Good morning, and welcome to Hasbro's Second Quarter 2024 Earnings Conference Call. At this time, all parties will be in a listen-only mode. A question-and-answer session will follow the formal presentation. Today's conference is being recorded. If you have any objections, you may disconnect at this time. 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 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. Q2 was another good quarter. We saw strength in gaming and digital licensing and landed where we expected within consumer products, while increasing operating margin and maintaining healthy inventory. It's nice to come into calls like this and not only deliver what we said, but to start making it a habit. Across games, IP and toys, Hasbro is emerging as a more profitable, agile and operationally excellent company, one dedicated to delighting fans of all ages through the MAGIC of play. Our licensing and IP business continues to be a differentiator for us. In digital, we're seeing megahits like Monopoly Go! demonstrating staying power. We have over 35 entertainment projects in development and our team continues to drive our IP within consumer products through partners spanning the globe in multiple categories. And as we look at the business of play, it's clear that digital is here to stay and is a bigger factor than ever in how successful toy and game companies will grow and strengthen their brands. We're years ahead of our peers, having already spent hundreds of millions of dollars building out our own studio capacity and expanding our brands through digital partnerships. Games like Baldur's Gate 3 show us what the future looks like. And while we're still in the middle of the ballgame on our turnaround efforts in toys, we're seeing signs our innovation is working, particularly where we have a big head start versus the competition. Many companies in the toy and games industry are waking up to the power of fans and the importance of their engagement. Hasbro has long appreciated this audience, driving over 60% of our revenue from consumers 13 and older, and we'll continue to lean in here as we think about innovation across our product portfolio. Looking at the business with the first half of the year in the books, our team delivered, and we're raising our full year guidance as a result. Gina will share more detail shortly, and I'll first offer some business highlights across gaming, licensing and toys. We had another solid quarter from MAGIC: THE GATHERING on the back of this year's blockbuster set release, Modern Horizons 3. Facing a high bar with last year's Lord of the Rings, Universes Beyond set, Modern Horizons 3 had a strong start, becoming the fastest selling set in MAGIC's history. While we expect a tougher comparison in the back half for MAGIC following the strong first half and as we lap a greater number of releases last year, we're seeing good early interest in our first tentpole set, Bloomboro, releasing next week. In 2025, we anticipate a return to growth for MAGIC driven by two Universes Beyond sets for Final Fantasy and Marvel that fans are already eagerly anticipating. Within D&D, we're seeing solid pre-orders for the 2024 Core Rulebook for the revised and expanded fifth edition. D&D also shows how we're increasing digitization across our portfolio. Digital revenue already accounts for over half of the mix due to the success of D&D Beyond. Next week at Gen Con, fans can expect to see more of our 3D role-playing sandbox experience built on Unreal Engine V, bringing players' favorite franchises to life across PC, console and mobile. We look forward to getting it in gamers' hands later this year. D&D Beyond already represents our largest direct-to-consumer platform with 18 million registered users. Along with polls, our destination for exclusive collectibles across fan-favorite brands like G.I. Joe and Star Wars, we see an opportunity to unlock more value across our Hasbro Direct business. Licensing was another standout in the quarter. The momentum in Monopoly Go! from our partners at Scopely continued into Q2, accelerating our revenue recognition beyond the minimum guarantees and driving healthy upside to both revenue and operating profit. Since launch, the game has grossed over $3 billion in revenue, making Hasbro the top licenser of video games over the past year, according to Aldora. The team continues to have an active pipeline of licensing opportunities across PC, console, mobile and casino, leveraging our rich IP. In Q2, we announced a new arcade-style game for Power Rangers with our partners at Digital Eclipse. Just this month, we kicked off the Transformers Overwatch 2 crossover. As we continue to invest in our digital gaming efforts, both through partnerships and self-publishing through our own studios, I'm excited that John Hight, former SVP and GM of the Warcraft franchise for Blizzard Entertainment, is joining Hasbro as President of Wizards of the Coast. John is a lifelong MAGIC and D&D fan and embodies Hasbro's mission to bring people together through play. Within Consumer Products Licensing, we saw growth in the quarter, helped by our new partnership with Kayo collectible trading cards, building on the resurgence of My Little Pony in China, and Littlest Pet Shop's international appeal continues to grow. We ranked as the number two growth property in playsets, dolls and collectibles across the G10, according to Circana. We also launched several partner-led Hasbro branded properties, including a new Peppa Pig theme park in Germany, as well as the game room and Planet Play School in New Jersey, combining for 60,000 square feet of games and STEM-based play experiences. Finally, turning to toys. As a reminder, we began the year expecting the first half for consumer products to look similar to last year's second half. Through Q2, we've landed where we thought we would and I'm encouraged by several early reads, notably Beyblade. After a strong launch in Japan, we've begun rolling out Beyblade globally. We've seen positive early demand with fans liking the streamlined brand assembly and the new accelerator rail stadium that creates epic collisions. This year, wider entertainment content has us well positioned with the biggest movie for toys coming to theaters this September, Transformers 1 with our partners at Paramount. We have strong retail alignment and healthy early demand for our fan SKUs to celebrate the brand's 40th anniversary. You can expect renewed innovations in some of our core toy properties as we head into back-to-school. PLAY-DOH has shown strength all year, and we've gained valuable insights from our digital marketing efforts in the spring that we'll be applying to the fall. We're expanding play styles with new launches like the first ride on pizza delivery scooter and aging up with PLAY-DOH Marvel action figures in partnership with the Walt Disney Company. This fall, we'll also be ramping our latest N-Series for Nerf, which features a proprietary Nerf dart. Retailer support has been strong since last month's launch. Our people and culture are critical to the successes I've highlighted during this call. Before I wrap up, I want to also welcome back Holly Barbacovi, an HR powerhouse, who's bringing her pragmatic approach to HR back to Hasbro as our new Chief People Officer. To recap, it was a good quarter with solid performance and profitability, led by our strength in games and licensing. Toys came in as expected, and we see a path to growth in Q4, driven by innovation and strong alignment with our retail partners. We still have most of the year left to go, and we'll be watching back-to-school closely. But our team's work is starting to make a real difference, and we feel confident in taking our guidance up for the full year. I'd like to now turn over the call to Gina to share more about our detailed results and updated outlook. Gina?

Thanks, Chris, and good morning, everyone. In Q2, we made further progress building a healthier foundation for Hasbro as we delivered better profits, moderated the pace of our revenue decline and continued to elevate our internal processes and systems. I'm pleased with our team's execution in the first half as we're continuing to drive operational rigor across the company. Similar to Q1, we once again saw outperformance in digital licensing, led by a material step-up in contribution from Monopoly Go! as the game's momentum allowed us to exceed the minimum guarantee sooner than expected. This, along with healthy growth in consumer product licensing, growth in MAGIC and another strong quarter from our supply chain team drove significant operating margin expansion. And while we still have more than half a year left from a revenue contribution standpoint, we're doing a lot of the right things, and are confident from where we sit today to take up our full year guidance. Our turnaround in toys is well underway. Q2 declined similar to Q1 as we had anticipated. While Q3 and the back-to-school selling season will be an important gauge, we're entering the second half with clean retail inventory and are seeing encouraging demand signals for our planned innovation. By putting the right underlying demand and supply planning processes and systems in place, we've been able to bring aged inventory down to historic lows while ensuring we have suitable inventory levels to support sell-through for the holidays. We've also improved our end-to-end planning capabilities to better align where we source inventory with customer demand. In the first half of this year, we've already had some major wins from our supply chain team. I'd like to acknowledge Stephanie Beal, who has been instrumental to this transformation, and congratulate her on becoming our new Supply Chain Officer. Integrated business planning plays an important role as we transform Hasbro into a more profitable and operationally agile company. After the first couple of quarters of implementation, we're seeing greater information flow and faster decision-making, which is starting to show up in our results. Just like we're focused on digitization across play patterns, we're also enhancing our digital operations to ensure we're running as efficiently as possible, and is why I'm excited to welcome Dan Shull as our new Chief Digital Information Officer. Dan brings a wealth of Fortune 500 experience and will steer our digital and IT strategy using cutting-edge technology to enhance collaboration, accelerate data analytics and modernize our infrastructure. Now moving on to Q2 financial results. Total Hasbro net revenue was $995 million, down 18% versus Q2 of last year. If you exclude the impact of the eOne divestiture, total revenue was down 6%. Growth of 20% in our Wizards of the Coast segment, led by MAGIC and licensed digital games, was more than offset by the 20% decline in consumer products, driven by lower closeout volume and reduced entertainment slate exited brands. The Entertainment segment declined 90% due to the sale of the eOne film and TV business. Absent this impact, entertainment revenue decreased 30% driven by timing. Adjusted operating profit was $249 million, for an adjusted operating margin of 25%, up nearly 14 points year-on-year. This substantial improvement was driven by favorable business mix, lower royalty expense, supply chain productivity savings, the eOne divestiture and about a 2.5 point benefit from lapping the D&D movie impairment. Q2 adjusted net earnings were $170 million with diluted earnings per share of $1.22, up from $0.49 in the year-ago period, driven by the items noted as well as reduced net interest expense and favorable timing within taxes. We returned $97 million to shareholders through the dividend and ended the period with $1.1 billion of cash and short-term investments following May's completion of a $500 million debt offering of notes. The proceeds from the issuance are expected to be used to repay our November 2024 bond maturity. Year-to-date, total Hasbro revenue was $1.75 billion, down 21% versus the same period last year. If you exclude the impact of the eOne divestiture, total revenue was down 7% versus a year ago. Growth of 15% in our Wizards of the Coast segment was more than offset by the 20% decline in consumer products and the 11% decline in the Entertainment segment due to the sale of the eOne film and TV business. Absent film and TV, the entertainment segment is relatively flat. Year-to-date adjusted operating profit was $397 million for an adjusted operating margin of 22.7%, up over 14 points year-over-year, mostly driven by cost savings from our operational excellence program as well as favorable business mix and the eOne divestiture. In aggregate, we were able to deliver significant margin improvement despite the ongoing volume deleverage across our toy business. Year-to-date adjusted net earnings were $255 million, with diluted earnings per share of $1.83, 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 $365 million year-to-date, a $246 million improvement year-over-year, driven by the profitability improvement, timing of digital licensing collections, as well as the shift in timing of a transition tax payment to Q3. Now let's look at our two major segments in more detail, starting with Wizards of the Coast in digital gaming. Q2 revenue grew 20% year-over-year, largely behind strength in digital licensing led by Monopoly Go! and, to a lesser extent, continued contribution from Baldur's Gate 3. Last quarter, we discussed there could be the ability to book above the minimum guarantees sooner than originally planned. Due to the game's momentum, we were able to earn approximately $35 million above the minimum guarantee of $5 million in the quarter. Segment revenue also benefited from growth in MAGIC tabletop behind the successful release of Modern Horizons 3, as well as early shipments for next week's tentpole set, Bloomboro, both of which more than offset last year's Q2 contribution from Lord of the Rings. Digital gaming revenue also saw a roughly $20 million non-cash benefit from a publishing contract with an international partner. Operating margin for Wizards finished at 54.7%, up nearly 17 points versus last year, mainly driven by a richer digital mix, supply chain productivity gains, and lower royalty expenses as we lapped last year's MAGIC Lord of the Rings set. Turning to Consumer Products, Q2 revenue declined 20% year-over-year, driven by reduced closeout volume, exited brands, and lapping a busier entertainment slate, including last year's Transformers: Rise of the Beasts. Consumer product licensing was a bright spot driven by our partnership with My Little Pony and Kayo Trading Cards. FURBY and the continued momentum in FURBLETS, G.I. Joe and PLAY-DOH also performed well within toys, while Nerf continued to see softness ahead of the back half innovation launch. Adjusted operating margin for Consumer Products came in roughly breakeven, down about 3.5 points compared to last year. Cost savings and the benefit from lower unprofitable closeouts were offset by product mix and volume deleverage. As anticipated, there was also approximately $10 million of operating income attributed to the segment as we reallocated cost savings captured within the corporate segment back to CP. On a year-to-date basis, despite a revenue decline of 20%, segment operating margin declined by only 3 points year-over-year as we were able to significantly mitigate the deleverage impact by reducing our costs across supply chain and within operating expenses. Now turning to our updated guidance for 2024. Given the strong performance in the first half, we are raising our guidance for the full year, and we now expect total Wizards revenue to be down 1% to 3%, up from our prior guidance of down 3% to 5%, driven by the first half outperformance in digital licensing. For the full year, Monopoly Go! will generate roughly $105 million in revenue. This outlook assumes a modest monthly gross revenue decay rate for the game and consistent marketing support. For Baldur's Gate 3, we now anticipate roughly $30 million for the full year, with the bulk of that revenue having been recorded in the first half. With all of these puts and takes, digital licensing will be down in Q3 as we lap the launch of Baldur's Gate 3, and we anticipate Q4 to be relatively flat versus last year. For MAGIC, we expect some contraction in the second half due to the timing of set releases. While Modern Horizons 3 successfully lapped the initial release of Lord of the Rings, it will not have a comparison launch for last year's holiday bundle. We now forecast Wizard operating margin to be approximately 42%, up from our prior guidance of 38% to 40%, driven by the increased mix of the licensing revenue. For Consumer Products, keeping in mind that a big part of the year is ahead of us, we expect revenue will be down 7% to 11%, up slightly from our prior guidance range of down 7% to 12%. This narrowing is driven by encouraging early demand signals and retailer support for our back half product innovation, specifically Beyblade, PLAY-DOH, and TRANSFORMERS ahead of the major animated film TRANSFORMERS 1 in September. We're forecasting a low single-digit decline in Q3 before flipping to growth in Q4, with the impact from our divested brands continuing to be a headwind. We maintain our adjusted operating margin guidance of 4% to 6% for consumer products. Margins in Q3 will be relatively flat versus last year, followed by significant expansion in Q4 as we lap the impact of the inventory cleanup. For entertainment, adjusting for the impact of the eOne divestiture, we continue to expect revenue to be down approximately $15 million versus last year and adjusted operating margin of roughly 60%. We remain on track towards our target of $750 million of gross cost savings by 2025 and continue to expect $200 million to $250 million of net cost savings in 2024. Through the first half of the year, we have delivered $150 million of gross cost savings and $90 million of net savings. With the increased revenue outlook and greater profitability in Wizards, we now expect total Hasbro adjusted EBITDA in the range of $975 million to $1.025 billion, up from our prior year guidance of $925 million to $1 billion. Given the improvement in our cash flow, we now expect 2024 ending cash to be at roughly similar levels versus 2023. From a capital allocation standpoint, our priorities remain to first invest behind the core business, second is to return cash to shareholders via the dividend; and third, to continue progressing towards our long-term leverage targets and pay down debt. With that, we can open the line for questions.

Thank you. Our first question comes from Eric Handler with ROTH Capital. Please go ahead with your question.

Good morning. Thanks for the question. Chris, what if you could talk a little bit big picture for Wizards, your recent hiring of John Hight to take over from Cynthia. Obviously, a huge background for him at Blizzard. You now have four people on your board with video game backgrounds. Can you talk about how you're thinking about internal development of video games and what you're willing to commit to capital for that business?

Sure thing. Good morning, Eric. Thanks for the question. Yes, John, I think, is a luminary hire. He's had a major hand in a bunch of my favorite gaming franchises, whether it's Warcraft, Hearthstone, God of War, and even going way back to Command & Conquer. He's worked on some great stuff, which I think is perfectly on point with what Wizards of the Coast is all about and what our digital gaming strategy is all about, which is extending a bunch of great mid-core and hardcore brands and an expertise in designing for those kinds of audiences and helping us digitize what those brands can do. I think between our Board moves and between talent that we brought on board, most recently with John, but even before that, studio leaders we have like Ames Kirshen, who was in charge of the Batman Arkham series at Warner Bros, and James Ohlen, who was the Head of Creative Design at BioWare, responsible for the first Baldur's Gate, Neverwinter Nights, and Mass Effect. We're going all in on becoming a digital play company. I think Gina has talked a lot about the kind of capital that we've invested. Our roughly capital envelope is about $250 million a year. About half of that is going into digital games. We think that's roughly around a steady state for us. Our goal is to ship 1 to 2 new games per year starting as early as late 2025, potentially early 2026. I think we have a balanced approach to that. When you look at our game, when you look at our portfolio of investments in games, whether they're partnerships or JVs that we're doing or just fully internal investments, and then you look at our whole lineup of licensed games, we have 150 projects that are either active in the market or in development. It's important for us to have a hand as a publisher to guide our franchises and to work on the areas and the audiences that we think are hyper-important. But I also think it's important for us to work with the best partners in the business and extend those franchises into areas where we don't have the expertise or platform, and I think we've been doing a good job of it. It's no accident why I think we're the number one licensor in the space. I think we're going to be a top publisher eventually in the space, and we're going to take our time and do it right.

Hi, Eric. This is Gina. Eric, I just have one point of clarification just so that folks grab it as we talk about the capital. That $250 million number that Chris quoted is for the entire company. As you said, about half of that is going against these games, and that's probably the right run rate as we take it forward here. So I don't want people to get hung up on the $250 million being just for digital.

Okay. That's helpful. And then as a follow-up, 3Q in your consumer products business in toys tends to be a very strong quarter for direct imports. Can you talk about what's happening there and how the supply chain is working for shipping?

Yes. Great question. I would say as we move through Q2, we saw very smooth shipments with our direct imports. We didn't really see any sort of volatility or funds in the movement of goods with direct imports. We're not anticipating a significant impact as we move through Q3 and Q4. Obviously, we're watching the tightening that we're seeing in some of the spot markets. But again, we're contracted out. We feel really good about our ability to access inventory and we're confident in our ability to get it on shelf in time for the holidays. You're welcome.

Thanks, Eric.

Thank you. Our next question comes from the line of Megan Alexander with Morgan Stanley. Please proceed with your question.

Hi, good morning. Thanks so much. I wanted to just dig into the guidance raise, if I could. Maybe a couple part question and happy to repeat anything if it doesn't make sense. But you raised, I think, by about $35 million at the midpoint, give or take. I think that's also what you said you exceeded from the Monopoly Go! minimum guarantee relative to your expectations. So I guess just to clarify, is the guidance raise just for the fact that Monopoly Go! came in better in Q2? And then the second part is it does seem related to that, like MAGIC is perhaps doing better than you expected. You did call out some benefit from an international publishing deal in the second quarter. So if there's any way to quantify that and how that flows through to the guidance, that would be helpful as well. Thank you.

Sure. Absolutely. Good morning, Megan. As we think about the overall guide, I think you've got the simple way in terms of the upside from Monopoly Go! really just translating all the way down to our EBITDA update. That's the primary driver of the raise. I mean, obviously, the margin is richer. We're feeling a little bit more bullish on the consumer product side, but that's the main headline. In terms of MAGIC performance, specifically within the quarter, yes, it is doing better than we had expected. Really that Modern Horizons 3 has proven to be a fair comparison against Lord of the Rings within the quarter. That was a positive. In terms of the contract, it's roughly a $20 million benefit that came in. We're calling it out because it's a substantial figure. It's a normal course of business. We have those in kind of puts and takes, just let Chris talk about all of the number of deals and partnerships that we have in the works. Over the course of the year, it will prove to be immaterial for this quarter; it was a big revenue gain.

Got it. Okay. That's helpful. And then maybe if I could just stay down Monopoly Go! a bit. Again, it seems like the minimum guarantee, you got $35 million. I think if I'm doing my math right, there's maybe $65 million implied in the back half. So a little bit of step down on a quarterly basis, but I think it's in line with the way you were thinking about it to start the year. So it would be helpful if you could just talk about kind of what you saw over the quarter from a revenue perspective and Scopely’s marketing investment and how you're thinking about the second half and whether that's changed at all.

Yes. Good question. Yes, let's level straight on the math. For the first half of the year we had $45 million of revenue booked into our P&L. So $5 million was just the minimum guarantee that came into Q1. And then we had $40 million in Q2. So $35 million was that over-delivery and $5 was the minimum guarantee. What's modeled in our back half then is $60 million, and to your point, it is a step down from what we saw play through in Q2. So as we thought about our modeling in the back half, we're thinking of the decay rate that can run anywhere from about 3% to 5% and consistent marketing support. For Scopely, we saw marketing investment as we move through the first half, kind of within that range. Obviously, those two pieces, the decay rate and the marketing are variables that we don't control. We understand where Scopely is headed with marketing, but ultimately it is their decisions in terms of how much they spend and at what end of that range. For us, we thought about the modeling. We know that Monopoly Go! is going to be a material contributor to our P&L this year and for many years to come. So as we thought about it, we just didn't really want to get ahead of ourselves in terms of the forecast. I mean all of you are looking at the same data that we are almost at the same time. We were watching the sensor tower data played through in the last couple of months, a little bit bumpy when it came to the decay rate, so we absolutely took that into consideration as we were modeling at the back half of the year. We'll remain committed to being super transparent about the assumptions both around decay rate and marketing so that we can all stay on the same page of what we're expecting.

Yes. I think the only thing I'd add, Megan, is the seasonality. We don't quite understand yet on the game. So if we're airing on the side of caution a little bit, it's because we don't quite grasp the seasonality yet. However, where I do think we have some bullishness is on the mid and long term for the game. When you look at games that reach this hyperscale like Monopoly Go! has, and you look at just the sensor tower data for North America and Europe, 10 of the 20 best performing games have been out for 5 or more years. This is a game that's going to be a really strong and positive annuity for us for a long time to come. We're still learning a little bit quarter-to-quarter what the contribution will be.

That’s really helpful. Thanks so much.

Thank you.

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

Hi, thank you for taking my question. Has anything changed in your outlook and thank you for the answers to the initial question that answered some of my questions? So I was just wondering, has anything changed in your outlook for MAGIC: THE GATHERING underlying business if we were to exclude, obviously, the digital aspect? For today's guidance revision, is there any change in the underlying outlook either towards better or slightly worse as it relates to the analog part of the business?

No. I mean the analog part of the business is doing better than I think we would have expected. It was up around 5% for Wizards in the first half of the year. When you look at the toy category as a whole, it's really MAGIC and LEGO that are outperforming and driving the overperformance in the category Trading Card Games and Building Sets. We don't see a reason for that to abate in the second half of the year. I think when we think about MAGIC, we think a little bit about what the release cadence looks like. It's going to be lighter this year than it was last year. We look at the quality of the sets and we think those are very strong. If you just look at pre-orders for Bloomboro on Amazon.com and look at the new product charge, it's one of the best performing sets we've seen for MAGIC in several years. We're pretty bullish on that. I think the second half is going to be lighter this year than it was last year just because of the release cadence, but I think you're going to see a nice uptick in 2025 with a really stacked line-up that we have starting relatively early in the year with Final Fantasy and a nice coda to that with our first Marvel release.

That's very helpful. Thank you. And then Chris I had a bit of a bigger picture or rather a very long-term question related to the nuance shift to kind of Hasbro being a games company that's making a choice from toys and games company before. If you think about the success of Monopoly Go! and upside from that franchise that was primarily sort of due to lower customer acquisition costs to do the strength of that franchise that really essentially stand from a traditional toy. How does longer term kind of departure from traditional toys position Hasbro to continue to win in digital? I'm not sure if my question makes sense, but it's a very sort of long-term big picture question?

No, I think I get the crux of where you're going and Gina might want to open as well. When I talk about games, IT and toys being the core of Hasbro, what I really mean is that's what I think a healthy great modern toy company is ultimately going to become. So it's about skating to where the Puck is going as opposed to where the Puck has been. I think physical products will always be important for kids, but when you look at what the megatrends are inside of the business of play, play is aging up. Play is going more international. It's going more digital, it's going more direct, and partners are becoming more and more important to be able to extend brands into additional aisles whether that's the toy category or outside of the toy category and additional experiences. Our strategy is all in across each of those. We still have a bit of turnaround work to do in our core toy business. We've been losing some volume on that the last couple of quarters, but I feel good about how we're getting our arms wrapped around that, particularly the cost side. You'll see that core toy business start to experience growth in the later stages of Q3 and more decisively in Q4 in 2025. When I look at the cards that Hasbro has and where the megatrends are in terms of the business of play, I feel really good about how we're positioned and the long-term prospects of the company.

Just to build, because I think that was an excellent setup. We owe you a broader conversation about where we're headed and to come in the new year. We'll be having an Investor Day, we'll sit down and talk through all of this because our strategy is shifting, as you heard, following the growth trends, which follow the profit and the business models, too. You can see it play through in our results where we're headed to a much more profitable place as we're leaning into games and IP. All of the efforts that we're making on the toy turnaround. Our focus there is really on getting back to profitability and getting back to growing share in the categories where we're competing. Our IP, our business, and our brands are set up very well for where we're headed.

Thank you both. Very helpful.

Our next question comes from the line of Christopher Horvers with JPMorgan Chase & Company. Please proceed with your question.

Thanks and good morning. So my first question is, can you talk about the headwind that the Transformers movie lab presented here in the second quarter and also the exited business headwind as we try to tease out what the underlying business trends in the consumer products business and then bridge that to your assumption for the inflection ahead in the third and fourth quarter and perhaps reconcile that back to what you're seeing on the POS side?

Sure, Chris. I'll give the English major answer and then you'll get the Kern answer from Gina following. Good morning, by the way. In the second half of last year, we had quite a number of releases, both from our partners at Disney, as well as the Transformers movie, which saw POS up 90% in Q2 of 2023. It's down a bit this year, around 5% or 6% through the first of the year, which is remarkable because we haven't had a lot of content since that movie. We see a surge in Transformers POS likely starting in the August, September timeframe going into Q4 around the release of Transformers One. Every indication we have from early screenings and tracking suggests that movie is going to be a real fan favorite with some nice legs into families. We believe it will sell a lot of toys, as Transformers movies tend to do. We also like the back half of the year in terms of new content that we have for Beyblade. Although Deadpool & Wolverine is shaping up to be a nice big movie, I don't think we're going to be selling a lot of preschool products for that, but certainly, there's a nice collectors business associated with it. When thinking about Q3 and our expectations for growth, we see that entertainment window popping up in September and extending into Q4, along with resets we did in Q2 for products like NERF and Beyblade. You’ll start to see the impact in August and September as those start rolling out to several thousand stores.

Got it. And now for the math answer, not the English one. Good answer. Good morning. So as we think specifically about what is happening within our shipments in the quarter, besides TRANSFORMERS, which was an impact, closeouts were down materially again. We talked about closeouts in Q1, we were down about 50%. Q2, we were down 57%. So that hurt shipments and health margins, but we're okay with that trade-off. The second piece you asked about was the exited businesses. That represented about three to four points of the decline and that's going to carry with us into the back half of the year. In aggregate, I think about three to four points still coming from those divested businesses or exited businesses.

I'm trying to assess the current underlying gross margin rate for the business. Looking ahead, the mix from MAGIC and Digital Games may influence this. If we exclude the impact of the $35 million increase, the implied margin is in the mid-30s range compared to 48% for the first half. Could you provide your insights on the current situation and how that is expected to grow over time?

Yes. I think that's generally right. As we continue to see that mix shift towards digital, that'll be a big driver of the continued growth. As we think about the back half of the year and what's going to carry with us, we still have a fair amount of cost saves within our purchase expenses and our people cost savings. All of the actions we put in place at the end of last year will continue to increase in terms of magnitude as we move through the back half of the year. As we move to '25 and '26, we'll have all the benefits of a refined mix plus a much healthier cost structure.

Got it. Thank you very much.

You’re welcome.

Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question.

Okay, thanks. Hey, guys, good morning. Maybe just sticking with margins. Can you remind us what the major margin headwinds are for the Wizards business in the second half? It looks like the implied margin is in the mid-30s range versus 48% for the first half. And I guess, more broadly speaking, why would you not be able to reach a 20% EBIT margin before 2027? What are the impediments to achieving that stated target earlier?

We were wondering who was going to ask that question. So Drew, you win the gold star. Okay. For your question on the year to go on Wizards, it all comes down to Baldur's Gate. That's really the single biggest driver of what we're lapping. Just think about the revenue contribution last year, it was very concentrated in Q3. While Monopoly Go! is going to be a good contributor for us in the back half, it's not going to completely offset the impact from Baldur's Gate as modeled within our guidance today. That's what causes the drag on margin in the back half for Wizards.

And the latter MAGIC schedule.

Yes. Yes. But the really big one is going to be that Baldur's Gate. In terms of what getting to the 20%, I mean we've been striking distance of getting there this year. I know that you can all do the math and see that. There are really two things as we think about crossing that threshold. One is Monopoly Go! So if that does contribute more than that $105 million, that will take us over. The other thing is Consumer Products. We still have a range in margin on the CP and the range on the revenue. If we finish on the better end of both of those ranges, that will also help to get us there. We are making really good progress. At this point, I'm not going to commit to any more cost savings. I feel like we've got the right cost savings number, net cost savings number for the year, that $200 million to $250 million but if Monopoly Go! continues to be better than what we are modeling in our guidance now and Consumer Products performs a bit better, yes, we could absolutely get there before 2027.

Got it. Okay. Very helpful. And then maybe, Chris, a competitor earlier this week suggested toy sales outperformed during the first half and raised their market forecast for the year. Do you share that view? If so, where do you see toy sales shaking out for the industry in '24?

Sure. Good morning. Two things. Yes, toy sales are doing better in the first half of the year. That's driven by Building Sets and Trading Card Games. I give a lot of credit to LEGO and MAGIC: THE GATHERING, frankly, for really understanding their consumers and driving upside with what I think is the fastest-growing segment inside of the business of play, which is consumers 13 plus and really 18 plus when you think about MAGIC and what LEGO's been doing. When you look at the balance of the industry, it's roughly performing what I think us and a lot of the industry prognosticators and our peers in the industry thought. We see that roughly carrying into the back half. When we think about our guidance for toys, call it down high single digits when you take the median of what we're seeing. We're factoring in both the exited businesses and what we think will be a toy industry that will be down kind of in that mid-single digit range but starting to hopefully improve a bit in the back half and the category tailwinds we saw in building blocks and trading card games potentially growing a bit for more categories. A lot of our guidance, though, isn't really based on the industry; it's based on our execution and the retailer support we have.

Got it. Thanks, guys.

Thank you. Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.

Hi, thanks for taking my questions and congrats on a great quarter here. I wanted to drill down a little bit more on the MAGIC business. Can you just talk about the performance of Modern Horizons 3 and how big of a contribution that could be versus Lord of the Rings given you said that it's the fastest selling set of all times so far, which would imply that it's sort of off to a quicker start than Lord of the Rings. And then maybe just remind us of the contribution of Lord of the Rings and sort of how you think Modern Horizons 3 could stack up against that?

Yes, sure. Modern Horizons did get off to a strong start; a lot of collector-heavy formats like Modern Horizons appeal. We think it will have a very long tail. When you look at Modern Horizons 2, we continued to sell cards for that 30 months into its run. We expect Modern Horizons 3 to, if not be our best-selling set of all time, which is currently held by Lord of the Rings, to certainly be a contender for it. I think the difference with it is going to be the timeline. Lord of the Rings had a major set release in June and then a minor follow-up in December, which allowed it to hit $200 million really fast. Modern Horizons 3 has a big set release and a bunch of reprints, which will span out over a couple of years. I don't expect we're going to get the same bump from Modern Horizons in Q4 as we did from Lord of the Rings last year. But we will have a nice fatter tail going into 2025 and possibly 2026 from a product like that.

Yes. Alex, my only add is that within the quarter, Modern Horizons 3 outperformed Lord of the Rings. But to Chris' point, as you look over the full year, because we won't have that holiday set, that's where the overall logic will be a little bit short.

Incredibly helpful. Thanks for your clarity there. Then just digging in on consumer products, I just wanted to ask sort of what signs of green shoots are most encouraging in consumer products? I guess, what toys and properties are you most excited for in the back half? Can you give us any early reads on Beyblade specifically or any channel commentary you're getting there?

Well, I think you're still my top green shoot with just mentioning Beyblade. Beyblade is performing well in some early outings in select markets. It's probably the best performing Beyblade release we've ever had in the U.K. It usually does really well in France. And again, it's doing well in France. In the select spots, it's available in the U.S. It's selling out very quickly. Our belief is Beyblade will be one of the top new toys or refreshed toys of 2024 and could actually claim the top spot, similar to what we did with Furby last year. Furby continues to do well. We like how Furblets can drive the right price point and extend that franchise. We've also seen nice momentum with Peppa Pig. I think after a couple of years of owning that franchise, not only are we hitting the right notes on the entertainment, but we're starting to hit the right notes on the toys, particularly with the right price points and kind of the wow moments. Transformers is shaping up to be a really nice Q3 and Q4 with Transformers One. D&D also shows promise. I think you just asked about consumer products, but I'm going to talk about the whole portfolio. The D&D refresh to the core rules of the fifth edition is going out strong. Pre-orders are breaking records and exceeding our forecasts. Now, that will help a bit in Q3 and Q4 when some of the products release, but some of those products won't release until Q1 and Q2 of next year. So again, I think we have a nice healthy midterm projection on the businesses as well.

And Alex, the one I have not brand in product-related per se, but it is a positive is that we continue to trend well in inventory, both our own inventory as well as retail inventory. So retail inventory was down again about 18% to 20% within the quarter. We are sitting at super healthy levels as we head into the holidays.

Perfect. That's really helpful. Best of luck going forward.

Thank you.

Thank you. Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.

Hey, guys. Good morning. Just to stick on the Consumer Products business. I know in the past, you sort of hinted that, that could reach the 10% or double-digit target that you've talked about in Q4. I'm wondering if you could just give us an update on how realistic that is and maybe what the biggest swing factor is? Is it really POS? Is it a matter of maybe cost saves hitting soon? What sort of gets you there or potentially gets you there?

In Q4 specifically, Fred, is that your question?

Yes, for 4Q this year.

Yes. We do anticipate it getting to that 10% in Q4. It really comes down to the leverage in the volume. We've talked about that being the single biggest drag on margin as we move through the front half of the year. As you put all the revenue in Q3 and Q4, both of those quarters tend to be at that 10% to 11% mark, and that's what we're planning for. I think our goal is to have that 10% to 11% not just be in the back half of the year, but we are working towards having that be the entire year, which would then say that the front half of the year is around that 10% to 11% or maybe a little less and then in the back half of the year it’s in the low teens, leveraging or moving with revenue. All of the work that we're doing this year to get that profitability right, all of the work we're doing on pricing and mix, and getting the product design in the right way. All of that will contribute as we move into '25 and '26 to get the entire year for Consumer Products to be in the double digits. In Q4 specifically, Fred, is that your question?

Yes. For 4Q this year.

Yes. We do anticipate it getting to that 10% in Q4. It really comes down to the leverage in the volume.

Our focus there is really on getting back to profitability and getting back to growing share in the categories where we're competing. Our IP, our business, and our brands are set up very well for where we're headed.

You’re welcome.

Thank you. And we have reached the end of the question-and-answer session. This also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.