Hasbro Inc (HAS) — Q3 2021 Earnings Call Transcript

Thank you. Good morning, everyone. Joining me today are Rich Stoddart, Hasbro's Interim Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Rich and Deb providing commentary on the company's performance, then we will take your questions. Our earnings release and presentation slides for today's call are posted on our Investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures, which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Our discussion will be based on adjusted results, which exclude several items associated with the eOne acquisition outlined in our release today. Please note that whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share. Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, in today's press release, and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. I would now like to introduce Rich Stoddart. Rich?

Thank you, Debbie and welcome to everyone joining us today. I'm Rich Stoddart, Interim CEO at Hasbro. Before we officially begin the remarks on the call today, I want to take a moment to reflect on the passing of our beloved leader and friend, Brian Goldner. I know many of you share in our sadness for his untimely passing. Brian was not only an accomplished CEO, he was a true visionary who transformed an almost 100-year-old toy and game company into a leading global play and entertainment company, but his impact can be felt well beyond Hasbro. He changed the game completely. He believed in the power of a story, seeing the potential for omnichannel storytelling and content built on powerful brands. He architected a compelling road map for Hasbro's growth in the Brand Blueprint strategy, and was so proud of where it has taken Hasbro, but even more so in its power and future potential now with eOne as an integrated part of the family. I had the privilege to work together with Brian and the Hasbro team for the last seven years, and serve on the company Board, most recently as Lead Independent Director. During that time, the company transformed its talent, its culture, its brands, and its potential as it executed the Brand Blueprint. In my new role as interim CEO, I will continue to work with a talented leadership team Brian put in place over the last 13 years, along with the powerful culture at Hasbro to supercharge the blueprint and build on the company's strong momentum. Hasbro is performing at a high level and with a clear, well-understood strategy. To ensure our success continues, I will be focused on five key priorities: supporting the amazing people at Hasbro; ensuring they have what they need to succeed while advancing our purpose-driven culture; executing the Brand Blueprint. This strategy is central to continuing Hasbro's transformation as a global play and entertainment company. We are beginning to see the full Blueprint execution come to life with significant potential to grow revenue and profit in the years ahead. Accelerating the growth of our Entertainment and Wizards of the Coast businesses, where we have unique and distinct advantages in the market and a differentiated business model relative to our competitors, delivering the guidance established for the year while helping the organization manage through supply chain challenges and continuing to drive strong cash generation in the business to pay down debt and fund the dividend. This should sound familiar to many of you as it is what the leadership team has been focused on as well. It's fitting that the strong third quarter results reflect the power of the Blueprint with significant growth in Entertainment as it returns to pre-pandemic levels, with another strong quarter in both tabletop and digital gaming from Wizards of the Coast, and with only a small decline in our consumer products business as we work to meet robust demand for Hasbro brands despite supply chain disruption. The diversification of the business enabled us to deliver a very strong quarter with 11% revenue growth, 6% adjusted operating profit growth, 5% gains in adjusted EBITDA and earnings and to generate significant cash. Deb will speak shortly in more detail to the third quarter performance. A clear proof point of the Brand Blueprint strategy and the omnichannel storytelling opportunity for our brands is in the success of the CGI animated feature, My Little Pony: A New Generation, which debuted on Netflix September 24. In its first weekend, the movie reached number one on Netflix in the kid's top 10 across 86 countries. It also reached the number one spot for movies, regardless of genre or target demographic in 20 countries, including the UK, Germany, Brazil and Mexico. The success of the film was made possible by the collaboration and partnership of the talented brand teams at Hasbro with the teams at eOne, who together created a beautiful engaging film for fans around the world to enjoy. The film's success is also a testament to their agility to successfully market and launch a picture originally planned for theatrical release, on a streaming platform. The movie success builds deeper connections with consumers, driving incredible engagement on social media across Instagram and TikTok. The brand's relaunch powered by an all-new main five cast of Ponies drove revenue growth for the franchise for the second straight quarter and the first positive quarter since the fourth quarter of 2017. Third quarter point-of-sale momentum began to rebound as the merchandise tied to the brand introduction and movie began to hit shelves. In the four weeks leading up to the movie, POS was up mid-single digits globally, and the week following the movie resulted in global POS gains of more than 150%. This trend has remained very strong in the weeks following. The movie launch was further supported with a robust licensing program, including a dedicated MY LITTLE PONY shop on Amazon and cross-category campaigns at several major global retailers. We've seen a favorable response from retailers and consumers, and the entertainment plan is only beginning as we are supporting the film with a robust content roadmap from eOne, including Netflix specials and new series as well as digital content in the coming year. Another significant milestone this quarter was the launch of Hasbro's PEPPA PIG and PJ MASKS toy and games lines in markets around the world. Brought into the Hasbro portfolio via the eOne acquisition, these brands significantly strengthened Hasbro's presence in the pre-school market. We developed deep lines for each brand as well as expanding their licensed consumer products presence. Each of these launches are off to strong starts and contributed to growth in the quarter. But they, among many other brand campaigns were limited in their upside in the short-term due to the supply chain challenges global companies are facing. In the third quarter, we had orders for approximately $100 million, which did not shift by quarter end. The vast majority of this has already been delivered in the fourth quarter. These factors were more than offset by the contribution of our entertainment business, which is up substantially versus last year's third quarter, and up versus 2019, as well as the continuing momentum in the Wizards of the Coast business. Through our differentiated strategy, they delivered the revenue and profit growth for the quarter. As we look to the fourth quarter and the holiday season, there was strong demand for Hasbro toys and games. We are expertly managing the supply chain to ensure the shelves will be filled with Hasbro products this holiday. As a result, we believe we will grow revenue in the fourth quarter through the combination of our three business segments, and deliver full year double-digit revenue growth in the range of 13% to 16%, along with adjusted operating profit margins in line with last year's adjusted rate of approximately 15%. Before turning the call to Deb, I want to touch briefly on the plan for naming a permanent CEO. Our Board is and always has been actively engaged in succession planning for the CEO and other senior executive roles. This work provides a strong foundation for the naming of a new long-term leader for Hasbro and is well underway. Until that time, I am working closely with the outstanding group of talented individuals making up our senior management team. In addition to Deb, joining me today for the Q&A portion, we have Chris Cocks, President and COO of Wizards of the Coast and Digital Gaming; Eric Nyman, Chief Consumer Officer and COO of Hasbro Consumer Products; and Darren Throop, CEO of eOne. Now I'll turn the call over to Deb.

Good morning, everyone. On behalf of Hasbro employees globally, I would like to thank Rich for stepping up at this time for us, our Board, our shareholders and our company. The past couple of weeks have been difficult for all of us at Hasbro. Brian is missed, but the impact he made is unmistakable. We heard from so many of you remarking on Brian's leadership and your positive personal interactions with him. Thank you for sharing these memories with us. Brian empowered me and the executive team to run Hasbro and together we are, and we'll continue doing that. Brian was proud of our third quarter results. They showcased the strength of Hasbro's unique business model with growth in Entertainment and at Wizards in both tabletop and digital gaming. Our results also show the strength of our global teams as they expertly manage through supply chain disruptions and position us for growth in the fourth quarter and for the year. Brian believed as we do in investing to grow to unlock Hasbro's full potential and create value for our shareholders. Our priorities remain the same and we are executing against those priorities. The quarter highlighted our focus on deleveraging our balance sheet as we repaid an additional $400 million of debt, bringing our year-to-date total to $972.5 million of long-term debt retired. We also paid the dividend, which has been maintained following the eOne acquisition and throughout the pandemic. At quarter end, cash on hand was $1.2 billion and we are toward our goal of returning to our target of two to two and a half times debt-to-EBITDA and maintaining our investment-grade rating. For the quarter, revenue grew 11% versus last year and 6% versus pro forma 2019. MAGIC: THE GATHERING, MY LITTLE PONY, PEPPA PIG, and PJ MASKS were among our largest revenue gaining properties globally in the quarter, further supported by significant Entertainment deliveries. These include MY LITTLE PONY: A New Generation for Netflix, Yellowjackets for Showtime; Fear the Walking Dead for international markets; Come from Away in Finch for Apple TV, as well as the rookie for ABC. Entertainment segment revenues grew 76%, with gains in scripted and unscripted television, live-action and animated film, and animated content. This performance has us well on the way to reach 2019 levels of Entertainment revenue for the full year, excluding the music business over the second half of the year. The segment delivered adjusted operating profit of $42.1 million or 12.9% operating profit margin, up from an adjusted loss of $3.6 million last year. We're developing over 200 projects across film and TV, including content for over 30 Hasbro brands for the coming years. Year-to-date through September, we've invested approximately $526 million in content development and continue to anticipate a full year spend range of $675 million to $750 million. For the fourth quarter, we have significant deliveries planned including Grey Male, a new scripted program for Netflix; additional episodes of the Rookie and Yellowjackets, and the films Clifford: The Big Red Dog and Mrs. Harris Goes to Paris. Wizards of the Coast and Digital Gaming segment revenues increased 32%, and Wizards had a great third quarter, and we expect the business to deliver its goal of doubling from its 2018 revenue by the end of 2021, two years ahead of plan. Magic: The Gathering and Dungeons & Dragons led this growth, both in the quarter and over the past few years, with gains in both tabletop and digital gaming revenues. It was the second largest quarter in Wizards' history behind only Q2 of this year. Among the Magic releases in the quarter, our third quarter premier set adventures in the Forgotten Realms launched July 23 and became our first co-branded premier set. Sand’s of both Magic and Dungeons & Dragons embrace the product, and it's on track to be our best-selling summer release of all time. Importantly, our digital investments are driving revenue growth. Magic: The Gathering Arena Mobile continues to grow. It's a meaningful source of new players, and our releases were bolstered by their engagement in the game. Our licensed Digital Gaming business also delivered strong growth in the quarter. Operating profit in the segment increased on the higher revenues, investments in future game development and support of new game launches as well as increased digital gaming depreciation, reduced operating profit margin from last year. Consumer products revenue declined 3%. There is strong demand for our brands, but we were unable to fulfill approximately $100 million of product we had orders for during the quarter. Including these missed shipments, revenue would have increased 5%. In September, we shipped the most volume ever domestically in a single month. And through today, we've shipped the majority of what we didn't deliver in the third quarter. This achievement is remarkable given it was accomplished in the middle of a global pandemic, with unprecedented supply chain challenges across the globe. As we shared last quarter, we took steps early to mitigate risk, including activating alternate ports in China and the US, expanding our shipping capacity, working closely with customers to provide support where we can, and prioritize supply based on inventory and customer needs, and in certain instances using air freight to ensure delivery. The team has done an amazing job and continues to work non-stop. Global point-of-sale declined mid-single digits. As we improve our in-stock levels and see the effects of a significant increase in advertising spend and auto buy execution, we expect significant improvement. Within consumer products, Hasbro Gaming revenues grew in the quarter, led by demand across our gaming portfolio and Emerging Brands revenue was up, fueled by our toy and game launches of Peppa Pig and PJ Masks. In our franchise brands, Rich already spoke to the success of My Little Pony, and how this positions us well in the relaunch of the brand. Transformers revenue increased in the quarter. The final chapter of the War for Cybertron Trilogy launched July 29 on Netflix, driving continued demand in our generation fan product. We also celebrated a new milestone for the Transformers franchise, when Universal Studios, Beijing opened Transformers Metro base, the first-ever Transformers-themed land. In partnership with Paramount, production on TRANSFORMERS: RISE OF THE BEAST continues for theatrical release next summer. Partner Brand revenue declined, but Hasbro products for the Marvel portfolio grew, including Marvel Legends and the new pre-school product line launch supporting Spidey and His Amazing Friends. We also introduced new products to support Marvel Studios Disney+ Series, and the theatrical release of Marvel Studios, Shang-Chi and The Legend of The Ten Rings. Blockbusters revenue increased with the primary launch of the toy line in August for the feature film GHOSTBUSTERS: AFTERLIFE from Sony Pictures coming to theaters November 19th. Operating profit for the Consumer Products segment decreased $15.8 million, reflecting the lower revenue and incremental expense for freight and related costs. Price increases to mitigate the higher expenses in shipping and input costs went into effect in most markets in August, and will be fully implemented for the fourth quarter. Looking at our overall Hasbro P&L, gross margin, including cost of sales and program amortization, declined 130 basis points. This reflected essentially flat cost of sales dollars. Given favorable mix and growth in entertainment, cost of sales declined 340 percent of revenue. The robust entertainment revenue growth drove an associated increase in program amortization of 470 basis points. Product development increased $17 million, led by incremental investments in future tabletop and digital games at Wizards and our ongoing commitment to innovation across the business. Advertising expense increased $26 million, including promotional activity and support of the MY LITTLE PONY movie and advertising behind new Wizards game launches. We have aggressive advertising plans for this holiday season, shifting more dollars this year into the fourth quarter to drive point-of-sale. We will, however, closely match this expense with inventory availability. Adjusted SG&A increased $35 million, and continues to reflect higher expenses as the business returns to pre-COVID levels. This includes higher freight costs, incremental marketing and sales expense; increased depreciation associated with capitalized digital games and increased compensation. Despite these higher expenses, SG&A remained flat as a percentage of revenue. The adjusted underlying tax rate for the quarter was 23.4% compared to 19.9% a year ago. The rate is mainly driven by a change in the mix of income. We continue to expect the full year underlying rate to remain at approximately 21%. Our balance sheet is strong. In addition to our cash position and lower debt, DSOs were 68 days, a reduction of five days compared to Q3 2020, reflecting both higher revenue and good collections despite shipping a large volume of product late in the quarter. Inventory increased slightly year-over-year but declined absent FX. At quarter end, we have less finished goods on hand than typical and significantly more in-transit inventory. In general, total transit times have nearly doubled across all lanes. And on certain lanes, transit times are as much as 50 days longer compared to pre-pandemic levels. Our strong third quarter and year-to-date performance has us on track to meet our guidance for double-digit revenue growth, which we now are expecting in the range of 13% to 16% for the full year and maintaining an adjusted operating margin of approximately 15%. We have orders to support the high end of the revenue growth range but there are supply chain factors out of our control, which could impact our ability to fully achieve the upside. I am incredibly proud of how the organization has come together this year. Despite many obstacles, our results showcase the strength of our business, our strategy, and our team. Our leadership team is now happy to take your questions.

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

Thank you, Steph. I truly appreciate your kind words. Brian's impact went beyond Hasbro; he influenced a great many people. As I mentioned earlier, the search for a permanent CEO is not just starting now. The Board has consistently considered succession as part of its responsibilities. The groundwork they have laid will serve as a strong base for appointing a new long-term CEO, and that process is actively progressing. I want to emphasize that our commitment to the Blueprint as Hasbro's strategic direction has never been stronger. What you witnessed this quarter is merely the start of what the Blueprint can achieve for our company. I would like to clarify that this phase is not a final destination for Hasbro but rather a new beginning. It's an opportunity for the Blueprint to demonstrate its value. Therefore, the ideal leader should be someone who is not only a fantastic supporter of our team, company, and culture, but also someone who can further develop and advance the Blueprint’s vision.

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

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

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

Thank you for the question, Eric. I know this is something you've been inquiring about for a while. I want to emphasize what the team has previously stated: mobile and digital gaming, along with tabletop gaming, are not in competition with each other nor are they distinct entities. They actually form an ecosystem that enhances each other. We are continuing to grow Magic Arena, and the mobile platform plays a crucial role in attracting new users to it. Simultaneously, tabletop participation is also on the rise. This reflects the strength of our expanded omnichannel experience. Chris, would you like to add anything to Eric's question?

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

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

Chris, do you want to take that?

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

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

Sure. We discussed the product delivery, and I can confirm that most of the $100 million that shifted from Q3 to Q4 has already been delivered. Currently, 40% of our inventory at the end of the quarter was in transit, so that's now available for shipping. We're excited about the opportunity, as we have many items on the way. We'll continue to utilize air freight this quarter, and our team has done an excellent job ensuring that our shelves are stocked with Hasbro toys and games for the holiday season. However, this has increased some costs, and we plan to invest more in advertising to ensure consumers are aware of our products. Consequently, some expenses will be higher, which is why we believe our gross margin will align more closely with pro forma 2019 than with 2020. We expect strong deliveries from our Entertainment segment and a favorable mix from Wizards of the Coast, while our consumer products business faces some cost pressures as well. All these factors highlight the strength of our portfolio and advanced business strategy. Our three business segments work in harmony to support our revenue growth and achieve operating profit margins near last year's level of about 15%. Furthermore, we maintain our medium-term guidance, believing there’s potential for operating profit margins to exceed 16%. We are making progress toward that goal, while handling some short-term challenges that many others are facing. So overall, our direct import business, we do expect it will be around similar levels to a year ago. I will say with the supply chain issues that the world is facing, our customers aren't immune to that as well. And we've been working very closely with them to ensure they have the product they need on shelves at the right time. As a matter of fact, partnering with them, if we can get containers and they can't, for example. So overall, I think our direct import business may be down a tick from a year ago, but overall in line, not significantly different.

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

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

Thank you. I apologize for the error; I meant to refer to the leverage target instead of investment grade. Are there any specifics we should consider regarding the timing of spending on programming over the next few quarters that could help us understand how that cost metric may fluctuate?

We still expect our spending to be between $600 million and $750 million for the full year, likely closer to the higher end based on our current position. This spending will contribute to revenue in future years, as well as some this year. We have significant deliveries planned for the fourth quarter. Darren, could you share more details about these deliveries and what we have in store for 2022?

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

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

Good morning, Fred. You're right, everyone is experiencing rising input costs at the moment. Recently, we've noticed a slight decrease in those costs. Fortunately, our Consumer Products line introduces new items every year, allowing us to adjust our products to meet specific price points. Nonetheless, we anticipate that the cost inflation we've encountered will persist for some time. Inflation is affecting most markets, and I've noticed that grocery prices have increased. Therefore, many industries are navigating similar challenges. However, we have the capability to refresh the majority of our product line annually, enabling us to reduce costs as we do so. We've been collaborating closely with our manufacturing partners to ensure they have the necessary components to produce our products effectively. Our priority is to ensure they are made correctly and priced suitably for the market.

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

For the fourth quarter, we are experiencing rising costs since implementing our price increases. This includes the costs associated with air freight and shipping, which many have discussed regarding the supply chain challenges. This situation will exert some short-term pressure on our margins. The full effect of our price increases will be realized in the fourth quarter. Nonetheless, we are confident that our overall gross margin, which factors in program amortization and reflects our deliveries in both the Entertainment sector and the growing digital segment of our Wizards of the Coast business, will align with our 2019 levels, leaning more towards 2019 than 2020.

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

Thank you, Gerrick, and I appreciate your kind words. We are grateful for everyone's support, especially yours. Thank you for the thoughtful notes; they truly meant a lot to us all. We are thrilled about Peppa Pig and PJ Masks. We began shipping products for both brands in the third quarter. Some supply challenges affected those lines, but they are now on the way. Since we started shipping in the third quarter, we anticipate a more significant impact in the fourth quarter. We estimate the total impact for the year will be between $75 million and $85 million, and we are on track for that. Peppa and PJ together have operating profit margins similar to our franchise brands, generally in the high teens to low 20s. We are very excited about these brands. Our consumer products business is fully integrated now, and we will continue to work with external licensing partners next year and beyond. There are some lines we won't manage ourselves, but we have excellent licensees handling those. We have successfully integrated most of that business and expect to see more integration in 2022. We are really excited that Peppa and PJ are part of the Hasbro family.

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

Chris, why don't you take that?

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

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

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

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

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

Yes. The first thing to note is that retailers determine the pricing. Those price increases went into effect in August, and we are now seeing the full impact of that pricing in the fourth quarter. Deb, do you have anything to add?

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

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately two hours. Additionally, management's prepared remarks will be posted on our website following this call. Thank you.