Welcome to The Walt Disney Company's Fiscal Full Year and 4th Quarter 2012 Earnings Conference Call. My name is Ellen, 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 turn the call over to Mr. Lowell Singer, Senior Vice President, Investor Relations. Mr. Singer, you may begin.
Okay. Thank you, Alan, and good afternoon, everyone. Welcome to The Walt Disney Company's Q4 2012 earnings call. Our press release This was issued about 45 minutes ago and is available on our website at www.disney.com/investors. Today's call is also being webcast and we will post the webcast and a transcript of the call to our website later.
Joining me in Burbank for today's call are Bob Iger, Disney's Chairman and Chief Executive Officer and Jay Rasullo, Senior Executive Vice President and Chief Financial Bob will lead off and Jay will make some comments and then of course we'll be happy to take your questions. So with that, I'll turn it over to Bob and we'll get started.
Thank you, Lowell, and good afternoon, everyone. I'm very happy to report that Disney has delivered yet another record annual performance, By improved results in each of our businesses in the fiscal 2012 year, Disney achieved record revenue, net income and earnings per share. Net income was up by 18% for the year on a 3% increase in revenue and our earnings per share adjusted for comparability were up 21% over last year. I'm also very pleased with our 4th quarter results, which driven by growth at cable networks and parks and resorts. Net income grew by 14% and revenue was up 3% for the quarter.
And our EPS for Q4 adjusted for comparability grew 15% to $0.68 These results once again demonstrate our ability to grow earnings in the near term, while investing for the long term And we are obviously proud of our performance. Before I get into the highlights of fiscal 2012, I just want to mention the tremendous creative We are seeing at Disney Animation. Building on the success of Tangled, our newest release Wreck It Ralph just had a phenomenal opening weekend Bigger than any previous Disney animated movie. With $58,600,000 in domestic box office so far, Wreck It Ralph continues the creative momentum that started with our acquisition of Pixar. Pixar deal brought us more than just great Pixar movies.
It Also reinvigorated our entire animation pipeline led by the great team of John Lasseter and Ed Catmull. Looking back, fiscal 2012 was a great year for Disney by every measure, creatively, financially and strategically. Marvel had a fantastic year capped by the extraordinary success of The Avengers, which became the world's 3rd highest grossing movie of all time, a global phenomenon and an incredibly important franchise for us. Pixar also generated a great deal of value for us this year from the opening of the phenomenal Cars Land to transform Disney California Adventure Into an extraordinary park to the opening of Brave, which became Pixar's 13th consecutive movie to debut number 1 at the box office. We opened 2 new lands in Hong Kong Disneyland, completed the first phase of our historic multiyear expansion of Fantasyland in Walt Disney World and made significant progress in Shanghai to keep development on track to open by the end of 2015.
With the addition of the Disney Fantasy last March, we've now more than doubled our cruise business. And this year, we were Named the number one large cruise line by readers of Conde Nast Traveler Magazine. ESPN was A strong contributor for the year as well adding Wimbledon to its world class sports lineup along with higher ratings, ad sales and affiliate revenue. ESPN also solidified its position in some critical sports, including college football and basketball and Major League Baseball. Disney Channels Worldwide continued to be an important brand and business driver for our company, reaching approximately 425,000,000 In 100 and 60 7 countries.
In 2002, we introduced Disney Junior and Disney XD to new markets around the world and also launched our first over the air Disney channel in Russia. We also completed our strategic well as one of the country's leading broadcasters reaching more than 100,000,000 viewers every week. And looking ahead, our Shanghai development is moving into Exciting phase as the construction work starts to define the shape of things to come and our vision starts to become reality. We look forward to completing our Hong Kong Disneyland expansion, which should only enhance the park's current strong performance. And we're also very excited about the ongoing Fantasyland transformation at Walt Disney World.
Expansion of the Magic Kingdom since that park opened more than 40 years ago and it's going to be pretty spectacular. And also in Florida, we're very excited about a new technology rollout designed to enhance guest experience and advance and expand guest engagement We will provide details early next year, but among the many features and benefits of this technology is giving guests the chance to plan their itineraries ahead of time including access to their favorite and often our most popular attractions. On the studio front, we're going to follow the success of Wreck It Ralph with 4 major films this fiscal year. Oz: The Great and Powerful opens on March 8 and Marvel's Iron Man 3 will be in theaters May 3. And this coming summer Pixar's Monsters University will Open on June 21 followed by The Lone Ranger on July 3.
As all of you know last week we announced our acquisition of Lucasfilm. And upon closing, we believe it will fit right in with Disney, ABC, ESPN, Pixar and Marvel in our unparalleled portfolio of phenomenal assets and world class brands. And when you look at all the franchises and IP ever created in the history of entertainment and rank them in terms of value. Star Wars is always at or near the very top of that list. It is the very definition of a franchise.
It is global appeal, stands the test of time 35 years so far and we see great potential well into the future. It enjoys strong unwavering popularity with 100 of millions of fans even in the absence of a new theatrical release in the last 7 years. Star The new slate of feature films starting with Star Wars Episode 7 in 2015. The addition of Lucasfilm to our strong portfolio of assets will continue to fuel Disney's creative engine across our entire company to create additional value for our shareholders. We're obviously very pleased with what we've achieved in fiscal 2012 and overall we believe we're well positioned for continued strong performance and growth.
I'm now going
to turn the call over to Jay Rasulo to go through the details. Jay? Thanks, Bob, and good afternoon, everyone. We're pleased with our 4th quarter results ending yet another record year of financial performance for the company. We reported record revenue, net income and earnings per share The Q4 in more detail and then I'll bring I'll highlight a few 2013 items.
In Q4, Media Networks was the largest contributor to our performance driven by growth in operating income at cable networks due to continued growth at ESPN and higher equity income at A&E Television Networks. Growth at ESPN was due to an increase in affiliate revenue, which was driven by higher rates, partially offset by higher programming costs for college football and Major League Baseball as well as our new Wimbledon contract. Higher equity income at A&E Television Networks during the quarter resulted from increases in advertising and affiliate revenue. Advertising revenue at ESPN was flat for the quarter as higher rates were offset by lower ratings. We experienced a less robust marketplace around the Olympics and we did not see a stronger pickup in demand as we expected after the Olympics ended.
During the quarter, ESPN signed a new long term agreement with Major League Baseball. This deal extends our rights through 2021 season And significantly enhances our current deal with more games, greater coexist rights and an increase in annual studio programming Hours of more than 100%. Extending our partnership with Major League Baseball further strengthens our unrivaled sports portfolio, which continues to make ESPN the number one destination for sports fans as well as cable television's most valuable network. Operating income at Broadcasting was down modestly compared to last year due to lower advertising revenue at the ABC Network, partially offset by higher Lower advertising revenue at the network was driven by lower prime time ratings. Higher program sales were driven by the sale of Castle and Wipeout in the quarter.
At the ABC Network, quarter to date scatter pricing is pacing mid teens above upfront levels. ESPN ad sales are pacing down modestly and ABC Family ad sales are pacing up high single digits. TV station ad sales are pacing up mid single digits as well. Our Parks and Resorts segment delivered solid results With revenue up 9% and operating income up 18%. The increase in operating income was due to higher results at our International And Disney Cruise Line.
Total segment margins were up 100 basis points compared to last year. Growth initiatives reduced segment margin expansion by about 90 basis points. Results at our international resorts were high due to increased attendance at Hong Kong Disneyland and Disneyland Paris. Royalties from the Tokyo Disney Resort were also higher versus prior year quarter. Higher operating income Our domestic parks were comparable to prior year as growth at the Disneyland Resort was largely offset by higher costs at Walt Disney World as a result of our growth We are encouraged by Disneyland Resort's overall performance in the quarter and are particularly pleased with its attendance and per capita spending results following the opening of Cars Land in June.
Overall, domestic attendance was up 3%, driven by strong attendance at the Disneyland Resort. Per capita spending at our domestic parks was up 7% on higher ticket prices and food and beverage spending. Average per room spending at our domestic hotels was up 8%. The increase in per room spending was driven by higher pricing and higher merchandise spending. Occupancy at our domestic hotels was down 3 percentage points to 78% due to an increase in available rooms at Walt Disney World.
The increase in available room nights was driven by the completion of the final phase of Disney's Art of Animation Hotel. So far this quarter, domestic hotel reservations are facing up mid single digits compared to prior year levels, while book rates are also up. At Studio Entertainment, the decrease in operating income was driven by lower worldwide theatrical results and higher film cost write downs, which were partially offset by stronger performance of our worldwide home entertainment business. Worldwide theatrical results were lower due to the strong performance of Compared to prior year, worldwide home entertainment results were up due to higher unit sales and increased effective pricing driven by the successful release of Marvel's The Avengers. At Consumer Products, operating income was up in the quarter due to higher results Licensing and Retail.
Growth in licensing was driven by higher earned royalties due to the strong performance of Spider Man and the Avengers merchandise. On a comparable basis, earned licensing revenue was up 5%. Higher retail operating income was primarily driven by strong results in North America and Europe. At the Interactive segment, lower operating losses compared to prior year were due to continued improvement in our social games business, which benefited from lower impact of purchase accounting. Results Our console game business faced a difficult comparison to the performance of Cars 2 and Pirates: Lego in the prior year with no comparable titles in the quarter this year.
I would now like to turn to fiscal 2013. Overall, we At Cable, domestic sports rights costs will be $170,000,000 higher in Q1 versus last year, driven by increases in college football, NFL and NBA programming. College football increase is due to our new deals with the Pac-twelve and the Big 12 along with the expansion of the SEC. Our Q1 NBA costs will be higher compared to last year when Fewer games were played in Q1 due to the lockout. However, ESPN's full year results will reflect the benefit of several new affiliate deals, one of which will commence in the 2nd quarter.
At Studio, we faced a very difficult home entertainment in Q1 given strong operating income from Cars 2 and the Lion King last year. Specifically, we expect this comparison to drive A year over year decline in home entertainment operating income of more than $150,000,000 Cars 2 delivered very strong Entertainment operating income last year, driven in part by lower cost allocations given the strength of its merchandise licensing revenue. The strong performance of The Lion King was volume driven as the title had not been available on home video since January 2005. The New Year's holiday will shift from fiscal Q1 to fiscal Q2. We estimate this will shift about $30,000,000 in operating income from Q1 to Q2.
2013 will benefit from a full year of performance from both the Disney Fantasy and Disney California Adventure. We expect these two projects to be accretive to operating income. However, the gains will be offset this year by incremental spending for projects in Orlando and Shanghai. In Orlando, we're continuing to work on the guest experience enhancement project Bob discussed. In Shanghai, we're beginning to ramp up Spending for our new theme park.
So in fiscal 2013, in aggregate, all of our growth initiatives, both launched and to be launched, will contribute roughly $500,000,000 of both incremental revenue and expense. We expect these initiatives to be accretive to operating income in fiscal 2014 and increasingly add to operating income each year thereafter And each to deliver returns above our cost of capital. We expect the Q1 tax rate to be About 2 percentage points higher than last year due to the benefit of tax settlements in prior year. Pension and post retirement medical expenses will increase by approximately $70,000,000 in fiscal 2013 due to a decline in discount rate. On top of these items, we do expect Superstorm Sandy to impact our Q1 results, though it's a little too early to quantify that.
This list of comparability and one time items that I've just shared with you will impact our Q1 reported earnings. But rest assured, we remain confident that our operating performance for the remaining quarters will result in solid earnings growth for the entire 2013 fiscal year. We continue to repurchase our stock during the Q4 with 19,100,000 shares repurchased for about $973,000,000 For the fiscal year, we repurchased 72,000,000 shares for $3,000,000,000 So far this quarter, we have repurchased 8,200,000 shares for $419,000,000 Over the next two quarters, we And that's in addition to our regular share repurchase. 2012 was another great year for our company and in 2013, we We expect to deliver another year of strong operating performance. Now I'll turn the call over to Lowell
for questions. Okay, Jay. Thanks. Operator, we're ready for the first question.
Thank you. We will now begin the question and answer session. The first question is from Michael Nathanson from Nomura. Please go ahead.
Thanks. And I have a couple of quick housekeeping questions for Jay, then one for Bob. Jake, can you just give us a sense of where our fleet fee growth was for this year for the cable networks?
Yes, sure. The full year adjusted cable revenue was high mid single digits. This is just for some high single digits, yes. Isn't that what I said? I'm sorry.
This is just for unfavorable FX impact and also for the impact of Leap Day, which I don't want to get into in great detail, but it affects our revenue for the year And reported cable affiliate revenue mid single digits.
Okay. And then Bob, you've been around Broadcast Networks a long time. And it just seems to make sense to ask you this question. What do you think is happening to the start of the season? Everyone's worried about broadcast over the years.
Is this decline in kind of the rating something that you think is going to be fixed over the course of the season? Or are you more worried than that?
Well, I think the story of the year really two things. 1, the greater penetration of DVRs and the greater usage of DVRs, which clearly have shifted the rating in the direction of C3 and ultimately hopefully C7, Because I think it speaks for an expanded look from a Nielsen in an advertising perspective at 7 days versus 3. And I think the other story is that there seems to be somewhat of an absence of what I'll call new big Real sort of buzzworthy hits. And because of that, I would say that it would be premature to either write the suggest that we're seeing a trend. We've seen years where the presence of a big hit by the way, as in the case with NBC, if you look at the The voice on their schedule has improved their numbers dramatically.
So I think I happen to believe that ABC's schedule is Pretty solid. Their Sunday schedule was Once Upon A Time and Revenge is working and they've gotten Modern Family in grays and Others show some real strong base and their ratings from a C3 perspective without sports are down in the 7% to 8% range, which I don't consider to That noteworthy. What I like ABC to have put on the schedule a really big hit at the beginning of the year, of But they put on a few shows that are I think quite serviceable and have potential Nashville being 1.
Okay. Thanks.
Okay, Mike. Before we go to the next question, this is Jay. Lowell just handed me a note that I misspoke on the share Repurchase, I think I said that we buy back the 40,000,000 shares issued for the Lucasfilm acquisition in the next two quarters. I misspoke. I meant the next 2 years, which we stated previously.
Sorry, Lawson.
No worries. Thanks, Michael. Thank you. Operator, next question please.
The next question is from Alexia Quadrani from JPMorgan. Please go ahead.
Thank you. Just on the domestic park business, You highlighted growth initiatives hurting profits in the quarter and it sounds like they'll continue into fiscal 'thirteen. Just want Clarify that any significant margin expansion toward your historic levels, we should now assume will happen more likely in 2014. And then staying with the parks, I think you mentioned Disneyland drove the good growth in attendance in the quarter. Can you talk about attendance trends at Disney World?
Hi, Alexia. Thank you. So relative to the new initiatives and the ultimate I said that they will affect, of course, the rest of fiscal 2013 and begin to accretive in 2014, I don't want to be I don't want to give too much guidance Where that takes us from a margin perspective, we have said for some period of time that there is no reason Structurally, including, by the way, what I just said about these new initiatives that will ultimately Keep us from reaching our pre recession margin levels at the parks. So I think that is your I hope that answers your question. Trends on the 2 coasts, obviously, the great success of Cars Land, both from And from a quantity perspective in terms of attendance and pricing has reflected itself in Disneyland Resort greatly outgrowing Walt Disney World.
I'll say that Walt Disney World attendance was down modestly, But Disneyland's attendance was up substantially resulting if you add the 2 together in domestic attendance being up to 3% that I mentioned.
We also feel good about expected attendance at Disney World for the year. We have seen some pretty decent Christmas bookings, although There's a quirk in the calendar in terms of when Christmas hits. So if you look at it over a 3 week period, it's the 2 Later weeks of that 3 week period that are the strong weeks because Christmas is on a Tuesday and that does bleed into what would be our next fiscal quarter, Not our which is our second, not our first. But the bookings are strong. We also feel really good about Fantasyland rolling It is, as I mentioned, the first big improvement that we've done at Magic Kingdom in about 40 years.
The Product is already in some cases open and doing really well and we think that's going to drive some attendance gains at that park. And then lastly, We opened a big new hotel Art of Animation, which features a family suite concept, which is growing in popularity in the marketplace and the bookings for that hotel have been great.
And we saw recently, I saw some reports that Hong Kong reached profitability for the first time. Have you really turned the corner there? And given the success, Are you likely to build out even maybe further than what you originally planned?
We're seeing really strong trends and we believe we have turned the corner there. If you just look at the attendance patterns, particularly from the mainland, for instance, we expanded with 3 worlds, 2 of the 3 are open, Including a Toy Story land and that's doing they're all doing quite well and the third one is going to open sometime this spring. So we feel really good about the trends at Hong Kong Disneyland. We always said that we were going to expand. We have the land to do so and we
Thank you very
much. Thanks, Alexia. Operator, next question.
The next question is from Ben Swinburne from Morgan Stanley. Please go ahead.
Thank you. I guess a couple of parks questions. Jay, I don't know if you'd be willing to give us the domestic international parks splits for the quarter. I think we have to wait for the 10 ks
I'll tell you that
I've talked for
a long time about that range being like 18% to 22%, 23%. And in this quarter at World, they were up at the high end of that range. We had a very A strong Q4 relative to international attendance, fundamentally driven by Brazil and Argentina, But even the U. K, which is of course one of our other big markets was up for the Q4.
Okay. And then just staying on the parks, You mentioned in the release and on your remarks that operating income at the domestic parks and resorts, so ex cruise was basically flat year over year. Was there anything unusual on the expense side? Because it seems based on the numbers you gave us that revenue growth was pretty solid. So I just wanted to come back to that point.
Yes. Ben, Bob mentioned in his comments, these enhancements that we are doing to what I would say This is really the essence of a visit to Walt Disney World, starting all the way back with planning, pre reserving, I'm up through your experience at the park with the use of technology and the use of a bunch of enhanced services to make Guests visit more efficient and enjoyable while they're there. And we will start to see revenue inure to us from that. But we are like many things, just before you start, there are costs and those costs in fact have had are offsetting The revenue increases that are implied by our attendance and per capita spending increases in terms of the quarter.
Also because we're in a testing phase to make sure the technology is working the way we both expect and need it to work, We've been hesitant to roll out more details to all of you and to the public for that matter. There's been a fair amount of chatter about The features of this technological advancement or investment, we've been hesitant to give details until we're ready to really Basically make it before it's ready for prime time so to speak. And we're getting close.
Maybe I could just ask one more Bob or either to either of you about The sort of list of items you named for us to think about in 2013, it's as we furiously write them down and try to digest them. Trying to understand if you think this is a year 2013 that's sort of an investment year for the company on the operating side or where growth is going to be Kind of below the historical average we're used to seeing from Disney or if these are it seems like every year there are things going on at the company where you're investing, but you seem to pump out 15% to Any way to kind of put a bow on this for us as these things to think about?
Well, let me start by emphasizing, Ben, that almost everything that I did check through, We see as primarily a Q1 impact, not primarily as an overall fiscal 2013 impact. And we are still very confident that this will be a strong year for us in terms of performance. Obviously, the comparability just to go through it, the large items, the one we Just talked about in terms of costs associated with these guest enhancements before the revenue comes in. Secondly, the home video comparison where we'll be off pretty substantially on a comparability basis there Because if you think about Cars 2, which was not only a successful video title, but because of all of the merchandise success In prior periods around that title that bleeds off a lot of the amortization that goes With the making of that film, when you because consumer product sales are part of the ultimate package in which the film is amortized So a lot of that was bled off in prior periods, which made that a particularly profitable title a year ago in the home video front. Brave was also a profitable title, but it doesn't have the benefit of bleeding off all of that amortization when the unit sell.
So that Has created a very tough comparison. And then I mentioned Lion King versus Finding Nemo in terms of its release where the Lion King had been Kind of in the vault since 2,005 and of course had enormous response in the marketplace due to that, NEMO was more Available on a regular basis in the market and therefore didn't benefit from that bump. So those two factors are about $150,000,000 but that's a 1st quarter event. And that is not that doesn't affect our performance at the studio in the rest of the three quarters of the year. The tax number I ticked off again is has to do with a tax favorability in the It's a Q1 event as well, of course, because taxes tend to you tend to carry that for the whole year.
We'll have a little bit up in our tax rate for the year, but not as much as in the Q1. So I tried to emphasize and it's always difficult in prepared remarks to kind of emphasize that These are really largely comparability items that we're trying to give you info on in the Q1 and are not to lead you I believe we don't have confidence in strong results for
the whole year. And Ben, as Jay suggested, we're not going to give you specific guidance for the year. But Since you asked us to characterize or categorize the year, I'd say that we are entering a phase of transitioning out of On investment mode and transitioning into a more compelling growth mode, But it is a again, it is a transition year in that regard because of some of the things that Jay talked about.
Thank you very much for the
And that's also reflected in the ramp down of capital spending.
Sure. Great. Thanks. Okay, Ben. Thank you.
Operator, next question please.
The next question is from Jessica Reif Cohen from Bank of America Merrill Lynch. Please go ahead. Thanks. I was just wondering if you could address
Your boys initiative, I'm not sure how to phrase that. I mean given the Star Wars acquisition, your Marvel acquisition, it seems like you really have a completely different product to offer boys and historically the focus maybe has been more girls. So could you talk How you're viewing that as a category and what you can do to address it? I mean, you are addressing it, but what's the opportunity?
Well, I think the opportunity is pretty broad in terms of what it will ultimately present to the company. I can start with our theme parks. While we haven't really had a gender problem at our theme parks, we've always been mindful that what we're offering is something for everybody. And as some of the IP gravitated more in a girl's direction, it made us turn to some other IP that maybe wasn't derived From movies or television series for instance in order to essentially deliver against basically the interests of our guests. Obviously, we've had Star Wars in the past.
This gives us an ability to expand that presence in our parks. Marvel in certain circumstances, Because you may recall there are some encumbrances there will give us an opportunity to expand, but then mostly internationally. So that's one way. Obviously, on the TV We launched or we relaunched a channel a few years back called Disney XD, which had other names in its past. If Disney Channel is focused a little bit more on girls than boys, this is going to be focused a little bit more on boys than girls.
We started to roll out Marvel shows there. We referenced in our comments about the Lucasfilm acquisition that there are opportunities for television. One big opportunity for us And Lucasfilm's derived IP is on that channel. Again, it gives the ability to fulfill the promise of that channel that much quicker. The footprint from consumer products obviously will give us much more of a blend that enhances our relationship in the marketplace with retailers and And with licensees as a for instance and just generally broadens the profile of the brand.
Lucas product by the way will be co branded with Disney's name on it. Then of course on the games front, we also have that ability to turn more to Disney IP particularly since games are a little bit more boys driven anyway. And so I don't want to we'll proceed with caution in this direction, but I think it enhances our opportunity particularly in the mobile space, Which is very driven by boys.
Right. And then I guess just I heard you on CNBC, but I was just wondering So you stated on CNBC Today that there probably are not big acquisitions or acquisitions of this size. Can you just give us your thoughts? Are you Do you feel like it's strategically complete? Or what other areas would you look at even if they were smaller?
Actually, we felt we were relatively strategically complete in The Lucasfilm acquisition, even though I just responded to your question about boys in a manner that would suggest we might not have felt complete from a gender perspective. I imagine talking about being strategically complete from a gender perspective. I think I should be shot for that. But we don't necessarily make acquisitions to fill in strategic goals and we didn't in the Lucas case. That was an opportunity To buy IP that as I described is unparalleled really in terms of its value, the strength of its franchise and the potential that it represents or especially to a company like ours.
And we're not looking right now at anything from an acquisition perspective That is in any way tied to something that we would consider a strategic whole.
Okay, Jessica. Thanks. Operator, next question please.
The next question is from Todd Juenger from Sanford Bernstein. Please go ahead.
Great. Thanks a lot. I have two questions if I may. 1 on TV and one on consumer. On the TV side, there's a can you hear me?
Yes, we can hear you.
Okay. Sorry. On the TV side, there is a comment in the release about the Disney channels having a significant program I just wondered if you could confirm, I think that might have been the Netflix or the Amazon deals, and And I wonder if you confirm that. And whether it was or wasn't, would love to hear just an update on how you're feeling about those services and the role of them in your platform. And then the question on the consumer product side, just given all the increased breadth of your franchises with Marvel and now WUKA Wondering if that changes the way you think about your retail strategy at all in terms of the aggressiveness about what you might think about opening
Okay. The second part of your question, the impact of the Lucasfilm Acquisition on our store strategy, it will not change our store strategy. We've approached that I guess with some degree of caution Because of the obvious risks associated with being the specialty retail bricks and mortar business, so it's not going to change our footprint. It will change Our SKU makeup at the stores is a great opportunity as we saw with Marvel to infuse our stores with Star Wars merchandise for instance and we look forward to doing that and also to grow our online retail or our e commerce business, which by the way It's grown very, very nicely since the relaunch of disneygod.com and noticing what we've noticed in terms of sale of Lucasfilm merchandise We think there's real potential there. To the first question, we were not specific about the deal that you referenced that was It impacted, I guess, the Q4 a year ago and we won't be specific.
You're pretty good at guessing, But I'll leave it at that. We feel very, very good about opportunities in SVOD and on digital platforms As we've seen and other large media companies have seen, the opportunities to monetize owned IP are only growing not just because of new technology, But globally and I think you'll continue to see growth in both revenue and growth in bottom line and income From output deals to these 3rd party or new platform owners. It's an exciting time for intellectual property owners.
Okay. Thanks. And just to confirm, your content is still on Netflix, at least a lot of Disney Channel content is still there. So regardless of the timing of specifics, it seems like you're
We're in business with Netflix. We're in business with others and we'll probably continue to be in business with those And new entrants in the marketplace. And we are engaged in discussions in a number of directions about that.
Terrific. Thanks.
Thank you, Todd. Operator, next question please.
The next question is from Doug Mitchelson from Deutsche Bank. Please go ahead.
Thanks so much. Bobby, sorry to address But if I sort of think back a decade ago, you were always brand focused, right? And you were running the brand committee. And there was An appeal and elegance to having 2 umbrella brands Disney and ESPN and having the focus on those two brands seem to be an advantage. And now you've spread out with So many brands with Pixar and Marvel and Star Wars and now ABCs mentioned pretty consistently is one was there an underlying strategy to diversify or expand your Brand portfolio beyond those sort of 2 initial core brands?
And then what gives you comfort that you can successfully manage this Brands when again in the past it seemed like focusing on just 2 umbrella brands was thought of as an advantage.
Well, 7 years after the Pixar acquisition or I Technically, it's 6, sorry, 6.5 years. I think there's ample proof that, That brand has been managed very effectively. And during the period of time that we've owned Pixar, the equity in the Disney brand, almost no matter how you measure it, Has also increased. So I think we've demonstrated our ability to be ambidextrous in that regard. We also co brand Pixar films With Disney.
And we found in the process that that enhances both impression of the Pixar brand and impression of the Disney brand. Marvel has seen, I think, real strong brand growth. That's largely been tied to A couple of things. 1, quality of their films, particularly the last 3, Captain America, Thor and obviously Avengers, But also the growth of their the presence of the brand, which is in part enhanced by self distribution. So So when we take over the distribution of their films for instance and we are also the owner of the brand, We're much more focused on growing the brand in the process than the 3rd party distributors that distributed their product before we're interested in.
So There are opportunities there. The Star Wars brand, I think, basically doesn't need much help, except obviously will, I think benefit greatly from the release of a film. We intend in that case to co brand as I mentioned just a few minutes ago Disney Lucas Or Disney Star Wars in some form different forms. And I think that's again another opportunity like Pixar to enhance both the Star Wars brand and the Disney brand. ESPN is doing just fine.
ABC is also doing fine, although from a brand perspective, we leverage the ABC name obviously in much more limited fashion than we do The other brands that we've been talking about.
Thanks for that. And if Lowell let me ask one for Jay, just a quick one. I want to take a shot at the park margins a different way. Would you say that the growth initiatives You've been nice enough to give us the revenue and OpEx impact for each of the past 3 years. Would you say those will prove margin accretive to the Park division in time or in line or margin dilutive?
So From today, but in aggregate will those growth initiatives be margin accretive or dilutive to the parks?
Yes, margin accretive Doug. We are Very confident that if you if I tick through the list quickly, the cruise ships, The enhancement of DCA, the Magic Kingdom expansion, the Bonnie Hotel and this new guest enhancement at Walt Disney World that we were talking about every single one of those was With a strategic and pretty tight strategic and Financial goal and they will be in aggregate accretive as will Someday Shanghai, I didn't put that on the list because it's much longer term than the rest of those things. But we think that all of these projects will be accretive to the ultimate margins of the business.
Thanks so
Thanks, Doug. Operator, next question please.
The next question comes from Jason Bazinet from Citi. Please go ahead.
Just had a clarifying question for Mr. Going back to those the Park investments that you've talked about, were you saying I think you said I wasn't sure if you were saying you're going to invest $500,000,000 in all of these initiatives next year? Or you were saying all of the growth initiatives that you've done historically will generate $500,000,000 of revenue at a certain margin and whatever sort of incremental EBIT that generates, will we be investing that much in these improvements?
Okay. What I said was a little bit of all the things that you said.
So let's start at the top. Okay.
In aggregate, they will generate $500,000,000 of revenue. Some of those incremental revenue above our base business. Some of those that have been up and running for a while like the cruise ship and DCA We'll in fact generate will be accretive to earnings. They will generate operating income positive operating income in The guest enhancement project that Bob talked about and Shanghai Disneyland are Still in the investment not the investment, in sort of generating operating income, there is investment, but generating Operating expense that exceeds any revenue that they will generate. So if you look at all these things in aggregate, the Disney Cruise Line expansion, the Fantasy Disney's California, the guest enhancement program that we're talking about and Shanghai Disneyland, in aggregate their expenses will match the aggregate incremental revenue.
So they will generate 5 $100,000,000 of incremental revenue $500,000,000 of incremental expense.
Perfect. Got
it. Thank you very much.
You're welcome.
Okay. Thanks, Jason. Operator, next question please.
The next question is from Anthony DiClemente from Barclays. Please go ahead.
Thanks. I don't think anyone asked about Advertising pacings at ESPN. And I guess, I think you said in your remarks that they were pacing down, which was a little surprising to me for a couple of reasons. First, I remember you guys had a bullish tone about ESPN moving forward on the last call. So I'm wondering what really changed during the quarter.
And then secondly, just wondering, Does that ad pacing being down include the return of the new NBA games?
So let me start out at the top and maybe Bob will want to jump in. Starting at the top, we did say that the pacings were down modestly
And some of that has
to do needless to say with distraction from the elections, What that implies on ratings, debates, the things that basically attract interest That are extraordinary and sporting events are sometimes consequently have lower ratings. But your question about the NBA, I'm sorry, could you repeat it?
Well, the question is Really for the 1Q, you talked about on the cost side, sports rights fees going up by the $170,000,000 And then just trying to Think about that in terms of revenue as well. And if one of the reasons that the cost side is going up, you said, is because of more NBA games. So our ad pacings going down Despite the favorable year over year comp despite having NBA games where you had to lockout last year?
Yes, Anthony. Yes.
Okay. Thank you.
And then I just
have a quick
follow-up, which is, I never I didn't think that Hulu was a big driver of broadcasting, but since you mentioned it In the press release, just wondering what was going on with the higher equity losses at Hulu in the quarter? Just wondering if you could comment on that? How should we think about that?
Yes, it's not a big effect. It did make it because we rank the impacts from largest to smallest At some point, we cut them off. I would say this one, we usually like to put 2 or 3. This one made it. In other quarters, it probably wouldn't.
But it's basically The increased programming costs, it's above if you back Hulu out of the broadcasting numbers, in fact, broadcasting would have been slightly positive. It turned out to be slightly negative because of it. I want to emphasize it's not a real driver for the quarter. Okay.
That's fine. Okay. Thank you very much.
Thank you, Anthony. Operator, next question please.
The next question is from David Miller from Karas and Company. Please go ahead.
Yes. Hey, guys. I have one for Jay, one for Bob. Jay, you mentioned in the press release Something about a film write down under the studio line. Could you just detail what you wrote down in the quarter?
And I Apologize in advance if it was already in your prepared remarks. I had some technical difficulty on the call. And then Bob, on the Lucas On the ensuing conference call last week vis a vis the Lucas deal, there was some confusion after the call, out of the buy side about any legacy agreement with 20th Century Fox that Lucasfilm has currently and what you have to pay out if anything to extract yourselves out of that. Appreciate you taking my question. Thank
you. David, let me take the short answer. I think I mentioned at a conference And it was broadly reported that the write down was for a film that was in progress in stop action animation called Cinderbiter And that was the vast majority, 98% of the write downs for the quarter. Okay.
And on Lucas, what we were referring is the fact that Fox has certain distribution rights to films that have already been made and released and will be released in varying forms going forward As they did recently with a 3 d release of 1 of the Star Wars films. In valuing Lucas going forward, We did not factor in any need on our part whatsoever to acquire any rights back from News Corp. We may choose at some point after closing to explore that, but all the value that we're looking at is going forward value Associated with all the rights that we've bought from Lucas and any new IP that is created, which is not encumbered by any of the deals At Fox Hat.
Okay, great. And then Jay on the Hurricane Sandy impact, you said you couldn't really quantify it as of yet, But with the majority of that impact whatever it is be due to disruption at the parks just because folks in the tri state area couldn't fly down to Orlando obviously may still not be able to fly down there or is it more of a make good situation at the at any of the networks or is Combination of both, what's sort of the majority effect, if you don't mind me asking? Thank you.
Not at all. Let me just tick off a list of things that we're looking at. Obviously, Due to the hurricane, there were a number of Disney stores in the Atlantic area that were closed. I think we closed over 40 stores for a number of days. Secondly, when you don't have people with power and you don't have people watching television, you've obviously got some impact there on the broadcast side.
Right. We got some impact there on the broadcast side. On the park side, there the Northeast It's a good feeder market to Walt Disney World. We this is probably the toughest to quantify. In the past, I will tell you that we have found from natural disasters that people make their way back in the course of the year.
So that could be a Short term impact, we have not seen a rest of cancellations, I will tell you that, that much we know so far.
Interesting This is a week that most New Jersey schools are closed for the week and that's as Jay referenced the important feeder market To Orlando and obviously Jersey got devastated by the storm. We have seen very little impact this week. I talked to Folks down in Orlando this morning and it appears that the makeup of attendance at Disney World this week from New Jersey is just as strong as it usually is. So that's a pretty Interesting sign.
Thank you very much.
David, thanks. Operator, next question please.
The next question comes from Michael Seno from Credit Twist, please go ahead.
How are you doing? Just a couple of questions in regard to CapEx. You guys You've mentioned that you expect it to ramp down in 2013. Just in sizing that, should we attach Some capital expenses to these enhancement projects and the incremental costs and investments that you've articulated for next year. And then also, you mentioned this being the peak CapEx year, but looking ahead with the Shanghai consolidation, should we be Expecting reacceleration back up to these peak levels during that time?
Yes, I'm happy to answer So let me just set the table. So we said that 2012 would be our peak CapEx year for sometime to come. And that we would be ramping down significantly in Parks Capital Thereafter, while Shanghai was ramping up. So let me talk to that. If you look on the domestic side, We're domestic Parkside, we're probably down we'll be down, but at the end of fiscal 2013 about $1,000,000,000 from where we were in fiscal 2012 in A lot of the capital expenditure that is behind what Bob talked about as Guest enhancing technologies is behind us.
On a consolidated basis though, It's only going to look like a $500,000,000 decrease. And in fact, The difference has to do with investment in Shanghai Disneyland. But remember, as only 43% owners of that project, we only spend 43% of the capital. So, 57% of the capital spent on Shanghai Disneyland will make its way back to us in a financing line. So if you look at it that way, even on a consolidated basis, we're going to be down about $800,000,000 for the year.
Okay. And is there any impact on the timing of that cash that's flowing back or is it pretty much in synchrony?
I think there's paperwork that goes to it, but it's not like it's back loaded or it's a bullet payment. It's Supposed to be contemporaneous with the expenditures.
Okay, great. Thanks.
Thank you, Michael. Operator, we have time for one more question.
The next question comes from Vasily Karasyov from Susquehanna Financial. Please go ahead.
Thank you, Jay. I have A couple for you. One, you mentioned that ESPN has a couple of affiliate deals coming up in the year. You said one will be done by March. Can you please remind us what percentage of subs will be covered by that?
And also on film, you highlighted the tough comp in the Q1. But if you look at the remainder of the quarters, you have an easy comp with the John Carter write down and then you have the Avengers for the next two quarters. So When we try to estimate, is it going to be an up or down quarter year, sorry, for the studio, what kind of put and takes should we keep in mind there?
Okay. Let me take your first question, which I've already forgotten, I'm afraid to
The percentage of sales coming up.
What I said in my comments I'm sorry, Vasily. What I said in my comments Was that we were going to see the kick in from the revenue side Some new affiliate deals in the course of fiscal 2013, one of which was going to be in the Q1. That's not the renegotiation of that deal, but that is in fact the realization of the revenue The negotiation of a prior deal. I don't want to we've kind of made a habit of not getting into the details About the timing of our affiliate deals with our partners for all the right reasons of confidentiality and not wanting to get in the way of negotiation. So I'm Sorry, I won't be any more articulate about that.
And as to your question about the comps and Our film slate, obviously, will have tough Q3 comparisons because of Avengers, but we feel good overall about the slate in the year. Oz, the Great and Powerful in March, Iron Man 3, Lone Ranger and of course Monsters University. So We think we've got a strong film slate coming up.
Thank you very much.
Vasily, thank you. And thanks again everyone for joining us today. And we do not undertake any obligation to update these statements. Forward looking statements are This concludes today's call. Thanks again for joining us.
Thank