Hasbro, Inc.

Greetings. Welcome to Hasbro's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Any question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning everyone. Joining me today are Brian Goldner, Hasbro's Chairman and Chief Executive Officer, and Deb Thomas, Hasbro's Chief Financial Officer. Today we will begin with Brian and Deb providing commentary on the company's performance. Then we will take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. our call today will discuss certain adjusted measures which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question and answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures. 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 Brian Goldner. Brian?

Thank you, Debbie. Good morning, everyone, and thank you for joining us today. The first quarter was an excellent start to the year, with growth in both sell-in and point-of-sale for our consumer product segment, robust engagement from gamers driving double-digit growth in the Wizards of the Coast and digital gaming segment, and we remain on track to deliver our full year expected revenue growth in entertainment. I want to recognize and thank the Hasbro employees around the world who continue to work through a pandemic and were able to deliver such a high quality quarter with revenue momentum, profit improvement, and strong cash generation. This quarter marked the first with our new reporting segment structure, which provides a clearer view of the drivers of Hasbro revenues, profit, margin, and cash generation. As we shared at our investor event in February, our brand blueprint succeeds as we create value from our three businesses. Hasbro consumer products, including toys and games, Wizards of the Coast and digital gaming, and entertainment. Each has a growth plan that drives that segment, but also drives growth across Hasbro. Our teams and expanding capabilities are enabling us to unlock the full potential of our brands and company. Deb will speak to the quarterly segment performance in more detail shortly. It is clear our unique portfolio of brands and capabilities is driving long-term, sustainable, profitable, and cash generative growth while we invest to build bigger, better brands across a much bigger universe that includes toys and games, but also spans digital gaming and entertainment revenues. With double-digit year-over-year growth in both consumer products and Wizards of the Coast in digital gaming, these businesses are up nearly 20% from the first quarter 2019 pre-COVID. Importantly, the quality of this growth is impressive as we have added $120 million in operating profit dollars between the two segments. We continue to see consumers choosing Hasbro brands as evidenced by the 9% point-of-sale growth globally and nearly 20% point-of-sale increase in the U.S. This doesn't reflect most of Magic the Gathering or Dungeons & Dragons and doesn't yet reflect Hasbro's line of Peppa Pig and PJ Masks toys and games. Hasbro franchise brands' revenue increased 24%. with games in Magic the Gathering, Play-Doh, NERF, Transformers, and Baby Alive. NERF revenue increased in all regions with high single-digit POS, led by the US and Europe. Innovation for consumers of all ages is driving this growth, including Dino Squad, which released in March, Elite 2.0, and our high-performance Ultraline, which have now fully set around the world. Continued strength in our licensed Fortnite business, and the March launch of the rival CurveShot. We have more innovation coming with the Nerf Hyper line and the newly announced Nerf Roblox for fans of the massively popular game. Transformers revenue growth was led by gains in the U.S. and Asia Pacific, and global point of sale was up nearly 40%. Innovation and storytelling are central to driving Transformers, and the E1 team is expanding the reach and relevance of the brand, through world-class entertainment across platforms and demographics. We delivered our latest War for Cybertron content in partnership with Netflix on December 30th, supported by new products that drove first quarter's performance. War for Cybertron Chapter 3 will be airing this summer, and in partnership with Paramount, the next feature in the theatrical Transformers franchise is slated for 2022. Transformers continued to be the top brand performer on Hasbro's Pulse in the first quarter, delivering the much-anticipated HasLab Unicron. The brand kept the momentum to start Q2. In partnership with Roboson, during Hasbro Pulse Fan Fest earlier this month, we unveiled the $700 auto-converting Optimus Prime robot, which sold out in pre-sale in less than 10 hours. Ecom revenues increased 70% in the quarter. COVID continues to shift consumer shopping behaviors, accelerating the shift to digital for Hasbro. Our pure play ecom retailers and our omni-channel retailers are supported by their investments in technology and services like curbside pickup. For the quarter, revenue in the total gaming category, including Magic and Monopoly, increased 7%. as gaming continued to be a focal point for players, consumers, and retailers. Throughout last year, robust demand drove high point-of-sale and revenue growth. In the consumer product segment, this surge in gaming demand began around Week 12 of last year. If we look at the U.S. this year, heading into that same week, our games' point-of-sale was up more than 30%. Once we hit Week 12, point-of-sale slowed. Despite the tough comparison, underlying game demand is healthy and point of sale is more than 30% higher than 2019 pre-COVID levels. We have many new games both this spring and for the holiday and availability of classic games to continue meeting the high levels of gaming demand. Within Wizards of the Coast and digital gaming, Magic the Gathering and Dungeons and Dragons both posted double digit revenue increases. Fueling this growth is both tabletop and physical play, as well as the team's continued expansion in digital. Magic was up against an exceptionally good first quarter shipment number last year. Based on release strength and timing, we continue to expect the second quarter to be the biggest for Magic and Wizards this year. Arena revenue was also higher, including a late first quarter release on mobile. Dungeons & Dragons licensed digital gaming revenue also increased. Dark Alliance is slated for release in June, and the game is receiving positive early buzz. Partner brand revenues grew 3% behind strong growth in Hasbro products for Star Wars, as well as continued strength in products for The Mandalorian, as well as growth in Marvel, led by momentum in the Spider-Man franchise across all consumer segments, and new products for Marvel Studios' The Falcon and the Winter Soldier unveiled at quarter end that will be fully distributed in the second quarter. Attaching to our entertainment business, our E1 team has more than 200 projects in development across TV, film, and animation, featuring more than 30 Hasbro IPs. As we spoke to earlier this year, we had theatrical revenues in the first quarter last year but do not this year due to COVID-related closures. We're also planning for television deliveries to be later this year versus last. We remain on track for our target to reach 2019 TV and film revenue levels this year. With our partners at Paramount, the GI Joe Snake Eyes movie release is now set for July 23rd, and the brand team continues to drive engagement and demand with fans through product and events, including our Pulse initiatives. The E1 team is also shepherding the relaunch of My Little Pony with new content across digital and broadcast networks with Pony Life and the release of the CG animated film on Netflix this September. We are currently in pre-production for the Dungeons & Dragons live action feature with a new release date of March 3rd, 2023 and an amazingly talented cast and crew. During the quarter, the team wrapped principal production on two films, All the Old Knives, and Arthur the King, and are currently in post-production on both. In scripted TV, Cruel Summer completed filming and premiered last week on Freeform, and we continued deliveries of Season 3 of The Rookie. In unscripted, we have a robust slate of shows in Canada, the U.S., and the U.K. underway, with more than 40 active productions. We announced yesterday an agreement to sell the E1 music business for $385 million. We continue to focus on the core strategic elements of our brand blueprint as a play and entertainment company. While we plan to continue working with the music group, including music supervision and music rights exploitation across several brands, music was not the primary driver of our acquisition of E1. This transaction will allow the team to continue investing to grow and unlock value for its many talented artists and partners. I want to recognize the leadership of Chris Taylor, his dedicated team, and the entire organization. We thank them for their countless contributions and look forward to working with them on various projects well into the future. We plan to use the net proceeds from the sale to accelerate the leveraging and for general corporate purposes. The first quarter's results are a good start toward achieving our target, double-digit revenue growth this year. The team did an excellent job delivering profit growth, strong cash generation, paying our dividend, and reducing our debt profile. We have tremendous innovation and content coming this year, and we look forward to sharing more details as the year progresses. I'll now turn the call over to Deb. Deb?

Thank you, Brian, and good morning, everyone. We began 2021 with a very good first quarter. which demonstrates the strength of our portfolio, our focus on driving profitable revenue growth, and progress toward our commitment to strengthening our balance sheet, as our goal remains to return to our stated target of two to two and a half times debt to EBITDA. Revenue grew 1%, including a positive $18 million impact from foreign exchange. Adjusted operating profit grew 15%, adjusted EBITDA increased 24%, and adjusted earnings per share were $1. Our continued focus on working capital was evident. We generated operating cash flow of $378 million and ended the quarter with $1.43 billion in cash after paying off $300 million in debt, which was due in May, and paying our quarterly dividends. Receivables declined with improved collection and the quality of receivables improved. DSO was 66 days versus 79 last year. Inventory was also down, decreasing 7% absent FX. We remain in a very healthy financial position as we invest to profitably grow. As Brian mentioned, this is the first quarter we've reported under our new operating segment. Consumer product segment revenues grew 14%, behind growth in franchise brands, emerging brands, and partner brands. Hasbro Gaming, excluding Magic and Monopoly, was down just slightly versus the difficult comparison with last year's strong performance. Revenue grew in each geographic region, led by the U.S. and Europe, along with growth in Asia Pacific and Latin America. Retail inventories declined in most markets, including the U.S. and Latin America, and the quality of inventory is good. Licensed consumer products revenue also increased in the quarter, with strong demand for our brands. Foreign exchange had a favorable $9 million impact on the segment. Operating profit for the segment increased $42 million on higher revenue, somewhat offset by increases in royalties and advertising, as well as higher freight costs. Profit was up throughout the segment, with North America, Europe, and Latin America contributing the most to profit improvements. Wizards of the Coast and Digital Gaming segment revenues gained 15% in the quarter. Both major brands in the segment, Magic the Gathering and Dungeons & Dragons, contributed to growth. Foreign exchange had a favorable $4 million impact, Operating profit grew with higher revenue, which was partially offset by increased product development as previously capitalized digital game development is now being expensed, as well as higher advertising spend to support the mobile launch of Magic Arena and the upcoming launch of Dark Alliance. Operating profit margin was essentially flat, but we expect the expense cadence to impact future quarters more significantly. Entertainment segment revenues declined 32%, primarily due to the TV and film business. Foreign exchange had a favorable $5 million impact in the quarter. As Brian discussed, and we shared with you earlier in the year, the comparison to last year when theaters were open was challenging. Given the nature of entertainment delivery timing, we'll have revenue variances quarter to quarter. but our full-year plan remains to deliver double-digit growth in the segment, beginning with growth in the second quarter. Operating profit declined on lower revenue, but lower program amortization and advertising contributed to higher operating profit margin for the segment. Our cash spend on content across scripted and unscripted live action, animated TV and film, is planned to be in the range of $675 million to $750 million for the full year. In the first quarter, we spent approximately $147 million of that plan. Looking at our overall Hasbro P&L, gross margin, including cost of sales and program amortization, increased 90 basis points. This improvement resulted from a reduction in program amortization as a percent of revenue, the favorable impact of growth in wizards, and fewer closeout sales. Cost of sales increased both in dollars and as a percentage of revenue, including higher freight costs as we spoke to earlier this year. Freight capacity continues to be very limited and more expensive across all markets. we have been actively managing transportation to minimize the impact. This includes using more air freight at a higher cost than our initial plan. In addition to higher freight costs, we, like most other companies, have seen significant increases in resin, packaging material, and metal prices. We are proactively mitigating such cost pressures with our vendors, but the trends have accelerated in recent months. We have covered this increase year-to-date, but recently communicated to our customers price increases for Hasbro toy and game products to help further mitigate the higher input costs. Product development increased 60 basis points, reflecting ongoing digital gaming investments. Magic Arena on mobile was the first of several games scheduled for release this year. with additional games slated for release in future periods. Advertising declines were driven by lower promotional spend at E1 due to lack of theatrical releases this quarter. We increased advertising spending at Wizards in support of digital gaming launches and increased advertising in the consumer product segments. SD&A included higher freight and warehousing costs, along with higher stock compensation and phased bonus expense, partially offset by declines from cost savings and integration initiatives. During the second quarter, based on the value allocated to the E1 music business at purchase, we anticipate recording a non-cash, pre-tax loss of approximately $125 to $135 million from the sale. This amount includes expected transaction costs. The first quarter underlying tax rate was 19.5%, and based on currently enacted tax law, we expect our underlying tax rate for 2021 to be approximately 21% or slightly higher, excluding the amortization of the E1 acquisition intangible. Other income net was $30.1 million, This includes a $25.6 million gain, or 19 cents per share, from a legal settlement realized in the first quarter of this year. Adjusting for that gain, other income was slightly lower year over year. We are very pleased with the quality of the first quarter and how it positions us to deliver our plan for the year. The team has continued to navigate the ongoing impacts of the pandemic to deliver strong results for the business while managing the health, safety, and well-being of our employees. Our plans are in place to continue innovating, continue telling compelling stories, and continue creating the experiences that bring people together to drive our business in 2021 and beyond. Brian and I are now happy to take your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are 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, and our first question comes from the line of Mike Ng with Goldman Sachs.

Pleased to see you with your question. Great. Thank you very much for the question and good morning. I just have two. First, could you talk a little bit more about the TV deliveries that are happening at E1 in the second half? Any sense of major shows that should be bigger contributors to revenue? And then second, given the strong margin performance in the quarter, Could you talk about your current expectations for EBIT margins for the full year? Thank you very much.

Good morning, Mike. On the first question, we're really seeing an array of TV series that are in production for E1, as well as a number of films. We talked about that on our prepared remarks. And we're beginning those deliveries, including the rookie Cruel Summer, which just launched on Freeform. a couple of films, and increasing television deliveries throughout the year. In fact, by Q2, we expect to see the growth that we've been talking about, and our expectation for the full year remains the same, which is that entertainment business should grow double digits in revenue and return on television and film revenues to the levels that we saw back in 2019. As we move beyond that, as we look at long-term plans, we clearly believe in the continued growth of E1's business over the longer term, and we're really seeing the Hasbro IP begin to take hold. In fact, right now we're already on pre-production with a planned launch of production in the next few months on the D&D Dungeons & Dragons film. We've got Transformers, both television and film, My Little Pony, The feature animated CG film comes out in September on Netflix. Power Rangers, we have both a TV series and a film that we'll talk about going to a platform very shortly. We have some great creative stewards on a brand like Risk that will be coming in a future period. So the Hasbro IPs are being actively developed, and the television and film studios While under production, we do continue to use COVID protocols right now, and we believe those will dissipate as the situation continues to get better. But we feel very good about the entertainment business for 2021 and beyond.

And as far as our EBIT margins, I mean, the first quarter is generally a smaller quarter. At this point, we don't see anything that changes our full-year outlook. Our demand's been strong. And we have positive trends in consumer products and wizards and digital gaming business. And Brian just talked about entertainment. So we're confident that that segment can continue to deliver as well. And together, it can all deliver double revenue growth for us for the year. But as we said in February, we're targeting operating margins in line with last year's adjusted level of around 15%. Demand's been strong, and that helps support it, but the impact of freight and input cost increases has become more pronounced over the past several months, and we do have plans in place to help mitigate those costs, including price increases, for the second half of the year. And we're actively working with our vendors, suppliers, and customers. So for the full year, our plans continue to show that we should be in line with operating margins around last year's adjusted level of 15%.

Great. Thank you, Ryan. Thank you, Deb. Thanks.

The next question is coming from the line of Eric Handler with MKM Partners. Please proceed with your question.

Thank you very much and good morning. I wonder if you could talk a little bit about the video game business at the moment, particularly Magic the Gathering Arena mobile launch. Maybe you could talk, give a little bit of color about, you know, how many downloads occurred, maybe the global representation there, and how much it's potentially expanding the funnel of players. And then secondly, looks like the hot new consumer product out there is NFTs. And given that you have a lot of collectible business, have you thought much about what might make sense in the NFT business?

Sure. Let me start by talking a bit about Wizards and digital gaming, and we'll begin with Magic Arena. We have really seen an acceleration of Magic Arena in the first quarter. We went to the full mobile launch just at the end of the quarter at March 25th. It's available both on Android and iOS, and Arena is up 24% versus a year ago. We've now seen about three and a half billion games played collectively since the beginning of the launch. The average per hour use and gameplay for the week is now back to trending at nine hours per week. As you know, we're launching a whole array of card sets that are simultaneously for Magic, Analog, and Digital. And we really saw great success in the first quarter around call time. In fact, that launch, which was early February, was the biggest winter set of all time for Magic. And Time Spiral was also in the quarter, and that was also very successful. As we move forward now with Magic Arena up on both iOS and Android, we'll be entering second quarter, in fact, just launching in April on the 23rd, Strickhaven, which is a brand new world for Magic the Gathering. The big new card release that will come in June, Modern Horizons, will really drive Q2's business. And there's a lot of excitement around that. And then by July, we have another release coming for the brand. So we're really seeing an acceleration of downloads. In fact, it's as good or even better than the team had anticipated. People are really enjoying the play. It's translated very well to the mobile format, and we'll continue to monitor and look at what appears to be an accelerating magic business. The NFTs are a real opportunity for us. As you know, we have so many brands that really operate on multiple demographic levels, whether it's Transformers or the Magic and D&D brands, brands like G.I. Joe, and we have a team that's leading our effort out of the West Coast. We have our arms around this and see multiple opportunities on the NFT side, and you'll hear more about that as we move forward. But we are actively developing our opportunity here, and we do see it as substantial.

Thank you very much.

Our next question is from the line of Steph with Think with Jefferies. Please proceed with your questions.

Thank you. Good morning, everyone. I just have a couple of housekeeping questions. Deb, this one is for you. I think you mentioned in your remarks on Wizards that the expense cadence is going to impact future quarters more significantly, and I think, Brian, you mentioned Q2 is going to be the biggest quarter. I'm just wondering if you can help us sync up expenses and revenues in the Wizards business. And then, Brian, on your comments on the entertainment business growing back to that 19 level for the year, can you help us think about the cadence by quarter? I just want to make sure that we're thinking through puts and takes. Is it pro rata kind of through the balance of the year, or is there going to be some higher and lower quarters as we think about Q2 versus Q3 and Q4? Thank you.

Sure. So I'll start, and then I'll let Doug comment on your question. So as we look at E1 throughout the year, we said Q2 we expect to see growth, and we're seeing our deliveries really come in. I think Q3, that will accelerate. And then Q4, we'll see how many additional deliveries come in Q4, whether certain episodes get delivered in the first quarter of 2022. But again, for the full year, we have a plan in place that gets us double-digit revenue growth, very robust sales. The team's executed across multiple platforms and productions and increasingly Hasbro IP comes into the mix. There's a number of unscripted shows for Hasbro IP that I didn't mention but are also underway and so we feel very good about that business. We had said all along that in Q1 a year ago we were still receiving theatrical revenues and it happened to be a very big theatrical quarter for us and clearly, just given the timing of closures, we would be up against those revenues this year. And we've mentioned that in our investor day as well as our first quarter conference call. So again, the team's doing an excellent job. They are really engaged in developing Hasbro IP and delivering a whole array of very entertaining shows and upcoming movies for the marketplace.

As far as the cadence of Wizards, you're right, Steph. It's the varying nature of the set releases really does impact the shipments for year-over-year trends. And the release cadence this year gives us an expectation that the second quarter will be the biggest quarter of the year. It's our current expectation, anyway, of the year for Wizards. So Q1 of last year had some revenues pulled forward to avoid COVID logistical issues, but obviously they comp very well because of the strength of releases. The momentum is there, and the spring set timing will be in Q2 of this year versus Q1 of last year. So that, with some incremental game launches in the second quarter, which don't have a comp on the digital side, that's what kind of gives us the belief of the second quarter being higher. than the other quarters. And if we look back on that business, we can see it fluctuates from time to time. And the digital revenue, as that ramps, will have depreciation that goes with that. So while Arena Mobile, we started to have some expense in the first quarter, you'll see a bit more of that ramping with those digital gains being developed. And that's why we continue to believe that full year operating profit margin for that segment is expected to be more in line with 2019 levels for the full year of 38.7 versus the 46.4 that we had last year.

Very helpful. Thank you.

Our next question comes from the line of David Beckel with Barenburg Capital. Please proceed with your question.

Hey, thanks a lot for the questions. I have two if I could. First one just on Arena or Magic in general, I guess. Really impressive growth, obviously, from Arena in the quarter. I'm curious, do you have the data set capable of giving you a holistic picture of your player base? I'm curious most specifically if that growth is coming at the expense of tabletop or if you're actually expanding the market base and whether or not you expect mobile to further expand the market base. That's my first question.

Sure. So, in fact, you're right. The Magic Arena had historically been expanding. It's accelerating in that effort. In fact, analog tabletop has performed incredibly well. And let me remind you that... the analog and tabletop business is performing incredibly well while people can't get together locally in their local favorite hobby shops or local gaming shops to play the game. In fact, about a year ago, if you looked at the hobby shops, you would have seen about 40% of global hobby shops had some capability to fulfill or either curbside pickup or some kind of e-commerce. And today, that's well over 80%. And we've tried to help foster those capabilities and building card sets and releases that would be enabling local hobby shops to really participate. But we do expect an additional tailwind on the analog business when we're starting to see that as markets begin to reopen and people can begin to get back together again. So that's obviously a major contributor to people's being able to play and also the opportunity to continue to share an individual gamer's passion with new gamers to the game. People get invited to come along and learn how to play Magic all the time. So yes, it's expansive. No, there is no cannibalization. And in fact, Magic Arena is just allowing people to play at a distance who had never been able to reconnect with friends or family before and not necessarily be in their neighborhoods. So, um, all in net positive.

That's really helpful. Thanks. And, um, just a question on the, the music deal. Uh, can you, uh, more housekeeping in nature? Can you give us the net proceed amount from that deal? I realize it was sold at a loss, so maybe there's a tax benefit. And then also, um, you know, what the financial impact of, uh, the divestiture will be for the, uh, for like on a full year basis.

Yeah, so in fact the business was not sold at a loss. We in fact sold the business on a multiple basis far over what we had paid for it. So obviously before we, or as we were acquiring E1, we assigned certain values to certain elements of the business, music, television, film, other goodwill, and that was back in late 2019. And so there's a book loss, just to true up, a book loss that comes as a result of the proceeds that we receive from the acquisition. But we feel very good about the sale, and it was, on a multiple basis, far ahead of what we paid for it. I don't know if you want to comment on that.

As far as the impact on the full year, it's not expected to be material. As we said, we expect the deal to close in the second quarter, late in the second quarter, early in the third quarter. We would expect at that point it would reduce revenues by approximately $60 to $70 million and maybe $15 to $20 in operating profits. So not material in the second half of 2021. Great.

Thanks so much. Our next question is from the line of Arpine Kocharian with UES. Please proceed with your question.

Good morning and thanks for taking my question. I was wondering if you could comment on POS. Q1 was pretty strong across the board, helped somewhat by Easter. But do you have any color on what POS is doing into April now that we're comping very sort of tough comparisons from COVID boost last year? Then I have a quick follow up.

Sure. Well, what we've seen is continued strength, obviously, If you look at the games business, and I described this a bit in the remarks, our games business up until week 12 was up 30%. And then obviously we hit where COVID really accelerated a year ago. And so games finished quarter at minus 5% in POS. However, underlying POS during this period is still up 30% versus the 2019 pre-COVID level. So We're still seeing that robust gaming demand. Secondly, our toy business, POS, has been incredibly strong through this period and double digits up for post Q1. The other thing that's really important to note is that this is a period of time where we can actually supply product, whereas a year ago, the POS was being generated from inventories retailers had on hand as our games factories in Massachusetts and Ireland had been closed for eight weeks. So now we're able to supply demand we weren't able to supply a year ago. And similarly, supply chain disruptions had caused us to be unable to supply product during Q2 last year. Despite good, strong POS, it was really coming from inventories on hand more than our ability to replenish. So we're seeing Q2 shape up quite well from a demand perspective and also early on, I'll comment, from a shipments perspective. We are really seeing continued strength around the product categories and growth in our franchise brands has really been robust around the world. In North America, franchise brands in Q1 grew 37%. You know, we're really seeing our partner brands grow. Our e-com POS was up 34% in the first quarter with even higher numbers for several brands. Disney Princess was incredibly strong with POS, up more than 60% in the first quarter, and that's continuing as the team has launched a whole array of new innovative products. So again, it's going to be a A bit of a strange comparison on POS and Q2 as compared to a year ago, but the ability to supply product against real demand is very evident, and we're executing on that.

That's super helpful. Thank you. And then just a quick follow-up. Have your expectations changed at all for what volume under PEPA and PGA you could sort of vertically integrate in the second half of the year?

No. In fact, I would say we're as confident or even more confident the teams have done an incredible job of working with our global retailers and Selling in an array of new really inventive product of season 9 of Peppa is really proceeding. There's a whole lot of new content coming and I don't want to give anything away to the fans, but including a trip to the United States for the family and A lot of product around all that and the play patterns are really just so cute and inventive. So, no, we feel very good. Peppa and PJ both will have around 50 SKUs each this holiday. And then we'll continue to accelerate in 2022 as we have new products coming in that year as well.

Thank you very much.

Our next question is from the line of Tammy Zakaria with JP Morgan. Please proceed with your question.

Hi, thank you so much for taking my question. So my first question is, do you still expect advertising expense to be nine to nine and a half for the year given the first quarter was light? And how should we think about this line for the rest of the year?

Good morning, Tammy. I think we do still expect advertising to be right around that 8% to 9% of revenue level. It was light in the first quarter, not because of consumer products and wizards in digital gaming, because we had increased advertising in those particular segments. It really was because of entertainment. and not having the theatrical launches that we had a year ago when we were out promoting those lines. So that's really why you're seeing the impact. But for a full year basis, we still expect it to be in that 8% to 9% of revenue range.

Got it, 8% to 9%. Got it. That's very helpful. And then along the same line, I think your cost of sales – excluding production cost amortization, saw about 220 basis points of deleverage in the first quarter. Do you expect that trend to continue for the rest of the year, or should it be lower given you've announced price increases to your clients, consumers?

Yes, so we did see that impact, you're correct, in the first quarter. And today we've been able to mitigate and absorb the increases that you're seeing in freight there as well as the product costs. But they have become more pronounced. But in addition to our efforts, we do have to increase prices. In fact, in the second half of the year to help mitigate those rising costs. So as of right now, With blending all of that together, we do expect that we should be able to mitigate those increases at present.

Got it. So the first quarter is really sort of the trough. That's the highest hit when you probably saw and it should get better throughout the rest of the year. Is that how we should be thinking about it?

I think we're seeing continued pressures, but we have plans to mitigate with price increases in the second half of the year.

Got it. Okay, that's very helpful. Thank you so much.

Thank you. Our next question is from the line of Drew Crum with CIFL. Let's just see what's your question. Okay, thanks. Good morning, guys.

Good morning, guys. Brian, as it relates to consumer products, do you have any insight into how retailers are planning the holiday shopping season this year? It seemed to start much earlier last year. Are you anticipating a similar shape this year, or do we return to pre-COVID-19 behavior on the part of retailers? And then separately for Deb, in the press release last night, you mentioned plans to accelerate deleveraging with the sale of the music business. Can you give a little more detail around that? Thanks.

Sure. You know, what we're seeing around the world, and it's really great to see the growth in every region around the world for the consumer products business, including a real return to growth in Europe and Asia Pacific and Latin America, in addition to very strong growth in demand in the U.S. As we look at our retailers' plans, it's clear that these are categories that are increasingly important to retail. The growth and robust sales increases we're seeing across our business are significant. are really important, again, to the consumer. So what we're going to see, we believe, is a number of very big promotional windows that will occur in the summertime. A few of our major retailers are already lining up around those kinds of plans. And then additional opportunities and big promotional windows occurring at the beginning of Q4. So I would say it's multiple at-bats, for big promotional windows that will begin early but also continue and accelerate during Q4, so the holiday period. And we're seeing that from several different categories of retailing and our major retailers.

As far as the net proceeds, as we said, we expect the deal to close late in the second quarter, perhaps early in the third quarter. And we do anticipate using the proceeds to de-lever. As you recall, we structured the debt at the E1 deal so we could prepay several components of it with no penalties. And our expectation is that you will see something likely around that time frame or shortly thereafter.

Got it. Thanks, guys. Our next question is from the line of Garrick Johnson with BMO Capital Markets.

This is your question. Good morning. Thank you. I have two questions. I promise to be quick. First, you mentioned that retail inventory is down in most markets. Where was it up and by how much and why? And then I have a follow-up, please.

Sure. Retail inventory is up a little bit with our Wizards business and it's and it's up a little bit in our games business, but these are very, very small increases. I would say overall inventory is either kind of in line with a year ago or slightly below, and it's just where we have increasing demand and sales. Okay.

Gotcha. And just to clarify, Last time you said that all three segments were expected to grow revenue, adjusted operating income, and adjusted EBITDA. Is that still the case?

It is. In fact, performance in the first quarter makes us even more confident in our ability to execute a very good year, and the team is performing at a very high level. So, yes, we feel very confident about the guidance that we had provided earlier this year. All right, fantastic. Thank you, Brian.

Our next question comes from the line of Fred Whiteman with Wolf Research. Please proceed with your questions.

Hey, guys. Good morning. I just wanted to follow up on Brian's restocking comments. Are you comfortable with where retail inventories are overall today, or are you seeing POS constrained in any way as a result of channel inventories?

No, I think we're feeling pretty good about inventories, and in fact... I think as you continue to drive e-com and Omni sales, and we talked about it being up 70% in a quarter, that will reflect a bit of a mixed shift in weak supply of inventory on the margin. And so you're just seeing us continue to hone the inventories for the channel, continuing to use really good techniques in how we restock our using flex warehouse space for our online and Omni retailers and be as efficient as possible while still fulfilling demand. And in fact, we're lining up against continued strong demand in Q2. A lot of new initiatives coming throughout the year. In fact, we're really excited about the number of new initiatives we have coming for the remainder of the year that run the gamut across a multitude of our brands. We talked about some of the new initiatives and new initiatives coming in action around a couple of new films, G.I. Joe, My Little Pony. And so, again, we're lining up those inventories for those major initiatives.

And then just on the games POS, is that 30% growth rate versus 2019 a good two-year expectation as we move through the year, or is there something that could cause that to change?

The team's really got an array of new games that are coming. We have really robust plans. In fact, already year-to-date, we have the number one new game in the marketplace, according to NPD, which is this Fusca fall, and it's been really well-received. We have a number of new games in Monopoly and several new original games coming as well. So very strong plans for games for the year. Obviously in Q2 and during this like eight, 12-week period, we have a bit of a flip on POS. But as I said, the underlying demand remains quite strong and plans for the year really look good.

Great, thank you.

The next question is from the line of Devin Prisco with Bank of America. Please proceed with your question.

Thanks for the question. Could you talk through the puts and takes for partner brands, given you're still able to grow revenue despite tough comps in the quarter? Could that certainly grow more in line with your core business for the full year, just given increased Disney Plus adoptions and new series like the Falcon and the Winter Soldier.

You know, you're right. There's a lot of excitement and major initiatives coming from the partnership with the Walt Disney Company. Clearly, Disney Plus has an array of new content lined up. Falcon and the Winter Soldier began to ship and to Q1, but it's really a Q2 initiative. And we're seeing incredible growth in the Star Wars business, incredible growth in POS. Disney Princess, I mentioned earlier, is really strong shipments as well as more than 60% increase in POS. And then Marvel, very strong around Spider-Man, but also will launch product for a number of films this year. including Black Widow and Shang-Chi. We'll have some product for Venom, and then Eternals, which comes later in the year, is going to be a major initiative for us. So, you know, again, and then the Spider-Man movie that comes at the end of the year. So against those three major brands, we're certainly driving a lot of innovation and product for both Disney Plus initiatives as well as the film initiatives.

Thanks. That's helpful. And related to E1, Sony recently just signed deals with Netflix and Disney with $3 billion combined, which is really unprecedented. And I know you recently signed output deals in the UK and Ireland with Sky, but I was hoping to get your thoughts on that deal and the implications for E1, just in terms of how you're thinking about investment in that business. and potential for more output deals in the future.

Yeah, well look, what's great about where we are is that E1 has historically been an organization that's been very effective in building incredible content in a risk mitigated way and selling to any number of partners. Great relationships across the board with the OTT platforms from Netflix to Amazon to Apple to others. We have shows on the air with all of those different outlets and then, of course, as well with broadcasters, terrestrial and satellite around the world. We continue to look at how we put Hasbro IP in the market. There's a very strong demand for world-class IP and Hasbro has an array of it. We're working, as I mentioned, on a number of brands and we're starting to see the traction around brands like My Little Pony, which we talked about, is on Netflix in September. Transformers, new TV series going on the air on other platforms. Our film coming next year in partnership with Paramount, and then Power Rangers, you'll hear more about it, but we've been developing that, and we expect shortly to be able to talk about the brand, new content for the brand, that will go after a multitude of audiences that will be on a streaming platform. So, again, a very good position for the company, and we look at all of our opportunities. But you're right. We've entered an era where there's unprecedented spending on content and an unprecedented desire for great brands with great story, and E1 is expert at that. Thank you.

Thank you. Our final question comes from the line of Sean Collins, the Citigroup. Please choose your question.

Great, thanks. Hi, Brian and Deb. Good morning.

Good morning.

Hey, Mike, my question is on the sale of the E1 music business. I'm just wondering, was this an alternative that you had planned on before the E1 acquisition in the summer of 2019? You certainly got a healthy deal multiple, you know, 3.2 times revenue. Or was this more of an opportunistic sale given a very healthy deal market? Any color would be interesting.

Well, I'll comment and let Deb comment. Look, from very early on, we received a lot of interest in the business. As soon as it was announced, if you remember the headlines around, you know, all the different music labels that E1 had as well, juxtaposed to some of our brands. And, you know, it was... It was really a lot of conversation and a lot of interest. We ran a very robust process. We had a number of parties, more than 10 parties interested in the business during the process. And ultimately, we think we found the right partnership. The team is really well positioned with the buyer and this opportunity. We'll continue to work with them on several brands for music supervision and some of our music for a number of years because they are so good at what they do. And again, it was a really robust process. It wasn't that we were contemplating a sale, but we certainly had the interest from the very beginning.

Right. And as Brian said, for us, it's about continuing to focus on really the core strategic elements of the acquisition and how they fit into our brand blueprints. to continue driving our company to get results like the double-digit revenue growth that we expect for this year. So go forward. We think their music business is a great team. They're in a great place. We look forward to working with them, and we look forward to continue growing Hasbro as a great play and entertainment company.

Great. That's helpful. Thank you very much.

Thank you. At this time, I'll turn the floor back to Debbie Hancock for closing remarks.

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

Thank you. This will conclude today's conference.