Good morning. Welcome to the Hasbro Third Quarter 2021 Earnings Conference Call. At this time, all parties will be in 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 of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Joining me today are Rich Stoddart, Hasbro's Interim Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Rich 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. Our discussion will be based on adjusted results, which exclude several items associated with the eOne acquisition outlined in our release today. 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 Rich Stoddart. Rich?

Thank you, Debbie and welcome to everyone joining us today. I'm Rich Stoddart, Interim CEO at Hasbro. Before we officially begin the remarks on the call today, I want to take a moment to reflect on the passing of our beloved leader and friend, Brian Goldner. I know many of you share in our sadness for his untimely passing. Brian was not only an accomplished CEO, he was a true visionary who transformed an almost 100-year-old toy and game company into a leading global play and entertainment company, but his impact can be felt well beyond Hasbro. He changed the game completely. He believed in the power of a story, seeing the potential for omnichannel storytelling and content built on powerful brands. He architected a compelling road map for Hasbro's growth in the Brand Blueprint strategy, and was so proud of where it has taken Hasbro, but even more so in its power and future potential now with eOne as an integrated part of the family. I had the privilege to work together with Brian and the Hasbro team for the last seven years, and serve on the company Board, most recently as Lead Independent Director. During that time, the company transformed its talent, its culture, its brands, and its potential as it executed the Brand Blueprint. In my new role as interim CEO, I will continue to work with a talented leadership team Brian put in place over the last 13 years, along with the powerful culture at Hasbro to supercharge the blueprint and build on the company's strong momentum. Hasbro is performing at a high level and with a clear, well-understood strategy. To ensure our success continues, I will be focused on five key priorities: supporting the amazing people at Hasbro; ensuring they have what they need to…

Good morning, everyone. On behalf of Hasbro employees globally, I would like to thank Rich for stepping up at this time for us, our Board, our shareholders and our company. The past couple of weeks have been difficult for all of us at Hasbro. Brian is missed, but the impact he made is unmistakable. We heard from so many of you remarking on Brian's leadership and your positive personal interactions with him. Thank you for sharing these memories with us. Brian empowered me and the executive team to run Hasbro and together we are, and we'll continue doing that. Brian was proud of our third quarter results. They showcased the strength of Hasbro's unique business model with growth in Entertainment and at Wizards in both tabletop and digital gaming. Our results also show the strength of our global teams as they expertly manage through supply chain disruptions and position us for growth in the fourth quarter and for the year. Brian believed as we do in investing to grow to unlock Hasbro's full potential and create value for our shareholders. Our priorities remain the same and we are executing against those priorities. The quarter highlighted our focus on de-levering our balance sheet as we repaid an additional $400 million of debt, bringing our year-to-date total to $972.5 million of long-term debt retired. We also paid the dividend, which has been maintained following the eOne acquisition and throughout the pandemic. At quarter end, cash on hand was $1.2 billion and we toward our goal of returning to our target of two to two and a half times debt to EBITDA and maintaining our investment-grade rating. For the quarter, revenue grew 11% versus last year and 6% versus pro forma 2019. MAGIC: THE GATHERING, MY LITTLE PONY, PEPPA PIG, and PJ MASKS…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is coming from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thank you. Good morning everyone. I just want to start by saying for those of us on this side of the call, Brian's absence in his voice has really felt today. So, it was a privilege to know him, and our sympathies are with all of you and his family. Rich, my question is for you. It's a question we're getting most from stakeholders right now, which is, can you share a little bit more about the search in terms of characteristics, background as you think about the Blueprint, who is the type of individual that you're looking for to really guide the next the company? Thank you.

Thanks Steph and I have to say how much we appreciate your sentiments. Brian didn't just touch Hasbro, he touched a lot of people in the world. And -- so thank you for that. So, as I said in my remarks, the search for the permanent CEO is not something that is just beginning now. The Board is and always has been thinking about succession as a matter of course, it is a responsibility of the Board to think through. And that work that they've been doing, I think, provides a very strong foundation for the naming of a new long-term CEO, and that process is well underway. I will say the commitment and belief in the brand Blueprint as the strategy for Hasbro go forward is greater than it's ever been. I think what you saw in this quarter is just the beginning of the potential of the Blueprint to drive this company forward. I'll say -- use the Brian is -- I guess right now to say this is not a point of arrival for Hasbro -- or not a point of departure for Hasbro, it's a point of -- sorry, not a point of arrival but a point of departure, right? This is the beginning of the Blueprint proving itself out in the world. And so I think the characteristics of a leader are, A, a fantastic leader who believes in this team and this company and this culture to take it forward and b, someone who can continue to expand on the blueprint and drive that vision forward.

Deb, could I put out a follow-up question for you on the guidance. I'm just getting a few e-mails this morning on what's built into your operating margin target from a cost and pricing perspective in the fourth quarter? Have you taken a similarly conservative approach as you did to the sales guidance?

Yes. Thanks, Steph. I appreciate the question. Now absolutely, as we said, we have orders on hand to meet the top end of our guidance range for revenue, but we're feeling the cost pressures that the rest of the industry is feeling. And we are also feeling the supply chain pressures that the rest of the world is facing right now. It's funny, I went to buy something at the grocery store the other day and the shelf was empty. And I'm like, okay, I'm not going to fell for another brand. I'll just go with that for now. But the important thing is we've got everything in place, so there will be Hasbro toys and games on the shelves this holiday season. The team has put a lot of process in place, some of which includes air freight. Our air freight expense was much higher in the third quarter than it typically is, and we do expect it to be higher in the fourth quarter. We don't intend to take additional price increases this year. So what we have built in is what is there to cover our costs. So overall, we still are in firm belief that we can hit our guidance of double-digit revenue growth at 13% to 16%. We have orders for the high end, but some things will be beyond our control. And we believe that we can achieve operating profit levels in line with last year for the full year as well.

Thank you very much.

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

Good morning. Thanks for the question. I wonder if we could talk a little bit about Magic: The Gathering, and curious if you'd be able to give us maybe a little insight into sort of the balance of revenue between physical play and digital play. What's been the impact on, let's say, daily average users now that mobile is -- has had time to ramp up a little bit?

Yes. Thanks for the question, Eric. So I know this is a question you've been poking at in the past. And I want to reiterate what I think the team has been saying in the past, which is that these -- the mobile and digital gaming and tabletop gaming are neither cannibalistic nor separate. They really are an ecosystem that mutually supports it. So we are continuing to grow Magic Arena. The mobile platform is a critical source of new users for Magic Arena. And at the same time, tabletop is increasing as well. And I think what you're seeing is the power of that expanded omnichannel experience. . Maybe though, Chris, I'll just ask you if you want to comment any further on Eric's question?

Sure. Thanks, Rich. Hi, Eric. Yes, the Magic business had a very strong and has overall, had a very strong 2021. By the end of Q3, in fact, Magic is already bigger this year than it was in all of 2020, which was a record year for us. Arena is a major contributor to that. Mobile has been a terrific source of new users for the brand, and we see a very healthy crossover between users who come on board digitally, who migrate to tabletop, and likewise, tabletop players who want to play a more magic in play, both on mobile and PC. And so I think the combination of those factors plus the segmentation we've been driving in our business has done an excellent job in terms of growing our overall user base, enhancing our engagement with fans, and driving our average revenue per user.

Great. And just as a follow-up. I know during the pandemic, a number of Hobby stores were closed, e-commerce was beneficial for selling physical sets. I'm curious now that Hobby stores are fully reopened. We're seeing more in-store tournaments, are you starting to see an oversized rebound with the physical sets at all?

Chris, do you want to take that?

Great. Yes, sure. Yes, we were very impressed with our Hobby channel partners and how they rallied with the realities of the pandemic prior to April of 2020, only about 35% of our Hobby stores offered any kind of online solution or curbside solution. And over the last 18 months, we now have over 80% of them offering their wares online and as a curb side solution. And so our overall mix of business has actually stayed remarkably similar during the overall pandemic. Hobby has grown. Our online and e-commerce partners have grown, and our mass partners have also grown. And I think it's a testament to kind of like the strong foundation that is underlying both the MAGIC business as well as the D&D business and our ability to partner with all those partners across different channel mixes.

Great. Thank you very much.

The next question is from the line of Arpine Kocharyan with UBS. Please proceed with your question.

Thanks very much. Thank you. Please accept our heartfelt condolences. We were very saddened by Brian's passing. He will be very much missed. To follow-up on earlier question, even top end of guidance for Q4 would imply perhaps less than 10% operating profit margin. First, is my calculation correct? And I know there are some moving parts like Prime Day comps and MAGIC card release sort of cadence. But could you perhaps spend a few minutes going over kind of puts and takes? I know, Deb, answered a good chunk of it already. But if you could sort of size it for us, that would be great. And I have a quick follow-up. Thank you.

Sure. Well, we talked a lot about the product that we have to deliver and as a matter of fact, the $100 million that shifted from Q3 into Q4, we talked about most of that's already been delivered. And in fact, if you look at just our inventory, never mind retail inventory, 40% of our inventory balance at the end of the quarter was in transit. So, that's here now, and we can ship that. So, we're very excited about the opportunity. We have plenty of things on the water. We are going to continue to use air freight for the quarter, and the team has done a terrific job, actually making sure that we will have full shelves of products, Hasbro toys and games for the holiday season. That being said, some of that costs a bit more and we've also talked a bit about advertising. It's very important that the consumer comes and takes away that product. So, in an effort to make sure that the POS is there that we're reaching the consumer will have higher advertising expense in the quarter as well. So, some of the puts and takes, some of the costs are going to be a bit higher which is why we said we believe our overall gross margin will be more in line with 2019 -- pro forma 2019 than 2020 because of the excellent deliveries that we expect on the Entertainment side, the good mix from our Wizards of the Coast business, but also our consumer products business, which does have some pressures on the cost side as well. So all of those things brought together, which is the beauty of our portfolio and our advanced business strategy. We have three businesses that work together that are going to allow us to achieve that revenue growth and operating profit margins that are in line with a year ago at about 15%. That being said, we also believe in our medium-term guidance that there is no inherent reason why we can't have operating profit margins over 16%. And we're well on our way to managing that. We're just dealing with some short-term issues that the rest of the world are dealing with as well.

Right. Right. Thank you. Are you able to share what percentage of your volume you expect to go through direct imports in Q4? If not, no problem. Thank you.

So overall, our direct import business, we do expect it will be around similar levels to a year ago. I will say with the supply chain issues that the world is facing, our customers aren't immune to that as well. And we've been working very closely with them to ensure they have the product they need on shelves at the right time. As a matter of fact, partnering with them, if we can get containers and they can't, for example. So overall, I think our direct import business may be down a tick from a year ago, but overall in line, not significantly different.

Thank you very much.

Next question is coming from the line of Jaime Katz of Morningstar. Please proceed with your question.

Hi. Good morning. And just want to echo the condolences that have already been sent to the team. But I'm hoping you can comment on capital allocation, particularly the continued reduction of debt and the walk back to investment grade. Is there an ability now to get back to that investment-grade target faster than originally planned, that three to four years? Thanks.

Thanks, Jaime. Yes. So we're really proud that we're an investment-grade company, and we've maintained our investment-grade status even after the acquisition of eOne. It's been very important to us, and we've worked very closely with the rating agencies to make sure they know our plans and how we're stepping along the way. Our capital allocation priorities really are the same. First and foremost, we invest in our own business. You see that in the growth, in Entertainment this quarter. You see it in the growth in Wizards. You see it behind all the wonderful innovation in our consumer products business. So we do believe in investing in ourselves first. Beyond that, we are committed to getting back to the 2 to 2.5 times debt-to-EBITDA. Right now, that is the right place for us. We believe that lets us keep investing for the future and continuing the growth trajectory that Hasbro has been on. And then thirdly, we will return excess cash to our shareholders. We have had maintained our dividend even after the acquisition of eOne. We maintained our dividend throughout the pandemic. That's important to us and to our Board as well. So we continue to have our capital allocation strategy to be consistent with the way it's been in the past. And we are proud to be an investment-grade company.

Thank you. I'm sorry, I misspoke. I meant to say the leverage target rather than investment grade. And then are there any idiosyncrasies we can be -- we should be aware of on the cadence of spend for programming over the next few quarters that could help us think through how that cost metric might change?

So, from a spend standpoint, we still expect to be between the $600 million and $750 million for the full year this year, probably a little bit closer to the high end, if you look at where we're sitting this year. And as you know, that spend will translate to revenue in future years. So, -- and some this year as well. We've got great deliveries planned for the fourth quarter. And maybe, Darren, you could talk a little bit about some of the deliveries and what we have planned for 2022?

Yes. Sure, Deb. Thanks. Yes, through the fourth quarter, as was mentioned, we've got more deliveries coming for the Rookie Season 4. We've got Yellowjackets deliveries through this quarter. We've got the second season of Moonshine delivery. We've got lots of children's animation product delivery, PEPPA PIG Season 9. We've got Clifford: The Big Red Dog coming to theaters in November. So, we've got a lot of activity delivering a lot of the programming that we've been producing throughout this year. As we roll into 2022, we see strong cadence of continued production, both on returning series, but also on new series. Obviously, since the acquisition, we've been really working hard on Hasbro content. I think it was mentioned before in the call, there's over 30 brands in development, and there's multiple entertainment streams being developed against those brands. Meaning in some regards, like for TRANSFORMERS, for instance, we've got a feature film in production. We've also got animated content coming and other programs planned for TRANSFORMERS. And you'll see that across the entire Hasbro portfolio. So, a lot planned for the fourth quarter, but 2022 looks to be a very, very strong year coming as well. And you'll see those deliveries, as Deb said, supporting that investment in content spend through 2021 and 2022.

Thank you.

Next question is from the line of Fred Whiteman with Wolf Research. Please proceed with your question.

Hey guy, good morning. I just wanted to follow-up on your commentary about the medium-term operating margin getting back to over 16%. When you look at a lot of what you've dealt with this year in terms of the input costs, how are you viewing those as far as transitory versus structural? And what do you think that means for pricing going forward? Could we need to price a little bit more over the next few years to offset that? How does that all shake out for that margin trajectory going forward?

Good morning Fred. You're right, everyone -- the whole world, I think, is seeing input costs going up right now. Trends have been good lately. We've seen them coming down a bit in the last short period. However, the beauty of our Consumer Products product line is -- a lot of that product line is new every single year. So, we can engineer our product to hit certain price points. That being said, we do believe that there's going to be that the cost inflation we've seen is going to continue for a period of time. Looking at inflation, we're dealing in inflationary markets in most places. And again, I'll go back to what I could find on the shelves at the grocery store was more expensive, right? So, it's a matter of, I think, the -- all industries are facing a bit of this right now. But we do have the opportunity to reinvent our product line -- the majority of our product line every year, and therefore, we can just take cost out of it as we do that. We've been working very closely with our manufacturing partners to ensure they've got the right components to make the product and we'll have it. That's what's most important. And then we'll ensure that it's made the right way and priced appropriately for the market as well.

Makes sense. And then I guess specifically on the fourth quarter, if we think about the timing of when those price increases hit in August, how should we be thinking about the consumer product margins specifically in the fourth quarter?

So for the fourth quarter, we continue to see escalating costs from when we put our price increases in place. So you just think about the cost of air freight, and the cost of freight -- everyone has talked about supply chain and the cost of shipping, right, and ocean channels, and what's in place for acquiring additional transport cost to get holiday, which we will have. But that does put just some near-term pressure on some of the margins. Our -- the full impact of our price increases will take effect in the fourth quarter. And overall, we still believe our total gross margin, which includes our program amortization, which is representative of our deliveries as well on the Entertainment side, as well as our Wizards of the Coast business, which we've seen the digital side of that business grow. That's why our diversified business model really lets us say, we think our gross margins will be in line with 2019. But more 2019 than 2020.

Great. Thank you.

Our next question is from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your question.

Great. Thank you. Good morning. I'd like to express my team's condolences as well. Brian was the toy Goat and my favorite sparing partner, so he'll definitely be missed. Deb, I want to ask you about Peppa Pig and PJ Masks, the in-sourcing of those products. What did those contribute in terms of, say, net revenue gain and net operating profit gain by bringing those in-house in a quarter? Thank you.

Well, thank you, Gerrick, and thank you for your sentiments. We appreciate everyone's but you may have been Brian's favorites sparing partner as well. So we all really appreciate your comments very much, all of you. So thank you, and thank you for all the nice notes that you sent that meant the world to us and to everyone here. The Peppa Pig -- and we're so excited about Peppa Pig and PK Masks. We started shipping products for our line for Peppa and PJ in the third quarter. Some of this supply challenges we had did impact those lines. But they are here now, and on the way. From the quarter standpoint, we just started shipping in the third quarter, so we expect to see a bigger impact in the fourth quarter. As we've said, we think that the total impact for the year would be $75 million to $85 million, I think we said, and we're on track for that for the impact for the full year. And Peppa and PJ together have operating profit margins very similar to our franchise brands. So you think high teens, low 20s operating profit margins. So we're really excited about the brands, the lines. We fully integrated our consumer products business now. We'll continue to have external licensing partners through next year, and beyond that as well. Because there are some lines that we won't take on ourselves that we have great licensees that are doing that. So we've successfully integrated most of that business. We'll continue seeing more of the business integrated in 2022, and we're really excited that Peppa and PJ are part of the Hasbro family.

Great. Thank you, Deb.

Our next question is from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Thank you for the question. First, I'd also like to express my condolences on behalf of our team to Hasbro and Brian's family, and friends for their loss. I just have one question for Chris or Deb. I was just wondering if you could talk a little bit about the cadence of MAGIC: THE GATHERING card set releases for the rest of the year, and how that might impact revenue growth? And then could you also just comment on the content and gaming outlook for 2022 for Wizards of the Coast more broadly? Thank you very much.

Chris, why don't you take that?

Sure thing. So, in 2021, we expanded our number of major set releases from six in 2020 to seven in 2021. Our next big release will be in Q4, which is called Innistrad: Crimson Vow, a vampire theme set. That's part of the twofer that we released the first part in the Innistrad: Midnight Hunt in Q3. And we expect continued growth in Q4, but as Deb mentioned in the upfront remarks, we think that will be moderated just based on set timing releases and composition. For 2022, we also expect to have seven major releases comping 2021. Those set releases will vary slightly in timing and composition. But based on the early fan reactions that we've received in Q3, we feel very good about the quality of those sets and how our fans are responding to them. And they include everything from returning to old classics like Commagawua and Dominaria and the Brothers War to exploring new themes, like a gangster theme set for the spring called the Streets of New Capana and then continuing to expand the number of formats and segments of consumers we're going after, including an expansion of our Universes Beyond initiative, which is taking outside IP for MAGIC and bringing it into the MAGIC play system like we did in Q3 with the D&D and MAGIC with Adventures in the Forgotten Realms, which set a record for us in terms of our summer releases. It was the biggest summer set release we've ever had. So, we feel good about the balance of the year, and we feel very good about the initial reactions to our 2022 set release schedule.

Thank you for all the thoughts Chris.

Our next question is coming from the line of Drew Crum with Stifel. Please proceed with your question.

Thanks. And our condolences to Brian's family and the Hasbro team. So, my question is on the sales guidance. With the language for 13% to 16% growth this year, is there any more precision you can offer at the segment level? I guess more specifically, you were previously forecasting Consumer Products up mid-single-digits for the year, is that something you see is still achievable?

So, overall, we do expect growth in all of our segments for the fourth quarter. That being said, there are some things on the supply chain side that really are beyond our control. I mean we've all read about every industry being impacted by ships floating outside of ports. That being said, we've increased a lot of ports. And Eric, why don't you actually talk a little bit about what we have put in place to ensure that we'll be able to get product on the shelves for this holiday?

Sure. We feel confident that there will be plenty of Hasbro toys and games here for the holidays. And I think that's the headline we want to stress. We've already talked about the headwind of $100 million shifting from Q3 to Q4. And I do want to highlight, as Deb mentioned, the majority of that has already shipped to our customers around the world, which is really just highlighting that this is a phasing issue, not an issue of lost orders or lost sales. With regards to mitigation, we are proud of our teams. We took several steps to mitigate some of the challenges that we saw happening earlier in the year. We activated new ports in both China and the US. We've added multiple ocean carrier contracts to increase capacity around the world. We've expanded our trucker capacity as well, which helps move products to warehouses all over the world. And we're ready for Q4 with plans lined up to meet as much demand as possible to deliver peak shipments during the peak season. So I feel we're ready to go, and we appreciate the question.

Thank you.

Our next question is from the line of Alok Patel with Berenberg. Please proceed with your question.

Hi. Thanks for taking my question. I was wondering if you guys can comment a little bit on some of the price increases that were supposed to be an effect in Q3? How have they materialized versus expectations? And with POS up strong, is there more room to pass on some of the cost to the consumers and the retailers?

Yes. So the first thing I'd say is just to remember, right, retailers set the pricing. But we did -- those price increases went into effect in August. And so we're really seeing the full impact of that pricing in Q4. So Deb, I don't know if you have anything to add to that?

Yes. I agree you, Rich. I think you hit it on the head. The retailer actually sets the price to the consumer, we don't. So we won't be taking further price increases in 2021. That would be very disruptive to our retail partners as well as if you think about the cost of running a company to implement something like that at this point is very difficult, right? So we want our retailers to have predictability for their season as well. However, they set the ultimate price to the consumer, and there'll be plenty of Hasbro toys and games for the consumer to buy this holiday season.

Got you. Thanks. That’s all I have.

Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the call over 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 two hours. Additionally, management's prepared remarks will be posted on our website following this call. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.