Good morning and welcome to Hasbro’s Second Quarter 2023 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. Kristen Levy, Senior Manager, Investor Relations. Please go ahead.

Thank you and good morning everyone. Joining me today are Chris Cocks, Hasbro’s Chief Executive Officer; and Gina Goetter, Hasbro’s Chief Financial Officer. Today, we will begin with Chris and Gina providing commentary on the company’s performance. Then we will take your questions. Our earnings release and presentation slides for today’s call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives and similar matters. There are many factors that 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 agreement we just entered into with Lionsgate to sell this business. That transaction is subject to customary closing condition and regulatory approvals. Following closing of that transaction, we plan to 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, Kristen and good morning. Today I am pleased to announce that Hasbro has entered into a definitive agreement to sell our eOne Film and TV business to Lionsgate for approximately $500 million, consisting of cash of $375 million and the assumption of production financing loans. This purchase will include a team of talented employees, a content library of nearly 6,500 titles, active productions for non-Hasbro owned IP like The Rookie, Yellowjackets and Naked and Afraid franchises, eOne’s Canadian Film & TV operations, and the eOne unscripted business, which will include rights for producing Hasbro-based shows like Play-Doh Squished. We expect the transaction to complete by the end of 2023. Hasbro will use the proceeds to retire a minimum of $400 million of floating rate debt by the end of the year and for other general corporate purposes. Hasbro Entertainment will be the new marquis for our ongoing entertainment efforts after the sale closes, under the leadership of Olivier Dumont, the current Head of eOne Family Brands. Hasbro Entertainment’s mission is to develop finance and produce entertainment based on the rich vault of Hasbro-owned brands. We’ll bring to life new original ideas designed to fuel all areas of Hasbro’s blueprint, including toys, publishing, gaming, licensed consumer products, and location based entertainment. We will retain a focused team of creative development and business affairs experts to shepherd the 30 plus Hasbro-based projects in development, working with the best studios and distribution platforms in Hollywood, including ongoing development of the TRANSFORMERS and GI JOE franchises, PLAY-DOH, D&D, MAGIC: THE GATHERING and our board game portfolio. As part of the sale, we expect to move to an asset-lite model for future live action entertainment, relying on licensing and partnerships with select co-productions like our previously announced Transformers One animated film and the D&D…

Thanks Chris and good morning everyone. As Chris laid out, we delivered a solid quarter with revenue coming in ahead of expectations and proof points emerging across several of our transformation initiatives. We also announced the sale of the eOne Film & TV business, a step that simplifies our strategy and our focus on Toys and Games. As we look to the quarter, total Hasbro revenue of $1.2 billion dollars was down 10% versus last year, as we continue to see normalization of inventory, lapped the exit of certain licenses and markets within the Consumer Products Segment and we had fewer planned releases for Wizards of the Coast. The Entertainment Segment revenue was down 3%, primarily due to the exit of non-core businesses in 2022. Excluding these divestitures the Film & TV and Family Brands businesses were up 5% versus prior year. Adjusted Operating profit of $137 million was down 43% versus last year. In addition to the revenue decline, we incurred higher inventory close-out costs as we continue to right size the inventory back to healthier levels. Profit was also negatively impacted by an impairment taken on Dungeons & Dragons: Honor Among Thieves, as a result of box office results coming in below expectations. Adjusted earnings per share of $0.49 was 57% below last year, due to the factors noted and includes unfavorable impacts related to taxes and interest expense. The adjusted results exclude the impact of a $296 million Film & TV impairment. Through the second quarter, the ongoing writers’ and actors’ strikes have had minimal impact on our results; however, as the strikes continue, our 2023 outlook for entertainment has come down. The adjusted results also exclude incremental costs attributed to the Operational Excellence program and amortization associated with the eOne acquisition. Looking at year-to-date results, revenue…

Thanks Gina. While our overall guidance is down for the year, the puts and takes are contained in a segment that we have found a better home for and a company adept at driving value. Our core business is making tangible progress, and while the next six months will present entertainment-related headwinds, we will emerge a more focused, more profitable and more predictable business. This will enable us to continue to fund our category-leading dividend, improve our balance sheet health and drive value for our shareholders, partners and fans of all ages. We’ll now pause to take questions.

Thank you. [Operator Instructions] Thank you. And our first question is from the line of Andrew Uerkwitz with Jeffries. Please proceed with your question.

Hey, great. Thank you. Good luck joining Gina. Its great to have you onboard. The increase in guidance around WotC, could you go through the puts and takes there? Is that driven largely by Magic? Better expectations on Baldur’s Gate and now that it launches today or Monopoly Go, if you just could walk through some of the changes there.

Yes, sure thing and thanks Andrew. You know at a high level, I'd say it's bullishness around Magic and good progress with our digital licensing portfolio, Baldur’s Gate and Monopoly Go included. I'll turn it over to Gina to get through more details.

Good morning, Andrew. Thanks for the welcome. I didn't know that I have additional color to add. I do think that our performance in the first part of the year overall for WotC in the digital segment has been on our expectation. We're seeing some good progress with Lord of the Rings. We're really excited about that launch and that came out in June, so the bulk of the revenue gain will be a pick-up here in Q3. And as Chris said, the launches that we've got scheduled for the back half of the year, we’re feeling really good about.

Yes, I should note that Lord of the Rings is not a standard set. We think it's more of an evergreen set that will have a longer tail. And you know our in-year expectation is that within seven months of it releasing, it'll be the number one set of all time from Magic. It should cross $200 million before the end of the calendar year. The last set that did that was Modern Horizons 2 and it took about two years for it to do that.

Got it. That's super helpful and great color. I appreciate it. Just kind of thinking about the digital strategy going forward that sits within Wizard of the Coast, could you give us an update on your thoughts there. eOne’s gone now. We can kind of start focusing on the video games and segments. You have some internal studio. So could you just kind of give us an update on where everything stands and what the primary driver is going to be there, you know one year out, three years out maybe?

Yes, you know at a high level I'd say it's a balanced strategy between working with license partners, which is very high profit for us and we've been fortunate to have some fantastic partners like Scopely and Larian who we think are making knock-it-out-of-the-park games, and then patiently investing on a milestone basis with our own internal studio development and publishing capability development. You know, when you look at a game like Baldur's Gate 3, I view that as a block – the equivalent of a blockbuster movie release. You know just to put in perspective, we think Baldur's Gate 3 has the potential to be a game of the year contender. It will engage millions of highly targeted fans and be highly accretive to the D&D brand. And just to kind of put in financial perspective, we will likely make more money on Baldur's Gate 3 than we have made on all of our film licensing for the last five to ten years combined. So it's not only a great brand win. It's a great financial win for us, and I think it's a heavy focus of the company moving forward. We purposely stated in this release that we're a leading Toy & Game company. We are squarely focused on that, and I would say the emphasis is on the gaming part of that.

Got it. That's really helpful. I appreciate it. Thanks Chris.

No worries.

Our next question is from the line of Arpiné Kocharyan with UBS. Please proceed with your questions. Arpiné Kocharyan: Hi. Good morning and thank you for the question. I was wondering if it could help us bridge margin guidance down about 25 basis points at midpoint. But then what you want to be up is actually up and what you want to be down is actually down. You have higher margin gaming revenue outlook up, but lower margin entertainment segment revenue actually lower. And I know you mentioned margin for Wizard is actually unchanged or better and then incremental headwind from impairment charges I guess. Is there anything else that you would point out in bridging that?

No, Arpiné good morning. This is Gina. I think you've got it – our margin guide down. We were a little bit more bullish starting the year at 30 to 60 bips and now we're saying 20 to 50. And that is really all about the impairment that we took within D&D and what is happening within the Film and TV segment itself or the broader entertainment itself. When we look at our core business, our toys business, our games business, that margin profile is healthy and actually a little bit better than what we expected it to be. We're seeing some nice momentum in our cost savings initiatives and you can see that in the margin bridges that we provided. You can see that starting to pull through the P&L and that really starts to accelerate as we look to the back half of the year. So the call down in margin, all about Entertainment, all about what happened with the D&D impairment and our core businesses that we are keeping are doing quite well. Arpiné Kocharyan: That's very helpful, thank you Gina. And I know you aren't giving EPS guidance at this point, but you mentioned $0.50 cents of TV and Film EPS headwind and then additional $0.10 to $0.20 of headwind. Could you maybe go over high level, just basic math on calculating close to no more than $0.25 in operating profit that you're giving up with this sale and then that's obviously partially offset by run rate, interest expense, cost savings down the road. Maybe if you could kind of point out whether that thinking is correct, high level, and then if you could break down that $0.50 a little bit more.

Sure. I will try my best to answer that math question. Our guidance that we originally had given was 445 to 455 and what we communicated was that two dates, so through the first six months, we've had a $0.50 headwind by the entertainment segment. And what we anticipate in the back half of the year is that's going to be another $0.20. So all in, our earnings per share guidance, if we were continuing to give guidance, would come down by $0.70, all in the Film and TV, all in the entertainment segment. Again, our core business, Toy & Game, and the digital part of our business, that is actually performing ahead of expectation. There's some puts and takes within tax and interest expense, so that kind of nets against that, but the call down in earnings per share, all in entertainment. Arpiné Kocharyan: Super helpful. Thank you.

Yes.

Our next question is from the line of Jaime Katz with Morningstar. Pleased proceed with your questions.

Hey, good morning. I know you guys are not really guiding on the sale of eOne, but I'm hoping that you can frame the size of what will be left after these assets are sold. Will it be 10% of the entertainment business? And then, with that sale, is there any reason that cost of goods sold and program production costs wouldn't go back closer to 2019 levels, just as we think through sort of the math of how that segment has impacted the overall P&L? Thanks.

Sure. Morning, Jaime. In the slide deck that we provided, we put a chart in there to try to dimensionalize the total entertainment segment and then the piece of the business that is being divested. So about 85% of the segment is going with the sale in terms of its revenue and the balance of 15% is staying with us and it will be embedded in the new kind of view of entertainment of how we're approaching it moving forward. In terms of how to think about production costs, I'd have to go back to where we were in 2019 to see precisely if we're up, down or sideways from that. But yes, you can assume, the eOne business we’re spending, $500 million, $600 million in production that that will – we will not be – they will not be spending that or we will not be spending that amount of money moving forward.

We'll be up versus 2019, simply because we continue to invest in some co-productions with Paramount like we're doing with Transformers One, which is a new animated film that will come out next year. And then we're also doing production for things like a D&D TV series. Now that is a cost-plus model that Paramount is fully funding, so we get the production margin from that plus like a licensing fee for being an IP owner on something like that. And then also we're retaining the eOne Family Brands portion of the purchase, which is a big value portion of the purchase with big brands like PEPPA PIG. And so that's incremental to 2019 as well. But as Gina states, it's far lower than the run rate we've been on for the last several years.

Right. And then I think there was some prepared remark that said there was momentum with key retailers, so any further color on that would be helpful. Thanks.

Yes. We won't name them by name, but certainly, it's nice to have clean inventories and inventories reduced. If you look at like our top three or four retailers, I feel pretty good about where we're going with them. Some of them are taking still a pretty aggressive stance on inventory management, and so we're working with them. But others are really leaning in and seeing an opportunity to build, share and have great kind of on-shelf availability. And e-commerce continues to gallop forward and consume share in the category. We just had a great Amazon Prime Day. We have had really good discussions with our major retailers around top toys for the holiday. So, I'm cautiously optimistic that you're going to see Hasbro gain share in terms of what our key retailers announced. And we're already starting to talk to them about 2024 and 2025. And with our new management team, I think we've tightened up the innovation muscle quite a bit, and we'll have some momentum going into that year, particularly if we see what folks like Tim Kilpin, who's our new leader of our toy team, has up the sleeve in terms of new product innovation.

Thank you. Very helpful.

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

Good morning. And thanks for the question. I believe you said that Hasbro Pulse, put POS was up 54%. I wonder if you could talk a little bit about that business and size it and talk about some of the growth plans for that.

Yes, sure. And good morning, Eric. Nice to talk. So Hasbro Pulse, as we talked about back in October at our Investor Day, direct-to-consumer is important to us. It's a great way for us to learn from our consumers, see how they shop, see what they want. And our initial efforts are very focused on kind of like that dedicated fan segment. Both what we do for Secret Lair with what we do at Wizards of the Coast, what we do with kind of the D&D fan, the D&D Beyond in terms digital goods, and then Hasbro Pulse is more about kind of like that fan economy segment and that's performed super well. It's a great partnership with, our Disney, business. There's a lot of Star Wars that goes through there. There's a lot of Marvel. There's a lot of super high-end Transformers and Hasbro owned items like the Robosen Auto Transforming Optimus Prime that we released last year, and an Auto Transforming Grimlock that we just recently announced, and a great opportunity for us to sell high-end items. You know, I would scope the business right now in the kind of the $100 million to $200 million range. I think we see significant upside for that. Call it potentially a TAM or a TAM opportunity for double, maybe 2.5x that over the next couple years. And as we start to build critical mass and capabilities in that segment, I think you'll also see us evolve our perspective on what we could do there. We'll start with fan focus and then we'll evolve that and hopefully start going out in concentric circles over time. Respecting the fact that we have a lot of great third-party retail relationships and making sure that we model kind of the mix of products appropriately.

Great, that's helpful. And also, wonder if you could just talk about retailor sentiment as you go – as orders start coming in for a holiday season and how do you think retailers are feeling right now as they think about the last month and a half of the year.

Well, I think it depends on the retailer. We have a couple retailers who are really leaning in and see a shared building opportunity. We have a retailer too who are taking a cautious view towards consumer discretionary as a whole and aggressively managing their inventory. And, I think a little bit of an over under on our guidance moving forward and why we're not raising our guidance and consumer products, it's just making sure that we understand where those retailers are ultimately going to position. I definitely think Q4 is going to be a more traditional Q4 kind of a 2018, 2019. It's going to be very end of the quarter focused. I think Black Friday is going to be important. I think the lead up and the drum beat into Christmas is going to be important. And then also, I think a array of bullishness that we have in the quarter is we have basically an extra couple days is shopping prior to Christmas. And then for our fiscal year, we have an extra week, because we ended our fiscal year last year I think on December 26. So we have a full extra week of potential shopping, which is probably about $60 million to $70 million of incremental POS.

Great. Thank you.

Our next question is from the line of Fred Whiteman with Wolf Research. Please proceed with your questions.

Hey guys, I just wanted to come back to Wizards. And if we think back to the Investor Day last fall, and I totally recognize a lot of this change, but it felt like D&D was a big piece of the plan to double the Wizards business. And if we just think about the film impairment and the softer box office, does that put those targets at risk or is there enough traction and momentum in some other areas to offset that?

No, I mean. Good morning, Fred. I would say, the underlying thesis of our D&D business was all about digital. To me, entertainment's a kicker. It helps to enable broader audiences' exposure to what's traditionally a mid-core to hardcore gaming brand. And what digital allows us to do is kind of take that tabletop role-playing game, TAM, that we have in the world, which is probably about $80 million people who participate in those hobbies and frequent that kind of channel, and take our brand like D&D to 800 million people who play role-playing games. And so, I think Baldur's Gate 3 is just the first of several new digital initiatives you're going to see from us, that span how we can try to transform tabletop role-playing gaming to an even richer kind of theater-of-the-mind experience to more traditional video games from us and partners like Larian.

Makes sense. And then on the supply chain side, it feels like you guys have really emphasized that for the past few quarters. I'm wondering if you could just frame sort of where you see the supply chain today versus where you think it could be, and then maybe what that ultimately means for the consumer products margin over the next few years.

Sure. Good morning, Fred. I would say we're making really good progress within the supply chain. I know that the company has talked about that in previous quarters. This quarter, especially you can see the benefits starting to flow through within logistics. So a lot of the focus from the team has been around our logistics network, how we're planning for inventory, kind of our order patterns, working with our retailers all around inventory and in order management and you can start to see that really play through with the cost savings. We expect that to continue to accelerate as we move into the back half of the year. The overall logistics environment is continuing to moderate, so that will help us as well. So not only do we have a lot of efforts underway in that space, but the overall environment is much more calm than it has been compared to the previous two years. I think our focus moving forward will be there, as well as working with all of our partners and getting a little bit closer to the operation with all of our manufacturers. That will provide another opportunity for us, more so in 2024 than in 2023.

Makes sense. Thanks a lot.

Our next question is from the line of Jason Haas with Bank of America. Please proceed with your questions.

Hey, good morning, and thanks for taking my questions. I was hoping to follow up on some of the numbers that were given earlier in the year regarding some of the headwinds you were facing for the consumer products business. So I recall the expectation or I think at the beginning of the year you had said that there was $135 million of excess retail inventory. So I was curious, apologies if I missed it, but how much of that have we worked through so far this year?

Yes, so I don't have a specific number to quantify the $135 million, but our retailer inventory is down 16% year-over-year. I think we feel like our retailer inventory is at a pretty productive level. I would say that through the balance of the year, our retailer inventory will end the year down, but probably not 16% down. Our own inventory, we still are a little bit elevated versus what we would typically be, but we are down quite a bit versus 2021, about 24% or so. And I think we'll end the year at around that level, both for consumer products and for Wizards of the Coast. And that'll get us to something that's more consistent to like what we ended at 2021 and within range of a more traditional level.

Got it. That's helpful. Another figure, I think it was tied to that, but it was – you had said that there was $300 million of headwinds. I think it was from exited licenses, FX, and then also that inventory. And the expectation was about, you'd see about 60% of that headwind in the first half. So I was curious if that so far has materialized as you had expected.

Yes. If you look at our POS for the first half of the year, we are down high single digits in POS. But when you take out those exited licenses, we're down low single digits. And as we get into the back half of the year, the impact of those licenses lessened because we were – our sell-in was a little heavier as a percentage in the front half of the year. And as we were getting ready to exit them and our retailers were kind of taking their inventory positions down to prepare for other master story licenses to enter. It just makes sense that way.

And Jason, just to add some color on the actual number, I would say of that $300 million, we're about halfway through that with the balance to come in the back half.

That's great. Thank you.

Thank you. Our next question is from the line of Stephen Laszczyk with Goldman Sachs. Please proceed with your question.

Hey, great. Thank you. Maybe for Gina, with this being your first earnings call since getting settled in, I was wondering if you could maybe talk a little bit more about your framework for thinking through leveraging capital allocation on the go forward, especially with eOne – the sale of eOne now behind us. In particular, I'd be curious if you see any incremental opportunities on the investment or capital returns front over the next few years. Thank you.

Sure. Morning, Stephen. Yeah, the sale of eOne absolutely helps us in terms of getting down to our leverage target. So we will use the majority of the proceeds from that sale to pay down our floating rate debt and start getting the balance sheet in a healthier position. As we move forward, as we think about capital allocation, first and foremost our priority is to invest back into the business. Our second priority is then to keep cleaning up that balance sheet and getting that leverage ratio down, and then the third piece is to continue giving money back to our shareholders. Our primary vehicle has been dividends. We've paid out dividends through the first part of the year. We expect to continue paying out dividends in the back half of the year. As we turn the corner to ‘24 and beyond, I think we will most likely add share repurchases back into the mix of capital allocation. But for now, in the near term here, our first three levers are invest, pay down debt, and give back money via dividends.

Got it. And then for Chris, I'm not sure if you've given this metric before, but since you mentioned it around Baldur’s Gate, I was wondering if you could remind us how much money you've made in film licensing over the last five or 10 years? Any approximate sizing would be helpful.

We would have to get back to you, Stephen. I don't have that off the top of my head. It's not tremendous.

Understood. Thank you.

Thank you. At this time, we've reached the end of the question-and-answer session, and I'll turn the call back over to Kristen Levy for closing remarks.

Thank you 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. Hasbro Management will be participating in the Goldman Sachs Communacopia and Technology Conference on September 6. Hope to see you there.

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