Hasbro's Senior Manager of Investor Relations, Kristen Levy, opened the Second Quarter 2023 Earnings Conference Call by introducing Chris Cocks, Hasbro's Chief Executive Officer, and Gina Goetter, Hasbro's Chief Financial Officer. Levy reminded listeners that forward-looking statements may be made during the call and that there are many factors that could cause actual results or events to differ from expected results. Levy also noted that today's guidance assumes that Hasbro will retain the non-core Entertainment Film and TV Business, despite the recently signed agreement with Lionsgate to sell it.

Hasbro has entered into an agreement to sell their eOne Film and TV business to Lionsgate for $500 million, with $375 million of it being cash and the remainder being production financing loans. Hasbro will use the proceeds to retire debt and for other general corporate purposes. After the sale closes, Hasbro Entertainment will be the new marquis for their entertainment efforts, with the mission of developing, financing, and producing entertainment based on Hasbro-owned brands.

Hasbro has retained a team of creative development and business affairs experts to shepherd the various Hasbro-based projects in development, such as TRANSFORMERS and GI JOE franchises, PLAY-DOH, D&D, MAGIC: THE GATHERING and their board game portfolio. The sale of eOne is a milestone in Hasbro's transformation, and in the second quarter, Hasbro made progress against their goals. Hasbro delivered better than planned operating results for the second quarter, and POS in the quarter was at or ahead of market. According to Circana, the G9 global toy and game market declined 7% through year-to-date June.

Hasbro has seen success in three of its five focus categories, Action Figures, Arts & Crafts, and Games. Hasbro Pulse has seen a 54% increase in point of sale, and Transformers: Rise of the Beasts has driven an 83% improvement in TRANSFORMERS POS. MAGIC: THE GATHERING has launched its biggest release in history, and D&D has generated nearly 2 million new registered users. Monopoly Go has been number one in downloads in many countries, and Hasbro has saved over $84 million in cost savings. Hasbro has reduced its inventory by 24% and retail inventory by 16%. Despite headwinds, Hasbro is maintaining its Consumer Products segment guidance and raising its Wizards of the Coast and Digital Games segment guidance, while lowering its Entertainment segment guidance.

D&D is expecting a strong second half of the year, driven by the upcoming release of Baldur's Gate III and the success of FURBY. The company is also introducing new products, such as Star Wars: Young Jedi Adventures, TWISTER AIR, NERF DOUBLE PUNCH, and Barbie MONOPOLY, which are expected to help drive sales. Additionally, the company is making improvements to its supply chain and cost structure, and the new leadership team is bringing a more disciplined approach to operations and product innovation. Overall, D&D is expecting to see improved margins and sustained growth over the mid and long term.

Hasbro reported a 10% revenue decline in the quarter due to normalization of inventory, lapped exit of licenses and markets, and fewer planned releases for Wizards of the Coast. The Entertainment Segment revenue was down 3%, primarily due to the exit of non-core businesses. Adjusted Operating profit was down 43%, due to inventory close-out costs and an impairment taken on Dungeons & Dragons: Honor Among Thieves. 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.

Hasbro's revenue for the second quarter of 2023 is down 12% compared to the same period last year due to declines in their Consumer Products segment and planned timing shifts across entertainment. Adjusted Operating Profit is down 52% due to higher costs associated with clearing inventory and the D&D film impairment, resulting in adjusted EPS of $0.49. Franchise Brands are down 5% in the quarter and year-to-date, but TRANSFORMERS and DUNGEONS & DRAGONS have seen an uplift due to movie releases. Partner Brand revenue is down 21% due to licenses exited at the end of last year, but sales of Hasbro products for SpiderMan by Marvel have increased significantly since the release of Spiderman: Across the Spider-Verse.

In the second quarter of the year, the volume decline and mix of business had the biggest impact on the operating margin, resulting in a 670 basis point decrease. The company has prioritized cleaning up their portfolio and reducing inventory levels, resulting in higher-than-normal close-out costs. Additionally, higher royalty expense and one less MAGIC release within the Wizards Segment caused an unfavorable mix in fixed cost absorption impact. Through the first half of the year, the company has achieved $84 million in gross cost savings, which have allowed them to reinvest back into the business. Additionally, since beginning the cost savings program in 2022, there have been $104 million in gross savings. Finally, a $25 million impairment on the D&D film caused a negative 280 basis point impact in other items.

The company saw a 16% reduction in inventory across all segments, primarily due to a 24% reduction in the Consumer Products segment. The Wizards of the Coast and Digital Gaming segment revenue was down 11%, and the Consumer Products segment was down 11%, driven by planned licensed exits, Toy and Game volume, pricing and mix, and Licensed Consumer Products. The Entertainment segment declined 3%, partially offset by 3% growth in Film and TV.

Hasbro, Inc. reported a 14% increase in revenue, driven by content sales, and announced the sale of its eOne Film and TV business to Lionsgate. The second quarter included a $25 million production asset impairment charge. Year-to-date, the company has repaid $91 million of long-term debt and spent $112 million on capital expenditures. The 2023 guidance is updated to reflect the writers' and actors' strikes on the eOne Film & TV business, with total Hasbro Inc. revenue expected to be down 3-6%. The Consumer Products Segment is expected to be down mid-single digits.

Wizards of the Coast is expected to deliver high single digit revenue growth, while Entertainment revenue is expected to decline by 25-30%. Adjusted Operating Margin is expected to be up 20 to 50 basis points, with $150 million of in-year cost savings from the operational excellence program. The company is expecting to generate $600 million to $700 million of operating cash flow and will use the cash from the sale of the eOne Film & TV to pay down debt and return excess cash to shareholders.

Hasbro recently announced the sale of its Film & TV business, which has had an approximate $0.50 negative impact on earnings per share for the second quarter and is expected to have an additional $0.10 to $0.20 negative impact on the full year. As a result, Hasbro has withdrawn its earnings per share guidance for the year. Despite this, the core business is making tangible progress and is expected to improve balance sheet health and drive value for shareholders, partners, and fans.

Chris Cocks and Gina Goetter provide an update on Wizard of the Coast's digital strategy, discussing the success of Magic and the launch of Lord of the Rings. They also mention their digital licensing portfolio and the progress of Baldur's Gate and Monopoly Go. They note that Lord of the Rings is an evergreen set that should reach $200 million within seven months of its release. They also discuss their digital strategy going forward, mentioning eOne's departure and their internal studio.

Chris Cocks of D&D provides an update on the company's strategy of working with license partners while also investing in their own internal studio development and publishing capabilities. He highlights the potential of Baldur's Gate 3 to be a game of the year contender and a great financial win for the company. He also states that the focus is on the gaming part of the company, with the emphasis on higher margin gaming revenue outlook.

Gina Goetter explains that the decrease in margin guidance from 30-60 bps to 20-50 bps is due to an impairment charge in the D&D segment and the Film and TV segment. She also states that the core business is doing well and margins are better than expected. Furthermore, she explains that the $0.50 cents of headwind from TV and Film is partially offset by the run rate, interest expense, and cost savings down the road.

Chris Cocks and Arpine Kocharyan had a discussion about the $0.70 headwind to earnings per share due to the entertainment segment. Gina Goetter then answered a question from Jaime Katz about the size of the entertainment business after the sale of eOne. 85% of the segment is being divested, leaving the remaining 15% embedded in the new view of entertainment. Production costs were not discussed in relation to 2019 levels.

Chris Cocks explains that Hasbro will be investing in co-productions with Paramount, such as a Transformers One animated film and a D&D TV series, as well as retaining the eOne Family Brands portion of the purchase, which includes PEPPA PIG. He also mentions that Hasbro is having positive discussions with major retailers around top toys for the holiday season and that they had a successful Amazon Prime Day, leading him to be cautiously optimistic that Hasbro will gain share in the category.

Hasbro Pulse, a direct-to-consumer platform, has been successful in selling high-end items such as Star Wars, Marvel, and Transformers products. Currently, the business is estimated to be between $100 million and $200 million, but Hasbro expects to double or even 2.5x that in the next couple of years.

Chris Cocks discusses the different attitudes retailers have towards the upcoming holiday season, ranging from those who are leaning in and seeing it as an opportunity to those who are taking a more cautious approach. He notes that the quarter will be focused on the end of the quarter, Black Friday, and the lead-up to Christmas, and that there is an extra week of potential shopping due to the end of the fiscal year.

Fred Whiteman asked Chris Cocks about the impact of the film impairment and the softer box office on the goals to double the Wizards business. Chris Cocks explained that the underlying thesis of their D&D business was all about digital, and that digital allows them to take the tabletop role-playing game to 800 million people who play role-playing games. Fred Whiteman then asked Gina Goetter about the supply chain and how it is progressing. Gina Goetter replied that they are making good progress in the supply chain, and that the benefits are starting to be seen in the logistics.

The team has been focusing on their logistics network, order patterns, and inventory management to save costs. The logistics environment is also more calm than it has been in the previous two years, and they are looking to get closer to their manufacturers in 2024 for further cost savings. Chris Cocks reported that retailer inventory is down 16% year-over-year, and their own inventory is down 24% compared to 2021.

Gina Goetter, on her first earnings call since taking her position, discussed her framework for capital allocation going forward. She mentioned that the sale of eOne is now behind them and that there may be additional opportunities for investment or capital returns in the next few years. Jason Haas asked for clarification on the $300 million of headwinds from exited licenses, FX, and inventory, to which Chris Cocks and Gina Goetter responded that they are halfway through that figure and the balance will come in the second half of the year.

Gina Goetter and Chris Cocks from Hasbro discussed their capital allocation strategy, which includes investing back into the business, paying down debt, and giving money back to shareholders through dividends. Stephen Laszczyk asked for an approximate sizing of their film licensing revenue over the past five to ten years, but Cocks was unable to provide an answer. The replay of the call will be available on their website in two hours and their prepared remarks will also be posted. Hasbro will be participating in the Goldman Sachs Communacopia and Technology Conference on September 6.

The speaker concluded the conference and thanked participants for their involvement. They invited them to attend a future event and then invited them to disconnect their lines.

This summary was generated with AI and may contain some inaccuracies.