This summary is based on the first quarter fiscal 2009 earnings call conducted by The Walt Disney Co. (DIS) on February 03, 2009.
Management:
President, CEO and Director: Robert A. Iger
Senior EVP and CFO: Thomas O. Staggs
SVP, IR: Lowell Singer
Key Investor Issues:
- Q1 net income dipped 32% from $1.3 billion to $845 million.
- Q1 cash from operations was $262 million compared with $662 million last year period.
First Quarter Financial Highlights:
The Parks and Resorts experienced a record-high Q1 of 2008 attendance at the domestic parks.
- In this year’s Q1, domestic parks attendance was 5% below those levels, with equal percentage declines at Walt Disney World and Disney Land.
- Desk spending at the domestic parks was flat compared with the prior Q1, as slightly higher average ticket prices helped to offset lower merchandise spending.
- Occupancy levels in both Orlando and Anaheim were 85%, down mid-single percentage points versus last year.
- The average spending at the hotels posted a modest increase.
- The international parks attendance increased, both at Disney Land Resort Paris and Hong Kong Disney Land.
- Operating income was lower as the prior Q1 results benefited from higher real estate sales at Disney Land Resort Paris.
- Margins in the quarter were affected by mark-to-market adjustments for fuel hedges of approximately $40 million.
- The fuel hedge impact alone accounted for 40% of the margin decline for parks in the quarter.
The management reported Media Networks cable operating income dipped 12%.
- At ESPN, increased affiliate revenue more than offset lower advertising revenue but operating income was impacted by higher rights cost, administrative expenses and receivables reserves.
- ESPN’s current advertising sales declined by high-single digit percentage points in the quarter, consistent with Q4.
- The decrease was partly due to softness in several categories, including consumer electronics and automotive.
- Results in the domestic Disney channel were also down as a result of the great success of High School Musical 2 on DVD last year.
The lower profits at broadcasting reflected ratings declines at ABC and a soft advertising market.
- This was partly offset by the lower programming costs at the networks.
- Q1’s results were also reflected by bad debt expense associated with the Tribune bankruptcy filing.
- Scattered CPNs came in above up-front pricing levels by roughly 10% but were significantly lower than Q1’s scatter pricing in the prior year.
Student entertainment faced difficult Q1 home video comparisons as the prior-year quarter because of the DVD release of Pirates of the Caribbean 3 and High School Musical 2.
- The industry realized lower conversion rates on new releases and softer demand for catalogue titles.
- This helped contribute to a decrease in DVD unit sales.
- The lower sales were the biggest factor in reduced results at the studio in the quarter.
In Consumer Products, Q1 earned license royalties were roughly flat versus prior year despite the difficult retail environment.
- The presence of Disney Stores North America revenue this year as opposed to royalty payments on the stores last year drove the segments revenue increase in the quarter.
- This however also had a depressing effect on margins.
- The company is now reporting the financials for Disney Bright Interactive business under a separate segment called Interactive Media.
- In Q1, for this new segment, increased losses were due to lower results in video games. - The unit sales for video games were slightly firmer but competition and the difficult market put pressure on pricing.
- The management also reported higher unit cost of sales and marketing expenses on video games in the quarter.
The company continues to record weakness in the advertising market.
- Advertising pacings at TV stations are significantly behind last year.
- This is in part due to the lack of political spending in this year’s fiscal Q2.
Key questions and answers from the first quarter fiscal 2009 earnings call conducted by The Walt Disney Co. (DIS) on February 03, 2009.
Jessica Reif-Cohen (BAS-ML):
You plan to spend less on films. Do you mean you are spending less per film or overall in the film business?
Robert A. Iger: Our goal is to openly spend less in total on films but because we are making fewer films and there is a greater percentage of those films that are what we call ten fold, the average price for a film isn’t necessarily going down significantly. We do believe, though, that the cost of both producing the DVDs, distributing and marketing the DVDs, needs to be addressed and that’s exactly what we’re doing with an eye toward not only reducing the cost and the investment in extras for the DVD but also focused on improving the price to value in relationships.
For instance, we are finding that when we sell a blue-ray DVD with a standard DEP file and also a downloadable file, we can actually offer a price to the consumer that is viewed by the consumer as delivering greater value, which is enabling us to drive revenue at a level that is slightly better than we might have if we had not added those basically valuable extras to the DVD.
Jessica Reif-Cohen (BAS-ML):
Can you discuss the free cash flow outlook for the year?
Thomas O. Staggs: The biggest determinate will be the operating results as we go through the year. There are a couple of places where we are making investments, first of all in the programming side. I expect to invest a little more in programming at ABC given the strike last year, on a year-over-year basis. We continue to invest in programming at the Disney channels around the world.
On the capital side we are investing in increased capacity at Pixar and we’re putting some money into that this year. On the park side, the major drivers, I would expect capital expenditures to be up because we are investing in California venture. We continue to invest in the new ships that are due for the cruise business in a couple of year. We also continue to invest in vacation club facilities.
Hence, we continue to try to make sure that we are being disciplined about our investments; that we are putting investment towards quality product that we think cuts through the clutter and on assets that we think will drive long-term growth for the company.
