Hasbro, Inc.

Q3 2023 Earnings Conference Call

10/26/2023

spk10: 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.
spk05: 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?
spk09: 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.
spk03: Thanks, Chris, and good morning, everyone. The Hasbro team continues to make progress in transforming our company, building a world-class gaming business, streamlining and improving the profitability of our consumer products, and strengthening our balance sheets. Our third quarter results demonstrate the growth potential across our diversified gaming portfolio, offset by the tough macro environment across toys and entertainment. Despite market headwinds, we are growing share in the categories where we compete and are beginning to see the benefits of our cost savings initiative play through the P&L. Total Hasbro revenue of $1.5 billion was down 10% versus last year. Wizards of the Coast in digital gaming revenue increased 40% behind strong contributions from Baldur's Gate 3, Monopoly Go, and Magic the Gathering. Consumer products declined 18% due to macro category trends and planned business exits. Excluding these exits, the segment finished down 12%. The entertainment segment declined 42% due to the writer and actor strike impacts. Adjusted operating profit of $343 million increased 27% versus last year. The increase was the result of favorable product mix, most notably high margin digital game revenues, as well as lower royalty and operating expenses. Adjusted earnings per share of $1.64 increased 15% versus last year, reflecting the higher operating profit partially offset by incremental interest expense in an unfavorable tax rate impact. The adjusted results exclude $512 million of cumulative pre-tax impact associated with the loss on assets held for sale, and to a lesser extent, one-time charges for the Operational Excellence Program. Looking at our brand performance, our franchise brands grew 8% in the quarter and were flat year-to-date. These brands represent our biggest and most profitable brands and are just over 60% of our revenue. Within franchise brands, we delivered significant Q3 revenue growth across gaming, including Dungeons & Dragons, Hasbro Gaming, and Magic. Partner brands declined year over year after strong performance from Marvel and Star Wars in 2022. Partnerships like we have with the Walt Disney Company remain a key priority for us. And we expect results to improve in the quarters ahead as we expand our partner brand lines and categories, like our just-announced collaboration with Marvel and Magic. Turning to operating margin, third quarter adjusted operating margin of 22.8% was 6.7 margin points higher than last year. The profit impact from the volume decline in consumer products was offset by favorable mixed growth in licensed digital gaming and Magix. Supply chain cost savings outpaced inflation and delivered 1.9 points of margin growth. Operating expenses also contributed 1.4 points behind labor and lower royalty expense for exited licenses. Lower advertising spend contributed 1.7 margin points of improvement as we align spend to current demand. That said, we will continue to invest in advertising and marketing to drive sales this holiday season. Finally, lower entertainment deliveries resulted in a decline in program amortization expense that contributed 1.5 points margin. Our transformation activities are delivering real savings in our P&L. Having begun these programs last year, we have a strong start on resetting the cost base for the company, and the savings are helping us navigate a softer toy market. Year to date, we have accumulated $62 million of gross cost savings within supply chain, and an additional $92 million of gross savings within operating expense. The combined $154 million of gross cost savings this year are more than offsetting supply chain cost inflation and allowing us to reinvest in the business and partially defray the higher cost to move through inventory. Cumulatively, since we began the savings program last year, we have reduced our cost base and delivered gross savings of $174 million. This progress puts us on track to meet our long-term growth savings goals earlier than expected, and we will be doubling down as we continue to focus on streamlining our operations and improving the profitability within toys. We continue to make progress in lowering inventory levels. We've reduced total owned inventory 27% versus prior year, primarily driven by a 34% reduction in the consumer product segment inventory. From a retail inventory perspective, their inventory was down 18% year over year, but up sequentially versus last quarter as they set through the holiday season. As we look to the balance of the year, we remain focused on ensuring we have a clean start to 2024, both in owned and retail inventory levels, and we'll continue remaining agile and taking actions to stay in sync with broader category momentum. Looking more closely at segment performance within the quarter, wizard segment revenue increased 40% versus last year. 23 points to growth was led by licensed digital gaming revenue from BG3 and to a lesser extent, Monopoly Go. The revenue for Baldur's Gate is realized along with unit sales, whereas in the near term, Monopoly Go has a straight line revenue recognition based on the total multi-year contract minimum guarantee. Tabletop revenue. which includes both Magic and D&D, added 14 points of growth, driven by timing releases, including an incremental Magic release in this quarter versus last year. The growth in high-margin licensed digital gaming drove a 99% increase in total segment operating profit versus last year and expanded operating profit margin by 14.3 percentage points. Turning to the consumer product segments, The overall toy category was down 8% in the quarter, according to Cercana, versus 6% through the first part of the year. Despite the category headwinds, we gained share in four of our five key categories, including action figures, arts and crafts, preschool, and blasters. Overall consumer product segment revenue was down 18% versus last year. Looking at the key drivers for the quarter, Six points of the revenue decline was driven by planned license exits. Another 12 points of decline was driven by toy and game volume, given the broad category trends. Two points of decline came from pricing and mix, driven by additional closeout costs as we worked through higher inventory levels. FX had a favorable two-point impact on the segment. The segment adjusted operating margin declined 1.4 margin points, primarily driven by unfavorable mix, and higher inventory obsolescence and closeout costs. Turning to the entertainment segment, in the quarter, revenue declined 42%, primarily as a result of the writers' and actors' strikes. Partially offsetting this was 53% revenue growth in family brands, driven by content sales primarily for Peppa Pig and Power Rangers. Adjusted operating profit increased 37%, and margin expanded 3.8 margin points to 6.6% due to the exited businesses, lower program amortization, and operating expenses. The E1 film and TV asset to be sold has delivered approximately $400 million of revenue year-to-date, which is down approximately 20% versus last year. Full-year earnings are expected to be break-even to a modest loss. We've received the expected regulatory approvals for the sale of E1 film and TV and remain on track to close the deal by the end of the year. Wrapping up with Hasbro Inc., we delivered $335 million of operating cash year-to-date, which is $73 million ahead of last year, driven by working capital improvements led by the reduction in inventory, combined with lower production costs within the entertainment segment. Our cash and cash equivalents of $186 million does not include approximately $70 million of cash recorded in assets held for sale, the substantial majority of which we expect to stay with Hasbro upon the close of the transaction. Including this, it brings our cash in hand to approximately $250 million, up from $217 million in Q2 2023. Through Q3, we repaid $107 million of long-term debt and spent $160 million on capital expenditures led by investments in Wizards of the Coast for future digital gaming releases. And we've returned $291 million of capital to our shareholders via dividends. In the quarter, we booked a 23.2% adjusted underlying tax rate, which compares to 19.9% last year. The higher rate continues to be the result of our film and TV losses and a shift in the geographical mix of income. Turning to our 2023 guidance, the impact of the broader toy category declines has had a change on our consumer products and total Hasbro outlook. Based on this, we now expect total Hasbro Inc. revenue to be down 13 to 15%. As we look at the three primary segments, This guidance now assumes that the consumer products business will be down mid to high teens. Based on the category trend in Q3, we are planning for modest improvement in Q4 as we begin to lack the market declines from last year. We believe that retailers will remain cautious with their inventory positions, which will have an impact on typical holiday order patterns. We continue to expect that Wizards of the Coast will deliver high single-digit revenue growth behind the strong performance within digital games and solid performance on Magic. The majority of the revenue from BG3 was realized in Q3. We expect a modest positive contribution to revenue from the game in Q4 as it will continue to be recorded in line with unit sales. Monopoly Go Q4 revenue will be consistent with Q3 given the accounting methodology. As Chris said, in total, we expect the aggregate contribution from these two licensed games to be more than $90 million for the full year. And finally, for entertainment, we continue to expect revenue declines of 25% to 30%, which incorporates the impact of the writers' and actors' strikes on production deliveries in the back half of the year. Minus these assets held for sale, we expect total company revenue declines of 8% to 11% for the year. Adjusted operating margin is now expected to be between 13 and 13 and a half percent. This guidance reflects the impact of the CP revenue call down and includes additional one-time cost to clear aged inventory on Hasbro's balance sheet, continue share momentum, and reset the foundation heading into next year. This margin guidance includes a step up in the in-year gross cost savings from our transformation efforts to $200 million. And as we look to 2024, we expect to continue accelerating our savings efforts to improve the profitability across toys and games. Given the revenue call-down, we now expect 2023 adjusted EBITDA of $900 to $950 million. And based on this current forecast, we expect to generate $500 to $600 million of operating cash flow. From a capital allocation standpoint, our priorities are to invest behind the business pay down debt, and return excess cash to shareholders via dividends. We remain committed to our dividend strategy and advancing our progress towards achieving an overall two to two and a half times long-term leverage target. As I said earlier, we are making good progress on our transformation, and the work we've done to date has us positioned to build on our gaming leadership and strengthen our toy business. We believe the toy market will stabilize and return to growth. Our near-term focus is on executing the holiday season, resetting the cost base, removing complexity, and sharpening the innovation pipeline for 2024 and 2025. Chris and I will now take your questions.
spk10: 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 from your telephone keypad, and a confirmation tone will indicate your line is the question queue. You may press star two 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. So that we may address questions from as many participants as possible, we ask you please leave yourself to one question and one follow-up. Thank you, and our first question comes from the line of Eric Handler with Roth MKM. Please receive your question.
spk11: Good morning, and thanks for the question. With regards to wizards, So third quarter exceeded expectations, at least relative to consensus. You kept the full year guidance for Wizards intact, which would mean people have to lower their fourth quarter numbers, but everything seems to be going well there. Is this just a matter of maybe Baldur's Gate 3 being more front-end loaded than expected, or is there something else that you're being a little bit more conservative on?
spk09: Eric, good morning. Yeah, Q3 met our expectations. We had the great fortune of being able to play Baldur's Gate for a while now and had pretty good high expectations about its performance. I think relative to how the analyst community was modeling it, I think you all put it a little more back-loaded, and it's going to be a little bit more front-loaded than I think the models indicated. That said, we see a long tail associated with Baldur's Gate and, likewise, a very lucrative and long tail for Monopoly Go as well. So, it'll be a nice annuity for us.
spk03: Okay. Eric, this is Gina. The only thing I'd add as colors, in our prepared remarks, we talked a bit about the revenue recognition. So, for BG3, that revenue is getting recognized as those units are being delivered. So... as Chris said, heavy in Q3, just given the overall launch of the game. And then as we move through Q4 and into next year, there'll be a tail.
spk11: Got it. And then just as a follow-up, with Monopoly Go, it's the number one revenue-generating mobile game in the world right now. I would assume it's doing well ahead of what expectations are. So what needs to happen for minimums to...
spk09: We can't go into a huge amount of detail on the deal. However, the deal is structured such that Scopely is incentivized to spend on marketing for it. So, you know, typically for the first year or two of a major mobile release, you spend a lot on marketing, you scale the game, the game gets to a steady state. And then the marketing as a percentage of total sales goes down to something more sustainable. And that's basically what's happening here. So effectively think about our royalties as the net of store participation and a fairly high percentage of marketing. So for the first couple of years, you're basically dealing with minimum guarantees. And as the game starts to get to maturity and the marketing kind of goes down to a more normalized level, your participation as a licensor goes up. And if the game performs like we all hope it's going to perform and that it's performing now, it could be a dramatic improvement as well.
spk11: Thank you very much.
spk10: Our next question is from the line of Jamie Katz with Morningstar. Pleasure to see you with your questions.
spk02: Hey, good morning. Can you guys talk a little bit about the products that you are keeping and not pruning in the consumer products category that maybe didn't perform up to expectations? And then maybe give us a roadmap of what you expect for turnaround time in that CP category as we work through some of these changes. Thanks.
spk09: Good thing. Good morning, Jamie. Thanks for the question. Well, our franchise brands are pretty core to the company, and they kind of are tied to each of our key categories. So in action figures, you have Transformers, secondarily Power Rangers. In outdoor and blasters, you certainly have Nerf. In creativity and arts and crafts, you have Play-Doh. In preschool, we have Peppa Pig. And then in games, we have a pretty substantial portfolio across Monopoly, Clue, Magic the Gathering, and D&D. And that's in addition to all the wonderful partner brands we have, like our partnership with Walt Disney across Marvel and Star Wars. And then, of course, with Takara Tomy on Beyblade, which is another important partner product for us as well. In terms of what's performing well, I think we covered that in the comments. We have several winners that are helping us drive category share. Transformers, I think, is having a fantastic year and I think is really a case study on how to do movie and product integration really, really well. That brand is up 30% year over year and during the movie window was up over 90%. Play-Doh continues to drive great price value and product innovation and is driving share for us in creativity. I think our games portfolio is second to none and is really broad-based across genres and player demographics. I think where we need to see more improvement, frankly, is in Nerf. We're up in share in the blaster category, but we need to do a better job bringing innovation and price value into that category. And then likewise, I think we say outdoor and blasters for a reason. We need to expand Nerf beyond just thinking about a dart. We need to think about more ways that we can engage kids and families in active play across more scenarios, and I think you'll be seeing more from that for us And then our partner brands, I think we're having a little bit of a retrenchment this year after a record year for Marvel last year and a really strong year for Star Wars. I think we have a lot of plans with Disney to expand categories like our just announced partnership on Marvel and Magic. And then likewise, we have a new version of Beyblade that's coming out next year that we're pretty bullish on, particularly based on the initial sales that they've seen in the launch in Japan.
spk02: And as far as sort of remedying that category and returning to growth, do you see that as a first half 2024 phenomenon, a second half 2024 phenomenon, or is there some more work that really needs to be addressed before we see that?
spk09: Well, Tim Kilpin came on board about five or six months ago to lead toy for us. He's a 40 year toy veteran who's helped champion and found multiple billion dollar categories and led some of the biggest franchises in toys. You know, I think typically a new leader needs 18 to 24 months to make a big impact on the product line. I think they can do more tactically in terms of what we do with our partners and how we go about going to market. So I think you'll see the impact of Tim and his new leadership team kind of slow out through 2024 and expand as we go into 2025. And then, you know, I think the market is another factor inside of that as well. You know, certainly we've been seeing headwinds in the toy category year to date. And we're expecting a relatively unpredictable market going into Q4. But consider us long-term bulls on toy. We see this market going back to kind of its historical growth rate of 2% to 3%. We see a very high demand for play. And we think Hasbro is well-positioned as the most diversified toy and game company in the industry. And so regardless of which way the market goes, I think that diversification will play well for us.
spk03: Jamie, what I'd build on the timeline there is you think about the steps in a turnaround. What we're doing this quarter in the call for the year is we're really cleaning up and resetting the foundation for TOI. As we head into 2024, there is going to be a very focused view on profitability and how do we quickly reset the profitability of that business while we're going through and reducing complexity and, as Chris said, clearing the decks and getting ready for New and sharper innovation as we move to the back end of next year and into 2025. So taking the market out of it and the unpredictability of the market, you know, in our categories where we compete, we are going to do that. We're going to remain aggressive, we're going to compete, and we're going to work to grow share. That's how you should think about just the cadence. It's really reset. We're going to get after profitability in 2024 and get ready for a sharper innovation pipeline in 2025. Thanks.
spk10: The next question is coming from the line of Drew Crum with Steful. Please proceed with your questions.
spk01: Hey, thanks. Hey, guys. Good morning. Chris, can you remind us what the content roadmap looks like for Magic and 4Q and how you grow the franchise in 2024 as you lap what appears to be some tougher comps? And then I have a follow-up.
spk09: Yeah, sure. So for Wizards in the fourth quarter, we have another Lord of the Rings set That'll be coming out. We think that'll be a bit smaller than what we had in Q2, but pretty solid. We also have a new premiere set called The Lost Caverns of Ixalan. And we just had another Universe is Beyond kind of commander release for Doctor Who. As we think about 2024, yeah, I mean, Magic had a great year, another record year in 2023. But we've been having record years for 13 out of the last 14 years on Magic. As I would think about 2024, I certainly think we'll have some more Universes Beyond releases. As we said, we were surprised on the upside in terms of the initial demand and fan reaction to Fallout, which should come into Q1. In Q2, I think we have that comp with Lord of the Rings, but we'll have another set coming out called Modern Horizons 3. And we've had two sets in the history of Magic that have done $200 million, Lord of the Rings, which officially passed $200 million earlier this week, and Modern Horizons 2, which was our previous $200 million set. So we feel pretty good about Modern Horizons 3, and I think it also should be noted that You know, given that's not royalty bearing and tends to be more of a collector's product, it also is a pretty nice operating profit opportunity for us as well. And then the back half of the year, we have other sets that we haven't yet announced yet. So I don't want the Wizards team to get mad at me. But generally speaking, you know, we have about six to seven premier sets per year and we'll be lapping that in 2024.
spk01: Okay, very helpful. And then as a follow-up, just curious if you could update us on the status of the Marvel license. It was good to hear the partnership with Disney and Magic, but can you address the company's commitment to retaining this license as it approaches its renewal? Thanks.
spk09: Well, I can certainly talk from our side. Walt Disney is our most valuable partnership. It's something that we meet with regularly. We put a lot of product innovation. We put a lot of marketing. We put some of our best people against it. And we're expanding that relationship aggressively across more categories, across more brands, whether they are standalone brands like we do for Star Wars and the Avengers or co-brands like we're doing with Magic and Marvel. So it's certainly something that we value and are leaning into. and I think you'll see growth from for us over the mid and long term.
spk10: Thanks, Chris. Our next questions are from the line of Jason Haas with Bank of America. Please proceed with your questions.
spk08: Hey, good morning, and thanks for taking my questions. So I just want to check some of the math on Monopoly going to Baldur's Gate 3 and what it implies for 4Q. So I think you said that for the full year, you're expecting over 90 million, um, from both monopoly go and Baldur's gate three. And you saw, I think it was 63 million in three queue. So that implies maybe 30 million or so comes in four queue, which would be, I'm getting like maybe like an eight or nine percentage point tailwind to wizards revenue in four queue. Then your guidance, you know, you left the guidance for high single digit growth. So that would imply, that X those two licenses, you would see wizards revenue down like eight or 9% in, in four Q. So one, do I have those numbers right? And if that's correct, why are we seeing that decline in four Q? Is it a function of timing of the releases or something else? Is it just conservatism? I mean, if you could help explain that, it'd be helpful.
spk09: I'll start really fast and then I'll turn it over to Gina. Uh, we see broad based growth in wizards for the fourth quarter. So, um, in kind of doing math camp on the numbers, I think you can get a general tone of cautiousness in our outlook, just given the unpredictability of the near-term market. In terms of your detailed questions, Jason, I'll turn it over to Gina to take you through kind of how we're thinking about it.
spk03: Yeah, Jason, good question. And you've got the math generally right on how to think about Baldur's Gate and Monopoly Go in the fourth quarter. What isn't right is how you're thinking about magic. So as Chris said from a Overall, Wizards will be growing. Magic will be growing as well in the fourth quarter. I think the pieces that you're probably not thinking through are some of the other businesses that are rolling up through. So D&D, I think it's down a tick in the fourth quarter. But overall, how you're modeling Baldur's Gate and Monopoly Go is correct.
spk08: Got it. Thank you. And then as a follow-up question, are you able to size up how much headwind you saw from destocking this year in the consumer products business. And my thought there is just, as we think about our models for next year, is there an embedded uplift to revenue in 2024 as you lap over some of this destocking? Or was the destocking that we saw just a reflection of more of a return to normalcy because there was restocking in the first half or so of last year? Any color on that would be helpful.
spk03: Yeah, good question. And I think there's a little bit of both that We will talk to you from a modeling standpoint. The one-time, you're going to see a lot in fourth quarter, and that was what was embedded in our updated margin guide here. And I would put that at roughly, call it $50-ish million of one-time cost that we're putting in to either move through inventory at the retailer level, extra marketing to move through the inventory, extra obsolescence costs. So call that roughly a $50 million headwind this year that I would expect as we turn the corner into 2024 becomes a tailwind for us. And to your point, there's always going to be some level of kind of promotion and all of that as we kind of reset into 2024. But that $50 million I would call out as one time in nature for this year.
spk08: Got it. And that sounds like that's on the cost side. Is there, was there a revenue headwind from the destocking or should we think about more it really impacted on the cost?
spk03: Yeah, I'm putting that all, yes, I'm putting that somewhat in that $50 million number.
spk08: Yes. Okay. All right. That's helpful.
spk00: Thank you.
spk10: Thank you. Our next questions are from the line of Megan Alexander with Morgan Stanley. Please proceed with your questions.
spk04: Yeah, I guess maybe just a follow up on that on the top line. you know, my given that quick math would suggest, you know, maybe from that toy and game volume piece, it's a low double-digit decline this year and, you know, similarly in the fourth quarter. So, from a top-line perspective, can you just maybe put a finer point on how the outlook for the consumer product segment was changed as it relates to inventory destocking? And, you know, I know it's early, but, you know, how you're thinking about the puts and takes for, that segment in terms of sales next year. You know, presumably you get the planned exits back. You know, hopefully we're not seeing any more inventory management into next year. And so, you know, the wild card seems to be that toy and game volume line. So can you just help us understand maybe a little bit of how 4Q changed and what you get back next year?
spk03: Sure. What we get back next year, I'm going to go back to the previous answer. $50 million is really the number that I would put in your model of one-time costs that we're not expecting to repeat. We're using that to try to get as clean as we can for 24. As we think about the revenue decline, when we said mid to high teens for the toy business for the year, for the CP segment for the year, there's probably three or four points that decline that are associated with just us accelerating revenue some of this, this move through of inventory. So from a, like a pure revenue standpoint, I would say call, you know, call it three to four points of that is, is this acceleration on the bottom line, it's $50 million.
spk04: Right. And three to four points is relative to the fire guide.
spk03: No, to our updated guide.
spk04: Right. Okay. Okay. That makes sense. And then for the cost savings, you know, 200 million this year, I think you implied you could get to 300 next year. You know, how much of that from a net perspective is flowing through to the bottom line this year and what should we expect for next year?
spk03: Well, not to be too cheeky about it, but I think that in short, none of it is flowing to the bottom line this year, just given that it's all going to move through the inventory line. So I would say there's zero kind of margin impact from the cost saves next year. And one of our big focus areas internally is moving us from talking about gross savings to talking about net savings. That's a key area of focus as we move into 2024. Next year will be the year where you'll start to see real margin acceleration from all of those cost savings initiatives. But I mean, this year, it's all going to inventory. I should also elaborate to say we are making investments in our growth initiatives. So some of it did go to invest behind digital games. Some of it went to invest behind new capabilities that were aligned with strategies such as like analytics that we had talked about earlier in the year. But anything else is going against the inventory line.
spk09: Yeah, I would say it's about half for long term, half for short term. And Megan, I think if you think about it for next year, we'll be leaning in more and we actively are now. And I think you'll start seeing the flow through that probably in the later part of Q1 and building into Q2 and Q3.
spk04: Okay, awesome. Really helpful. Thank you both.
spk10: Our next question comes from the line of Steven Lasik with Goldman Sachs. Please proceed with your questions.
spk07: Hey, great. Thank you. Maybe just a follow-up on cost efficiencies for Gina. You're making some good progress on that front. Could you maybe talk a little bit more about the areas of the cost structures where you feel like you're particularly making better progress and if there's any potential upside to the $300 million as we go through the course of next year. And then maybe one for Chris on digital. Away from Baldur's Gate and Monopoly Go, could you talk a little bit more about the pipeline or momentum you're seeing in other games that could potentially make an outsized contribution to growth in the digital segment over the next few quarters? Thank you. Sure.
spk09: I'll defer to Gina first, and then I'll follow up with digital.
spk03: Okay. So on the cost saving side, I think we're making really good progress across our supply chain, particularly this year in 23, our focus has been within logistics. So the majority of the cost saves within supply chain have come through that logistics space. As we look at 24 and potential upside of the 300, I'm not going to commit to a number right now in 2024, but I will commit to bullishness and our ability to kind of deliver and over deliver that number. There's a few areas of focus for us as we move into next year. So within the supply chain, this year was logistics. Next year, it's going to be more about procurement and manufacturing. So there's some low-hanging fruit there that we'll continue to drive after within the supply chain. Also on complexity and just getting complexity out of the network, really focusing on our most profitable and kind of effective and efficient SKUs. taking cost out of the products as we think about designing our product and designing to value, that is going to generate some good savings for us and really improve the profitability of our toy business. And then lastly, on the corporate overhead, we have made some progress on that in 2023, reducing the overall overhead structure. There is more to do there, and we will see that flow in the early part of 2024.
spk09: Yeah, and Stephen, on digital, a couple things to note. So, Definitely there will be a long tail on Baldur's Gate 3 and a multi-year long tail on Monopoly Go. You know, I think those two versus the $90 million this year will take a step back, but it's nowhere near 100% step back. You know, you're probably talking maybe a 40% haircut on what we achieved this year, but, you know, tailed out across four quarters. And then we have new deals in development all the time. So, you know, I consider digital licensing a very bullish case for Hasbro. There's a lot of demand for our IP, and it's everything from, you know, integrations with Roblox and Minecraft to a variety of new mobile games and PC and console games. And then I think, you know, as you think about beyond 2024 into 25 and beyond, you know, I definitely think what Monopoly Go and D&D with Baldur's Gate has showed is there is a very, very high demand from our fans for new digital content. We are seeing that in terms of our own internal studios and in the collaborations that we have. So Baldur's Gate 3 is not going to be a one-off. There will be more great D&D-style content And Monopoly Go, if it scales the way that I think it's scaling right now, that is going to be a very long-lived and lucrative game for Scopely and Hasbro.
spk07: Got it. And just to make sure I got the 2024 math on Boulder's game, Monopoly Go, correct? That sounds like maybe $10 million a quarter in tailwind from those two properties, 40% of the nine-year, say $100 million from this year. Is that correct?
spk09: Yeah, rough and tough. That would be a decent one to have. Okay, great. Thank you.
spk10: Our next questions are from the line of Arpine Kocharian with UBS. Please receive their questions.
spk06: Hi, good morning. Thanks for taking my question. Going back to a little bit near term for a second, you know, you mentioned taking share in key categories you're in for Q4. and your consumer product business is down something like 17% implied for Q4 based on the guidance today. And even when you remove exited licenses, that's still down double digit in underlying in terms of shipments. Does that imply lower industry POS than the 10% we've seen so far? Maybe a little bit worse into October, but how are you taking share against that? That means the industry is probably a little bit worse versus what you're doing. Could you just talk to that for a second? I have a quick follow-up.
spk09: Well, I would say, you know, short-term, we have a cautious outlook on the holiday. And, you know, I think anyone who says they know how the holiday is going to go, you know, they must have a crystal ball because, you know, this has been a tough one to predict. That said, we're long-term bulls on where TOI is going to go. It's a resilient category, and we definitely think it's going to come back. For the short term, given the unpredictability, we're taking a cautious outlook on our view of the market and on our view of our execution. We're leaning in. We're going to take advantage of opportunities as they present themselves, and we think we're going to build shares as a result of that. But I don't think we have a real solid view on where the market's going to go, other than it's going to be late-breaking and heavily deal-focused. And the nature of it being late-breaking, I think, is going to change the relationship between sell-in and sell-through. So, you know, I think replan is going to be on the later side of the holiday, and likely if the holiday does better than maybe what our cautious outlook says, that'll be a tailwind for Q1.
spk06: Okay. Thank you, Chris. And then a quick follow-up question. In terms of operating profit structure for 2024, you're exiting obviously a very low margin business with entertainment. At the same time, base just came down quite a bit for 2023 and you have long-term target that's far above that 13%. Could you talk through maybe 2024 margin puts and takes as we think over the next 12 months really?
spk09: Yeah, I'll give you a quick 20-second overview and then turn it over to Gina for the details. We see a pretty near-term snapback for our margins, given some of the short-term investments we're making in the holiday to drive share and keep momentum going, and some very solid benefits of both our operational excellence program in terms of our cost structure and simplification of exiting the majority of entertainment. So, you know, I think we maintain bullishness on our ability to achieve our long-term margin targets.
spk03: Yeah, the additional color I'd add, let's keep coming back to this $50 million number. That's a couple of margin points that come back to us next year. We also have the D&D impairment that, if you remember, we took that in Q2 of last year. That was a material one-time item that comes back to us. So there's... There's just some kind of, I would put that in the camp of accounting good guys or the bad guys this year that become good guys for us next year that help us on the margin front. And then as we think about toy and kind of being laser focused on improving the profitability on toy, the kind of all the work on complexity, all of the work on the cost structure on overhead, et cetera, will kind of accelerate our efforts on the margin front for the first part of next year.
spk10: Thank you. Thank you. Our final question is from the line of Andrew Erickowitz with Jefferies. Please proceed with your question.
spk12: Hey, thanks for taking my question. Chris, I guess this question is probably for you because I think you were here when the game started. Licensing games from toys and movies isn't really anything new, but it feels like we're seeing bigger and better successes today. Just curious why you think that is and why What is Hasbro doing to enabling that? Thank you.
spk09: Yeah, no worries, Andrew. Baldur's Gate 3 was my first deal at Wizards of the Coast. I think I went out to Ghent and had dinner with Sven at Larian in the fall of 2016, and we inked a deal in 2017. So I'm pretty proud about how everything kind of turned out. That's nice to see when you make a long-term bet. You know, I think what you saw this year with video games and mobile games and movies, whether on the video game side, it's Monopoly Go, which is the number one mobile game release of 2023, Baldur's Gate 3, which I think is sitting at a 96 Metacritic score on PC and console, or in movies, whether it's the ongoing success of Transformers, uh, the Barbie movie Mario is that there's a high demand, uh, for play-based brands, uh, and play-based brands are really becoming the dominant brands, uh, about how people engage and what people love. You know, I was, uh, a shocking stack that I should have known better because it just mimics my lifestyle. Uh, Sirkana, you know, came up with a report that showed, um, The biggest demographic of video gamers today isn't sub 22 year olds. It's people 45 years and older. And it's also the fastest growing demographic of gamers in the world. So, you know, I'm pretty bullish on the industry of play, on the strength of brand portfolios that are based on play. And, you know, I think Hasbro has a deck of cards in terms of our brands and our capabilities that I wouldn't trade with anyone. You know, I think that's a long-term bull case for the company and for the industry as a whole.
spk12: And then just as a follow-up, and I appreciate that answer, how do you balance or try to balance the, you know, you're well-versed in games. These things aren't necessarily like the toy cycle where it takes a lot longer and time and money. How do you kind of balance that with, the traditional nature of Hasbro, which is trying to get everything ready for a particular holiday season?
spk09: Well, I mean, we have two separate business units that have two very different go-to markets, but when combined together under one roof, creates a very well-diversified portfolio that can help us weather ups and downs in any given category or any given set of market conditions. So, you know, I think especially with something like this holiday where the market remains rather unpredictable, it's great to have diversification and it's a real strength of the company. You know, we're fortunate in that Wizards of the Coast is a very margin-rich business that's highly cash generative. Effectively, based on Wizards of the Coast and our digital licensing revenue, we can self-fund a fairly significant set of long-term capital investments. And we've diversified that risk pretty effectively between licensing, games as a services, our tabletop business, and our own internal publishing build-out. And, you know, that business gives us a nice cushion to help us with restructuring and turning around of a toy business, which we remain long-term bulls on. We think that IT portfolio is fantastic, and we really like the team that we've set up there. So, you know, Our Q4 numbers weren't what we wanted, but, you know, we're taking – we're looking at the market. We're being realistic about it. We're investing so that we can create a runway for that team to be successful in 2024 and beyond.
spk12: Got it. I appreciate that. And congrats on that Bullers Gate 3 game. It was great. Thanks.
spk10: Thank you. At this time, we've reached the end of question and answer session. I'll now turn the call over to Debbie Hancock for closing remarks.
spk05: 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 also be posted on the investor relations portion of our website following this call.
spk10: Thank you. Thank you. This will conclude today's conference. Let me disconnect your lines at this time. Thank you for your participation.
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