Washington,
D.C. 20549
The following is a transcript of Hasbro, Inc.’s first quarter
2022 earnings call held on April 19, 2022.
CORPORATE
PARTICIPANTS
Christian Cocks Hasbro, Inc. - CEO &
Director
Cynthia W. Williams Hasbro, Inc. - President of Wizards of the
Coast and Digital Gaming Division
Darren Dennis Throop Hasbro, Inc. - CEO & President of
eOne
Debbie Hancock Hasbro, Inc. - SVP of IR
Deborah M. Thomas Hasbro, Inc. - Executive VP &
CFO
Eric C. Nyman Hasbro, Inc. - President &
COO
CONFERENCE
CALL PARTICIPANTS
Alok Patel Joh. Berenberg, Gossler & Co. KG,
Research Division - Analyst
Andrew Edward Crum Stifel, Nicolaus & Company, Incorporated,
Research Division - VP and Analyst
Arpine Kocharyan UBS Investment Bank, Research Division -
Director and Analyst
Eric Owen Handler MKM Partners LLC, Research Division -
MD
Frederick Charles Wightman Wolfe Research, LLC - Research
Analyst
Gerrick Luke Johnson BMO Capital Markets Equity Research - Senior
Toys and Leisure Analyst
Jaime M. Katz Morningstar Inc., Research Division - Senior
Equity Analyst
Megan Christine Alexander JPMorgan Chase & Co, Research Division -
Research Analyst
Michael Ng Goldman Sachs Group, Inc., Research Division
- Research Analyst
Stephanie Marie Schiller Wissink
Jefferies LLC, Research Division
- Equity Analyst and MD
PRESENTATION
Operator
Good
morning, and welcome to the Hasbro First Quarter 2022 Earnings
Conference Call. (Operator Instructions) And at this time, I'd like
to turn the call over to Ms. Debbie Hancock, Senior Vice President
of Investor Relations. Please go ahead.
Debbie Hancock - Hasbro, Inc. - SVP of IR
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. Cynthia Williams, President of Wizards of the
Coast and Digital Gaming; Darren Throop, President and CEO of eOne;
and Eric Nyman, Hasbro's President and Chief Operating Officer,
will join for the Q&A portion of the call.
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 and 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 Chris Cocks. Chris?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Good morning. I'm happy to be joining you today to discuss Hasbro's
first quarter results and share the efforts our leadership team are
undertaking to assess the business and strategic direction of
Hasbro. Deb Thomas will speak shortly in detail about our quarterly
performance that supports our view of growth for the year.
In
Q1, our Hasbro teams executed well, growing revenue to $1.16
billion, a 4% year-over-year increase and 7% absent our Music
business, which we sold last year at the beginning of Q3. Revenues
grew in each segment.
One of the standout performers for the quarter was our latest
MAGIC: THE GATHERING release, Kamigawa: Neon Dynasty, which is our
best-selling winner set of all time, beating the prior year set by
28%. Neon Dynasty is the fifth MAGIC set to generate in excess of
$100 million and is our third largest set ever.
Our overall Games portfolio grew 4% and would have been even
stronger. However, we moved our March MAGIC release, Unfinity, to
September to help our supply chain to keep up with robust demand
for the base MAGIC business.
Our
Consumer Products segment also showed growth, buoyed by MY LITTLE
PONY, PEPPA PIG and Hasbro products for the Marvel portfolio and
Star Wars, and our industry-leading entertainment capabilities
drove a revenue increase of 4% or 22%, excluding $31.8 million of
Music revenue from last year. TV, film and animated content drove
the growth, including deliveries of The Rookie, which was just
picked up for Season 5; the premier of Transformers BotBots, which
was a top 10 kids series on Netflix in its first week; and Power
Rangers Dino Fury, which was also 1 of the Top 10 Most Watched kids
shows on Netflix in all markets it launched.
For the full year, we continue to project top line growth in the
low-single digits behind continued strength in our highly
profitable Wizards and Digital Gaming business, which we now see
growing at the upper end of our previously communicated growth
range of mid-single digits with the potential to reach low-double
digits. We continue to expect the Entertainment segment to grow
mid-single digits, absent the Music business. Combined with
low-single digit growth in the Consumer Products segment, projected
growth in Consumer products would be mid-single digits, absent an
approximate $100 million headwind related to Russia.
On
a bottom line basis, since taking over as CEO, our team commenced a
comprehensive review of our strategy and operations. A major theme
of this effort is focus and scale: focusing on fewer, bigger
opportunities and scaling those with reinvestment to drive
profitable growth and enhanced shareholder return. We'll share a
more fulsome update on this strategy at an Investor Day we are
scheduling for October 4, but we are already identifying
opportunities to drive enhanced operating profit across the
company, particularly when coupled with the continued strong demand
we are seeing in our Games business.
For the year, we are increasing our outlook for operating profit
and anticipate adjusted operating profit margins of 16%, a
meaningful improvement versus last year's 15.5%. I'm also pleased
to report, based on the solid profitable fundamentals we see across
our company, starting in Q2, we will resume our stock repurchase
program with a target investment in the $75 million to $150 million
range in 2022.
As
part of this review, Games, Multigenerational Play &
Entertainment and direct-to-consumer will be key focus areas for us
as a company. In 2021, games was a $2.1 billion business for Hasbro
growing 19% year-over-year, generating an OP margin in excess of
30%.
Last week, we announced a deal with Fandom to acquire D&D
Beyond, the premier digital content platform for DUNGEONS &
DRAGONS, for $146 million. The addition of D&D Beyond to our
games portfolio adds a powerful asset to one of our cornerstone
gaming brands. D&D Beyond brings nearly 10 million connected
gaming accounts and a highly profitable, rapidly growing business
into the Hasbro family. With a 3-year CAGR of over 50% and a
projected operating profit margin once combined with Hasbro in
excess of 65% and powerful new growth vectors as part of Hasbro,
including international market expansion, enhanced digital play
experiences, physical digital tie-ins, all new direct-to-digital
exclusive content and new brand partnerships.
We
see a bright future for DUNGEONS & DRAGONS. And we only see
these opportunities growing over time as we invest in an end-to-end
brand blueprint for DUNGEONS & DRAGONS, including blockbuster
films and streaming TV, AAA video games, a major consumer products
push and significant marketing tie-ins. D&D Beyond is more than
just a great business. It will become the digital hub of DUNGEONS
& DRAGONS play that our Brand Blueprint will enhance and
accelerate.
Multigenerational Play is a significant growth opportunity for us.
It may surprise many that Hasbro generates the majority of our
profits among consumers over the age of 13. Much of this is
generated by gaming but also by collectibles and the fan economy,
which are one of our fastest-growing and most important growth
businesses. We see a big opportunity in embracing the agelessness
of play as we unlock more value through play and entertainment
across our portfolio, among our own brands and our strategically
important partner brand portfolio and in the partner IP we work
with for co-brands. Our license partnerships go forward will
further unlock and enhance this profitable opportunity.
As
an example of this approach, we are excited to announce the return
of one of the most beloved sports collectible brands of all time,
STARTING LINEUP. The relaunch of STARTING LINEUP gives us a new
product line to appeal to fans of all ages in a fast-growing
category with many more exciting partnership announcements to come
in the near future. Starting Lineup joins a collection of some of
the most sought-after collectors' brands in the world, including
Fortnite, Disney's Marvel, Indiana Jones and Star Wars and Fantasy
Juggernauts, the Lord of the Rings and Warhammer 40,000.
Our new approach to brand partnerships combines IP with terrific
multigenerational appeal, strong growth profiles supported by
Evergreen AAA games and blockbuster entertainment and a superior
margin outlook. Starting Lineup and D&D Beyond also represent
important investments in our direct-to-consumer capabilities.
STARTING LINEUP will launch exclusively on Hasbro Pulse, our
direct-to-consumer platform and across the Fanatics network this
fall, and D&D Beyond brings the largest online collection of
DUNGEONS & DRAGONS players onto a platform owned and operated
by Hasbro. Combined, they represent both compelling businesses and
a great opportunity to enhance our growing insight into some of our
most lucrative and engaged fans.
Before I turn it over to Deb, I want to welcome a new member to our
senior management team. Shane Azzi is joining us in May as our new
Chief Global Supply Chain Officer, reporting to Eric Nyman,
Hasbro's President and COO. Shane was the SVP and Chief Global
Supply Chain Officer at CPG Powerhouse, Kimberly-Clark and will
help us modernize and streamline Hasbro's back-end operations over
the coming quarters. I'm excited to have a supply chain expert of
Shane's caliber and experience join our executive leadership team
and look forward to his contributions in our ongoing strategy
review as we focus and scale, drive our games business, expand our
Multigenerational Play & Entertainment opportunities and build
out our direct capabilities.
In
closing, Hasbro executed a solid first quarter punctuated by
continued strength in our Games business, particularly Wizards and
Digital Gaming, which we view growing at the top end of our
previous guidance for 2022. We project continued growth in 2022 and
see clear opportunities to enhance the profitability of our
business and invest in new direct capabilities like D&D Beyond,
new collectible platforms like Starting Lineup and enhancing
shareholder value with these strategic investments for growth,
including our share repurchase program.
It's only been a little over 100 days since my announcement in
January, but my hope is you see the same energy and discipline in
these investments and focus on our consumers as we pursued across
the Wizards business for the past 6 years, and we are only just
beginning. Our approach to our strategy review will be
comprehensive, evaluating our brand priorities, our cost structure,
our capital allocation strategy and where we need to position
Hasbro for long-term success and superior shareholder return.
The management team and I are looking forward to sharing more about
our plans to focus and scale at our Investor Day this October. I'd
now like to turn the presentation over to Deb to share more details
about our performance in the first quarter and our outlook for the
year ahead.
We will
follow this up with a Q&A session where Cynthia, Eric and
Darren will join Deb and I on the call. Deb?
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
Thanks, Chris, and good morning, everyone. Coming off a strong
2021, the Hasbro team delivered a good start to the year. We're
excited to have Chris on board, and as he did with Wizards of the
Coast, he's looking at Hasbro with a fresh view to our rich
opportunities and strengths, bolstered by a disciplined approach to
build on the solid foundation in place. We look forward to sharing
more with you as the year progresses and in October at our Investor
Day.
First quarter revenue grew 4% and 6% on a constant currency basis.
Each segment had revenue growth. The brand portfolio categories
grew and TV, film and entertainment was flat but grew 19%, absent
Music.
Our total Gaming category grew 4% versus the first quarter last
year to $379 million. Total Gaming has grown in 10 of the last 12
quarters, reflecting the multigenerational power of connecting
through games. For the full year 2021, our total games category was
over $2 billion in revenue with an OP margin in excess of 30%. We
continue investing to grow our gaming capabilities and
leadership.
At
current exchange rates, we expect full-year revenue growth in the
low-single digits. As we focus on building scale around our largest
and most profitable brands, growing our games portfolio and tightly
manage our fixed cost, we've increased our operating profit growth
guidance to mid-single digits and believe we can achieve 16%
adjusted OP margin.
The first quarter of 2022 experienced the cost pressures we
anticipated and guided to. Higher capitalized input and freight
costs in year-end inventory had a negative impact on gross margin.
Freight costs remain high, impacting both cost of sales and
distribution. Adjusted operating profit was $141.8 million or 12.2%
down from a year ago due to higher product input costs and freight,
the mix of entertainment deliveries in the quarter and the sale of
the Music business mid-2021.
Consumer Products segment revenues grew 5% in constant currency and
grew 3%, including a negative impact of FX of $13.5 million.
Strength in partner brands, primarily Marvel and Star Wars; and
emerging brands, primarily POWER RANGERS and PJ MASKS, led this
growth. Franchise Brands slightly declined due to FX with PEPPA PIG
and MY LITTLE PONY posting good growth. Hasbro Gaming revenues were
flat absent FX. Geographically, revenue grew in the Americas, the
U.S., Canada and Latin America, and declined in Europe. Absent the
impact of FX, European revenues were up.
Due
primarily to COVID-related retail closures and inability to ship
product, Asia Pacific revenues declined 19% with FX not having a
significant impact in these markets.
Adjusted operating profit for the segment declined by $13.4
million. The decreased profit reflects higher product cost and
freight expense. As we have previously discussed, price increases
take effect in the second quarter to help offset higher costs and
support our view to growing revenue low-single digits and improving
adjusted operating profit margin.
Wizards of the Coast and Digital Gaming segment revenues grew 9% in
the quarter. MAGIC: THE GATHERING and DUNGEONS & DRAGONS as
well as DUEL MASTERS contributed to growth. Foreign exchange had a
negative $3 million impact. Tabletop revenues increased on the
strength of Kamigawa as well as growth in DUNGEONS & DRAGONS.
Digital revenues grew by $3.7 million. This reflects continued
growth in last year's MAGIC and DUNGEONS & DRAGONS Digital
Gaming launches. We do not have similar launches this year and will
have more difficult comparisons for the remainder of 2022.
As
Chris mentioned, last week, we announced the acquisition of D&D
Beyond from Fandom. This investment provides a platform for growing
the DUNGEONS & DRAGONS digital business over time, coming in
advance of the brand's deeper activation including a March 2023
feature film and significant consumer product plans. Due to
acquisition costs, the transaction is expected to be slightly
dilutive to EPS, although immaterial in 2022, but accretive in
future years.
Operating profit for this segment declined by $3.6 million or 3% to
40.5%. This is due to higher product costs associated with our
tabletop business both in card stock and printing, increased
freight costs and ongoing head count and product development
investments to support the growing business, both near and long
term. In order to mitigate significantly higher input costs, we
expect to implement price increases midyear. We continue to expect
the second quarter to be the largest of the year but now expect
full year mid-single digit to potentially low-double digit revenue
growth and adjusted operating margin declining slightly from 42.5%
in 2021.
Entertainment segment revenues increased 4% primarily due to
increased deliveries in unscripted and scripted television, the
resumption of live touring shows and higher content sales related
to animated programming. These increases were largely offset by
revenue from the Music business, which was $31.8 million in the
first quarter of 2021. As a reminder, the Music business was sold
midyear 2021. Negative comparison will also impact the second
quarter. Absent Music revenue in 2021, the segment revenue grew
22%.
Foreign exchange had a negative $1 million impact in the quarter.
For the full year, we continue to expect revenue growth, absent the
Music business, in the mid-single digits. Adjusted operating profit
in this segment declined by $20.9 million over 2021 and $12.7
million excluding the Music business. Approximately half of this
decline in operating profit was due to COVID-related cost subsidies
received in the first quarter of 2021, and the remainder is due to
the mix of lower-margin deliveries, particularly in the film and
scripted television business.
For
the second quarter, based on planned deliveries, revenue is
expected to increase over the 2021 period, and adjusted operating
profit margin is expected to decline slightly due to Music profits
in the comparable period. For the full year, adjusted operating
profit margin is expected to be in the high single digits.
Looking at our overall Hasbro P&L, Gross margin, including cost
of sales and program amortization, was 59.5% of net revenues
compared with 65.3% in the first quarter of 2021. As discussed in
the segments, increased input costs and higher freight drove a 2.6
percentage point increase as a percent of revenue and cost of goods
sold, while the mix of entertainment deliveries drove a 3.2
percentage point increase in program amortization.
Based on the expected mix of our business and the timing of price
increases taking place, we expect cost of sales as a percentage of
revenue in Q2 to be slightly lower than Q1, with the full-year
percentage to be in line with full year 2021. Based on expected
deliveries, program amortization as a percentage of revenue is
currently expected to be slightly higher than Q2 2021 levels in the
second quarter and in full-year 2022 at a slightly lower level than
2021.
To
improve product in stocks this holiday season versus last, we're
advancing deliveries of key items in our owned inventory so that we
can ensure it's on hand. This lets us take advantage of best
available rates but with increased shipping times also ensures that
we do not have issues with setting inventory in high consumer
demand periods. Additionally, to ensure we have paper stock on hand
for strong demand in our high-margin growing games business, we've
purchased paper product. Gaming is a strategic growth driver, and
we'll continue to ensure we have the right supply and investments
behind these brands.
Historically, inventory purchases peaked in the August to December
timeline. In 2022, we expect this peak to occur in the May to July
time frame. Higher cost in inventory and an approximately 20%
acceleration in purchases in the first quarter are reflected in our
inventory balance, which is 17% higher than year-end 2021. We
expect to have higher levels on hand or on the water in the earlier
part of the year than historically.
Advertising declines were driven by lower spend in entertainment
with the sale of the Music business as well as lower spend in
Wizards and Digital Gaming for launch support of both Arena Mobile
and Dark Alliance in 2021.
SG&A for the quarter includes higher marketing and sales and
administrative costs associated with salary and benefits in our
commercial and brand organizations, increasing travel costs and
higher freight and warehousing. For the full year, we expect
SG&A as a percentage of revenue to be similar to 2021.
Other income net was $1.8 million. In 2021, the first quarter
included a $25.6 million gain or $0.19 per share from a legal
settlement. Absent that gain, other income was slightly lower
year-over-year.
The
first quarter tax rate was 20.4% of adjusted income. Based on
currently enacted tax law, we continue to expect our full year '22
adjusted rate to be in the 19% to 20% range. The low rate in Q1 of
2021 was due to the legal settlement included in other income,
which did not have a tax impact.
In
our historically and consistently smallest quarter of the year,
adjusted earnings per share decreased year-over-year to $0.57 due
to a combination of continued supply chain headwinds, nonrecurring
events and the shift in the MAGIC release.
At
the end of the first quarter, our cash balance was $1.06 billion
compared with a year-end balance of $1.02 billion and Q1 2021 of
$1.43 billion. Over the last 12 months, we paid down more than $1
billion in debt and returned $376 million to our shareholders in
the form of dividends. Given our cash position and business
outlook, we plan to repurchase $75 million to $150 million of
Hasbro shares this year. We remain on track to achieve our gross
debt to adjusted EBITDA target of 2x to 2.5x in the second half of
2023 or sooner.
Our operating cash flows for the first quarter of $135 million
reflect the advanced inventory purchasing I spoke to earlier and an
increase in accounts receivable related to our Entertainment
business revenue. Our DSO was 73 days compared with 66 days in Q1
2021, when we were only just starting to resume entertainment
deliveries after COVID production shutdowns. Our cash spend on
production for the quarter was $169 million and was largely funded
through the use of our new short-term production facility, which
carries lower interest and administrative costs than those of the
past and the proceeds of which is included in financing cash
flows.
Overall, the team delivered a good first quarter. Our momentum in
strategic growth areas like gaming, coupled with strong product
innovation, a robust entertainment slate and a focus on cost
discipline give us confidence in maintaining our revenue guidance
of low single-digit growth for the full year while increasing our
expectation for adjusted operating profit margin to reach
16%.
We are now
happy to take your questions.
QUESTIONS
AND ANSWERS
Operator
(Operator Instructions) Our first
question will be coming from the line of Eric Handler with MKM
Partners.
Eric Owen Handler - MKM Partners LLC, Research Division -
MD
Wonder if you could talk a little bit about some of the supply
chain issues. Specifically, there's a lot of ships, container ships
right now waiting to dock in -- outside of Shanghai. Wonder if you
could just talk about how that's impacting your views. And is there
any risk there with getting enough product?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Good morning,
Eric. This is Chris. I'm going to turn this one over to Eric, who
can take you through the supply chain situation that we have
overall in the first quarter and what we look at for the outlook
for the balance of the year. Eric?
Eric C. Nyman - Hasbro, Inc. - President &
COO
Thanks, Chris. Eric, I'll really pivot to talk about where our
inventories are because that's, I think, at the heart of your
question. At the start, our Hasbro inventories are in good shape at
the end of quarter 1. We feel good about our position heading into
the balance of the year. Our retail inventories are in good shape
as well. We're up a bit in the U.S., as noted.
Quality is good as we head into our strongest events for the
balance of the year. And I'll just remind you of some of them,
things like Star Wars Obi-Wan Kenobi streaming on Disney+,
Spider-Man Across the Spider-Verse, our new MY LITTLE PONY and
Transformers EarthSpark animation and Wakanda Forever, knowing that
we're in pretty good shape there.
We
feel at this point pretty good, Eric, about our inventories going
into the back half. And I'd also note with regard to supply chain,
as Chris noted and Deb noted, in their upfronts, we're excited to
also have a world-class leader coming in and joining Hasbro as
Shane Azzi is planning on joining Hasbro in May coming from
Kimberly-Clark.
Eric Owen Handler - MKM Partners LLC, Research Division -
MD
Great. And then just a quick follow-up for Darren, if possible.
Darren, so congratulations on The Rookie getting renewed for a
fifth season. That should give you close to 100 episodes at the end
of next year, which should put us in a good position to sell into
the syndicated -- syndication market for TV. I know you're on Hulu,
but wondered if you could talk about maybe some off-network
syndication, how that market is shaping up and where you are with
that process.
Darren Dennis Throop - Hasbro, Inc. - CEO & President of
eOne
Yes, sure. Thanks, Eric. Yes. So great news on Season 5 of The
Rookie. The show continues to trend really well and get viewed
really well. Really, syndication, it turns into -- when we get
those episodes back from the broadcaster, we've got an opportunity
to go back to market and resell them in a packaged format. There's
all kinds of demand right now, Eric. Of course, the streamers are
some of our biggest buyers right now in the networks as well. So
it's a real good opportunity for the group to go back and tap the
market again with a well-loved show. So it's good to see Season
5.
Operator
Our next question is from the line
of Arpine Kocharyan with UBS.
Arpine Kocharyan - UBS Investment Bank, Research Division -
Director and Analyst
I
have 2 quick ones. So for operating profit margin, it seems like
outlook is better. Overall, kind of higher than previously
communicated, which is impressive given sort of what we know about
supply chain and everything that's going on. It seems like Wizards'
margin is slightly lower. I was wondering if you could talk about
what is better to offset that such that your overall margin outlook
is better.
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, we continue to see a positive mix shift in our overall
revenue mix, Arpine. Our games segment has a very nice operating
profit profile. Wizards, we think, is going to grow on the top end
of our range, potentially as high as more of our traditional
double-digit growth rate. And when we couple that with the great
product lineup, the fantastic entertainment and storytelling lineup
that Eric talked about, along with some targeted cost savings that
we're doing across the organization, we feel like we can raise that
operating profit -- adjusted operating profit outlook for the
year.
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
Just to add a bit more detail Arpine as well. As you look at the
business and the cost pressures, we said we would have cost
pressures in our gross margins. For the first quarter, and we did.
Price increases in CP start to hit in the second quarter. Actually,
they've already started, and we'll see those to offset some of
those higher costs as well as our first price increase in MAGIC:
THE GATHERING, in certain sets that come later this year. So as
Chris said, it all balances out that high-growth gaming business
and that focus as well as covering some of the increased costs that
we're seeing will help us get to that margin.
Arpine Kocharyan - UBS Investment Bank, Research Division -
Director and Analyst
That's super helpful. And then just a quick one on POS. I know you
mentioned POS down for Q1, which is not surprising given that
Easter shift. I was curious if you could share, if you have,
year-to-date Easter adjusted numbers that include the first 2 weeks
of POS in April. And then while we are at it, do you have a weeks
of inventory at retail at quarter end handy?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, it's still a little early for a full POS readout on the first
quarter. What we can say is, traditionally, the Q1 is one of our
smallest quarters. We have a fantastic lineup coming up in
following quarters, along with a great entertainment lineup. And we
exited the quarter with POS on the positive upswing. We like what
the trends are, and we see that improving as the year goes.
Operator
Our next question comes from the
line of Mike Ng with Goldman Sachs.
Michael Ng - Goldman Sachs Group, Inc., Research
Division - Research Analyst
Thanks for the question and increased disclosures around Wizards. I
was just wondering if you could talk a little bit about what the
swing factors are for this year to potentially reach the low-double
digit top line growth for Wizards. And then, separately, I was just
wondering if you could talk a little bit about the longer-term mix
of tabletop versus digital and when you need to execute against to
achieve that?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Sure. I will give a very quick answer, and then I'll turn it over
to Cynthia Williams, our new President of our Wizards and Digital
segment. When we look at Wizards, we look at a combination of
MAGIC, both tabletop and digital and D&D and the balance of the
portfolio. And in Q1, and throughout the rest of the year, we see
strength across each of those. And so that's kind of what we're
looking at as we look at the mix. We see our tabletop revenues
being pretty buoyant and actually growing at above our
expectations, and we continue to invest heavily in digital.
Now that said, as Deb mentioned during her upfront, we have a
couple of headwinds on digital in terms of comps. We had a very
successful release of Arena Mobile last year, which has kind of
settled into a more of a mature kind of growth rate. And we also
had Dark Alliance, which was a new video game for D&D that came
out in late June last year. We're not going to be comping those. So
we think our digital growth is going to be a little bit more muted.
But on balance, when we look at the 2, we feel good about where the
Wizards' segment is going. Cynthia, I'll turn it over to you on any
further color commentary to add.
Cynthia W. Williams - Hasbro, Inc. - President of Wizards of the
Coast and Digital Gaming Division
Yes. Thanks, Chris. I think a few things I'd say is we still have 6
additional sets we're going to be releasing this year. Two of those
will be in the second quarter, which will be our biggest quarter of
the year. You've likely seen that we've announced the release of
Streets of New Capenna, which is a new golden age urban setting for
MAGIC. Players will identify with and play as one of the 5 demon
mob families. And beyond Streets of New Capenna, you'll see us
continue to expand the number of formats and reach new customer
segments by expanding our Universes Beyond initiatives, which
brings IP from outside of MAGIC into the MAGIC Play system. We are
excited about Universes Beyond given the success we saw last summer
with the D&D theme set, Adventures in the Forgotten Realm,
which set a summer release record. Deb also mentioned that we're
taking our first price increase in quite a long time on MAGIC,
which will take effect on select card sets starting in July.
Christian Cocks - Hasbro, Inc. - CEO &
Director
And
I'd certainly say that Kamigawa: Neon Dynasty being up 28%
year-over-year and the best-selling winter set of all time is quite
a bullish signal for us. And it should be noted last winter's set
was also the best-selling winter set of all time. So it's record
upon record. Mike, you had a second half of your question. If
possible, could you rearticulate it for us?
Michael Ng - Goldman Sachs Group, Inc., Research
Division - Research Analyst
Yes. I was just wondering if you
had a view on the long-term mix of tabletop versus digital and
whether you see digital becoming an increasing part of the mix.
What are going to be the key drivers to get that mix to where you
want it to be?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Yes. So I would say for this year, we see a fairly stable mix, if
not table actually being a slightly higher mix than it was last
year given some of the comps that we have. And over the mid- to
long term, we see both robust growth in tabletop and digital with
digital as a growing portion of the mix for our Wizards and Digital
segment over time. We don't have a specific goal around what that
percentage mix should be. Both segments are highly profitable gross
margin segments. And so we like growth in both.
Operator
Our next question comes from the
line of Megan Alexander with JPMorgan.
Megan Christine Alexander - JPMorgan Chase & Co, Research Division
- Research Analyst
Just a follow-up on retail inventories. I know you mentioned
they're in good shape, up a bit in the U.S. Are you comfortable
with where they are at this point? I know you talked about later
arrival of spring product. Has that all been set at this point? And
do you think POS is still constrained at all by channel
inventories?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, I would say, in Q1, we actually executed ahead of our plan.
And so we feel pretty good about where we're going into for Q2, Q3
and Q4, which is why we're maintaining our guidance despite some
market headwinds that we and we think the whole industry are
seeing. We believe that the path to great market -- great
performance and great growth is through superior execution and
great products. And as Eric mentioned, we think that inventory is
filled with great products, and it's going to have a lot of
fantastic story-based execution, both from us and our partners at
eOne. As well as our license partners like Disney, which has just a
stacked lineup of entertainment in the second half of this year.
Eric, any further color to add?
Eric C. Nyman - Hasbro, Inc. - President &
COO
Yes. Thanks, Chris, and Megan. I think it bears repeating that we
have a tremendous amount of retail support for the second half of
the year in support of our innovative new Hasbro products, as Chris
mentioned, Megan, including our action brands like TRANSFORMERS,
where we're launching our new Transformers EarthSpark Animation
later this year. We have a big NERF Fest Event planned for
September 9. MY LITTLE PONY and PEPPA PIG, the launch of Starting
Lineup, which we announced yesterday, which we're all thrilled
about bringing back to the pop culture consciousness for fans. And
in addition, we have the industry-leading games portfolio that
Chris noted.
And the entertainment it bears repeating as well. We have this big
Star Wars launch coming up with Obi-Wan Kenobi on Disney+. As I
mentioned prior, Thor: Love And Thunder, Spider-Man Spider-Verse
and Wakanda Forever, all of which lead into 2023, where we have a
great slate, inclusive of DUNGEONS & DRAGONS and TRANSFORMERS:
Rise of the Beast. So as we have our inventory build up, we're
ready for that. And I think that's why we continue to know that we
feel like our inventories are in a good position.
Megan Christine Alexander - JPMorgan Chase & Co, Research Division
- Research Analyst
That's
really helpful. And maybe just a quick one for Deb. You saw some
nice leverage in 1Q on royalties and advertising. Both came in a
little bit better than where the Street was modeling. How should we
think about those 2 lines for the full year?
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
I
think from a royalty standpoint, as Eric mentioned, we are excited
about some things happening later in the year. But as we mix more
to Hasbro-owned products, we talked about the growth in MAGIC and
D&D and some terrific growth that we've seen in MY LITTLE PONY
with the entertainment we have. We expect royalties to be slightly
down year-on-year. From an advertising standpoint, our advertising
is focused on -- as always, on the all-important holiday season.
However, different launches that we have during the year, it was a
bit higher earlier in 2021 due to the Digital Gaming launches that
we talked about earlier and some of the entertainment.
The one thing I would say for Q3, we had a higher advertising
balance because we also had the MY LITTLE PONY movie launch. So
certainly, as we think about entertainment, we would expect that to
be the toughest comp for that segment for the year Q3 because of
that movie launch, and advertising would have been higher in that
quarter as well. But overall, I think we expect advertising in line
to slightly down as a percent of revenue just based on mix for the
year.
Operator
Our next question comes from the
line of Drew Crum with Stifel.
Andrew Edward Crum - Stifel, Nicolaus & Company,
Incorporated, Research Division - VP and Analyst
I
just want to go back to the margin question. Maybe looking ahead to
next year, can you comment on your expectations there? You recently
suggested 16%-plus was the goal. Given that you're targeting 16%
this year, is there any change to your view for next year? And then
I have a follow-up.
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, for this year, certainly,
we're targeting 16%, and our goal is to always see that rise. I'm
going to let Deb take you through a little bit more where we see
the midterm and long-term outlook.
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
Sure. No, absolutely. And as we said at year-end, we believe that
we could get back to 16%. We get asked that question constantly.
And really with the focus on -- focus and scale, gaming, our
Multigenerational Play & Entertainment and -- we are very --
and looking at our cost in great detail. We reiterated guidance
that we'll get to that 16% this year. We haven't set out a
guidance, but we expect growth from that level in 2023 and beyond,
particularly when you look at what we have coming.
I
mean we have -- we're all very excited about DUNGEONS & DRAGONS
and the movie that we have coming early in the year, TRANSFORMERS:
Rise of the Beast and all of our partner entertainment that's
coming as well. In particular, we look at the D&D Beyond
acquisition, which we're excited about. We just said that would be
accretive in 2023 and beyond. It's coming. That acquisition gives
us a great base and player base as we head into the movie, which
will expand the number of people who are out there to play D&D
Beyond. So as we look at our total gaming portfolio and all the
entertainment we have for 2023 and beyond, we're very excited about
what we have ahead of us.
Andrew Edward
Crum -
Stifel, Nicolaus & Company, Incorporated, Research Division -
VP and Analyst
Got it. Deb, and then my follow-up, as it relates to Europe, I just
want to clarify, you mentioned the potential risk of approximately
$100 million from Russia. Are you suggesting that you could
potentially ship to Russia later this year? I just want to
understand that. And has your view of Europe changed in any way? So
this is excluding Russia. Any change in view in terms of outlook
for the year?
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
So we have
paused shipments into Russia, and we've been asked the size of our
business in the past. So we wanted to quantify that for people, and
that is exactly what we're doing. And Eric, do you want to comment
on the remainder of Europe?
Eric C. Nyman - Hasbro, Inc. - President &
COO
Sure. As we think about -- as Deb mentioned, for Russia
specifically, just to clarify again, we've paused all shipments
into Russia. That's a situation that we're all continuing to
evaluate day by day and week by week. With regards to the rest of
Europe, our European business is in good shape. We were up in POS
for the quarter in Europe specifically, and we continue to look
forward to that business continuing to grow and improve.
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
The only item I would add to that is the one thing I just would
point out, I mean, the -- we saw in our European business this
quarter, it was very strong absent FX. And the one currency --
there's really 2 currencies that have significantly impacted us
year-on-year. One is the euro, so a stronger dollar against the
euro. I think it's down about 9% from our average rate for last
year. And then the yen is the other one, which more significantly
impacts our Wizards of the Coast business. But just for Europe, I
look at exchange rates, just could have an impact for us. But on a
constant currency basis, the business is doing very well.
Operator
Our next question is from the line
of Steph Wissink with Jefferies.
Stephanie Marie Schiller Wissink
- Jefferies LLC, Research
Division - Equity Analyst and MD
We
wanted to ask 2 real quick ones on Wizards, and maybe this is for
Chris and Deb together. Just thinking through the revenue
sequencing, you mentioned Q2 is going to be the largest quarter. Q3
has a difficult compare but help us think through just the cadence.
And then the same question on the costs on the investment side. The
margins -- incremental margins have been a bit lower than we would
have expected. So I just wanted to think through the timing of some
of the investments and when you expect to realize the benefits of
those.
Christian Cocks - Hasbro, Inc. - CEO &
Director
Yes. So Q1, we expected it to be a good quarter for Wizards, and it
turned out to be a better-than-expected good quarter for Wizards
despite even moving a release into September. Q2, we expect to be
the biggest quarter that we've ever had because last Q2 was our
biggest quarter as well. So we think that will be comping favorably
based on just the number and quality of releases that we have. Q3,
we also expect to be a significant quarter. But just based on
comping year-over-year and the types of formats that we have
releasing, it likely will be flat to down. And then Q4, we expect
another growth quarter for the business as well. Again, just based
on the nature of the formats and type of releases that we
have.
Deborah M.
Thomas - Hasbro, Inc. -
Executive VP & CFO
And then with respect to the investments, as we look over the past,
we've invested over $1 billion in the Wizards of the Coast and
Digital Gaming business, and it's grown over 150%. We continue to
make those long-term investments. We've talked about the
investments being in talent. We have the opportunity, and we're
very excited to have Cynthia on the call with us today. She's a
great new talent, just one of many, that we've been able to bring
to Wizards of the Coast, and we will continue to make those
investments to drive that long-term profitable growth.
Stephanie Marie Schiller Wissink
- Jefferies LLC, Research
Division - Equity Analyst and MD
Okay. Deb, if I could, just for
clarification as well, the guidance for Wizards does not include
the D&D acquisition. Is that correct?
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
D&D Beyond acquisition is with -- that is within our guidance.
As you recall, they were a good partner of ours before. So we did
have licensing revenue from them. However, as we look to the
future, we expect that to be an even greater benefit as we brought
them into our group. And we have that great talent that came with
the acquisition as well.
Christian Cocks - Hasbro, Inc. - CEO &
Director
We expect the acquisition to close
in mid to late Q2. So our guidance would incorporate Q3 and Q4. And
then a lot of the integration -- meaningful integration would be
back half loaded or into 2023.
Operator
Our next question comes from the
line of Jaime Katz with Morningstar.
Jaime M. Katz - Morningstar Inc., Research Division -
Senior Equity Analyst
First, can
you give us some insight on what you learned in your due diligence
process of the D&D Beyond acquisition and how you might utilize
that to penetrate a broader part of the total addressable market
with Arena?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, when we looked at the D&D Beyond acquisition, we've been
partners with D&D Beyond since they were founded back in late
2017, 2018. They were -- we were the exclusive licensor and they
were a digital distributor for us. So we had a lot of unique
insight into the value of that platform, the growth of that
platform and the nature of the user base on it. And so we've been
in discussions with Fandom for many quarters in terms of bringing
D&D Beyond into the Wizards family. And I think we had some
great discussions. I think we had a really mutually compelling deal
where both sides got a lot of value for the asset. And we see that
asset only accelerating in value under Wizards' ownership.
Having our biggest digital content platform, paired with the actual
content creation team, there's a lot of potential synergies.
There's a lot of international growth vectors we can do. There's a
lot of new exclusive content we can do. We've talked a lot about
Universes Beyond in MAGIC, which is this concept of thinking about
MAGIC as a play system and bringing in outside brands or outside IP
into that play system. We see potential for that with D&D as
well, and we think D&D Beyond can be a primary hub for that.
And then we see a lot of e-commerce and direct opportunities
working in partnership with our Hasbro Pulse team to have physical
digital tie-ins that are unique to the platform.
So
the combination of those business upside opportunities and then
really getting this great tight connection with the 10 million
customers who play on that platform, which is the majority of
customers who actively play D&D, it's a fantastic learning
opportunity for us. And to your point, very similar to what we've
seen with Arena, where we build this relationship with our
customers. It's a great incremental business opportunity and a
fantastic learning platform for us to understand how people are
playing our games, what do they want to purchase and how can we
make our products better.
And I think that's been an important part of our segmentation
approach for MAGIC over the last couple of years, and I think it's
going to become an increasingly important part of our D&D
segmentation and product development approach as well. And to cap
all that off, in 2020 -- March of 2023, we're going to have a
blockbuster film coming out with DUNGEONS & DRAGONS. We have a
lot of streaming entertainment on tap that our eOne team is
planning. We've got a big consumer products push for 2023. And then
we'll add on top of that the 50th Anniversary of DUNGEONS &
DRAGONS in 2024, where that Entertainment, Consumer Products and
gaming momentum will continue. So we see a lot of growth vectors
and a lot of lifts for D&D with the D&D Beyond platform
being central to that.
Jaime M. Katz - Morningstar Inc., Research Division -
Senior Equity Analyst
Okay. That's helpful. And then I'm
sure you guys don't have any comment, but if there's anything you'd
like to share about Alta Fox with us, I'd be curious to hear
it.
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
No. We're here to comment on our
earnings, and we're very focused on that. We will not be commenting
on Alta Fox today.
Operator
Our next question is coming from
the line of Fred Wightman with Wolfe Research.
Frederick Charles Wightman - Wolfe Research, LLC - Research
Analyst
Last quarter,
you had talked about the expectation that the U.S. industry growth
rate would slow or potentially even decline. I'm wondering if you
have any updated thoughts on sort of the full-year outlook.
Christian Cocks - Hasbro, Inc. - CEO &
Director
Yes. Our view on the market is there's a lot of factors at play.
There's inflation that's pinching consumers' pocketbooks. There's
continued supply chain headwinds, and there's a lot of geopolitical
uncertainty in the marketplace right now. Regardless, though, of if
the market goes up or is down or is flat, we believe in focused and
scaled execution. Having great product innovation, coupling that
with fantastic storytelling and just executing the heck out of that
with our channel partners and our general licensing partners
overall. And so we believe that we can grow in any market context,
and that's what underlies our overall guidance for the year.
Frederick Charles Wightman - Wolfe Research, LLC - Research
Analyst
Okay. And then you gave us a little bit of detail just from an
inventory sequencing perspective and how that's going to shake out
for the balance of the year. But do you think that we could
actually see some change in the revenue recognition cadence? Is
that potentially getting pulled forward just based on conversations
that you're having with retailers? Or is it sort of similar from a
cadence perspective on a year-over-year basis?
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
I
think the cadence from selling into our retailers is very similar
year-over-year. We did have, as Eric mentioned earlier, certainly,
as we look at a direct import business, that's coming directly to
our retailers, and it's really their order pattern. They've got a
bit more on the water as well. As they think about that, they may
be pulling in a bit earlier, but we expect the cadence to be very
similar to last year. We want to make sure we have products in our
own held inventory so we don't end up having out-of-stock issues
and that at a very all-important holiday season, and around all
this great entertainment we have coming this year.
Operator
Our next question is from the line
of Gerrick Johnson with BMO Capital Markets.
Gerrick Luke Johnson - BMO Capital Markets Equity Research -
Senior Toys and Leisure Analyst
Getting over a cold so please bear with me. I want to talk about
your partner portfolio. Chris, you mentioned that you're evaluating
brand positioning. And the Disney Princess license and the Trolls
license are going to your primary competitor. Just wondering if
that's a strategic decision to concentrate on your own IP. Or did
you bid on it and miss out? And how should we think about your
commitment to other partner licenses?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, I don't think I'll comment on any specific license or any
specific partner. But in general, as we think about partners and we
think about co-brands, we see that as a continued important part of
our mix. Particularly as you think about our themes of games,
Multigenerational Play & Entertainment and direct-to-consumer
as our big investment areas.
Partner co-brands will be an increasingly important part of that
mix. But dedicated partner lines, like our partner brands, as we
call them today, will also continue to be important. And we'll be
investing across the line on those. In particular, we see a lot of
great opportunities to bring those brands into what we term as play
systems. And those can be gaming play systems or they can be
collectible play systems.
I
think our NERF business and our MONOPOLY business have been
particularly adept at that historically. I think the announced
STARTING LINEUP has a -- is a huge platform for fantastic sports
partnerships across the world. I think our gaming portfolio,
particularly MAGIC and D&D, offer a lot of fantastic
co-branding relationships. And we'll continue to lean into how we
do that on action figures and collectibles across our lineup with
Hasbro Pulse being a real focus area for that.
And
so we think -- when we think about that kind of perspective, Games,
Multigenerational Play and Direct, we see a lot of growth
opportunities for partners in our mix. And importantly, we see a
superior operating profit margin associated with that as
well.
Gerrick Luke Johnson - BMO Capital Markets Equity Research -
Senior Toys and Leisure Analyst
Okay. Great. And Deb, you
mentioned price increases have already started. It might be early,
but what are you seeing in terms of elasticity of demand from the
consumer?
Deborah M. Thomas - Hasbro, Inc. - Executive VP &
CFO
Well, it's early. They just started, and we don't have a lot of
that POS data and as we spoke about now. But really, we're looking
to take those price increases on the product just to cover our
cost. And we've been very thoughtful about what we increase. We
continue to try to engineer a product if we can take -- if we can
change a few things to give better value to the consumer at the
lower price, we continue to do that.
Right now, Gerrick, we're facing, and I'm sure you've heard about
it, paper allocations and card stock allocations. So we're trying
to acquire some of that ourselves, so we don't have an issue. But
as we look to it, we've been very, very thoughtful about taking
price increases to not hurt the consumer and to not have elasticity
issues with that in all of our product lines. It's not just the CP
Group. It's also impacting our Wizards of the Coast business
through MAGIC and D&D and DUEL MASTERS as well.
Operator
Our final question today is from
the line of Alok Patel with Berenberg Capital Markets.
Alok Patel - Joh. Berenberg, Gossler & Co. KG,
Research Division - Analyst
I wanted to ask about the 16%
operating margin target. What's built into that target? Is the
improvement being driven by price measures outweighing cost
headwinds or a favorable shift in the sales mix?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, I think I'll open this up to everyone on the call, but I'll
give you a general thematic. A lot of it is sales mix, the type of
products that we're driving. And again, I'll go back to the themes
of Games, Multigenerational Play & Entertainment and Direct are
things that we're definitely leaning into, and we see superior
operating profit margin outlook for. And then we also are
evaluating our business, evaluating our structure and evaluating
where we're making investments. And we've seen some cost savings
opportunities and reinvestment opportunities in higher-margin
businesses as a result of that. So when you take those 2 factors
into play, we -- it gives us confidence in raising our outlook for
our adjusted operating profit margins for the year.
In
terms of pricing, pricing is ultimately up to the retailer at point
of sale. And most of our pricing outlook really is to cover costs,
both in terms of freight as well as the bill of materials.
Alok Patel - Joh. Berenberg, Gossler & Co. KG,
Research Division - Analyst
Got you. That makes sense. Just a quick follow-up. So as you guys
kind of shift towards becoming a more digitalized gaming-oriented
company, how does that kind of alter the historically recessionary,
resilient nature of Hasbro? I guess, bringing it another way,
Wizards of the Coast and Entertainment, how resilient are those
segments in an economic downturn compared to Consumer
Products?
Christian Cocks - Hasbro, Inc. - CEO &
Director
Well, Wizards of the Coast has grown for, I think, 12 out of the
last 13 years. And that growth spurt started in 2008, 2009. And so
we see games as pretty economically resilient. And generally
speaking, we see the toy industry as being a proven economically
resilient industry to economic headwinds.
Operator
Thank you. At this time, we've
reached the end of the question-and-answer session. I'll now turn
the call over to Debbie Hancock for closing remarks.
Debbie Hancock - Hasbro, Inc. - SVP of IR
Thank you,
Rob, and thank you, everyone, for joining the call today. The
replay will be available on our website in approximately 2 hours.
Additionally, management's prepared remarks will be posted on our
website following this call. Thank you.
Operator
This will conclude today's
conference. You may disconnect your lines at this time, and thank
you for your participation.
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