and lower depreciation related to 2021, many of our modules.

We also saw lower freight distributional.

Plan that has higher warehousing costs.

These levels of inventory.

In 2023, while we're achieving cost savings on that line item.

Given the timing to achieve the run rate for those.

This forecast.

With more normalized compensation expense plan.

We.

At 2023 by approximately $80 million with approximately $65 million.

And the remainder in product development.

For the current year.

Outlook translates to an adjusted operating profit margin improvement.

70 basis points.

Our adjusted underlying tax rate for 2022, excluding discrete items was 21, 8% in line with our projected rate overall.

In 2023.

Our underlying adjusted rate to be between 20% to 21%.

Looking at our stack LOE.

The coastal digital gaming revenues increased 5%.

Tabletop revenues were up 12%.

Magic the gathering.

Yes, it all declined 23%.

Expected.

The local totaled 21 launches of the premium <unk> and magic the gathering arena mobile.

In 2023 digital revenues for us.

With the launch of <unk> <unk> from <unk>.

With some revenue first.

Third quarter and increased in the fourth quarter.

Magic T&D digital will move investment priorities, perhaps.

Adjusted operating profit was $538 4 million down 2%.

Primarily by higher product costs increased royalties due the magical versus beyond.

These product development, partially offset by decreases in advertising promotional and differentiation.

Since 2021 game launches as well as lower incentive compensation.

As forecasted adjusted operating profit margin decreased almost 40%.

For the full year 2023, we expect mid single digit revenue growth in this segment.

Also as we continue to invest for future growth and expand our universe of CRM product, we expect adjusted operating profit margin in the high 30% range.

And for product segment revenues decreased seven pro forma excluding the negative $117 million impact of foreign exchange $92 three of what's within Europe .

The segment decline led by lower revenues in North America, and Europe , partially offset by growth in licensing.

Erica.

Lower revenue higher sales allowances closeout and warehousing contributed to a decline in adjusted operating profit margin to seven.

Which was partially offset by savings realized from our operational excellence program within cost of sales.

Sales and distribution expense as.

As well as lower airfreight loyalty appetite.

Potential.

For the full year 2023 consumer products revenue is expected to.

<unk> declined mid single digits portfolio 2000, 2002, with adjusted operating profit margin improvement of 150 to 200 basis points.

From the adjusted margin in 2024.

The teams are executing against our robust.

And style innovation.

April significant headwinds from Exane.

Party Licenser transitioning several Hasbro brands from an in house or license model, reducing leaks and inventory at retail.

Right.

Market and compete.

Pool FX hydro.

As noted earlier a significant portion of these headwinds are in the first part.

Entertainment segment revenue.

Currency.

When adjusting for music this segment declined 12%.

Revenue was impacted by the timing of deliveries to partners on the TV side of the Boswell and fewer formerly this share of voice as well.

The TV business through building samples successful expected theory, including a working capital inflow.

With several new shows like the Olympics that we recruit.

Family brands.

And in my Little Pony and regeneration was delivered from FY 'twenty, one without a comparable portfolio.

Combined with decreases in digital revenue.

On delivery.

The decrease in music and other primarily relates to the sale of <unk> and <unk>.

Third quarter 2021.

For 2023, this revenue should be close to zero as we had exited April .

Total entertainment segment adjusted operating profit decreased lengths.

Right.

Lower revenues impacted profit and were partially offset by lower royalty advertising promotion and our potential.

For the full year 2023.

Entertainment revenue to increase low single digits and adjusted operating profit margin is expected to increase by eight from $8.

In 2024.

As Chris mentioned, Dungeons and Dragons honor among premier in months.

We funded the Paramount and we will participate in the box.

And associated Entertainment Avenue.

Based on our share of box office.

Entertainment revenue again being recognized and low Q3 Q4 of this year.

We expect the majority of the related cash receipt to occur in 2024.

As we look ahead, the sales process with select film and television Entertainment era. Thank you Don.

And the outcome will inform our long term financial.

We continue.

Revenue at a mid single digit CAGR and improving operating margin was 20% and potentially greater level in 2020.

I couldn't be prouder of the work and dedication.

And for the business this past year.

The past several years.

It's been dynamic.

I never shy away from materials.

And while the year to date loan that we had planned.

<unk> two <unk> strategy is in place.

Our teams are aligned behind it and we're well along the path.

Plan.

Before I close since we last spoke in October .

No it's my fault to retire.

Sure.

I remain committed to the company for almost say in for my successor is in place and then Florida and transition.

During my time at Hasbro, we have accomplished more than optical modules and I know this company, even more enable accomplishment for horrible.

Thank you for your partnership with supported Hasbro items.

These are hard decisions, but I am confident that Hasbro is therefore.

Sure.

We are now happy to take your questions.

Thank you we will now be conducting a question and answer session if.

We would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press star two to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

We ask that you please limit yourself to one question and one follow up question. One moment. Please while we poll for your questions.

Our first questions come from the line of our Piney Cartera <unk> with UBS. Please proceed with your question.

Thanks for taking my question and good morning, So down 20% in the first half means that back half needs to be up mid single digits for the year for the second half I guess what visibility.

You have on that 5% to 6% growth in the second half and does that include any assumption.

For a recession or not particularly sort of steady state macro picture and then I have a quick follow up.

No worries are being a good morning, nice to nice to talk to you again.

So when we look at the first half we look at a couple of different factors.

The first is we see we saw a difficult Q4 in the consumer discretionary sector as a whole and in toys and games in particular, we would anticipate that that's going to continue in Q1, and Q2 and potentially roll into at least part of Q3 as well before starting to normalize in Q4 back to a more traditional.

<unk> growth level.

So that's one set of headwinds that we've factored in the.

The other one that we're looking at is 2021 had.

Historically, an unusual sales pattern with that retailers were buying much earlier in the year, we were playing catch up from 2020, particularly.

Particularly in Q1 in terms of fulfilling.

A filling orders and we don't see that happening this time.

We see retail inventory not unhealthy, but still having a little bit of an overhang given.

Given the slowing consumer demand that we saw in Q4, so we see kind of demand starting to normalize I think something like we were something like 57% of our sales were for second half last year and this year, we probably see that in the $60 to 65% range, which is more historically normal for 2019.

And before.

So that has a that is something that play and then we just look at our overall release calendar across Wizards of the coast across our entertainment segment and across consumer products and we have a pretty exciting Q3 in terms of new products across all of them and a lot of entertainment that's going to be coming out.

In Q2, and having a nice kind of halo effect into Q3 and Q4, so that's kind of what informed our overall.

Our over our quarterly mix and half mix.

And some of the assumptions we made in it do you have anything to add yes, I was just a great. Chris I think we see 2022 was a bit of an anomaly in the order pattern early in the year.

We do expect to get back to those historical shipment patterns.

I think retailers well closer to the holiday season that is typical and we also.

See that in our business and with all the entertainment we're really excited.

Our P&L you had a follow up.

Yes. Thank you. This is super helpful and then perhaps.

Partially answered my second question, but im still going to ask this because I've been getting a lot of feedback from investors as well on this sort of math, John calculating around five percentage points of revenue headwind from just giving up that Disney Princess and frozen license for the consumer products business plus you have about.

Two four points inventory overhang on your <unk>.

That segment consumer products business to be down mid single digits could you just walk us through what is growing to offset that four points of overhang I think you had a good rundown on some of the performance.

Obviously, dnb and also while we're at it could you.

Give us a sense, where the dnb merchandise is going to be.

Reported is it going to be and is there anything in consumer products or all of that it's gonna be within that segment. Thank you.

Yes, so I think as we've reported in the past the average that we experienced over the last several years on Disney Princesses was about $250 million of revenue with the peaking around 2019 with glass frozen movie.

Last year, we were well off that peak as we were starting to exit that business and it transition to another company.

So that would be how I would think about in modeling that.

And then yes, we see about $135 million of inventory overhang at retail.

And then we have.

A little bit less than that in terms of inventory that we're holding onto as well we think that will take the full year to kind of move through but I think we'll move through a good hunk of that and our fair share in the first two quarters of the year.

And then when we look at kind of what the growth vectors are we have we have a strategy, where we want to grow in five focus categories and we have a plan for each of those categories.

And outdoor action, which is helmed by nerf.

We have an exciting lineup of new gel Blasters that go after older consumers, we launched that in fall of last year and the mythic was our number one item and I think one of the number one items in the category. After that launch we're going to be building out that category and then on the opposite side of the market for kids five to seven we haven't.

All new lineup of Nerf <unk>.

<unk> products that expands the market's down to lower age ranges with greater ergonomics, and I think really strong consumer insights associated with that and then we're also doing.

Some fairly aggressive pricing actions to make sure that we have compelling products at every winning price point from $10 to $20 to $30 on up.

On action.

Have a very robust entertainment slate between six blockbuster films and a host of new streaming series in kids animation supporting it.

It's fair to say you can quote me that I think we have a stacked lineup.

And thats going to help us in Q2, it's not going to fully offset some of the headwinds that we see in Q2, but it's going to help and I think thats going to have dividends in Q3 and Q4.

Then in creativity play Doh was one of our top performing gross brands last year. It grew share inside of the creativity space. We have new compounds I think we have some best sellers that we're going to be annualized this year in expanding distribution on so we feel pretty good about where played out was going to go.

On preschool Peppa pig continues to be one of the top entertainment brands for little Kids.

Of any stripe and we continue to feel good about that product line and our partnership with Disney has never been stronger Spidey is amazing friends was one of the top new properties in preschool and we feel really bullish on Star Wars Young Jedi Adventures, we think thats going to be an amazing show and a super compelling product line.

That will come out later this year.

In <unk>.

<unk> when you look at our games portfolio, we feel pretty good about the innovation. We have there. We just came back from Nuremberg Toy Fair got great feedback on Twister are really strong feedback on clue and kind of the balance of the line. So we're feeling good about the innovation there and then certainly wizards of the coast continues to crank out really strong.

<unk>.

For FCS our latest <unk> is doing quite well out of the gates early on in Q1 domineering remastered was our January <unk> release and.

That sold very very well so we feel good about the fundamentals of magic DND continues to grow at pace and we have a fantastic entertainment lineup, there and really starting to build out the four quadrant nature of our products.

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

Doug anything to add.

Just to comment on the D&B, we will see some.

Some revenue coming through our consumer products division as well as Wizards of the coast and as I commented earlier from an entertainment standpoint based on when the movie is released and our share of the box office, we expect to see that later in the year, maybe some in the third quarter, probably more in the fourth quarter and the cash that's associated.

With that will come really in 2024 in a meaningful way, but we're very excited about that release. So our P&A. That's the first thing you're going to see traveling through the blueprint.

Well it.

It's a great brands and we're very excited.

We're looking forward to bringing more France more fans into this brand who can really enjoy it for years to come because it is a great brand that can be enjoyed by people of all ages.

Thank you. So much this is very helpful. Thank you both.

Thanks for being here.

Thank you. Our next question is coming from the line of Eric Handler with Roth. Please proceed with your questions.

Good morning, and thanks for the question.

First with regards to Wizards of the coast.

You expect magic to grow in 2022, and then as we think about the cadence I imagine will look a little bit different than consumer products I would think your toughest comp for magic as of the fourth quarter. Your easiest comp is in the third quarter not sure how to think about the first half of the year.

Sure, Hey, Hey, Eric Yes.

Yes, I think the question was will it grow in 2023 grew pretty well in 2022, yes, we.

Specced magic to grow I think the growth will be a bit moderated versus what we saw in prior years.

We're taking some of the feedback to heart, we had some supply chain issues last year, which forced us to compress our release schedules.

Particularly in October of this year due to a couple releases slipping from April and August into October along with our regularly scheduled releases, we're going to be.

Facing those out in a more even basis, we think we've got a handle on all of the supply chain issues that we had with paper stock in local paper production. So that will change the nature of what R. R.

Our revenue distribution is by quarter in General I think we expect magic and Wizards to have a good Q1.

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

Great and then just as a follow up to that when you look at magic and <unk>.

The vectors for growth you have a very full release slate you pulled a lot of levers. There. So is the growth for magic now pretty much just predicated.

Expanding the player base and what do you do to keep that player base growing.

Well magic is arguably.

One of our most innovative product and design teams.

I would never discount their ability to figure out new ways to engage players and delight our fans they've had a pretty good track record we've grown that brand for 13 out of the last 14 years and I think the one year. It was down it was down maybe two or 3% that was actually my first year on the business.

We turned that around pretty significantly I think over the last five years. So as we think about growing magic. We always think about okay. How can we engage our existing players more how can we find new fans and then how can we attract.

Lapsed fans.

And I think that's going to be the magic formula for this year as well.

I think we have some exciting new initiatives I think one of the one I'm most looking forward to and I think we've seen some early success is universe is beyond.

Our war Hammer set that we released in October of last year, we couldnt keep in stock.

That's on its third reprint, it's doing very very well I think our hobby shops, and our retail partners are thrilled by it and.

As big of IP as war Hammer is we're going to be going out with we're going to be going out with the <unk> of fantasy with Lord of the rings come This June .

That's a big fan base.

Ripe adjacency for magic the gathering and we think it is a great opportunity for Lord of the rings to introduce them to our fan base and help kind of grow their.

And an awesome opportunity to introduce Lord of the rings fans, who love fantasy into a deep strategic game like magic. So I think that will be both an opportunity to attract new fans and also add some add some collector surprises as well for our existing fan.

Thank you so much.

Thanks, Eric.

Thank you. Our next question is coming from the line of Megan Alexander with J P. Morgan. Please proceed with your question.

Hi, Thanks, very much for taking my question, maybe just ask <unk> question in a little bit of a different way. So is the $300 million that you cited and brand exits and market exits is that all in consumer products and if so the excess inventory and that 300 million would.

<unk>.

12 point headwind.

Would suggest you expect core growth maybe in that high single digit range in the context of the overall consumer products guys. So first is that right and then if so can you maybe tell us how that compares to what those brands. The core brand did in 2022.

And what drives your expectation for such strong share gains relative to your expectation for the industry to be flat to down.

Sure Hey, Megan good talking with you if you.

Our investor's deck, we have a waterfall, which walks through our expectations of those $300 million of headwinds on the slide that says 2023 outlook. Just in case, you want to take a look at it after the call.

We do see that $300 million headwind spread across our business, but it is concentrated in consumer products.

We're exiting several rather significant licenses this year like Disney Princesses and Sesame Street.

Trolls those were pretty low margin businesses for us frankly, they were negative margin businesses for us in aggregate.

But it does have a top line effect.

We've transitioned several of our in house brands like <unk>.

Z bake oven Littlest pet shop.

Into an out licensing model. So we think that will be.

Creative on a bottom line basis, but it will impact our top line because some of those brands drive meaningful revenue and we'd likely have a few more plan that we have yet to announce.

FX is certainly a continued headwind that we're anticipating certainly in the first half of the year more notably than the second half as we comp FX and that will affect all of our businesses.

But CPE tends to be our most internationally exposed we exited a couple of entertainment businesses last year. One that's called secret location had meaningful top line not so meaningful bottom line that was a location base business and then a couple of digital businesses and also some theatrical distribution that will impact <unk>.

Attainment, and then of course of course, Russia, we exited Russia in March of last year.

And so that comp will be most difficult in Q1.

So when we add all that together it adds up to about $300 million of total revenue headwinds, we see about 60% of that hitting in the first half of the year and the balance in the second half, but then when we look at kind of like a release calendar for entertainment for Wizards and for our consumer products business, we look at kind of the REIT.

Dale promotions, we have lined up the feedback we're getting.

And the volumetric testing that we're doing on the items because we've expanded that basically threefold this year versus what we did for 2022.

We feel like the second half of the year when you combine that with what we anticipate will be improving macroeconomic conditions should yield the growth that we have projected.

Okay. Thank you and then maybe a follow up for Doug when you look at the expected margin improvement.

Can you just talk through some of the puts and takes it seems like from what you said you should have SG&A deleverage advertising deleverage. So the improvement is coming mostly from cost of sales and royalties and can you maybe give any more color on the phasing or timing of that improvement considering the retail overhanging.

Owned inventory being a bit higher.

Right of course, and you actually hit it I mean, we're spending more on advertising and we're making it much more focused.

Again, if you look at blueprint to <unk> and our focus on the consumer and Youll see more of that clearly.

Clearly against the consumer.

As we go forward in 2022, we had a significant amount of sales allowances and we talked about that in our prepared remarks, and we had a significant amount of closeouts.

We do have some additional inventory will be looking at closing out over the course of this year, that's built into our assumptions.

We have that every year and our inventory build if we look at it a big piece of it was preparing for the early releases of magic the gathering making sure. We have paper on start to print because that was in shortage short supply last year. So as we look at that the closeouts that are in our owned inventory.

We see selling selling those at the right time for both us and for retailers to maximize the profit on that.

Do you see the impact on our gross margin won't be as significant as it was in 2022.

And all of the sales allowances I mean, it was important for us to reduce our inventory on hand at retail from where it sat at the third quarter and we did have a lot of sales allowances in 2022 associated with that so when you look at the reduction in sales allowances you look at maximizing our Closeouts go.

Forward and honestly our cost savings.

We have a slide on this as well in our presentation I think it's on page 24, we continue to expect a very large percentage of our.

Our cost savings initiatives as part of our operational excellence program.

You come out of our cost of sales line.

So it's.

That's the piece that Im sorry, I apologize if we're getting some feedback seems to be me that's not the case.

Let's get it gets tougher as we found but thats okay.

The.

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

Being better positioned for 2023 as well as retail.

Okay. So just to put a fine point on that.

It sound like you the profit improvement it is heavily weighted to the second half as the revenue it does that.

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

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

Okay. Thank you.

Thanks again.

Okay.

Thank you. Our next question is come from the line of Garrick Johnson with BMO capital markets. Please proceed with your questions.

Great. Good morning. Thank you I wanted to pick apart the $300 million revenue headwind I'm, just a little bit more.

In particular, the brands that Youre out licensing to other toy partners, what portion of $300 million.

Because I thought you said on your analyst day that it will be about $250 million to $300 million or somewhere in that range of 200 to $2 50, maybe.

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

Of the $300 million this year it will be slightly.

It would be maybe about.

Alright.

Think about the timing of it. So we said over time, we expect that revenue to be about $250 million or 100% right. If I look at that impact from from 'twenty. One it would be about 100 million. This year. It would be from 2022, it would be less than that.

And the reason why is we are we're providing an orderly transition to a license model, that's what's helping our operating profit as well. So we are losing revenue wilmar, we still will have some in 2022, but youll see us transition out of that over time and it will be a lower revenue number but a more profitable revenue.

<unk> for us.

For instance for <unk> Okay.

Throughout the year right.

Alright.

Sorry, what was that Chris.

But for instance for real friends would be a handoff that would happen throughout the year.

And a couple of the ones that we haven't announced what yet would would be a hand off throughout the year with the full transition by 2024.

Right right, it's going to take them a little while I got it Okay. And then my second question would be on the inventory number in the $636 million of inventory.

Your channel inventory.

Why couldnt you be more aggressive in liquidating your owned inventory why couldn't you be more aggressive and in store promotions to get rid of inventory at retail just didn't seem like.

You were very aggressive in store promotions.

Well we can.

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

Okay.

Okay. Thank you.

Hey, no worries thanks Garik.

Thank you. Our next question is come from the line of Jamie Katz with Morningstar. Please proceed with your questions.

Hi, Good morning, I have a couple of clarifications actually during the prepared comments you guys had noted.

That Q4, Pos turns had slowed but I don't know if you delineated whether that meant they went negative or if they were still positive.

At retail so would you be able to clarify that.

Yes, our Pos was down in toys and games last year.

By the mid teens kind of Mark overall.

Which was slower than what we saw for the balance of the year. So that's kind of where that comment was generated wizards of the coast saw strong turns but thats not captured in our Pos tracking at least the public Pos tracking and our direct business center license or saw healthy gains as well.

Okay, and then I think there was a comment that EBIT could be higher than 20%.

And I wanted to make sure thats not contingent on the sale or divestiture of that entertainment business that that comment was made sort of as the business is at.

But the radically if you guys did this divestment entertainment business.

That that.

Cost structure profit structure, but actually have more upside opportunity, if we're thinking about that right.

Yes.

Thank all of our forward guidance is on an as is basis, where it is assumed that entertainment stays with us now.

Obviously, we're in a sales process and Thats, a pretty far advance. So we feel like by mid year, we will be able to have a significant update on where we see that going the comment that Deb made was we're still targeting 2027 for a 20% operating profit margin.

We might be able to beat that by a couple of quarters, but right now we are maintaining 2027 as a target.

Assuming a sale happens as the majority of the non core TV and film assets I think we could accelerate that target quite significantly.

Okay. Thank you.

Thanks.

Thank you. Our next question is coming from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your questions.

Hi, Thank you I got on a little bit late so sorry, if I missed this but I think the thing that was surprising the most about the fourth quarter result.

We all understand what was going on with toys, but.

The Miss on the entertainment revenue to me, that's something that was.

Project evolve because you have deliveries et cetera, So can you sorry.

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

No problem Hi, Linda.

Thanks for joining the call.

For entertainment it really just had to do with timing of deliveries that are partners our network partners wanted.

And to a certain degree we're we're a vendor working on their behalf and they have a fair degree of flexibility about when they'll accept deliveries on products.

We had assumptions that we would be able to achieve by end of December some of these deliveries and some of them got moved out not just by a couple of weeks, but by several quarters is.

Theyre managing their own P&L and.

And so thats, what really drove the material difference.

Okay. Thank you and then.

Just there's just so many things going on here in 2023, but if you had to just boil it down for me.

Maybe the one or two key things that you have to execute in order to drive the top line and then the same question on the margin performance like what would be the key thing in your mind out of all of these different things you need to do that are the most critical to succeed at.

Well I think on the topline.

When youre looking at a market that is flat to potentially down for a year, it's a share gain.

So we need to execute against our five focus categories and deliver the right pricing the right promotion at retail and make sure we get our product in there and well assorted.

We missed our marks on that in 2022 and too many areas. We grew in two we grew and creativity in preschool.

We need to grow more fulsomely across all of them and so when we look at our product roadmap. When we look at the quantitative testing we have been doing and.

And we look at the promotions, we have in place both pricing as well as.

As well as what we're doing just to drive kind of availability of product we.

We feel better positioned for that for 2023 I think the second thing we have to do to drive the top line is responsibly managed down our inventory and we will be doing.

A good hunk of that in Q1, and Q2, but I think that also gets back to your bottom line question, which is hey, we need to do that responsibly and not just make a fire sale because that's not going to help our bottom line and ultimately not help our capacity to be able to fund our growth initiatives and then the last thing I think you really need to look at for Bottomline last two.

Things.

Internally this wouldn't be as available to you, but it's a big area of focus for US is making sure we have really robust demand planning and supply chain management in place I feel really good about the team that we're building around that but that's going to be something that we need to improve our marks on and then driving our savings goals, we have 100.

$50 million gross savings goal for this year, we will be reporting on that every quarter in terms of progress and thats going to be a meaningful bucket of money that will drive both bottomline performance and helped to fund increases in our advertising and promotion budget and our ability to be price competitive.

Thank you that's very helpful Alright.

Alright, Thanks Linda.

Thank you our next questions come from the line of Jason Haas with Bank of America. Please proceed with your questions.

Hey, good morning, and thanks for taking my questions.

One follow up on I.

I think the question I was actually right on the cadence of Wizards because segment revenue I think you said.

Our guidance for a mid single digit revenue it sounded like last year. There were some releases that got pushed to the second half of the year. So I was just curious is there expectation that wizards will again have sort of a back half weighted.

Year or.

It's sort of a fair run rate to use in each of the quarters, just trying to get a sense of the cadence there. Thanks.

Yes, Jason Hey, I understand congratulations are in order here, a new father so.

I don't think youre, not only an analyst, but you actually have customers. So that's going to be great.

Yeah.

So so on Wizards of the coast and Magic in particular.

As I talked in Eric's question I think you should expect in Q1 down in Q2.

A significant up Q3, and then a fair up in Q4 and Thats just based on release timing last year, we had.

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

But that's generally how I'd think about it.

Is it just doesn't have the seasonality of the overall <unk>.

<unk> products business, it's more release driven.

So that's how I would look at magic is going to be a pretty big component of their revenue for this year.

Okay. That's great. The other thing I'd note.

The only other thing I'd note is there is quite a big <unk> component that will happen in Q3, and Q4 with the release of Baldur's Gate, three even though that's a licensed product.

It is a pretty.

Fair sized expectations about what that product is going to do it was one of the it was one of the most successful early access products in history on steam.

And.

That will have meaningful revenue impact starting in Q3, and even more so in Q4 for DND.

Thank you that's helpful. And then you mentioned I think you described it as Misfiring.

Some of the proposed changes for the <unk> was there any sort of financial impact to that in the.

First quarter I think that I guess, the controversy is kind of behind us at this point, but I'm just curious.

If theres anything to look out for in <unk>.

Yes, I mean, we had some we had some.

Subscription cancellations, but they were comparatively minor in the totality of both the <unk> P&L and the Wizards P&L.

We take anything like that seriously we're in contact with the people who.

Canceled and in <unk>.

General what we're finding is.

A lot of them are very open to restarting their subscriptions DMD beyond is a great platform, it's a really good value.

And it's something that's been a good growth factor for us we find it we feel.

Eight months into owning the asset it's been a really good purchase for us It was EPS accretive within six months of joining the company and we had over 20% user growth through the end of 2022 and the revenue growth was roughly commensurate with the user growth as well so.

I think <unk> should be on pace for a healthy 2023 with everything we have going on.

Great. Thank you.

Thank you. Our next question will come from the line of Matthew <unk> with Jefferies. Please proceed with your questions.

Hi, everybody. Thank you so much for taking my question.

The only question that I have left would be around you talked about some of the impacts.

D&A beyond being fully in the model for 2023.

As well as the impact in the back half from Baldur's gate, but is there any initiatives to maybe jumpstart.

Revenue again within magic the gathering arena.

On mobile and PC during 2023 or some of those initiatives.

Further out.

In the out years.

Matt Thanks for joining.

Yes.

The biggest thing on arena is going to be the release on steam and I think we're targeting Q3.

The reason for the timeline to get to Q3 as we're reinventing what the new player experiences as we start to expand that.

So that it's an easier onboarding and.

A more fun way to learn how to play.

What is a super deep, but can be a difficult learning curve game. So we think.

<unk> is going to help open up the game to more users. Obviously, we think there'll be some decent revenue growth associated with that.

Over the mid term, we continue to evaluate consoles, particularly Xbox and Playstation platforms, and think that'll be an interesting opportunity for us, but likely in 2024 and beyond and then we continue to invest in.

And figuring out new ways in which we can express magic digitally.

If you think about the success of magic over the last five years. The success really has been driving like this will be called a segmentation strategy, where we are offering bespoke products to <unk>.

New segments of consumers that we either were under serving before we're not serving at all before.

And Theres formats, like commander, which is a four player version of the game that is highly social.

I am enthused as I know Cynthia and the team is figuring out how we can get like a true multi player experience beyond two players for magic digitally and then I think we're still intrigued by digital Collectability.

I don't think Youll find is kind of going after the passing fad at the minute.

But we do think digital collectability is going to be a thing and it's going to stick and so we continue to invest R&D about what the right approach is for that whether doing it ourselves we're doing it through a partner.

Awesome. Thank you so much.

Hey, thanks.

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

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

Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.

[music].

Yes.

Okay.

Yes.

Okay.

[music].

Hum.

[music].

Yes.

Okay.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music].

Yes.

Okay.

Sure.

Okay.

Sure.

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Okay.

Good morning, and welcome to the Hasbro fourth quarter and full year 2022 earnings conference call.

At this time all parties will be in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, today's conference is being recorded.

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 of Investor Relations. Please go ahead.

Thank you and good morning, everyone.

Joining me today are Chris Cocks, Hasbro's, Chief Executive Officer, and Deb, Thomas Hasbro's, Chief Financial Officer.

Today, we will begin with Chris and Deb, providing commentary on the company's performance.

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, we 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 matter. There are many factors that could cause actual results or events to differ materially from the anticipated.

Salt or other expectations expressed in these forward looking statements. These.

These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q and today's press release and in our other public disclosures.

Today's guidance assume through retained the noncore entertainment film and TV business notwithstanding the current marketing process. While there is no guarantee at such an outcome at this process results in a sale, we will update our guidance.

We undertake no obligation to update any forward looking statements made today to reflect events or circumstances occurring after the date of this call.

I'd now like to introduce Chris Cox Chris.

Thank you Debbie and good morning.

In October we laid out our new strategic plan for Hasbro blueprint to point out built on fewer bigger more profitable brands, a sharpened focus on the categories, where Hasbro can be best in class and operational excellence program to speed, our agility and improve our cost competitiveness and growth initiatives and digital games.

Asbury content direct to consumer and licensing.

While Q4 proved to be a disappointment, particularly in our traditional toys and games segment, we made progress under the hood that meaningfully improved our bottom line and sets us up for margin expansion in 2023, despite what we anticipate will be a continued challenging consumer environment.

Our transformation efforts are positioning Hasbro for success.

In 2022, we identified $50 million in run rate cost savings that improved our Q4 earnings by over $20 million in.

In 2023, we anticipate our operational transformation will generate $150 million in run rate savings money, we are using to both reinvest in the business and improve our profit profile.

Within our growth initiatives, our direct business comprised of Magic Arena D&A beyond Hasbro pulse and Magic secret lair was up 15% in 2022.

As ROE pulse was our fastest growing channel increasing 70% on robust fan demand across premier industry Entertainment properties.

D&A beyond delivered user growth in excess of 20% since we acquired the service in May of 2022, and as forecasted with EPS accretive in Q4.

Wizards of the coast and digital gaming grew 5% in constant currency outperforming a games market that by most measurements was flat to down with magic tabletop, leading the growth.

Importantly, we celebrated our first billion dollar brand in magic the gathering.

Huge milestone not just for Hasbro.

Thousands of hobby shops are most important and fastest growing channel for the brand and millions of fans, who make both magic and <unk> more than just games, but vibrant global communities.

Our growth in Wizards was not without challenges, we navigated significant supply chain disruptions that while resolves for 2023 compressors that release schedules in 2022, particularly in Q4.

We were too aggressive in some of our pricing assumptions, notably our 30th anniversary edition of Magic and pulled back on available supply impacting Q4 results.

Lastly on DMD.

We misfired on updating our open game license a key vehicle for traders to share or commercialize their DND inspired content.

Our best practice is to work collaboratively with our community gather feedback and build experiences that inspire players and creators alike.

How we make our games among the best in the industry we.

We have since of course corrected and are delivering a strong outcome for the community and game.

Our teams are focused on growing market share in the categories, where we can lead we had success in preschool with Peppa pig creativity with play Doh and action with strong growth in hazardous products from partner brands, Marvel, which had a record year and Star Wars.

Our focus on content is centering around Hasbro IP for the long term our sales process for the majority of <unk> film and TV is well underway with strong interest in these valuable assets.

We expect to have an update in the second quarter.

Our content pipeline for Hasbro IP is set for growth in 2023 with the upcoming release of the feature films Dungeons and Dragons honor among thieves and Transformers rise of the bees and a host of new and continuing preschool and kids shows from transform reserve spark to the new seasons of my little Pony and <unk>.

<unk> to the new Tia and the <unk> heroes on Disney Junior and Disney plus.

<unk> ahead, we are excited about the recently announced <unk> live action series and for next year. The animated Transformers feature film with our partners at Paramount.