Hasbro, Inc. (NASDAQ:HAS) Q4 2023 Earnings Call Transcript

Hasbro, Inc. (NASDAQ:HAS) Q4 2023 Earnings Call Transcript February 13, 2024

Hasbro, Inc. misses on earnings expectations. Reported EPS is $0.38 EPS, expectations were $0.64. Hasbro, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good Morning. And welcome to Hasbro Fourth Quarter Full Year 2023 Earnings Conference Call. At this time, all parties will be in listen-only mode. [Operator instructions] 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.

Kern Kapoor : 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, and 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?

Chris Cocks: Thanks, Kern, and good morning, everyone. For more than a year now, you’ve heard me outline Hasbro’s strategy to refocus on play behind a philosophy of Fewer, Bigger, Better. Fewer SKU’s that drive higher impact. Bigger investment behind winning brands in more focused categories. And Better innovation driven by a renewed leadership team and a focus on kids, parents, and fans, our consumers, the lifeblood of Hasbro. We laid out a blueprint for a more focused and profitable company with a number of growth initiatives built on a diverse portfolio of some of the most iconic brands in the toy and game industry. While business transformations take time, I’m pleased with how much we accomplished in 2023, setting the table for a 2024 punctuated by strong profit growth and momentum in renewing Hasbro’s innovation engine.

We’re entering 2024 with a healthier balance sheet, a leaner cost structure, and an operational rigor that will maintain and build on these improvements in the quarters ahead. In 2023, we took substantial action to bolster our balance sheet. At the end of the year, we closed our deal with Lionsgate on eOne Film and TV, allowing us to focus our investments on higher return, play-focused initiatives across toys, games, and digital. Proceeds from the deal allowed us to reduce our debt by approximately $400 million. As we shipped our entertainment strategy to an asset light and partner-led model, we took a $1 billion impairment, a noncash item in Q4, which reflects the sale of eOne, and a change in outlook for the balance of our own and operated production efforts.

This shift frees up more capital for us to reinvest in toys, games, and particularly our digital future. Between hard work from our sales and operations teams and some of the financial actions we took at the end of the quarter, we entered 2024 with inventories down over 50% year-over-year, which is well below 2019 levels. We also took steps to improve our structural profitability, exiting a number of low or negative profit businesses that we have shifted to a licensed-out model. Finally, we are driving better than expected cost savings through our operational excellence work. Unlocking crucial investment capacity as we seek to connect with fans of all ages and across all play patterns. Previously, we communicated $350 million to $400 million in annual run rate savings.

We’re updating our target to $750 million of gross savings by the end of 2025, with half of it dropping to the bottom line. This allows us to reinvest in our business, meaningfully improve our cash flows, and return cash to our shareholders, which we are committed to continuing through our category-leading dividend. Since I became CEO in 2022, Hasbro’s returned almost $1 billion to shareholders and paid down over $0.5 billion in debt. While 2023 was challenging and we still expect the toy industry to face near-term headwinds, we believe we’re taking the necessary steps to turn around our consumer products business. Wizards and Digital Gaming is coming off a banner year led by MAGIC, Universes Beyond, the success of Baldur’s Gate III from our partners at Larian, and Monopoly Go! from Scopely.

2024 is about returning consumer products to profitability, investing for long-term momentum in games, and driving significant improvements in Hasbro’s bottom line, fueled by operational discipline and renewed product innovation. In short, we’re putting all the right pieces together to keep investing in our growth initiatives while expanding the ways our franchises reach fans through digital games. We expect the next year we’ll likely see continued headwinds in the toy category. We’re exiting 2023 with our retail inventory down around 20%. While we think Hasbro’s retail inventory is in a healthy position, across the industry a lot of older discounted inventory still remains in the market. The consumer remains value conscious and we anticipate entertainment will be less of a tailwind in the year ahead, behind a reduced box office slate.

Anticipating these headwinds, we made necessary choices to get our cost structure and inventory positions healthy. Accelerating a number of cost savings initiatives by several quarters. Since I became CEO, we have significantly enhanced our consumer insights capabilities and upgraded our design and toy leadership. In 2024, we’ll see more and more of the resulting innovation improvements as these capability upgrades come to market across our portfolio. As such, we believe we’re in a good position to at least pace the industry this year with innovation and share trends accelerating to ahead of market as we head into 2025. Turning around a product pipeline is key, with the right people and the right insights. At the end of the day, it’s all about great product.

In the back half of 2023, we started to see the first evidence of our new team and products working. Take FURBY, for example. This was a product we took our time testing and iterating based on consumer insights. It paid off as FURBY was one of the top new toy introductions in 2023. We continued the FURBY craze in December with the launch of Furblets, another hit introduction, and we’re excited to continue building this franchise in 2024. 2023 was also a strong year for our TRANSFORMERS franchise. On the back of the hit movie, Transformers Rise of the Beasts from our partners in Paramount, driving point of sale growth of 35%. We have some exciting activations planned as we celebrate the brand’s 40th anniversary in 2024, as well as the star-studded animated movie, Transformers One, coming this summer along with fresh merchandise.

This year also marks PEPPA PIG’s 20th birthday. We’ll be celebrating with new, innovative products and an entertainment special featuring A-list talent Katy Perry and Orlando Bloom. After gaining share in the arts and crafts category in 2023, with another strong year including our ultimate ice cream truck, the Play-Doh team continues to innovate, expect more creative surprises and new cross-brand collaborations in the year ahead. In action figures, we are leaning into our category-leading collaboration with The Walt Disney Company for their Marvel Superheroes Assemble marketing campaign, featuring new price points and products across our lines, including all new preschool fun with Spidey and His Amazing Friends. For Star Wars, we’re excited to expand our best-selling Lightsaber Forge Kyber Core series and introduce our new $7.99 Epic Series 4-inch action figures.

We saw an incredibly strong launch from Beyblade X last year in Japan from our partners at Takara Tomy and are eagerly anticipating the U.S. launch this summer, What we believe will be one of the hottest new toys of 2024. It’s an exciting product that we think long-time collectors and kids fresh to the franchise will be thrilled with. The blaster category continues to be under pressure, but we also continue to believe this is a strong and enduring play pattern for fans of all ages. This year we’ll be introducing new innovation into the category, featuring a new performance start technology, pop off-the-shelf design and attractive pricing up and down the range. Board Games continues to be a leading category for us, and one we anticipate will grow in the year ahead.

Twister Air was a number one new game across the G-10 markets in 2023, according to Sircano. Thanks to an innovative new augmented reality experience. You’re going to see a renewed focus on expanding genres, leveraging our reach and distribution strength to introduce more cool new games than ever, and working with some of the brightest designers in the industry to give their games a platform they deserve. Whether it’s adult party games, family card games, casual strategy, or extending mega hits like Monopoly, 2024 will be a big year for gaming from Hasbro. Speaking of games, Wizards and Digital outperformed our guidance in 2023, driven by a series of blockbuster hits. MAGIC had another record year in ‘23 with a string of amazing new sets, including our best-selling set of all time, The Lord of the Rings: Tales of Middle-Earth.

While a product like Lord of the Rings creates a tough comp in 2024, we have some unique sets that fans are eagerly anticipating, including March’s Fallout, a new commander-focused Universes Beyond product line, this summer’s Modern Horizons III, the sequel to our prior best-selling set of all time, and this September’s charming new world, [Bloom World]. We continue to see the power of our franchises play out with our digital licensing partners. Monopoly Go! from partners and Scopely is the number one mobile game launch of all time in the U.S., outperforming the launches of global phenomena like Pokemon Go and Candy Crush, and the fastest mobile title to reach $1 billion in the U.S., and the game continues to break records. In Q4 alone, the game drove more than $800 million in revenue worldwide for Scopely.

As far as our financial participation goes for revenue and profit, it’s like having the equivalent of $1 billion movie supporting Monopoly, except every year, with the impact growing sequentially as the game works through our minimum guarantees and marketing allowances. Baldur’s Gate III from our partners of Larian continues to win awards around the world and is one of the highest rated video games of all time. We expect a long tail into 2024 and beyond for this mega hit. Last but not least, we have a compelling new lineup of adventures, core rulebooks, and new digital first offerings for D&D as we celebrate this iconic brand’s 50th anniversary. We’ll launch the biggest update to fifth edition since its introduction in 2014, reinventing everything from the artwork of our iconic monsters, to new classes, to new mechanics, to bold new ways to bring to life the world of D &D digitally.

All of this will add up to more and more impressive product as the year goes on, leading into an even brighter 2025. We look forward to sharing more about 2025. All new brands, entertainment collaborations, and a chance to really show what this team is capable of later this year. Wrapping up, 2023 was a challenging year, but not without significant wins. Wins we believe augur the Hasbro to come. A company rededicated to play, innovation, and fun for fans of all ages. Last year, we launched a top toy with FURBY. We won a Game of the Year award with Twister Air. And we wowed tens of millions with Monopoly Go! Transformers Rise of the Beast, Baldur’s Gate III, and Magic Lord of the Rings, all while cleaning up the business, selling eOne, paying down debt, and clearing excess inventory, which makes for a healthier, stronger Hasbro to start 2024.

I’m excited to see the results to come. I’d now like to turn over the call to Gina to share more about our detailed results and to provide guidance for the year. Gina?

Gina Goetter: Thanks, Chris, and good morning, everyone. 2023 marked an important milestone in our transformation towards a more streamlined and profitable toy and game company. As Chris mentioned, transformations take time and amidst the tough industry backdrop, I’m proud of the progress the Hasbro team made over the past several quarters in resetting the business and getting us in the best position for 2024. Before I touch on the financial highlights from the past year, I want to recap three major actions we took and how to think through their impacts. First, we successfully closed the sale of the eOne Film and TV business to Lionsgate, and we used the proceeds to reduce debt by $400 million, which will result in annual interest expense savings of approximately $25 million.

In addition to reducing our leverage, the sale of eOne frees up capital to invest in higher growth initiatives, while allowing us to continue monetizing Hasbro IP in an asset-light structure. In conjunction with the sale and the change in the business strategy for family brands, namely PEPPA PIG and PJ Masks, we recorded a noncash, goodwill and intangible asset impairment of approximately $1 billion, which you will see in our reported results. As we look to 2024, besides the reduction in interest expense, we also expect to see an improvement in operating margin, as well as an improvement to cash flow, given the reduction in production spending. Second, in Q4, we accelerated efforts to clean up our excess inventory. As I had mentioned last quarter, we were focused on starting 2024 in a cleaner position.

And we would remain agile in taking actions consistent with broader category momentum. While we landed within our revenue guidance, we did not see the holiday season pickup that we were hoping for, and as a result took more aggressive actions in bringing inventory levels down over 50% from the prior year. Our inventory is now running well below pre-pandemic levels, and we believe this improved position will allow us to drive higher value retail distribution and return focus to upcoming toy and game innovation. We also expect annual savings of roughly $10 million from exiting overflow locations previously used to store excess inventory. And while this was the right decision for the long-term health of the business, the near term impact from accelerating this cleanup resulted in a roughly $130 million noncash impact to operating income.

Lastly, as part of our operational excellence program, we made the difficult decision in Q4 to reduce the size of our workforce. While these decisions are never easy, this move will enable cost savings, which will improve profitability and fuel investments towards long term growth around toy and digital games innovation. Moving to our financial results and business segment highlights, in Q4 we saw a continuation of the trends seen throughout much of the year. Total Hasbro revenue of $1.3 billion was down 23% versus last year. Wizards of the Coast and Digital Gaming revenue increased 7% behind ongoing contributions from the award winning Baldur’s Gate III and Monopoly Go! Consumer products declined 25% due to the planned business exits, broader category declines, and an enhanced focus on clearing inventory.

Q4 adjusted operating loss of $50 million was down year-on-year, mostly driven by nonrecurring and noncash charges of $168 million which includes the $130 million of inventory write off. We believe the cleanup efforts are behind us as we are starting 2024 at much healthier levels compared to prior years and our retail inventory is at an acceptable level. Q4 adjusted net earnings were $52 million with diluted earnings per share of $0.38, also down versus the prior year, primarily due to the aforementioned nonrecurring charges. For the full year 2023, total Hasbro revenue of $5 billion was down 15% versus 2022 and within our previously stated guidance range. Wizards of the Coast and Digital Gaming revenue grew 10%, ahead of our guidance benefiting from the success of Baldur’s Gate III, MAGIC: THE GATHERING, and Monopoly Go! Consumer products revenues were down 19% for the full year driven by planned business exits, softer industry trends, and stronger inventory management on behalf of our retailers.

Adjusting for the exit of brands and markets, revenue would have declined by 15%. And despite the tougher category backdrop, we delivered some bright spots within our toy portfolio, including Transformers, Twister Air, Furby, and GI Joe. On a reported basis, the Entertainment segment revenue declined by 31% as the writers’ and actors’ strikes impacted content deliveries. Family Brands revenue grew 6% from streaming deals of animated content in support of Hasbro’s brands. Total Hasbro Inc. 2023 adjusted operating profit was $477 million, down 48% versus last year, primarily driven by the nonrecurring expenses, as well as lower revenues. 2023 adjusted net earnings of $349 million, or $2.51 per diluted share, was down 44% versus last year. Besides the charges for inventory, earnings were negatively impacted by content impairments and higher royalty expense, partially offset by our cost savings program and a one-time tax benefit.

Operating cash flow for the full year was $726 million, well ahead of our guidance and nearly double from the prior year, driven mostly by a working capital benefit of approximately $350 million due to the inventory cleanup efforts. We ended the year with $545 million in cash on our balance sheet and reduced debt by approximately $500 million. We also returned $388 million of capital to our shareholders via dividends. Before I move to guidance for 2024, I want to frame how we are thinking about the year ahead from an operational perspective, and in particular, how we’re looking to turn around the consumer product business. In 2023, we took the necessary steps in our transformation to reset the business. This year, with the right foundation in place, we are focused on reinvigorating innovation across the portfolio, while continuing to drive operational rigor, which we expect to pave the way for sustainable profitable growth.

The near-term model that we’re building is one where cost productivity provides the fuel to innovate and grow the business. And in 2024, there remains a significant opportunity to improve the underlying profitability, while rebuilding its innovation engine. These two go hand-in-hand and align with our overarching strategy of focusing on Fewer, Bigger, and Better brands. Over the past several quarters, we have been mobilizing around this imperative and taking actions to simplify and prioritize resources on our largest portfolios and biggest bets. One of the single biggest contributors to complexity reduction relates to our product portfolio. Moving into 2024, we have eliminated about half of our SKUs. These SKUs were only 2% of our revenue and were duplicative and unprofitable, quashing the network and creating cost for us and our retailers.

Along similar lines, we made the decision to move to an out-license model for brands where we determined the respective path to scale and profitability as an owned and operated entity did not meet our internal threshold. In 2024, for Real Friends, an Easy-Bake Oven will transition. While there are short-term impacts to revenue from this model shift, we ultimately can expect greater operating profit dollars from out-license IP and it allows us to focus resources back to our core brands. In 2023, we started the work to streamline our supply chain and improve the efficiency of the organization. And in 2024, we will be continuing these efforts by reaching further upstream to unlock value in our product design and manufacturing processes. We are taking an organization-wide focus across the supply chain, brandings, product development, procurement, and manufacturing to identify waste and redefine the right design-to-value equation for each product.

Ultimately, this will culminate in higher margins and contribute to an improved play experience. We started this work last year on select brands within our Hasbro gaming portfolio and will be rapidly extending this approach to two of our biggest brands, NERF and Play-Doh. Also, within our supply chain, we are building new capabilities within planning and forecasting to ensure that inventory levels, both owned and retail, remain within the desired threshold. We made significant progress coming out of 2023 and these updated processes and tools will ensure that we maintain a healthy inventory position. Since coming on board at Hasbro, I’ve talked about the imperative to bring costs down within managed expenses to stop the dynamic of overhead growing faster than revenue, particularly within the consumer product segment.

In December, we announced the next round of actions to address the organizational structure. We have also introduced zero-based budgeting as a tool to help us optimize our spending and ensure dollars invested are driving the right actions in our in-support of our strategy. And finally, we are continuing to enhance our capabilities around consumer insights, revenue growth management, and marketing effectiveness as core drivers in strengthening our foundation and enhancing product development. Looking forward to the 2024 holidays, we have more innovation compared to last year that’s backed by insights and stronger pricing precision. This, coupled with stronger planned execution with our retailers, will enable Q4 growth across the toy business.

Turning to guidance for 2024 and looking more closely at the two main operating segments, total Wizards revenue is forecasted down 3% to 5%. The decline is primarily a result of the strong growth delivered in 2023 behind the launch of Baldur’s Gate III and the Magic Lord of the Rings set. Looking at each of the pieces, we are planning for growth within D&D with the upcoming update of the fifth edition and the continued expansion of D&D beyond. MAGIC will have the same number of releases in 2024 as last year, but revenue will be flat to down as we count Lord of the Rings. It’s important to call out that MAGIC will be back to growth in 2025 as we expand our Universes Beyond lineup. Licensed digital games will be relatively flat. The revenue from Baldur’s Gate III will begin to taper down as we move through the year and will be partially offset by the continued momentum of Monopoly Go! With the success of the game, we are now anticipating that we will begin to record revenue higher than the contract’s minimum guarantee in the back half of the year.

From a phasing standpoint, we expect Wizards revenue to grow in the front half with a decline coming in the back half as we comp the huge launches. Wizards operating margin will be between 38 % and 40%, which will be up 200 to 400 basis points versus last year. The margin improvement is a result of a favorable mix shift within digital, lower royalty rates across MAGIC, and strong cost management within operating expenses. Margin are also benefiting from supply chain cost productivity more than offsetting the inflation. For Consumer products, revenue will be down 7% to 12%. About half of the decline is due to actions we’ve taken to improve profitability, including the planned business exits, as well as a reduction in unprofitable closeout revenue given the significant inventory cleanup executed at year end.

The other half of the decline is a result of prevailing category trends. Overall, we are planning to grow share in the categories in which we compete and are leaning into innovation green shoots with step ups in Hasbro gaming, Beyblade, Play-Doh, FURBY, and NERF. And we are also adopting a more agile approach with our marketing dollars to better target consumers and increase the effectiveness of the spend. We are forecasting revenue trends will improve as we move through the year with steeper declines in Q1 and Q2 and stabilization coming in the back half of the year behind innovation, marketing effectiveness, and maintaining healthy retail inventory levels heading into the holidays. A key focus for 2024 is improving the profitability of toys.

And we are forecasting operating margins to be between 4% and 6%, which is 500 to 700 basis points better than last year. Approximately 400 basis points of improvement is driven by the lap of the nonrecurring inventory charges. And this is almost completely offset by the anticipated volume declines and associated deleverage impact. The additional margin expansion is driven by a combination of favorable product mix due to less close-up volume, supply chain cost savings more than offsetting inflation, reduced complexity across the network, and operating expense reductions. Margin will also be positively impacted from the work on SKU elimination and design the value, which I mentioned earlier. For Entertainment, stripping out the impact of the eOne divestiture, revenue will be down approximately $15 million versus last year.

And operating margin will show significant improvement driven by operating expense reductions, as well as lapping the impact of the D&D movie impairment in 2023. We will continue to report entertainment as a separate segment for 2024, albeit on a much smaller base. As part of the 2024 guidance, we are increasing our gross cost savings target through 2025 from the $350 million to $400 million communicated in December to $750 million. Through 2023, we have delivered approximately $220 million of gross cost savings and anticipate a sizable step up as we move through the next two years. Roughly half of the gross cost savings will drop to the bottom line as we focus on improving profitability and the remaining dollars will be reinvested back into the business to support growth initiatives including the reinvigoration of toy innovation and the continued investment in the gaming business.

With the improvement and operating margin across all segments, Total Hasbro Inc. EBITDA is forecasted to be $925 million to $1 billion, up $215 million to $290 million versus the prior year. The positive impact from the cost structure reset as well as the lack of the one-time inventory cleanup in 2023 is more than able to offset the revenue decline and cost inflation. We are planning for relatively flat-owned inventory levels in 2024 and estimate approximately $225 million of project capital to support growth initiatives and invest back into the infrastructure as we continue to rebuild the underpinning of the operation. Ending cash will be slightly down versus 2023, driven by relatively flat-owned inventory levels, increased capital project spending, and additional costs associated with the restructuring actions announced in December.

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 leveraged targets and pay down debt. As you heard Chris mention, we remain committed to our category-leading dividend and believe that the changes that we’ve made within working capital to free up cash, as well as the changes we’re making on the broader cost structure, provide enough cash flexibility to deliver on the capital allocation priorities. The board has declared our next quarterly dividend payable in May and keeping consistent with industry best practices as we move through 2024, we will be shifting the declaration of the dividend to more closely align with the record dates.

And to close, looking out beyond 2024, we expect that the Consumer product’s business will return to low single-digit revenue growth and that Wizards will return to mid to high single digit revenue growth. With our step-up in cost savings, we remain committed to getting to 20% operating margin with the potential to reach that milestone before 2027. And with that, I’ll turn it back to Chris to wrap up.

Chris Cocks: Thanks, Gina. Turnarounds take time. And for our toy business, we are still in the early innings. While we’re likely to face some near-term industry headwinds in 2024. And we’re comping a better than planned 2023 for Wizards. The work we’ve done under the hood to strengthen our balance sheet, upgrade our planning and right size our inventory is a strong foundation to build from. I want to thank the teams at Hasbro for driving this and putting our fans first. This year is all about execution. As we build on that foundation, drive our profitability, and reinvigorate our innovation pipeline for category share gains in 2024, and renewed top-line growth in 2025 and beyond. We’ll now pause to take your questions.

See also 25 Fastest Growing Real Estate Markets in the US and 20 Fastest Growing Energy Companies in the US.

Q&A Session

Operator: [Operator Instructions] Our first question will be from the line of Eric Handler, ROTH MKM.

Eric Handler: Good morning. And thanks for the question. A lot to digest here. I wonder if you could talk about what the retail situation and your cost structure look like international versus North America?

Chris Cocks: Sure. I think perhaps Gina and I will answer this question. Good morning, Eric. Generally speaking, we’re feeling pretty good about where our retail situation is. In the U.S. and Europe, in terms of retail inventory, we’re down about 20% year-over-year. That translates to about a four-week improvement on the supply. So between Europe and the U.S., we generally have about 17 to 20 weeks of supply at our major retailers, which is about what we’d like to see. It’s about what our normal is pre-pandemic. So generally speaking, that means we neither see retail inventory as a tailwind nor a headwind, which is nice because over the last year or so, it’s been decidedly a headwind as retailers have been trying to right size their inventories.

I think if we have any concerns inside of retail, it’s that there’s still a lot of industry discounted merchandise, particularly in what we would call the growth channel or kind of like value resellers. That’s going to take a quarter or two to work through. But again, based on our inventory position, we have very little aged inventory and any aged inventory we have has a PO associated with it. So we feel in a generally good position. Gina, anything to add?

Gina Goetter: No, Eric, the second part of your question about the profitability between North America and our international markets. I mean, North America is our highest margin market. Within international, a couple of things that draw that margin profile down. One is within the allowances and just how we intersect or interact with the retailers. That is a bit more costly than what we have in the US. And the second piece is really within our overhead structure to support the international business. Both of those pieces we are working to address. So through our initiatives of revenue growth management, that is squarely focused on all of that cost that’s sitting between post revenue and net revenue. And then the second piece on overhead, all of the cost savings initiatives that we’ve put into motion will start to attack the cost structure of rather North America as well as the international.

Eric Handler: Great. And then just as a follow up. Chris, you’ve talked before about being the inevitability that MAGIC has to see slow down. just because of law of large numbers in revenue. And D&D was supposed to pick up the torch and drive higher growth. I wonder if you could talk about maybe some of the key drivers with D&D that as you look at over the next few years, where what’s going to build that business even more?

Chris Cocks: Yes, for sure. So last year, we were fortunate in that both MAGIC and D&D were growers for us. The MAGIC tabletop business was up probably in the 3% to 5% range. We had a little bit of attrition on digital, but still the business was up low single digits. And D&D was up over 75% on a total brand basis. I think the contributors for D&D’s growth last year will be very similar to what they’ll be moving forward. We continue to think D&D Beyond was an excellent acquisition. It really is the way increasingly people are playing tabletop role-playing games. I think it’s an excellent platform for us to build upon and expand the ways that people can play, the ways that people can experience theater of the mind. And also for us to distribute and showcase a more diverse set of content, whether that’s Universes Beyond style content, like we do with MAGIC, or our major creators content or user-generated content.

So I think you’ll see more from that on the tabletop side. We continue to have a robust entertainment slate on D&D that we’re working with several partners behind, notably the new streaming series from Paramount that we’re partnering with them on. And then video games will clearly be a huge leg up on the D&D business. Baldur’s Gate III is one of the seminal role-playing games of all time. It’s won multiple games of the year awards. Our partners at Larian really knocked it out of the park with that and were fantastic to work with. Baldur’s Gate III is just the first of several new video games that will be coming out over the next 5 to 10 years that I think will continue to power that franchise. And really, I think the three combined, continued innovation on tabletop, powered by D&D Beyond, targeted entertainment, working through partners in an asset-light model, and then great video game content through licensees and through our own internal studios.

I think the future is bright for that brand.

Operator: Our next question is from the line of Christopher Horvers with JP Morgan.

Christopher Horvers: Thanks and good morning. So, first a clarification. Did you say you expect consumer products to be flat in 3Q and then up in 4Q in that mix? How are you thinking about NERF growing again? And to what extent are you taking in a shorter holiday calendar next year? And as a part of that, fourth quarter question, could you mention what the specific lift in 4Q ‘23 was from clearance sales?

Gina Goetter: All right. I will try to dissect all of those for you, Chris. So you’ve gotten the phasing generally right within CP. So as we think about the guide of 7 to 12 down, you’re going to see steeper declines in Q1 and Q2, similar to what we saw playing through Q3, kind of the average what we saw playing through in Q3, Q4. As we look at Q3 of ‘24, we start to stabilize as we move into Q4, we’re planning for growth. As we think about which brands are going to carry it, it’s really behind the strong innovation that we’re putting in, NERF being one of them. So we do have some innovation that’s coming. That will be a market kind of in the back half of the year as we head into holiday. In terms of your last question on the lift specifically from closeouts, I don’t know that I have that number to an exact extent.

What I would say is that our closeout volume and revenue was generally consistent with what we saw play through the year prior. There wasn’t a huge, a huge delta from previous years. And then couple that with all of the efforts that we took to clean up inventory as we’re looking here in the front part of the year, we’re seeing that closeout volume come down quite significantly. So nothing I would call out as different as we played through Q4.

Chris Cocks: As you think about the back half, Chris, I’d be really looking at Beyblade X as a huge launch for us. It did many orders of magnitude larger in the launch in Japan last year versus Beyblade Burst from 2016. We’re expecting it to be quite a runner and the early feedback from the toy fairs is our retailers are getting behind it as well. We have some really cool innovation across price points for Play-Doh that I think will continue to the run on that brand, both building share and building point of sale and sell-in. And then we have quite a lineup of board games that will be coming out throughout the year. But generally speaking, we have a good Q4 for our board games and we think this year will be no exception.

Christopher Horvers: Got it. And then on the MAGIC business, because how many of the larger releases that you mentioned, would you expect could eclipse $100 million? And then from a Universes Beyond perspective, was there any shift into ‘24 from IP partnerships that you were expecting in ‘23? Thank you.

Chris Cocks: Sure. So last year, we did six premier sets per year, which is like large sets that go across formats. I think last year five of our six premier sets eclipsed $100 million. I don’t think we have a specific forecast for each of the premier sets this year, but we will have six sets this year. We think actually we’ll have probably slightly less kind of secondary sets or secondary SKUs associated with MAGIC. And so we’re projecting flat to slightly down for the brand. So I think you can do the math and say it’s roughly about the number of equivalent sets that are hitting that $100 million bogey. As you think about Universes Beyond, last year we had our first what we would call premier set for Universes Beyond that was Magic Lord of the Rings.

That did over $200 million in under six months. This year we have some smaller Universes Beyond sets. The first one’s going to be fallout, which will come up in March. That won’t be at the same scale or size, but we’ll do better than what a typical commander set would do. But starting in 2025, we’re going to have two premier Universes Beyond sets as part of our mix. And we believe the brands that will be shipping in 2025 have the same kind of carrying power as the Lord of the Rings. The one that we’ve announced will be in the front half of the year, and that’s Final Fantasy, which is just a juggernaut in role-playing games. We’ve announced partnerships with a host of other brands, Marvel being one of the last ones that we kind of talked about.

There’ll be multiple sets associated with that. So for ‘25 going forward, you should expect to see as part of our six premier sets per year, two of them will be Universes Beyond branded. And we think we’ll have a similar uplift to what we experienced with Lord of the Rings. And so that’s underlaying a lot of our bullishness on the growth for MAGIC.

Operator: Our next questions are from the line of our Arpine Kocharyan with UBS.

Arpine Kocharyan: Hi, thanks for taking my question. So EBITDA finished the year at around $700 million, and you expect around $250 million of incremental cost base in 2024, but then you’re probably annualizing cost base from 2023 with some kind of underlying decline in EBITDA. Could you just maybe bridge to the puts and takes of 2024 EBITDA guides for the year for us, because there’s also cost to those cost savings, as I understand, if you could just go through the puts and takes. And then I have a quick follow up for Chris.

Gina Goetter: Got it. Sure. Very happy to do so. So if you kind of name some of them, we think about the build from where we stood in the $750 million. Keep in mind that we have that one time, all those non-recurring charges come back. That is the benefit to us next year. That becomes a tailwind. Almost completely offsetting that tailwind, though, is the volume coming down, the revenue coming down. So the one-time benefit is offset then by the volume kind of delev impact. Overall, we have supply chain productivity that is going to be offsetting inflation. So when you think about the cost save, that’s one piece of the cost save, supply chain productivity. The second big piece really is what’s happening within our operating expenses.