Good morning, and welcome to the Hasbro First Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Kern Kapoor, Senior Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Gina 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. 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 Chris Cocks. Chris?

Thanks Kern and good morning. For the past several quarters, you've heard us reaffirm Hasbro's strategy to refocus on play with our fewer, bigger, better principles. In our Q1 results, we're seeing Hasbro's strategy come to life. We are applying a franchise-first mindset. We're realizing our brands' potential through licensing with success across digital and consumer products. And we're continuing to invest in innovation across toys and games, appealing to consumers of all ages across play patterns. We began 2024 with a healthier balance sheet, a leaner cost structure, and an improved inventory position. In Q1, we saw tangible progress on our turnaround. Our revenue landed as expected, and our margins outperformed. While most of the year remains ahead of us, I'm glad to see the business is on a solid track. It gives me confidence that Hasbro is pointed towards sustainable, long-term growth backed by industry-leading innovation across games, toys, and partner-led entertainment. Digging into the quarter, there were several highlights. Let's start with licensing. MONOPOLY GO! from our partners at Scopely has crossed over $2 billion in lifetime revenue and 150 million downloads, breaking records as the fastest-growing mobile game ever. Baldur's Gate 3 from our partners at Larian Studios continued its momentum from last year with even more recognition. It's now the only game to ever win all five prestigious Game of the Year awards. While the success of Baldur's Gate 3 is in a league of its own, we see a long-term opportunity to leverage the richness of D&D across more games. In Q1, we signed new licensing agreements with Resolution Games, best known for the VR game Demeo, as well as Gameloft, makers of Disney Dreamlight Valley, both to build within the D&D universe. To celebrate D&D's 50th anniversary, we executed new partnerships with LEGO, Converse, and BlackMilk Apparel. Dungeons & Dragons Red Dragon's Tail is a 3,700-piece fan favorite that combines the building fun of LEGO and the rich world-building of D&D. I can't wait to build my own. Our success in licensing extends to our toy brands. We saw positive early results in Q1 from LITTLEST PET SHOP, now manufactured and distributed by Basic Fun. Just this week, we announced a strategic relationship with Playmates to produce and distribute Power Rangers toys starting in 2025. These are high-profit partnerships that leverage great partners with iconic brands from our extensive IP vault. Our new asset-light entertainment model is already paying dividends. We look forward to bringing the star-studded animated zone TRANSFORMERS 1 to theaters this September with our partners at Paramount. In Q1, we announced deals with Lionsgate and Margot Robbie's production company, LuckyChap, to produce a live-action MONOPOLY movie, as well as with the CW to create game shows around Trivial Pursuit and Scrabble. And of course, I can't wait to see what Sony has in store for us, with the just-announced film and TV projects for CLUE. The movie was a favorite of mine in the 1980s. Our success in asset-light partner-based entertainment extends well beyond the screen. We now have 115 Hasbro branded partner-led properties, bringing in over 55 million visitors last year alone. We see those figures increasing significantly over the next couple of years as our partners bring our brands to life through thrilling experiences and attractions and billions of dollars of third-party capital investments. With quality executions like Hasbro City in Mexico, which we've just awarded the best family entertainment center in the world by the International Association of Amusement Parks and Attractions. Reinvigorating our innovation and driving operational rigor underpins our turnaround. In games, we continue to make changes within our board games portfolio, opening the door for share gains in growth categories like party, strategy, and card games. In Q1, we launched Life in Reterra, a tile-laying strategy game from acclaimed designer, Eric Lang; and Fork Milk Kidnap, a fun new adult party game. We also are doubling down in where we are the clear leader. In February, we launched the second edition of Monopoly Prizm: NBA board game at the NBA All-Star weekend, and it helped make Monopoly the #2 growth property in the games category in the U.S. for the quarter. We expect to see more crossover opportunities for the brand and sports in the future. MAGIC: THE GATHERING saw healthy growth in Q1, driven by the timing of sales for our latest release Outlaws of Thunder Junction and strong demand for Fallout Commander. Q2 is an important quarter for MAGIC, with the releases of both Outlaws and Modern Horizons 3, which we expect to be our biggest set of the year. While we expect MAGIC to be down for the year after a record 2023, we maintain our long-term bullishness on the brand based on continued robust fan engagement and a killer lineup of new universes beyond collaborations, including upcoming sets in 2025 for Final Fantasy and Marvel. Stay tuned for more exciting innovation from our D&D team as we continue to scale D&D Beyond and expand the richness of tabletop gameplay to digital. We expect to connect to an even wider audience while delighting our existing fans as D&D celebrates its 50th anniversary. Finally, let's turn to toys, where our turnaround efforts are well underway. We began Q1 with inventories at multiyear lows, down over 50% from the prior year. As a result of our cleanup efforts, we saw a significant reduction in closeout volume in Q1. Thanks to our operational discipline and careful SKU management. We're in a good position with our large retail partners as we work towards new product innovation, including Beyblade, Nerf, and a refreshed lineup for BABY ALIVE. We also are seeing solid progress in revamping our approach to marketing, significantly shifting our mix to digital, driving stronger-than-ever partnerships with our e-commerce and multichannel partners like our just completed Birthday Shop execution with Walmart, and are seeing improved return on advertising spend as a result. We continue to see momentum with FURBY, one of last year's top new toys, including our latest best seller, Furblets. According to Serkan, these fuzzy little friends were the top-selling item in the special feature plush category in the U.S. Earlier this week, we announced a glow-in-the-dark Furby Galaxy coming this summer. We've also seen encouraging POS trends from Transformers as we celebrate the brand's 40th anniversary. While we're lapping last year's successful film Transformers: Rise of the Beasts in Q2, we look forward to sales rebounding in the back half as we gear up for Transformers 1. Last but not least, our retail and licensing partnerships are among our most important. Last month in New York City, Hasbro and Amazon collaborated with The Walt Disney Company to create a Star Wars experience at their first-ever March to May 4 event. Through an immersive retail experience in the main floor of the Empire State Building, fans were able to take photos with costumed characters, including Darth Vader, and check out Hasbro's latest Black Series helmets and Kyber Core lightsabers collectibles. Before I wrap up, I want to highlight the recent changes to our Board of Directors, bringing in new members with extensive games and retail operations experience. I'd like to welcome Darin, Frank, and Owen to the board. I also want to thank Tracy, Linda, and Michael, who will be retiring from the Board following our shareholder meeting next month. I'm grateful for their support and guidance over the past few years. Lastly, I want to honor Alan Hassenfeld, who will be stepping away from his role as Emeritus Chairman. Alan has been and always will be a prominent architect of Hasbro's legacy, and he will continue to be engaged with Hasbro in guiding the company's philanthropic efforts providing development and relief for children around the world. To recap, it was a good quarter. We landed revenue where we expected with wins across digital licensing, board games, and continued momentum for FURBY. We continue to sharpen our execution, staying within our guardrails and inventory and delivering meaningful cost productivity across the P&L. While it's still early, our turnaround efforts in consumer products are going well, and we look forward to monitoring our progress over the next couple of quarters. I'd now like to turn over the call to Gina to share more about our detailed results and guidance for the year. Gina?

Thanks, Chris, and good morning, everyone. In February, I outlined our strategy to build on the foundation we put in place last year after resetting the business and the necessary steps we're taking to reinvigorate innovation across the portfolio while continuing to drive operational rigor. I am pleased with how we executed in the first quarter with our strength in digital licensing and MAGIC contributing to a more profitable business mix while our turnaround efforts in toys started to take shape. We continue to deliver supply chain productivity ahead of inflation, and we made meaningful progress on reducing operating expense. We see more room to drive our cost footprint lower as we further refine our supply chain and optimize product design across each brand. We have already identified significant savings through this design-to-value strategy with our teams leveraging customer insights and competitive analysis to inform our actions. Looking at our toy turnaround in more detail. While Q1 represents the smallest contributor to full year sales, we maintained our controlled stance on inventories after the cleanup efforts last year. We ended Q1 with inventories at healthy levels, down over 50% from a year ago and roughly flat to where we ended in 2023. Our number of days in inventory was at multiyear lows for Q1 and at around 66 days. While we expect to see our inventory days increase over the next couple of quarters in line with normal business seasonality, we are still planning for total owned inventory levels to finish the year relatively flat versus 2023. Our much improved inventory position led to over a 50% reduction in closeout sales in the quarter. Although this negatively impacted our Consumer Products segment revenue growth, we did realize a margin benefit from the improved sales rate, and we expect this trend to continue as we move through Q2. While improving the profitability of toys and delivering our cost savings target are two of the company's top priorities, I want to emphasize that we are concurrently staying vigilant around what investment opportunities require incremental spend to drive the most profitable revenue across the portfolio. Through greater analytics, we are already seeing an improvement in our marketing efficacy, and this is an area we will lean into as we ramp our innovation across toys and games and prepare for a stronger holiday season. Moving now to our Q1 financial results. Total Hasbro revenue was $757 million, down 24% versus Q1 of last year. If you exclude the impact of the eOne divestiture, total revenue was down 9% versus a year ago. Growth of 7% in our Wizards of the Coast segment, led by MAGIC and licensed digital games, and 65% growth in entertainment, driven by a renewal deal for Peppa Pig, was more than offset by the 21% decline in consumer products, driven primarily by category declines and reduced volume moving through closeout. Q1 adjusted operating profit was $149 million, with an operating margin of 19.6%, up about 15.0 points year-over-year. This improvement was largely driven by a reduction in costs stemming from our operational excellence program as well as supply chain productivity gains and favorable business mix, including the eOne divestiture. In aggregate, we were able to deliver significant margin improvement despite ongoing volume deleverage across our toys business. Total Hasbro Q1 adjusted net earnings were $85 million, with diluted earnings per share of $0.61, driven by the improvement in operating profit as well as favorability from a stock compensation adjustment and net interest expense reduction. Operating cash flow was $178 million, an $89 million improvement over the same period last year, driven by the increase in net earnings as well as reduced production expense in connection with our sale of eOne. We gave back $97 million to shareholders through the dividend and ended the period with $570 million of cash in our balance sheet. Now let's look at our two major segments in more detail. Starting with Wizards of the Coast in digital gaming, revenue grew 7% behind ongoing digital licensing contributions from Baldur's Gate 3 and MONOPOLY GO!, which, as a reminder, neither recorded revenue in Q1 of last year. We also saw growth in Magic tabletop revenue, benefiting from shipments for our latest set release Outlaws of Thunder Junction, which arrived in stores last week, as well as a strong reception to our Fallout Commander set. Operating margin for the segment finished at 38.8%, up 13 points year-on-year, driven by supply chain productivity, cost savings, and improved business mix, given the growth in digital licensing. Turning to Consumer Products. The total revenue decline of 21% was mostly driven by broader market softness across our key brands, exacerbated by a reduction in closeout volume following our inventory cleanup efforts in Q4. We also saw some modest impact from our exited brands as well as timing-related headwinds within our direct-to-consumer platform, Pulse, which is lapping a strong product offering in Q1 of last year. The volume decline was in line with our expectations and resulted in an improvement in our gross-to-net sales rate, reflecting a more disciplined stance around discounting, which we expect will continue to benefit the CP segment profitability as volumes recover. As Chris mentioned, we saw some bright spots with the recent launch of Furblets, as well as with PLAY-DOH and Hasbro Gaming. Conversely, we had continued softness in the blaster category, which negatively impacted NERF as well as action figures due to the light entertainment slates and lapping last year's successful launch of Transformers: Rise of the Beasts. Operating margin for Consumer Products came in at negative 9.2%, which is down roughly two margin points compared to last year. As expected, we saw a material impact from deleverage associated with the volume decline, which was partially offset with supply chain productivity gains, managed expense savings, and improved gross-to-net selling rate due to lower closeout volume. It's important to note that the CP gross margins grew by over five margin points, demonstrating the improvement in the underlying profitability of the business despite the negative impact from deleverage. Turning to guidance for 2024. While we are pleased with our Q1 progress, we recognize that the quarter represents a small portion of our full year sell-through for toys, and we want to monitor throughout Q2 our progress in Wizards, particularly in digital licensing and Magic, before potentially revising our outlook for the full year. So at this time, we are reaffirming our initial guidance, which calls for total Wizards revenue to be down 3% to 5%. The decline is primarily a result of the strong growth delivered in 2023. Within Wizards, we continue to plan for licensed digital games to be relatively flat versus last year, with contributions from Baldur's Gate 3 tapering down as we move through the year. For MONOPOLY GO!, we are still planning to record the contract minimum guarantee through the first half of the year, and we'll continue to watch the data closely as we move through the second quarter. If the current trends continue, there could be the ability to book above the minimum guarantees sooner than the second half, but at this time, we are holding our initial guidance. Wizards operating margin will be between 38% and 40%, up two points from last year, driven by the favorable mix shift within digital, lower royalty rates across Magic, and strong cost management, both in supply chain and within operating expenses. For Consumer Products, revenue will be down 7% to 12%, and operating profit margin will be between 4% and 6%. As a reminder, about half of the revenue decline is due to actions we've taken to improve profitability, and the other half is due to prevailing category turns. We continue to expect a similar revenue decline in Q2 as we saw in Q1, with the pace of decline moderating in Q3 and flipping to growth in Q4 behind sharper innovation and marketing effectiveness as well as healthy retail inventory levels heading into the holidays. However, we expect to see profitability improving as we move through the year as we build volume ahead of the holidays, and we realize more of our net cost savings.

Thanks, Gina. We're pleased with our first quarter performance. We're doing what we said we would do, driving a shift in games and licensing, fixing our toy business and lowering our costs. It's still early, and we have lots of 2024 to go, but I think it's fair to say this was a good start to the year. We'll now pause to take your questions.

Our first question comes from Eric Handler with ROTH MKM.

First, Gina, I wonder if you could maybe help refine the guidance a little bit in providing what the numbers you provided equate to on an EPS basis. And then given the sizable beat you had relative to consensus expectations, while maintaining guidance, where do you think Street expectations are maybe overestimating in their model in future quarters?

We do not provide specific EPS guidance. After reviewing our models, it appears that analysts are closely aligning with our internal calculations. For the recently concluded quarter, it's important to note that we experienced about $0.10 of favorable adjustment from stock that will impact future models. However, we are not offering detailed EPS guidance at this time.

Okay. And certainly for Chris, it's been a while since you guys have talked about MAGIC Arena. I wonder if you could give us a little bit of an update there? It seems to be sort of lagging the tabletop segment. Just what are you doing to broaden the appeal of Arena?

Eric, thanks for the question. Yes. So Arena was down a bit in Q1. Mostly that was due to not lapping a remastered set that we did last year for Shadows Over Innistrad. Barring that, it would have been roughly in line with the overall property, which was up about 4% on tabletop. So we continue to invest in Arena. We continue to mimic all the card sets that are inside of it. And we're also investing over the long term to refresh the platform. So you'll be hearing more about that over the coming couple of years because it's a long-term digital project. When you look at MAGIC and where our growth has been, a lot of that growth has been in social-based play like Commander and in collectibility. We'll be investing in those areas on the digital platform over the long term.

Our next question comes from the line of Megan Alexander with Morgan Stanley.

One is a two-part question. You just did almost a 20% operating margin in what's typically your smallest quarter of the year from a sales perspective. In the slides, you did reiterate that 20% full year target by 2027. So I guess first question, why wouldn't you be able to get to that 20% number this year, if not higher than that? And maybe second part, was there something in that 1Q operating profit performance that won't repeat? The corporate segment, in particular, did stand out to us. Maybe you can just clarify what's in there and how we should kind of think about the run rate of that segment going forward?

Sure, Megan, that's a good question. Let's begin with the corporate segment, where we posted $45 million in profit. Approximately half of that amount came from a non-stock compensation adjustment we made, which will not be repeated. So approximately 2.5 points of our margin performance in the quarter came from that adjustment, and it will not carry forward. Looking at the rest of the year, there will be fluctuations in the margin. In the second quarter, we will still experience some deleveraging with toys, but in the third quarter, we need to consider the impact we had last year from digital offerings like Baldur's Gate and Lord of the Rings, which provided a favorable comparison for that period.

Understood. That's super helpful. And then maybe just on the Consumer Products top line. I think you said POS for the industry was down. I was wondering if you could talk about Hasbro POS. And then I think you also said related to that 2Q decline similar to 1Q. I think the closeouts are typically more of a 1Q phenomenon than 2Q. So maybe can you just unpack in terms of the dynamics between the closeouts and POS, how we should think about that 2Q being down 20% again?

I think when you look at Q1, January and February, our results were pretty heavily impacted based on two factors: one, the reduction in closeouts; and two, not lapping a couple releases that we had with Pulse in the prior year. We had some fairly large ones. Those two factors kind of contributed to that underperformance in February and January. Starting in March, though, we saw very healthy trends on our point of sale and our Easter trends normalizing for the dates were also quite healthy. So far into April, we're seeing those positive point-of-sale trends continue. Now I think the thing that gives us a little bit of pause that we're monitoring in Q2 is just a relatively light slate of entertainment. Last year, we had the D&D movie and Transformers: Rise of the Beasts, which both were pretty positive contributors to the quarter. That's not going to be lapped as completely. So we're taking a little bit of a cautious tone and wanting to monitor our performance. The thing that helps negate may be the impact of the entertainment-related headwinds is our marketing effectiveness. We're seeing a significant improvement in our overall return on advertising spend. We've retooled our marketing team. That tailwind we have to look at and monitor. We'll get back to you guys at the end of Q2 on a potential revision to guidance if we continue to see positive trends play out.

The only other added, I mean, on your closeout comment. You're right, it's typically heavy in Q1. Given what we were going through last year and trying to clear out all of the inventory, it was a factor in all four of our quarters. That will be the huge reduction that we took in inventory last year, so that will be a positive contributor every quarter that we go. We'll continue to see that closeout volume being down. So I should say a positive contributor on the margin side and negative contributor on the revenue side in every quarter.

Our next question comes from the line of Drew Crum with Stifel.

So Gina, just going back to Consumer Products, you discussed improved underlying performance and benefits from operational excellence, but you still saw adjusted OI down and some margin compression. If the volume decline headwind is moderating as you progress through the year, when should we start to see positive bottom line comps for that business?

Yes. Drew, good question. If you think about how we've kind of talked about our top line flow for CP, we'll be down similarly in Q2. We start to rebound in Q3 and we're back to growth in Q4. So I would expect our margin to follow suit. We're still going to see that same kind of material deleverage headwind in Q2. It starts to stabilize in Q3, and then our margins are growing absent even the huge comp that we have on inventory, but then that kind of one-time margin pickup that we have will further expand our margins in Q4. It's going to kind of follow with the top line.

Yes. So I would say Fallout has been a great set. I'm a little bit of a fan boy, so I'll try not to play it a little bit too much. I've been playing it since the '90s. But it's probably our best-performing commander set ever, whether it's a Universes Beyond set or not. Commander sets tend to be quite a bit smaller than our overall premier sets, so you have to weight that accordingly. Our view on MAGIC is pretty healthy. Engagement has reached pre-pandemic levels. Our stores are all healthy. Fallout is doing well. Outlaws of Thunder Junction, which is our first major release of Q2, is off to a promising start. Think about this: Our caution and MAGIC is just Q2 is a big quarter. We've got Modern Horizons at the end of the quarter, and we want to monitor how those do. But signs are pointing in the right direction for us. In terms of the long-term view on Universes Beyond, I think Final Fantasy and Marvel are going to be pretty significant sets. I would put them in the same league as what we saw with Lord of the Rings. Marvel is a huge IP. We're going to do multiple sets with The Walt Disney Company on that, which we're excited about. Final Fantasy is huge in North America and Europe. However, our sales in Japan will probably underperform compared to what we did with Lord of the Rings because of the resonance it has in that market, which is the #2 market for Magic and the #2 market overall for trading card games.

Our next question comes from the line of Arpine Kocharyan with UBS.

Just to clarify on POS, you mentioned down for the quarter. Have your expectations changed at all regarding full year industry retail trends? And then I have a quick follow-up.

Yes. I mean, Q1 for the industry is usually around 14% to 15%. It's still in terms of the total volume that Q1 represents. I think it was a positive quarter. We certainly saw momentum exiting the quarter that's been continuing into Q2. It's just super early. The toy industry has been a difficult one to predict for the last 18 months or so. We're going to continue to monitor it this quarter, particularly in light of the relative pause in entertainment that helps to drive toy sales. That said, I think it was a good start to the year for us and for the industry as a whole. My hope is it continues.

Margin is clearly the highlight for your results today, and I think it's going to be the same for the year as well. Could you maybe talk about cadence for margins for the rest of the year? I mean, Q2, we'll obviously have strong Wizard, I think, so that helps flow through, and you have closeout sales sort of easing or the impact of that easing. What are other big inputs you would highlight for Q2 as we think about the back half as far as margins go?

I'll start, and then I'll turn it over to Gina. What you're seeing in Q1 is kind of our overall strategic thesis playing out, which I think will play out through the rest of the year and for the foreseeable future. Hasbro is the games, IP, and toy company effectively in that order. When you have a healthy games business and great IP like we have, and start to get your act together on your cost structure and operational efficiency in the underlying toy business, good things happen.

When we consider how things will unfold each quarter, the components in Q1 indicate that our continued shift into gaming and digital will serve as a significant advantage. Additionally, improvements in supply chain productivity will more than counterbalance inflation, a trend that will persist throughout the year. The efforts we are making to reduce purchase costs and people costs will also continue to benefit us.

Q3 is going to have the big Baldur's Gate 3 launch time.

Correct. And the MONOPOLY GO! minimum guarantee will start to hit for MONOPOLY GO!.

That's a great segue to my last question. You just talked about digital coming in flat. I think that's unchanged versus what you said last time. Everything we've been able to track on this shows that there could be upside to that given how strong MONOPOLY GO! has been, why not raise that guidance today? And could you talk about your visibility on that because it's clearly not a toy business, right? It's sort of digital games where you probably have a little bit more to say in terms of visibility.

Yes. The short answer is it's just really too early in the year to call it out. But to your point, the trends are favorable if they continue to play out in the way that everyone is watching. We did see that there could be upside. We just want to watch and play out here as we move through Q2 before we officially take guidance up for it.

The challenge within our P&A is it's really a comp one. So we just need more time.

Our next question comes from the line of Christopher Horvers with JPMorgan.

So I just want to follow up on the corporate line item. It was $45 million. You said roughly half of it was stock comp and that benefit does not sustain. What's the other half of that? And does that piece of it continue?

Yes, it's a material amount of money. The other half is all due to the operational excellence program. I would think of it as a timing element of where it sits. It's real money: purchase cost savings, people cost savings. Sometimes within the quarters in the year, it just settles out in corporate. As we move through the balance of the year, that's going to be allocated back. That favorability will be allocated back to the two segments of CP and Wizard. That will flush its way through; it’s a timing element of where it sat at the end of Q1.

And did you say that the non-repeating portion was $0.10? Or is that half because if you do have, it's a bigger number than $0.10.

No, it's about $0.10 of earnings per share. Yes, it was right about that.

About half, which translates to around $0.10 a share.

Okay. If MONOPOLY GO! does continue at the current pace, I think you're looking at maybe $50 million to $70 million in the back half from MONOPOLY GO!, any comments on what it could be if what you see today continues? Could it be two times that?

I don't think we're prepared to give you a sizing on it. If trends and advertising spend to revenue continue, it will be quite favorable for us. We'd likely exceed the minimum guarantee within Q2.

Our next question comes from the line of Stephen Laszczyk with Goldman Sachs.

Maybe just a follow-up on the marketing strategy, Chris, you talked about some success that you're seeing in the first quarter. Perhaps you can talk a little bit more about what you're doing differently? And then, if that success does continue, how should we think about the upside drivers throughout the year? Do you think it's more of a top-line growth driver or perhaps something on the cost side?

I think it's a pretty simple rubric that we're using, which is spend where we can measure, which is primarily digital. We have traditionally been a little traditional in our media planning. It's worked, but we haven't been able to really refine it down to the SKU level and partner level. We're spending a lot more on digital; we're spending a lot more with our retail partners near the point of sale or near the point of decision. We're seeing a significant multiple effect in terms of the effectiveness of the spend. It's still early in the year, and we still have to scale it, but it's certainly positive for us. I would say the majority of that will go to top-line inside of CP if it keeps working. That top line, particularly given the cost structure efficiencies we're driving and supply chain efficiencies we're driving, will have a nice flow-through to bottom line results.

Good question. For us, every kind of the whole the Red Sea, all of that is really been immaterial on our business. I think in the P&L in Q1, it was less than a couple of hundred thousand dollars of impact, and even since then, our team has been doing a good job of navigating around and finding productivity to offset. So it's not a factor that I would call out as impacting our business right now. Overall, what we're seeing across freight is some moderation, capacity is opening up, and we're seeing rates come down. That is absolutely benefiting the P&L part of our guidance. We said that there was going to be two points of inflation in the year. It's playing within that, but the environment is much more rational for us this year.

An important thing to keep in mind about us is that most of our profit pools are nearshore. Most of our licensing business has very little sea freight dependencies associated with it because they're either made in market or in markets not affected by traditional Southeast Asian or Chinese freight lanes.

Our next question comes from the line of Alex Perry with Bank of America.

You gave really good color on sort of the 2Q expectations for the CP segment and op margin. But could we get sort of how you're thinking about Wizards in 2Q from a revenue and op margin perspective?

For Wizards in Q2, it's going to be favorable from a top line standpoint and a bottom line, so it's going to look pretty consistent, just given the release schedule. We expect there to be another kind of growing quarter. On the bottom line, just given the mix we're seeing within the business and the shift toward digital, we'll see consistent trends there. I would say, for both businesses, CP and WotC, we've got the benefit from operating expenses that will continue to flow in throughout the quarter.

There should be a nice royalty benefit in Q2 as well for MAGIC; Modern Horizons 3 is not royalty bearing. Lord of the Rings did fantastically, but there was a royalty associated with it.

Our next question comes from the line of James Hardiman with Citi.

First, I want to follow up on the previous questions regarding the corporate aspects. For the first quarter, we saw $45 million. What should we expect that figure to be for the entire year? It sounds like you're indicating it will actually be less than $45 million. Should we anticipate that number to turn negative for the remainder of the year? Or could you provide some guidance on how to approach the full year figure?

Yes, good question. I know it's confusing to just given some of the timing components. Last year in '23, it was roughly $20 million. I would say, we'll probably be around that plus or minus a bit just given that we have this stock comp adjustment sitting there. That represents corporate overhead structure, much of it gets allocated back as we go throughout the year. Call it $20 million, $30 million by the end of the year.

And just to clarify, and then I have a follow-up. Any way to think about that from quarter to quarter? Because that could be a pretty big swing factor as we think about potentially some negative numbers. Does that start right away? Or is that more back half weighted?

In Q2 and Q3, you're not going to have that $20 million adjustment for the stock comp in there. You're looking kind of plus or minus a few million dollars moving in and out, so it becomes an immaterial impact as we move through the next few quarters.

Got it. Okay. The consumer products margin was notably negative in the first quarter, but it appears you are optimistic about its future direction. How should we approach the exit rate for this year? It seems likely to be significantly better than the 4% to 6% range given the starting point. I'm trying to understand its trajectory, especially for 2025 and beyond.

I think we feel based on what we delivered in Q1, really good about our ability to deliver that 4% to 6% guidance range. To your point, a big drag that we saw in Q1 was the eOne transition. As we push past that and move into growth in Q4, we're going to see some nice underlying profitability within the business. As we move then into 2025, we've publicly stated that our goal is to get this as close to double digits as we can through 2025. It's going to be some of the same levers that you're hearing us talk about: continued focus on cost structure, continuing to refine our supply chain, getting smart with our product mix and how we're pricing in markets. The last lever we haven't brought up yet is the whole design to value and all the work we're doing within our product design. That hasn't had a material positive benefit, but we see that picking up as we move into Q4 and into 2025. We feel good about Q1 landing and we're on the right path to get us within that range of 4% to 6%, continuing towards 2025 pushing double digits.

Is it crazy to say that we're going to be pretty close to that double-digit rate sort of implied in second half or fourth quarter?

No, it's not crazy to think about that same rate in fourth quarter, particularly since we had that large inventory adjustment last year that benefits us huge in the fourth quarter.

Our next question comes from the line of Fred Wightman with Wolfe Research.

I just wanted to come back to margins. You guys are calling out cost saves net of two points of inflation. We've seen some other toy companies talk about actual benefits from deflation. Can you talk about where you're seeing that cost inflation specifically and how to think about that as we move throughout the year?

Yes, we wouldn't call it deflation per se. We're seeing a couple of points of inflation. The three areas I'd call it, one is labor, that's our biggest cost in the P&L. We're continuing to see that inflate a few points. The second, when you think about our largest ingredient that we're purchasing, is also inflationary in the year. Our logistics cost has its pluses and minuses. Overall, we're managing logistics pretty well. For the year and the quarter, we saw about two points of inflation, we think that's going to play through the rest of the year.

Just on an apples-to-apples, I'm not sure how other companies are talking about deflation. When we talk about it, we talk about it as productivity based on our teams working with our vendors. Our productivity is significantly scaling past underlying inflation in the supply chain to a pretty healthy manner, driving our gross margin productivity.

Yes, that makes sense. And maybe another one for you, Chris. You talked about the traction from the LITTLEST PET SHOP license. You also talked about the deal for Power Rangers. Does the early success that you're seeing with some of these licensing decisions change how you're thinking about the need to own versus license some of these CP brands going forward?

No, I think it's validating that we made the right choice. Two years ago, we outlined our selection criteria, basically can we generate $50 million in revenue at a 10% OP, and can we grow to $100 million or more revenue at a 15% OP on a line? We've chosen the lines to outsource that we don't think meet those thresholds. But another company with a different cost structure or expertise could still make a nice business even if it was sub-$50 million. We're basically done without licensing. We certainly will be driving cross-licensing and leveraging our brands for category expansion and new product opportunities, like we're doing with LEGO, like we're doing with Mattel, like we're doing with location-based entertainment. Power Rangers is probably the last brand that we will outsource.

Our final question comes from the line of Kylie Cohu with Jefferies.

I just wanted to double click a little bit on the timing aspect. Anything that you can quantify from Easter? How has that affected the quarter? How are you thinking about how that would affect Q2 as well?

Yes. Easter gave a modest lift in the quarter; maybe, call it, 1 or 2 points based on it being earlier. We're seeing April continue to show positive trends even barring what's going on with Easter. In the last week of April that we measured, we were up 7% without our divested brands included and up about 4% even including those divested brands. While we think Easter helped in Q1, it wasn't really a decisive help.

Got it. Great. That color is super helpful. I know you mentioned earlier about how most of your major profitability drivers are near-sourced, but could you remind us what your exposure kind of is to China at this point in time? I know we've been getting a lot of inquiries on that.

Yes, about 50% or so of our...

When you add in Wizards, we're about 40%.

About 40% of our total volume is built in China today. But only 5% or 10% of our total profit is sourced out of China.

Thank you. Ladies and gentlemen, this concludes our Q&A session. And this concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.