Good morning and welcome to Hasbro’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning everyone. Joining me today are Chris Cocks, Hasbro’s Chief Executive Officer; and Deb Thomas, Hasbro’s Chief Financial Officer. Today, we will begin with Chris and Deb providing commentary on the company’s performance. Then we will take your questions. Our earnings release and presentation slides for today’s call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q in today’s press release and in our other public disclosures. Today’s guidance assumes we retain the non-core entertainment film and TV business, notwithstanding the current marketing process. While there is no guarantee of such an outcome, if this process results in a sale, we will update our guidance. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cocks. Chris?

Thanks, Debbie and good morning. 6 months ago, we unveiled our strategy for Hasbro, highlighting three priorities: focusing on fewer bigger brands and initiatives; building our consumer insight to grow share and drive innovation; and improving operational excellence to fuel bottom line health and strategic reinvestment. It’s a plan that recenters Hasbro on what has made us great for the past 100 years and which will serve as our foundation going forward. Play. Put simply, Play is what we do. And as we celebrate our 100th anniversary, 2023 is about refocusing our teams to drive renewed leadership in toys and games, rightsizing our entertainment investments and driving fundamental improvements in our organization to deliver long-term success. With our strategy top of mind, let’s review our Q1 results. As anticipated, Q1 revenue was lower year-over-year, but ahead of expectations, driven by continued positive performance of Wizards of the Coast in digital gaming and another strong growth quarter for MAGIC: THE GATHERING. Revenue for the quarter was $1 billion, a year-over-year, with growth in both Magic and D&D. MAGIC: THE GATHERING was a standout performer, growing 16%, particularly impressive given its 40% growth in Q4. The fundamentals of Magic, Hasbro’s first billion-dollar brand are strong with new player growth, player engagement and player sentiment all pointing in the right direction. We expect the positive momentum for MAGIC to continue with Q1 also seeing one of our most successful preorders ever for our upcoming Universes Beyond, The Lord of the Rings: Tales of the Middle-Earth set, which will launch in late Q2. Given our release calendar, we expect revenue for MAGIC to be down in Q2, but up solidly in Q3 and for the full year. Consumer Products revenue declined 23% year-over-year. Point of sale was down for the quarter but improved from…

Thank you, Chris, and good morning, everyone. As Chris said, first quarter results were ahead of our expectations and position us to meet our full year guidance. Wizards of the Coast, led by strong MAGIC: THE GATHERING demand, continued to perform well. Our consumer products teams are working through retail inventory and setting for major entertainment releases, and our operational excellence program is delivering savings and helping offset these expenses. As you know, the first quarter is a historically small quarter for our business and most of the year remains ahead. In Q1, our fixed cost base is disproportionate to revenue. This impacts our profit early in the year, but we see improvement in future quarters as revenue grows and as we begin to actualize more of our cost savings. In Q1, we realized an additional $35 million in savings and remain on track to deliver $150 million of run rate savings in 2023. In addition, this is a 53-week fiscal year, and the first quarter holds that extra week. And this equaled $14 million of incremental expense on little revenue. Given our first quarter, we now expect revenue in the first half of 2023 to be down approximately 16% versus our previously forecasted 20% decline. For the full year, we continue to expect a low single-digit revenue decline in 50 to 70 basis points of adjusted operating profit margin improvement. We started the year with a cash balance of $513 million. $89 million of operating cash flow in the quarter was offset by non-operating outflows, including $30 million of long-term debt repayment, $53 million of CapEx led by investments in Wizards of the Coast for future gaming releases and a $97 million return of capital through dividends to our shareholders. We ended Q1 with $386 million in cash. We…

Thanks, Deb. Before we turn it over to Q&A, I’d like to spend a minute thanking Deb Thomas for her 25 years of leadership at Hasbro. I started this company 7 years ago as the fresh-faced leader of an under-the-radar subsidiary called Wizards of the Coast. From my first day on the job, there was no bigger supporter of Wizards than Deb. She got it, and was always there for Rookie, helping me navigate the broader company and giving me and the team at Wizards the support we needed to turbocharge that business. My story is the same story thousands of people across the company have about Deb. She is the true definition of a servant leader: The first one in the office in the morning; the last one to turn the lights off in the evening; and a true believer in the power of our people and brands. Deb has been an invaluable partner who has helped Hasbro become one of the biggest and best companies in the toys and games and broader entertainment industry. Deb, it’s been an honor to work with, partner and learn from you over the years. Our company and our shareholders owe you a debt gratitude. On behalf of everyone at Hasbro, and especially me, thank you. Now we will take your questions.

Thank you. [Operator Instructions] Our first question is from Andrew Uerkwitz with Jefferies. Please proceed.

Hey, thank you so much. I guess a question on MAGIC. Could you just kind of help us understand like the audience segmentation with The Lord of the Rings set coming, who are you targeting? And it looks like the strategy around that set is a little different than what we’ve seen. Thank you.

Yes. Thanks, Andrew. And hey, great report, by the way, on MAGIC. We all had a chance to read that earlier this week, but it was well researched and did a good job of reviewing the brand. So on Lord of the Rings, as we’ve talked about for our overall strategy for Universes Beyond, it’s all about bringing in adjacent fandoms. We’ve had great success with this, with D&D, which was kind of a prototype for Universes Beyond that we did a couple of years ago, the summer set called Adventures in the Forgotten Realms. We’ve had one of our best-selling commander sets ever with Warhammer that we did this fall. We’re already on our fourth reprint. And for Lord of the Rings, it’s really about appealing to those – that rabid fan base who loves Lord of the Rings, who loves J.R.R. Tolkien, who also might love a game like MAGIC: THE GATHERING. I think an important secondary component to that is that there is already a whole bunch of MAGIC: THE GATHERING fans who are big kind of fantasy, uber fans. They like the Lord of he Rings, and we see it as a great engagement opportunity for them and a special collector’s experience for a set that we don’t do very often.

Got it. That’s helpful. Thank you. And then just my one follow-up. Could you kind of just give us an update? You have Baldur’s Gate launching, I think, in Q3. Could you give us an update on expectations, how that will monetize through the income statement? And then just broadly an update on the video game strategy. Thank you.

Yes. So Baldur’s Gate 3 is being done by our partners at Larian. Larian is probably one of the – arguably one of the best independent role-playing game publishers in the world. And so we’re really excited about what they can do. They released Baldur’s Gate 3 into early access on Steam about 2.5, 3 years ago. To date, it’s the most successful early access game in Steam’s history with well over 1 million adopters, just in that kind of like preview period. So we have pretty high expectations for Baldur’s Gate 3. We think the quality is going to be very, very high. If you look at the reviews on Steam, they are excellent. It definitely is going to be a game of the year, or at least a role-playing game of the year contender, and it’s going to release very broadly on consoles and PC. So we think it’s going to be a pretty big release. In terms of how we participate in that, it’s a license product for us. We like kind of the partnership that we have with Larian on that. So we will start to see some contribution from that in the later, like probably September in Q3. And then more meaningfully just based on kind of the timing of when we recognize the license royalty-based revenue, in Q4 and Q1 of next year.

Got it. Thank you so much. Appreciate the updates.

No worries.

Our next question is from Eric Handler with ROTH MKM. Please proceed.

Good morning, thanks for the question. I’ll just say, Deb, just good luck in all your future endeavors, and you’ll be missed. So first question, with regards to Consumer Products, the reported results were about over $100 million better than what consensus was looking for. I wonder if you could just maybe give a little color as to where that upside came from? Was this a pull forward for maybe 2Q or another quarter? Or was – are you just seeing more positive retail orders?

No. I think we’re seeing some underlying momentum in the business across the board. Certainly, Wizards of the Coast came in ahead of expectations. Our latest release based on Phyrexia did very, very well. And we continue to be bullish on what Wizards has in store, particularly The Lord of the Rings set in late Q2. On Consumer Products, I think our POS came in a bit better than planned. It’s still not where we want it to be, but I think we are making steady progress. And just to give some perspective on it, based on our own internal numbers, and this doesn’t include kind of discounting, we were down about 12% in Q4. We cut that roughly in half in Q1. We were down about 7% year-over-year. And when you take out some of our exited businesses, particularly Disney Princess and Frozen, we were down less than 4%, which by our math is likely at or ahead of market. We are not satisfied with that, but that was ahead of what we planned. But I think it augurs well for what’s going to happen in Q2, Q3 and Q4, where we add like our disciplined execution that we’ve been doing with our retailers. We add new products, and we add what we think is a pretty killer content slate from both ourselves with TRANSFORMERS and our partners, particularly at Disney.

Okay. That’s helpful. And then as a follow-up, can we talk a little bit about DUNGEON & DRAGONS? You have now had a global launch of the movie. A lot of international markets haven’t really been exposed to D&D before. Can you maybe talk about your marketing strategy here to bring the game to more markets and how that’s going to play out?

Yes. I mean we are very enthused by the critical response and the fan response to the movie. It is by far the best reviewed movie in Hasbro’s history. And so we think it’s going to have a very long life, and it’s going to perform particularly well in post theatrical sales and streaming. And that’s important for us, because D&D is a very strong brand in North America. It’s well known in Europe and Asia, but not highly engaged or highly penetrated in those markets. And so like a great reviewed movie that has a lot of fan enthusiasm, is a perfect opportunity and a perfect entry point into the brand. And then I think the way that we will expand upon that over time is we are lowering the barriers to entry for the core games by initiatives that we have digitally, particularly the investments we are making in DUNGEONS & DRAGONS and beyond, and kind of what we call a virtual table top, which is kind of like a video game like experience for being able to play the game. And then we have a very aggressive lineup of new digital content and video games coming out, starting with Baldur’s Gate 3 this year, but then continuing on with other licenses that we haven’t yet announced as well as owned content that we have in production at Wizards Studios. And so I think really that kind of one-two punch of have entertainment, which makes the brand broadly accessible. And then add on to that low barrier entry digital experiences is really going to be kind of the flywheel that drives the brand’s growth over the next couple of years.

Thank you.

Our next question is from Drew Crum with Stifel. Please proceed.

Okay. Thanks. Hey guys. Good morning and Deb, best of luck. It was a real pleasure working with you over the years. So, maybe to start, part of your original outlook, you had flagged $300 million of sales headwinds from outsourcing brands and foreign exchange. Is there an updated figure you can share there? How is the business tracking to that $300 million? And then I have a follow-up.

Yes. So, in Q1 we predicted that about $75 million of that $300 million would manifest, and that’s the case. We are not operating in Russia. We are not doing Disney Princess or Trolls or Sesame Street, and we are starting to out-license some of our secondary properties. We anticipate about 60% or so of that $300 million will manifest in the first half of the year. And really what we are seeing is, I think better-than-anticipated strength in our overall gaming portfolio, particularly MAGIC and D&D. And then we are starting to see some impacts around improved execution at retail, and across our marketing teams, particularly in our franchise brands that saw some decent POS across TRANSFORMERS. We see some momentum in core NERF. We see momentum in core Hasbro Gaming, PEPPA PIG and PLAY-DOH as well.

Got it. Okay. Thanks Chris. And then maybe just my follow-up. Your forecast for the Wizards segment to achieve high-30s EBIT margin in ‘23, a little bit lower relative to the last few years, is that a reasonable range over the longer term, or would you anticipate margin expansion beyond ‘23, which feels like more of an investment year?

I would say high-30s is what we are targeting in the mid-term, for sure. We are investing pretty significantly in building out our digital capacity. Some of that is capitalized, but not all of it. And so I think as we start to launch those games, you will start to see kind of like the realization of those capitalized costs, which will impact kind of like the mid-term outlook for our margins. And then as we expand MAGIC in particular with things like Universes Beyond, it’s a great opportunity to bring in new players, but that’s going to be a little bit of a margin impact, both in terms of the royalties we spend as well as the development costs because those tend to be a little bit more intensive when you involve a second party. Now that said, we feel like that’s a really wise investment. When we attract a new MAGIC player, they typically stick around for 5 years to 7 years and they have an average revenue per user over that time in the $500 to $1,000 range. So, giving up a little bit of margin upfront to attract highly engaged, highly profitable fan segment, we think it’s a nice trade-off that helps us and helps our shareholders win over the long-term.

Yes. Okay. Very helpful. Thanks.

Thanks.

Our next question is from Jason Haas with Bank of America. Please proceed.

Hi. Good morning. Thanks for taking my questions. And I would also like to say congratulations to Deb as well on your retirement, and best of luck on your future endeavors. In terms of my questions, I was curious for consumer products. Are you expecting POS improvement through the remainder of the year to get to down mid-single digit guidance? And can you just talk about what the drivers are in the rest of the year?

Yes. So, in terms of POS, I think Q1 was really about execution. It was about nuts and bolts working with our retailers, improving our positioning, improving our inventory outlook. Through the end of Q1, our retail inventory is down about 15%, which we think is a good down payment on the year. And we will continue to make steady progress in that in Q2 and Q3. Our owned inventory is up a bit, but most of that has to do with kind of the nature of Wizards production and load-in for our entertainment releases around action figures. Outside of Wizards and action figures, our owned inventory is actually down through Q1 as well. When we get into Q2 and Q3, I think we will add to that kind of disciplined execution with increased marketing support and content support with a host of blockbuster movies and great streaming content, whether it’s from us or from Disney. And then also, we are just going to have a lot more product innovation. Q1, we had a couple of new things that hit pretty well. Our Gel segment is doing pretty well inside of NERF. NERF Junior launched, and that’s doing pretty well to expand age segments inside of the NERF portfolio. But really, it’s Q2 and Q3, where all of our new games, a lot of our preschool innovation. I am particularly excited for Young Jedi Adventures with our partnership with Star Wars in preschool and what we can do there. As well as across the board, several new pieces of innovation that we haven’t announced yet, but we see a lot of retailer excitement for, that should add to the POS momentum.

That’s great. And then can you just walk through the releases for MAGIC for 2Q versus 2Q last year, because I thought it was – I know you have said you are expecting to be down, I know that was the initial expectation for 2Q. But I just think we have loaded the range, which seems to be off to a good start. And then what’s that up against? Was that Kamigawa last year? Can you just kind of help frame up what causes the difficult compare?

Well, Kamigawa was Q1 of last year. Double Masters was in I believe second quarter last year. Really, it’s less of around the sell-through of the releases because we actually think the sell-through is going to be quite strong in Q2, and it’s the timing of the releases, particularly in the beginning of the quarter and then in Q3. So, like our March of the machines release this year comes a little bit earlier than last year’s comparable release. So, we had a little bit of Q1 shipped, which affects Q2. And then our major release for Q3 is about a month later year-over-year. So, last year we were able to ship a fair bit of our Q3 release at the end of Q2, whereas this year, almost all of that Q3 release will be shipped solely in Q3. So, while we are excited about the sell-through and the fan engagement potential of the Q2 releases, we actually for the quarter in terms of a sell-in perspective, are down about a set to a set and a half year-over-year.

Helpful. Thank you.

[Operator Instructions] Our next question is from Fred Wightman with Wolfe Research. Please proceed.

Hey guys. I just wanted to follow-up on the retail inventory performance. It sounded like in the prepared remarks you expected that to be sort of cleaned up by the end of the first half. And then Chris, I thought you just made a comment that it could continue into 3Q. So, when do you sort of think that will be normalized? And is it a little bit sooner than you would have thought exiting last quarter?

Well, I would say we will get to pretty normal levels by the end of Q2, but there will be some additional kind of cleanup into Q3. That’s just the nature of the beast. In terms of our owned inventories, we made progress outside of Action Figures and Wizards in Q1, and we expect that to continue. I would say we will be done with about 50% to 60% of the job by the end of Q2, and should be pretty clean on kind of our aged inventory by the end of Q3 and entering Q4 in a pretty clean state, both for retailers as well as our owned and operated. Our goal for the year continues to be our overall inventories are down 25% or more with comparable levels exiting 2023 to what we exited 2021 at, which was historically low year for us.

Makes sense. So, if we think about the timing that you just touched on for the retail inventories and we think about sort of the year-over-year changes in some of the MAGIC releases, can you just help us think about the mix for the back half of the year as far as 3Q versus 4Q, like how do you sort of see that shaking out versus historical patterns? And how do you sort of see the back half of the year progressing versus that first half guide that you gave us?

Deb, do you want to take the follow-up?

Sure. So, historically the back half of the year has always been like in the high 60% range, and we expect it to get back to that this year. As far as the mix, as we talked about, we expect Q3 to be the biggest quarter for MAGIC this year. We have got very strong releases. Chris talked about the timing. And you will certainly see more sell-through. We shipped Lord of the Rings late in Q2, but the sell-through comes in Q3. So, when you think about the mix, we do expect the consumer to come back. We talked about that. It’s just a function of the timing. But we do expect a bigger quarter for MAGIC, just looking at timing and releases. But overall, we expect it to get back to that normalized rate in the back half of the year.

Okay. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Debbie for closing comments.

Thank you, Sherry and thank you everyone for joining our call today. The replay will be available on our website in approximately two hours, and management’s prepared remarks will be posted on our website following this call. I would also like to let you know that Hasbro management will be participating in the Wolfe Research Leisure Conference on May 11 and 12 and the JPMorgan TMT Conference on May 22nd. Hope to see you there. Thank you.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and have a wonderful day.