The Walt Disney Company (DIS) F4Q 2013 Earnings Conference Call November 7, 2013 5:00 PM ET
Lowell Singer – Senior Vice President, Investor Relations
Robert A. Iger – Executive Chairman and Chief Executive Officer
James A. Rasulo – Senior Executive Vice President and Chief Financial Officer
Alexia Quadrani – J.P. Morgan Securities LLC
Michael Nathanson – MoffettNathanson LLC
Doug Mitchelson – Deutsche Bank Securities, Inc.
Jessica Reif-Cohen – Bank of America Merrill Lynch
Todd Juenger – Sanford C. Bernstein & Co. LLC
Vasily D. Karasyov – Sterne, Agee & Leach, Inc.
Tuna N. Amobi - S&P Capital IQ Equity Research
Bart E. Crockett – FBR Capital Markets
Marci Ryvicker – Wells Fargo
Jason Bazinet – Citi
David Joyce – International Strategy & Investment Group
Alan S. Gould – Evercore Partners
Welcome to the Walt Disney Company’s Fiscal Full Year and Q4 2013 Earnings Conference Call. My name is Livian, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now like to turn the call over to Mr. Lowell Singer, Senior Vice President of Investor Relations. Mr. Singer, you may begin.
Okay, thanks Levy and good afternoon, everyone, and welcome to the Walt Disney Company’s fourth quarter 2013 earnings call. We issued our press release about 45 minutes ago. It’s now available on our website at www.disney.com/investors. Today’s call is also being webcast and the webcast and the transcript of the call will also be available on our website.
Joining me for today’s call are Bob Iger, Disney’s Chairman and Chief Executive Officer, and Jay Rasulo, Senior Executive Vice President and Chief Financial Officer. Bob is going to lead off and then Jay will follow him and then we of course will be happy to take some questions. So, with that, I will turn it over to Bob.
Robert A. Iger
Thank you, Lowell, and good afternoon everyone. We are very pleased with our performance in the fourth quarter with earnings per share up 13%, primarily driven by growth in our Interactive, Consumer Products, and Parks and Resorts businesses.
Our net income for the quarter also grew by 12% on a strong revenue growth of 7%. I am also happy to report that in fiscal 2013, Disney delivered record revenue, net income and EPS for the third year in a row.
We are also making two other important announcements today. One is that we have set an official release date for Star Wars Episode VII, December 18, 2015. This obviously is one of the most important movies we have in the next few years and we’ve chosen a date we believe will allow the creative team of the Time to make a great film. It’s also the date Avatar opened in 2009.
The second announcement is our unprecedented deal to create multiple live action series and a mini series event exclusively for Netflix, beginning in 2015. Under the agreement, Marvel TV in association with ABC Television Studios will develop four serialized programs featuring some of the Marvel’s popular characters; Daredevil, Jessica Johns, Iron Fist and Luke Cage. This original program will run over a multiple years and lead to a Marvel's The Defenders mini-series event that reimagines dream team of heroic characters. Both of today’s announcements underscore the value of two of our major acquisitions Marvel and Lucasfilm.
As you know, over the last several of years we’ve made a number of major acquisitions and capital investments to drive growth and create shareholder value, now with some of those investments have been completed and the actuations are fully integrated their positive impact is clear in our results especially in Parks and Resorts.
In its first full year of operations since we open Cars Land and completed the transformation of Disney’s California Adventure, the Disney Land resort delivered record attendance revenue and profitability. Walt Disney World also set new attendance records for the year, driven in part by our historic expansion of Fantasyland which will be completed in 2014. We are beginning construction on an Avatar themed area in Disney’s Animal Kingdom and continue our progress towards the full roll out of MyMagic+.
International attendance in our domestic parks, also set in all time high in fiscal 2013. Internationally; Tokyo Disney Resort and Hong Kong Disneyland also had record attendance this year. We recently announced that Hong Kong will be home to our first Marvel-themed attraction when the Iron Man experience opens in late 2016. And last month construction on our Shanghai Resort officially went vertical it was a major milestone. And we are on track to open the gates of that spectacular resort just two years from now at the end of 2015.
Turning to our Media Networks group, ESPN has been the brand in sports for almost 35 years more than 100 million sports fans connect with ESPN every week for incredible sports contact, content rather. And that connection is strong, the average fans spends about 7 hours a week interacting with the ESPN, it was more then 35,000 hours of sports programming every year.
Major long term sports rights locked up for the next decade and unparallel brand strength, we remained confident in ESPN’s value and continued rein as the leader in the sports. In broadcast, we are encouraged by ABC’s start to season and non-sports programming ABC is currently a very close second in both C3 and L7 ratings. The network is some of TVs most DVR shows as well as the number one new show Marvel’s Agents of S.H.I.E.L.D. and the fastest growing returning series Scandal.
The perennial leader among upscale audiences this season ABC once again leads the other networks in the price demo by double-digits, it’s also the only broadcast network to see it’s audience get younger.
We’ve also successfully sold ABC studio shows including S.H.I.E.L.D., Scandal, Revenge and Grey’s Anatomy into more than 100 markets around the world. We continue to generate tremendous value from original Disney content as well, especially in kid’s television businesses. All ten of the top 10 series for Kids 6-11, in Q4 were Disney Channel shows and the channel has been number one among that demo as well as with Tweens 9-14 for 125 consecutive weeks.
Disney Junior is another fantastic success story although we just launched the standalone channel here in the U.S. 19 months ago it’s been the number one pre-school channel among Kids 2-5, every single weeks since News On began reporting its ratings back in April.
The success of franchises like Sofia the First, Jake and the Never Land Pirates and Doc McStuffins have made Disney Junior an important growth driver for our merchandise licensing business.
Retail sales for Disney Junior products exceeded $1.8 billion in fiscal 2013, more than double the year before. And going into the critical holiday season, Disney Junior toys are prominently featured on the retailers hot toy lists and our top four retail partners are planning to double Disney Junior shelf space compared to last year.
Retailers are also excited about Disney Infinity this holiday season and so are we. We’ve already sold more than 1 million starter packs globally and the individual figures are also doing extremely well with the most popular ones selling out at major retailers in a matter of days. This successful launch drove Disney Interactive swing profitability in Q4 and all indications suggest the strong demand for Disney Infinity will continue.
Turning now to our Studio business with the phenomenal global success of Marvel’s The Avengers and Iron Man 3. Marvel Studios became the first studio in history to release two $1 billion movies in a row. That gives us some incredible momentum going into our next model release, Thor: The Dark World, which has already opened strong in a number of international markets and we’re confident that Thor will do very well when it opens here tonight.
We plan to keep the streak of great Marvel movies going with Captain America, The Winter Soldier and Guardians of Galaxy next year and with Agents of S.H.I.E.L.D. on small screens around the world and new Iron Man attraction headed to Hong Kong. And the Netflix deal we announced today, it’s clear our integration of Marvel across our company has been incredibly successful.
Through the animations phenomenal greater resurgence continues with Frozen, a new animated musical and the spirit of tangled and the great animated films throughout Disney’s history. Great storytelling, fantastic music and world-class animation, Frozen will join the ranks of the loved Disney characters when it opens at Thanksgiving.
Then we’ll end the year with Saving Mr. Banks, a great story starring Tom Hanks and Emma Thompson as Walt Disney and Mary Poppins author P. L. Travers. Next year in addition to the two Marvel movies I mentioned, we’re also looking forward to a new Muppet Caper and Angelina Jolie as Maleficent. And of course we’ve got some huge movies in calendar 2015 with Marvel’s The Avengers, Age of Ultron and Star Wars Episode VII as well as Pixar's Inside Out and The Good Dinosaur.
We’re obviously pleased with our performance in fiscal 2013 across The Walt Disney Company from both the creative and financial standpoint. We’re well positioned for continued growth in 2014 and with the slate of blockbuster movies I just mentioned as well as the opening of Shanghai Disneyland. We’ve been more excited about what’s ahead in 2015 and beyond
And now, I’m going to turn the call over to Jay for the financial details.
James A. Rasulo
Thank you, Bob and good afternoon everyone. Earnings per share in the fourth quarter were $0.77, an increase of 30% over the last year. We are very pleased with our results this quarter, which capped yet another year of strong financial performance. Our fourth quarter and record full year results only again demonstrate the significant benefits we derived and the way we managed the company, which includes aggressive reinvesting in our core businesses, extending our portfolio through prudent M&A and returning a significant amount of capital to shareholders.
Operating income at Media Networks was down in the quarter. As a result, the Cable were adversely impacted by the timing of affiliate revenue recognition at ESPN. Broadcasting results were down versus last year. This quarter ESPN recognized $172 million less in previous deferred affiliate revenue than it recognized in the fourth quarter of last year. As a reminder, this issue does not affect full year results. Absent this impact, both Cable revenue and operating income would have been up 6% compared to last year driven by higher operating income at ESPN and the domestic Disney Channels. Excluding the impact of the revenue to deferral ESPN’s operating income would have been up in the quarter due to higher affiliate revenue and increased advertising revenue partially offset by a modest increase in programming costs for College Football, the NFL and the Major League Baseball.
Reported cable affiliate revenue was down 3% in the quarter. This decrease was due to the impact of the ESPN’s revenue deferral, business model changes including the sale of the ESPN U.K. business as well as FX. Absent these impacts cable affiliate revenue would have been up high single-digits. For the full year cable affiliate revenue was up 6% on a reported basis and high single digits absent these impacts.
Ad revenue at ESPN was up a solid 9% in the quarter due to an increase in unit sold and higher rates. The ESPN’s ratings were up year-over-year driving by College Football, Major League Baseball and the NFL. So far this quarter ESPN’s cash ad sales are pacing up nicely.
At broadcasting operating income was down in the quarter due to difficult comps and program sales and higher prime time programming costs which were partially offset by higher ad revenue at the ABC Network.
At the Network programming costs were higher in the quarter because we aired more hours of scripted program in compared to last year, when some prime time hours were dedicated to coverage of the Presidential election.
Ad revenue at the Network was up 10% in the quarter as a result of increase in unit sold higher rates and growth in online sales partially offset by lower ratings and the Emmy's rotating from ABC to CBS this year.
Quarter-to-date scatter pricing at the ABC Network is running more than 20% above upfront levels.
Our parks and resort segment delivered yet another solid quarter of performance. Revenue for the quarter was 8% and operating income was up a solid 15% on the back of continued growth at our domestic parks and resorts and vacations club sales at the Grand Floridian.
Result at Disneyland Paris were lower in the quarter. Higher operating income at our domestic parks and resorts was primarily due to increased guest spending, higher attendance and occupied room night at Walt Disney World and a k increase in guest spending at the Disneyland Resort, partially offset by higher costs including on going spending for growth initiatives.
For the quarter attendance at our domestic parks was comparable to prior yeah, an increase in attendance at Walt Disney World was offset by a decrease at the Disneyland Resort given the comparisons to last year when there was a surgeon attendance around the opening of Cars Land.
Domestic per capita spending was up an impressive 9% on higher ticket prices and food and beverage spending. Average per room spending at our domestic hotel was up 4% compared to prior year and occupancy in the quarter was comparable to prior year redespite an increase in available room nights. So far this quarter domestic resorts reservations are comparable to prior year levels, while book for 5% or 8% versus prior year.
We continue to enjoy steady margin improvements as the base business grows and margins begin to reflect the benefit of recent investments. Total reported parks and resort segment margins were up 90 basis points in the fourth quarter compared to the prior year. The year-over-year change in Q4 margins was on top of an adverse impact of an estimated 90 basis points due to spending on growth initiatives.
For the year margins were up 110 basis points and that was on top of an adverse impact of 30 basis points due to growth initiatives.
At Studio Entertainment, operating income was up due to better worldwide theatrical performance and higher TV distribution results, which were partially offset by higher film cost write-downs and lower operating income from worldwide home entertainment.
Theatrical results improved in the quarter due to strong performance of Monsters University compared to Brave in the same period last year. Film impairments were higher in the quarter, reflecting the impact of our write-down of The Lone Ranger.
During the quarter, we released Iron Man 3 on DVD, and while we are pleased with its performance, worldwide home entertainment results were down due to a difficult comparison with the release of the Avengers DVD in Q4 last year.
At Consumer Products, growth in operating income was primarily due to gains in Merchandise Licensing. Results were due to strong demand for a number of our key properties including Planes, Monsters University and Disney Junior. The increase in licensing this quarter also reflects the inclusion of Star Wars results. Licensing revenue was up an impressive 9% in the quarter and that’s on a comparable basis, so it excludes the impact of Star Wars.
At the interactive segment, operating income was up significantly in the quarter through the successful launch of Infinity. Segment results swung from an operating loss in the fourth quarter last year to an operating profit this year. As Bob said, the next test for Infinity will come this holiday season where we feel good about it’s prospects based on sales so far and the feedback we have gotten from retailers, consumers, and hardcore gamers.
During the fourth quarter, we significantly increased our pace of share repurchase by buying 21.8 million shares for about $1.4 billion and for fiscal 2013, we repurchased 71.3 million shares for $4.1 billion.
We remain committed to returning capital to our shareholders via share repurchase and dividends. We believe our shares are very attractive at these levels and as we have said, we expect to repurchase between $6 billion and $8 billion in stock during fiscal 2014. So far this year, we have repurchased 15.1 million shares for about $1 billion.
We feel very good about how we are positioned for fiscal 2014, given the underlying trends we are seeing in our business.
Before I conclude, let me proactively address a couple of questions you may have about 2014.
We expect total consolidated CapEx in 2014 to be about $1 billion higher than in 2013 with the increase, primarily due to increased investment in Shanghai Disney Resort.
As we have discussed in the past, capital spending for the Shanghai project will ramp meaningfully in 2014 and 2015 as we prepare for the resorts opening in late 2015.
While we fully consolidate all of Shanghai’s CapEx, our net contribution is only 43% of the total CapEx. Thus our CapEx will be up approximately $600 million. Domestic parks CapEx is expected to be essentially flat compared to 2013.
Pension expense is expected to decline in 2014 due to an increase in the discount rate. The lower pension expense will be partially offset by expected adverse impacts from foreign exchanged rates primarily due to a decline in the value of the Japanese yen. We expect the net impact of these two items to through result in a benefit of about $150 million for the year.
With that, I will now turn the call over to Lowell for Q&A.
Jay thank you and operator, we are ready for the first question.
Earnings Call Part 2: