The Hasbro Fourth Quarter Full Year 2023 Earnings Conference Call began with an introduction from the operator and a welcome from Kern Kapoor, Senior Vice President of Investor Relations. CEO Chris Cocks and CFO Gina Goetter then discussed the company's performance and answered questions from participants. The earnings release and presentation slides were posted on the Investor website and included information about non-GAAP adjustments and measures. A reconciliation of GAAP to non-GAAP measures was provided. Management also made forward-looking statements, but reminded listeners that actual results may differ due to various factors.

In 2023, Hasbro implemented a strategy of Fewer, Bigger, Better to focus on play and drive profitability. They took action to improve their balance sheet, including closing a deal with Lionsgate and reducing debt by $400 million. They also shifted to an asset light and partner-led model for their entertainment strategy, resulting in a $1 billion impairment. As a result, inventories are down over 50% from the previous year.

In order to improve profitability, Hasbro has made changes such as exiting low-profit businesses and driving cost savings. They plan to reinvest in their business, improve cash flows, and return cash to shareholders. The company has had success in their Wizards and Digital Gaming division, but the toy industry is still facing challenges. Hasbro is focused on turning around their consumer products business and investing in long-term momentum in games. They also plan to expand their franchises through digital games. While Hasbro's retail inventory is in a healthy position, there is still a lot of older discounted inventory in the market.

In the upcoming year, the consumer will remain value conscious and entertainment may not be as strong of a factor due to a reduced box office slate. The company has made necessary cost-cutting measures and has invested in consumer insights and design to improve their product portfolio. They anticipate at least keeping pace with the industry and expect their innovation and share trends to accelerate in 2025. The company has seen success with products like FURBY and TRANSFORMERS and will continue to focus on creating great products, with plans to celebrate the 40th anniversary of TRANSFORMERS and the 20th birthday of PEPPA PIG with new products and entertainment specials.

The Play-Doh team plans to continue innovating and collaborating with other brands in the arts and crafts category. They also have new products and collaborations planned for their action figures, including a partnership with Disney for Marvel Superheroes. They are excited for the launch of a new Beyblade product and have new innovations planned for their blaster category. Board games will also be a focus, with a renewed effort to expand genres and work with top designers to introduce new games.

In 2024, Hasbro will have a strong year for gaming, including adult party games, family card games, and popular titles like Monopoly. Wizards and Digital also had a successful year in 2023, with record-breaking sets like The Lord of the Rings: Tales of Middle-Earth. Despite tough competition, they have highly anticipated sets coming out, such as Fallout and a new commander-focused Universes Beyond product line. Hasbro's digital licensing partners have also seen great success, with Monopoly Go! becoming the number one mobile game launch in the US and Baldur's Gate III winning awards and receiving high ratings. Additionally, D&D will be celebrating its 50th anniversary with new adventures, core rulebooks, and digital offerings.

In 2023, Hasbro announced a major update to their fifth edition of Dungeons and Dragons, with new artwork, classes, and mechanics. They also plan to collaborate with other entertainment brands and showcase their team's capabilities. Despite challenges, Hasbro had significant successes, such as launching a top toy and winning a Game of the Year award. They also streamlined their business and paid off debt, making them stronger for 2024. Gina, the speaker, will now provide more details on their financial results and guidance for the future.

In the fourth quarter, the company successfully sold its eOne Film and TV business, reducing debt and freeing up capital for higher growth initiatives. This sale also resulted in a noncash impairment charge of $1 billion due to a change in business strategy for family brands. The company also took aggressive actions to reduce excess inventory, resulting in a 50% decrease from the previous year. This will lead to improved operating margin and cash flow, as well as annual savings of $10 million from exiting overflow locations. However, this cleanup had a near-term impact of a $130 million noncash charge to operating income.

In the fourth quarter, Hasbro saw a 23% decrease in revenue compared to the previous year. This was due to planned business exits, category declines, and a focus on clearing inventory. The company also had a $50 million adjusted operating loss, primarily driven by nonrecurring charges. However, for the full year, Hasbro's revenue was within their stated guidance range, with growth in Wizards of the Coast and Digital Gaming revenue. Consumer products revenue declined due to planned business exits and inventory management.

Despite a tough category backdrop, Hasbro saw growth in some of its toy brands, but overall revenue declined by 31%. The company's 2023 adjusted operating profit and net earnings were down by 48% and 44%, respectively, due to nonrecurring expenses and lower revenues. Hasbro also saw a working capital benefit of $350 million and reduced debt by $500 million. The company plans to focus on reinvigorating innovation and driving operational rigor in order to achieve sustainable profitable growth.

In 2024, the company plans to improve profitability and innovation by focusing on fewer, bigger, and better brands. They have already eliminated 50% of their SKUs and will be transitioning to an out-license model for certain brands. They are also streamlining their supply chain and improving efficiency in product design and manufacturing processes. This will result in higher margins and a better play experience, with a focus on NERF and Play-Doh.

In order to improve inventory levels and decrease expenses, Hasbro is implementing new processes and tools within their supply chain and organizational structure. They are also focusing on enhancing their consumer insights, revenue growth management, and marketing effectiveness. For 2024, they are forecasting a decline in total Wizards revenue, primarily due to the strong growth in 2023. However, they are expecting growth in D&D and flat to down revenue in MAGIC due to the absence of the Magic Lord of the Rings set. MAGIC is expected to return to growth in 2025.

In 2024, the revenue from Baldur's Gate III will decrease but will be offset by the success of Monopoly Go! Wizards operating margin is expected to increase due to a favorable mix shift, lower royalty rates, and cost management. Consumer products revenue will decline due to planned business exits and prevailing category trends, but the company plans to grow share and increase innovation in categories such as Hasbro gaming, Beyblade, Play-Doh, FURBY, and NERF. They also plan to adopt a more agile approach to marketing and improve revenue trends throughout the year. A key focus for the year is improving the profitability of toys.

Hasbro Inc. is forecasting improved operating margins for the upcoming year, with a range of 4% to 6%, which is 500 to 700 basis points higher than the previous year. The increase is primarily due to the lap of nonrecurring inventory charges, but is offset by anticipated volume declines. The company also expects margin expansion from favorable product mix, supply chain cost savings, and operating expense reductions. The Entertainment segment will see a decrease in revenue due to the eOne divestiture, but operating margin will improve due to expense reductions and lapping the impact of a previous impairment. Hasbro Inc. is also increasing their gross cost savings target through 2025 to $750 million, with half of the savings going towards improving profitability and the rest being reinvested into the business for growth initiatives. As a result, the company forecasts EBITDA of $925 million to $1 billion, a significant increase from the previous year.

The company is expecting positive results in 2024 due to a reset in cost structure and lack of one-time inventory cleanup. They plan to invest in growth initiatives and pay down debt, while also remaining committed to returning cash to shareholders through dividends. The company expects their Consumer products business to return to low single-digit growth and Wizards to return to mid to high single-digit growth. They are aiming for a 20% operating margin before 2027. The CEO concludes by stating that the turnaround for their toy business is still in its early stages.

The company is expecting some challenges in the near future but is confident in their strong foundation and the work done to improve their balance sheet and inventory. They thank their team for putting fans first and are focused on execution. The retail situation in the US and Europe is looking good, with a 20% decrease in inventory from last year. However, there is still discounted merchandise in the market that may take some time to work through.

The company has a good inventory position and is working to improve profitability in both North America and international markets. MAGIC and D&D were both growers for the company last year, and D&D's growth is expected to continue due to similar contributors as last year.

The speaker clarified that they expect consumer products to be flat in the third quarter and then grow in the fourth quarter. They also mentioned that they are expecting NERF to grow again, and they are taking into account a shorter holiday calendar next year.

During the fourth quarter of 2023, there was a lift in sales due to clearance sales. The company expects steeper declines in the first and second quarters of 2024, but stabilization and growth in the fourth quarter. The NERF brand will contribute to this growth, along with other strong innovations. The specific lift from closeout sales is not known, but overall closeout volume and revenue was consistent with the previous year. The launch of Beyblade X and new Play-Doh products are expected to drive sales in the back half of the year.

The company is expecting a good Q4 for their board games and has a lineup of new releases throughout the year. Last year, five out of six premier sets for their MAGIC brand made over $100 million. This year, they expect flat to slightly lower numbers for the brand. They also have smaller Universes Beyond sets coming out, with the first one being Fallout in March. In 2025, they will have two premier Universes Beyond sets, with the first one being Final Fantasy in the first half of the year.

The speaker discusses partnerships with brands such as Marvel and expects an increase in premier sets for MAGIC. A question is asked about EBITDA and the speaker explains that there will be a one-time benefit offset by a decrease in volume, but supply chain productivity and cost savings will help in 2024.

The speaker discusses the positive aspects of their business, including the continued shift to digital, higher profit volume, and growth in their D&D brand. They also mention the negative impact of revenue decline. The speaker confirms that the previous guidance of $500 million for D&D business over a three-four-year period still holds.

Megan Alexander asks Gina Goetter to provide more details about the revenue guidance for consumer products. Goetter explains that their assumption is that their shipments will align more closely with point-of-sale (POS) numbers, and the guide gives an indication of how they are thinking about the macroenvironment. She also mentions that their cost savings are estimated to be around $500 million by the end of the year, with no significant savings seen last year. She adds that there may be some cost inflation, particularly in areas like freight and product materials.

The speaker discusses the inflation rate of 3% embedded in their guide, with labor being the biggest driver. They also mention seeing inflation in resin and fuel, but believe they have cost productivity to offset this. They expect a net cost saving of $200-250 million between supply chain cost productivity and managed expenses. The following question asks about the cadence of digital games for Wizards of the Coast beyond 2024, to which the speaker responds that they cannot provide any specific information but they expect a mix of mobile and traditional PC/console games.

In the next few years, there will be one major new digital game published in 2026, and potentially one to two in the following years. The licensing business is expected to grow each year as new licensors are added and games like Monopoly Go! become more profitable. The mix of licenses tends to be more mobile and casino gambling focused. The goal of the Universes Beyond sets with Marvel and Final Fantasy is to target new audiences and attract new players to the franchise. The Lord of the Rings was the most successful product in bringing in new players.

The speaker mentions that they expect the same or greater success for IPs like Lord of the Rings and Marvel in the future. They also mention that they have completed the brand pruning process and will be focusing on creating new brands. The cost savings are split evenly between cost of goods sold and SG&A, with a small portion going towards royalty expenses. The speaker also mentions that they will announce any remaining brand deals within the next month or two.

In response to a question about the industry's performance, Chris Cocks, a representative from a toy company, stated that the industry was down about 12-13% in Q4 of 2023, and expects it to continue declining in the first half of 2024. However, they anticipate a return to low single digit growth in the second half of 2024 and beyond, with potential for even higher growth due to their company's innovation and marketing efforts. They attribute the current downturn to a post-COVID correction and plan to regain lost market share in certain regions.

Jason Haas asks for more information on the contributions of Baldur's Gate III and Monopoly Go! in the fourth quarter of 2023. Gina Goetter explains that Monopoly Go! only contributed the minimum guarantee in revenue, while Baldur's Gate III brought in around $90 million for the year. In 2024, the tail end of Baldur's Gate III's sales will still bring in revenue, but not as much as in the previous year. However, Monopoly Go! is expected to perform well and potentially offset the decline in Baldur's Gate III sales. Overall, digital game licenses are expected to be flat year-over-year. Linda Weiser asks a question, but it is not specified in the paragraph.

Gina Goetter, a representative from a company, discusses the cash flow and dividends for 2024. She mentions that operating cash flow will be slightly down compared to 2023 due to inventory benefits and increased capital expenses. The ending cash will be relatively flat or slightly down, and the company does not expect to have negative free cash. She also mentions that the cash taxes paid will increase and the company will spend around $100 million on cash restructuring. The interviewer brings up the idea of cutting the dividend to improve the company's finances, but Goetter does not mention any specific leverage targets for the future.

The speaker responds to the idea of reducing the dividend to pay off debt faster, stating that the company remains committed to their capital allocation strategy and believes that fixing the business will free up their ability to meet their targets. They also mention being cautious with their industry projections and having tools and levers to manage any potential challenges.

The company is confident in their capital allocation priorities, which include investing in the business for long-term growth, giving money back to shareholders, and achieving their long-term deleverage targets. During the Q&A session, they were asked about their medium to long-term margin opportunities and their CapEx plans. The company remains committed to reaching a 20% midterm margin target and believes that volume and innovation will have the biggest impact on their margin growth. They also have a good line of sight to the margin targets for this year.

The company expects their margin to grow in the future, but the speed of this growth will depend on their ability to overcome challenges related to growth. They are investing in digital games, with half of the investment going towards their Wizards business and the other half towards their toy business and infrastructure. These investments are seen as foundational to the company's future and are expected to continue for the next three to five years, creating value for the company.

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