Hasbro, Inc.
Q2 2022 Earnings Call Transcript

Published: 19 Jul 2022

[Operator:]

Good morning, and welcome to the Hasbro Second Quarter 2022 Earnings Conference Call. At this time, all parties will be listen-only mode. A question-and-answer session will follow the formal presentation. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Ms. Debbie Hancock, Senior Vice President of Investor Relations. Please go ahead.

[Debbie Hancock:]

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Chris and Deb providing commentary on the Company's performance then we will take your questions. Cynthia Williams, President of Wizards of the Coast and Digital Gaming; Darren Throop, President and CEO of eOne; and Eric Nyman, Hasbro's President and Chief Operating Officer, will join for the Q&A portion of the call. 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 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:]

Thank you, Debbie, and good morning. Since our first quarter earnings call, the executive leadership team and I have been undergoing a multi-month strategic review of the business. While the review is still in process, it's already clear we're an organization with a bright future. Led by an unmatched brand portfolio that spans fans of all ages; an industry-leading gaming business, which is a top investment priority for us; a growing direct-to-consumer business and unique assets and entertainment creation all knitted together by talented global teams working with a clear sense of purpose and value creation. We see big opportunities to scale our Franchise Brands, drive all new play platform innovation and transform our operations to improve our agility, focus and profitability. Games, digital, expanding the age ranges of our portfolio and harnessing direct connections with our consumers are all compelling growth opportunities for Hasbro. We'll share more about our plans in October at our Investor Day, but I'm energized with what we have accomplished to date as we focus on driving long-term profitable growth and environmentally responsible, sustainable business and superior shareholder returns. While we've been advancing our long-term strategic work, our teams have been busy delivering a strong second quarter with 4% revenue growth absent FX, 14% adjusted operating profit growth and 200 basis points of margin expansion, adjusted earnings per share of $1.15 and 6% growth in adjusted EBITDA. Deb Thomas will speak to our results in more detail, but let me share a few highlights. Revenues grew for Consumer Products and the Wizards and Digital Gaming segments. Entertainment segment revenue was down in the quarter mostly due to the timing of deliveries, but is up year-to-date absent the Music business we sold last year. As we projected in our Q1 earnings call, Wizards delivered its biggest quarter ever in Q2, successfully comping last year's Q2, our prior record. Tabletop revenues grew 15%. MAGIC

[Deb Thomas:]

Thank you, Chris, and good morning, everyone. Our second quarter results have us on track to achieve our full year guidance, including low single-digit revenue growth in constant currency, operating margin expansion to 16% and operating cash flow at the low end of the $700 million to $800 million range. The second quarter, the team delivered revenue growth, margin expansion and $1.15 in adjusted earnings per share while returning $221 million to shareholders through our quarterly dividend and share repurchases and adding an important growth engine to both our gaming business and our direct-to-fan capabilities with the acquisition of D&D Beyond. Importantly, we proactively managed our supply chain and inventory purchases to mitigate disruption. We're much better positioned to meet demand this year versus last. This action resulted in higher-than-typical inventory levels at Hasbro for this time of the year. To avoid the out-of-stock positions of the last year holiday season due to supply chain disruptions, retailers also shifted some consumer product direct shipments into the second quarter from the third quarter. Both our inventory and that at retail is of extremely high quality. We have product to meet demand, including significant new releases in MAGIC

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session . Thank you and our first question is from the line of Eric Handler with MKM Partners. Please proceed with your question.

[Eric Handler:]

One of the things you've been highlighting of late has been the fan collectibles segment. And I'm curious to get your sense of what's the size of this market and sort of the overall expected growth of this industry? And then what's Hasbro share in that business, your growth potential over the next several years and sort of the key drivers of that incremental growth?

[Chris Cocks:]

Hey, Eric, thanks for the question. Yes, we see fan -- the fan economy, in general, as a huge growth area for us. It's one of our fastest-growing categories overall. And I really think you can think of the segment as multiple segments put together. There's kind of classic fan collectibles like plastic figurines and action figures. There's sports memorabilia, and then there's a very wide trading card industry that deals with both playable trading card games like MAGIC as well as sports card trading games. Over the last couple of years, this has been probably our fastest-growing segment of the Company, and we continue to be very bullish on the sector. It's a highly resilient sector in terms of down economic times or up economic times. It tends to be focused and concentrated on a target consumer with a very high discretionary income. And it's a passion-driven industry. So people are very engaged in it. On your specific question on kind of like sizing, I'm going to turn that over to Eric a little bit to give you kind of a little bit of a sense of where we see it going and what we think our key initiatives are. Eric?

[Eric Nyman:]

Thanks, Chris. So with regards to market sizing, which is a part of your question, as Chris mentioned, there's a lot of different dynamics at play and different ways to look at it. In the collectibles business, we anticipate that through our research to be about $4 billion to $5 billion in overall market size. So it is a very sizable market. Our momentum continues. We don't break out our share publicly, but we can say that with our Hasbro Pulse platform as an example, we were up 69% in the first half of the year. So we have good, strong momentum that we expect to continue throughout. And we also had some great launches. This week, you'll see at San Diego Comic-Con some really incredible new innovations from the team. One piece of that, which we're really excited about, we talked about it last week is called Hasbro Selfie series, which allows you to basically put yourself on your shelf and turn yourself into an action figure. So we expect that to be a very strong new innovation for Hasbro as we launch this week.

[Operator:]

Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

[Steph Wissink:]

We have two questions. Chris, the first one is for you, is just on helping us dimensionalize the Wizards of the Coast business between MAGIC and D&D. I think you've said in the past that you expect incremental growth to be coming from D&D over time. So share with us a little bit about the size of that business relative to MAGIC and what your expectations are? And then if you could just remind us what percentage of the Wizards business is domestic. And is there a big international opportunity? And then just a quick clarification for you, Deb, on the program amortization. Can you help us think through back half Q3 versus Q4? We just want to make sure we're modeling that line correctly going forward. Thank you.

[Chris Cocks:]

Great. Thanks for the questions. Yes, I mean, Wizards of the Coast is an important and vital business for us. It's been a major growth driver for the Company. And we've had a great first half of the year for the Wizards business overall. For the first half of the year, we see it up 5%, and we're continuing to project at the high end of our range of upper single digits to lower double digits growth for the entire year. In terms of the composition of that business, Wizards tends to be very MAGIC-heavy. MAGIC is probably about 70% to 80% of that business overall. And we tend to be -- between the D&D brand and the MAGIC brand, it tends to be very North American-centric. About 75% of our overall sales take place in the U.S., Canada and Mexico. So we see a lot of growth vectors for both of those opportunities. We see -- Europe has been one of our key growth drivers for the MAGIC brand. We just started localizing D&D product internationally just this past year. We see a huge opportunity for products like D&D Beyond to go beyond North America. Over 85% of the registered users for D&D Beyond, for instance, right now are based in the U.S. or Canada. We see a big growth opportunity there. And when we look moving forward, we continue to see the tabletop industry as being very vital and robust. I think you can see that in the 15% growth that we saw in our tabletop revenues in Q2. And we see a big opportunity to open up these brands over time as we really start to leverage our Brand Blueprint assets. If you just look at what we're going to do with DUNGEONS & DRAGONS in 2023, we have an only blockbuster movie that will be coming out in March of next year. We're going to be previewing that in Comic-Con later this week in a sold out Hall H preview. We'll even have like a little bit of an interactive tavern that people can go to and experience the world of D&D firsthand. And then we're going to be complementing that blockbuster entertainment with follow-on streaming entertainment, a huge consumer products push, all-new tabletop games and some really cool new video game innovation that will be coming out shortly following the film. So I think the Wizards business and the future for that business continues to be bright. And I see both MAGIC and D&D growing and maybe even D&D picking up some share inside of the overall Wizards business in terms of its future and its potential.

[Deb Thomas:]

Right, Chris. Let me pick up on the amortization point. So if we think about program amortization, we said at the beginning of the year, we expected it to be in that 9% to 10% range. We still expect that. And I think in the quarter, we were just under 9%, the amortization as a percent of revenue. And if I look back on last year and just think about the phasing of our expected deliveries this year, as we mentioned, we had a much bigger Q3 from a delivery phasing last year than we expected this year. So my expectation is the rate would be slightly higher in the fourth quarter than it is in the third quarter. But we still expect to be within that range. And our expectation is probably more towards the lower end of that range based on all the things that we're delivering this year.

[Operator:]

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

[Arpine Kocharyan:]

Margins were quite a bit stronger than we thought for the quarter. And of course, you had MTG up nicely, so that underpins strong margins. But in terms of advertising, G&A, as you look at Q2 versus kind of back half of the year, anything in Q2 that is not repeatable from the top that we should take into account? And then I have a quick follow-up.

[Chris Cocks:]

I don't see anything that was different in Q2 than what you should expect for the balance of the year. Eric, any comments?

[Eric Nyman:]

No, I agree, Chris. I don't think there's anything there, Arpine, to worry about.

[Chris Cocks:]

I think the biggest difference between Q2 this year and Q2 last year, Arpine, was we leaned into two rather large digital launches with Magic

[Arpine Kocharyan:]

Okay. That's very helpful. And then just a quick follow-up on revenue. Is it possible to give us a sense of how much D&D Beyond is adding to revenue for the year? Or is the guidance now kind of low single digit up -- ex-FX is excluding that and is more organic? I was not sure whether that guidance includes the acquisition. And if you could detail how much exactly that's heading for the year? I think you said before that it's really immaterial to EPS. So I'm not worried about EPS. Just asking about revenue here.

[Chris Cocks:]

Yes. I'm going to turn most of this answer over to Cynthia if you want to opine, Cynthia. It's relatively small for the balance of the year. We -- and it was certainly very small for the quarter. But we do see it being material as we get into 2023 and beyond on the top line and bottom line basis. But a lot of that's going to have to do with the revenue synergies that we see with the business as we start to integrate it, which is still relatively early days. Cynthia, anything to add from the Wizards vantage point?

[Cynthia Williams:]

Thanks, Chris. Yes, the one thing I'd say is D&D Beyond performed consistent to our expectations. It's only been -- we've only owned it for a month now. But we are super excited about the opportunities it gives us to better serve our fans. Chris mentioned a moment ago that about 85% of their current audience on Dungeons & Dragons Beyond is based in North America. So we see a big opportunity to unlock the global audience with regional translations and culturalized content. We see an opportunity to create multiple experiences that will cater to different player segments, especially those that will tap into that awareness we'll build with our entertainment offerings. So while it's small right now, we see a bright future with Wizards owning Dungeons & Dragons Beyond.

[Deb Thomas:]

And just to add, looking at our financials overall, we do expect it to be dilutive for the full year. However, it will be accretive to next year.

[Operator:]

Next question is from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

[Michael Ng:]

I just have two. First, I was wondering if you could just help begin what the 3Q revenue could look like. It sounds like there's an implication that it should be down year-over-year just given the direct import revenue shift and the slowing growth or slower growth in Wizards of the Coast. But I was just wondering if you could talk a little bit about that? And then secondly, I was just wondering if you could just give us a little bit more detail around Wizard margins in the quarter, obviously, a record high. Was that simply operating leverage because of the record revenues? Or were there any mix benefits? And what's driving the drag on margins for the remainder of the year in Wizards relative to the second quarter? Thank you.

[Chris Cocks:]

Got you. Yes. So for Q3, I think you're reading our guidance correctly, Michael. I think a couple of things are going on. First off, it's just kind of more release timing associated with what we're releasing across our Film & TV teams and our Family Brand teams and Entertainment. I think it has to do -- like we actually feel the underlying growth in Wizards is very strong. Our tabletop revenues were up 15% in Q2. So we see good momentum in that business. But based on the quirks of when we're going to release different sets, we feel like Q3 is going to be a little bit of a breather for that business. And we'll start seeing growth again in Q4, particularly as we lead into our 30th anniversary for the -- for MAGIC going into 2023. And then our overall CP business, like you said, we had a little bit of a shift of some of our direct imports from Q3 into Q2. I think that really reflects strong retailer enthusiasm for our back half of the year innovation. It's going to allow our teams to be able to really lean into advertising and promotions and really be able to solve some of the issues that we've had for the last couple of years on out of stocks because we feel like that inventory is very high quality and has a lot of upside potential for us in terms of POS. I'll turn over the balance of the question over to Deb.

[Deb Thomas:]

Right. And we did talk a bit about entertainment as well, some of the deliveries that we have in Q4 versus Q3 a year ago. Interestingly, and we tried to highlight this in our release, when we release movies directly to streaming, revenue recognition just has us take it right at that point in time. And we have more releases that are actual theatrical coming in the third quarter, which will have that same revenue. It just gets spread out over the period with all of the ultimates and the library value that comes to that as well. So we're very excited about what's coming up in entertainment, but our delivery timing is a bit more Q4 from a revenue recognition standpoint and beyond than it was in Q3 a year ago. We also had the MY LITTLE PONY movie as well. So when you think about all those things, it really is just a timing issue. And the only thing I would add to what Chris said is as we look at our retailers and what they're expecting over the holiday period, they're looking to have more holiday promotions this year. And we're actually seeing that. You're seeing people actually going into shops more. Well, we're very excited about direct-to-consumer. And Eric talked earlier about pulse in the market that we have there and how excited we are about all that innovation. I think we're going to see more holiday promotions at retail. And we are well positioned this year with the inventory to meet that demand, whereas last year, we were short and retailers were short.

[Chris Cocks:]

Yes. And so from your second part of your question was margins on the Wizards business. For Q2, a great deal of that upside was the lack of amortization or realized kind of amortization for our digital launches, particularly Dark Alliance and Arena mobile and a much lower A&P spend associated with the business because we tend to heavy up and front load the marketing spends for those kinds of releases. For the back half of the year, I think what you see is we continue to invest heavily in building out the infrastructure for digital games, in particular, with the Wizards business. And we also have, as the economy starts to open up, we're starting to resume some of our more historical spending on organized play and helping to support that. So, those costs are starting to come back into the Wizards business and something that we're factoring in on our guidance.

[Operator:]

Our next question comes from the line of Megan Alexander with JPMorgan. Please proceed with your question.

[Megan Alexander:]

In the slides, you mentioned POS was down again in 2Q. You did mention the Amazon Prime shift. So did that drive POS down in the quarter? And maybe can you just talk about how that trended versus 1Q and maybe what it looks like quarter-to-date, given you are expecting growth in POS in the second half?

[Chris Cocks:]

Yes. Certainly, having a Prime Day shift from June to July did have an impact, and we're very pleased with the results of Prime Day this year, 20% increase in sell-through, felt pretty good to us and was generally on track with what we're looking for. In terms of our overall POS, we have long guided that our product innovation is back half of the year weighted. That's like we have some great new products coming out. Eric talked about Selfie series. We just announced Wordle

[Eric Nyman:]

No, you hit most of them, Chris. I think just to finish that, Megan, we really do feel like after some headwinds in the first half, we have a strong second half plan. We're proud of our teams and their innovation. Even in addition to all the great innovations Chris mentioned, we also have some big programs in retail in August behind Star Wars and the Obi-Wan product line, which is sitting behind their extremely popular Disney+ series. And across the board, the strength continues across the Marvel portfolio. So we really do feel like we're poised to have some positive POS versus where we've been. And I think the innovation you're going to continue to see from Hasbro is very, very strong.

[Megan Alexander:]

Got it. That's really helpful. And then maybe as a follow-up, again, on the Wizards margin, it had very strong performance in 2Q. And it does seem like you raised the top line guide a bit for that segment. You talked about potential to reach low double-digit, now you are including that in the guide. So that would imply just higher operating margin on mix in the back half, but you did keep the overall profit outlook unchanged. So are you just seeing higher costs in other areas of the business? And are you still thinking about COGS being around 30% of sales for the year?

[Deb Thomas:]

So overall, we are seeing higher cost. As we mentioned, there was pressure on gross margin from our -- particularly our MAGIC business, but also the D&D business when you think about Wizards in the quarter. We just had much lower advertising and depreciation expense as we talked about. So when we see the mix as we head into the back half of the year, we do have pricing on select MAGIC

[Operator:]

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

[Fred Wightman:]

I know that you made the comment that you had assumed some macro challenges when you guys issued guidance start of the year. But could you just give us sort of a quick sense of the high level for how you see each of the main categories performing if we do move into a recession? I think that we can go back and sort of look at what the toy business did in '08 and '09, but for some of the newer pieces of the business that might not have been broken out previously or that were part of Hasbro, could you sort of give us a sense for how you see the elasticities or peak to trough or however you want to frame it?

[Chris Cocks:]

Yes. Certainly, we came into the year feeling like there is a mix of headwinds and tailwinds for the consumer. We were very cognizant of the inflationary environment we were operating in, both from a consumer takeaway as well as its impact on our supply chain. I think net new headwinds that emerged through the year has been the Russia conflict and the effects of that and then the currency dynamics with the strengthening dollar, which particularly affects our CP segment in markets like EMEA and our Wizard segment with a very strong dollar versus the Japanese yen. So as we look at our segments moving forward, I think what we feel fortunate as, as a company is that we have very resilient segments across toys, games and entertainment. These tend to be small luxuries that consumers value pretty highly. Our CP segment in prior economic downturns has done relatively well. It has been affected, but not nearly as much as those economic downturns would affect the macro economy. The games business tends to be very resilient. MAGIC

[Fred Wightman:]

Makes sense. And then you called out the $60 million shift just from the direct import timing. Is there anything else that you're seeing or hearing from retailers that could cause some impact as far as 3Q, 4Q split in the back half of the year?

[Chris Cocks:]

Eric, anything to add?

[Eric Nyman:]

I think with regards to retail, Deb already mentioned some of the dynamics. I think we're feeling actually pretty comfortable from a supply chain standpoint, which is the one thing Chris didn't touch on in the last narrative that conditions are improving. And while things are more expensive and transit times do take a little bit longer than they have in the past. Our teams are managing through those challenges. Retailers are managing through those challenges. And I think you'll see, as Deb mentioned, as we get into the Q3 and Q4, a stronger environment where our position amongst retailer promotions and their advertising is favorable. And we're certainly optimistic about that.

[Operator:]

Our next question is from the line of Drew Crum with Stifel. Please proceed with your question.

[Drew Crum:]

So, on the Wizards business, I think in some recent correspondence, you indicated that you've expended over $1 billion on this business over the last five years. Can you address what the planned cadence of spending will be going forward? And Deb, I think you suggested that you're going to focus on digital and talent. But any more specifics you can provide in terms of where you intend to invest?

[Chris Cocks:]

Well, I would say at a top level, and then I'll turn it over to Deb and/or Cynthia if they'd like to chime in. We continue to invest behind the Wizards business and our games business as a whole. Digital will be an area of focus for us. I think we will at least maintain our production spending on digital. I think over the next couple of years, you'll see us announcing more products and introducing new innovation. I think games as a service is going to be a big area of focus inside of that digital business with what we call digital tabletop, what are we doing and where are we taking platforms like Magic

[Drew Crum:]

Got it. Very helpful. And then just a quick follow-up, Deb. You're forecasting the cash flow to come in at the lower end of the range. Anything specific to call out there that's driving that updated guidance?

[Deb Thomas:]

Really just that you're seeing the reflection of our preorders on the inventory and the operating cash flow number. From an investing standpoint, we just -- which is part of our free cash flow. We did make that very strategic acquisition of D&D Beyond, which we're very excited about the future for that, as Chris just said, for the platform for many things that we have in our view going forward. So as we look at that, we do expect the inventory to turn, but in the back half of the year, we expect our cash flow generation to actually improve in the back half of the year.

[Operator:]

Next question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

[Linda Bolton-Weiser:]

I was wondering if you could comment on what you're seeing like on the toy side of the business in terms of raw material input costs. I know that for the toys being produced for this Christmas, the costs are up, but we're seeing like spot prices for some things like plastic resin are starting to roll over. So can you just kind of comment on kind of like what you're seeing on a longer-term basis? And do you think next year kind of bodes well in terms of cost comparisons on the raw material side? Thank you.

[Chris Cocks:]

Yes. Thanks for the question, Linda. I'm going to turn it over to Eric to give you an overview on what we see going on in the supply chain. Eric?

[Eric Nyman:]

Thanks, Chris. So a couple of things to hit with regards to your question, Linda. The first was with regards to input costs. We do see those rising, and both Deb and Chris talked about them in our prepared remarks a bit. We have taken pricing to cover that, and we feel comfortable that we continue to make the right decisions with regards to pricing to cover those input cost increases. And we're working with our partners as we look go forward to continue to manage and mitigate some of those headwinds. With regards to transit, which is kind of the other big piece that we've talked about in the past, we are seeing some of the transit times and transit costs easing a bit. And we expect that trend to continue as well as we go into the fall. So I think some puts and takes across the board there, but we feel like we have our hands wrapped around it, and the teams are managing it well.

[Linda Bolton-Weiser:]

Great. And just switching a little bit. We've seen a lot of talk about the Toys "R" Us store within stores expanding to all the Macy's. Can you talk about -- does that move the needle at all for you? And how are you thinking about that opportunity in terms of some expanded distribution in the channels?

[Eric Nyman:]

Sure. I'll just continue on that one. Clearly, Toys "R" Us is making another comeback. And we're always excited when we see toy space and toy merchandising increase in retail footprints around the world. We're certainly encouraged by what we're seeing as Toys "R" Us partners up with Macy's. And we saw the announcements, obviously, that you did. And we clearly have been in conversations with them for quite some time that they're going to expand that footprint for this Q3 and Q4. They're good partners of ours. And -- but when I say they, I'll talk about Macy's because it's really a footprint store within a store concept, and we'll continue to supply them as needed. I don't expect it to be significantly material for this year. But we are excited that we're continuing to see the toy footprint expanding. And we think that any time you have the chance to put more toys and games in the hands of consumers around the world at holiday, it's a good thing.

[Operator:]

Our next question is from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your question.

[Gerrick Johnson:]

Great. I have one follow-up. First, on Wizards, there's a lot of noise in the Wizard segment this quarter. Can you please talk about the performance of the core Magic Arena on its own excluding mobile launches and DUNGEONS & DRAGONS, et cetera? Thank you.

[Chris Cocks:]

Yes. I'll start. And then, Cynthia, if you want to add, please do. So Arena Mobile launched last year. We saw a nice surge of new users and new revenue associated with that. Revenue for the platform was down after seeing kind of that surge, but still up on a on a pre kind of mobile basis. We're entering the fourth year of the platform. So it's -- we would expect it to be starting to get to a maturing aspect. We think things like scheme, things like consoles will be nice revenue kickers and user kickers for us. Moving forward, we see a relatively stable outlook for the revenue for Arena. We see it maintaining as the most important acquisition vehicle inside of the MAGIC brand in terms of bringing new people in and training them on the brand. And then long -- mid and longer term, we see some nice innovation opportunities, which potentially could change that revenue curve and kind of that outlook. Cynthia, anything you'd like to add?

[Cynthia Williams:]

Yes, I think you covered most of it. The only other thing I would say is we will continue to listen to our customers and the community as we are working on that road map for innovation. We're super excited about how Arena will continue to contribute to the overall MAGIC ecosystem.

[Chris Cocks:]

Great. You had a follow-up, too?

[Gerrick Johnson:]

Yes, I did. On a consolidated basis, you guys have commented over and over that you're maintaining guidance. But the fact of it is, you've lowered revenue outlook because of FX, right? It's in constant currency now. Before, it's just in dollars. Your operating margin guidance is maintained. So is it FX hedges below the operating line or share buyback or lower interest? What is it that gets you to maintaining guidance?

[Deb Thomas:]

Sure. Gerrick, you're right. I mean, as we said in the first quarter, we warned that currency was a headwind. And in fact, we saw the euro for the first time in 20 years reach parity. I think it's up a tick this morning, right? But on a translation basis, that impacts our revenue, right? But the underlying business is healthy. Our -- we do hedge our costs. Most of our costs for products are denominated in U.S. dollars. So we hedge that. We're probably 65%, 70% hedged at a given time. So it does have less of an impact to operating profit. In addition to that, we are very focused on controlling our costs and implementing cost savings initiatives wherever we can. And we're excited to actually talk more about that when we get to Investor Day and how we view the long-term impact of that. But overall, we continue to invest in our business for long-term growth and do the smart business things to protect our margin on the bottom line and cut costs where we don't need to expand them.

[Operator:]

At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Debbie Hancock for closing remarks.

[Debbie Hancock:]

Thank you, Rob, and thank you, everyone, for joining the call today. The replay will be available on our website in approximately two hours, and management's prepared remarks will be posted on our website following this call. As Deb and Chris both mentioned, we look forward to sharing more about our strategic plans at our Investor Day on October 4 in New York. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.