Hello, welcome to the Q2 2013 The Walt Disney Company earnings conference call. My name is Maisha, 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. If you would like to ask a question, please press star then one on your touchtone phone. Please note this conference is being recorded. I will now turn the call over to Lowell Singer, Senior Vice President of Investor Relations. Lowell, you may begin.
Thank you. Good afternoon, everyone, welcome to The Walt Disney Company's second quarter 2013 earnings call. We issued our press release about 45 minutes ago. It's available on our website at www.disney.com/investors. Today's call is being webcast. We will post a transcript to our website after the call. Joining me in New York 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 will make some comments followed by Jay. Then we will be happy to take some questions. With that, let me turn the call over to Bob.
Thank you very much, Lowell, good afternoon, everyone. We had a strong second quarter with earnings per share up 36% over last year when adjusted for comparability, driven primarily by Studio, Parks and Resorts, and Media Networks. We're pleased with our overall performance, confident in our strategy, thrilled with a stock price that keeps reaching new record highs. Of course, it's great to announce such strong earnings just after we are rolling out another Marvel blockbuster, "Iron Man 3," which had an incredible domestic opening with almost $175 million. That makes it the second-biggest opening weekend of all time, surpassed only by "The Avengers." Internationally, "Iron Man 3" set new opening weekend box office records in a number of countries and has already brought in over $525 million outside the U.S. To date, the global box office for "Iron Man 3" is more than $711 million.
We're proud of this movie, thrilled with its performance. The Avengers franchise is certainly strong today, but we have a lot more to come with "Thor: The Dark World" in November, "Captain America: The Winter Soldier" next year, and "The Avengers 2" in 2015. On the animation front, Pixar continues to create great value for our company, too. We're very excited about "Monsters University," which opens next month. Pixar's slate of films for the next five years includes fantastic original stories, as well as some great sequels to their previous hits. As we recently announced, we're in production on one of those sequels, "Finding Dory," featuring Ellen DeGeneres once again as the voice of Dory, one of the most beloved characters from "Finding Nemo," which is one of the most popular and profitable movies to date.
On to Lucasfilm, our integration is well underway, and based on our success with Pixar and Marvel, we're confident we can drive great value from this acquisition. In addition to the Star Wars feature films that we've already talked about, we're also working on opportunities for television and our parks. It's still very early in the process. We'll announce details as these developments evolve. In the meantime, with great tentpole features like "Iron Man 3" and "Monsters University," followed by Johnny Depp as Tonto in "The Lone Ranger" in July, our studio has delivered an incredibly strong slate of movies, and we have a lot more to look forward to. As I mentioned earlier, Parks and Resorts contributed significantly to our results this quarter as the investments we've made in our domestic and international parks over the last several years begin to drive growth.
We've completed the phenomenal transformation of Disney California Adventure, added two spectacular new cruise ships, and we're well into our historic expansion of Fantasyland at Walt Disney World. Later this month, we will complete our recent expansion of Hong Kong Disneyland with the opening of another new land. In Q2, Walt Disney World and the Disneyland Resort both set new attendance records for the quarter. Attendance in our Disneyland Resort is now more evenly split between Disneyland and California Adventure, a strategic goal of our investment in that expansion. In Hong Kong Disneyland, the addition of new lands and attractions also continued to drive strong performance. Cable networks were another important contributor to our results this quarter.
As I mentioned on our last call, with 30,000 hours of sports programming across all platforms every year and long-term rights to the marquee events, ESPN is still the must-have brand for sports fans. We just announced a 20-year agreement between ESPN and the Southeastern Conference to create and operate a national multi-platform network airing SEC content 24/7. ESPN has been covering the SEC since 1982, this new network will provide an unparalleled SEC fan experience with live sports coverage as well as studio shows and original programming. The new network launches in August 2014 and will serve SEC fans as well as multi-channel distributors and advertisers who want to reach them.
Our kids television portfolio is also doing extremely well, Disney Channel continues to be our biggest and most effective global brand builder and content engine, bringing Disney directly into hundreds of millions of homes around the world. We leveraged that strength to successfully launch Disney XD in multiple new markets, more recently to launch Disney Junior, which now reaches almost 400 million homes in 166 countries. Here in the U.S., Disney Junior is now a 24-hour channel reaching nearly 60 million homes, anchored by hit preschool series like "Sofia the First," "Jake and the Never Land Pirates," "Doc McStuffins," and "Mickey Mouse Clubhouse." Disney Junior is beating Nick Jr.'s ratings by double digits in almost every category and beating Sprout's ratings by triple digits across the board. As an emerging franchise driver for our company, the success of Disney Junior goes far beyond television.
Disney Junior-branded products have a strong and rapidly growing presence in the preschool retail space, with retail sales expected to increase by 80% to $1.5 billion in the current fiscal year. Turning to Disney Interactive, yesterday, we announced a new gaming agreement with Electronic Arts to deliver and publish several new games based on the epic Star Wars franchise. As you know, EA is one of the world's premier developers of mobile, tablet, console, and PC games. This multi-year, multi-title, and multi-platform agreement will allow us to bring great new Star Wars game experiences to the core gaming audience. We're already planning the first titles from this agreement, and we look forward to announcing them with EA soon.
As part of this deal, Disney retains rights to develop new titles within mobile, social, tablet, and online gaming categories, as well as the rights to develop new titles for the Asian gaming market. Overall, we feel great about what we achieved in Q2. We have an effective strategy, and we're looking forward to what's ahead. It's an exciting time at Disney, driven by high-quality creative content and our unparalleled ability to leverage it for continued long-term growth. I'm now going to ask Jay to review the details of our performance, then we'll take your questions. Jay?
Thank you, Bob. Good afternoon, everyone. We delivered another quarter of excellent financial performance, with segment operating income up 29% on revenue growth of 10%. Earnings per share, excluding items affecting comparability, were up an impressive 36%. These results demonstrate the ongoing successful execution of our strategy and our ability to monetize our assets and the performance of recent investments in our parks and resorts business. Let me spend a few minutes discussing our second quarter in more detail, then I'll highlight some factors that may influence our performance for the third quarter. Growth at Media Networks was due to increased operating income from our cable networks, partially offset by a decline in our broadcasting business.
The performance of our cable business in the second quarter reflects the benefit of new affiliate agreements, resulting in total cable affiliate revenue growth in the low teens or almost 10% when adjusting for the impact of revenue deferral timing at ESPN and foreign exchange rates. Operating income at cable increased 15% on revenue growth of 9%, primarily due to growth at ESPN. Results at ESPN were driven by increased affiliate and advertising revenue, partially offset by increased programming and production costs. The increase in programming costs were related to contractual rate increases for college football and college basketball rights. During the second quarter, ESPN deferred $70 million less in affiliate revenue compared to last year, which benefited reported revenue. In the third quarter, ESPN will recognize $73 million less in net deferred revenue than in the prior year, which will have an unfavorable impact on Q3 reported revenue.
I'll remind you, these changes have no impact on full-year results. ESPN ad revenue was up 4% in the second quarter, primarily due to higher units sold and higher rates. So far this quarter, ESPN's ad sales are pacing up more than 10%. At broadcasting, lower operating income in the quarter was due to higher cost write-offs for underperforming shows, an increase in prime-time programming costs for acquired programming, and a decline in ad revenue at the ABC network, partially offset by an increase in ad revenue at our owned stations. The decline in ad revenue at the network was due to lower ratings, partially offset by higher rates and an increase in online advertising. Ad revenue at the ABC network was down low single digits compared to the prior year. Quarter to date scatter pricing at the ABC network is running more than 25% above upfront levels.
Ad revenue at the stations was up 5% during the second quarter, so far in Q3, TV station ad sales are pacing down single digits versus prior year. Our parks and resorts segment delivered an impressive quarter, with revenue up 14% and operating income up 73%. The increase in operating income was primarily due to growth in domestic operations as a result of higher guest spending and attendance at Walt Disney World and the Disneyland Resort, and higher passenger cruise days, given a full quarter of operation for the Disney Fantasy. These increases were partially offset by higher costs, which were primarily due to growth initiatives. For the quarter, attendance at our domestic parks was up 8%, and per capita spending was up 10% on higher ticket prices, food and beverage, and merchandise spending.
Average per-room spending at our domestic hotels was up 7%, and occupancy was down two percentage points to 80% due to an increase in available room nights at Walt Disney World. So far this quarter, domestic resort reservations are pacing up 7% compared to prior year levels, while book rates are comparable to prior year levels. Higher operating income at our international operations reflects higher guest spending at Disneyland Paris and increased attendance at Hong Kong Disneyland Resort, partially offset by lower results from Tokyo Disney Resort, reflecting the absence of business interruption insurance proceeds that we collected last year. Total segment margins were up almost 400 basis points in the second quarter compared to the prior year and were favorably impacted by about two percentage points due to the timing of New Year's and Easter holidays.
While operating income in the second quarter was aided by a portion of the New Year and Easter holidays falling in Q2 relative to when those holiday periods fell last year, the results also reflected improved attendance and spending throughout the period, the growth investments we've made over the past couple of years are performing well. Studio entertainment operating income improved significantly in the quarter due to lower film write-offs compared to prior year, and improvement in our worldwide theatrical results due to the strong performance of "Oz: The Great and Powerful" and "Wreck-It Ralph" compared to "John Carter" last year. At Consumer Products, the increase in operating income resulted from higher performance in merchandise licensing and retail.
The increase in licensing is due to higher revenue from Disney Channel, standard character, and Marvel merchandise, partially offset by lower revenue from Cars merchandise, as well as the resolution of a licensee audit. On a comparable basis, earned licensing revenue was up low single digits versus last year. The performance of our retail business was driven by higher comp store sales in North America and Japan, as well as higher online sales in North America. Results at our interactive business improved this quarter due to higher operating income from our Japan mobile business, increased sales of mobile games, and lower purchase accounting impact at our social games business. As we look to the third quarter, I'd like to highlight a few factors that will impact our results, most of which are timing-related.
At Parks and Resorts, the timing of the Easter holiday will adversely impact our Q3 results, as only one week of the two-week holiday fell in Q3, whereas the entire holiday period fell in Q3 last year. We estimate the adverse impact of the Easter holiday shift on Q3 to be about $35 million. Our studio results in the third quarter will be impacted by the timing of pre-release marketing expenses for The Lone Ranger, which will be released domestically and in some international markets very early in fiscal Q4. At Interactive, we expect an operating loss in Q3 that is comparable to the loss in the second quarter, due primarily to the shifting of the release date of our Infinity game from Q3 to Q4.
At Broadcasting, programming expenses are expected to be about $40 million higher due to an increase in hours of original programming compared to last year. We also face a difficult syndication comparison due to the sale of shows, including Castle in the prior year, as well as lower sales of library shows this year, which we expect to have a total adverse impact of about $40 million in Q3. We continued to repurchase our stock during the second quarter by buying back 15.8 million shares for about $850 million. Fiscal year to date, we have repurchased 38 million shares for $2 billion. We feel great about the results this quarter and for the first half of the fiscal year. We remain incredibly well-positioned strategically and financially, which enables us to continue to create value for our shareholders. With that, I'll turn the call over to Lowell for questions.
Thank you, Jay. Operator, we are ready for the first question.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or hash key. If you are using a speakerphone, you may need to pick up your handset first before pressing the numbers. Once again, if you have a question or a comment, that is star then one on your touchtone phone. Our first question is Michael Nathanson with Nomura. Please go ahead.
A quick housekeeping for Jay, then one for Bob. Jay, thanks for giving us the organic affiliate fee number. You made Lowell's life a little easier tonight. The question I have for you is for the rest of the year, what's the right rate to think about the like-to-like growth on affiliate fees? Is there anything unusual about this quarter or low teens be consistent for the rest of the next couple of quarters?
I think in general, you can look for high single digits, low teens moving forward for the rest of the year. Nothing extraordinary about this quarter.
Okay. Bob, for you, Jay just laid out the big-picture story on all your drivers kicking in next couple years. You spent the past few years investing in franchises, investing in your parks. A lot of your competitors have focused on buying back stock. You look at the next couple of years, your drivers are all well known to you. Do you consider at this point increasing the capital returns levels, dividends, buybacks, or even adding some incremental debt to the company? How do you think about that, knowing all you've done is now paying dividends?
Well, we feel good about our ability to deliver more free cash flow and don't have much to say specifically about how we will allocate it, except that as you look back, we obviously made three pretty important and large acquisitions in Pixar, Marvel, and Lucasfilm, which we think has already delivered and will continue to deliver great growth and value to our shareholders. I'm not sure that as we see ahead, we see opportunities that are of like size. Not to preclude that from occurring completely, but it's just not obvious to us. That will then leave us with the opportunity, if we continue to grow our cash flow, to increase our dividend or buy back more shares. We've not made that decision yet. I think it'll be a good problem for us to have.
Okay. Thanks.
I think, Michael, in terms of the capital allocation, almost because it's a given, Bob didn't mention that first and foremost, we look for internal opportunities to invest our capital in projects like you've seen us do over the last five years, in addition to acquisitions, the work we've done in parks and resorts, the joint ventures on free-to-air television stations. We constantly look for ways that we can get superior returns through investment in organic growth. We continue to want to grow the company organically. What's left after that, Bob just handled.
We've also never really been a hoarder of cash, I think you can expect that philosophy to continue. We've been pleased with our credit rating. I doubt you'll see us going to the market in the way that would impact our rating. For more debt, that is.
Thank you, Michael. Operator, next question, please.
Next question is Benjamin Swinburne with Morgan Stanley. Please go ahead.
Thanks. Good afternoon. Just to clarify, Jay, I wanted to ask you, the almost 10% growth in affiliate revs, that was organic ex currency and ex deferrals. Was that ESPN or overall cable? I realize we're kind of splitting hairs here.
That was the overall cable number. I can tell you that if you back those two factors out, Ben, you are looking at 12.5% growth this year in affiliate revenues. This quarter, I'm sorry, if you back out the deferral and the FX impacts.
At cable?
Yes.
Okay, thank you. Is there any particular reason would Parks margins be better because of the calendar shift? I realize it benefits attendance, et cetera, but I would obviously get incremental expenses from the extra-
Yeah, of course, with the flow-through you have on incremental business, in our business, when you're taking on that kind of incremental revenue in a single quarter, if you think about, for instance, around the holiday period, we're already fully staffed, so we have very strong flow-through. Yes, we think that of the 400 basis points, about two percentage points was due to the shift in the front end or the back end of that quarter in terms of impact on margins.
Okay, thanks. Lastly, Bob, could you just talk about your outlook for the Studio segment? You've put a lot of capital to work with Lucas and Marvel, and clearly the titles are clicking on all cylinders. When you look back a few years ago, this was a billion-dollar-plus profit pool, I know the DVD market's changed, but you've also made some headcount changes. How do you think about the potential here for that line over the next several years as you roll out all these franchise films?
I think you'll see more and more focus on big tentpole films and less on non-franchise, non-branded, smaller films. When you consider that strategy and that investment, you also have to consider the impact that that investment and those films have across the company.
Obviously consumer products, to some extent, interactive. Certainly, there are opportunities on the theme park front. We feel good about the slate ahead from all sectors of the company. Disney Animation, which has, we think, an excellent Christmas film in "Frozen." Pixar, I mentioned on the call, with a blend of sequels like "Monsters," as for instance, and "Nemo" with some real good original shows, original movies rather. I mentioned Marvel, which is very, very rich. "Star Wars" in 2015, and then some Disney live-action films that we feel quite good about in terms of our ability to basically drive decent returns on them. It is definitely a more challenged business in terms of what I'll call physical sales or the physical home entertainment side of the business.
That is, sell-through and rental of physical goods, it's been growing nicely on the digital front, I think that bodes well for the future.
Thank you.
Okay, thanks, Ben. Operator, next question, please.
Next question is Douglas Mitchelson with Deutsche Bank. Please go ahead.
For Bob and one for Jay. Bob, if you could talk about the timing of the rollout of MyMagic+. Is there any way to give us a sense of the potential impact from that initiative? It's not the easiest thing for us to model. For Jay, hotel bookings up 7% against flat room rates. Is there a discounting strategy to drive hotel market share, or are those both an organic outcome as you look at it right now?
I'll start, Doug. On hotel bookings, I would say it's an organic outcome. In California, because of the strength of the demand that has accompanied s Disney California Adventure, we have really rolled out a lot of the discounting that's taken place on that property and feel very good about demand holding up despite that and the overall both strategic and financial impact that product is having. Of course, when you're looking at average book rates across the domestic business, it's heavily weighted towards Walt Disney World. We've brought on a lot more inventory with that new value hotel that we've opened, and I think that we feel pretty strongly that you're seeing the demand numbers and remember, when you bring on a big value hotel, the very mix of the pricing that you have across the inventory of rooms will continue to push your rate down a little bit.
There's no Promotional pricing that's taking place to push volume right now in that business. We're really at a point, as we said we would be, where we are yielding the volume returns and pricing returns on the ticket side that accompany the investment we've made in that product. I think you'll continue to see that as Fantasyland fully opens, and then as MyMagic+ is fully implemented, which Bob's going to speak to right now in terms of timing.
The goal is for us to roll out MyMagic+ at some point this year. It's in various levels of beta testing right now. We want to be very careful that it is working absolutely right before we roll it out to the general public, because there's no reason for us to rush it to market. In terms of what we can expect from it return-wise, you're right, although we've modeled it's somewhat difficult to be specific about. You can expect that it will create a better experience, and with that, we believe people will spend more time at our parks and ultimately deliver more visits per guest. We also know that it will deliver some upsell opportunities in terms of the array of products that basically digital technology will allow. We also think it's going to give us somewhat of a competitive advantage.
I think you have to look at all of those things, basically new products to sell, better experience that should obviously keep people coming back for more or staying longer, and then the competitive advantage would be the way to do it. I can't get specific with you, Doug, in terms of how to model that.
Perhaps, Bob.
Yes.
Just in terms of timeframe, would that be something where by fiscal 2014 you think we'd start to see some impact?
Yes. Well, I definitely believe we'll see some impact in fiscal 2014. That's certainly our plan.
Yeah. Okay.
Okay, you were going to mention something.
Yeah. Doug, just in terms of how to think about this, we have known for a really long time that getting our visitors to Walt Disney World to make decisions about where they spend their time before they leave home is a powerful driver of visits per guest. When they get into the Orlando market and their time isn't yet planned, they can be subject to everything you see down there, which is a lot of in-city marketing for all the many products that people have put there to basically bleed off the feed that we fundamentally motivate. If we can get people to plan their vacation before they leave home, we know that we get more time with them, we get a bigger share of their wallet. That's one thing for you guys to think about.
The second thing is what happens to purchases when they become much more convenient and you don't spend time queuing up for a transaction, queuing up to get in the park, and you actually have more time to enjoy the entertainment and subsequently spend more money doing things other than standing in line, which of course you can't spend any money while you're doing that. Those are the components. Bob spoke to the enhanced product and competitive advantages and so on, sort of on the more strategic level. On components to think about how to model that financially, you might think through some of those.
Thank you very much.
You're welcome. Operator, next question, please.
Next question is Jessica Reif Cohen with Bank of America Merrill Lynch. Please go ahead.
Thank you. I have one for Bob and one for Jay. Bob, I'll start with you. The company is obviously hitting on all cylinders, the parks, film, as you mentioned, and consumer products, cable networks, et cetera, with a really strong multi-year outlook. There's one exception, which is the television business, meaning, not just the broadcast network, but also your TV production is not at the levels of some of your peers. How much of a focus is it for you, and can you give us some specifics about what you're thinking about doing in terms of turning that around?
Well, I think the network, and particularly in this quarter, the stations too, have had somewhat of a tough run these last few months. Station business has been generally soft, by the way. Even though our stations are performing well in their markets, and actually in some markets growing share nicely, the markets themselves are basically compressing or getting smaller, and that's obviously an issue. On the network front, we'd like a stronger prime time schedule, particularly one that is populated with more programming that we own. It's hard to look at that year-over-year in terms of the product that we own, because we tend to look more long-term at these investments than short-term. From a short-term perspective, you'd have to say that "Scandal" certainly, a program that we own, has great potential in terms of delivering on our investment, but we'd like more of them.
What you really end up doing there is you hope that your team in place, which is a great team, comes up with the kind of shows that not only drive higher ratings and more advertising revenue, but ultimately includes a number of shows that we own that drive more revenue in general. There's no real secret to it, Jess, because you know, you've been following this for a long time. We could use a few more new hits, and certainly hits that we own. It's that simple. Paul Lee is hard at work with his team on that, as you know, as we speak. I've seen the pilots. I'm reasonably encouraged by what I've seen. Actually, more than reasonably encouraged. I'm very encouraged by what I've seen. And hopeful that the year ahead will deliver more value for us than the year prior.
Okay, thanks. On the parks for Jay Rasulo. I have a couple of really short questions, but can you break out what % of the cost of variable at this point, what your mix is of international and domestic visitors? Obviously, spending's come down quite a bit. If you could give us an update, your thoughts on margins. You've said that you expect to get to peak margins, at least in the U.S., which we can't see yet. How do you feel about margins over the next few years?
Okay. Let me try to take a couple of those. In terms of the international domestic mix, this quarter is the same exact mix as last quarter. I told you that in general, we run between 18% and 22%. We're at the low end in Q2 of that. Our strength has been from Brazil and the U.K., a little bit of weakness from Canada in the second quarter. I would say there's not a big story there, although we love to see our business from Brazil continue to grow. It's been a real driver for us, and it's nice to see growth back from the U.K. In past quarters, a lot of our international attendance growth has been from Canada. Anyway, I think the story there is within the range, and we're pretty happy with it.
With the overall increase in volume, international has kept its pace. In terms of margins, the story there is going to be one of improving margins as we put behind us the launch costs and ramp-up lower margins of new business initiatives that have been affecting us since we started on our big parks capital program. Every quarter or every other quarter, we've been launching a business. There's been substantial pre-opening costs that are associated with those, of course, with no revenue. Even in the following quarter, when the revenue starts, it's usually not at full tilt. That should be contributing to our overall margins. We're pretty happy, frankly, with what we see in the base business margins. If you back out the things that we backed out, I think this has been a quarter that has evidenced very strong fundamental growth in margins in that business.
Even though there have been a lot of structural changes that have occurred since we used to talk about 20% margins, i.e., the consolidation of businesses overseas into the parks segment that were not consolidated before, recognizing incentive comp in the parks margins, which was not done before. When you take those things out, we really do believe that we can get back on a steady state basis to the kinds of margins we had pre-downturn. I think the story's good there. I'm sorry I can't give a whole bunch more detail. In terms of the variable %, it varies through the course of the year. Obviously, you are in periods where more of the down periods in the year when more of the costs are fixed. When you go through the holidays like New Year's and Easter, you have a much larger variable component.
I can't really give you too much more insight beyond that.
Okay. Thank you.
You're welcome.
Operator, next question, please.
Next question is Alexia Quadrani with J.P. Morgan. Please go ahead.
Hi, thank you. Just staying on the parks for a minute. Given your experience at Cars Land and the real impressive attendance growth that has followed that opening, could you give us a bit of color how we should think about Fantasyland renovation? How significant can it be in terms of driving growth going forward at Disney World? Any sense of how much that might have already, I know part of it already was renovated and opened, a lot of it's still ahead of us. Any sense on sort of the timing when we might see sort of a big marketing push behind, or we might see more of a notable impact on that renovation?
Well, as you may or may not know, the Magic Kingdom park in Orlando is the number one park down there. It's actually the number one park in the world. We hadn't really done much to Fantasyland in the many years since we opened. This was significant, both from our perspective, but also from a guest perspective. The only thing I can tell you that may give you some sense is that the Magic Kingdom broke an all-time single-day record for attendance during the Easter holiday. We believe that was a direct result of the investment that we made in Fantasyland. Obviously, the summer will tell us a lot more. We do know from a guest satisfaction perspective that the numbers that we're seeing from the Magic Kingdom, specifically from Fantasyland, are way up.
We have more to open, as you cited, Alexia, what we've opened is really being well-received.
In terms of the expenses or sort of the launch cost, I'm guessing it sort of straight-line as far as you open it, or is there a bigger component of it that comes later on that we'll see a bit more of a cost pressure around?
I wouldn't expect to see significant cost pressure. When you think about the magnitude of Fantasyland, extraordinarily important for us to do that in the Magic Kingdom because of all the reasons Bob just discussed. If you look at the impact of that on the overall cost base at Walt Disney World, it's nothing like the Disney's California Adventure expansion, which was substantive relative to the base of the Disneyland Resort. I wouldn't look very hard for a whole bunch of costs associated with its launch. I think that you can see, certainly in 2014, you will start to see reasonably good contribution from that. I wouldn't look for a cost degradation there.
All right. Thank you very much.
Welcome.
Thanks, Alexia. Operator, next question, please.
Next question is Todd Juenger with Sanford Bernstein. Please go ahead.
Hi, good afternoon. I have what is probably a handful of questions that are disguised as one question, so I'll just limit myself to that. I'm interested in your international television business. Particularly as a network operator or in other cases where you are sort of a de facto operator by licensing large blocks of content. Really just interested in any commentary you'd share on how fast is that part of your business growing, in both affiliate fees and advertising? How much is that contributing to your media segment growth of those line items? What are the margin trends? I told you this was several questions disguised as one. How big would that sort of be as we look out and it compounds over the next couple of years?
Are there any opportunities for sort of investment there, either organically or even through M&A to increase that portion of your business? Thank you for indulging all that.
I'm not sure that we can give you much detail except to say that our international television business, which is largely Disney branded, Disney Channels, Disney XD, Disney Junior, as I mentioned on my call, in 166 countries. We do have, as you mentioned, we have program blocks that we've licensed to third party distributors in a variety of places in the world. Obviously we distribute the other content that the company owns, notably our movies and our TV shows. All of that has grown very nicely over the years, and we think that it will continue to grow. We've also continued to make investments in new channels in new markets. We're launching a free over-the-air Disney Channel in Germany. We launched in Russia. We launched in Turkey. We're looking for some other opportunities there as well.
To give you some perspective. I just don't have the details in terms of a growth trajectory or what that looks like from a margin perspective. We also look at it as brand-building opportunity too, because as I mentioned a number of times, the Disney Channel has become one of the most important drivers of basically brand value for the company. The impact that it has, not only with the programs that it puts on, but essentially supporting all the other content that the company has, particularly our movies, is pretty substantial around the world. There's value there that we don't necessarily put specifics against. It's been a great growth engine for the company, and we believe it will continue to be. Particularly, again, as some of these markets that we've only launched recently in mature. Russia, a good example of that.
What you're seeing right now in the numbers, Todd, are dilutive to our earnings in each of those. They're still all in the launch stage, Germany, Turkey, Russia, and our Japan Dlife project. We're still in investment mode on all of those.
On the new ones
new ones. Needless to say we wouldn't invest in those if they're not going to turn around and be accretive to our earnings down the road. As Bob said, we can't get too much into the details of how the margins relate to our domestic business, but we are investing in growth in the international television business.
Okay. I had to give it a try. I appreciate it. Can I just say, is it material to the affiliate fee growth rate when we look at sort of low teens, 10% organic? Is the international contribution, which I assume those things are growing maybe faster than that, is it material? Should we not even think about it as we think about how that grows over the years and pops up or aids the acceleration of that growth? I'll leave you going. Thank you.
It was not material in Q2, Todd.
What I will say, but I think what you can say just as you think of the future is we've been very aggressive over the last five years at launching new channels in many places. I think while we'll continue to look for opportunities to launch new channels in new markets, as I mentioned, there'll be fewer new launches in the future than there have been in the past five years. Obviously, as they mature and we move out of the investment phase and basically into the real growth phase, then you'll start to see an impact on the bottom line, both from advertising and from affiliate fees.
Fair enough. Thank you, guys.
Thank you, Todd. Operator, next question, please.
Next question is Anthony DiClemente with Barclays. Please go ahead.
Hi, just one question turning to ESPN and your sports franchises. I think if I have this correct, I think the spring of next year, your new MLB deal takes effect, then in the fall of 2014, your new NFL deal and presumably new SEC Network agreement kicks in. I want to ask about the NBA deal, which you share with TNT. That I think goes until 2015, 2016, and I'm just wondering how core the NBA is to your sports franchises. There are other national sports networks out there, Fox Sports 1, NBC Sports. They'll presumably be hungry for sports content when that deal comes up. I just want to get your thoughts on that. The other question there is, do your current affiliate renewals with the MSOs contemplate a renewal of your NBA deal in those contracts? Thank you.
The NBA deal that we currently have goes through 2016. You're off a little bit, Anthony, in your timing there. If you look at ESPN, they've locked down rights other than the NBA to virtually every other important sports franchise that they have for a long time. They've also concluded a number of very long-term affiliate agreements. If you think about our businesses going forward, there's probably more certainty as it relates to ESPN than almost any other business that we're in. Which I think, generally speaking, is a good thing. Now there are some opportunities to buy some other events. We obviously have the NBA, which is important programming to us coming up, and we have a few new affiliate deals to do, but not many. I think generally speaking, ESPN is in great shape.
As we look at the timing of when new contracts kick in, as you mentioned, Major League Baseball and the FCC, we don't look at it in a vacuum. We look at it against the timing of when new distribution deals kick in, as we talked about, I think more in the last quarter as it related to Comcast and new rates, as a for instance. We think that ESPN's future, in terms of its growth trajectory, is actually quite good, and we know a lot about what it is likely to be. I can't comment as to whether there are affiliate deals that are in any way tied to a renewal of the NBA. Okay. Thanks, Anthony. Operator, next question, please.
Next question is David Bank with RBC Capital Markets. Please go ahead.
Thanks very much. Two questions. The first is, Bob, can you talk about as viewership of premium video over time, both ESPN and ABC migrates incrementally over online, how do you view the optimal monetization for ad inventory on a kind of a Nielsen OCR demo sold basis versus just sort of a gross impression? How do you think that inventory is maximized most, and why? Then second, as you think about rolling out the FastPass+ and all those new technological elements, do you think it's a better strategy to kind of bifurcate them by offering them to resort guests or something only at first to drive higher occupancy? Or do you kind of go wide for everybody with that stuff? Thanks very much.
I'll answer the second question because it's easier to answer. We have for years had in place products that are available only to hotel guests. Actually, one thing that I think that Jay alluded to, didn't say specifically, is the MyMagic+ will definitely encourage people to stay more on property than off property. Jay was talking about essentially by being able to plan ahead, people will basically have more planned with us, and that will, in effect, discourage them from doing other things. I think it will also encourage them to stay more in our hotels. So I think you have to look at that as an additional value to MyMagic+. I'm not 100% sure I understand your question, the first part, but let me give it a shot. I don't know that you're going to see more viewing migrating online necessarily.
I think you'll see more online viewing of product, both scripted traditional entertainment and sports. We look at that as essentially a real opportunity because we think we're giving consumers, particularly consumers who have already bought the expanded basic bundle, an opportunity to choose the screen that makes most sense for us. What we obviously need to happen at the same time is we need for either Nielsen or some measurement system to kick in that adequately compensates us for the increased consumption on new devices.
What we have done is we've created selling tools and a selling structure across our businesses, including at the network, by the way, that is essentially kind of a selling to, in fact, we're already talking as it relates to ABC and the upfront, selling packages to advertisers that go across all media, which we've been doing for a while at ESPN and we're doing much more aggressively at ABC and the other networks. We think that'll also add value. I think the key is for us to get a measurement system in place that enables us to monetize, because I'm convinced that there's a lot of consumption going on there.
Thank you very much.
Thank you, David. Operator, next question, please.
Our next question is Alan Gould with Evercore Partners. Please go ahead.
Thank you. A couple of park-related questions. They're quick, though. One, could you conceivably get the rights back to the Marvel characters and attractions at the parks? Second, could you give us the international park revenue and operating income, which I think comes in the Q? Thirdly, the Infinity division, do you still think it'll hit break even with the pushback of Infinity to August?
The last question, with the pushback of Infinity to August, it's doubtful that you're going to get break even this year because of when Infinity will street, which is essentially in our fourth quarter. It essentially pushes that back. We believe in Infinity. It's actually been very well received by the gaming community and by consumers, and we're pleased with what we see in the product. That also, retail has had really great buy-in for it as well. We think it'll be a great product, and it's going to help drive profitability for fiscal 2014. By pushing it back, it's going to make us harder to achieve profitability or break even this year at that division, even though the division will deliver results this year that are substantially improved from last year.
Had Infinity not pushed back and Infinity done what we expect it will do, then achieving break even this year was very doable. I can't really say much about Marvel rights at the parks other than to say the rights to the Marvel properties, particularly in Florida, are not ours at this point. I'm not going to even speculate as to not only when we'll get them back but whether we will ever get them back. We have plenty of opportunity, though, for Marvel in our parks, and we're hard at work at developing Marvel presence, particularly in our international parks, notably in Hong Kong.
Alan, in terms of the revenue of our international parks, it was $543 million this quarter. We saw growth in Paris and Hong Kong, as I mentioned. Because in the prior quarter, we had business interruption insurance payments in Tokyo, our revenue there was down a little bit, but the fundamentals at Tokyo Disney Resort are quite strong.
The operating income for the international parks, Jay?
We'll wait for the Q for that number.
Okay. Thank you.
Thanks, Alan. Operator, next question, please.
Next question is Michael Senno with Credit Suisse. Please go ahead.
Good afternoon. I just wonder if you guys could quantify, as you've done in the past, the margin impact at parks from new initiatives in this quarter, and if we could expect to see that continue to decelerate as the year goes on. Second question, just in regard to the strong per cap spending. Understand there were ticket price increases, but it seemed to accelerate this quarter, and just wanted to see if there are any other particular drivers you're seeing at the parks that are resulting in that. Thanks.
On the margin impact on new initiatives. They're a little lumpy. This quarter, they happen to be marginally accretive to the overall margins, but just modestly, to be honest with you. As I said, they're lumpy, and I think, next year, as everything moves into fuller stride, you'll start to see those be more positive drivers to margins. Your second question on spending for the quarter across all categories, of course, per caps were helped by the holiday business that Bob mentioned, particularly Easter. There was nothing unusual about any of the categories. They were all up across the board. Okay, Michael. Thank you. Operator, next question, please.
Next question is David Miller with B. Riley & Co. Please go ahead.
Hey, guys. Good call being in New York because it's raining here in Los Angeles. Jay, just following up on, I think it was Benjamin Swinburne's question, I think the third question in. I've followed you guys for a long time, and I'm going back to my models here, actually in the spreadsheet, all the way back to 2001, and I don't see any example of a Q2, which is your March quarter, usually your weakest quarter, ironically enough, for the parks, where your margins were this high, 11.6%. I know what you're going to say. You're going to talk about the timing shift. You're going to talk about the demand curve moving to the right. I believe that there were some phase three shutdown sequences that occurred in late March. Was there anything else going on costs that you're willing to elaborate on?
These are truly outstanding margins, and I believe, correct me if I'm wrong, a record for Q2. Within that, do you guys still have a fuel hedge for the boats, or has that been unwound? Thanks very much.
David, Jay mentioned that obviously some of the impact in Q2 at the parks, both on the margin side and on the bottom line, had to do with the shift in timing of both Christmas and Easter. Let's call it what it was. It was a great quarter for the parks.
Yep.
A great quarter. There was nothing on the expense side to really note in this case. Continued diligence in that regard for the parks. I think they've done a good job of managing their expenses, particularly when they've continued to invest to grow. This was a quarter that I think stood out because the product that we recently put online really worked, like California Adventure and Fantasyland and the ships, as we talked about. The product that we've had online for years and years, as I think in many respects, just never looked better to the consumer. In an economy that is, I think, seeing some slight improvement, you get results like the results that we got. I think it bodes very well for our future. As we mentioned earlier, there'll be a little lumpiness in terms of margin expansion.
The cost, for instance, of the MyMagic+, you'll see in the next quarter as a, for instance, some a little bit more on Fantasyland. Generally speaking, we have a great park story to tell. Just as an aside, we've talked a lot about California Adventure. Before we redid California Adventure, at a typical day at Disneyland, the Disneyland Resort, you'd see about 75% of attendance going to Disneyland and 25% going to California Adventure. That's now, in most days, more like 55/45. That's an incredible change. It enables us to drive real bottom-line growth because you got a better experience at Disneyland. We're getting pricing out of California Adventure that's substantially above what we were able to drive before. We have increased food and merch spending there as a, for instance. That obviously contributes nicely to the margins.
I'm not sure there's any other way to characterize the quarter for the company in Parks and Resorts except to say it was a tremendous quarter.
Fair enough. Thank you very much.
On your fuel hedging question, we generally hedge our fuel out of Port Canaveral. It accounts for about a third of what we will be using in terms of fuel for the cruise line this year.
Thank you.
Thanks, David. Operator, we have time for one more question.
All right. Our last question is Jason Bazinet with Citi. Please go ahead.
Just have a question for Mr. Iger. One of the things that always struck me as unusual about your financials on a trailing basis is how much of the growth came from media nets relative to the other divisions? Even though if you asked a man on the street what they thought of Disney, they wouldn't necessarily think of ESPN. Now that you've sort of made all of the investments in parks and made all the investments in IP, are we just in harvest mode now and just the investments that you've made, you're just going to sort of execute and let the strategy play out? Is that the right way to think about it? Or is there another pivot that you see sort of on the horizon over the next 3 years?
That's a bit of a tricky question there, Jason. I don't want to, in any way, say there's something big afoot when I answer your question by saying we're never in harvest mode, per se. There are always opportunities to harvest what we've invested in, but we're in extremely dynamic businesses in a very dynamic global marketplace, and there are always going to be opportunities for us, particularly given the strength of these assets, ESPN, Disney, Pixar, Marvel, and Star Wars. There are going to always be opportunities for us to invest in those to grow in a marketplace that generally is pretty robust. I think we talked about the fact that we believe we'll be able to grow free cash flow nicely.
I guess in a way, that's a form of harvesting, but I get a little bit concerned about using the word harvest because sometimes it suggests a status quo approach, and I don't think status quo in as dynamic a marketplace as we operate in is a good strategy.
Let me recast it. Is it fair to say that the Lucas acquisition was the capstone of a fairly significant strategic pivot for the firm?
I said it before. If you're asking me today, as we look ahead at whether there's a Pixar, a Lucas, a Marvel on the horizon, I'd have to say not likely. We just don't see it. That doesn't mean one isn't going to crop up and that we won't act opportunistically as we did on those three to take advantage of it if we see an acquisition that we believe is going to really deliver long-term value and growth for our shareholders. We feel really good about Pixar. We feel great about Marvel, not just because of this week, although we have to admit that it certainly helped. When we look ahead at what Marvel's got in the pipeline and the opportunity to monetize those properties, not only across our businesses but across the world, obviously significant. We feel great about Lucas. It's been very well-received.
As we look at Lucas, the more we get into it, the more we realize that we've got a property on our hands that is probably more loved and more well-known than almost anything else that we have, which is remarkable. It's remarkable that it was even available for us to buy. I don't want to say never, meaning that there is never again or there isn't one out there. It's just much more difficult as we look ahead to cite one. I certainly wouldn't be able to mention it to you on this call.
I will say that on the Marvel and to give you maybe a little bit more perspective, on the Marvel and the Star Wars or the Lucasfilm acquisitions, those appeared on, I'll call it, internal lists of things that we thought might make real sense for this company and its shareholders for quite a long time. We looked at them very carefully. That list is shorter today than it used to be.
It's very helpful. Thank you very much.
Thanks, Jason. Thanks again, everyone, for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our website. Let me also remind you that certain statements on this call may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. This concludes today's call. Have a good night, everyone.
Thank you, ladies and gentlemen. This concludes the Q2 2013 The Walt Disney Company earnings conference call. Thank you all for participating. You may now disconnect.