Hasbro, Inc.

Q1 2024 Earnings Conference Call

4/24/2024

spk08: Good morning and welcome to the Hasbro first quarter 2024 earnings conference call. At this time, all parties will be in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on 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 Karan Kapoor, Senior Vice President of Investor Relations. Please go ahead.
spk03: 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. 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 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 or most recent 10-Q in today's press release and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cox. Chris?
spk13: Thanks, Kern, and good morning. For the past several quarters, you've heard us reaffirm Hasbro's strategy to refocus on play with our fewer, bigger, better principles. In our Q1 results, we're seeing Hasbro's strategy come to life. We are applying a franchise-first mindset, We're realizing our brand's potential through licensing with success across digital and consumer products. And we're continuing to invest in innovation across toys and games, appealing to consumers of all ages across play patterns. We began 2024 with a healthier balance sheet, a leaner cost structure, and an improved inventory position. In Q1, we saw tangible progress on our turnaround. Our revenue landed as expected, and our margins outperformed. While most of the year remains ahead of us, I'm glad to see the business is on a solid track. It gives me confidence Hasbro is pointed towards sustainable, long-term growth, backed by industry-leading innovation across games, toys, and partner-led entertainment and licensing. Digging into the quarter, there were several highlights. Let's start with licensing. Monopoly Go from our partners at Scopely has crossed over $2 billion in lifetime revenue and 150 million downloads, breaking records as the fastest growing mobile game ever. Baldur's Gate 3 from our partners at Larian Studios continued its momentum from last year with even more recognition. It's now the only game to ever win all five prestigious Game of the Year awards. While the success of Baldur's Gate 3 is in a league of its own, we see a long-term opportunity to leverage the richness of D&D across more games. In Q1, we signed new licensing agreements with Resolution Games, best known for the VR game Demio, as well as Gameloft, makers of Disney Dreamlight Valley, both to build within the D&D universe. And to celebrate D&D's 50th anniversary, we executed new partnerships with LEGO, Converse, and black milk apparel. Dungeons and Dragons Red Dragon's Tale is a 3,700-piece fan favorite that combines the building fun of Lego and the rich world building of D&D. I can't wait to build my own. Our success in licensing extends to our toy brands. We saw positive early results in T1 from Littlest Pet Shop, now manufactured and distributed by Basic Fun. And just this week, we announced a strategic relationship with Playmates, to produce and distribute Power Rangers toys starting in 2025. These are high-profit partnerships that leverage great partners with iconic brands from our extensive IP vault. Our new asset-light entertainment model is already paying dividends. We look forward to bringing the star-studded animated film Transformers 1 to theaters this September with our partners at Paramount. In Q1, we announced deals with Lionsgate and Margot Robbie's production company, Lucky Chap, to produce a live-action Monopoly movie, as well as with The CW to create game shows around Trivial Pursuit and Scrabble. And of course, I can't wait to see what Sony has in store for us with the just-announced film and TV projects for Clue. The movie was a favorite of mine from the 1980s. And our success in asset-light, partner-based entertainment extends well beyond the screens. We now have 115 Hasbro-branded, partner-led properties bringing in over 55 million visitors last year alone. We see those figures increasing significantly over the next couple of years as our partners bring our brands to life through thrilling experiences and attractions and billions of dollars of third-party capital investment with quality executions like Hasbro City in Mexico, which was just awarded the best family entertainment center in the world by the International Association of Amusement Parks and Attractions. Reinvigorating our innovation and driving operational rigor underpins our turnaround. In games, we continue to make changes within our board games portfolio, opening the door for share games and growth categories like party, strategy, and card games. In Q1, we launched Life in Rittera, a tile-laying strategy game from acclaimed designer Eric Lang, and Fork Milk Kidnap, a fun new adult party game. We also are doubling down in where we are the clear leader. In February, we launched the second edition of Monopoly Prism NBA board game at the NBA All-Star Weekend, and it helped make Monopoly the number two growth property in the games category in the U.S. for the quarter. We expect to see more crossover opportunities for the brand and sports in the future. Magic the Gathering saw healthy growth in Q1, driven by timing of sales for our latest release, Outlaws of Thunder Junction, and strong demand for Fallout Commander. Q2 is an important quarter for Magic, with the releases of both Outlaws and Modern Horizons 3, what we expect to be our biggest set of the year. While we expect Magic to be down for the year after a record 2023, we maintain our long-term bullishness on the brand, based on the continued robust fan engagement and a killer lineup of new Universes Beyond collaborations, including upcoming sets in 2025 for Final Fantasy and Marvel. And stay tuned for more exciting innovation from our D&D team later this year as we continue to scale D&D Beyond and expand the richness of tabletop gameplay to digital. We expect to connect to an even wider audience while delighting our existing fans as D&D celebrates its 50th anniversary. Finally, Let's turn to toys, where our turnaround efforts are well underway. We began Q1 with inventories at multi-year lows, down over 50% from the prior year. As a result of our cleanup efforts, we saw a significant reduction in closeout volume in Q1. Thanks to our operational discipline and careful SKU management, we're in a good position with our large retail partners as we work towards new product innovation, including Beyblade, Nerf, and a refreshed lineup for Baby Alive. We also are seeing solid progress in revamping our approach to marketing, significantly shifting our mix to digital, driving stronger than ever partnerships with our e-commerce and multi-channel partners, like our just-completed birthday shop execution with Walmart, and are seeing improved return on advertising spend as a result. We continue to see momentum with Furby, one of last year's top new toys, including our latest bestseller, Furblitz. According to Cercana, these fuzzy little friends were the top-selling item in the special feature plush category in the U.S. And earlier this week, we announced glow-in-the-dark Furby Galaxy coming this summer. We've also seen encouraging POS trends from Transformers as we celebrate the brand's 40th anniversary. While we're lapping last year's successful film, Transformers Rise of the Beasts in Q2, we look forward to sales rebounding in the back half as we gear up for Transformers 1. Last but not least, our retail and licensing partnerships are among our most important. Last month in New York City, Hasbro and Amazon collaborated with the Walt Disney Company to create a Star Wars experience at their first ever March to May the 4th event. Through an immersive retail experience in the main floor of the Empire State Building, fans were able to take photos with costumed characters, including Darth Vader, and check out Hasbro's latest Black Series helmets and KyberCore lightsabers collectibles. Before I wrap up, I want to highlight the recent changes to our board of directors, bringing in new members with extensive games and retail operations experience. I'd like to welcome Darren, Frank, and Owen to the board. I also want to thank Tracy, Linda, and Michael, who will be retiring from the board following our shareholder meeting next month. I'm grateful for their support and guidance over the past few years. And lastly, I want to honor Alan Hassenfeld, who will be stepping away from his role as Emeritus Chairman. Alan has been and always will be a prominent architect of Hasbro's legacy, and he will continue to be engaged with Hasbro in guiding the company's philanthropic efforts, providing development and relief for children around the world. To recap, it was a good quarter. We landed revenue where we expected with wins across digital licensing, board games, and continued momentum for Furby. We continue to sharpen our execution, staying within our guardrails and inventory, and delivering meaningful cost productivity across the P&L. While it's still early, our turnaround efforts and consumer products are going well, and we look forward to monitoring our progress over the next couple of quarters. I'd now like to turn over the call to Gina to share more about our detailed results and guidance for the year. Gina?
spk10: Thanks, Chris, and good morning, everyone. In February, I outlined our strategy to build on the foundation we put in place last year after resetting the business and the necessary steps we're taking to reinvigorate innovation across the portfolio while continuing to drive operational rigor. I am pleased with how we executed in the first quarter with our strength in digital licensing and magic contributing to a more profitable business mix while our turnaround efforts in toys started to take shape. We continue to deliver supply chain productivity ahead of inflation, and we made meaningful progress on reducing operating expense. We see more room to drive our cost footprint lower as we further refine our supply chain and optimize product design across each brand. We have already identified significant savings through this design to value strategy with our teams leveraging customer insights and competitive analysis to inform our actions. Looking at our toy turnaround in more detail, While Q1 represents the smallest contributor to full-year sales, we maintained our controlled stance on inventories after the cleanup efforts last year. We ended Q1 with inventories at very healthy levels, down over 50% from a year ago, and roughly flat to where we ended in 2023. Our number of days in inventory were at multi-year lows for Q1 at around 66 days. And while we expect to see our inventory days increase over the next couple of quarters in line with normal business seasonality, we are still planning for total owned inventory levels to finish the year relatively flat versus 2023. Our much improved inventory position led to over 50% reduction in closeout sales in the quarter. And although this negatively impacted our consumer product segment revenue growth, we did realize a margin benefit from the improved sales rates. and we expect this trend to continue as we move through Q2. While improving the profitability of toys and delivering our cost savings target are two of the company's top priorities, I want to emphasize that we are concurrently staying vigilant around what investment opportunities require incremental spend to drive the most profitable revenue across the portfolio. Through greater analytics, we are already seeing an improvement in our marketing efficacy, And this is an area we will lean into as we ramp our innovation across toys and games and prepare for a stronger holiday season. Moving now to our Q1 financial results. Total Hasbro revenue was $757 million, down 24% versus Q1 of last year. If you exclude the impact of the E1 divestiture, total revenue was down 9% versus a year ago. growth of 7% in our Wizards of the Coast segment led by Magic and licensed digital games, and 65% growth in entertainment driven by a renewal deal for Peppa Pig was more than offset by the 21% decline in consumer products driven primarily by category declines and reduced volume moving through closeout. Q1 adjusted operating profit was $149 million with an operating margin of 19.6%. up about 15 points year over year. This improvement was largely driven by a reduction in cost stemming from our operational excellence program, as well as supply chain productivity gains and favorable business mix, including the E1 divestiture. In aggregate, we were able to deliver significant margin improvement despite ongoing volume deleverage across our toys business. Total Hasbro Q1 adjusted net earnings were $85 million, with diluted earnings per share of 61 cents, driven by the improvement in operating profit, as well as favorability from a stock compensation adjustment and net interest expense reduction. Operating cash flow was $178 million, an $89 million improvement over the same period last year, driven by the increase in net earnings, as well as reduced production expense in connection with our sale of E1. We gave back $97 million to shareholders through the dividend and ended the period with $570 million of cash in our balance sheet. Now let's look at our two major segments in more detail. Starting with Wizards of the Coast and digital gaming, revenue grew 7% behind ongoing digital licensing contributions from Baldur's Gate 3 and Monopoly Go, which as a reminder, neither recorded revenue in Q1 of last year. We also saw growth in Magic tabletop revenue, benefiting from shipments for our latest set release, Outlaws of Thunder Junction, which arrived in stores last week, as well as a strong reception to our Fallout Commander set. Operating margin for this segment finished at 38.8%, up roughly 13 points year on year, driven by supply chain productivity, cost savings, and improved business mix given the growth in digital licensing. Turning to consumer products, The total revenue decline of 21% was mostly driven by broader market softness across our key brands, exacerbated by a reduction in closeout volume following our inventory cleanup efforts in Q4. We also saw some modest impacts from our exited brands, as well as a timing-related headwind within our direct-to-consumer platform, Pulse, which is lapping a strong product offering in Q1 of last year. The volume decline was in line with our expectations and resulted in an improvement in our growth to net sales rate, reflecting a more disciplined stance around discounting, which we expect will continue to benefit the CP segment profitability as volumes recover. As Chris mentioned, we saw some bright spots with the recent launch of Furblitz, as well as with Play-Doh and Hasbro Gaming. And conversely, we had continued softness in the blaster category, which negatively impacted NERF, as well as action figures due to the light entertainment slate and lapping last year's successful launch of Transformers Rise of the Beast. Operating margin for consumer products came in at negative 9.2%, which is down roughly two margin points compared to last year. As expected, we saw a material impact from deleverage associated with the volume decline, which was partially offset with supply chain productivity gains, managed expense savings, and improved gross to net selling rate due to lower closeout volume. It's important to note that the CP gross margins grew by over five margin points, demonstrating the improvement in the underlying profitability of the business, despite the negative impact from deleverage. Turning to guidance for 2024. While we are pleased with our Q1 progress, we recognize that the quarter represents a small portion of our full-year sell-through for toys. And we want to monitor throughout Q2 our progress in WZRDS, particularly in digital licensing and MAGIC, before potentially revising our outlook for the full year. So at this time, we are reaffirming our initial guidance. And as a reminder, this calls for total WZRDS revenue to be down 3 to 5 percent. The decline is primarily a result of the strong growth delivered in 2023. Within Wizards, we continue to plan for licensed digital games to be relatively flat versus last year, with contributions from Baldur's Gate 3 tapering down as we move through the year. For Monopoly Go, we are still planning to record the contract minimum guarantee through the first half of the year, and we'll continue to watch the data closely as we move through the second quarter. If the current trends continue, there could be the ability to book above the minimum guarantee sooner than the second half. But at this time, we are holding our initial guidance. Wizzard's operating margin will be between 38% and 40%, up two points from last year, driven by the favorable mixed shift within digital, lower royalty rates across Magic, and strong cost management both in supply chain as well as within operating expenses. For consumer products, revenue will be down 7% to 12%, and operating profit margin will be between 4% and 6%. As a reminder, about half of the revenue decline is due to actions we've taken to improve profitability, and the other half is due to prevailing category trends. We continue to expect a similar revenue decline in Q2 as we saw in Q1, with the pace of decline moderating in Q3 and flipping to growth in Q4, behind sharper innovation and marketing effectiveness, as well as healthy retail inventory levels heading into the holidays. However, we expect to see profitability improving as we move through the year, as we build volume ahead of the holidays, and we realize more of our net cost savings. For entertainment, adjusting for the impact of the E1 divestiture, revenue will be down approximately $15 million versus last year, and operating margin will be roughly 60%, up significantly driven by operating expense reductions, as well as lapping the impact of the D&D movie impairment in 2023. We remain firmly on track towards our target of $750 million of gross cost savings by 2025. And given the results in Q1, we are on pace to deliver $200 to $250 million of net cost savings in 2024. We continue to expect total Hasbro EBITDA in the range of $925 million to $1 billion, driven by our cost savings in the lap of non-recurring inventory cleanup charges taken last year. which will more than offset the revenue decline and cost inflation. Ending cash will be slightly down versus 2023, driven by relatively flat owned inventory levels, increased capital project spending, and additional costs associated with the restructuring actions announced in December. And from a capital allocation standpoint, our priorities remain to first invest behind the core business, second is to return cash to shareholders via the dividend, And third, to continue progressing towards our long-term leverage targets and pay down debt. And with that, I'll turn it back to Chris to wrap up. Thanks, Gina.
spk13: We're pleased with our first quarter performance. We're doing what we said we would do, driving a shift in games and licensing, fixing our toy business, and lowering our costs. It's still early, and we have lots of 2024 to go. But I think it's fair to say this was a good start to the year. We'll now pause to take your questions.
spk08: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. 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. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Eric Handler with Roth MKM. Please proceed with your question.
spk04: Yes, good morning, and thanks for the question. First, Gina, I wonder if you could maybe help refine the guidance a little bit in providing what the numbers you provided equates to on an EPS basis, and then given the sizable beat you had relative to consensus expectations while maintaining guidance, Where do you think street expectations are maybe overestimating in their model in future quarters?
spk10: Got it. Morning, Eric. So we don't give EPS guidance specifically. We've been through the models. I would say analysts are coming up pretty close to kind of our internal math. I think the one thing to keep in mind for the quarter is that just finished here is that we had about 10 cents of favorability from a stock adjustment, a stock compensation adjustment that will carry forward through and into your model. But we're not getting specific EPS guidance at this point.
spk04: Okay. And certainly for Chris, it's been a while since you guys have talked about Magic Arena. I wonder if you could give us a little bit of an update there. It seems to be sort of lagging the tabletop segment. Just what are you doing to sort of maybe broaden the appeal of Arena? Hey, Eric.
spk13: Thanks for the question. Yeah, so Arena was down a bit in Q1. Mostly that was due to not lapping a remastered set that we did last year for Shadows over Innistrad. Barring that, it would have been roughly in line with the overall property. which was up about 4% on tabletop. So we continue to invest in Arena. We continue to mimic all the card sets that are inside of it. And we're also investing over the long term to refresh the platform. So you'll be hearing more about that over the coming couple of years because it's going to be a long-term digital project. But when you look at Magic and where our growth has been A lot of that growth has been in social-based play like Commander and in collectability. So certainly we'll be investing in those areas on the digital platform over the long term. Thank you.
spk08: Thank you. Our next question comes from the line of Megan Alexander with Morgan Stanley. Please proceed with your question.
spk07: Hi. Thanks very much and good morning. Kind of a two-part question. You just did almost a 20% operating margin in what's typically your smallest quarter of the year from a sales perspective. In the slides, you did reiterate that 20% full-year target by 2027. So I guess first question, why wouldn't you be able to get to that 20% number this year, if not higher than that? And maybe second part, was there something in that one Q that operating profit performance that won't repeat. The corporate segment in particular did stand out to us. Maybe you can just clarify what's in there and how we should kind of think about the run rate of that segment going forward.
spk10: Yeah, sure, Megan. Good question. So let's start with the corporate segment. So there was $45 million of profit that we posted in there. About half of that is that non-stock comp adjustment that we made. And so that is roughly half of that $45 million, and it will not repeat. So when you think about our margin profile in the quarter, about two and a half points of kind of our margin performance came from that adjustment. That's not going to carry forward as we go. As we think about the balance of the year, there's going to be puts and takes within the margin. So in Q2, we're going to still have that deleverage happening with TOI. In Q3, though, Remember, there's the impact last year that we had on all of the digital with Baldur's Gate, Lord of the Rings. There was a lot of savorability coming into Q3 last year that we begin to comp. But there's no doubt that our margin performance at the start of the year is really healthy. I mean, our supply chain performance, I mean, we are killing it within supply chain. I think our team is really out to make our supply chain the most cost competitive, best in class supply chain. And we've seen... an acceleration in the benefits within that area, that if that keeps continuing, yeah, there's some good momentum that could carry us forward to the end of the year and get us closer to that 20% sooner rather than later. But there's a lot of things that need to play out as we go through the year before we commit to that.
spk07: Understood. Thank you. That's super helpful. And then maybe just on the consumer products top line, I think you said POS for the industry was down. I was wondering if you could talk about, you know, Hasbro POS, And then I think you also said related to that 2Q decline similar to 1Q. I think the closeouts are typically more of a 1Q phenomenon than 2Q. So maybe can you just unpack in terms of the dynamics between the closeouts and POS, you know, how we should think about that 2Q being down 20% again?
spk13: Well, I think when you look at Q1, January and February in our results were pretty heavily impacted based on two factors. One, the reduction in closeouts, and two, not lapping a couple releases that we had with Pulse in the prior year. We had some fairly large ones. Those two factors kind of contributed to that underperformance in February and January. Starting in March, though, we saw very healthy trends on our point of sale and our Easter trends normalizing for the dates were also quite healthy. And so far into April, we're seeing those positive point of sale trends continue. Now, I think the thing that gives us a little bit of pause that we're monitoring in Q2 is just a relatively light slate of entertainment. Last year, we had the D&D movie and Transformers Rise of the Beast, which both were pretty positive contributors to the quarter. Also, our partners at Disney had just an amazing slate of content, both in streaming and in theaters. That's not going to be lapped as completely. So, you know, we're taking a little bit of a cautious tone and wanting to monitor our performance. I think the thing that helps to negate maybe the impact of the entertainment related headwinds is our marketing effectiveness. We're seeing a significant improvement in our overall return on advertising spend. You know, we've retooled our marketing team. And so, you know, that tailwind we have to look at and monitor. And we'll get back to you guys at the end of Q2 on a potential revision of guidance if we continue to see positive trends play out.
spk10: And Megan, the only other added evidence on your closeout comment. So you're right, it's typically heavy in Q1. But given what we were going through last year and trying to clear out all of the inventory, it was a factor in all four of our quarters. And so that will be that huge reduction that we took in inventory last year. The fact that we don't have that overhang, that will be a positive contributor every quarter that we go. We'll continue to see that closeout volume being down. So I should say positive contributor on the margin side and negative contributor on the revenue side in every quarter.
spk08: Great. Thank you both. Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question.
spk02: Okay, thanks. Hey, guys, good morning. So, Gina, going back to consumer products, you know, you discussed improved underlying performance and benefits from operational excellence, but you still saw adjusted OI down and some margin compression. If the volume decline headwind is moderating as you progress through the year, when should we start to see positive bottom line comps for that business?
spk10: Yeah, Drew, good question. Yeah, if you think about how we've kind of talked about our top line flow for CP, so we'll be down similarly in Q2, and we start to rebound in Q3, and we're back to growth in Q4. So I would expect our margin to follow suit. So I think we're still going to see that same kind of material D-Lab headwind in Q2. It starts to stabilize in Q3, and then our margins, I mean, Our margins are growing absent even the huge comp that we have on inventory, but then that kind of one-time margin pickup that we have will further expand our margins in Q4. So it's going to kind of follow with the top line.
spk02: Got it. Okay. And then Chris, you had some comments on the universe beyond sets. Can you address the performance of Fallout Commander? I know it's still early, but has that changed your view on Magic revenue for the year? Does it have any impact on segment margin? And then just wanted to get a sense as to how you're sizing up or thinking about Final Fantasy and Marvel sets next year, how those compare to Lord of the Rings. Thanks.
spk13: Yeah, so I would say Fallout has been a great set. I'm... I'm a little bit of a fan boy, so I'll try not to brain a little bit too much. Uh, I've been playing it since the nineties, uh, but it's probably our best performing commander set ever, uh, whether it's a universe is beyond set or not. However, commander sets tend to be quite a bit smaller than our overall premier sets. Um, so you have to weigh that accordingly. Um, you know, I, I would say our view on magic is pretty healthy. Engagement is, uh, has reached pre-pandemic levels. Our stores are all healthy. Fallout's doing well. Outlaws and Thunder Junction, which is our first major release of Q2, it's early, but it's off to a promising start. So, you know, I think our caution and magic is just Q2 is a big quarter. We've got modern horizons at the end of the quarter, and we want to monitor how those do. But, you know, I think signs are pointing in the right direction for us. In terms of the long-term view on universes beyond, man, I think Final Fantasy and Marvel are going to be pretty significant sets. I would put them in the same league, at least, as what we saw with Lord of the Rings. Marvel is just a huge IP. We're going to be doing multiple sets with the Walt Disney Company on that, which we're pretty excited about. And then Final Fantasy, it's It's huge inside of North America and Europe, but our sales in Japan will probably dwarf what we did with Lord of the Rings because of the resonance that it has in that market, which you should remember is the number two market for Magic and the number two market overall for trading card games.
spk02: Super helpful. Thanks, guys.
spk08: Thank you. Our next question comes from the line of Arpina Kotarian with UBS. Please proceed with your question.
spk01: Hi, good morning. Thank you for taking my question. Just to clarify on POS, you mentioned down for the quarter. Have your expectations changed at all regarding full-year industry retail trends? And then I have a quick follow-up.
spk13: Yeah, I mean, Q1 for the industry is usually around 14% to 15%, so it's still – in terms of the total volume that Q1 represents. So I think it was a positive quarter. Certainly we saw momentum exiting the quarter that's been continuing into Q2, but it's just super early. And, you know, the toy industry has been a difficult one to predict for the last, you know, 18 months or so. So we're going to continue to monitor it this quarter, particularly in light of, you know, the relative pause in entertainment that helps to drive toy sales. That said, I think it was a good start to the year for us and for the industry as a whole, and my hope is it continues.
spk01: Thank you. And then, you know, margin is clearly the highlight for your results today, and I think it's going to be the theme for the year as well. Could you maybe talk about cadence for margins for the rest of the year? I mean, Q2 will obviously have strong wizard, I think, so that helps flow through, and you have closeout sales sort of easing or the impact of that easing. What are other big inputs you would highlight for Q2 and as we think about the back half as far as margins go?
spk13: Yeah, I'll start, and then I'll turn it over to Gina. So I'll maybe do a little bit of thematics and then turn it over to Gina to go into the details of your question, Arpinae. I think what you're seeing in Q1 is kind of our overall strategic thesis playing out, which I think will play out, knock on wood, through the rest of the year and for the foreseeable future. And I think that is that Hasbro is a games, IP, and toy company effectively in that order. And I think our margins will start to shape around those style of industries. and those style of TAMs and growth opportunities. And so what you're seeing in Q1 is, wow, when you have a healthy games business, when you have great IT like we have and great partners that you can leverage it through, and you start to get your act together on your cost structure and your operational efficiency in your underlying toy business and start to address kind of some of the marketing deficiencies you have, good things happen.
spk10: And when you kind of ladder that up with how it will play out by quarter. So if you kind of look at the pieces in Q1, that mix and that as we continue to shift into gaming and into digital is going to continue to be a tailwind for us as we move through the balance of the year. The fact that supply chain productivity is going to more than offset inflation, that trend is going to continue as we move throughout the year. and then operating expenses and all of the work that we're doing on purchase cost reduction, people cost reduction, that benefit will continue to impact us as we move throughout the year. So the one quarter that we'll just have to watch is Q3 because of how strong it was in Q3 of So it's still going to be a very healthy margin, but there was just so much positivity last year at that time that there could be a slight dip year over year. But all of the underpinnings of the cost structure, that is going to hold and carry with us for the year.
spk13: Key three is when we had the big Baldur's Gate 3 launch comp.
spk10: Correct. And the minimum guarantee started to hit for Monopoly Go.
spk01: Right, and that's a great segue to my last question. Sorry for three questions. You just talked about digital coming in flat, and I think that's unchanged versus what you said last time. Everything we've been able to track on this shows that there could be upside to that given how strong Monopoly Go has been. Why not raise that guidance today? Could you talk about sort of your visibility on that? Because it's clearly, at least seasonally, it's not a toy business, right? It's sort of digital games where you probably have a little bit more to say in terms of visibility.
spk10: Yeah. I mean, the short answer is it's just really too early in the year to call it up. To your point, the trends are favorable. If they continue to play out in the way that everyone is watching and some of the other variables that are out of our control kind of break our way and become positive contributors, we absolutely do see that there could be upside. We just want to watch it play out here as we move through Q2 before we officially take guidance up for it.
spk13: The challenge with it, our P&A, is it's really a compa one. And so we just need more time.
spk08: All right. Thank you very much. Thank you both. Thank you. Our next question comes from the line of Christopher Horvath with JP Morgan. Please proceed with your question.
spk14: Thanks, and good morning. I just want to follow up on the corporate line item. It was $45 million. You said roughly half of it was stock comp, and that benefit does not sustain. What's the other half of that, and does that piece of it continue?
spk10: The other half is all due to the Operational Excellence Program, and I would think of it as as a timing element of where it sits. So it's real money, it's purchase cost savings, it's people cost savings. And sometimes within the quarters in the year, it just settles out in corporate As we move through the balance of the year, that's going to be allocated back. That favorability will be allocated back to the two segments of CP and wizard. So that'll kind of flush its way through. It's just a timing element of where it sat at the end of Q1. Last year, the corporate P&L, I believe, was roughly $20 million annually of operating profit. I would expect maybe a little bit more just given that stock comp adjustment, but that's That's how you should think about Q1. Half of it was the stock comp, half of it was just some timing stuff that will get flushed back through the segments.
spk14: And did you say that the non-repeating portion was 10 cents or is it half? Because if you do half, it's a bigger number than 10 cents.
spk10: No, it's about 10 cents of earnings for sure. Yeah, it was worth about that.
spk13: About half of 45, which translates to around 10 cents a share.
spk14: Okay, okay, I got it. I guess to, you know, try to build on that last question, I guess if you, like if Monopoly Go does continue at the current pace, correct me if I'm wrong, but I think you were looking at like maybe 50 to 70 million in the back half of Monopoly Go, sort of any comments on what it could be if what you see today continues? Could it be 2x that?
spk13: I don't think we're prepared to give you a sizing on it. As Gina said, if current revenue trends and the current advertising spend to revenue continues, it will be quite favorable for us, and we'd likely exceed the minimum guarantee within Q2. Got it.
spk04: Thanks very much.
spk08: Thank you. Our next question comes from the line of Stephen Lashek with Goldman Sachs. Please proceed with your question.
spk06: Hey, great. Thanks for taking the questions. Maybe just a follow-up on the marketing strategy. Chris, you talked about some success that you're seeing through the first quarter. Perhaps you could talk a little bit more about what you're doing differently, and then if that success does continue, how should we be thinking about the upside drivers throughout the year? Do you think it's more of a top-line growth driver or perhaps something on the cost side?
spk13: Well, I think it's a pretty simple rubric that we're using, which is spend where we can measure, which is primarily digital. We have traditionally been a little traditional in our media planning. It's worked, but we haven't been able to really refine it down to the SKU level and down to the partner level. So we're spending a lot more in digital. We're spending a lot more with our retail partners near the point of sale or near the point of decision. And we're seeing a significant multiple effect in terms of the effectiveness of the spend. Still early in the year and we still have to scale it, but it's certainly positive for us. I would say the majority of that will go to top line inside of CP if it continues to work like what we're hoping. And I think that's part of the thesis that we have for our Q3 and our Q4 projections. And then, you know, that top line, particularly given the cost structure efficiencies we're driving and supply chain efficiencies we're driving, that'll have a nice flow through to bottom line results, which, again, I think kind of goes to the margin comments that Gina made earlier.
spk06: Got it. Thanks for that. And then maybe one more just on freight. Gina, can you update us on what you're seeing in the freight market at the moment, just given the disruptions in the Middle East, and perhaps how we should monitor that from our side as we think about any margin of pressure that could come in 2024, 2025? Yeah, good question.
spk10: And for us, the whole of the Red Sea, all of that has really been immaterial on our business. I think in the P&L in Q1, it was less than a couple hundred thousand dollars of impact. And even since then, our team has been doing a good job of navigating around and finding productivity to offset. So it is not a factor that I would call out as impacting our business right now. Overall, what we're seeing across freight is some moderation, capacity is opening up. We're seeing rates come down. So that is absolutely benefiting, you know, part of our guidance. You know, we said that there was going to be two points of inflation in the year. So it's playing, playing within that. Uh, but the environment is, uh, is much more rational for us this year. And our team has done a really nice job renegotiating and renegotiating rates, renegotiating our contracts, and then getting after our network in a way that, that benefits the P&L. Yeah.
spk13: And I think an important thing to keep in mind about us, when you think about things like the Red Sea and exposure, maybe a toy dominant companies, um, would have is most of our profit pools are near short. Magic, board games, Play-Doh, almost all of our licensing business has very little sea freight dependencies associated with it because they're either made in market or they're made in markets that really aren't affected by kind of like a traditional Southeast Asian or Chinese freight lanes. So I think that's a competitive advantage for us in a world that has a little bit of tumult on the freight lines.
spk06: Got it. Thanks, Chris. Thanks, Gina.
spk08: Thank you. Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.
spk12: Hi, thanks for taking my questions here. You gave really good color on sort of the 2Q expectations for the CP segment and not margin, but could we get sort of how you're thinking about wizards in 2Q from a revenue and not margin perspective? Thank you.
spk10: For wizards in Q2 is going to be... probably pretty favorable from a top line standpoint and a bottom line standpoint. It's going to look pretty consistent just given the release schedule that we have on the top line. So we expect there to be another kind of growing quarter. And then on the bottom line, again, just given the mix that we're seeing within the business and the shift towards digital, we'll see consistent trends there. I would say for both businesses, for both CP and WOTC, we've got the benefit from operating expenses that will continue to flow in as well throughout the quarter.
spk13: And then there should be a nice royalty benefit in T2 as well for MAGIC. Modern Horizons 3 is not royalty bearing. Lord of the Rings did fantastically, but there was a royalty associated with it.
spk12: Perfect. And then just my follow-up is on MAGIC, actually. So, Can you talk about any timing shifts that may have supported the quarter and how we should think about sort of phasing of growth there as we move through the year?
spk13: Well, I think in Q1, you saw a bit of Outlaws of Thunder Junction, which is the colorful name for our first major Q2 release, a bit of that shift in Q1, and I think that helped. For the balance of the year, I don't think there are any huge quarter-over-quarter shifts. You'll probably see a bit lighter release schedule in Q4, which I think might affect that quarter as you think about things. But Q2 should be reasonable for Magic. Q3 should also be reasonable, and then Q4 will probably be the light one.
spk12: Perfect. That's really helpful. Best of luck going forward.
spk10: Thanks. Thanks, Alex. Nice to hear your voice.
spk08: Thank you. Our next question comes from the line of James Hardiman with Citi. Please proceed with your question.
spk11: Hey, good morning. First, I just want to close the loop on this court for another last question, I promise, Gina. So $45 million in the first quarter, what should that number be for the year? It sounds like you're saying...
spk10: less it's actually going to be less than 45 so that we should expect that to go negative for the balance of the year or maybe just give us a sort of north star how to think about that full year yeah number yeah good question i know it's confusing too just given some of the timing components last year in 23 it was roughly 20 million dollars is what when all kind of got settled out it was roughly 20 million i would say we'll probably be around that plus or minus a bit just given that we have this stock comp adjustment sitting in there. It's really held as a lot of our corporate costs sit within there. It's trying to represent kind of that corporate overhead structure, but then much of it gets allocated back as we go throughout the year. And all of that, just given all of the work that we're doing in that area is a little bit, as you can imagine, it's moving. It's agile this year as we make all of those changes. So I would say call it $20, $30 million by the end of the year. Okay.
spk11: And just to clarify, and then I have a follow-up, but any way to think about that from quarter to quarter? Because that could be a pretty big swing factor as we think about, you know, potentially some negative numbers. Does that start right away or is that more back halfway?
spk10: I would say in Q2 and Q3, Q4, you're not going to have that $20 million adjustment for the stock comp in there. And so then you're looking kind of plus or minus a few million dollars moving in and out. So it's really becomes an immaterial impact as we move through the next few quarters.
spk11: Got it. Okay. And then, you know, consumer products margin, obviously pretty negative for the first quarter, but if anything, it sounds like you, you feel pretty positive about the trajectory of, of that margin. How should we think about, I don't know if there's a way to think about an exit rate for this year. It seems like it would be meaningfully better than that 4% to 6% range given the starting point. What I'm really trying to get at is how do you feel about where that's headed, particularly for 2025 and even beyond?
spk10: Got it. Yeah, I think we feel, based on what we delivered in Q1, really good about our ability to deliver that 4% to 6% guidance range. And to your point, a big drag that we saw in Q1 was the eLab. And as we kind of push past that and move into growth in Q4, you're going to see some nice underlying profitability within the business. As we move then into 2025, you know, we've publicly said that our goal is to get this as close to double digits as we can through 2025. And it's going to be some of the same levers that you're hearing us talk about, continued focus on cost structure, continuing to refine our supply chain, getting really smart with our product mix and how we're pricing in market. And then lastly, the last lever we haven't brought up yet on this call is the whole design to value and all of the work that we're doing within our product design. So far, that hasn't had a material positive benefit on the P&L. We see that picking up as we move into Q4 and really into 2025. So, you know, I think we feel good about where Q1 landed. It tells us we're on the right path to get us within that range of four to six, and we're continuing to march into 2025, thinking that, you know, we're going to push for that double-digit margin.
spk11: Is it crazy to say that we're going to be pretty close to that double-digit rate sort of implied in second half or fourth quarter?
spk10: No, it's not crazy to think that in fourth quarter. Particularly, you've got to keep in mind we had that big inventory adjustment last year that becomes a huge benefit for us in the fourth quarter.
spk11: Got it. Perfect. Thanks, Gina.
spk10: Yep.
spk08: Thank you. Our next question comes from the line of Fred Whiteman with Wolf Research. Please proceed with your question.
spk05: Hey, guys. Good morning. I just wanted to come back to margins. In the slides, you guys are calling out cost saves net of two points of inflation, and we've seen some other toy companies talk about actual benefits from deflation. So can you talk about where you're seeing that cost inflation specifically and how to think about that as we move throughout the balance of the year?
spk10: Mm-hmm. Good question. Yeah, we wouldn't call it deflation per se. So we are seeing a couple of points of inflation. The three areas I'd call it, one is labor. You know, that's our biggest cost in the P&L. We're continuing to see that inflate a few points. The second, then, when you think about our largest kind of ingredient that we're purchasing in resin, that also is inflationary in the air. But those are kind of the big two, I would say. I mean, our logistics costs, there's pluses and minuses. Overall, you know, we're managing logistics pretty well. For the year, you know, in the quarter, we saw about two points of inflation. That's what we think that is going to play through for the rest of the year, about two points of inflation.
spk13: Yeah, just to do an apples to apples. I'm not sure how other companies are talking deflation issues. When we talk about it, we talk about it as productivity based on our teams working with our vendors. And so our productivity is significantly scaling past underlying inflation in the supply chain to a pretty healthy manner, which is driving our gross margin productivity.
spk05: Yep, that makes sense. Thanks, Chris. Maybe another one for you, Chris. You talked about the traction from the Littlest Pet Shop license. You also talked about the deal for Power Rangers. Does the early success that you're seeing with some of these licensing decisions change how you're thinking about the need to own versus license some of these CP brands going forward?
spk13: I think it's validating that we made the right choice. Two years ago, we outlined what our selection criteria would be. Basically, can we generate $50 million in revenue at a 10% OP? And can we grow to a hundred million dollars or more revenue at a 15% OP on a line? And so basically we've chosen the lines to outsource that we don't think meet those thresholds. Um, but another company with maybe a different cost structure or a different set of expertise could still make a really nice business with, even if it was sub $50 million. So, you know, I think we're basically done without licensing. We certainly will be driving cross-licensing and leveraging our brands for category expansion and new product opportunities like we're doing with Lego, like we're doing with Mattel, like we're doing with location-based entertainment. But I think Power Rangers is probably the last brand that we will outsource.
spk05: Makes sense. Thanks a lot.
spk08: Thank you. Our final question comes from the line of Kylie Coho with Jefferies. Please proceed with your question.
spk09: Good morning. Thank you so much for taking my question. Just kind of wanted to double-click a little bit on the timing aspect. Anything that you can quantify from Easter, how has that affected the quarter, and how are you kind of thinking about how that would affect Q2 as well would be helpful.
spk13: Yeah, Easter gave a modest lift in the quarter. You know, maybe call it one or two points based on it being earlier. Funnily, though, we're seeing April kind of continue the positive trends, even barring kind of like what's going on with Easter. I think we were up in the last week. You know, our total global POS in the last week of April that we measured, we were up 7% without our divested brands included, and up about 4% when you even include those divested brands. So while we think Easter was a help in Q1, it wasn't really a decisive help.
spk09: Gotcha. Great. That color is super helpful. And then I know you mentioned earlier about how most of your major profitability drivers are kind of being near sources. But can you just remind us what your exposure kind of is to China at this point in time? I know we've been getting a lot of inbounds on that.
spk13: Yeah, about 50% or so of our... When you add in wizards, or about 40%? Okay, about 40% of our total volume is built in China today. But only 5% or 10% of our total profit is sourced out of China.
spk09: Gotcha. Great. Well, thank you guys so much. I appreciate the time.
spk00: Thank you. Thanks.
spk08: Thank you. Ladies and gentlemen, this concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-