Walt Disney Company (The) (DIS)

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Walt Disney (DIS)

Q2 2011 Earnings Call

May 10, 2011 5:00 pm ET

Executives

Robert Iger - Chief Executive Officer, President, Director and Member of Executive Committee

James Rasulo - Chief Financial Officer and Senior Executive Vice President

Lowell Singer - Senior Vice President of Investor Relations

Analysts

Spencer Wang - Crédit Suisse AG

Richard Greenfield - BTIG, LLC

Anthony DiClemente - Barclays Capital

Benjamin Swinburne - Morgan Stanley

Douglas Creutz - Cowen and Company, LLC

Michael Nathanson - Nomura Securities Co. Ltd.

David Miller - Caris & Company

James Mitchell - Goldman Sachs Group Inc.

John Janedis - UBS Investment Bank

Douglas Mitchelson - Deutsche Bank AG

Tuna Amobi - S&P Equity Research

David Bank - RBC Capital Markets, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Walt Disney Company Earnings Conference Call. My name is Stacy, and I'll be your conference moderator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today to Mr. Lowell Singer, Senior Vice President of Investor Relations. Please proceed.

Lowell Singer

Okay, thank you, and good afternoon, everyone, welcome to the Walt Disney Company second quarter Earnings Call. Our press release was issued almost an hour ago, it's now available on our website at www.disney.com/investors. Today's call is also being webcast, and the webcast will be on the website after the call. Finally, a replay and transcript of today's remarks will be available on the website as well.

Joining me in Burbank for today's call are Bob Iger, Disney's President and Chief Executive Officer; and Jay Rasulo, Senior Vice President and Chief Financial Officer. Jay is going to lead off followed by Bob, and then we'll be happy of course to take your questions. With that, let me turn the call over to Jay and we'll get started.

James Rasulo

Thanks, Lowell, and good afternoon, everyone. We reported Q2 earnings per share of $0.49, up $0.01 from last year. The underlying quality of our earnings was good, but our results were particularly impacted by 4 items which we estimate collectively reduced operating income by approximately $170 million versus last year. These items are: first, the impact of the very disappointing performance of Mars Needs Moms and the year-over-year timing difference of key Pixar DVD releases, which together reduced results at Studio Entertainment by roughly $90 million; second, an estimated $23 million impact on Parks and Resorts from the Easter calendar shift; third, the impact of the devastating Japan earthquake, which we estimate reduced operating income at our Parks and Consumer Products businesses by $25 million; and finally, a $34 million impact on Interactive Media results from purchase accounting from the Playdom acquisition. These 4 items collectively reduced EPS by about $0.06.

Now I'll turn to the main drivers of our Q2 performance in our business segments. Media Networks operating income was up 17%, driven by growth in affiliate and advertising revenue at ESPN and Disney Channels, as well as at our broadcast network and our TV stations. At ESPN, ad revenue came in 43% above prior year. During the quarter, ESPN added 3 BCS college football games, including the National Championship Game. When adjusting for these, we estimate that ESPN's ad revenue was up by 23%. In Q2, ESPN recorded lower equity income as a result of higher programming costs at our ESPN Star Sports joint venture due to its airing of the Cricket World Cup.

At Broadcasting, strong results were driven by increased revenue from advertising and from retransmission fees, as well as higher sales of ABC produced shows. Results were also helped by decreased news production costs.

ABC Network advertising revenue was up in the second quarter, helped by strong pricing in the marketplace, particularly offset by low -- partially offset by lower ratings. Q2 scatter CPMs came in 41% above upfront levels. Ad revenue at our TV stations was up 6% in the second quarter.

At Studio Entertainment, operating income was impacted by the timing comparison of key DVD releases and by lower performance of our theatrical slate. As expected, home video results were affected by the difference in the international release timing between UP, which was released in Q2 last year, and Toy Story 3, which was released in most markets in Q1 this year. We estimate this timing difference impacted Q2 operating income by $15 million.

As I mentioned earlier, the Studio results were also impacted by the very disappointing performance of Mars Needs Moms, which reduced Studio operating income by more than $70 million in Q2 driven by both P&A spending on the film and an incremental impairment charge.

At the Parks and Resorts segment, operating results reflected higher costs at Disney Cruise Line and the loss of royalties resulting from the Japan earthquake. In addition, Q2 results across our parks last year included 1 week of the Easter holiday, whereas the holiday period this year falls entirely in Q3. Underlying trends at our Parks and Resorts were solid. Domestic attendance in Q2 came in flat to prior year levels. We estimate that without the impact of the Easter timing shift, attendance at our domestic parks would have been up 2% versus prior year. Per capita guest spending rose by 6%, driven by higher pricing and lower discounting. Occupancy across our Domestic Hotels came in 1 percentage point above prior year levels at 81%. Per room spending was up 4%.

At our International Parks, higher results in Paris and Hong Kong were offset by the loss of royalties from Tokyo Disney Resort, which was closed for about 3 weeks during Q2 due to the earthquake in Japan.

Read the rest of this transcript for free on seekingalpha.com