00:00I think it really starts with close to three years ago when Chris Cox came in as the CEO of Hasbro.
00:05He was running the Wizards of the Coast business prior to that, gaming focus,
00:10and he really took on a strategy for Hasbro of transforming the company into more of a games and IP-driven company.
00:17And the result of that is the mix has now shifted to higher margin, higher growth businesses,
00:23and that's driving more sustainable and durable growth for the company.
00:26Gina came on about a year later as the CFO and then later the COO,
00:31and she's been on a journey to really transform the supply chain
00:34and transform the consumer products business, which is the legacy toy business.
00:39They've simplified the portfolio.
00:41They've cut a lot of costs out of the supply chain,
00:43and the net result of that is a really bright outlook, in our opinion, as we look ahead to 2026 for the toy business.
00:50With regards to the toy business, we came into this year, particularly with the change in the U.S. administration,
00:55a lot of concerns about tariffs, how that would affect a business that is heavily reliant on overseas goods.
01:01Just kind of put into perspective, how much of Hasbro's business is actual in physical toys
01:06and how much they were affected by the tariffs?
01:08Yeah, absolutely.
01:09I think all of us think about Hasbro as a traditional toy business, Transformers, Nerf, Peppa Pig, all very important.
01:15All fan favorites.
01:16Yes, all very important franchises for the company.
01:18I still have some of my transformers when I was a kid, by the way.
01:20Very important franchise, and it's still going to be an important franchise.
01:24I think I want to emphasize that, that the toy business, I think, is going to be a long-term part of Hasbro's portfolio.
01:30But as they've executed this strategy and this mix shift, an interesting stat today,
01:35over 80% of operating profit comes from the Wizards of the Coast business.
01:39That's driven by Magic the Gathering predominantly, Dungeons & Dragons, as well as some of their new digital gaming efforts.
01:46Toys are just 15% of operating profit this year.
01:49It's around 50% of the total top line, but Magic is a disproportionate share of the profit.
01:55Part of that is because they've been going through a transformation.
01:57They've had some struggles in the toy business, and we do expect the margin profile of that business to improve.
02:04But the reality is, is the business has just shifted, and they're not as heavily reliant on the traditional toy business anymore.
02:10So they've certainly had impacts from tariffs this year.
02:14It's hurt the entire toy industry.
02:16You've seen it in their margin performance, but just given the strength in the rest of the business,
02:20Magic's up over 40% year-to-date.
02:22It's masked, honestly, what's gone on with tariffs in the toy business.
02:26With regards to when we start to see some of the new games come out, the D&D games, Warlock, and, of course, the Magic one as well,
02:34I think 2027 is now kind of the projected target that we're going to start to see those come to market?
02:38Yeah, absolutely.
02:39So digital gaming is a bit of a new venture for Hasbro.
02:42This was part of Chris's strategy when he stepped into the CEO role.
02:46And what they're doing is it's a balanced strategy.
02:49So it's a combination of partner-driven and licensed models.
02:54Monopoly Go, a perfect example.
02:56And what's interesting about something like Monopoly Go is it's very capital-light.
03:01Hasbro did not make any upfront investment.
03:03They just collect a royalty.
03:05Monopoly Go ended up being the exception, not the rule, but it's about 15% of Hasbro's operating profit this year,
03:11again, with very little upfront investment.
03:13So really a creative venture for them.
03:16What you're going to start to see in 2027 that you alluded to is this targeted push into self-published games, self-published video games.
03:23In 2027, we'll get Exodus, which is a new IP, a sci-fi role-playing game.
03:29And then we'll get Warlock, which was announced last week at the Game Awards.
03:32That's based on D&D, which is a known IP.
03:35So you'll have a new IP, a known IP, two video games that we expect to launch in 2027.
03:40And what I think is interesting about the video game strategy is everyone always worries about video games.
03:45It can be a lucrative business, but it's challenging.
03:48In our opinion, I think we view it as a call option because the market is so skeptical.
03:52But what about the upfront cost for that?
03:53I mean, how does that compare?
03:54And I'm particularly referring to the new digital ones that they're pushing.
03:57Yeah, the upfront cost is much more significant, right?
03:59So we estimate Exodus is in the range of $200 million to $250 million of upfront costs for the game.
04:05That's just pure development games.
04:08There's marketing costs on top of that as well.
04:12What's great, though, is all of those costs have already been spent.
04:14So they're capitalized on the balance sheet.
04:16They'll have to flow through the P&L.
04:18But even if they sell one unit, that's incremental to free cash flow.
04:21And free cash flow, in our opinion, is how you think about intrinsic value of a business.
04:25So, yes, there is an upfront cost to it, and we'd like to see them at least break even.
04:30But we think at this point, with how skeptical the market is, anything is incremental to free cash flow.
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