Hasbro, Inc.

Good morning, and welcome to the Hasbro second quarter 2022 earnings conference call. At this time, all parties are 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 from your telephone keypad. Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Joining me today are Chris Cox, Hasbro's Chief Executive Officer, and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Deb providing commentary on the company's performance. Then we will take your questions. Cynthia Williams, President of Wizards of the Coast and Digital Gaming, Darren Troup, President and CEO of E1, and Eric Nyman, Hasbro's President and Chief Operating Officer, will join for the Q&A portion of the call. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. 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 in today's press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cox. Chris?

Thank you, Debbie, and good morning. Since our first quarter earnings call, the executive leadership team and I have been undergoing a multi-month strategic review of the business. While the review is still in process, it's already clear we're an organization with a bright future. Led by an unmatched brand portfolio that spans fans of all ages, an industry-leading gaming business, which is a top investment priority for us, a growing direct-to-consumer business, and unique assets and entertainment creation all knitted together by talented global teams working with a clear sense of purpose and value creation. We see big opportunities to scale our franchise brands, drive all new play platform innovation, and transform our operations to improve our agility, focus, and profitability. Games, digital, expanding the age ranges of our portfolio, and harnessing direct connections with our consumers are all compelling growth opportunities for Hasbro. We'll share more about our plans in October at our Investor Day, but I'm energized with what we have accomplished to date as we focus on driving long-term profitable growth an environmentally responsible, sustainable business, and superior shareholder returns. While we've been advancing our long-term strategic work, our teams have been busy delivering a strong second quarter with 4% revenue growth absent FX, 14% adjusted operating profit growth, and 200 basis points of margin expansion, adjusted earnings per share of $1.15, and 6% growth in adjusted EBITDA, Deb Thomas will speak to our results in more detail, but let me share a few highlights. Revenues grew for consumer products and the Wizards and digital gaming segments. Entertainment segment revenue was down in the quarter, mostly due to the timing of deliveries, but is up year to date, absent the music business we sold last year. As we projected in our Q1 earnings call, Wizards delivered its biggest quarter ever in Q2, successfully comping last year's Q2, our prior record. Tabletop revenues grew 15%. Magic the Gathering led with 11% revenue gains and is up 10% year-to-date. For the first time in history, every major set this year has crossed $100 million in sales. The underlying business and demand for Magic remains strong, and we continue to expect the Wizards business to grow at the high end of our beginning-of-year forecast. a range of high single digits to low double-digit year-over-year growth on a constant currency basis. In the quarter, our overall games portfolio grew 2% or 4% in constant currency. We enhanced an already powerful portfolio during the quarter, completing our acquisition of D&D Beyond to bolster our direct digital platform for Dungeons & Dragons, adding key capabilities in two areas of focus, gaming and direct. We expect the acquisition to be immaterial this year and accretive to EPS in 2023 and beyond. As we forecasted, our digital revenues were down for the quarter and are expected to be down for the full year as we comp both Dark Alliance for Dungeons & Dragons and Magic the Gathering Arena's mobile launch last year. Digital remains an investment priority for Hasbro. Arena is entering its fourth year of availability since its open beta in 2018, and is a profitable, vital platform for new player acquisition and magic. Later this year, the game will be available on Steam for the first time, and in 2023, we expect it to launch on major consoles. D&D Beyond is in the early stages of integration into our Wizards business, and we are pleased with the early results. We expect D&D Beyond to be a growth platform, particularly as we turbocharge the Dungeons & Dragons brand with blockbuster entertainment, digital games, and consumer products in 2023, leading into the brand's 50th anniversary in 2024. We also expect several exciting new game announces in the coming quarters across D&D, Magic, and new brands we have in development. Consumer product segment revenues grew behind gains in several Hasbro brands, including Play-Doh, Peppa Pig, Power Rangers, and My Little Pony. as well as Hasbro products for the Marvel portfolio and Star Wars. As we look to the remainder of the year, we have innovative new initiatives and are in a much better position this year versus last with inventory at retail and on hand at Hasbro to mitigate supply chain disruptions and meet demand. Retailers increased direct import orders by approximately $60 million in the second quarter versus our plans, taking product earlier to ensure availability and proactively manage the supply chain. While our inventory levels are up year-over-year at the end of Q2, the inventory is of high quality, positioning us to meet consumer demand and promote our new product innovation aggressively. For instance, our early read on our first of two prime days at Amazon last week is positive, with consumer deal takeaway up 20% year-over-year. Our newest game announcement, The Party Game, is off to a record start for gaming pre-orders. As such, we expect inventory by year-end to be approximately flat year-over-year and to see reductions in on-hand supply by the end of Q3. Our entertainment business is up year-to-date and on track for full-year revenue and profit margin growth, absent the sale of the music business last year. With over 200 projects in development across film, scripted and unscripted television, The E1 team is working on over 35 development projects for Hasbro brands, including content for Transformers, Magic, D&D, Peppa Pig, My Little Pony, Power Rangers, and Play-Doh, among many others. Last week, we received seven Primetime Emmy Award nominations for Yellowjackets, including Outstanding Drama Series. We are in production on Season 2, with deliveries slated to begin later this year. In Q2, we delivered season four of another hit show, The Rookie, for ABC. This fall, The Rookie will return for season five, and previous seasons will begin syndicated broadcast in the U.S. ABC also ordered a spin-off, The Rookie Feds, to series, where it is set to premiere September 27th. As we look to the full year, we began 2022 with what we felt was an appropriately measured outlook for growth that reflected a challenging economy. and we're maintaining our guidance. We continue to expect low single-digit revenue growth in constant currency as we see exchange rates, particularly in the Eurozone, as a potential headwind that Deb will speak to further. We are prioritizing profitable growth and expect adjusted operating profit to grow faster than revenue as higher margin product lines, including games, grow at a faster rate, combined with cost savings we have identified in our business. Our target remains a 16% adjusted operating profit margin for 2022 versus 15.5% last year. The team and I are looking forward to sharing with you our long-term plans and vision at our upcoming Investor Day on October 4th. We've spoken with many of you over the past several months, and we've taken to heart your excitement and feedback. We remain laser-focused on producing profitable growth, articulating our updated vision, continuing to drive industry leadership in sustainability and governance, and positioning Hasbro to deliver superior total shareholder return over the long term. Put simply, our aim is to do good while we do well. I'd now like to turn the call over to Deb to share more details about our performance in the second quarter and our outlook for the year ahead. Deb?

Thank you, Chris, and good morning, everyone. Our second quarter results have us on track to achieve our full year guidance, including low single-digit revenue growth and constant currency, operating margin expansion to 16%, and operating cash flow at the low end of the $700 to $800 million range. The second quarter, the team delivered revenue growth, margin expansion, and $1.15 in adjusted earnings per share while returning $221 million to shareholders through our quarterly dividend and share repurchases, and adding an important growth engine to both our gaming business and our direct-to-fan capabilities with the acquisition of D&D Beyond. Importantly, we proactively managed our supply chain and inventory purchases to mitigate disruption. We're much better positioned to meet demand this year versus last. This action resulted in higher than typical inventory levels at Hasbro for this time of the year. To avoid the out of stock positions of the last year holiday season due to supply chain disruptions, retailers also shifted some consumer product direct shipments into the second quarter from the third quarter. Both our inventory and that at retail is of extremely high quality. We have product to meet demand, including significant new releases in Magic the Gathering and in our toy and game business. Based on our plan to drive point of sale growth in the second half of the year, we believe we will end the year with inventory levels similar to year end 2021. While product and freight costs are up, we're beginning to see a reduction in port congestion delays and lead times have come down, although they remain two times higher than historical levels. We also have begun to see the offset to higher input and freight costs from price increases in our CP business that went into effect in the second quarter and will be increasingly impactful in the third and fourth quarters. Price increases also went into effect at the beginning of July for select Magic the Gathering sets, and will begin to be reflected in results in the third quarter. As Chris spoke to, we are managing costs and finding efficiencies in our business, leaning into the theme of focus and scale. We have already begun to identify and see some of this work reflect favorably in our results. In the quarter, we more than offset the 230 basis point decline in gross margin with lower and more efficient spending. This included a 170 basis point decline in advertising to revenue, primarily from lower spending on digital gaming launches and no longer supporting the music business sold in 2021. Adjusted SDNA to revenue reflects a 180 basis point reduction driven by lower compensation and depreciation as well as the sale of the music business. This was partially offset by higher costs associated with our annual meeting. Intangible amortization includes an incremental $900,000 from the acquisition of D&D Beyond. We anticipate $4.7 million this year and $7.5 million next year in amortization expense associated with the acquisition. Adjusted operating profit grew 14%, driving 200 basis points of margin expansion to 18% of revenue. Below operating profit, interest expense declined $4.5 million as we progress toward achieving our debt-to-adjusted EBITDA target of two to two and a half times in the second half of next year, if not sooner. The underlying adjusted tax rate, excluding discrete items, was 21.6% versus 23.2% last year, and we expect the full year rate in a range of 20.5% to 21.5%. Looking at our segments, Wizards of the Coast and digital gaming revenues were up 5% absent FX. This was led by a 15% increase in tabletop revenues. Digital gaming revenues were down 36%, as planned, reflecting the year-over-year comparison to the 2021 digital gaming launches of Dark Alliance and Magic the Gathering Arena on mobile. Total Magic the Gathering revenues grew 11%. Operating profit in the segment increased 17% to 53.7% of revenue. We continue to invest to grow Wizards for the long term, including in digital gaming and talent. Cost of sales increased behind higher paper and freight costs and we continue to pre-purchase paper stock to help meet our printing needs for future set releases. Operating margin improvement reflected both revenue growth and lower costs from digital gaming launches in depreciation and advertising, as well as lower compensation accruals this year versus last. The team remains on track to deliver high single-digit to low double-digit revenue growth for the year, and operating margins that are down from last year but remaining above 40%. Consumer products revenue grew 9%, absent FX. In constant currency, North America revenues were up 11%, Europe was flat, Latin American revenues were up 38%, and Asia Pacific was up 1%. Of the $19.1 million negative impact from foreign exchange in the segment, $14.9 million of it was in Europe. For the first time in 20 years, the Euro and the US dollar are now at parity, and the Euro is our largest international currency. If we look at the back half of our year, we expect this to have an additional negative impact to CP revenue of $30 to $40 million versus our expectations as we enter the year. Given hedges we have in place, we expect less of an impact to operating profits. The other item impacting results is Russia. For the full year 2021, our revenue in Russia was $115 million. with approximately 70% earned in the second half of the year. We will not have this revenue and associated operating profit in 2022. From a brand perspective, each brand portfolio category in the segment, franchise brands, partner brands, Hasbro Gaming and emerging brands were up in the quarter. Our products for Marvel are on track for another tremendous year, with strong growth in the quarter and year-to-date. New entertainment releases and innovation are driving this business. Play-Doh, Peppa Pig, Power Rangers, PJ Masks, My Little Pony, and Hasbro gaming titles were among the Hasbro brands driving quarter growth. Higher product and freight costs were partially offset by price increases taken at the beginning of the quarter. Adjusted operating profit was $3.1 million, down $14.7 million, reflecting these higher costs as pricing will phase in during the coming quarters. Our full year view for CP remains low single-digit revenue growth and constant currency, with operating margins flat to up slightly from last year's 10.1%. Entertainment segment revenues reflect the 2021 sale of the music business and timing of deliveries. Segment revenue absent music declined 4%, and our view for growth in the year remains unchanged. Our film and TV business was down 10%, as delivery shifted between quarters and family branch revenue was down slightly absent FX. With the lower deliveries, program amortization declined and the mix of revenue was favorable. Adjusted operating profit increased more than 100% to $23 million or 12.4% of revenue. For the full year, We continue to expect revenue growth in mid-single digits and operating profit margin expansion from 8%, both absent the music business sold last year. As you think about the full year, the third quarter is the most difficult comparison for our business. Retailers placed more direct import orders in Q2 this year than planned, about $60 million more of CP revenue. In Wizards, we're up against a more difficult release slate and could see a flat to slightly down quarter, as we've discussed with you previously. And entertainment delivery timing is unfavorable in the third quarter, including comparisons to several film releases to streaming platforms last year. including My Little Pony, A New Generation, Finch, and Come From Away, and a heavier slate of scripted TV deliveries in Q4 this year versus Q3 last year. We also expect many retailers to return to a more traditional promotional calendar with more holiday activations in the fourth quarter. Our cash balance was $628.2 million compared to $1.2 billion in last year's second quarter. During the quarter, we spent $146.3 million for a highly strategic acquisition, $97.4 million in dividends, and we resumed share repurchase to the total of $124 million. We have paid down $50 million of share in debt and remain committed to investments in talent, innovation, and key strategic initiatives. Our operating cash flows for the first half of the year were $147.8 million and continue to reflect the advanced inventory purchasing I spoke to earlier. DSOs were flat with last year at 59 days. Our expectation is that inventory will end the year around last year's levels and that will generate operating cash flow toward the low end of our targeted range. Our plan continues to have us returning to approximately $1 billion in operating cash flow next year. As we head into the second half of the year, we are in a strong position to meet demand and to deliver the year. While economic conditions are challenging, we took that into account in our full-year plan, and our businesses, toys, games, including magic, and content are historically very resilient during down economic periods. Importantly, we've made significant progress in our strategic review. We look forward to speaking with you during the coming weeks and seeing many of you in New York on October 4th for our Investor Day. We 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 using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please ask one question and one follow-up question. We'll pause a moment while we poll for questions. Thank you, and our first question is from the line of Eric Handler with MKM Partners. Please proceed with your questions.

Good morning, and thanks for the question. One of the things you've been highlighting of late has been the fan collectibles segment. And I'm curious to get your sense of what's the size of this market and sort of the overall expected growth in this industry. And then what's Hasbro sharing that business, your growth potential over the next several years and sort of the key drivers of that incremental growth?

Hey, Eric, thanks for the question. And good morning. Yeah, we see the fan economy in general as a huge growth area for us. It's one of our fastest growing categories overall. And I really think you can think of the segment as multiple segments put together. You know, there's kind of classic fan collectibles like plastic figurines and action figures. There's sports memorabilia. And then there's a very wide trading card industry that deals with both playable trading card games like Magic as well as sports card trading games. Over the last couple years, this has been probably our fastest-growing segment at the company, and we continue to be very bullish on the sector. It's a highly resilient sector in terms of down economic times or up economic times. It tends to be focused and concentrated on a target consumer with a very high discretionary income. and it's a passion-driven industry, so people are very engaged in it. You know, on your specific question on kind of like sizing, I'm going to turn that over to Eric a little bit to give you kind of a little bit of a sense of where we see it going and what we think our key initiatives are. Eric.

Thanks, Chris. Hey, Eric. You know, so with regards to market sizing, which is a part of your question, you know, as Chris mentioned, there's a lot of different dynamics at play and different ways to look at it. In the collectibles business, we anticipate that, you know, through our research to be about $4 to $5 billion. and overall market size, so it is a very sizable market. Our momentum continues. We don't break out our share publicly, but we can say that with our Hasbro Pulse platform, as an example, we were up 69% in the first half of the year. So we have good, strong momentum that we expect to continue throughout. And we also have some great launches. This week you'll see at San Diego Comic-Con some really incredible new innovations from the team. One piece of that, which we're really excited about, we talked about it last week, is called Hasbro Selfie Series, which allows you to basically put yourself on your shelf and turn yourself into an action figure. So we expect that to be a very strong new innovation for Hasbro as we launch this week.

Thank you very much.

Sure. Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thanks. Good morning, everyone. We have two questions. Chris, the first one is for you. It's just on helping us dimensionalize the Wizards of the Coast business between Magic and D&D. I think you've said in the past that you expect incremental growth to be coming from D&D over time. So share with us a little bit about the size of that business relative to Magic and what your expectations are. And then if you could just remind us what percentage of the Wizards business is domestic and is there a big international opportunity? And then just quick clarification for you, Doug, on the program amortization. Can you help us think through back half, Q3 versus Q4? We just want to make sure we're modeling that line correctly going forward. Thank you.

Great. Well, hey, Steph, good morning. Thanks for the questions. Yeah, I mean, Wizards of the Coast is an important and vital business for us. It's been a major growth driver for the company. And we've had a great first half of the year for the Wizards business overall. You know, for the first half of the year, we see it up 5%, and we're continuing to project at the high end of our range of upper single digits to lower double digits growth for the entire year. In terms of the composition of that business, Wizards tends to be very magic heavy. You know, magic is, you know, probably about 70% to 80% of that business overall. Um, and, uh, you know, we tend to be, you know, between the D and D brand and the magic brand, it tends to be very North American centric, uh, about 75% of our overall sales take place in the U S Canada and Mexico. Um, so we see a lot of growth vectors for both of those opportunities. You know, we see, uh, you know, Europe has been one of our key growth drivers for the magic brand. We just started localizing D and D product, uh, internationally just this past year. We see a huge opportunity for products like D&D Beyond to go beyond North America. Over 85% of the registered users for D&D Beyond, for instance, right now are based in the U.S. or Canada. We see a big growth opportunity there. And when we look moving forward, we continue to see the tabletop industry as being very vital and robust. I think you can see that in the 15% growth that we saw in our tabletop revenues in Q2. And we see a big opportunity to open up these brands over time as we really start to leverage our brand blueprint assets. If you just look at what we're going to do with Dungeons & Dragons in 2023, we have an all-new blockbuster movie that will be coming out in March of next year. We're going to be previewing that in Comic-Con later this week in a sold-out Hall H preview. We'll even have a little bit of an interactive tavern that people can go to and experience the world of D&D firsthand. And then we're going to be complementing that blockbuster entertainment with follow-on streaming entertainment, a huge consumer products push, all-new tabletop games, and some really cool new video game innovation that will be coming out shortly following the film. So I think the Wizards business and the future of that business continues to be bright, and I see both Magic and D&D growing. And maybe even D&D picking up some share inside of the overall Wizards business in terms of its future and its potential.

Great, Chris. And let me pick up on the amortization point. So if we think about program amortization, we said at the beginning of the year we expected it to be in that 9% to 10% range. We still expect that. And, you know, I think in the quarter we were just under 9%, the amortization as a percent of revenue. And if I look back on last year and just think about the phasing of our expected deliveries this year, as we mentioned, we had a much bigger Q3 from a delivery phasing last year than we expected this year. So my expectation is the rate would be slightly higher in the fourth quarter than it is in the third quarter. But we still expect to be within that range, and our expectation is probably more toward the lower end of that range, based on all the things that we're delivering this year.

Thank you. Very helpful.

Our next question is from the line of Arpine Kocharian with UBS. Please proceed with your questions.

Thanks very much, and good morning. You know, margins were quite a bit stronger than we thought for the quarter. And of course, you had MTG up nicely, so that underpins, you know, strong margins. But in terms of advertising, GNA, as you look at Q2 versus kind of back half of the year, anything in Q2 that is not repeatable in the back half that we should take into account? And then a quick follow-up.

I don't see anything that was different in Q2 than what you should expect for the balance of the year. Eric, any comments? No, I agree, Chris. I don't think there's anything –

Anything there, Arpino, to worry about?

I think the biggest difference between Q2 this year and Q2 last year, Arpino, was we leaned into two rather large digital launches with Magic the Gathering Arena Mobile, which was in April. And then we started doing all the pre-sell and advertising for the launch of Dungeons & Dragons Dark Alliance, which came out in late June. So year over year we didn't comp those and that's what drove kind of the favorability on A&P.

Okay, that's very helpful. Thank you. And then just a quick follow up on revenue. Is it possible to give us a sense of how much D&D Beyond is adding to revenue for the year? Or is the guidance now kind of low single digit up XFX is excluding that and is more organic? I was not sure whether that guidance includes the acquisition. And if you could detail how much exactly that's adding for the year. I think you've said before that it's really immaterial to EPS. So I'm not worried about EPS. Just asking about revenue here. Thank you.

Yeah, I'm going to turn most of this answer over to Cynthia if you want to opine, Cynthia. It's relatively small for the balance of the year, and it was certainly very small for the quarter. But we do see it being material as we get into 2023 and beyond on a top line and bottom line basis. But, you know, a lot of that's going to have to do with the revenue synergies that we see with the business as we start to integrate it, which is still relatively early days. Cynthia, anything to add from the wizard's vantage point?

Thanks, Chris. Yeah, the one thing I'd say is D&D Beyond performed consistent to our expectations. We've only owned it for a month now. But we are super excited about the opportunities it gives us to better serve our fans. Chris mentioned a moment ago that about 85% of their current audience on Dungeons & Dragons Beyond is based in North America. So we see a big opportunity to unlock the global audience. with regional translations and culturalized content. We see an opportunity to create multiple experiences that'll cater to different player segments, especially those that'll tap into that awareness we'll build with our entertainment offerings. So while it's small right now, we see a bright future with Wizards owning Dungeons & Dragons Beyond.

And just to add, looking at our financials overall, We do expect it to be diluted for the full year. However, it will be accretive to next year.

Thank you, Deb.

Thanks, Arpina. The next question is from the line of Michael Ng with Goldman Sachs. Please just use your question.

Hey, good morning. Thank you for the question. I just have two. First, I was wondering if you could just help bookend what the 3Q revenue could look like. It sounds like there's an implication that it should be down year over year, just given the direct import revenue shift and the slowing growth or slower growth in Wizards of the Coast. I was just wondering if you could talk a little bit about that. And then secondly, I was just wondering if you could just give us a little bit more detail around wizard margins in the quarter, obviously a record high. Was that simply operating leverage because of the record revenues, or were there any mixed benefits, and what's driving the drag on margins for the remainder of the year in wizards? Thank you. Relative to the second quarter. Thank you.

Gotcha. Yeah, so for Q3, I think you're reading our guidance correctly, Michael. You know, I think a couple things are going on. First off, it's just kind of more release timing associated with what we're releasing across our film and TV teams and our family brand teams and entertainment. I think it has to do, like we actually feel the underlying growth in Wizards is very strong. Our tabletop revenues were up 15% in Q2, so we see good momentum in that business. But based on the quirks of when we're going to release different sets, We feel like Q3 is going to be a little bit of a breather for that business, and we'll start seeing growth again in Q4, particularly as we lead into our 30th anniversary for Magic going into 2023. And then our overall CP business, like you said, we had a little bit of a shift of some of our direct imports from Q3 into Q2. I think that really reflects strong retailer enthusiasm for our back half of the year innovation. It's going to allow our teams to be able to really lean into advertising and promotions and really be able to solve some of the issues that we've had for the last couple years on out-of-stocks because we feel like that inventory is of very high quality and has a lot of upside potential for us in terms of POS. I'll turn over the balance of the question over to Deb.

Great. And we did talk a bit about entertainment as well. Some of the deliveries that we have in Q4 versus Q3 a year ago. Interestingly, and we tried to highlight this in our release, when we release movies directly to streaming, revenue recognition just has us take it right at that point in time. And we have more releases that are actual theatrical coming in the third quarter, which will have that same revenue. It just gets spread out over the period. with all of the ultimates and the library value that comes to that as well. So we're very excited about what's coming up in entertainment, but our delivery timing is a bit more Q4 from a revenue recognition standpoint and beyond than it was in Q3 a year ago. We also had the My Little Pony movie as well. So when you think about all those things, it really is just a timing issue. And the only thing I would add to what Chris said is as we look at our retailers and what they're expecting over the holiday period, they're looking to have more holiday promotions this year. And we're actually seeing that. You're seeing people actually going into shops more. Well, we're very excited about direct-to-consumer, and Eric talked earlier about Pulse and the market that we have there and how excited we are about all that innovation. I think we're going to see more holiday promotions at retail, and we are well-positioned this year with inventory to meet that demand, whereas last year we were short and retailers were short.

Yeah, and so from your second part of your question was margins on the Wizards business. For Q2, a great deal of that upside was the lack of amortization or realized kind of amortization for our digital launches, particularly Dark Alliance and Arena Mobile. and a much lower A&P spend associated with the business because we tend to heavy up and front load the marketing spends for those kinds of releases. For the back half of the year, I think what you see is we continue to invest heavily in building out the infrastructure for digital games, in particular with the Wizards business. And we also have, as the economy starts to open up, we're starting to resume some of our more historical spending on organized play. and helping to support that. So those costs are starting to come back into the wizard's business and something that we're factoring in on our guidance.

Great. That's all very helpful.

Thank you, Chris and Deb.

Thank you. Our next question comes from the line of Megan Alexander with JP Morgan. Please proceed with your question.

Hi. Good morning. Thanks for taking our question. In the slides, you mentioned POS was down again in 2Q. You did mention the Amazon Prime shift. So did that drive POS down in the quarter? And maybe can you just talk about how that trended versus 1Q and maybe what it looks like quarter to date, given you are expecting growth in POS in the second half?

Yes, certainly having a Prime Day shift from June to July did have an impact. And we're very pleased with the results of Prime Day this year, 20%. increase in sell-through felt pretty good to us and was generally on track with what we were looking for. In terms of our overall POS, we have long guided that our product innovation is back half of the year weighted. We have some great new products coming out. Eric talked about Selfie Series. We just announced Wordle the Party Game. It's our best-selling pre-sale ever in the board game category. We've got a lot of new innovation coming out across our brands, whether it's the Play-Doh ice cream cart, which we think is an amazing giftable item, Nerf Gel Fire, which is going to be some of the best new innovation in the blaster category we think there's ever been, frankly, and then all new product lines like starting lineup for the sports memorabilia fan. We feel pretty good about where our product innovation is coming from, Also, you know, we had a relatively light first half in terms of our entertainment lineup. And the back half of the year, I think, really starts a fantastic cadence of new entertainment releases. Probably one that I'm most looking forward to is Black Panther, Wakanda Forever. That's probably going to be one of the biggest blockbusters of 2022. And I think that's just kind of, you know, as big as that movie is going to be, It's just an appetizer for what's going to be a fantastic first half to next year, including the Dungeons & Dragons Honor Among Thieves movie, some fantastic new releases from our partners at Disney, and then Transformers Rise of the Beasts come next June. Eric, anything to add?

No, you hit most of them, Chris. I think, you know, just to finish that, Megan, you know, we really do feel like after some headwinds in the first half, we have a strong second half plan. We're proud of our teams and their innovation. Even in addition to all the great innovations Chris mentioned, we also have some big programs in retail in August behind Star Wars and the Obi-Wan product line, which is setting behind their extremely popular Disney Plus series. And across the board, the strength continues across the Marvel portfolio. So we really do feel like we're poised to have some positive POS versus where we've been and I think the innovation you're going to continue to see from Hasbro is very, very strong.

Got it. That's really helpful. And then, you know, maybe as a follow-up, you know, again, on the Wizards margin, it had very strong performance in 2Q. And it does seem like you raised the top-line guide, you know, a bit for that segment. You talked about, you know, potential to reach low double-digit versus now you are including that in the guide. So, you know, that would imply just higher operating margin on Mix and the .caf. but you did keep the overall profit outlook unchanged. So are you just seeing higher costs in other areas of the business, and are you still thinking about COGS being around 30% of sales for the year?

So overall, we are seeing higher costs. As we mentioned, there was pressure on gross margin from particularly our magic business, but also the D&D business when you think about Wizards in the Quarter. We just had much lower advertising and depreciation expense, as we talked about, So when we see the mix as we head into the back half of the year, we do have pricing on select Magic the Gathering releases. We have had to take just to compensate for paper costs. We've invested to make sure we have paper to support the demand that we expect in both D&D and Magic the Gathering as well. But overall, as we see the mix and the things that impacted us back half of the year, while we could be surprised, We are expecting margins to be slightly down from a year ago overall for the full year. However, we agree the second quarter was an exceptional quarter given the mix of business.

Got it. Thank you.

Our next question comes from the line of Fred Whiteman with Wolf Research. Pleased to see you with your questions.

Hey, guys. Good morning. Thanks for the question. I know that you made the comment that you would assume some macro challenges when you guys issued guidance at the start of the year, but could you just give us sort of a quick sense at a high level for how you see each of the main categories performing if we do move into a recession? I think that we can go back and sort of look at what the toy business did in 2008 and 2009, but for some of the newer pieces of the business that might not have been broken out previously or that weren't part of Hasbro, could you sort of give us a sense for how you see the elasticities or peak to draw for however you want to frame it?

Yeah, certainly we came into the year feeling like there was a mix of headwinds and tailwinds for the consumer. You know, we were very cognizant of the inflationary environment we were operating in, both from a consumer takeaway as well as its impact on our supply chain. You know, I think net new headwinds that emerged through the year has been the Russia conflict and the effects of that. And then, you know, the currency dynamics with the strengthening dollar. which particularly affects our CP segment in markets like EMEA and our wizard segment with a very strong dollar versus the Japanese yen. So as we look at our segments moving forward, I think what we feel fortunate as a company is that we have very resilient segments across toys, games, and entertainment. These tend to be small luxuries that consumers value pretty highly. You know, our CP segment in prior economic downturns has done relatively well. It has been affected, but not nearly as much as those economic downturns would affect the macro economy. The games business tends to be very resilient. You know, Magic the Gathering started, you know, Magic has grown 12 out of the last 13 years, and that growth vector started back in 2008 during the last financial crisis. And we continue to see that consumer being very resilient with a deep well of savings and a large amount of passion for, you know, pursuing what they love. And then in the entertainment segment, we continue to see that to be, you know, rebounding from the pandemic. Our film and TV business is up in the first half of the year. We continue to project our overall entertainment segment, the sale of our music business, up for the full year. So we feel pretty good about where our outlook is and maintaining our guidance from prior quarters.

Makes sense. And then you called out the $60 million shift just from the direct import timing. Is there anything else that you're seeing or hearing from retailers that could cause some impact as far as 3Q, 4Q split in the back half of the year?

Eric, anything to add? You know, I think, Fred, excuse me, I think, you know, with regards to retail, Deb already mentioned some of the dynamics. I think we're feeling actually pretty comfortable from a supply chain standpoint, which is the one thing Chris didn't touch on in that last narrative, that conditions are improving. And, you know, while things are more expensive and transit times do take a little bit longer than they have in the past, our teams are managing through those challenges. Retailers are managing through those challenges. And I think you'll see, as Deb mentioned, as we get into the Q3 and Q4, a stronger environment where our position amongst retailer promotions and their advertising is favorable, and we're certainly optimistic about that. Perfect. Thanks, guys.

Thank you. Our next question is from the line of Drew Crum with Stiefel. Please proceed with your question.

Okay, thanks. Hey guys, good morning. So on the Wizards business, I think, you know, in some recent correspondence, you indicated that you've expended over a billion dollars on this business over the last five years. Can you address what the planned cadence of spending will be going forward? And Deb, I think you suggested that you're going to focus on digital and talent, but any more specifics you can provide in terms of where you intend to invest?

Well, I would say at a top level, and then I'll turn it over to Deb and or Cynthia if they'd like to chime in. We continue to invest behind the Wizards business and our games business as a whole. You know, digital will be an area of focus for us. I think we will at least maintain our production spending on digital. I think over the next couple years, you'll see us announcing more products and introducing new innovation and I think games as a service is going to be a big area of focus inside of that digital business with what we call digital tabletop. What are we doing and where are we taking platforms like Magic the Gathering Arena? I think we've already announced some platform expansion, but we see some upside potential in new gaming formats and new quadrants of players. I think D&D Beyond will be a major area of investment for us and development. We see a lot of upside in kind of content to commerce synergies with our Hasbro Pulse platform, international growth, and really doing something special to make screens such a more and more important part of even face-to-face kind of in-person play. And then we're also fascinated with what we can do with the balance of our gaming portfolio based on some of the learnings that we've had with some of our quote-unquote hardcore tabletop games. I think there's some interesting opportunities for digitization of our overall board gaming assets that I know the team is investigating. And then, you know, beyond that, video games continues to be an area of focus for us. I think we'll have a couple really interesting announces coming up, you know, within the next three to four quarters. We've got some just killer talent working on those games. And, you know, those games will span, you know, announcements that we have for established brands like Dungeons & Dragons and then some new innovation that we have being cooked up by people who are almost household names inside of the gaming industry, James Olin and the team at Archetype Studios being one of them that I'm particularly excited about. So I would say we're going to continue to lean in on investments in games. I think digital will be a particular focus of that investment, and you should expect us to at least maintain our current spending outlook, if not leaning in further as we see upside potential.

Got it. Very helpful. And then just a quick follow-up, Deb. You're forecasting the cash flow to come in at the lower end of the range. Anything specific to call out there that's driving that updated guidance?

Really, just that you're seeing the reflection of our pre-orders on the inventory and the operating cash flow number. From an investing standpoint, which is part of our free cash flow, we did make that very strategic acquisition of D&D Beyond, which we're very excited about the future for that. As Chris just said, for the platform, for many things that we have in our view go forward. As we look at that, we do expect the inventory to turn, but in the back half of the year, we expect our cash flow generation to actually improve in the back half of the year.

Got it. Okay. Thanks, guys. Next question comes from the line of Linda Bolton-Weiser with DA Davidson.

Please proceed with your question.

Yes, hi. I was wondering if you could comment on what you're seeing, like, on the toy side of the business in terms of raw material input costs. I know that for the toys being produced for this Christmas, the costs are up, but we're seeing, like, spot prices for some things like plastic resin are starting to roll over. So can you just kind of comment on kind of, like, what you're seeing on a longer-term basis, and do you think next year kind of bodes well in terms of cost comparisons on the raw material side? Thanks.

Yeah, thanks for the question, Linda. I'm going to turn it over to Eric to give you an overview on what we see going on in the supply chain. Eric. Thanks, Chris.

So a couple things to hit with regards to your question, Linda. The first was with regards to input costs. You know, we do see those rising, and both Deb and Chris talked about them in our prepared remarks a bit. You know, we have taken pricing to cover that, and we feel comfortable that we continue to make the right decisions with regards to pricing to cover those input cost increases. and we're working with our partners as we go forward to continue to manage and mitigate some of those headwinds. With regards to transit, which is kind of the other big piece that we've talked about in the past, we are seeing some of the transit times and transit costs easing a bit, and we expect that trend to continue as well as we go into the fall. So I think some puts and takes across the board there, but we feel like we have our hands wrapped around it and the teams are managing it well.

Ray, and just switching a little bit, we've seen a lot of talk about the Toys R Us store within stores expanding to all the Macy's. Can you talk about, does that move the needle at all for you, and how are you thinking about that opportunity in terms of some expanded distribution in the channels?

Sure, I'll just continue on that one. Clearly, Toys R Us is making another comeback, and we're always excited when we see toy space and toy merchandising increase in retail footprints around the world. We're certainly encouraged by what we're seeing as Toys R Us partners up with Macy's. We saw the announcements, obviously, that you did, and we clearly have been in conversations with them for quite some time, that they're going to expand that footprint for this Q3 and Q4. They're good partners of ours, but when I say they, I'll talk about Macy's because it's really a footprint store within a store concept. and we'll continue to supply them as needed. I don't expect it to be significantly material for this year, but we are excited that we're continuing to see the toy footprint expanding, and we think that any time you have the chance to put more toys and games in the hands of consumers around the world at holiday, it's a good thing.

Okay, thank you very much.

Our next question is from the line of Garrick Johnson with BMO Capital Markets. Please just do a few questions.

Great. Thank you. I have one and a follow-up. First, on Wizards, you know, there's a lot of noise in the Wizards segment this quarter. Can you please talk about the performance of the core magic arena on its own, excluding, you know, mobile launches and Dungeons & Dragons, et cetera? Thank you.

Yeah, I'll start, and then Cynthia, if you want to add, please do. So Arena Mobile launched last year. We saw a nice surge of new users and new revenue associated with that. Revenue for the platform was down after seeing kind of that surge, but still up on a pre-mobile basis. We're entering the fourth year of the platform, so we would expect it to be starting to get to a maturing aspect. We think things like Steam, things like consoles will be nice revenue kickers and user kickers for us. Moving forward, we see a relatively stable outlook for the revenue for Arena. We see it maintaining as the most important acquisition vehicle inside of the magic brand in terms of bringing new people in and training them on the brand. And then mid and longer term, we see some nice innovation opportunities which potentially could change that revenue curve and kind of that outlook. Cynthia, anything you'd like to add?

Yeah, I think you covered most of it. The only other thing I would say is we will continue to listen to our customers and the community as we are working on that roadmap for innovation. We're super excited about how Arena will continue to contribute to the overall Magic ecosystem.

Great. You had a follow-up, too? Yeah, I did. You know, on a consolidated basis, you guys have commented over and over that you're maintaining guidance. But the fact of it is you've lowered revenue outlook because of FX, right? It's in constant currency now before it's just in dollars. Your operating margin guidance is maintained. So is it FX hedges below the operating line or share buyback or lower interest? What is it that gets you to maintaining guidance?

Sure. Well, Garrick, you're right. I mean, as we sat in the first quarter, we warned that currency was a headwind. And, in fact, we saw the euro for the first time in 20 years reach parity. I think it's up a tick this morning, right? But on a translation basis, that impacts our revenues. But the underlying business is healthy. We do hedge our costs. Most of our costs for product are denominated in U.S. dollars. So we hedge that. We're probably 65%, 70% hedged at a given time. So it does have less of an impact to operating profit. In addition to that, we are very focused on controlling our costs and implementing cost savings initiatives wherever we can. And we're excited to actually talk more about that when we get to Investor Day and how we view the long-term impact of that. But overall, we continue to invest in our business for long-term growth and do the smart business things to protect our margin on the bottom line and cut costs where we don't need to expend them.

Great. Thank you, Deb.

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

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately two hours, and management's prepared remarks will be posted on our website following this call. As Deb and Chris both mentioned, we look forward to sharing more about our strategic plans at our Investor Day on October 4th in New York. Thank you.

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