Hello and
welcome to the Walt Disney Company Quarter 3 Fiscal Year 15 Earnings Please note that this conference is being recorded. Please note that this conference is being recorded. I would now like to turn the call over to Senior Vice President of Investor Relations, Lowell Singer. Mr. Singer, you may begin.
Good afternoon, and welcome to
The Walt Disney Company's Q3 2015 earnings call. Our press release 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 a recording and a transcript of the call will be available on our website. Joining me for today's call are Bob Iger, Chairman and Chief Executive Officer Tom Steds, Chief Operating Officer and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Bob, Tom and Christine will each make some comments and then of course we will be happy to take your questions.
So with that, let me turn this call over to Bob and we can get started.
Thanks, Lowell, and good afternoon, everyone. Before we begin, I'd like to welcome our new CFO, Christine McCarthy. Christine has done a great job as the company's Treasurer over the past 15 years. She's highly respected in the financial community and her strong leadership and keen financial acumen make her ideal for the role of CFO. I'm sure you'll all have the opportunity to get to know her and you'll be hearing from her a little later.
Now turning to the quarter. We're very pleased with our 13% to $1.45 and revenue was up 5% to more than $13,000,000,000 with strong results across the board. Since our last earnings call, we had the pleasure of unveiling the exciting details of Shanghai Disneyland. And with a 60 year history of relentless innovation, fantastic storytelling and extraordinary experiences, we're creating a truly one of a kind world class destination. Shanghai Disneyland will have 6 themed lands featuring the best of what everyone knows and loves about Disney Parks, as well as a number of amazing original attractions created specifically for Shanghai, resulting in an authentically Disney and distinctly Chinese Disneyland.
I'm happy to say that since we unveiled the details, the response in China has been tremendous with nearly 150,000,000 people expressing their excitement on the country's top social media platforms. This investment represents one of the biggest creative endeavors undertaken by the company. And with an opening plan for spring of 2016, we're truly excited by the potential in the world's most populous market. For those of you who haven't seen the great images and details of Shanghai Disneyland, you can view them online at shanghai disneyresort.com and I think you'll be impressed. Before Tom takes you through the highlights of our businesses, I'd like to address an issue that has been receiving a fair amount of interest and attention these days and that's the rapidly changing media landscape, especially as it relates to ESPN.
We're realists about the business and about the impact technology has had on how product is distributed, marketed and consumed. We're also quite mindful of potential trends among younger audiences in particular, many of whom consume television in very different ways than the generation before them. Economics have also played a part in change and both cost and value are under a consumer microscope. All of this has and will continue to put pressure on the multichannel ecosystem, which has seen a decline in overall households as well as growth in so called skinny or cable light packages. ESPN has experienced some modest sub losses, although those have been less than reported by one of the prominent research firms.
And the vast majority of them 80% were due to decreases in multichannel households, but only a small percentage due to skinny packages. Overall though, we believe the expanded basic package will remain the dominant package of choice for some years to come because of the quality and variety it represents for a price that is generally considered fair and appropriate. We also see the continued development of new platforms with smaller which we see as a positive trend for us since ESPN is a must have brand as part of the initial service offering for these new packages. And we all know why this is. ESPN is the number and one of the most valuable brands in all of sports and among the most popular respected and valuable brands in media by consumers, advertisers and distributors.
This is supported by the fact that in the 1st calendar quarter of this year alone, 83% of all multichannel households turned to ESPN at some point. ESPN is the most significant collection of sports program packages in the industry and its license agreements for these sports typically run into the next decade, including the NFL, the NBA and Major League Baseball. Its coverage of college sports is unparalleled, particularly football and basketball and the 1st year of the College Football Playoff and National Championship was an enormous success. ESPN's rights to this fantastic package have 11 years to run. And we all know how valuable live programming has become and ESPN is the leader in live This year's upfront provided ample proof.
ESPN enjoyed both increased demand and sell through rates as well as pricing increases. And ESPN has embraced technology better than anyone in traditional media reaching its fans and engaging with them mobile devices with its linear channels as well as with an array of additional programming, sports information, commentary, conversation and very rich social media features. All of this adds up to a very strong hand and gives us enormous confidence in ESPN's future no matter how technology disrupts the media business. Now, I'll turn it over to Tom to take you through the highlights across the rest of our businesses. Tom?
Thanks, Bob, and good afternoon, everyone. The core part of our strategy and a key source of sustained advantage in Pixar, Marvel and Lucasfilm underscore and dramatically enhance that advantage. Benefit of our strategy is evident in this quarter's results as our branded content led to healthy increases in operating income at our Parks and Resorts,
at our Parks and Resorts, Studio Entertainment and Consumer Products segment.
Parks and Resorts had their highest quarter ever in Q3 in terms of both revenue and operating We've seen remarkable excitement for Disneyland's 60th anniversary diamond celebration, which features a new fireworks show and electrifying nighttime parade and a reimagined World of Color Spectacular, resulting in the highest attendance and profit for any quarter in the resort's history. At Walt Disney World, attendance hit a record level for Q3, while also delivering the highest profit for any previous quarter for that location. The studio continues to execute extremely well on our branded tentpole strategy by delivering high quality, immensely creative and broadly appealing theatrical entertainment. 3 of the top 6 films in the U. S.
This year are from Disney, Cinderella, Marvel's Avengers: Age of Ultron and Disney Pixar's Inside Out. And all three helped drive our strong results in the quarter. Inside Out has grossed $330,000,000 in the U. S. And more than $600,000,000 worldwide with more overseas markets yet to open.
Avengers: Age of Ultron is now the 6th highest grossing film of all time with $1,400,000,000 at the box office. Ant Man, the newest character to join the Marvel Cinematic Universe spent its first two weekends at number 1 and has already grossed nearly $300,000,000 worldwide with multiple overseas markets yet to open. And we're extremely pleased with another great original Disney Pixar film, The Good Dinosaur coming this Thanksgiving.
Of course, we're all kind
of days till December 18, when Star Wars: The Force Awakens makes its much anticipated debut. That's just about 135 days and 10 hours from now, in case you're wondering. To give you a sense of the excitement for this film, a single Star Wars panel at Comic Con this year drove 1,600,000,000 social and editorial impressions. December 16, 2016. It will be followed by Episode 8, The Star Wars Saga in May of 2017.
We'll come back in 2018 with a standalone film about young Han Solo and then Episode IX will hit theaters in 2019. And that's just the theatrical lineup. On August 30, we'll launch the Star Wars themed Disney Infinity 3.0 Edition, followed by an unprecedented consumer products global event called Force Friday in September 4th. Stores around the world will open their doors at 12:0:1 a. M.
To unveil an amazing array of merchandise inspired by Star Wars: The Force Awakens. Of course, Star Wars is already a strong contributor among our broad array of powerful franchises for our consumer products business, where profits were up substantially in the quarter led by the collective strength of Frozen, Avengers and Star Wars. Our cable networks benefited from strong digital programming at the Busy Channels and ABC Family, which both contributed nicely cable operating income growth in the quarter. In broadcasting, ABC was the only TV network with year to year primetime ratings growth this past season, thanks to the success of our lineup of returning and new hit shows, including Scandal, How to Get Away with Murder, Blackish and Fresh Off the Boat. ABC also received the most Emmy nominations of any broadcast network this year, 42 in all, including 10 for the critically acclaimed series American Looking ahead, we're optimistic about ABC's fall lineup, which advertisers have responded by agreeing to give ABC industry leading pricing gains and are just completed upfront.
As Bob said, we're pleased with our results in Q3. We remain confident in our ability to create significant value for our shareholders. We have a lot to look forward to across all of our businesses in both the near term and the years ahead. With that, I'm extremely pleased to welcome Christine to her new role and turn the call over to her to take you through additional details for the quarter.
Thanks, Tom, and good afternoon, everyone. It's a pleasure to be here on my first earnings call and I look forward to working with many of you more closely in the near future. With 3 quarters of the fiscal year behind us, we are very pleased with how the year is progressing. 3rd quarter earnings per share increased 13% to a record $1.45 driven by strength across our businesses. At Media Networks, growth in operating income was due to higher results at cable, partially offset by lower results at broadcasting.
Cable operating income was higher in the 3rd quarter due to growth at Disney Channel, ABC Family and ESPN. Disney Channel's and ABC Family results benefited from program sales and higher affiliate revenue, while growth at ESPN was driven by higher affiliate revenue, partially offset by a 3% decline in advertising revenue. The decrease in ad revenue at ESPN was due to a difficult comparison with the Men's World Cup in Q3 last year, which more than offset the benefit of an additional game of the NBA finals in Q3 this year. We estimate that ESPN's ad revenue was up a little over 5% when you exclude the impact of these events. So far this quarter, ESPN ad sales are pacing up compared to prior year.
Programming and production costs at cable were relatively flat in the quarter consistent with our expectation and we still expect these costs to be up low teen percentage points for the full year. Domestic cable affiliate revenue was up mid single digits in the quarter as a result of contractual rate increases and the addition of the SEC network, which launched in August of last year. These increases were partially offset by lower deferred in previously deferred revenue during Q3 last year and there was no deferred revenue recognized in the Q3 this year. Excluding the effect of the deferred revenue recognition last year, domestic cable affiliate revenue was up 12%. Broadcasting operating income was lower in the 3rd quarter as higher programming costs and lower advertising revenue more than offset increases in affiliate revenue and higher program sales.
The growth in affiliate revenue was due to new contracts and higher contractual rates. Program sales were up in the quarter driven by the sale of a number of shows including Grey's Anatomy, America's Funniest Home Shield. Ad revenue at the ABC Network was down low single digits as lower news and daytime ratings were partially offset by higher rates. Quarter to date, scatter pricing at the network is pacing modestly above upfront levels. At Parks and Resorts, growth in operating income was driven by higher results at our domestic operations, which saw gains in both attendance and guest spending, partially offset by lower results at our international operations.
Margins were up 100 basis points to over 22%. Attendance at our domestic parks was up 4% and per capita spending was up 2% in the Q3 due to increased spending on food and beverage and merchandise. Occupancy at our domestic resorts was up 5 percentage points to 87% and per room spending was up 4%. So far this quarter, domestic resort reservations, excluding the 53rd week, are pacing up 4% compared to prior year levels, while booked rates are up 6%. International operations were lower in the 3rd quarter due to a decline in attendance and occupied room nights at Hong Kong Disneyland and higher pre opening spending at Shanghai Disney Resort.
Results at Disneyland Paris were comparable to prior year. The weakness of the euro compared to prior year resulted in about $100,000,000 adverse impact to Disneyland Paris's revenue. However, there was a corresponding benefit to expenses of roughly the same amount. Partially offset by the performance of Tomorrowland. Studio results also benefited from higher revenue share from consumer products and growth consumer products and growth in international television distribution.
Home entertainment results were lower in the quarter as a result of a difficult comparison with the performance of Frozen in the prior year. Our consumer products business continues to benefit from the depth and breadth of our licensing portfolio. Segment operating income was up 27% on revenue growth of 6% and margins were up over 600 basis points. Growth in operating income in the quarter was due to higher results in merchandise licensing, which was driven by Frozen, The Avengers and Star Wars. On a comparable basis, earned licensing revenue in the 3rd quarter was up 20% over last year.
At Interactive, results reflected lower performance of Disney Infinity, partially offset by higher results from our mobile games business. We feel great about our Q3 results. And with the end of fiscal 2015 less than 2 months away, I now want to take a moment to give you an early look into fiscal 2016. As we look ahead to 2016, there are 2 items I want to address. 1st, the strength of the U.
S. Dollar versus a number of key foreign currencies is expected to adversely impact our operating income in 2016 by approximately $500,000,000 2nd, in April of last year, we told you that we expected to grow both domestic cable affiliate revenue and cable operating income by high single digits on a compounded annual basis between fiscal 2013 fiscal 2016. Due to the lower subscriber levels Bob discussed earlier, we now expect domestic cable affiliate revenue to fall a bit short of our previous expectation, though still in the high single digit range. We now expect lower affiliate revenue and the multi year impact of foreign exchange rates to moderate our cable operating income growth to mid single digits during the fiscal 2013 to 2016 period. Are disciplined in our capital allocation strategy and continue to take a balanced approach between investing in existing businesses, making strategic acquisitions and returning capital to shareholders.
Our financial results over the past several years, including the record quarter we just reported, are evidence our capital allocation strategy has delivered and continues to deliver tangible results. Returning capital to our shareholders continues to be a key component of our capital allocation strategy. Last month, the Board declared a dividend of $0.66 for the first half of this fiscal year, which represents an increase of 15% on an annualized basis. Going forward, we expect to pay dividends on a semiannual basis. During the Q3, we repurchased 9,400,000 shares for 1,000,000,000 dollars Fiscal year to date, we've repurchased 32,400,000 shares for $3,200,000,000 which coupled with $3,100,000,000 in dividends paid this year represents approximately $6,300,000,000 in capital returned to our shareholders so far in fiscal 2015.
And given our outlook for next year, we currently expect to increase our level of share repurchase to between $6,000,000,000 8,000,000,000 dollars in fiscal 2016. Before I turn the call back over to Lowell for Q and A, I want to take a moment to say how honored I am to be the CFO of this company. And I look forward to continue working with so many great colleagues here at Disney as well as many of you in the near future.
Thanks, Christine. Joe, we are ready for our first question.
Thank you. We will now begin the question and answer session. Our first question here comes from Mr. Michael Nathanson from MoffettNathanson. Please go ahead.
Thanks. I have one for Christine and one for Bob. Christine following up on the guidance you just gave on foreign exchange. Can you talk a bit about how Disney hedges? And why don't we see more foreign exchange impact in this fiscal year given the movement in dollar a year ago versus being felt in 2016?
So talk a bit about the timing of that impact.
Okay. Thank you, Michael. That's a great question. The way we hedge foreign exchange is on a multiyear basis. So it does have the benefit of mitigating the full impact of changes in currency rates on operating income.
So let me just give you some perspective, 2015, as we layered into additional hedges for fiscal 2016, they were at less favorable rates. Hence, the year over year 2015 to 2016 impact is currently estimated to be around that $500,000,000
Okay. Thanks. And then Bob, something you said at the beginning, it's a question that I know all of us get and Will gets to. It's about the right number of subscriber losses at ESPN and all of us track Nielsen. You put it in your 10 ks in terms of the quarterly the yearly change in ESPN subscribers.
What's the right level of subscriber growth? And when you think about your current guidance, what's the right level of future near term to describe the losses do you think for ESVAN maybe for the Big Basin bundle in total?
Well, first of all, Michael, we report in our filings Nielsen's numbers, but they don't necessarily track the number of subs that we get paid on. And in fact, the numbers that have recently been in the press, which were Nielsen numbers, were higher in terms of sub losses than those that we're seeing. But we are not at this point ready to give specifics in terms of what those numbers are. That answer that question? Okay.
Partially. Okay.
Okay. And then your change in guidance is because have you taken a more conservative view of the next year on subscriber revenue? Or is it based on where you were?
On the revenue side, Christine said, we're sticking to the high single digits. On the OI side, the combination of slightly less subscribers than we predicted at the time with foreign exchange rate changes leads to us taking the OI guidance down from the high single digits to the mid single digits. That's all. But on the revenue side, we're maintaining the high single digit outlook.
Okay. Thanks, Bob. Okay, Michael. Thank you. Operator, next question please.
Of course, our next question here comes from Alexia Quadrani from JPMorgan. Please go ahead.
Thank you. I guess Bob just sort of staying on that same subs, how do you balance sort of maintaining the current ecosystem and helping sustain traditional subs with sort of new opportunities that over the top can present themselves? And I guess ultimately on that same point, as over the top platforms expand, do you think it's just a share shift from linear TV? Or do you think it actually can expand the reach of the market for ESPN?
Well, I think you can look at this many different ways. 1, you can look at it in terms of the overall television landscape and the linear MVPD expanded basic business versus the growth in so called over the top businesses or you can look at specifically with regard to ESPN. I guess I'll take the broader sort of market look first. First of all, I think while there has been a lot said about what's going on in the multichannel universe, and as I said in my comments, it's still the dominant form of television viewing, and it is the dominant form clearly for sports viewing as well. And we mentioned an 83% statistic, 83% of all U.
S. Households watch ESPN U. S. Multichannel households watch ESPN in the Q1. So you're still looking at a significant amount of consumption through the multichannel universe.
We also look at that business and we look at it as a consumer offering and we see huge variety of programming, a lot of live or kind of topical programming that's on, meaning you don't have to wait a year to watch library as a for instance. I mentioned significant amount of variety and quality obviously for a price that's generally considered reasonable and a price that's often bundled with broadband and in some cases with telephony. So when we look at that universe, we don't really see dramatic declines over the next, say, 5 years or so. And therefore, we're not taking what I'll call radical steps to move our product into over the top businesses to disrupt that business because we don't think right now that it's necessarily the greatest opportunity and we don't think it's we just don't think it's necessary. That said, there are new platforms that are launching, some multichannel and some other types of platforms that on the multichannel front, they all want our programming.
They want ABC. They want Disney Channel. They want ESPN. There isn't one that has talked about launching without coming to us suggesting a desire to have us. And we're going to obviously, because we believe that's in our best interest, we're going to take advantage of those opportunities and at the right price under the right circumstances, license our linear channels to those platforms.
In addition to that, you have the growth of platforms like Netflix or SVOD. That's interesting as well, because while one could argue that for all the right reasons that's starting to incentivize or maybe incentivizing people including millennials, to cord cut, it's also providing us opportunities because Netflix has become a really important partner to us in buying our off network product, buying original programming for us, the Marvel deal is a good example. And then our film library kicks in, the output deal for the 16 slate kicks in. So, we look at Netflix actually right now as more friend than foe because they become an aggressive customer of ours. I also think that products like Netflix are pretty attractive because they offer a very user friendly efficient and oftentimes less much less expensive way for people to watch television.
I'm going to say one more thing. I realize I'm getting wordy, but the average American is watching about 5.5 hours of TV a day and we see that going up to about 6 hours. The reason they're watching 5.5 hours of TV a day is because of just what I just described, this huge value in the multichannel product for customers, and it's popular. And the reason we believe it's going to increase from 5.5 hours to 6 is because of the advent of new technology driven platforms, whether they're over the top, whether it's SVOD, whether it's new smaller services. So it's a long way around my saying that we actually believe that with Disney, ABC, ESPN, our other products, we're really well positioned.
We've been among the first, if not the first, to offer our product on new platforms, even if it's somewhat disruptive. We still believe in the expanded basic service for years to come, but we're going to take advantage of opportunities. And it's just hard to say when something either feels too disruptive too fast or not. But when we see it, we'll tell you about it.
Thank you very much.
Thank you, Alexia. Operator, next question please.
Of course. Our next question comes from Todd Juenger from Sanford Bernstein. Please go ahead, sir.
Hey, thank you. Guess what I want to talk about too, just the multi channel universe and pay TV subscribers. Let me take a shot at this and see what you're willing to engage in. I'd love to hear as you construct your traditional distribution arrangements, especially for ESPN, but your general cable networks, would you be willing to talk about what type of protections or options you generally might look for in the case that subscriber losses accelerate or more than you expected? Are there minimums?
Are there pricing resets? Are there opportunities to protect yourself? I'm sure there are in the downside. We'd love to hear those. Thanks.
Todd, we cannot get specific about it. I can tell you that our distribution agreements do address the number of subs that were that are being delivered or that were being paid for. And there are facets of those agreements that enable us to amend the business relationship with a contractual relationship that we have with these distributors should subs go below a certain number. When I say amend, I'm not going to get specific about how we would go about that or what the specific mechanisms are in the contracts for that because frankly, it's confidential. Going since you, I guess, asked a little bit about maybe the future and new deals, I can only say and you know a lot of these deals run for multiple years, but I can only say that when we enter new deals, we will probably take an even longer term view about what threats and what opportunities exist for us in the marketplace so that we are both protected against the threats and we are given full opportunity to take advantage of changes in the marketplace that could strengthen our business, like going direct to consumers, should we conclude that, that becomes the more attractive alternative to us.
Fair enough. And then one follow-up if you don't mind. I'll make it quick. And somebody's got to ask just anything that you care to say about the status of your relations with Verizon and what's going on there? Thanks.
No, we're not commenting on that except to say we've had ongoing discussions with them. I think they clearly recognize that the channels of the product that we offer have great value to them in their current services and in new services that they're contemplating launching.
All right. Fair enough. Thank you.
Thank you, Chad. Operator, next question please.
Of course, our next question comes from Jessica Reif Cohen from BOA. Please go ahead.
Okay. It's a BAML, but okay. I have 2 topics. 1 is film and 1 is theme parks. And then couple of small questions on film.
Could you clarify was Eddie's shortfall in Tomorrowland fully in the 3rd fiscal quarter? And Bob, following up on the comment you made about television viewing and your view that viewing will actually go up because there's more ways to see, including Netflix. Do you have a point of view on films like both film distribution change or film viewing change because of technology? And then I guess I'll come back with the theme park questions.
Well, just very briefly, Jack, this is Tom. On Tomorrowland, we did see an impact to Tomorrowland in the quarter. Obviously, that was more than offset the success of the other titles. But yes, the underperformance there did show up.
On the motion picture side, we see global motion picture consumption actually growing. A lot of that is obviously due to the number one growth market in the world in terms of grosses, and that's China, where we've seen just massive increase in moviegoing over the last 2 even 2 to 3 years. I know a lot's been said about the window and whether technology and the opportunity to view under higher quality circumstances in the home is going to compress the theatrical window. For the kind of movies that we make, which are largely what I'll call tentpole films, we actually believe the theatrical window is incredibly important to us. And at the moment, we don't really see any need to aggressively compress it.
We time our, call it, the home video product that goes into the marketplace very carefully, mostly to track the retail opportunities that we have as a company, retail opportunities to both sell the movie into that window and retail opportunities to take advantage of the consumer product sales that we generally get at retail from a lot of the movies that we make. So we think that generally motion picture consumption is increasing in the world. It's been relatively flat in the United States by the way. I don't think that's going to change. And for at least us, we don't really see taking steps to decrease the most the theatrical window because frankly it's working for us.
And then on theme parks, just a couple of really quick ones. But you mentioned the currency impact you expect in fiscal 2016 overall. But is there any do you think an impact from international visitors, the stronger dollar in international visitors? 2nd, the 60th anniversary, is there any way you can frame the impact of that for Disneyland? And then finally, sorry about that, but finally, there's been speculation that you guys have gotten approval.
I mean, I think you've gotten some approvals in California. So the speculation that you're building a new land, have any comment on Star Wars land or something like that?
Okay, Jessica, it's Tom. First of all, on the foreign exchange, Christine talked about that overall impact for next year. But in terms of looking at international attendance right now, the overall, we haven't seen dramatic impact on the currency rate in terms of the total attendance. Now if we look at it, the correlation with where the economies around the world are weakest, we also see that in the attendance. So for example, the U.
K. Was relatively strong this past quarter. The Brazil was a bit lower. And so that economic status coupled probably with some change in exchange rate does have an impact. But if you look at international tenants for Q3 as an example, Q3 by the way is perennially the lower of the quarters in terms of international tenants percentagewise, it was in the range that we normally experience.
So we don't discern a very big impact there. With regard to the 60th, there's no question that people have responded well to the 60th and there's obviously a lot of attachment to Disneyland and that has led to what we talked about, which is the best quarter ever for that Disneyland Resort in terms of attendance and profitability. And so I would say that the 60th is one of the key drivers there, but it's really the new content and the product that we put in around the 60th that drives it. So this and that we expect to continue to do well going forward. And then with regard to Star Wars, as we've said, we're excited about Star Wars across the company and Parkes is no exception.
So, I would say stay tuned for more specifics about our plans there.
Thank you.
Thank you, Jessica. Operator, next question please.
Our next question here comes from David Bank from RBC Capital Markets. Please go ahead.
Okay. Thank you very much. I will not ask about ESPN and the evolving ecosystem. You guys have 2 incredibly seminal events that are going to occur over the next 12 months in the relaunch Star Wars and the opening of Shanghai. And we're really close to the eve of those events at this point.
And I think from any of us, any the questions I get, we still have a pretty hard time putting our arms around the criminal income statement impact from those 2 incredibly seminal events in 2016 and beyond. And so I guess I'm hoping for a little more color as we sit on the eve. I think we have a framework for the box office, but is there any sense of sort of incremental order of magnitude you could talk to us about aside from the forced Friday impact on consumer products? Like what is the order of magnitude on the income statement? And for Shanghai, can you give us kind of a basic sense of impact on that 1st 12 months?
Is it kind of breakeven? Is it earnings drag? Is it earnings lift? Anything any incremental color on those two events in the income statement would be really, really helpful. Thanks.
On the Star Wars front, David, we know that there is just incredible interest in this film. We put 2 teaser trailers out and the response has been enormous. Anything that moves gets a lot of attention and anticipation is obviously huge. And we've seen some examples already of Star Wars product going to the marketplace on the consumer products front, including in markets like China that are very, very encouraging. That said, as enthusiastic as we are for what we know of the film, we've not seen a Star Wars film in the original one since 2,005.
And there are markets around the world that are less familiar Star Wars than, say, the United States, for instance. So while the enthusiasm is, I think, rather apparent, we just want to be careful that the world doesn't get ahead of us too much in terms of the estimates, and we've seen them as well. We're making, at this point, no estimates whatsoever in terms of what we believe the film will do. We know we have probably the most valuable film franchise that ever existed. We know we have the ability as a company to leverage it in very, very compelling ways, whether it's in Disney Infinity, whether it's at parks Tom cited, whether it's on the consumer products front or on the TV front.
And we fully expect that the success of this film will reverberate throughout the company not only in 2016, but in the years beyond because we obviously have a rich slate of Star Wars films coming. So we just want to be careful here that the market doesn't get too far ahead of us or ahead of itself even on this. Let's all continue to anticipate the movie and be optimistic about it, but we have to take a wait and see approach in terms of what it will do. On the Shanghai front, I'm going to let Tom talk about the economic impact in 2016. But there too, like Star Wars in many ways, there's huge anticipation.
As I mentioned in my comments, the reaction to what we revealed a couple of weeks ago in Shanghai was extraordinary, not just in terms of the level of interest, but the level of enthusiasm and the positive reaction to the fact that we're building a park that was of such scale and was so unique in many ways, particularly in its blend of what I'll call traditional Disney theme park experiences and a lot of things that are both original and very, very specifically tailored for the Chinese market.
And I think that the real the headline for 2016 and as we get closer to the opening, we'll do
more to help you understand how
to look down the road. 20 14, we started to incur some opening expenses of size that were noticeable. That number of course has gone up in 2015, which is part of what you see in the international theme park results. And then that will ramp even further in 20 16. And you should anticipate that roughly half of the total preopening expenses for the project we'll see in 2016.
And so the net result of that is Shanghai won't contribute to profitability in 2016 based on our best assumption right now. But then in future years, you'll see the real impact and the financial returns which we continue to believe will be quite attractive.
Terrific. Thank you very much.
Thanks, David. Operator, next question please.
Our next question comes from Anthony DiClemente from Nomura. Please go ahead.
Thanks a lot. I have two questions, one for Christine and one for Bob. Christine, just given the clarification to the ESPN guidance, I wanted to just follow-up on that. Maybe I'm getting ahead of myself. But as we look even further beyond that guidance window, you don't have any big sports rights step ups in fiscal 2016, but in Q1 2017 you have the NBA rights fee step up, which is a big step up.
So what are the things that you're doing or plan to do in order to make room for that in the budget at ESPN for the increase in the NBA rights fee at that time? And then secondly for Bob, you talked about China, we're talking about Shanghai and the Park. I wanted to just talk about the media market or get your thoughts. I mean the theatrical market obviously huge and massively growing. Your release slate will presumably help you with share gain there.
But what about the home entertainment market? You recently partnered with YOUKU for exclusive local marketing of Marvel films. I know there's a lot of piracy there, but also presumably a massive opportunity. What is the strategy for home video distribution in China? Thanks.
Okay. Anthony, your question about ESPN, the new NBA deal will occur in 2017, and we still believe that ESPN has plenty of room for growth.
On the question about China, the announcement that was made about a deal with Youku, I think you mentioned, was not correct. We've not entered into a partnership arrangement with them. The home video market in China is obviously challenged by the fact that it's a market that's been, as you know, rife with piracy. And so it wasn't a legitimate home video market, never quite developed there. That said, there are a number of new platforms that have launched or that are expected to launch.
And we're in a number of conversations, none that we can discuss because we're not ready to announce it, with some of them about output deals for our films. And we feel good about essentially digital delivery of these films into a window that's likely to be lucrative for us over a long period of time and essentially enable us to put legitimate product into the piracy.
Thanks a lot. Okay, Anthony. Thanks. Operator, next question please.
Of course, our next question here comes from Doug Mitchelson from UBS. Please go ahead.
Thanks so much. Let me add my welcome to Christine. Bob, I think we've gotten what we can from you on ESPN. So I'm going to turn to Tom and Christine. Tom, I just wanted to make sure you could give us a sense about the benefits of the domestic park investment MyMagic Plus in particular relative to the 2% per cap rate for the quarter?
Was that just a tough comp? Are we starting to see any kind of wind down in the benefits of prior investments at the U. S. Parks? And for Christine, the comment on the $500,000,000 of FX and the fact that you hedge over a multiyear period suggests there could be some lag in fiscal 2017 or beyond above the $500,000,000 relative to the current interest rate levels.
Is that right? Is there further impact if you mark to market everything to current exchange rates? And lastly, I guess also for Christine, maybe I missed it, but the moderating EBIT growth for cable networks from fiscal 2013 to 2016, is some of that currency as well as the
subscriber growth that we've all been
talking about? Or is it just ESPN subscriber
first question. The parks per cap growth 2% that you saw, the real driver there really was the attendance mix, where we saw very strong demand at the local level, especially in the annual pass. And that then shows up on the attendance per cap. Food and beverage and merchandise were in line with what we've been seeing in prior quarters. So that really is guest mix.
But the major new initiatives, we continue to be very pleased with them broadly and with My Magic Plus in particular. It's been broadly available for about a year now. We've actually had about 13,000,000 folks use the Magic Bands and they've overwhelmingly called it an excellent experience. So we're very pleased there. The intent to return all those metrics that we look at are pointed in the right direction.
And Mymetric Plus actually was a contributor to the results positively in the quarter. So and also you continue to see the strength of things like the relaunch of California Adventure driving the gains at Disneyland. So we feel very good about both that set of initiatives and their continued ability to drive our results.
Thanks,
$500,000,000 that's another good question regarding foreign exchange. It's not the simplest subject. But if we had not hedged at all, the FX impact would have been more significant in fiscal 2015. But the reason I say that is, we don't know what rates are going to do in fiscal 2016. But right now, for fiscal 2016, we are expecting that 500,000,000 dollars adverse impact.
And the hedge ratios that we have in place are actually more favorable than current levels. So if there were changes in different directions during the year, we would continue layering in during 2016 for 2017. But right now, the hedges that we have in place for 2017, albeit more modest than where we are for 2016, they're with they're right now, they look like they would benefit us in a strong dollar market. ESPN in particular, the FX issue there is separate and distinct from the $500,000,000 that we talked about. The foreign exchange impact for ESPN is over that 3 year period.
And when we talked back in 2014 at the Investor Day for that outlook, right at that point in time, the U. S. Dollar had not started its significant strengthening. That was in the summer of 'fourteen. So during that period, the dollar has significantly strengthened across a number of key currencies for our cable nets, including the yen, the euro, the pound as well as the Brazilian real.
So that FX impact is part of that outlook guidance that we gave.
Okay. And just to be clear, the lowering from the high single digit to mid single digit was a mix of currency and domestic subscribers or just domestic subscriber shortfalls?
It's a combination it's not it's the it's both the adverse impact of lower expected sub levels and the adverse impact of the stronger dollar.
Okay, great. And there's no way you can give us the breakdown of those 2 by chance?
No. I think just the way we've explained it is what we can do.
All right. Thank you so much.
Okay. Thanks, Doug. Operator, next question please.
Our next question comes from Ben Swinburne from Morgan Stanley. Please go ahead.
Thank you. I have questions for Bob and then for Christine. First, Bob, you've been very vocal about the shift of advertising from TV to digital. Can you just help us think about how you think about ESPN, ABC ad sales going forward? Do you expect those businesses to grow over time?
Do you expect the industry to grow when you look out over sort of a multiyear forecast?
We're seeing real growth, but it's still relatively small in terms of total dollars versus what we see on the traditional platforms. In ESPN's case, as we've said before, they package their ad sales across all of their platforms, basically their linear, more analog platforms as well as all their digital platforms and platforms like radio and even their magazine. But we think that there's going to be tremendous growth from a percentage basis of digital. And we are going to continue to work with advertisers and with the research firms that are out there to work to not only get more creative, but to provide more details, essentially more consumption research so that we can grow the business even more. The demand is clearly there.
What you see in the advertising community, not only do you see much more opportunity for, I'll call, addressable advertising, but you see a huge demand from the advertising community as well. By the way, while we're on the subject of ESPN because we've been on it a lot, so why not, I want to make one other point about it. First of all, we've said a number of times, when you think ESPN, you have to think about the NFL, the NBA, Major League Baseball, the best package available in college football, college football championships, college basketball, events like Wimbledon U. S. Open, etcetera.
The other thing you have to consider is that in many of these cases, we're only at the beginning or in some cases not even at the beginning like the NBA of new deals that kick in. Those new deals all provide for more programming, more opportunity for on digital platforms, which will enable us to increase consumption on digital platforms and grow that business even more and generally more flexibility in terms of how we distribute this product. So the NBA is a great example. You're going to have a huge increase in essentially inventory on ESPN across its platforms. So while there's definitely increase in cost, there's huge increase in terms of opportunity as well to reach more people, to serve advertisers more effectively and to grow our digital platforms.
Thank you. Christine, just on the 53rd week, any way to think about the impact, the benefit in Q4? You mentioned ESPN was pacing up in the quarter. I didn't know if that was both including and excluding the 53rd week impact. And then any way to think about the 53rd week impact in 2016 where you're going to comp the 2015 benefit?
Thanks.
Thanks, Ben. You can think about the 53rd week in terms of it being an additional week of operations. So it's relatively proportional in the year. So that would be a benefit here in fiscal 2015 and it would have the reverse effect in fiscal 2016.
Okay. Thank you.
Okay. Thanks, Ben. Operator, we have time for one more question.
Thank you. Our last question here comes from Spencer Hill I'm sorry. Our next question here comes from Jason Bazinet from Citi. Please go ahead.
Maybe a quick question for Ms. McCarthy. Regarding leverage, the gross leverage has come down very gradually over the last decade to below one time. The cost of debt is quite low obviously in the markets. Your ROICs even if I include goodwill in all divisions seems to be in the low double digit range.
So why is this the right level of leverage for a firm like
yours? Thanks, Jason. You're absolutely correct. Our leverage has reduced as the company has continued to perform. We generate cash flow that we deploy to returning to shareholders as well as investing in businesses, doing strategic acquisitions.
So when we look at our leverage, the number that you quote is actually a gross number. And we do look at our leverage in terms of the way the rating agencies look at it. So they will make some adjustments to that for things like pension obligations. So it's actually a little bit higher from a rating agency perspective. That being said, we do enjoy a mid single A credit rating.
We also are a Tier 1 commercial paper issuer. So as it currently stands, we feel like we are returning capital to shareholders as well as investing in businesses, doing acquisitions. And at the same time we're maintaining financial strength and flexibility.
Okay. Thank you very much.
Thank you, Jason. And 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 Investor Relations 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 ks and in our other filings with the Securities and Exchange Commission. Thanks again for joining us
today.