Good morning. And welcome to the Hasbro Second Quarter 2021 Earnings Conference Call. At this time, all parties will be listen-only mode. [Operator Instructions] 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, Investor Relations. Please go ahead.

Thank you and good morning everyone. Joining me today are Brian Goldner, Hasbro's Chairman and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Brian and Deb providing commentary on the company's performance. Then we will take your questions. Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude those non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our Annual Report on Form 10-K, our most recent 10-Q, in today's press release and in our other public disclosures. 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 Brian Goldner. Brian?

Thank you, Debbie. Good morning everyone and thank you for joining us today. The Hasbro team delivered an excellent second quarter, highlighting the power of our portfolio and the benefits of supercharging our blueprint across consumer products, wizards and digital gaming and entertainment. Each segment grew revenues and profit on an adjusted basis in the second quarter. Overall revenue was up 54% from last year and 9% higher compared to pro forma second quarter 2019. Demand for Hasbro brands, products, and content remained strong. The team is executing extremely well to meet consumer, retailer, and audience demand in a dynamic environment while driving significant profit and cash generation. As communicated earlier this year, we are on track to grow revenues, adjusted earnings, and adjusted EBITDA this year. This includes revenue growth in all segments to achieve double-digit revenue growth for Hasbro. We also continue to believe we can reach an adjusted operating margin level approximately in line with last year's adjusted level of 15.1%. We delivered two quarters of excellent results so far, and given these results in favorable mix, year-to-date adjusted operating margin is 570 basis points higher versus last year's first half. We successfully established price increases that go into effect during the third quarter and provide an offset to the rising input and freight costs in the business. These supply chain pressures are meaningful, but given the strength in our business, the actions we have taken combined with our global footprint, we continue to believe we can meet our full year targets. The team is doing tremendous work from manufacturing, to logistics, to partnering with our retailers, to ensure there is product to meet demand. It is not easy, and we'll work through challenges every day. Deb will speak to this further. Each brand category grew in…

Thank you, Brian. And good morning, everyone. The second quarter was another very good quarter for Hasbro. The team executed at a high level to drive revenue growth, profit and margin improvement, manage a complex supply chain, while reducing debt and delivering a strong balance sheet. Revenues were up significantly versus last year, but importantly, also up compared to the second quarter of 2019, which did not have an impact from COVID. Each segment grew revenues and profits on an adjusted basis year-over-year. As Brian said, we're tracking to our full year goals and our outlook is in line with our prior guidance. The strength of our balance sheet and the sale of the Music business, which was completed early in the third quarter, enabled us to pay off $250 million of long-term debt prior to quarter end and another $100 million in July. Through today, we've retired $650 million of debt this year and are evaluating incremental opportunities for further reductions. At quarter end, cash on hand was $1.2 billion and we're making good progress toward our goal of returning to our target of 2 to 2.5 times debt-to-EBITDA and maintaining our investment grade rating. Receivables declined further in the quarter. DSOs were 60 days, a reduction of 37 days compared to Q2 2020 and down 24 days from pro forma Q2 2019. These are the lowest levels of DSOs in a very long time. This improvement is the result of higher sales, combined with improved collections and excellent work between the commercial and treasury teams across our business. Inventory decreased versus second quarter last year when sell into retailers was limited. Inventory remains below 2019 levels and of good quality. Retail inventory increased in markets where we were under stocked last year, including the US and Europe, and…

Thank you. [Operator Instructions] Thank you. Our first question is from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thank you. Good morning, everyone. Deb and Brian, I have one for each of you. Deb, the question is on operating margins. It's much stronger than what we would have expected for the quarter even with Wizards. I'm just curious if you can talk a little bit about how you expect margins to play out over the longer term? Do you expect to see some of the margin benefits continue to progress through the back half? And then Brian, my question for you is just a bigger picture. Now that you've gotten the blueprint enhanced capabilities around the blueprint, can you give us a few examples for the back half, maybe it's PEPPA or MY LITTLE PONY, how do you expect to fully exploit the capabilities, and what we should be looking for in the marketplace as evidence of that? Thank you.

Great. Good morning, Steph. Brian, let me lead off, and thanks for the question there. The team delivered tremendous revenue and operating profit margins for the quarter, I mean really good job all the way around. As we've said, we continue to expect that throughout the rest of the year, we'll have solid operating profit margins and that we can achieve the guidance we set out at the beginning of the year to grow revenue you know, double digits and operating profit margins to be in line with a year ago. Over the longer term, in the medium term, we do expect that we can have - grow our operating margin levels greater than 16% on a full-year basis and have cash generation close to that $1 billion level that we saw a year ago. So, excited about what the teams are doing, how they're working, and how they're driving profitability and products. As you know, this year, there are some pressures that are existing out there on the cost side. We've taken pricing that we think will cover all of that, and we expect it to cover it right now. But we still expect there'll be some fluctuation in operating profit level for the rest of the year. But over the long-term, no reason why we won't exceed that 16% level in the future.

Yeah. Good morning, Steph. And as we look at the business, clearly, Q2 is an important inflection point for the company and for stakeholders. As we return to growth in our Entertainment business, we're seeing the momentum in our Wizards of the Coast business, and of course continue to see very strong consumer product sales. For the fall, we are lining up with PEPPA and PJ launches. It's great to see those brands in growth mode in Q2. Consumer products returning on those businesses, and PEPPA is the second most viewed pre-school brand in the world and that content consumption really goes unabated as we are in season nine on that brand and in season four PJ MASKS with lots of new content to come. MY LITTLE PONY film is coming in September, its on Netflix, it will be beneficiary of the 200 million subscribers that Netflix has and a really robust array of products, great innovative products from our team, as well as an array of consumer products that come from any number of licensees. Great, big movie sized marketing campaign and a lot of excitement with a whole new core cast with lots of content to follow. In addition to that, DUNGEONS & DRAGONS has its live action film in production. Currently, the team is doing a tremendous job in delivering that film. That will be for first quarter 2023, and I've already seen the plan along with the team for consumer products and licensing were out to our global retailers and their entertainment councils. And it's really the shape of things to come as we activate more Hasbro IP and begin to take them into content, stand them up with great storytelling, and begin to activate them across the flywheel and the blueprint. Then of course, you're seeing Wizards really in the early stages of unlocking the opportunity there as we begin to achieve that doubling of the size of the business and start to set some new objectives and targets for that brand - those brands and that business as we go forward. So overall, this is a very good and important time for us. As we've said, we would return to growth, and it helps us to be as confident as we are in our full year goals and objectives as well as our medium range guidance that we provided.

Thank you very much.

The next question is coming from the line of Eric Handler with MKM Partners. Please proceed with your question.

Good morning and thanks for the questions. Wondering if we could dissect the Entertainment segment, as we think about the back half of the year a little bit here. Film and Entertainment, since you have two movies coming globally, and then you also have MY LITTLE PONY going to Netflix, and then I assume production deliveries are ramping. I imagine the Film and TV segment should be up nicely on a year-over-year basis. But when I look at the Family Brands line, first and second quarters were down year-over-year and still well below 2019 levels. Is that reflecting animated program deliverables? Is that a timing issue? Is that consumer products or can you help me understand that? And then I’ve got a follow up question.

Sure. Well, first, let me remind you that the Consumer Products revenues that were prior reported inside of eOne and moved over to the Consumer Products group. So what you're seeing now in eOne is the Family Brands revenues that comes from entertainment. If you take it in total, in fact, the Family Brands were up in the second quarter, if you look at like by PEPPA PIG and PJ MASKS, and that's taken in total, where you have consumer products, plus entertainment coming from the two different divisions. As we look at Q3 and Q4, we do expect with production returning, we're seeing a great array of deliveries. We expect growth in Q3 and Q4 for the eOne business. We have a number of television series in production for delivery in Q3, and we also have a similar amount for Q4, including a new show for Showtime called Yellowjackets, that come from a way - movie that will be up here on Apple TV on the fall. The fourth season of the Rookie, as well as getting the Family Brands revenues for the new seasons of PEPPA, PJ, and we will get paid for the MY LITTLE PONY movie primarily in the third quarter as we deliver it to Netflix. So I'd say we have a very robust slate of entertainment coming, lots of Hasbro IP in development, and we're very excited about the return to growth for eOne as we had projected.

Okay. Thanks. And then as a follow up, you did talk about MAGIC: THE GATHERING Arena that launched on mobile did a little bit better than expected. I wonder if you could maybe talk a little bit about some of the key performance indicators, if not just for mobile, just in general for the digital business with Arena?

Sure. So if you look at Arena, it's up quite considerably year-over-year. And also, we're really seeing that sustained high level of hourly weeks, hours per week played, so about nine hours a week. And what I would tell you is that the KPIs, if we compare the KPIs of Magic Arena to other top mobile games, we are very competitive, on the comparisons. And it's really part of that virtual circle that we're seeing within the Magic business. Also just to remind you, as we think about the cadence for the full year, we have two major releases in Q3 and just one major release in Q4 this year. And a year ago, Magic's biggest quarter was Q3 followed by Q4. So we have seen great growth in Magic Arena, and we continue to see that where people are playing both Magic Arena and MAGIC: THE GATHERING that it's really adding to the engagement and players playing. And as we are seeing a return to more in-store and in-person play, that's also a tailwind to the business.

Great. Thank you.

Our next question comes from the line of Arpine Kocharyan with UBS. Please proceed with your question.

Thank you. And good morning. So very strong set of results this morning. And it sounds as if full year top line guidance is unchanged. But was prior guidance including Music business and now it doesn't, which means underlying guide actually went up, could you clarify it? And then I have my main question.

Certainly. So as we look at the Entertainment business, we've said we believe that film and TV can get back to those 2019 levels. And if you look at Entertainment overall, we think all of our Entertainment segment can get back to about 2019 levels. The second half Music and I know - believe we said this last quarter, but if we didn't, we expect that Music business revenue to be reduced because it's no longer our business by about $60 million to $70 million and about $15 million to $20 million in operating profit over the course of the second half of 2021. So those are the levels that we're talking about.

Okay. I was wondering on your Gaming business, is your margin guidance of 39% for the year largely unchanged? I guess what I'm trying to understand and to go back to an earlier question, to meet your operating profit guidance of around 15% for the back - for the full year, you know, back half doesn't need to be up more than 14.5% in terms of sort of overall operating profit margin. I guess, could you talk through some of the kind of puts and takes on how to think about it. It seems like the first half has been very strong, and some of that was front end loaded like the Gaming business, but how to think about the back half? Thank you.

Certainly. Well, as we talked a little bit about this earlier, but I can certainly add some more color. If you think about our Consumer Products business, while we see the Consumer Products Licensing business coming back, Arpine, as retail starts to open, you will also see some pressures on freight costs and moving things around. Now we've taken price increases for that. But you think about all the product that's kind of moving in the second half of the year. So if you go back and look over time, there are some pressures on certain of the quarters operating profit for that. When you think about the Entertainment business, as Brian mentioned, we're very excited for MY LITTLE PONY to launch on Netflix and be able to access all those subscribers. But with that comes the amortization of the cost of the film itself. So when you think about that, that's also going to be coming through in the second half of the year, as well as some of the other entertainment initiatives that we've talked about out there. Wizards, we said earlier in our prepared remarks, they actually outperformed our expectations for the first half of the year. We'll continue to have - or for the second quarter. We'll continue to have amortization of our administrative cost around amortization, depreciation of the games that we have, that are being launched out there in that as well. And that's why last year was just such an exceptional year for Wizards from an operating standpoint, we think that it will be closer to those 2019 levels than 2020 levels this year. So when you add all of that up, it's just those different puts and takes over the last part of - the latter part of the year is what gets us back to our operating profit guidance around the same levels as a year ago.

Thank you.

The next question comes from the line of Drew Crum from Stifel. Please proceed with your question.

Okay, thanks. Hey, guys. Good morning.

Good morning.

So I think entering the year, the goal for Consumer Products was to grow revenues by mid single digits. That business is up more than 20% through the first half. And so for the math to work for the year, consumer products would need to be down low to mid single digits. Is that how we should be thinking about the business in the second half or is you’re outlook changed there. And then I guess, separately Brian, you mentioned the DARK ALLIANCE [indiscernible] your expectations, can you just discuss what happened there. And you know, in the past you've indicated that launching new titles was important doubling the size of Wizards. I mean it sounds like you're pacing ahead of that. Should we expect new titles to be similar in size, the DARK ALLIANCE going forward or more robust production budgets for new games? Thanks.

Yeah. So on - starting with D&D and the titles, we are going to have an array of new development in titles. Some come from third-parties like, Baldur's Gate, which has performed quite well, and we'll go wide [ph] in the next period, probably in 2022. We have a number of games that we have in development. Some will have more modest budgets and some have larger budgets as we continue to invest in digital. While the underlying games in D&D have really grown that Drew, and we're just seeing great play, both in face-to-face role playing, as well as digital role playing. It's really a new area for us as people are playing more online and really building that brand quite considerably. So again, we feel very good about the slate that we have coming up and the momentum we have in brands like Magic and Arena. And as we said, the launch of DARK ALLIANCE was really about listening to the players, giving them more of what they want, more downloadable content, more satisfactory, more immersive game play, and look, that's part of the process. And we're fully prepared to continue to invest behind the games. As we think about Consumer Products, clearly, for the year-to-date period, if you look at the industry data, it was up double digits, but in the second quarter, it was up single digits, clearly, Hasbro outperformed. And as we go forward, we'll have some different compares for Q3 and Q 4 last year as we began to return to greater levels of sales and being able to supply product. Remember, the big eight week wall of supply was from mid-March to about mid to end of May last year. So no, we do believe we can continue to see growth in our Consumer Products business. But taken in total, we are happy to reiterate our guidance for the full year, recognizing that there have been so many questions about the supply chain and about our ability to supply a product that we felt that we're able to supply product. We are able through an immense amount of work on behalf of the supply chain team to add ports, to add tactics and strategies, to add new ocean carriers and to achieve the objectives we set out for the company, which was growth across our business in each of the operating groups of the business. And ultimately, with the opportunity to achieve double-digit revenue growth for the full year.

Thank you.

Our next question comes from the line of Jaime Katz with Morningstar. Please proceed with your question.

Hi, good morning. I guess I have a sort of a follow up to some of your prior comments. While you guys have made all these steps in sourcing and availability of products for the holiday season, how have the retailers worked with you to accept that product? I'm just thinking about working capital intensity over the back half of the year and whether or not that's going to escalate if Hasbro has to hold on to the inventory rather than maybe target a Walmart? Thanks.

Yeah. So let me comment, and then Deb can comment further on the cost side. From an execution side, what I'll tell you is our retailers have been incredible partners and not just in the United States where they're amazing partners, but around the world. We have been incredibly resourceful in finding several new ports and ways of bringing in product, working with our retailers. And the great news about our business and the categories where we're competing is they're in very high demand. And we are seeing that high demand with an array of new innovation, with entertainment returning not only for our portfolio, but also for the Marvel and Star Wars portfolio. The Princess business is performing very strongly. So our retailers are making good investments in these categories, where our consumers are purchasing incremental product and are certainly participating in toys and games sales across the board. So again, the fact that we have a very rich mix of new innovative product in our toy business, the NERF business was up considerably and up in every region, for example. The PLAY-DOH business was up and is a major contributor to the growth in the quarter. And the PLAY-DOH business was up, and we continue to see double-digit growth in our online and omnichannel business taken together. So again, the good news is we have categories of products that are in high demand with gamers and players, with families and fans engaging in our brands in an increasing manner. Deb, do you want to talk cost side?

Sure. We do expect, as Brian said, there is great demand for the products that they are bringing in. So as we bring it in and pass it through to our retailer as well, we had an exceptional - I will say, an exceptional DSO from a receivable standpoint this year. And so much of that was dependent on the mix of our revenue and when we shipped items in the quarter and the great work that our teams did on collection. So while I wouldn't expect our DSOs to be at the same level from an DSI standpoint, I do expect our inventory levels to still be in line. With reasonable amounts, our retail inventory is good. We've increased retail inventory in the places where we couldn't have inventory a year ago, we just couldn't get it and we couldn't ship it. So retailers were selling out of everything. So I think our inventory will be in good shape on our books. It will be in good shape on our retailer's books, I think our receivables will be in good shape. So we don't anticipate any unusual draws on our working capital for the full year. And in fact, we still expect our operating cash flows for the full year to be in that $6 to $750 million level for the full year, kind of getting back to that $1 billion level over the medium term.

Excellent. Thank you.

The next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question

Hey. Guys, good morning. Maybe just a follow up on that last question. I know that we have seen some timing changes just given the FOB and domestic fulfillment a couple of years ago. Do you think that given the shipping environment today, we could see a similar type of timing shift from 3Q to 4Q or relatively steady to the past few years?

Yeah. Look, I think our first objective is to ensure that gamers and the people engaging in our toys and games business have the product that they're looking for and that our retailers have product to support these major initiatives that we have. I do believe that there could be some shifting between Q3 and Q 4. We're out to source product and to bring it in via any number of new carriers. The team secured more ports, and we've got more shipping lanes than we've had in the past. And so I'm going to be a little less focused on exactly where the inventories come in, but rather that we have the inventories to meet the demand that we need for the second half of the year, recognizing we also have a number of new entertainment initiatives, including the MY LITTLE PONY film, several from our partners at Marvel, additional Star Wars content coming for the second half of the year. Princess is performing at a very high level. And then, of course, we get into the holidays, and the team has an array of new games lined up there as well. So again, you're right, there could be some shifting around as - it's a little different than past years where direct import could play a bigger role than it has in the past. But again, working with our retailers around the world, we feel - most importantly, we want to meet the high demand.

Makes sense. And then just if we look at some of the language and the slides from this quarter, it looks like you guys are now saying you're tracking ahead of plan to double the Wizards business by '23. Is that really just the mobile launch? Is it some of the pent-up demand for the legacy card sets that you're seeing? And how do you sort of offset that with some of the supply constraints that you touched on in your prepared remarks?

Yeah. Let me comment on the supply a little bit first. What we just wanted to make sure again that people understood that while we were using certain printing expertise and capabilities, we had to expand our global footprint for capabilities because the brand is expanding, because gamers are increasingly discovering and re-discovering the brand, are playing at an increasing rate and are also sharing more, bringing in new players more than ever before. And I think the magic of Magic is that, in fact, it is that great flywheel where players play face-to-face and the card game that contributes to engagement that Magic Arena, as you know, has the release [ph] cadence that marries to the card releases of the analog game. And so again, they really contribute to one another, and they're synergistic with one another. It's not as if one detracts from the other or takes time away from the other. In fact, it just gives people more opportunity to play, and they play with different players, whether they're friends or acquaintances at a distance and they play in mobile and online, or whether they're playing face-to-face increasingly returning to our global hobby shops, which have performed quite well, thanks to our support and support of others through the pandemic.

Great. Thank you.

Our next question is coming from the line of Tami Zakaria with JPMorgan. Please proceed with your question.

Hi. Thank you so much for taking my questions. And congrats on the very strong trend. I have two questions. The first one, just to get a little more color on Wizards of the Coast expectation for the rest of the year, do you expect growth in both the third and the fourth quarter? Or are you seeing the back half is going to be up, depending on timing of releases?

Yeah. So it's a very good question. And look, let me walk you through a little bit of detail on that. So we have two major releases coming in Q3, one is called, The Adventures in the Forgotten Realms, and that's actually a very exciting set because it's a crossover with DUNGEONS & DRAGONS, and that will come out - actually just coming out about now. And then we have a second release in Innistrad coming in Q3. We have one major release for Q4. So as Deb indicated in her remarks, we expect to see that Wizards will continue to see some growth, but our big quarter for the year was Q2. And let me remind you, last year, Q3 was the largest quarter followed by Q4. So if there's a comparison challenge in revenues, and we don't yet know exactly where we'll end up, given the level of engagement that we're seeing in the brand right now, probably the most challenging comparison will be in Q4 relative to a year ago. But again, the momentum in the business remains. We are ahead of our plan to double the size of that business, and it will come down to what really takes place in the Q4 period.

Got it. That's very helpful. And then very quickly, I know it's probably a bit early, but are you seeing any benefit of the advanced tax credit payments that began in mid-July? Any benefits of that in your POS for the Consumer segment in the past couple of weeks?

What we're seeing is that consumers are very engaged in the products and categories that we're offering. We've also gone out, as we always do, and do a lot of proprietary insight work and research around our brands and categories. And we're seeing an increased and sustained level of commitment to our gaming business and game playing. People are very engaged. I think they have found gaming, again, for those who had played it more in the past or playing it more now, lots of families around the world who hadn't really discovered games or discovering games now. So I don't know that I can comment specifically on family budgets, but what I can say is that people are spending money in the Consumer Product categories that we're offering, from NERF to PLAY-DOH to Playskool [ph] to our partner brands in Marvel, Star Wars and Princess and of course, several other brands in the portfolio.

Great. Thank you so much.

The next question is coming from the line of Mike Ng with Goldman Sachs. Please proceed with your question.

Great. Thank you for the question. I just have two. One is a follow up in - on MTG Arena. Could you talk a little bit about where we are in the point of life cycle there? Is it still loss making and spending heavily on user acquisition? Or is it approaching profitability? When would you expect it to do so? And then could you talk a little bit about what you expect to see as the long-term mix as it relates to mobile versus PC? And then I have a quick follow-up.

Sure. Well, Magic Arena is profitable. But obviously, as Deb described, with the cost that we amortized, profitability is below the analog business. And that's why if you look at the blended mix, the operating margin for the year, on average comes down a little bit as digital enters more of the mix of offerings. But again, long-term, as you pay for the initial development, as you pay for your marketing campaigns, you start to get more and more of the benefit of the underlying and consistent game play, and that's what we're seeing in Arena. So it's a profitable part of the business. Obviously has some costs associated with it. The analog card business does not bear. I don't know, Deb, if you want to comment further on that. And then as we go forward, I would also say digital is going to be a growing part of the business, but I also expect, and we're seeing it, that the analog businesses for both D&D and for Magic continue to grow. So perhaps the universe continues to grow, and therefore, as a percent of total digital increases, but maybe by not as much as one would expect. The other thing to note is that within D&D, there's this digital role playing area that we're really investing in. And so it's kind of a partially analog, partially digital and we think this is a great opportunity for the brand as we go forward. So we're charting a course beyond doubling the size of the business. It will include a good array and a very robust slate of new digital games coming at different price points. It will also include both first party games, as well as third party games. We're lining up some great studios to produce games for us as well with our teams embedded with them to ensure just great game play and brand continuity. But Deb, do you want to comment?

Yeah. I was going to say, and which is fantastic. And you're actually seeing that in the results of the numbers as well. So if you think about what we've had capitalized, we've got about - from a digital gaming standpoint, we have similar levels to what we had at year end. So we've obviously depreciated some and added some to that. And within the results of the segment, we see it all lift up, right. So we see a lift - a lot in digital. And you're seeing that amortization, that user acquisition, those costs within the results of the segment.

Great. Thank you, both. And I was just wondering if you might be able to provide us with a little bit more detail around how you're thinking about the holiday, lots of factors to think about. I think you talked about some of the shifting in delivery dates, the pricing. Can you talk a little bit about the magnitude of that price increase? And how we should think about how it flows through and obviously, some of the input cost inflation? Any additional color there would be really helpful. Thank you.

Sure. I'll comment, and then Deb, she also talk a bit about this. What we really are seeing, obviously, is early on we saw a necessity to raise prices as we saw the steps the team was needing to take in supply chain and logistics in order to execute our year. And that's very consistent with so many consumer product categories across the board where we're seeing the snapback in demand in this transitory return to try to find production and capabilities. I think the holiday should be incredibly good, and very, very solid with great new innovations coming from several of our brands. We have big launches coming in the second half of the year from the MY LITTLE PONY. New line-up behind the brand new film and new cast [ph] to several of our partner brands, PEPPA PIG and PJ MASKS, an array of new games and again, lots of new innovation and new game and toy to play for global consumers. Deb, I don't know if you want to comment further on the cost side on the second half?

Sure, absolutely. What we talked earlier about ocean freight in some of our prepared remarks, and we're seeing those costs are over four times higher than what we had been experiencing earlier in the - you know, earlier or last year even. So we expect a lot of those costs to continue. However, as Brian said, the team is doing just a tremendous job, actually getting the product, and that's what's important, right. So we expect between that and some increased input costs you know, that our gross margin - we continue to expect our gross margin to be slightly down from a year ago. And just as a reminder, that's cost of sales, plus program amortization because we're in the great situation that we can actually provide content now and release things theatrically. So we expect that program amortization to go up as well. But between cost of sales and that, we do expect our gross margin to be slightly down from a year ago, but we do expect the price increases that we've taken to offset our increased costs.

Thank you.

The next question is coming from the line of Gerrick Johnson with BMO. Please proceed with your question.

Hey, good morning. Two questions. First, I was hoping you could break down Wizards between digital and physical, that would be really helpful, if you could. And then on the Consumer Products side, what were the average price increases that you're putting in, in the back half? If you could quantify what that is? And with your own inventory down 11%, is that sufficient? I guess it is sufficient to hit your goals in the back half, but how are those shifts in fulfillment between FOB and domestic affecting you as well? Thanks.

Yeah. So clearly, both digital and analog are contributing to the growth in MAGIC: THE GATHERING and digital role playing with D&D as well. We don't really break down those categories within those brands. But suffice it to say, we're seeing very strong growth on both sides. As we look at the second half of the - if we look at the second half of the year, you're right, we're going to see additional shifting between FOB and domestic shipments. We're working with our global retail partners on what that will exactly look like. But because of the demand in the product categories that we are offering, we have a lot of great partnership and we do expect that we'll get our products to market recognize that the price increases we're taking will cover the incremental costs that we're experiencing. And those cost increases are around the world, and they will be a little different in each of the regions, just depending on foreign exchange and the way that they will hit the P&L. But they're just intended to cover our cost increases, to maintain our gross margins and to hit the operating margin that we believe we can achieve for the full year.

So would perhaps 10% be a good number there?

I won't provide guidance, but I think I would just say that's a bit high.

Okay. Thank you…

I would say that's a bit high as well, Brian.

Thank you.

The next question is coming from the line of Devin Brisco with Bank of America. Please proceed with your question.

Thanks for the question. In the back half of the year as you start to bring PEPPA PIG and PJ MASKS product in-house, how should we think about the initial impact to operating margins, as licensing revenue is replaced with revenue that represents full ownership, alongside associated upfront investment in tooling? And my second question related to that, is what is the long-term margin potential for those brands? And how much of the product that's currently being licensed, can you or do you plan to bring in in-house over time?

Sure. Well, both PEPPA and PJ have very strong operating margins on the Consumer Product side, very consistent with our Consumer Products licensing business. And the product they're offering, in many ways, is both the categories that had been offered, but also a lot of incremental product categories, and yet we're also maintaining our Consumer Products licensees. So I would expect perhaps about - over time, about 80% of the product lines of PEPPA and PJ to be inside, but with another 20% continuing to be licensed in those categories with additional Consumer Products licensing opportunities. PEPPA and PJ enjoy on our P&L, the Consumer Products P&L, enjoy Hasbro high teens operating profit margin. So on average, higher than company average operating margins, which is very consistent with Hasbro IP on the toy and game side and then obviously, much higher on the Consumer Product side. I don't know, Deb, if you want to add anything else relative to the plan?

I think we had talked about this year that just based on, as Brian said, this year, we'll be ramping the lines, and we expect about maybe $78 million [ph] to $85 million of impact to revenue for the full year based on what we're going to launch, but really growing that and growing up to that 80% of the in-source line by 2022. So with the revenue ramping with product as we go forward and margins close to our franchise brands, we're really excited about the future of PEPPA and PJ. And we'll continue to work with some of our great licenses. - licensees that do a terrific job out there as well.

Thank you.

Our final question is coming from the line of Shawn Collins of Citigroup. Please proceed with your question.

Great, thanks. Good morning, Brian and Deb. How you’re well? My question is on expectations for Consumer Products in 3Q. As we emerge from the pandemic, at least in the US and the developed world, people are likely to travel more and get out of their houses. And more importantly, it looks like this August and September we should have a back-to-school experience. There are some toy buyers that we talk to and think this could result in industry retail sales in 3Q being flat year-over-year and then bouncing back for the usual 4Q holiday season. Can you comment on any expectations around 3Q retail performance? Thanks.

Well, look, let me give you - most notably, as we've come through what we call the COVID wall those eight weeks, where there were very strong sell-through, but our inability to supply product in Q2. What we're seeing in the last four weeks, and you take our North American business, for example, our POS was up 11%. Our games business was up in the high teens. We're seeing good growth in regions like Latin America. We have a lot of new initiatives coming for that period of Q3, lots of new product associated with MY LITTLE PONY, as well as our partner brands and a whole new line-up for NERF in the Elite and the Ultra lines. So again, we believe we can grow and we said in line or ahead of the industry because of our innovation, storytelling and content and commerce. And so I won't comment specifically on Q3, except to say, we expect that we'll have a very good year in consumer products. We have the innovation and the strong product line-up to achieve our objectives. I'm again, believing and seeing what consumers are doing. And they really are participating in the categories. If you look at kids and preschool, if you look at older kids with our NERF business, if you look at still older kids and young adults into our games business like Magic and D&D, we're seeing great engagement and we would expect that to continue.

Great. Thank you for the timing. Thanks.

Thank you. At this time, I'd like to turn the call back to Debbie Hancock for closing remarks.

Thank you, Rob. And thank you, everyone, for joining the call today. The replay will be available on our website in approximately 2 hours, and management's prepared remarks will be posted on the website following this call. Thank you.

Thank you to our participants. This concludes today's conference. You may now disconnect your lines at this time.