Hasbro, Inc.

Good morning and welcome to the Hasbro fourth quarter and full year 2022 earnings conference call. At this time, all parties will be in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, today's conference is being recorded. 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. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question and answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release, and in our other public disclosures. Today's guidance assumes we retain the non-core entertainment, film, and TV business, notwithstanding the current marketing process. While there is no guarantee of such an outcome, if this process results in a sale, we will update our guidance. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cox. Chris?

Thank you, Debbie, and good morning. In October, we laid out our new strategic plan for Hasbro, Blueprint 2.0, built on fewer, bigger, more profitable brands, a sharpened focus on the categories where Hasbro can be best in class, an operational excellence program to speed our agility and improve our cost competitiveness, and growth initiatives in digital games, Hasbro content, direct-to-consumer, and licensing. While Q4 proved to be a disappointment, particularly in our traditional toys and games segment, we made progress under the hood that meaningfully improved our bottom line and sets us up for margin expansion in 2023-2022. despite what we anticipate will be a continued, challenging consumer environment. Our transformation efforts are positioning Hasbro for success. In 2022, we identified $50 million in run rate cost savings that improved our Q4 earnings by over $20 million. In 2023, we anticipate our operational transformation will generate $150 million in run rate savings, money we are using to both reinvest in the business and improve our profit profile. We are also undertaking a significant organizational redesign that streamlines decision-making, puts the consumer at the center of everything we do, and aligns the company behind core competencies in games and toys. Within our growth initiatives, our direct business comprised of Magic Arena, D&D Beyond, Hasbro Pulse, and Magic Secret Lair was up 15% in 2022. ASRO Pulse was our fastest growing channel, increasing 70% on robust fan demand across premier industry entertainment properties. D&D Beyond delivered user growth in excess of 20% since we acquired the service in May of 2022, and as forecasted, was EPS accretive in Q4. Wizards of the Coast and digital gaming grew 5% in constant currency, outperforming a games market that by most measurements was flat to down, with Magic Tabletop leading the growth. Importantly, we celebrated our first billion dollar brand in Magic the Gathering, a huge milestone, not just for Hasbro, but for the thousands of hobby shops, our most important and fastest growing channel for the brand, and millions of fans who make both Magic and D&D more than just games, but vibrant global communities. Our growth in Wizards was not without challenges. We navigated significant supply chain disruptions that while resolved for 2023, compressed our set release schedules in 2022, particularly in Q4. We were too aggressive in some of our pricing assumptions. notably our 30th anniversary edition of Magic, and pulled back on available supply, impacting Q4 results. Lastly, on D&D, we misfired on updating our open game license, a key vehicle for creators to share or commercialize their D&D-inspired content. Our best practice is to work collaboratively with our community, gather feedback, and build experiences that inspire players and creators alike. It's how we make our games among the best in the industry. We have since course corrected and are delivering a strong outcome for the community and game. Our licensing business was up 5% for the year. Over the past several months, we've announced multiple strategic licensing partnerships, and we're excited to have top partners taking on iconic brands like For Real Friends, Littlest Pet Shop, and Easy Bake Oven, to name just a few. Our teams are focused on growing market share in the categories where we can lead. We had success in preschool with Peppa Pig, creativity with Play-Doh, and action with strong growth in Hasbro's products from partner brands Marvel, which had a record year, and Star Wars. Our focus on content is centering around Hasbro IP for the long term. Our sales process for the majority of E1 film and TV is well underway, with strong interest in these valuable assets. We expect to have an update in the second quarter. Our content pipeline for Hasbro IP is set for growth in 2023, with the upcoming release of the feature films Dungeons & Dragons Honor Among Thieves and Transformers Rise of the Beasts, and a host of new and continuing preschool and kid shows from Transformers Earthspark to the new seasons of My Little Pony and Peppa Pig, to the new Kia and the Kamoji Heroes on Disney Junior and Disney Plus. Looking ahead, we are excited about the recently announced D&D live action series, and for next year, the animated Transformers feature film with our partners at Paramount. For 2023, we expect the toy and game market to continue the trends of Q4 into the first two to three quarters of the year, given the lingering effects of consumer inflation. We also see approximately $300 million of revenue headwinds from foreign exchange and exiting low-profit brands, licenses, and businesses as part of the fewer, bigger, better pillar of our strategy. As a result, we anticipate revenue for the company to be down low single digits for the year, with consumer products down mid-single digits, Wizards of the Coast and digital games up mid-single digits, and entertainment up low single digits. The progress we were making in our cost savings, operational excellence, and focusing on key brands initiatives is expected to drive continued operating margin expansion of 50 to 70 basis points. We made progress on both our owned and retailed inventory in the fourth quarter, but have more work to do. The teams are focused on clearing inventory in addition to supporting our innovation. This will impact our growth rates and profits, most notably during the first two quarters of the year which Deb will provide detailed comments on. We ended the year with $513 million in cash. As we sell through inventory and drive profit expansion, our cash flow is projected to grow during the year. As we announced earlier this week, we are maintaining our current category-leading dividend. We continue to prioritize investing to grow, de-levering the balance sheets, and returning cash to shareholders. Given a challenging market context, Our focus this year will be on increasing our operating profit margins and growing share in our focus categories. In outdoor, we are taking targeted pricing actions on NERF to compete at every price point, expanding the market with the introduction of NERF Junior to kids 5 to 7, and winning share in the fast-growing gel segment, with all-new innovation starting at a segment low of $19.99. In action, we have one of our strongest content lineups in a decade, including six blockbuster films, a host of new streaming series, and some of the strongest new product innovation for Transformers in years, set against the launch of the Rise of the Beast feature film in June. In preschool, we are excited by the continued global appeal of Peppa Pig and our new line based on the upcoming hit series Young Jedi Adventures from Lucasfilm. In creativity, Play-Doh is growing share, and we are adding new compounds like Nickelodeon slime and bringing best-selling innovation like our Play-Doh ice cream truck into the new year. And in games, we are adding all new innovation, like the casual AR game Twister Air, building on the best-selling Clue Escape Room series, extending our audiences in Magic with our newest Universes Beyond set based on J.R.R. Tolkien's Lord of the Rings series, Tales of Middle-Earth, growing our distribution for Magic Arena with our upcoming launch on Steam, and reaching all-new global audience scale for D&D with our new blockbuster movie Dungeons & Honor Among Thieves and AAA video game Baldur's Gate 3 from our partners at Larian later this year. Over the next 12 months, we will share more about some of the innovation we have coming to market in 2024 and beyond. To give you a sense of a few, In creativity, we see an amazing opportunity to grow that market and maintain audiences as they age up with new, innovative, character-centric, and story-based play. In video games, we are excited to reveal an all-new sci-fi IP from Archetype Studios in Austin that we believe will be one of Hasbro's biggest in over 20 years. Selfie Series, our new custom action figure line, gives a glimpse of the possible and Hasbro's early leadership investment in high-fidelity, custom 3D printing, which has a long-term potential to introduce the concept of mass customization for toys and collectibles. In traditional role play, we see exciting possibilities in all new virtual tabletops that unlock new consumer value choices, bring imaginations to life, taps into the scale effects of user-generated content, and create seamless remote and in-play play possibilities across phones, PCs, and tablets with AAA graphics, and intuitive controls. And last but not least, we have some fun new twists on old favorites that will delight new generations of fans and introduce amazing new low price points supported by magical play innovation. As we think beyond 2023, our focus remains on growing more of our franchise brands to $1 billion businesses, extending our blueprints through partnerships, content, and new digital experiences and driving significant bottom line and margin growth through a more focused, agile, and leaner organization. In the near term, we will execute our focus category and inventory reduction plans to grow share, transform our organization and cost structure to drive innovation and improve margins, and continue to invest in new categories, competencies, and partnerships to set up Hasbro for robust long-term growth, as we celebrate our 100th anniversary in 2023. I'll now turn the call over to Deb Thomas, ASRA's Chief Financial Officer. Deb?