Hasbro, Inc.

Welcome to Hasbro's third quarter 2023 earnings conference call. At this time, all participants will be in listen-only mode. 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 Gina Getter, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Gina providing commentary on the company's performance, and 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. The 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 head-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 our recently announced agreement with Lionsgate to sell this business. That transaction is subject to customary closing conditions. 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?

Thanks, Debbie, and good morning. A year ago, we outlined a strategy to grow share in key categories with our core toy and game franchises. We called it Fewer, Bigger, Better. drive savings and investment capacity through operational excellence, and build new growth for the company across games, direct-to-consumer, and licensing. We also announced our intention to refocus on what has traditionally made us great, the business of play. This required making tough choices, including some significant divestitures. The goal of this plan, Blueprint 2.0, was a more focused, profitable, and higher-growth Hasbro, built on a portfolio of some of the most valuable brands in the toy and games industry. We've made progress against this framework, including impressive growth in wizards and digital, continued momentum in direct-to-consumer, and share gains in key categories. But as our Q3 results show, particularly in our consumer product segment, more needs to be done. This morning, we will talk about progress on each pillar and add a special emphasis on a key part of our plans. returning consumer products to growth. Let's start with refocusing on play. Play is what makes our brands great and our company healthy. The sale of E1 film and TV, which continues to be on track for an end-of-year close, will simplify our operating model and refocus Hasbro on our core mission. Moving forward, our entertainment efforts will be franchise-led and asset-light, focused on driving toy and game sales with support from world-class content partners. We have over 30 projects in development, from blockbuster movies like the upcoming Transformers 1 with Paramount, to an animated magic series with Netflix, to digital-first IP development like our new YouTube series, Oddpaws. The margin and simplification benefits of refocusing on play will grow over time as our teams build innovative, next-generation toy and games reinforced by cost-effective and partner-led content. Next, operational excellence, where we are making solid progress but need to accelerate flow-through. Our cost savings initiatives have already exceeded our 2023 savings targets of $150 million. This year, we anticipate total gross savings of approximately $200 million. Dollars we are using to fund short-term inventory reductions and product promotions in a toy market facing headwinds, and to invest long-term in new consumer insight capabilities and our growth initiatives. Importantly, our supply chain team is reinventing itself. In a time where inflation is up over 4%, our logistics and production costs are down mid-single digits. Supply chain alone is driving approximately $100 million of the full year's expected savings. and we see more opportunities ahead to enhance our gross margins while improving the quality and competitiveness of our toys and games. For instance, we'll be releasing a new version of Jenga. It will be of comparable quality, but lower cost and higher margin, all based on a fresh design for cost model. We are replicating this up and down our line. Our revamped supply chain is helping us get smarter on inventory management. Through Q3, Hasbro's total inventory is down 27% year-over-year, with a 34% reduction in our CP business. We anticipate we'll end the year with inventories 20% to 25% below 2022 levels. This should enable us to improve cash flow and lower our allowances in the quarters to come. Given the headwinds facing our consumer product segment, the flow through to the bottom line on these initiatives has not materialized as quickly as anticipated. So we plan to accelerate our efforts heading into 2024. We expect to achieve our 2025 goal of $250 to $300 million in gross cost savings earlier than expected. And we'll use these incremental savings and healthier inventory position to flow more cash directly to the bottom line, particularly in CP. Next are growth initiatives, which are broadly on track. Wizards of the Coast and digital gaming is up 11% year-to-date. Magic the Gathering is delighting tens of millions of fans with new concepts like Universes Beyond, which combine magic with fan-favorite IP like Lord of the Rings and Doctor Who. Universes Beyond is a long-term multi-property strategy that is already delivering collector excitement and new player growth. Last week, we announced a new collaboration with the beloved video game series Fallout and saw pre-orders climbed number one in the toying game charts over the weekend on Amazon. And on Monday, we expanded our partnership with the Walt Disney Company with the announcement of a multi-set Magic and Marvel collaboration. Expect more exciting news and previews in the quarters to come. D&D is expanding into a digitally driven multimedia franchise. Baldur's Gate 3, the new video game from Larian Studios based on D&D's 5th edition, is one of the best-selling games of 2023 and one of the highest-rated video games of all time, with metacritic reviews equivalent to mega franchises like Grand Theft Auto and The Legend of Zelda. Our success in digital isn't just contained to the world of core gaming. Monopoly Go, from our partners at Scopely, is the number one mobile game launch of 2023. Combined, Hasbro expects to generate in excess of $90 million in license revenue from these two properties this year, with a multi-year long tail anticipated. These were long-term, thoughtful partnerships. Each game was signed pre-2018, and we have several more of these kinds of projects in the pipeline, including new games from our own internal studios, which we'll be sharing more about in the coming months. Our direct-to-consumer business is up 57% year-to-date. Hasbro Pulse is a modest-sized platform today, but it's scaling rapidly, giving us a new avenue to delight fans and learn from our consumers. We're excited to continue to grow our direct initiatives behind brands like Star Wars, Marvel, Transformers, Magic, G.I. Joe, D&D, and Power Rangers. One of the best lineups of IP in the collectible space. And we continue to scale our industry-leading licensing business across an array of brands and categories, from Peppa Pig to Transformers, education to location-based entertainment. Next, growing share in key categories. In Q3, we grew share in four of five of our key categories, preschool, action, blasters, and arts and crafts. Driving this, we have several brands that are performing well, In gaming, Magic and D&D are having record years. Monopoly is back to growth, recently reclaiming the title of the top-selling board game brand. New innovation like Twister Air is driving genre expansion in board games. Transformers' point of sale is up over 30% year over year. And Play-Doh is also showing solid gains. G.I. Joe continues to be a fan favorite and growth driver for our Pulse business. And Furby is off to a strong start. one of the hottest new toy introductions of the holiday. But we have challenges in other brands that weigh in our results, particularly in our consumer products business. Let's now turn to how we return this key segment back to growth. We went into 2023 expecting a toy category down low single digits for the year. We expected Hasbro performance to be broadly in line with market, minus our exited licenses and businesses. Year to date, our point of sale is roughly in line with category. However, market performance has been more challenging than planned. Our internal POS system shows total point of sale down negative 8% through Q3, roughly equivalent to our view of the total toy market, or negative 4% when accounting for exited licenses. We saw the category soften during Q3 to negative 10%, again, roughly equivalent to our view of the market, or negative 5% when accounting for discontinued licenses. Our share is up in our core categories. Our work on operational efficiency means our performance versus market is the best it's been in several years. But we are facing headwinds. In any market scenario, we think this holiday will be late-breaking and heavily deal-reliant. So we're taking the necessary steps to position our portfolio for continued share growth, exiting the year with momentum for our brands, and assuring our inventory health is back to historical norms. Our guidance is based on a cautious outlook, but we're prepared to take advantage of any opportunities presented. We are investing in Q4 to drive continued share momentum, including maintaining our advertising and promotion budgets at competitive levels, and working with retail partners to excite consumers with compelling deals. We are accelerating our cost-savings initiatives to reduce overhead and see near-term flow-through in operating margins. And we continue to invest in product innovation behind a new leadership team and toy that will expand us into new play patterns, price points, and market opportunities in the months ahead. Our long-term capital priorities guide our decision-making for these near-term decisions. invest to grow the business, pay down our debt, maintain a healthy balance sheet, and return cash to shareholders via our category-leading dividend. Consistent with these priorities, we are investing to ensure our toy business exits the year with healthy inventories, continued share momentum, and a clear runway for new product introductions in 2024. Wrapping up, our results in Q3 show we are making progress across many of our key initiatives, but that we also have more to do, particularly in returning consumer products to growth. Hasbro's strength is the diversity of our brands across both toy and game. Our wizards and digital business continues to demonstrate impressive growth, with smart bets coming to fruition this year and lots to be excited about in the years to come. We are likewise investing in toy to strengthen this business for the long term. A healthy toy business is a healthy Hasbro. I'd like to now turn over the call to Gina Getter, our Chief Financial Officer, to share more about our detailed results and an update on guidance. Gina.