Hasbro Inc

NASDAQ:HAS

Good morning, and welcome to the Hasbro Fourth Quarter and Full Year 2024 Earnings Conference Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this [indiscernible]. 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. And joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Chief [ Financial and Operating Officer]. Today,, we will [indiscernible] 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 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 [indiscernible], we are referring to earnings per diluted share. Before we begin, I would like to remind you that the call and the question-and-answer session that follows, members of Hasbro management may make forward 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 or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual work on Form 10-K, our most recent 10-Q, today's press release and in our [indiscernible] disclosures. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this call. I would now like to introduce Chris Cocks. Chris?

Thanks, Ken, and good morning. We closed 2024 with momentum, beating plan board, our Wizards of the Coast and Digital Games segment had another record year. We saw strong growth across our licensing business, and we delivered the best operating profit margin in company history, eclipsing 20%, including a return to profitability for our Consumer Products segment.

We began last year a healthier, stronger Hasbro with an improved balance sheet and operating structure outlining plans for greater cost savings and reinvigorating the company's innovation engine. We over-delivered, exceeding our guidance on nearly every metric, operating with renewed discipline that we believe positions Hasbro for multiyear growth and margin expansion.

Wizards of the Coast and Digital Games was up 4% year-over-year, with an operating margin north of 40%. As MAGIC: THE GATHERING and MONOPOLY GO! proved a potent 1-2 punch with both poised for continued growth in 2025. Wizards grew for the 14th time in the last 15 years led by a booming digital licensing business. MONOPOLY GO! maintained its high levels of engagement, capping the year with a star-studded TV campaign and success with its new Tycoon club.

Baldur's Gate 3 saw solid use sales, nearly doubling our initial expectations. MAGIC: THE GATHERING had another impressive year. 2024 nearly matched 2023's record year despite fewer set releases. And the MAGIC ecosystem is as healthy and engaged as it's ever been.

We saw year-over-year increases in active players and MAGIC Con attendance and better-than-expected demand for several tent pole sets, including Q4's release foundations. MAGIC also exhibited beyond its 10 poles. We saw strong demand for backlist and secret layer, capping off the year with a record-setting Marvel offering, which sold out instantly.

D&D relieved first significant update to Fifth Edition since 2014, and closed out the year strong with both the new players handbook and Dungeon Master's guide breaking records for the best-selling D&D books ever. [indiscernible] shared more about our video game future, including a new best-selling novel for Exodus by award-winning author, Peter Hamilton, a top-rated episode on the new hit Amazon Prime Game anthology series, Secret Level, exploring more about the Exodus universe, and our first gameplay sneak peak that has Sci-Fi video game fans buzzing.

Consumer products licensing was a standout, led by My Little Pony trading cards and our out-licensed brands like FurReal Friends and Littlest Pet Shop saw POS lifts of over 50% in 2024, showing the value of our IP Vault and promise of our partnerships. The LEGO Ideas, Dungeons & Dragons Set [indiscernible] and is nominated for a Toy of the Year award.

We celebrated over 140 location-based entertainment experiences open around the globe, reaching our 50 million visitors annually, making Hasbro one of the most visited brand portfolios in the world. The momentum in our licensing business has been a huge catalyst for Hasbro, with a highly diversified and high profit revenue stream across over 1,000 partners driving over 4,000 individual collaborations.

Toy and Board Games finished the year on a much stronger footing. Our revamped innovation, marketing effectiveness and retailer alignment drove some nice wins for the holidays. One of the biggest was Beyblade, which saw demand acceleration in Q4 following media support and streaming content to the holidays. We also saw solid growth in TRANSFORMERS, following the animated movie TRANSFORMERS 1, strength in our Marvel Collector range and outperformance in preschool led by Marvel's Spidey and His Amazing Friends.

Discounting was down for the quarter across the business. In fact, when factoring in a significant reduction year-over-year in inventory clearance, our mainline toy sales grew in the quarter, indicating momentum as we enter 2025. 2024 wasn't just a good year for Hasbro proving we can deliver. It also helped up the foundation for our new strategic plan Playing to Win.

Playing to Win focuses Hasbro on what has always made us great, play and partners. Through the power of our brands and breadth of our partnerships, we bring joint community to over 0.5 million fans across the world. Whether it's 40 theme park rides for Transformers, unique collectibles for [ gem in the holograms], Epic Quest with D&D, all new video games with GI Joe, or bankrupting [indiscernible] with a well-timed hotel on Boardwalk in MONOPOLY.

Our focus on play and partners is clarifying. It has allowed us to exit noncore businesses like E1 film and TV, reduce our content budget by over 95%, while active production pipeline for Hasbro IP by 15% and take out over $600 million of costs from our P&L in the process.

Our balance sheet is stronger. Our lineup of partnerships is the best it's ever been, and our focus has allowed us to lean into high-profit, high-growth areas like Digital Game, where our brands have proven resonance and our diversified digital revenue streams allows us to self-fund the efforts.

Play is the foundation for our incredible portfolio of brands, a library of thousands of spanning our 164-year history. From The Checkered Game of Life, created by Milton Bradley in 1860 to the first mass marketed toy in history, Mr. Potato Head, 1952 to cutting-edge video games like Baldur's Gate 3.

What distinguishes us is the breadth and depth of our portfolio. Hasbro generates nearly 70% of our revenue in categories outside traditional toys for kids, games, digital licensing compounds, while we have powerhouse brands for children, over 60% of our audience is 13 or older, representing the lifetime fandom we create with consumers of all ages, whether it's collecting Spidey and Friends action figure, to completing your collection of super rare cards for MAGIC: THE GATHERING.

Our audience diversity, the lifetime nature of our fandom and the diversification of our brand portfolio gives us conviction to invest in the future of play. As strong as our brands are, partners are the rocket fuel that helps them go supersonic. In the last 3 years, our licensing business has grown by 60%. Hasbro is the third largest entertainment licensor on the planet and the biggest in Digital Games, by far the fastest-growing entertainment category of the last decade.

Across Digital Games, occasion-based entertainment, and toys and merchandising partners, our brands are expected to see over $4 billion in incremental partner-led investments over the next 3 years. Our upcoming collaborations span blockbuster movies, themed hotels, cruise ships, quick-service restaurants, category-expanding toy partnerships and, of course, AAA video games. Our approach thrives on some of the most expansive inbound partnerships in the industry.

Today, I'm pleased to announce 2 more. First off, today, we are unveiling an all-new licensing collaboration with Mattel, combining the creativity of PLAY-DOH with the empowering play of Barbie. PLAY-DOH Barbie allows children to unlock their inner fashion designer, creating PLAY-DOH fashions with amazing ruffles, bows and realistic fabric textures, all made with every kid's favorite dough for a never-before-seen creativity experience.

Second, we have many new digital collaborations in the works, but I'm especially excited to announce this one today, being a personal fan of many of this team's games. Hasbro and Sabre [ innovative ] will be collaborating on an all-new video game partnership developed by the team behind 2024s megahit Warhammer 40,000 Space Marine 2, combining high octane single-player action an amazing multiplay with SABRE's Swarm Tech. This new AAA title, one of our tentpole IPs is sure to be a hit.

Playing to Win is grounded in 5 strategic building blocks. First, Hasbro's unique advantage in aging up, driving play experiences for fans of all ages, whether it's through retail partners like Amazon, Walmart, Smiths or Target or via our growing direct initiatives, including Hasbro Pulse, Magic Secret Lair and D&D Beyond.

Second, leadership in digital play. We've been investing in video games for over 7 years through our portfolio of over a dozen projects in various stages of development, coupled with 100-plus licensing partnerships.

I'm excited to show off our first project, Exodus to the world when we launch it in 2026. James Olin, the creative visionary behind Exodus has triggered of success. Serving as a design leader for Baldur's Gate 1 and 2 as well as the Creative Director during the golden age of BioWare who helped to helm the creation of the Dragon Age and Mass Effect franchises.

Our third building block, everyone plays will drive Hasbro's expansion in fashion dolls and girls collectibles and leverage our much improved supply chain efficiency to better serve emerging markets and value channels globally. You'll see some early payoff in these areas from audience expanding play and collectible innovation later this year with some new announcements we have in store next week at New York Toy Fair.

Partnership, our fourth building block will continue to be a huge part of our story with projects in the work spanning everything from new toy collaborations, new universes beyond partners with MAGIC, new video game partnerships, AI-enabled games and toys and major new location-based entertainment investments from partners around the world.

Our fifth and most important strategic building block is profitable franchises. This doesn't mean just driving our brands through innovation and partnership. It means operating them with excellence from our supply chain to our managed cost discipline to our retail execution.

As part of this pillar, I'm pleased to announce we are increasing our cost target from $750 million by the end of 2025, a goal we are well on our way to achieving to $1 billion in total annual gross savings by 2027, with 50% flowing to the bottom line.

Playing to Win marks an important pivot for the company, a return to growth. In 2025, we are projecting modest revenue growth, coupled with continued margin expansion. Through 2027, we are projecting a mid-single-digit revenue CAGR with continued operating profit improvement. Powered by a killer entertainment slate, all nutrition and major launches from our multiyear digital investments. When we play to win, we play to grow.

In 2025, the first elements of our multiyear strategy will start to play out. MAGIC is poised to have its biggest year ever as we launched 3 Universes Beyond sets, starting with the blockbuster Final Fantasy in June. Featuring characters, items and moments from all 16 mainline games of the beloved series, Final Fantasy has the potential to be our biggest MAGIC release yet and we'll continue to drive best-in-class partner IP across the MAGIC play system with Spider-Man and a yet to be disclosed Universes Beyond set in the past. Stay tuned for more details at this weekend's MAGIC Con in Chicago.

And going beyond cards, we expect Magic's reach to grow wider than ever through content like the newly announced animated Netflix series, and live action film and TV series from Legendary Entertainment.

D&D is also set up to continue its recent momentum. This week, we released the widely anticipated 2025 Monster Manual with strong initial orders. We'll continue to build the D&D community, leveraging D&D Beyond as a marketplace. With many third-party publishing releases set for the first half, and the future of D&D's wider franchise ambitions is strong with all new video games and new entertainment on the horizon, including a new streaming series in development, the Forgotten Realms from Netflix and executive producer, Shawn Levy.

And in Board Games, the team is focused on driving growth through redesigned classics celebrating MONOPOLY's 90th anniversary, including our all new expansion packs and bringing to market fun new family games like CONNECT 4 frenzy and [ rebounds ] that we're unveiling at Toy Fair next week.

Last but not least, we have major new innovations across our toy portfolio, whether it's fun mashing collectibles, starting at $3.99 with Furby, amazing new action play with MixMashers allowing you to mix and match to customize your favorite Marvel, Star Wars and Transformer superheroes or exciting new water-based outdoor play with Super Soaker. Across price points, play patterns and age ranges, Hasbro is Playing to Win.

Playing to Win marks a new phase for Hasbro. One focus not just on cost discipline and improved profitability, but on growth and expanding our brands across new categories and new partnerships. Now I'll turn over the call to Gina Goetter, our CFO and COO, to share details on our 2024 results and provide guidance for 2025 and beyond. Gina?

Thanks, Chris, and good morning, everyone. 2024 marked a year of significant improvement for Hasbro across several [indiscernible] and operational measures. It was a year of putting wins on the board and resetting the foundation and profitable portfolio.

We continue to grow revenue in Wizards while meaningfully improving the trajectory of our Consumer Products business. We eliminated complexity across our product portfolio and within our operations [indiscernible] to streamline our cost structure and maintain healthy inventory levels.

The actions we took at the end of 2023 improved our cost structure via lower shipping and warehousing costs, scale advantages across our suppliers and reduced inventory obsolescence cost. And we built new capabilities and design to value to optimize product design, ultimately driving down costs while improving the play experience.

Altogether, we delivered $227 million of net cost savings and achieved a record operating margin. With an asset-light and operationally efficient business model, we strengthened cash flow, allowing us to reduce debt and return cash to shareholders with our category-leading dividend.

Looking at our results mark closely, starting with total Hasbro revenue was $1.1 billion, down 3% excluding the [ E1 ] divestiture, including [ E1], revenue declined 15%. Wizards revenue declined 7%, with the decline almost entirely driven by having one fewer set release in the quarter. As Chris mentioned, the momentum on the core business remains healthy as evidenced by growth in backlist and Secret Lair. MONOPOLY GO! contributed $38 million of revenue behind robust player retention and marketing effectiveness.

Consumer Products declined 1% behind exited brands and reduced closeout volume. We continue to see growth in licensing and benefited from lower promotional discounts across retailers. Q4 adjusted operating profit was $113 million for an adjusted operating margin of 10.2% over a 14-point improvement year-on-year, driven by the lap of recurring items, favorable business mix and supply chain productivity.

Q4 adjusted net earnings were $64 million with diluted earnings per share of $0.46, benefiting from improved profitability and tax rate favorability. For the full year, total Hasbro revenue was $4.1 billion, down 7%, excluding the [ E1 ] divestiture, including [ E1], revenue declined 17%. The Wizards revenue grew 4%, benefiting from the success of MONOPOLY GO! and solid performance from MAGIC. The profitable mix of revenue, a record profit margin for Wizards at 41.8%, almost a 6-point improvement over last year.

Consumer Products revenue was down 12% as growth in our licensed Consumer Products business was more than offset by exited brands, reduced closeouts and softer volume, namely across NERF and Star Wars. Despite this segment decline, we saw growth in several brands, including Beyblade, Furby and My Little Pony, and we continue to improve the profitability of the [indiscernible] a 6% adjusted operating margin or 6.7 point improvement versus last year.

On a reported basis, Entertainment segment revenue declined by 88% given the sale of E1. Absent this impact, revenue declined 4% and finished within our expectations. Total Hasbro adjusted operating profit was $838 million, up 76% versus last year, reflecting the lap of nonrecurring inventory costs, favorable business mix and cost savings.

We delivered $370 million of gross cost savings and $227 million of net cost savings and continue to track ahead of schedule, achieve the $750 million savings goal by the end of 2025. Adjusted net earnings of $563 million was up $214 million versus last year, leading to a $4.01 earnings per diluted share.

Operating cash flow for the full year was $847 million, an improvement of $122 million, and we ended the year with $695 million in cash on our balance sheet, after investing about $200 million back into the business to support organic growth.

Additionally, we reduced debt by $83 million in Q4, bringing our gross leverage ratio to 3.2x adjusted EBITDA and our net debt ratio to 2.5x. We also returned $390 million of [indiscernible] shareholders via dividends.

Looking to 2025 and beyond, we are excited to launch our updated strategy, Playing to Win, which is anchored in play and partnerships while continuing to drive additional excellence. Playing to Win is centered around 5 key strategic building blocks, targeted operational transformation initiatives and an investment framework that prioritizes spend and resources across our major brands, channels and markets to deliver strong financial returns.

The 5 building blocks that Chris described reinforce each other. And when coupled with our IP and improved capabilities drive a positive flywheel deserves to reinforce Hasbro's competitive advantage and positions us for growth. In this strategy, we are planning for the toy industry to be relatively flat over the next 3 years with growth peaks driven by strength in the broader entertainment slate.

Emerging market growth and aging up of the consumer will influence our innovation priorities and the broader video gaming market will continue to accelerate, driven by the next generation of console releases. Through Playing to Win, we expect Hasbro's business mix to continue shifting aligning more with how we see the future of play patterns.

We expect through 2027 that our digital and partner-driven licensing will represent about 1/4 of the corporate revenue mix. We also expect the broad definition of gaming to grow its contribution to our revenue mix through this period, including board games, trading cards, digital licensing and video games.

This combination of growing high-margin revenue streams, while our brand scale through partnerships will sustain our investment towards our biggest opportunities, including MAGIC and self-publishing video games, as well as continue to support the innovation pipeline for toys.

As we think about the major brands, channels and markets in which operate, a new prioritization framework will ensure we're driving the best returns on our investments. Growth brands with the highest growth in margin potential like MAGIC and PLAY-DOH and new business opportunities like our self-published video games, including 2026's released, Exodus, who will receive higher incremental investments.

Opportunities with a lower growth or margin profile, we'll see more targeted investments to maintain share and optimize profitability. And for brands like NERF, which are facing structural category headwinds, the focus will be towards reinventing the business model to ultimately put it on a path towards renewed profitability.

In addition to having the right strategic building blocks and prioritization framework in place, it is also imperative we maintain operational rigor and continue to transform the business. We have multiple initiatives underway across the organization, including the continued modernization of our IT and back office systems to speed up decision-making and reduce costs, improving the agility of our design process to bring products to market faster and the evergreen initiative of driving supply chain cost productivity inflation.

The transformation we have driven over the past 2 years has put us well on our way to hitting our goal of $750 million of gross cost savings through 2025 and we now have line of sight to reach $1 billion in savings 2027. This step-up is a result of changing how we work and building on the significant progress we have already made with supply chain.

The expected cost savings, coupled with a pivot back to revenue growth, will drive healthy profit and cash flow, allowing us to stay committed to our capital allocation priorities of investing in the business, paying down debt and returning cash to shareholders via the dividend. As cash flow increases in 2026 driven by video game monetization, we will create the opportunity for an even more balanced capital allocation framework.

Turning to guidance for 2025. We expect total Hasbro revenue to be up slightly year-over-year on a constant currency basis. Total Wizards revenue is forecasted to grow between 5% to 7%, driven by expected strength in MAGIC on the back of 3 Universes Beyond set releases. Given this set timing, we expect stronger growth quarters in Q1 and Q4.

Licensed digital games will be flat as contributions from a full year and MONOPOLY GO! will offset the moderation of Baldur's Gate 3. Wizard's operating margin will be between 39% and 40% and with a step down from last year, largely driven by the income royalty expenses for Magic Universes Beyond [ tentpoles ] sets.

Consumer Products revenue will be flat to down 4%. This includes a roughly 4-point headwind from 2 businesses: NERF, due to the structural category declines and Star Wars on the back of a light entertainment slate. We expect closeout volume to be relatively flat year-over-year and exited brands will not be a material headwind.

From [ a thing ] standpoint, primarily due to late Easter, we expect Q1 revenue to be down mid- to high single digits before demonstrating sequential year-over-year improvement. Products operating margin will be between 8% and 10%, with a step-up driven by ongoing cost savings. Given the volume stability across most business lines, we expect to see minimal impact from volume deleverage.

Entertainment revenue is expected to be flat with an operating margin of approximately 50%. Total Hasbro adjusted EBITDA is forecasted to be $1.1 billion to $1.15 billion, the increase versus last year is primarily driven by the continued profitability improvement in consumer products.

Our guidance includes the anticipated invest tariffs on imports from China and potential tariffs on Mexico and Canada as announced on February 1. It also reflects mitigating actions we plan to take, including leveraging the strength of our supply chain and potential pricing.

We also continue to diversify our manufacturing footprint to create optionality as we navigate the trade environment, and we are on a path to move from 50% of our U.S. toy and game volume originating from China to under 40% over the next 2 years.

We expect to spend approximately $250 million in project capital with half to support our internal video game development and the balance to support organic growth in toy as well as the various transformation initiatives across the organization. We expect operating cash to be roughly flat and to sufficiently fund our existing capital allocation priorities. And the Board has declared our next quarterly dividend payable in March.

As we look to the Playing to Win strategy out beyond 2025, we expect total Hasbro revenue to grow at a mid-single-digit growth rate from 2025 through 2027 with the acceleration driven by momentum in MAGIC, a stronger entertainment slate in toys and the launch of internally published video games, starting with Exodus in 2026.

We expect Hasbro operating margin to expand on average by 50 to 100 basis points annually with the favorable revenue mix shift improve toy profitability and continued cost savings towards our $1 billion goal. We also expect to reach our gross leverage target of 2.5x or better by 2026. And through a combination of debt paydown and EBITDA growth.

In closing, after significant progress in our turnaround over the last 2 years, Hasbro is stronger, focused and ready to execute our latest strategic plan. We have developed a strategy that capitalizes on our unique strengths and market advantages and is focused on creating profitable growth that positions us to drive long-term value for all of our stakeholders.

Special thank you to all of our employees, partners and customers for your thought leadership and partnership as we turn the page to this next chapter and play to win. And with that, we will take your questions. Thank you.

[Operator Instructions]. Our first question comes from the line of Megan Clapp with Morgan Stanley.

Maybe I could start, I just wanted to ask about the Consumer Products top line guide. Excluding that 4-point headwind from NERF and Transformers, you're implying the rest of the portfolios kind of flat to up 4%, which is pretty strong. Can you talk about what your expectation for industry POS is? I think you said flat over '25 to '27.

Is that consistent in '25 as well? And then how are you thinking about market share performance. If I look at your performance in the fourth quarter, it does seem like you still lost a bit of share in most of your categories. If you could just kind of contextualize how you're thinking about the industry and market share ex those 2 brands, NERF and Star Wars, that would be helpful.

Thanks for the question. I think Gina and I will tag team on it. Yes. I think we're thinking the toy industry is in the plus or minus 1% for this year, so call it flattish. That assumes our expectations on what's going on with the China tariffs as announced on February 1, but doesn't really factor in anything else that might happen in terms of government policy over the next couple of months because that's a little bit of an unknown.

We think trading cards and building blocks are probably the drivers of the toy category right now outside of that. the balance of categories are probably down low single digits. And as we look at our own portfolio, we feel pretty good about what we see in terms of our entertainment slate. Captain America had a pretty good opening weekend. We saw some pretty nice POS lifts.

So we're seeing the business respond. We've got a lot going on inside of preschool that we'll be announcing at Toy Fair that we weren't prepared to talk about today, but we think that those will have some lifts. We like some of the things that we're doing inside of girl collectibles. We also like a lot of the price point innovation we've been driving across our supply chain.

So I think you're going to see Hasbro be a lot stronger at sub-$10 and sub-$20 which is an area that I think we've under-indexed and been a little off trend on, but we think will be very on trend this year.

And then when you add on top of that, so that's CP, what's happening in Wizards, MAGIC should have a very strong year. And as we said, we think our licensing segments overall across digital and CP will probably be roughly flat this year, but still a nice contributor of profit for us.

Yes. Megan, build on that, morning, by the way. My build, if you look at the couple of businesses that we called out in our prepared remarks, that are impacting the guide but also really impacted our Q4 performance. Our Star Wars and then in NERF. So when you -- from a share perspective in Q4, those 2 had a disproportionate drag.

The other thing to keep in mind over the course of the year, but then really in Q4 as well. We had less closeout volume. So we've talked about this on a few past calls. Overall for the year, our [indiscernible] volume was down about $100 million of revenue. It was about $40 million down in Q4. That's very good for us from a profitability standpoint, but it absolutely does impact the top line and ultimately, the share results that you're seeing.

So as we look into '25, closeouts will be relatively flat year-over-year. We're not expecting that huge kind of pulled down that we saw in 2024. It will be relatively flat. But the share -- we'll have share gains in many categories, but we'll continue to be challenged with Star Wars and NERF.

Okay. Understood. And then maybe a kind of 2-part follow-up. First is just a little bit of a clarification on the medium-term guidance. So you talked about 50 to 100 basis points of average margin expansion per year. You're guiding to over 100 here in 2025 at the midpoint.

So the first is just a clarification. Is that 50 to 100 bps per year cumulative, i.e., 150 to 300 over 3 years? Or is it that the goal is to grow 50 to 100 basis points per year kind of regardless of the starting point? And then the second part of the question is, how should we think about the self-publishing video games as those start to become a bigger part of the business? How should we think about how that is embedded into your margin expansion goals?

Yes. Great question. Great question. So how you phrase the margin accretion. I will say it's cumulative. So every year, we're looking to grow 50 to 100 basis points. So it will get over to a 3-point span over the course of our strategic plan. From how video game starts to play into it, so when you think of what we've been doing, we've been capitalizing all of the expense for that development.

And then when the video game launches, we will see upticks in revenue from the unit sales. We'll see upticks in absolute profit dollars from the profit driven by those unit sales. And then we will see a nice infusion of cash. The offset, though, is in the margin because we will start to depreciate out that expense that we've been capitalizing. So some of the give-back in margin will come as a result of the video game monetization, but ultimately, we'll be in a better profit situation and a better cash flow situation.

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

So first, a follow-up on the prior question. I know you mentioned Captain America starting to see some pickup on the POS side. But there are a lot of questions that perhaps there was some holiday pull forward in general merchandise, February weakness, Hispanic consumer, weather, so on and so forth.

So could you possibly peel out the business in the U.S. as what you've seen in January and February a bit more?

Sure. We're actually having a decent start to the year. Can't go into too many details because this is the Q4 call as opposed to the Q1 call. But generally speaking, our thesis for the year is playing out in what we've seen in the first 6 weeks of the year.

Yes, Chris, my build was -- we had a -- we felt really good about how the holidays played out for us. We didn't feel like we had a significant amount of pull-in or weird merchandising activity was happening in Q4. As we look at Q1, in my prepared remarks, I talked about how Q1 will be down mid- to high single digits. And what we're seeing play through so far is tracking with that.

Generally speaking, our retail inventory around the world is flat to down as we entered the quarter. Yes, that's underlying the question too.

Yes, pretty clean.

Got it. And then as we think about the MAGIC business and the 2 big launches this year, maybe -- could you contextualize them relative to your experience on an individual basis relative to the experience that you saw in Lord of the Rings, please?

Yes, sure. So certainly, we think Final Fantasy has a good chance of taking the crown of best-selling MAGIC set and history. I'll give you a very recent example. Just the other day, we launched preorders for gift bundles for Final Fantasy, Commander gifts and gift bundles. For Lord of the Rings, that took a week to sell out. For Final Fantasy, it took an hour to sell out. So we think Final Fantasy will do pretty well.

I don't think you can necessarily quantify that absolutely, but there absolutely is a lot of demand. And then Spider-Man, we feel like that will do well. Now I think the important thing to note on Spider-Man is it's a little bit of a different complexion of a set in terms of what's incorporated into it. Final Fantasy and Lord the Rings had Commander decks, which usually constitute a fairly big hunk of assets total volume. Spider-Man will be standard only cards. There won't be any kind of [ pre-conduct]. So that will make it a bit smaller.

But again, when we did our first Secret Lair drops for Marvel in December, those things sold out within minutes. So we think both of these releases have very strong innate demand, both from existing Magic players and just as importantly, from adjacent fans who we think could be new to magic, and that's what we think the real power of Universes Beyond is, which is building the MAGIC installed base.

Our next question comes from the line of Eric Handler with ROTH MKM.

Gina, I wonder if we could dig in a little bit on your medium-term guidance. So you're expecting mid-single-digit sort of CAGR. So if is going to be, let's call it, flattish on a constant currency basis. Toys, you expect to be flattish for the next several years? I'm not sure if you're thinking that MAGIC will have a tough comp in 2026. But like what's going to be driving this acceleration? Is it all video games and new licensing or just sort of help me with the road map here?

Yes. Eric, good question. So there's really 3 things that I'll point to that drive the uptake. So first is MAGIC. So MAGIC you just heard -- you could hear Chris smiling as he was answering that question, to MAGIC is going -- we're anticipating a strong year this year, but we are also anticipating continued strength as we move into '26 and '27.

We see the pipeline. We see the momentum on the business, the fundamental health of our fan base. So we feel good that MAGIC is set up for a good runway of growth. So that's the first thing.

The second thing on toys, to your point, this year, flattish, slightly down. Next year and into 2027, we have a much stronger entertainment slate that benefits our businesses and our brands more so than we're seeing this year. So that will take toy and the CP business positive as we move through '26 and '27.

And then the third piece is the video game launch in Exodus. That will become the third kind of peak that we see. And -- and depending, we haven't nailed down the specific launch date of Exodus, but it will happen at some point in 2026. So that will be a little bit of lumpiness of growth depending on when that launch timing is set.

Yes. So I would characterize our growth expectations is fairly balanced across the business.

That's helpful. And also in terms of your video games, what is sort of a normalized cadence? And how do you think about in-house versus outsourcing your development? And then is M&A in play here in terms of possible studio type deals?

Well, I think a couple of things. First off, good morning, Eric. So you should expect one to 2 releases from us per year from '26 to '30 is about what we're thinking. And I think we've said that for several years now. I think you should also expect us to continue to lean into licensing.

Our portfolio of our pipeline of licensed products and digital has grown from 95-ish this time last year to about 110, 115 projects in development or published this time this year. I think the new news is that we're going to lean in more to JVs and partnerships as we think about our self-published portfolio for the next 5 to 7 years. The Sabre Interactive announced being an example.

That's a co-publishing deal between the 2 companies. We will -- we will each be the publisher of record. We will use the Warhammer 40,000 Space Marine 2 team to develop the product. And we think that's a pretty good model. It's a nice kind of risk adjustment for us. It helps us to be able to access some of the best talent in the industry and helps to be able to unlock some of our IP in new ways.

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

I just wanted to follow up on the midterm outlook in the context of the '25 guidance and I understand sort of the top line ramp, but I want to make sure I'm clear on sort of what the margin offset is because to Megan's earlier question, it seemed to imply a deceleration as we move throughout period, even though the top line is accelerating. So is it literally just that some of the capitalized costs hit the P&L? Is it investment in some of these video game services or capabilities they're internal? Like what is sort of the margin offset in '26 and '27?

Yes, good question. So largely, it is the capitalization. And if you look at the 2 businesses, our CP margin, we've guided to '25 8% to 10%. We expect to continue to see that moving north, moving upwards as we move into '26 and '27.

We've been committed and making progress towards getting to that, call it, low teens percentage, and that is what we've planned over the course of the next few years. The Wizards business, that's where you'll see some of that margin pullback as that capitalization plays through. But I mean, keep in mind, our Wizards business is posting record level margins. So even a slight -- that capitalization coming through still keeps the margins in the mid- to high 30s.

That makes sense. And then on tariffs, I just want to make sure I'm clear on sort of what the assumptions are. It sounds like you guys are assuming that Mexico and Canada come back in the not-too-distant future. Can you maybe just order of magnitude, how the different buckets hit are contemplated for guidance across the 3 markets?

Yes. You've got it right. We've basically taken what the administration put out on February 1, and quantify that and put it into our guidance for the year. Really, it's a China story for us. We don't source from Canada. We have minimal sourcing coming out of Mexico. So we're really watching that China rate. So that's what we baked in.

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

Just before we focus on 2025, I was just wondering, would you say this new strategy is more of a recap of where you've been headed, which is more of a kind of a gaming company that makes some toys versus toys and games company before? Or some material lineup of products or partnerships, maybe in the digital space or other areas that you're not ready to talk about today that sort of gave you the confidence to issue formal outlook here on the top line?

I would think it's fair to say we've been trying to project our strategic thinking for several quarters now, and this is an articulation of it and summation of it. We're proudly a toy company, but we think we're a very different toy company than most other toy companies.

We're huge in the games. We're very big in the licensing, and we've got a fantastic toy portfolio, which serves as the first handshake with consumers. So I think there are some important distinctions. I think I'm excited about getting back into more oriented categories in a bigger way. I'm excited about going after emerging markets in a much bigger way. I've always been excited about our digital ambitions. I think we're well ahead of most of our traditional toy industry peers. And so I think that differentiates us.

You look at the nature of our 3 businesses, licensing is up big time. It's a huge margin driver for us. It's relatively inexposed to like some of the tariff drama that's going on right now. Games tends to be a nice business for us that has a great secular growth pattern.

And toys, while the category has been down for the last couple of years post COVID, it's traditionally a very stable business, and we've got some great brands. And I think the team that we put in place in toys over the last 18 months, you're going to see some nice wins from them over the following 18 months as you really -- as they put their mark on our product portfolio.

Great. Great. So to [indiscernible] down to profitability a little bit, and this might depend on what you assume for debt paydown, but your gross debt-to-EBITDA target of 2.5x could imply something like $1.3 billion of EBITDA by next year.

And if I were doing the math around D&A right, depreciation and amortization, we're looking at over $5 of earnings by 2026. I guess do you have pushed back to that math? And yes, what other puts and takes we should keep in mind?

Good question. I mean your EBITDA math is not far off. So probably you're getting to that right spot. And again, with the video game in the monetization of that, that is a margin hit, but it's going to positively impact our EBITDA.

Earnings per share is probably running a little hot in '26 6 from what you're calculating. A couple of things just to keep in mind as we move through this year '25 and into '26. One, our tax rate is stepping back up. So we had a few things that went our way here at the end of '24. We're not planning for those to happen again '25 and '26.

And then the second thing is interest expense. So that was also something in '24. We were sitting on a fair amount of cash as we were waiting to pay off that note in November. So we won't have that kind of interest income and we're more exposed then to the interest expense. So that is another thing that goes against us from an EPS standpoint as you think about '25 and '26.

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

So I actually just wanted to continue on that same thinking with some of the math in just given sort of how DNA might skew operating income the next few years. As I think about 2027, right, the Playing to Win outlook where should we be landing in terms of EBITDA? I was getting to something in the $1.3 billion, $1.4 billion range but that didn't really account for the step-up in D&A. So should it ultimately be higher than that number as we think about 2027?

I would -- it's not going to be as low as $1.3 billion. I think your higher number is more right. How is that for a hint?

Got it. That's perfect. And then as we think about the 2025 guide, right? So margin expansion in that 70 to 170 basis point range. Maybe just help us bridge that in any way you can. The cost savings number that you've laid out there, $175 million looks like a lot of that's going to fall through to the bottom line, maybe 2/3 of that.

I'm getting to something like 300 basis points of margin just from the net cost savings. I guess what are the offsets? Obviously, tariffs seem like they might be a big one. Is that the majority of the delta as I think about getting from the net cost savings to what you did for the year?

Yes. Yes. It's a good question. So when you break down kind of the big pieces of the '25 build, overall volume and mix is going to be a net positive contributor. So think about a point of margin benefit comes from ball mix. Within the supply chain, which is where you'll see the pickup of the tariff expense, largely supply chain is going to be relatively flat.

So we have good amount of cost productivity, and that is able to offset what we're seeing play through inflation as well as tariffs. So that's kind of a net neutral margin. All of them, the rest of the accretion is coming from below the line and within our managed or operating expenses.

Our next question comes from the line of Jaime Katz with Morningstar.

I hope you can drive a little bit further down into the incremental cost savings and maybe the differences in what you found between the $750 million and the $100 million -- I'm sorry, in the $1 billion number that you guys are looking at now?

Yes, good question. So to date, I would say the $600 plus that we've saved gross savings-wise has been, I would say, roughly half of it has been supply chain and the rest has been the balance of line items within the P&L. Into '25 and beyond, supply chain will always have that evergreen cost productivity is going to offset inflation, but we start to pick up cost savings from a few other areas of the P&L.

So the first is within gross to net. So all of that cost that sits between gross revenue and net revenue, that becomes a contributor for us. Our design-to-value work, we've seen very little of that impact to P&L to date. That also starts to accelerate '25 and beyond. And then the third piece of it is within managed expenses. So as we continue to morph and transform the organization, how we work, how we're spending, et cetera, we start to see that play through in cost savings.

Okay. And then as you guys continuously evaluate the portfolio, given the rhetoric that you shared around NERF and structural changes maybe in demand around the business. How do you think about what you determine you want to out-license versus what you want to keep on some of these long-lived brands?

Yes, Jaime. So as we think about how we categorize our brands, we're using a 3-part matrix that's replacing like the old franchise and partner brands. Now it's growth, optimized and reinvent. So brands like NERF, we would classify in the reinvent category. The category has been under a little bit of stress over the last several years.

NERF still is a very strong brand, but we have to reinvent ourselves. For something like NERF in particular, I think we have to go back to fundamentals, which is NERF started off in the 1970s as the world's first indoor ball. It's about safe active play. And we can't think about reinventing NERF and just think every solution involves a Dart.

So we've challenged our product teams to think about safe active play, think about it more expansively and also think about the business model and the channels in which we operate in. And at the end of the day, there also is always the option to license the product out or license a portion of a brand out which also is on the table for any of those.

I would say our net bias is that we're going to be a net brand creator, and we're going to do less out-licensing in terms of new brands that are going to be out licensed but it still always is on the table because honestly, we've had really good success with it. If you look at our share last year, we had one point of share. We look at our out-licensed brands. The POS on those brands are up 50% year-over-year. And our partners are doing a fantastic job helping us to expand into new categories.

We're into vehicles now with Transformers via Hot Wheels. We're in the building sets with LEGO with D&D and Peppa Pig and Transformers. I think [ Jeff Play in Basic fun ] have done a fantastic job with FurReal friends and Littlest Pet Shop. So I think that's a viable strategy as well.

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

To start, on MONOPOLY GO, what should we think as sort of the right underlying run rate now looks like that actually accelerated 4Q versus 3Q, having some marketing spend settle out there? And then just broadly, what drove the source of the digital gaming strength in the quarter? I think MONOPOLY came in better than expected, but it also looks like other parts of the portfolio drove a decent amount of upside?

Well, I think we're going to keep with our call on about $10 million a month in terms of what we received from MONOPOLY GO. I think Scopely did a great job with their TV campaign. It certainly was a lot of fun seeing Will Ferrell embody Mr. Monopoly and hanging out with all of the celebrity friends. And I think that drove some upside for them.

I think really, though, what really drives the upside of MONOPOLY GO! is just a fantastic game that's very sticky. It engages consumers. I also think they've been smart in terms of how they've managed the business. The Tycoon Club isn't the majority of their revenue, but it's been a nice way for them to be able to capture a bigger share of revenue on that, which also benefits us.

So we continue to see MONOPOLY GO! as a huge mobile game. There likely is going to be some month-over-month moderation in the business over time. That's just what naturally happens with mobile. But we feel pretty confident in that $10 million number.

The other thing that's been going really well for us is Baldur's Gate 3. I think we doubled what our forecast was for that business. And that's something that spend at [ Larry ] and called really early. They have very long tail games. They don't spend as much money upfront on marketing their games. They rely on the quality of the games and the enthusiasm of their community to drive word of mouth and we're seeing that. We saw that with Baldur's Gate over the course of 2024 and into Q4 and I think we'll continue to see benefits from that this year in excess of what a typical AAA game would experience.

Really helpful. And then just my follow-up question on the Consumer Products division. Can you just talk about -- I don't think you gave it yet, but sort of how POS trended in the fourth quarter? And then just on sort of the implied first quarter outlook, is sort of the outsized decline all Easter shift what drives the acceleration as you move throughout the year on the Consumer Products vision?

Yes. So yes, primarily what's happening in Q1 is the Easter timing shift. I mean there's always, as you go through January and February, the final clear outs and kind of what happens at retail as they're kind of resetting or getting ready for the reset. There's a little bit of that, but not atypical for what the industry typically goes through in January and the early part of Feb. So it really becomes about the Easter timing.

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

Maybe first for Gina, one more follow-up on the medium-term margin guide, maybe in a slightly different way. I'm curious if you could talk more about the swing factors that are top of mind for you as you think about what could cause you to come in at the high end of that range for margin expansion versus the low end, the $150 million versus $300 million I imagine digital is a big component there, but I would love to get your thoughts on the puts and takes.

And then second on CapEx, I think CapEx is stepping to $250 million next year. Could you talk a little bit more about the [indiscernible] puts and takes of CapEx growth this year, maybe where you're investing and then looking ahead, what we should expect from the arc of CapEx past 2025.

I would say from an overall swing factors on the margin in the out years is really going to be about when that the video game in the launch timing and when that video game starts to monetize and the capital flow -- or the capitalization flows because that decrease will hit at the same pace of when the units are coming in. That's how it will be phased. So that will be the factor that swings at either to the higher end of the range or the lower end of the range. But every year, you should take away that we will be growing our margin.

From a capital standpoint, we do have a bit of a this year into '25. We don't expect to see dramatic step-ups as we move through the balance of the strategic plan. But to step up, I would say roughly half of that $250 million that we put out there is going to the video game, the video launches.

And then you could take the balance and say we're going to continue to invest behind toy and toy innovation. And we're also going to continue to invest behind all of the transformation initiatives that are underpinning the strategy. So you kind of take that last half, kind of divide it by 2 and you get where we're prioritizing the spend.

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

I kind of want to ask a question maybe a different way. Looking at the midterm drivers of margin expansion, I was wondering if you could like rank order those. So whether that's increased licensing revenue, cost savings so we can kind of understand where they all -- where those will fall.

Rank order them, like in order of our favorite types of margin?

[Technical Difficulty]

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Okay. We do have the speakers that we will now proceed.

Do we still have Kylie there?

Yes. Yes.

It is never a dull moment on earnings day.

[indiscernible] my question though.

No. Well, I'll tell you, we have the best answer to your question now though. In all seriousness, so your question of what is really going to drive the margin in the out years. Very simply, it's going to boil down to the profitability improvement we're making within toys. Whether it is the mix benefit that we're generating off of the innovation in the portfolio to all of the cost savings that are playing through P&L, and that is going to be the largest contributor to that margin accretion.

Because remember, the Wizards we've talked about it a couple of times, the Wizards margin will go down as that monetization start to happen, much more profiting Wizards, just the margin itself will go down.

Exactly. Okay. No. That is super helpful. And then as [indiscernible] someone is just kind of on -- talk about inflation for the year and how supply chain efficiency should offset that pressure. But just kind of curious what which cost you're seeing the most inflation in right now? And just kind of how to think about that, should we be conscious of lapping any deflation from the previous year?

No. Good question, but nothing material. I mean as we played through last year, we saw in '24, 2%, 2.5% inflation, largely driven by labor. And as we look into '25, it's similar, 2.5%, 3%, a slight tick-up in inflation, largely again driven by labor within manufacturing as well as within logistics. But again, our model is to always have that cost productivity inflation.

Obviously, I'm kind of putting tariffs to the side as I answer that question. We did see, as we went through the balance of last year, logistics rates started to pop a little bit in Q4. We weren't materially impacted by that, but we did see that play through in the market. They're starting to settle out, and we don't expect it to be anything atypical for what we're planning for the year.

Thanks for hanging out and being patient. We'll take to you later this morning.

And ladies and gentlemen, this concludes the question-and-answer session. And therefore, this also concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time. And again, we do apologize for the inconvenience of the technical difficulties.