Hasbro Inc (HAS) — Q2 2022 Earnings Call Transcript

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 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 Chris Cocks. Chris?

Thank you, Debbie, and good morning. Since our first quarter earnings call, the executive leadership team and I have been undergoing a multi-month strategic review of the business. While the review is still in process, it's already clear we're an organization with a bright future, led by an unmatched brand portfolio that spans fans of all ages; an industry-leading gaming business, which is a top investment priority for us; a growing direct-to-consumer business and unique assets in entertainment creation, all knitted together by talented global teams working with a clear sense of purpose and value creation. We see big opportunities to scale our Franchise Brands, drive all new play platform innovation and transform our operations to improve our agility, focus, and profitability. Games, digital, expanding the age ranges of our portfolio, and harnessing direct connections with our consumers are all compelling growth opportunities for Hasbro. We'll share more about our plans in October at our Investor Day, but I'm energized with what we have accomplished to date as we focus on driving long-term profitable growth and environmentally responsible, sustainable business and superior shareholder returns. While we've been advancing our long-term strategic work, our teams have been busy delivering a strong second quarter with 4% revenue growth absent foreign exchange, 14% adjusted operating profit growth, and 200 basis points of margin expansion, adjusted earnings per share of $1.15, and 6% growth in adjusted EBITDA. Deb Thomas will speak to our results in more detail, but let me share a few highlights. Revenues grew for Consumer Products and the Wizards and Digital Gaming segments. Entertainment segment revenue was down in the quarter, mostly due to the timing of deliveries, but is up year-to-date absent the Music business we sold last year. As we projected in our Q1 earnings call, Wizards delivered its biggest quarter ever in Q2, successfully comping last year's Q2, our prior record. Tabletop revenues grew 15%. MAGIC: THE GATHERING led with 11% revenue gains and is up 10% year-to-date. For the first time in history, every major set this year has crossed $100 million in sales. The underlying business and demand for MAGIC remains strong. And we continue to expect the Wizards business to grow at the high end of our beginning-of-year forecast, a range of high single digits to low double-digit year-over-year growth on a constant currency basis. In the quarter, our overall games portfolio grew 2% or 4% in constant currency. We enhanced an already powerful portfolio during the quarter, completing our acquisition of D&D Beyond to bolster our direct digital platform for DUNGEONS & DRAGONS, adding key capabilities in two areas of focus: gaming and direct. We expect the acquisition to be immaterial this year and accretive to EPS in 2023 and beyond. As we forecasted, our digital revenues were down for the quarter and are expected to be down for the full year as we comp both Dark Alliance for DUNGEONS & DRAGONS and Magic: The Gathering Arena's mobile launch last year. Digital remains an investment priority for Hasbro. Arena is entering its fourth year of availability since its open beta in 2018 and is a profitable vital platform for new player acquisition in MAGIC. Later this year, the game will be available on Steam for the first time, and in 2023, we expect to launch on major consoles. D&D Beyond is in the early stages of integration into our Wizards business, and we are pleased with the early results. We expect D&D Beyond to be a growth platform, particularly as we turbo-charge the DUNGEONS & DRAGONS brand with blockbuster entertainment, digital games, and consumer products in 2023 leading into the brand's 50th anniversary in 2024. We also expect several exciting new game announcements in the coming quarters across D&D, MAGIC, and new brands we have in development. The Consumer Products segment revenues grew behind gains in several Hasbro brands, including PLAY-DOH, PEPPA PIG, POWER RANGERS, and MY LITTLE PONY, as well as Hasbro products for the Marvel portfolio and Star Wars. As we look to the remainder of the year, we have innovative new initiatives and are in a much better position this year versus last with inventory at retail and on hand at Hasbro to mitigate supply chain disruptions and meet demand. Retailers increased direct import orders by approximately $60 million in the second quarter versus our plans, taking product earlier to ensure availability and proactively manage the supply chain. While our inventory levels are up year-over-year at the end of Q2, the inventory is of high quality, positioning us to meet consumer demand and promote our new product innovation aggressively. For instance, our early read on our first of two Prime Days at Amazon last week is positive with consumer deal takeaway up 20% year-over-year. Our newest game announcement, Wordle: The Party Game, is off to a record start for gaming preorders. As such, we expect inventory by year-end to be approximately flat year-over-year and to see reductions in on-hand supply by the end of Q3. Our Entertainment business is up year-to-date and on track for full year revenue and profit margin growth absent the sale of the Music business last year. With over 200 projects in development across film, scripted and unscripted television, the eOne team is working on over 35 development projects for Hasbro brands, including content for Transformers, MAGIC, D&D, PEPPA PIG, MY LITTLE PONY, POWER RANGERS, and PLAY-DOH, among many others. Last week, we received seven Primetime Emmy Award nominations for Yellowjackets, including Outstanding Drama Series. We are in production on Season 2 with deliveries slated to begin later this year. In Q2, we delivered Season 4 of another hit show, The Rookie, for ABC. This fall, The Rookie will return for Season 5, and previous seasons will begin syndicated broadcast in the U.S. ABC also ordered a spin-off, The Rookie Feds, to series where it is set to premiere September 27. As we look to the full year, we began 2022 with what we felt was an appropriately measured outlook for growth that reflected a challenging economy, and we're maintaining our guidance. We continue to expect low single-digit revenue growth in constant currency as we see exchange rates, particularly in the Eurozone, as a potential headwind that Deb will speak to further. We are prioritizing profitable growth and expect adjusted operating profit to grow faster than revenue as higher-margin product lines, including games, grow at a faster rate combined with cost savings we have identified in our business. Our target remains a 16% adjusted operating profit margin for 2022 versus 15.5% last year. The team and I are looking forward to sharing with you our long-term plans and vision at our upcoming Investor Day on October 4. We've spoken with many of you over the past several months, and we've taken to heart your excitement and feedback. We remain laser-focused on producing profitable growth, articulating our updated vision, continuing to drive industry leadership in sustainability and governance, and positioning Hasbro to deliver superior total shareholder return over the long-term. Put simply, our aim is to do good while we do well. I'd now like to turn the call over to Deb to share more details about our performance in the second quarter and our outlook for the year ahead. Deb?

Thank you, Chris, and good morning, everyone. Our second quarter results have us on track to achieve our full year guidance, including low single-digit revenue growth in constant currency, operating margin expansion to 16%, and operating cash flow at the low end of the $700 million to $800 million range. The second quarter, the team delivered revenue growth, margin expansion, and $1.15 in adjusted earnings per share while returning $221 million to shareholders through our quarterly dividend and share repurchases and adding an important growth engine to both our gaming business and our direct-to-fan capabilities with the acquisition of D&D Beyond. Importantly, we proactively managed our supply chain and inventory purchases to mitigate disruption. We're much better positioned to meet demand this year versus last. This action resulted in higher-than-typical inventory levels at Hasbro for this time of the year. To avoid the out-of-stock positions of the last year's holiday season due to supply chain disruptions, retailers also shifted some consumer product direct shipments into the second quarter from the third quarter. Both our inventory and that at retail is of extremely high quality. We have product to meet demand, including significant new releases in MAGIC: THE GATHERING and in our toy and game business. Based on our plan to drive point-of-sale growth in the second half of the year, we believe we will end the year with inventory levels similar to year-end 2021. While product and freight costs are up, we're beginning to see a reduction in port congestion delays. And lead times have come down, although they remain twice as high as historical levels. We also have begun to see the offset to higher input and freight costs from price increases in our Consumer Products business that went into effect in the second quarter and will be increasingly impactful in the third and fourth quarters. Price increases also went into effect at the beginning of July for select MAGIC: THE GATHERING sets and will begin to be reflected in results in the third quarter. As Chris spoke to, we are managing costs and finding efficiencies in our business, leaning into the theme of focus and scale. We have already begun to identify and see some of this work reflect favorably in our results. In the quarter, we more than offset the 230 basis point decline in gross margin with lower and more efficient spending. This included a 170 basis point decline in advertising to revenue primarily from lower spending on digital gaming launches and no longer supporting the Music business sold in 2021. Adjusted SG&A to revenue reflects the 180 basis point reduction driven by lower compensation and depreciation as well as the sale of the Music business. This was partially offset by higher costs associated with our annual meeting. Intangible amortization includes an incremental $900,000 from the acquisition of D&D Beyond. We anticipate $4.7 million this year and $7.5 million next year in amortization expense associated with the acquisition. Adjusted operating profit grew 14%, driving 200 basis points of margin expansion to 18% of revenue. Below operating profit, interest expense declined $4.5 million as we progress toward achieving our debt to adjusted EBITDA target of 2x to 2.5x in the second half of next year, if not sooner. The underlying adjusted tax rate, excluding discrete items, was 21.6% versus 23.2% last year. And we expect the full year rate in a range of 20.5% to 21.5%. Looking at our segments, Wizards of the Coast and Digital Gaming revenues were up 5% absent foreign exchange. This was led by a 15% increase in tabletop revenues. Digital Gaming revenues were down 36% as planned, reflecting the year-over-year comparison to the 2021 Digital Gaming launches of Dark Alliance and Magic: The Gathering Arena on mobile. Total MAGIC: THE GATHERING revenues grew 11%. Operating profit in the segment increased 17% to 53.7% of revenue. We continue to invest to grow Wizards for the long term, including in Digital Gaming and talent. Cost of sales increased behind higher paper and freight costs. And we continue to pre-purchase paper stock to help meet our printing needs for future set releases. Operating margin improvement reflected both revenue growth and lower costs from Digital Gaming launches and depreciation and advertising as well as lower compensation accruals this year versus last. The team remains on track to deliver high single-digit to low double-digit revenue growth for the year and operating margins that are down from last year but remaining above 40%. Consumer Products revenue grew 9% absent foreign exchange. In constant currency, North America revenues were up 11%. Europe was flat. Latin America revenues were up 38%, and Asia Pacific was up 1%. Of the $19.1 million negative impact from foreign exchange in the segment, $14.9 million of it was in Europe. For the first time in 20 years, the euro and the U.S. dollar are now at parity. And the euro is our largest international currency. If we look at the back half of our year, we expect this to have an additional negative impact to Consumer Products revenue of $30 million to $40 million versus our expectations as we enter the year. Given hedges we have in place, we expect less of an impact on operating profit. The other item impacting results is Russia. For the full year 2021, our revenue in Russia was $115 million, with approximately 70% earned in the second half of the year. We will not have this revenue and associated operating profit in 2022. From a brand perspective, each brand portfolio category in the segment, Franchise Brands, Partner Brands, Hasbro Gaming, and Emerging Brands were up in the quarter. Our products for Marvel are on track for another tremendous year with strong growth in the quarter and year-to-date. New entertainment releases and innovation are driving this business. PLAY-DOH, PEPPA PIG, POWER RANGERS, PJ MASKS, MY LITTLE PONY, and Hasbro Gaming titles were among the Hasbro brands driving quarter growth. Higher product and freight costs were partially offset by price increases taken at the beginning of the quarter. Adjusted operating profit was $3.1 million, down $14.7 million, reflecting these higher costs as pricing will phase in during the coming quarters. Our full year view for Consumer Products remains low single-digit revenue growth in constant currency, with operating margins flat to up slightly from last year's 10.1%. Entertainment segment revenues reflect the 2021 sale of the Music business and timing of deliveries. Segment revenue, absent Music, declined 4%. And our view for growth in the year remains unchanged. Our Film & TV business was down 10% as deliveries shifted between quarters, and Family Brands revenue was down slightly absent foreign exchange. With the lower deliveries, program amortization declined, and the mix of revenue is favorable. Adjusted operating profit increased more than 100% to $23 million or 12.4% of revenue. For the full year, we continue to expect revenue growth in mid-single digits and operating profit margin expansion from 8%, both absent the Music business sold last year. As you think about the full year, the third quarter is the most difficult comparison for our business. Retailers placed more direct import orders in Q2 of this year than planned, about $60 million more of Consumer Products revenue. In Wizards, we're up against a more difficult release slate and could see a flat to slightly down quarter, as we've discussed with you previously. And Entertainment delivery timing is unfavorable in the third quarter, including comparisons to several film releases to streaming platforms last year, including My Little Pony: A New Generation, Finch and Come From Away and a heavier slate of scripted TV deliveries in Q4 this year versus Q3 last year. We also expect many retailers to return to a more traditional promotional calendar with more holiday activations in the fourth quarter. Our cash balance was $628.2 million compared to $1.2 billion in last year's second quarter. During the quarter, we spent $146.3 million for a highly strategic acquisition, $97.4 million in dividends, and we resumed share repurchases totaling $124 million. We have paid down $50 million in debt and remain committed to investments in talent, innovation, and key strategic initiatives. Our operating cash flows for the first half of the year were $147.8 million and continue to reflect the advanced inventory purchasing I spoke to earlier. Days Sales Outstanding were flat with last year at 59 days. Our expectation is that inventory will end the year around last year's levels and that will generate operating cash flow toward the low end of our targeted range. Our plan continues to have us returning to approximately $1 billion in operating cash flow next year. As we head into the second half of the year, we are in a strong position to meet demand and to deliver the year. While economic conditions are challenging, we took that into account in our full year plan. Our businesses, toys, games, including MAGIC, and content are historically very resilient during down economic periods. Importantly, we've made significant progress in our strategic review. We look forward to speaking with you during the coming weeks and seeing many of you in New York on October 4 for our Investor Day. We are now happy to take your questions.

One of the things you've been highlighting of late has been the fan collectibles segment. And I'm curious to get your sense of what's the size of this market and sort of the overall expected growth of this industry? And then what's Hasbro's share in that business, your growth potential over the next several years and sort of the key drivers of that incremental growth?

Hey, Eric, thanks for the question. Yes, we see the fan economy, in general, as a huge growth area for us. It's one of our fastest-growing categories overall. And I really think you can think of the segment as multiple segments put together. There's kind of classic fan collectibles like plastic figurines and action figures. There's sports memorabilia, and then there's a very wide trading card industry that deals with both playable trading card games like MAGIC as well as sports card trading games. Over the last couple of years, this has been probably our fastest-growing segment of the Company, and we continue to be very bullish on the sector. It's a highly resilient sector in terms of down economic times or up economic times. It tends to be focused and concentrated on a target consumer with a very high discretionary income. And it's a passion-driven industry. So people are very engaged in it. On your specific question on kind of sizing, I'm going to turn that over to Eric a little bit to give you kind of a little bit of a sense of where we see it going and what we think our key initiatives are. Eric?

Thanks, Chris. So with regards to market sizing, which is a part of your question, as Chris mentioned, there's a lot of different dynamics at play and different ways to look at it. In the collectibles business, we anticipate through our research it to be about $4 billion to $5 billion in overall market size. So it is a very sizable market. Our momentum continues. We don't break out our share publicly, but we can say that with our Hasbro Pulse platform as an example, we were up 69% in the first half of the year. So we have good, strong momentum that we expect to continue throughout. And we also had some great launches. This week, you'll see at San Diego Comic-Con some really incredible new innovations from the team. One piece of that, which we're really excited about, we talked about it last week, is called Hasbro Selfie series, which allows you to basically put yourself on your shelf and turn yourself into an action figure. So we expect that to be a very strong new innovation for Hasbro as we launch this week.

We have two questions. Chris, the first one is for you, just on helping us dimensionalize the Wizards of the Coast business between MAGIC and D&D. I think you've said in the past that you expect incremental growth to be coming from D&D over time. So share with us a little bit about the size of that business relative to MAGIC and what your expectations are? And then if you could just remind us what percentage of the Wizards business is domestic. And is there a big international opportunity? And then just a quick clarification for you, Deb, on the program amortization. Can you help us think through back half Q3 versus Q4? We just want to make sure we're modeling that line correctly going forward. Thank you.

Thank you for the questions. Wizards of the Coast is a significant and essential part of our business. It has been a major growth factor for the Company. We've experienced a strong first half of the year in the Wizards segment, with a growth rate of 5%. We remain optimistic about reaching the higher end of our projected growth range, which is between upper single digits to lower double digits for the full year. In terms of our business structure, Wizards is heavily focused on MAGIC, which constitutes approximately 70% to 80% of our overall business. Additionally, the D&D and MAGIC brands are primarily centered in North America, where around 75% of our total sales occur in the U.S., Canada, and Mexico. We see numerous growth opportunities in both areas. Europe has emerged as a key growth market for the MAGIC brand, and we just began localizing D&D products internationally this year, presenting a significant opportunity for D&D Beyond to expand outside North America. Currently, over 85% of D&D Beyond's registered users are based in the U.S. or Canada, indicating substantial growth potential. Looking ahead, we view the tabletop industry as vital and strong, as evidenced by the 15% growth in our tabletop revenues in Q2. We believe there is great potential to further develop these brands over time as we utilize our Brand Blueprint assets. In 2023, we have an exciting blockbuster DUNGEONS & DRAGONS movie set to release in March, which we will preview at Comic-Con later this week, including an interactive tavern experience for attendees. This blockbuster will be supported by follow-up streaming entertainment, a significant push in consumer products, new tabletop games, and innovative video game developments to be released soon after the film. Overall, I believe the Wizards business has a promising future, with both MAGIC and D&D set for growth, and D&D could potentially capture additional market share within the Wizards business.

Right, Chris. Let me pick up on the amortization point. So if we think about program amortization, we said at the beginning of the year we expected it to be in that 9% to 10% range. We still expect that. And I think in the quarter, we were just under 9%, the amortization as a percent of revenue. And if I look back on last year and just think about the phasing of our expected deliveries this year, as we mentioned, we had a much bigger Q3 from a delivery phasing last year than we expected this year. So my expectation is the rate would be slightly higher in the fourth quarter than it is in the third quarter. But we still expect to be within that range. And our expectation is probably more towards the lower end of that range based on all the things that we're delivering this year.

Margins were quite a bit stronger than we thought for the quarter. And of course, you had MTG up nicely, so that underpins strong margins. But in terms of advertising, G&A, as you look at Q2 versus kind of back half of the year, anything in Q2 that is not repeatable from the top that we should take into account? And then I have a quick follow-up.

I don't see anything that was different in Q2 than what you should expect for the balance of the year. Eric, any comments?

No, I agree, Chris. I don't think there's anything there, Arpine, to worry about.

I think the biggest difference between Q2 this year and Q2 last year, Arpine, was we leaned into two rather large digital launches with Magic: The Gathering Arena mobile, which was in April. And then we started doing all the presale and advertising for the launch of Dungeons & Dragons Dark Alliance, which came out in late June. So year-over-year, we didn't comp those, and that's what drove kind of the favorability on advertising and promotion.

Okay. That's very helpful. And then just a quick follow-up on revenue. Is it possible to give us a sense of how much D&D Beyond is adding to revenue for the year? Or is the guidance now kind of low single-digit up — ex-FX is excluding that and is more organic? I was not sure whether that guidance includes the acquisition. And if you could detail how much exactly that's heading for the year? I think you said before that it's really immaterial to EPS. So I'm not worried about EPS. Just asking about revenue here.

Yes. I will hand over most of this answer to Cynthia. It's relatively small for the rest of the year, and it was certainly very small for the quarter. However, we expect it to become significant as we move into 2023 and beyond, affecting both our top and bottom lines. Much of that will depend on the revenue synergies we anticipate as we begin to integrate the business, which is still in the early stages. Cynthia, do you have anything to add from the Wizards' perspective?

Thanks, Chris. I would say that D&D Beyond has performed in line with our expectations. We've only had it for a month, but we are very excited about the opportunities it presents to better serve our fans. Chris mentioned earlier that approximately 85% of their current audience on D&D Beyond is located in North America. This gives us a significant opportunity to reach a global audience through regional translations and culturally relevant content. We also see potential to create various experiences that will appeal to different player segments, particularly those that will benefit from the awareness we build through our entertainment offerings. While it's small at the moment, we envision a promising future with Wizards owning D&D Beyond.

And just to add, looking at our financials overall, we do expect it to be dilutive for the full year. However, it will be accretive to next year.

I just have two. First, I was wondering if you could just help begin what the 3Q revenue could look like. It sounds like there's an implication that it should be down year-over-year just given the direct import revenue shift and the slowing growth or slower growth in Wizards of the Coast. But I was just wondering if you could talk a little bit about that? And then secondly, I was just wondering if you could just give us a little bit more detail around Wizard margins in the quarter, obviously, a record high. Was that simply operating leverage because of the record revenues? Or were there any mix benefits? And what's driving the drag on margins for the remainder of the year in Wizards relative to the second quarter? Thank you.

Got it. Yes. For Q3, I believe you are interpreting our guidance correctly, Michael. Several factors are at play. Firstly, there is a timing issue related to our releases from the Film & TV teams, Family Brand teams, and Entertainment. We do feel that the underlying growth in Wizards is very strong, with tabletop revenues up 15% in Q2, indicating good momentum in that area. However, due to the timing of our set releases, we anticipate that Q3 may be somewhat slower for that business. We expect to see growth resume in Q4, especially as we approach the 30th anniversary of MAGIC in 2023. Regarding our overall Consumer Products business, there was a shift of some direct imports from Q3 into Q2, which reflects strong retailer enthusiasm for our upcoming innovations in the latter half of the year. This will enable our teams to focus on advertising and promotions, helping to address the out-of-stock issues we've encountered over the past couple of years, as we believe our inventory is high quality with significant growth potential in terms of sales. I’ll now pass the rest of the question over to Deb.

Right. And we did talk a bit about entertainment as well, some of the deliveries that we have in Q4 versus Q3 a year ago. Interestingly, and we tried to highlight this in our release, when we release movies directly to streaming, revenue recognition just has us take it right at that point in time. And we have more releases that are actual theatrical coming in the third quarter, which will have that same revenue. It just gets spread out over the period with all of the ultimates and the library value that comes to that as well. So we're very excited about what's coming up in entertainment, but our delivery timing is a bit more Q4 from a revenue recognition standpoint and beyond than it was in Q3 a year ago. We also had the MY LITTLE PONY movie as well. So when you think about all those things, it really is just a timing issue. And the only thing I would add to what Chris said is as we look at our retailers and what they're expecting over the holiday period, they're looking to have more holiday promotions this year. And we're actually seeing that. You're seeing people actually going into shops more. Well, we're very excited about direct-to-consumer. And Eric talked earlier about Pulse in the market that we have there and how excited we are about all that innovation. I think we're going to see more holiday promotions at retail. And we are well positioned this year with the inventory to meet that demand, whereas last year, we were short and retailers were short.

Yes. And so from your second part of your question was margins on the Wizards business. For Q2, a great deal of that upside was the lack of amortization or realized amortization for our digital launches, particularly Dark Alliance and Arena mobile, and a much lower advertising and promotion spend associated with the business because we tend to heavily front-load the marketing spends for those kinds of releases. For the back half of the year, I think what you see is we continue to invest heavily in building out the infrastructure for digital games, in particular, with the Wizards business. And we also have, as the economy starts to open up, we're starting to resume some of our more historical spending on organized play and helping to support that. So those costs are starting to come back into the Wizards business and something that we're factoring in on our guidance.

In the slides, you mentioned POS was down again in 2Q. You did mention the Amazon Prime shift. So did that drive POS down in the quarter? And maybe can you just talk about how that trended versus 1Q and maybe what it looks like quarter-to-date, given you are expecting growth in POS in the second half?

Yes, moving Prime Day from June to July did affect our results, but we're pleased with this year's outcome, seeing a 20% increase in sell-through. This aligns well with our expectations. Regarding our overall point-of-sale, we have always indicated that our product innovation is more concentrated in the latter half of the year. We're excited about several new products on the horizon, including the Selfie series and the recently announced Wordle: The Party Game, which has become our best-selling presale in the board game category. We have many new innovations across our brands, such as the PLAY-DOH ice cream cart, which we believe will be an excellent gift item, and NERF GelFire, which we anticipate will be one of the best innovations in the blaster category. Additionally, new product lines like STARTING LINEUP for sports memorabilia fans make us optimistic about our upcoming innovations. We also had a relatively quiet first half in terms of our entertainment offerings, but I believe the second half will bring a remarkable series of new releases. One film I’m particularly excited about is Black Panther: Wakanda Forever, which is expected to be one of the biggest blockbusters of the year. This film is just a lead-in to what should be an amazing first half of next year, featuring the Dungeons & Dragons Honor Among Thieves movie, fantastic new releases from Disney, and Transformers: Rise of the Beast coming in June. Eric, do you have anything to add?

No, you hit most of them, Chris. I think just to finish that, Megan, we really do feel like after some headwinds in the first half, we have a strong second half plan. We're proud of our teams and their innovation. Even in addition to all the great innovations Chris mentioned, we also have some big programs in retail in August behind Star Wars and the Obi-Wan product line, which is sitting behind their extremely popular Disney+ series. And across the board, the strength continues across the Marvel portfolio. So we really do feel like we're poised to have some positive point-of-sale versus where we've been. And I think the innovation you're going to continue to see from Hasbro is very, very strong.

Got it. That's really helpful. And then maybe as a follow-up, again on the Wizards margin, it had very strong performance in 2Q. And it does seem like you raised the top line guide a bit for that segment. You talked about potential to reach low double-digit, now you are including that in the guide. So that would imply just higher operating margin on mix in the back half, but you did keep the overall profit outlook unchanged. So are you just seeing higher costs in other areas of the business? And are you still thinking about COGS being around 30% of sales for the year?

We are experiencing increased costs overall. As previously mentioned, our gross margin has faced pressure, particularly within our MAGIC business, as well as the D&D business when considering Wizards this quarter. We've seen a significant reduction in advertising and depreciation expenses as discussed. Looking ahead to the latter half of the year, we have had to implement pricing adjustments on certain MAGIC: THE GATHERING releases to offset paper costs. We've made investments to ensure we have enough paper to meet the anticipated demand for both D&D and MAGIC: THE GATHERING. However, considering the mix and factors affecting us in the latter half of the year, we expect margins to be slightly lower than the previous year for the full year overall, although the second quarter was exceptional given the business mix.

I know that you made the comment that you had assumed some macro challenges when you guys issued guidance at the start of the year. But could you just give us sort of a quick sense of the high level for how you see each of the main categories performing if we do move into a recession? I think that we can go back and sort of look at what the toy business did in '08 and '09, but for some of the newer pieces of the business that might not have been broken out previously or that were part of Hasbro, could you sort of give us a sense for how you see the elasticities or peak to trough or however you want to frame it?

Yes. Certainly, we came into the year feeling like there is a mix of headwinds and tailwinds for the consumer. We were very cognizant of the inflationary environment we were operating in, both from a consumer takeaway as well as its impact on our supply chain. I think net new headwinds that emerged through the year have been the Russia conflict and the effects of that and then the currency dynamics with the strengthening dollar, which particularly affects our Consumer Products segment in markets like EMEA and our Wizard segment with a very strong dollar versus the Japanese yen. So as we look at our segments moving forward, I think what we feel fortunate is as a company is that we have very resilient segments across toys, games, and entertainment. These tend to be small luxuries that consumers value pretty highly. Our Consumer Products segment in prior economic downturns has done relatively well. It has been affected, but not nearly as much as those economic downturns would affect the macro economy. The games business tends to be very resilient. MAGIC: THE GATHERING has grown 12 out of the last 13 years, and that growth vector started back in 2008 during the last financial crisis. We continue to see that consumer being very resilient with a deep well of savings and a large amount of passion for pursuing what they love. And then in the Entertainment segment, we continue to see that to be rebounding from the pandemic. Our Film & TV business is up in the first half of the year. We continue to project our overall Entertainment segment, excluding the sale of our Music business, to be up for the full year. So we feel pretty good about where our outlook is and maintaining our guidance from prior quarters.

Makes sense. And then you called out the $60 million shift just from the direct import timing. Is there anything else that you're seeing or hearing from retailers that could cause some impact as far as 3Q, 4Q split in the back half of the year?

Eric, anything to add?

I think with regards to retail, Deb already mentioned some of the dynamics. I think we're feeling actually pretty comfortable from a supply chain standpoint, which is the one thing Chris didn't touch on in the last narrative that conditions are improving. And while things are more expensive and transit times do take a little bit longer than they have in the past, our teams are managing through those challenges. Retailers are managing through those challenges. And I think you'll see, as Deb mentioned, as we get into Q3 and Q4, a stronger environment where our position amongst retailer promotions and their advertising is favorable. And we're certainly optimistic about that.

So, on the Wizards business, I think in some recent correspondence, you indicated that you've expended over $1 billion on this business over the last five years. Can you address what the planned cadence of spending will be going forward? And Deb, I think you suggested that you're going to focus on digital and talent. But any more specifics you can provide in terms of where you intend to invest?

At a high level, we are continuing to invest in the Wizards business and our overall games business. Digital will be a primary focus for us, and we plan to at least maintain our production spending in this area. Over the next couple of years, you can expect us to announce more products and innovations. Games as a service will be a significant focus within our digital strategy, particularly with our digital tabletop initiatives and platforms like Magic: The Gathering Arena. We've also announced some expansions for our platforms and see potential in new gaming formats and player demographics. D&D Beyond will receive major investment and development as we explore content-to-commerce opportunities with our Hasbro Pulse platform, international growth, and enhancing the experience of face-to-face play that increasingly incorporates screens. Additionally, we are excited about leveraging our gaming portfolio's strengths based on our experiences with hardcore tabletop games, and we see interesting opportunities for digitizing our board game assets. Video games remain a key focus for us, and we anticipate several exciting announcements in the next three to four quarters, backed by exceptional talent. These announcements will cover established brands like Dungeons & Dragons and new innovative projects from well-known industry figures, such as James Ohlen and his team at Archetype Studios. We will continue to prioritize investments in games, with a particular focus on digital, and expect to at least maintain our spending outlook, if not increase it as we recognize further potential.

Got it. Very helpful. And then just a quick follow-up, Deb. You're forecasting the cash flow to come in at the lower end of the range. Anything specific to call out there that's driving that updated guidance?

You're seeing the impact of our preorders on the inventory and operating cash flow. From an investing perspective, this relates to our free cash flow. We made a strategic acquisition of D&D Beyond, which we are very optimistic about for the future of our platform. As we consider this, we anticipate that inventory will begin to turn, and in the latter half of the year, we expect our cash flow generation to improve.

I was wondering if you could comment on what you're seeing like on the toy side of the business in terms of raw material input costs. I know that for the toys being produced for this Christmas, the costs are up, but we're seeing like spot prices for some things like plastic resin are starting to roll over. So can you just kind of comment on kind of like what you're seeing on a longer-term basis? And do you think next year kind of bodes well in terms of cost comparisons on the raw material side? Thank you.

Yes. Thanks for the question, Linda. I'm going to turn it over to Eric to give you an overview of what we see going on in the supply chain. Eric?

Thanks, Chris. So a couple of things to hit with regards to your question, Linda. The first was with regards to input costs. We do see those rising, and both Deb and Chris talked about them in our prepared remarks a bit. We have taken pricing to cover that, and we feel comfortable that we continue to make the right decisions with regards to pricing to cover those input cost increases. We're working with our partners as we look to go forward to continue to manage and mitigate some of those headwinds. With regards to transit, which is kind of the other big piece that we've talked about in the past, we are seeing some of the transit times and transit costs easing a bit. And we expect that trend to continue as well as we go into the fall. So I think some puts and takes across the board there, but we feel like we have our hands wrapped around it, and the teams are managing it well.

Great. We’ve seen a lot of discussion about the Toys 'R' Us stores being introduced within Macy's. Can you share if that impacts you at all? Additionally, how are you approaching that opportunity in terms of expanding distribution in various channels?

Sure. I'll continue on that point. Clearly, Toys 'R' Us is making a comeback, and we are always excited to see the toy market and toy merchandising grow in retail spaces globally. We are encouraged by what we see as Toys 'R' Us collaborates with Macy's. We've had discussions with them for quite some time about expanding that presence for this Q3 and Q4. Macy's is a good partner for us, and I’ll refer specifically to them since it's a store within a store concept. We will continue to supply them as needed. While I don’t expect this to have a significant impact this year, we are excited to see the growth of the toy market. We believe that having more toys and games available for consumers around the world during the holiday season is a positive development.

Great. I have one follow-up. First, on Wizards, there's a lot of noise in the Wizard segment this quarter. Can you please talk about the performance of the core Magic Arena on its own excluding mobile launches and DUNGEONS & DRAGONS, et cetera? Thank you.

Yes, I'll begin. Cynthia, feel free to add to my comments. Arena Mobile launched last year, resulting in a significant increase in new users and revenue. While revenue for the platform decreased after that initial surge, it remains higher compared to the period before mobile was introduced. As we enter the fourth year of the platform, we anticipate it will begin to mature. We believe features like schemes and consoles will provide additional revenue and user engagement. Looking ahead, we expect a stable revenue outlook for Arena, continuing to serve as the key acquisition tool within the MAGIC brand for attracting new users and educating them about our brand. Moreover, we foresee some promising innovation opportunities over the medium to long term that could positively influence our revenue trajectory. Cynthia, do you have anything to add?

Yes, I think you covered most of it. The only other thing I would say is we will continue to listen to our customers and the community as we are working on that road map for innovation. We're super excited about how Arena will continue to contribute to the overall MAGIC ecosystem.

I think you had a follow-up, too?

Yes, I did. On a consolidated basis, you guys have commented over and over that you're maintaining guidance. But the fact of it is, you've lowered revenue outlook because of FX, right? It's in constant currency now. Before, it's just in dollars. Your operating margin guidance is maintained. So is it FX hedges below the operating line or share buyback or lower interest? What is it that gets you to maintaining guidance?

Sure. Gerrick, you're right. I mean, as we said in the first quarter, we warned that currency was a headwind. And in fact, we saw the euro for the first time in 20 years reach parity. I think it's up a tick this morning, right? But on a translation basis, that impacts our revenue, right? But the underlying business is healthy. We do hedge our costs. Most of our costs for products are denominated in U.S. dollars. So we hedge that. We're probably 65% to 70% hedged at a given time. So it does have less of an impact on operating profit. In addition to that, we are very focused on controlling our costs and implementing cost savings initiatives wherever we can. And we're excited to actually talk more about that when we get to Investor Day and how we view the long-term impact of that. But overall, we continue to invest in our business for long-term growth and do the smart business things to protect our margin on the bottom line and cut costs where we don't need to expand them.

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately two hours, and management's prepared remarks will be posted on our website following this call. As Deb and Chris both mentioned, we look forward to sharing more about our strategic plans at our Investor Day on October 4 in New York. Thank you.