迪士尼 (DIS) 2001 Q2 法說會逐字稿

Good afternoon ladies and gentleman and welcome to the Walt Disney Company second quarter financial results conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mrs. Wendy Webb, Senior Vice President of Investor Relations. Ma'am, you may begin.

Thank-you. Good afternoon and thanks for joining us. On the call with me today to discuss Disney's second quarter earnings are Michael Eisner, Chairman and CEO; Bob Iger, Disney's President and COO; and Tom Staggs, Senior Executive Vice President and Chief Financial Officer. For today's call, Tom will lead off with his remarks, followed by Bob and Michael. Then we will open the call up to you for Q&A. We will try our best to conclude the call by 5:30 p.m. Eastern time. Today's discussion will focus on Disney's pro forma figures in order to enhance comparability with the prior year and to properly reflect among other things noted in the press release such factors as the consolidation into Walt Disney Company of the Walt Disney Internet Group, and the closing of the GO.com portal, as well as the impact of the film accounting change. Additionally, any net income and earnings per share figures covered on this call are before restructuring and impairment charges. These charges largely reflect the write-off of non-cash goodwill associated with the GO.com and Disney Store closure charges and other items tabulated on table C of today's press release. So, on that basis let's get started. Tom?

Thank-you Wendy. Good afternoon. The company's result this quarter demonstrate the strength and diversity of Disney's asset base and revenue streams especially in light of the softer economy, and while we took a number of restructuring charges during the quarter, the vast majority of which were non-cash, these actions will help position us for strong earnings and cash flow over the long term. We indicated at the beginning of the year that the success of this year's film slate and home video releases could be an important swing factor in our results. That was certainly the case this quarter as upsides from the studio led our growth. On an overall basis for our second fiscal quarter, pro forma segment operating income was just over $1 billion, up 14% from the prior year despite a modest decline in revenues. This improvement was driven by higher margin business and continued cost containment in studio entertainment and improvements in our internet group as we continue to streamline our operations. Net income before the restructuring and impairment charges was up 33% to $391 million, delivering earnings per share of 19 cents, up 36% over the prior year and ahead of expectations. At the segment level, the soft ad market was the principal driver with a decline of 8% revenues and 9% operating income at Media Networks. Its impact was most pronounced on the broadcasting side with the ad market and somewhat disappointing ratings resulted in a 15% drop in revenues. However, at the ABC Television Network, the ad market and rating factors were more than offset by rigorous cost containment and by the lack of Super Bowl cost this year. At the station level, however, the absence of Super Bowl ad revenues resulted in a tough year-over-year comparison. Going into the next quarter, we are encouraged by the early success of our mid season replacement shows and continued strength of "Millionaire," which is still a top five show in total viewers, week in and week out. Additionally, while broadcasting results have fallen off from last year levels, it is important to note that compared to the second quarter of 1999, broadcasting has posted total operating [income] growth of roughly 23%, which is

indicative of the improvements made in this business over the last couple of years. Our majority owned cable networks continue to perform strongly, delivering operating income of $319 million, a 9% increase over the prior year. At ESPN, our growing subscriber base and increased affiliate fees resulted in continued gains. Moreover, the ongoing conversion of the Disney Channel to a basic service, and the addition of more than 10 million subscribers worldwide since just last year were also key factors in this quarter's growth. Bear in mind that our newest cable offerings, including SoapNet and our most recently launched Disney channels in Brazil, Germany, Spanish-speaking Latin America, and Asia are not yet posting profits and should contribute meaningfully to our growth in years to come. Parks and Resorts' operating income was flat versus the prior year, at $331 million. We had indicated some softness in advance bookings in our last conference call which showed up in our Walt Disney World attendance this quarter. It is worth noting that the tremendous success of the Millennium Celebration throughout last year makes the year-over-year attendance comparison more difficult. Of course, the addition of Disney's California Adventure resulted in attendance gains at Disneyland Resort. However, the combination of pre-opening cost, soft economy, and poor weather on the West Coast dampened results somewhat at the Disneyland Resort. Nonetheless, guest spending increased again this quarter at both Disneyland and Walt Disney World, which contributed favorably to the results. While the economy may continue to impact our domestic parks, we are encouraged by strengthening visitation at Disney's California Adventure during the spring break period and by the number of out-of-state visitors coming to the new park. At Walt Disney World occupancies at our hotels remain very high. It is important to remember that these are the long-term assets whose fundamental appeal and value to our shareholders will not be materially diminished by short-term swings in the economy. Outside of the US, both Tokyo Disneyland and Disneyland Paris hosted record attendance for the quarter. This strong performance of the Disney parks outside the United States bodes well for the opening of our newest parks in Tokyo and Paris over the next 12

months and our increasing geographic diversification in this business. As I have said, the studio was our biggest driver of growth in the second quarter, delivering operating income of $164 million, more than tripling last year's figure. Our home video and DVD business was the biggest factor in this success. The direct-to-video release of "Lady and the Tramp II," which is on its way to selling more than 6 million units in United States, is the most successful direct-to-video release since our "Lion King" sequel "Simba's Pride." The growth of DVD is also improving both our current results and our outlook for the segment as Bob will discuss in a moment. On the theatrical side, our results also compared favorably to last year. The highlight of the quarter was the performance of "Recess" which generated domestic box-office gross more than 3 times its production cost. "Recess" is a good example of the kind of high return, value adding film projects that we will continue to look for at the studio. In consumer products, Disney Interactive posted continued growth, resulting from the successful release of PlayStation titles such as "Aladdin" and "Emperor's New Groove" and our PC-based "Mickey and Pooh learning series." This success coupled with aggressive cost control helped the segment deliver operating profit of $90 million, 30% improvement over the prior year. Michael and Bob will discuss the progress that we are making in positioning this segment for long-term growth. We are pleased with the year-over-year comparisons in the quarter. Not included in this pro forma figure for Consumer Products [are] roughly [$50] million in restructuring cost associated with closures of approximately 70 Disney stores. As we said last quarter, we currently plan to close 100 stores in United States, bringing our domestic Disney store count to roughly 400 over the next 4 years. We are also proceeding with our store redesign efforts and are encouraged by the performance of 2 prototype stores which continue to show sales gains that are some 20 percentage points greater than rest of the chain. Our internet businesses posted improved results in the quarter as we continue to generate strong traffic across all our branded properties. Although our overall internet advertising revenues were down somewhat, our traffic performance coupled with our strategy to sell integrated sponsorships across our sites

have increased advertising revenues at our Enhanced TV, Disney, and ESPN branded sites. Overall, we're showing resilience in a soft advertising market, and we are pleased to see that we are increasing market share. Internet Group operating losses narrowed by 49% overall due to the elimination of cost associated with toysmart.com and increased efficiencies across our web-based businesses. During the quarter, the company also purchased $31 million of Disney stock bringing our total repurchases during the year to over $250 million, leaving a purchase authorization remaining of just over 385 million shares at the end of the second quarter. We are pleased with the company's overall second quarter performance and particularly the success of our studio entertainment division. Looking ahead, we are mindful that the continued softness in the economy could lead to difficult comparisons in our theme park and media networks businesses, but taking into account these short-term concerns, we still expect to deliver growth for the fiscal year 2001 in the single digit range although continued upside from our theatrical and home video releases for the balance of the year could push our growth into doubles digits. Despite uncertainty regarding the economic environment in the near and medium term, we believe that this setting can create opportunities for companies like Disney. Our strong balance sheet and growing cash flow allow us to take advantage of potential investment or acquisitions opportunities that may arise. At the same time, we will continue to manage our businesses to maximize the long-term earnings, [_______________] earnings, cash flow, and capital returns. With that, let me turn the call over to Bob Iger to discuss further, our business unit performance.

Thank-you Tom. Operating a more efficient enterprise in a period of economic downturn is critical for the Walt Disney Company. One of the aggressive steps we have taken to substantially lower cost throughout our organization includes a difficult decision to reduce our workforce, divesting our interest in nonstrategic or under-performing assets, focusing on strategic sourcing initiatives, consolidating accounting and finance functions, managing our production process more tightly by producing fewer and lower budget live action films. These actions are part of a wide range of strategic initiatives designed to help us reach our goals for growth and profitability while ensuring our businesses retain their industry leadership and continue to surpass creative expectations. At the studio, although we plan to produce big event theatricals when the property is worth the risk as is the case, "Pearl Harbor." We have reduced our average theatrical motion picture production budget and will continue to be disciplined in this area. That having been said, quality will not be compromised. Recent success of Miramax/Dimension's "Spy Kids" and "Bridget Jones' Diary" and last fall's theatrical release, "Remember The Titans," are great examples of this strategy. "Titans," in particular, was an exceptional film which further extended the Disney brand in live action and was produced on a more modest financial budget which makes profitability achievable at realistic box-office targets. "Titans" was extremely strong at the box-office, and as Tom mentioned, its DVD video release is proving as significant. Also on home entertainment, our direct-to-video titled "Lady and the Tramp II" has become one of our top selling direct-to-video titles following its mid second quarter release. "102 Dalmatians" is tracking above "Titans" which hit the streets two weeks earlier. The success of these titles targeted to kids, bodes well for the future home entertainment release of films such as "Spy Kids." DVD represents an opportunity for growth of substantial magnitude for the Walt Disney

Company. DVD penetration, both sell-through and rental, has grown substantially in recent periods. As a company, we intend to capture market share by implementing key release and marketing strategies such as worldwide release dates, enhanced entertainment experiences through supplemental programming, sell-through pricing, collector's sets for library properties, and promotion to capitalize on the opportunity that this growth represents. In the fiscal second quarter, the media network segment continued to be an important source of cash flow while adapting to changes in the advertising marketplace relative to the prior year. Media Networks flourished in 2000 as a result of an exceptionally robust advertising market which was busted by the new category of dot com business and the performance success of the programming phenomenon "Who Wants To Be A Millionaire." Although ABC Television Network sales are down in 2001 relative to sales in 2000, we still anticipate that revenues will significantly exceed 1999 levels. In addition, advertising rates in the scatter market are showing growth with rates for prime-time advertising up double-digit percentages over rates in the upfront market. Our mid season programs also show [promised] with "What About Joan," starring Joan Cusack, ranking in the top 25 prime-time programs and consistently outperforming its regular competition by an average of 27% to 75% and "My Wife and Kids," starring Damon Wayans winning its time periods by as much as 18% and 34% among young adults. Furthermore, our prime-time development includes tremendous talent both in front off and behind the camera such as Jason Alexander, Steven [_______________], John [_______________], [_______________], and Sally Field just to name a few. Turning to ABC's owned television and radio stations, the significant decline in dot com advertising also adversely impacted our television and radio station businesses. However, the radio networks have shown improved sales results in comparison to the

fiscal second quarter last year, and despite a decline in the size of the TV station advertising marketplace and network performance concerns, ABC's owned TV stations have maintained their share of their market with six of our own TV stations in the top US markets ranking #1 from sign-on to sign-off. To offset the soft ad market, ESPN has made significant progress in its cost cutting efforts in its production and programming costs. With the increased production of original sports programming versus license rights programming, ESPN is in a stronger position to manage programming cost on a long-term basis. In both the financial and performance perspective, we are extremely pleased with the results of ESPN's new series "The Life" and ESPN2's "2-Minute Drill." Both programs are delivering solid ratings among men 18 to 34, improving time period performances. It is also worth noting that in many cases, our average in-house programming cost per rating point is well under half the cost of our license programming. Our equity interest cable networks, Lifetime, A&E, History Channel, and E! are largely on target with regards to sales, but nonetheless are identified expense reductions to deal with potential shortfalls in ad revenue. The Disney Channel, following its conversion from a premium service to basic, now reaches more than 85.5 million homes worldwide, an increase of 14% over last year. Another wholly-owned program service, Toon Disney, had over 20 million homes at the end of the quarter, a 79% increase over the prior year. On April 2nd, 2001, SoapNet became the 44th basic cable network metered by Nielsen Media Research and quickly rose among the [top-end] audience delivery of the Nielsen [metered] cable universe. The growth in these cable services reflects the important new agreements struck with cable operators, including Time Warner and [_______________]. Brand extension was extremely important to our company

and an important source of growth. Our decision to close Go.com during the quarter enables our internet enterprise to focus on building new businesses by leveraging the Disney, ABC, and ESPN brands using the unique attributes of the internet, interactivity, community, and personalization. In addition, we continue to concentrate on distribution through all delivery systems. Disney Consumer Products has signed a number of important deals as it implements its new licensing strategies. In toys, we're pleased with our alignment with Hasbro whose "Monsters Inc." product line has gotten rave reviews from buyers at the recent toy fair. In the apparel we have signed direct-to-retail agreements with H&M, Tesco, Lindex, Kmart, JC Penny, and Pre-Natal. We are also in final stage negotiations with several other retailers. In Hardlines, we have signed a noncarbonated beverage deal with Minute Maid, a division of Coca-Cola, to roll out a line of Disney branded juice, water, and milk drinks, and we're also in advanced discussions with a number of leading food companies to launch other Disney branded food products for kids and parents, which are brand appropriate and represent engines for future growth. Disney Interactive's performance, as Tom mentioned, continues to be strong with revenue and operating income increasing dramatically over the past year. In our theme parks and resorts, Tom discussed our near-term challenges, but bear in mind that our business cycle is long-term. Looking forward, our plans include a major celebration at Walt Disney World entitled "100 years of magic" commemorating the 100th anniversary of Walt Disney's birth. Increased marketing support for Disneyland and Disney's California Adventure this summer, new hotels, most notably the remarkable Animal Kingdom Lodge at Walt Disney World and new parks in Tokyo later this year, Paris next year, and Hong Kong within another 5 years. In the meantime, we're experienced at managing theme park costs, especially in adapting our work force to meet market demand while maintaining a high standard of guest service and safety. Despite the weakened economy, the Disney Cruise Line is

performing very well with strong bookings and rates. In addition, California hotel bookings are high for the summer month, an important note considering that we just added 750 new hotel rooms or 50% more room nights. Today at the Walt Disney company, we believe we are in a much stronger position relative to the impact of a softer economy because we are taking necessary steps to reduce cost in a short term, manage expenses over the long term, and set strategies to sustain growth in the years ahead and now, I would like to turn the call over to Michel Eisner. Michael?

Thank-you Bob. An economic slowdown is never good news, but it does not affect all companies equally. At Disney, current sluggishness of the American economy represents an opportunity to build for the future. With this in mind, so far in 2001, we have opened Disney's California Adventure which will be a long-term asset that drives long-term earnings and value growth. We have revamped our internet strategy to put our energies toward our strengths in our category leading branded sites. We have made the difficult decision to reduce our labor force to more efficiently deal with near-term economic realities while contributing to cost containment over the long term. We have released our best-selling made-for-video title in two years "Lady and the Tramp II," which further demonstrates the dynamic value of our library of films and characters. We have seen the DVD market start to hit critical mass as almost every one of our DVD titles has gone on to solidly exceed sales expectations and projections, and we have released a breakout film hit "Spy Kids," which is produced on a moderate budget and is likely to be a true franchise for Dimension Films. In fact, "Spy Kids" and the Miramax film "Bridget Jones' Diary" gave us and them the #1 and 2 slots at the box-office this week. In the months ahead, we will continue to put out great entertainment product, which has the potential to drive bottom-line growth regardless of the overall economy's performance, such as the upcoming film releases, "Pearl Harbor," "Atlantis," and "Monsters, Inc." A "100 Years of Magic" event at Walt Disney World which starts in the fall and a fantastic new theme park Tokyo DisneySea which opens in Japan in September. Furthermore, because our company continues to have a healthy balance sheet, the current

economic climate may present us with potential acquisition opportunities as some attractive overvalued enterprises are becoming attractively fairly valued enterprises, but we will continue to resist the temptation to make a splashy acquisition that makes headlines, but ultimately doesn't make sense. Creation of shareholder value is our overriding criterion as we review any acquisition candidates. So in the worse case economic scenario, Disney should still be a solidly profitable company in the near term and should be stronger than ever when things rebound, but the worse case scenario is not the most likely scenario. The economy may turn around at any time, and when it does, we believe, we will be well positioned to be among the first to feel its benefits. In the meantime, Disney's executive management committee will continue to manage, shape, and grow the extraordinary assets of our company as skillfully as possible, working to create dynamic new opportunities, within a cost effective financial box. For example, during the second quarter, Disney consumer products reached an agreement, Coca Cola's Minute Maid unit, as Bob just mentioned, to market healthy children's beverages globally under that Disney brand. This is a multiple and mutually advantageous relationship that helps Minute Maid enter new market categories, but helps us expand the Disney brand in appropriate ways. Then, there is the SoapNet that we talked about. SoapNet is the number one in basic cable among women, 24 to 54, and the number two among women, 18 to 49. In the last 6 months, its numbers of subscribers has nearly doubled from 4.5 to 8.5 million people, and most of this has been achieved by airing programming that we completely own and is already thoroughly profitable. [And its hard], what I'm outlining is really nothing

new. Disney's success has always been built on the creation of great new entertainment products and the effective leveraging and extension of products we already own. In addition, this proven formula for success, we add a dedication to cost efficiencies, focus on driving for higher returns on the capital we invest, and maintain the financial flexibility to take advantage of opportunities that may present themselves. We have every reason to believe that regardless of economic fluctuations, this approach will achieve growth in an absolute sense and relative to our peers and most important, would generate value for our shareholders for years to come.

Thank-you Michael. Now let's move on to the Q&A. Operator, we are ready to take the first question.

Thank-you. The floor is now open for questions. If you do have a question or comment, please press the numbers 1 followed by 4 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, will you please pick up your handset to provide optimum sound quality. Once again ladies and gentlemen, that is 1 followed by 4. Thank-you. Our first question or comment is coming from Chris Dixon of UBS. Please state your question or comment.

Thank-you very much. Gentlemen, could you please walk through where you are on your restructuring in terms of cutting back and headcounts and some of the comments this morning as relates to the animation division?

Yes Chris, this is Bob talking. As you know, we announced a few weeks ago, our goal to reduce staff by approximately 4000 people, beginning with what we call a voluntary separation plan. We are in the middle of that voluntary plan, and we cannot disclose the number of people who have already stepped up, but we are pleased with number and believe that when we get past this cycle, we will be well on our way to achieve our goal. As relates to animation, the animation unit of the studio and the studio itself is part of the overall company's plan to reduce staff. In fact, all of our units are participating in this, and the goal there is consistent with the goal that we have for all company divisions, and that's to reduce staff. Specifically in that area, there are other opportunities to reduce cost because of the general slowdown in competition which is widely known across the industry and has already been reported on.

I think, I might as well just say about animation, our animation company is in excellent shape, both the feature animation and the television animation. Our slate is locked till 2006. We know every movie that's being made, in production, and whether its 2 dimensional animation or 3 dimensional animation with us or with Pixar. We couldn't feel more comfortable about it. The fact of the matter is that the enormous competition that started after "Lion King" was opened and a very strong increase in the cost of making animated movies basically because they are 100% labor intensive, because that competition has lessened, we are able to improve already, and already profitable business by looking at the cost of that labor, both in the amount of time we spend on an animated movie and on the number of people and the cost of each person. So we're very optimistic about animation. And the next 3 releases, as you know, we have "Atlantis" this summer, followed by "Monsters", followed by Treasure Planet next summer, all of which are less expensive than their predecessors and equal to or better than their predecessors creatively. So we're pretty excited about animation, and we are pretty pleased with ourselves, which is [how I get] to say, and we are managing it financially, as well as creatively.

Okay, next question please.

Thank-you. Our next question is coming from Richard Simon of Goldman. Please state your question or comment.

Yeah, I had a question, and that basically revolves around how you did it so well in filmed entertainment and the consumer products, especially the latter. Is there any way you can give us guidance on that, on where to [_______________] consumer products?

There are a lot of reasons, not the least of which is that we've had quality products. We do have a very valuable library, so you are able to make "Lady and the Tramp II," and direct-to-video has a knowledge in the marketplace and inexpensive because it was made by our television animation group and did extremely well. Our theatrical movies did well, like "Recess." We took a television property that's on ABC, [_______________] Synergy on Saturday morning. We made a fairly inexpensive movie that did extremely well. I mentioned in my comments, I think both my associates mentioned it too, we've been talking about this for a couple of years. DVD is really happening. We've exceeded our expectations in DVD. As you know, the studio is made up of not only theatrical, live action, and animation, but it's also made up of home video and pay television, and all of this, and frankly, we had no movies that came out, that we were off, that I am aware of. We had no disaster, so to speak. We had no write downs. [Passing] comparison to the last couple of years, we've had some mildly financial embarrassments, not creative ones, but some financial ones, and so Peter Schneider and his group are managing this business more efficiently and quite creatively.

Yeah, we did. One of the things we said to watch for in terms of potential upsides was home video and DVD in particular and then certain titles, "Titans" on home video and "Recess," which we had talked about as a very low cost film that if it hit, could have a great profit impact. With regard to consumer products, Richard, I would tell you that licensing in the stores are pretty much on track with what we told you to expect, meaning, they weren't the drivers of this increase in this last quarter although both Bob and Michael talked about some of the steps that we have been taking, so we're on course there. The interactive group had some good titles that performed strongly. That had a nice impact for us, and they had put in some cost restructuring efforts that we started to feel in the quarter, and that helped us to a decent amount as well. So, you know, we had mentioned that we would expect the comparisons to start to get a little bit better in consumer products. This is perhaps a little earlier to have a quarter like this. We're still working through. It will still take its time on licensing and the stores. We're certainly pleased with the continued growth of our interactive group which is one where we look for continued growth in the future.

Although we are not [sitting here] projecting too much about the future, I can't help myself here. I have seen "Pearl Harbor." We had a screening in Denver, and it's one of those nice things that comes along, not that often, but I have no idea whether it will perform a dollar. I know it's fabulous, and I liked it. So, I don't know if I protected myself by saying, it won't perform a dollar, but I think there is upside there. Now I'm getting ill looks from all my associates and say I shouldn't be doing this [_______________], but it's still good.

Okay, next question please.

Thank-you. Our next question is coming form Jill Krutick of Salomon Smith Barney. Please state your question or comment.

Thank-you. Good afternoon. I was hoping you could potentially address revenue growth, the revenue outlook for the company. What you anticipate for the second half of the year. Should we expect a resumption of revenue growth in the second half of the year? And secondly, if you could address on the theme park side, what type of contingency plans might be put into place to stem any further reduction in operating income outlook for the second half? Thank-you.

Jill, this is Bob. I'll start on your question regarding revenue focused on our advertiser-supported businesses. As you know, we have been experiencing a softness throughout this fiscal year. We thought actually after the first quarter that some of it was due to the Olympics, the uneasiness over the presidential elections, but clearly, we were wrong, and the softness continued throughout this past quarter. We are still seeing softness. We are not necessarily projecting it to get any worse, but we don't see signs of recovery yet, and that's one of the reasons why we are focused as we are on our cost cutting initiatives, not just in the advertiser-supported businesses, but particularly in the advertiser-supported businesses. The comment that Tom made earlier that the networks' performance this quarter was staged by the fact that we are very attentive on the cost side, and that's only going to continue.

By the way, this is the time that it's very good to have the capital cities, cost conscious half of our company, that we acquired in 1995 because Disney was at its tremendous revenue growth since 1984 and hadn't spent the kind of attention that we are now spending on the cost sides, kind of a legacy of Dan Burke and Tom Murphy, which Bob and the ABC people understand well, and it has been an effective process, and it does have a lot of rewards to it.

But again on the revenue side, it's too soon to predict what the upfront will look like. I have a general sense that there is a lot of [posturing] going on right now from the advertisers which is the case every year. I think that there is a chance that the upfront actually could be better than last year, but again, it's a little too early to tell, and we are more focused now on our product because there is little we can do about sales until the upfront actually begins. So, I think the bottom line on the advertising side is I think the softness will continue. I don't believe it will get worse, and I am hopeful that things will start to turn around at the later part of the year, but I don't see signs of that yet. Tom, you can address the theme park side.

Without going into too much detail on specific actions at the theme parks, only because I don't think that is necessarily appropriate. We will continue to do it. They have been doing in the last quarter, making sure that they have got the right amount of cash in the park to manage the amount of traffic in the park and still provide excellent guest service and make sure everybody has a positive experience in the parks. We will make sure that, as you know, labor is one of the big variable costs there, so we will make sure that we manage the incremental labor costs to meet the demand that is out there. One of the nice things, one of the things we talked about earlier in the year is that even though you see some softness in bookings due to the economy, we continue to have very strong occupancies at our hotels, and part of the strategy that we have been following for last 10 years to bring more people on property helps to mute the impact of these kinds of economic downturns. And [perhaps] the opening, just to remind you that, [maybe, we should have] managed through this and have theme parks poised to get back under their growth trajectory is something that we pay close attention to, and we've been able to do that before, and we've got experienced management in the parks. I think we'll do that again.

People delay their vacation because of fear of economic slowdown. They almost inevitably just delay it a year, and after these slowdowns end, we have such an enormous rebounds in our parks, and then with the cost structure [_______________] reduced, it should help us, as I would say in my comments, come out of whatever it is in a strong way.

And it's not on the cost side, Jill, just to be clear. There are [things] that we do on the marketing side, some special events side, some things that we don't want to avail though it's time to avail them, but some special activities [now certainly] will be going in the parks. We think, we can drive some demand in this environment.

Okay. Next question please.

Thank-you. Our next question is coming from Scott Davis of First Union Securities. Please state your question or comment.

Yes, thank-you. As you guys know better than anybody, it's important to balance focused on costs with making the right investments going forwards. So along those lines, can you add a little more color on your investments in development spending at the network on programming? A qualitative answer would be fine. Maybe a quantitative answer, maybe in terms of a percentage over last year, would be even better. And then second, could you be a little more specific in your attendance of Walt Disney World, not the specific number, but is it down, low single digits, high single digits? Thank-you.

We wouldn't comment on what we are spending on development except I would tell you from now, almost 2 decades of experience, that I don't think there is a direct correlation between what you spend on development and how well you do on it. We are extremely encouraged by what we have seen already from our prime-time group in development and looking forward to screening our [pilots] in a couple of weeks.

I can say from 3 decades of working in the television network, we have been told [_______________] that it is the absolute best development, most creative, best hours, best comedies that we have ever had. Now, I will tell you that. I will also tell you that I have been told that every year for the last 30 years. So, I am not sure it will come to pass although it looks like between the 3 shows that went on the air recently that all have high potential going forward, plus the development, plus our event programming that we know about, plus the strength of our daytime schedule, including [the view] on all those shows and serials and the strength of our news. I think that the unbelievable strength of our own television stations and Steven Bornstein coming in now to run our television operation. We are feeling pretty good about the way that's set up.

Scott, on the question with regard to theme park attendance. As you know, we tend not to give out theme park attendance numbers or growth rates, and it's not [a decoy. It's] because that's such a small part of the overall picture, partially I think as this quarter demonstrates. I am not sure it does much good, as we have said. We had seen some softness in bookings. It wasn't an amount that got us overly alarmed. We continue to see that sort of trend. So, to the extent that it got to the point where we thought it was really off of where we see it today, I suppose we might come back and talk about it, but at this point and that's as much as we should say on it.

Thanks. Next question please.

Thank-you. Our next question is coming from Richard Bilotti of Morgan Stanley. Please state your question or comments.

Good afternoon. [Slowing] down on the studio for a second, the results there seem to be supported by your revived home video strategy. Could you speak specifically to, now that you have the 29 gold titles out there, has that had a positive impact on your market share in the VHS segment? And also, you mentioned DVD. Are you capturing the same share of the DVD sell-through market that you've historically taken in the VHS sell-through market. In other words, are you, does it not matter to you which format that you are selling, so the impact of the gold program, and how do you compare on VHS versus DVD sell-through?

You are asking a multiple point question here, but let me do it in reverse. We have a title a year for the next 10 years that has been kept off the shelf. Starting this fall, we will be releasing Snow White, and we will be releasing it exclusively for the first 2 months on DVD in a double disk box with a lot of additional material never before seen, including a new version of "Some Day My Prince Will Come" recently last week sung by Barbara Streisand. The following year, we have, I will just go that far, we have "Beauty and the Beast," and that will follow a large format IMAX, if you will, theatrical release over Christmas of "Beauty and the Beast" with an additional scene animated that was not animated in the movie, but ended up being in the Broadway Show, which will be [that] and a lot of other things which will be promotioned for the fall release on DVD and VHS, and that will be the first one that had a complete 10 year window, although there were sequels to it, "[Bells] Christmas" and things like that. So, we look forward to these titles and their resurgence, and the resurgence of our library. As far as the rest of the library that is out and what you are calling the gold collection as opposed to the platinum collection, I think it's too early for us to tell. We have been very pleased with how they've done. Over time, we may take one or two of them and pull them off the shelf if this other process of resting it works. So, it's still too early to really give you an absolute definitive answer, and that last piece was on.

In terms of the share of the DVD market, we obviously are very encouraged by our recent success, and we've named them, "Titans" and "Lady And The Tramp II" were just a couple of examples. Obviously, the early adopters of DVD tended to be more interested in live action titles, male oriented titles, titles like "Matrix." As DVD has penetrated the market to a greater extent, now in roughly 15 million homes, we believe by the way, that could easily double by the early part of 2002. Clearly, we are getting a lot of consumers who are more interested in a more general product, and that's one of the reason why we're seeing these early successes with Disney-branded titles or kids and family titles. So that, we believe, bodes extremely well, not just for the platinum titles, Michael mentioned a few, but for the Disney library in general, both old titles and new titles that we release. So, we actually think that we're going to able to easily maintain share of that marketplace consistent with the share that we've had before or maybe even slightly better if you add the impact of the platinum collection, but that had not necessarily been the case with the early adopters, but as I said, that's changing already.

We're encouraged [_______________] about our library because you know we went through it once on VHS, almost once, we still have a [_______________] and a few others, but almost all of it, is using the library to do direct-to-video sequels, and we've done several whether it is "101 Dalmatians" or whether it is "Lady and the Tramp II" with "Simba's Pride," and they seem to be holding up incredibly well, so the library is very, very powerful for us still.

We're ready for the next question, please.

Thank-you. Our next question is coming from David Londoner of ABN Amro. Please state your question or comment.

I was just curious about some of the below the line stuff. Corporate and shared expenses are up a little bit. We thought it would be down, and net interest expense was down pretty sharply, and I thought it would be up. It shows you how good we are. Any comments?

Corporate and shared expenses were up principally due to actually almost solely due to costs associated with the Disney Club, which is our company wide customer relationship management marketing effort, and so there is a startup cost associated with that, that we're taking at the corporate line. At this point, those aren't being allocated out. And the interest expense line, of course, came down. [In large measures], we were about 50% floating in the quarter. We took advantage of the rate reductions, and our net debt reduced slightly during the quarter. So, we're not getting a positive impact on both sides there.

Okay. Next question please.

Thank-you. Our next question is coming from Jessica Reeve Cohen of Merrill Lynch. Please state your question or comment.

Thank-you. Two quick questions on consumer products. Are there any one-time payments from these direct-to-retail deals or any kind of guarantees?

Yes.

And, sorry?

Guarantees [_______________].

Alright, the second question is on films. You had obviously a great quarter in both theatrical and video, including DVDs. Why was revenue down?

What is the last query?

Why was the revenue down?

Yeah, why was revenue down?

I'll take the first part, on the direct-to-retail deals. There are upfront payments in many of these deals, as well as guarantees, but we haven't taken them yet because these deals are, they've just been signed and will, in effect, actually begin in the ensuing months, but in most cases, there are upfront payments and in all cases, there are guarantees.

On the video revenue question, Jessica, it's largely driven by theatrical. Last year we had some rather large, rather expensive theatrical releases, "Mission to Mars" being the biggest. That generated a decent amount of revenue at the box office, but in fact, cost enough so that they actually were an impairment to the bottom line. This year, the big performers, "Recess," very inexpensive, drove good box-office, not as much as "Mission to Mars," but profitability obviously well in excess of "Mission to Mars." So, that's part of the reason to get that margin swing.

Okay. We'll take one last question please.

Thank-you, our next question is coming from Dave Miller of Sutro. Please state your question or comment.

Yeah. Hey guys. Question with regard to California Adventure. I know we had some weather problems here in Los Angeles in February, but in general, at least thus far, the response to the new park seems to be okay, not great, but okay. Given the park's smaller size, and the fact that there are far less [_______________] rides relative to Disneyland next door, at what point, do you consider a price decrease to stimulate attendance? And I have a followup question if that's okay.

Why don't you give the followup question at the same time?

Okay. With regard to the upfront, in preparation for a possible strike, some of the other broadcast networks are talking about preparing two different presentations to media buyers. Do you guys have two different slates, and if so, assuming there is no resolution to the strike in the next three weeks, which one do you plan on presenting on May 15? Thank-you.

I'll do the first and Bob can do the second. We're very pleased with Disney's California Adventure. All of the research, the [exit] research is incredibly strong. It's a hair below Disneyland, which of course is off the charts. The issue other than, yes, weather issues, and we opened it at a time that we knew would be slow. People coming to Disney's California Adventure from outside packages, buy the three-day package. People in the market, in Los Angeles, have not yet been kind of trained to take the three-day package. We have a significant plan which, Paul Pressler will kill me if I announce, for the summer which we think we will ensure that Disney's California Adventure will be a smash. Hope he is listening because he has to deliver it. Creatively, it is strong. Now, you have to understand, we did the Disney MGM studios in Florida. It had much less capacity than the Magic Kingdom did down here. It took a while to take off the Animal Kingdom down here as well. We added capacity to each of these parks as time went on. We did not want to build them too big on opening day. We wanted to grow [into them], and I'm very enthusiastic about the exit-polling and the plans going forward. It's very, very early. I remember stories about when [_______________] opened between Thanksgiving and Christmas and disappointed some people, they thought the sky was falling, and it didn't, and the same thing happened in Europe in the opening in the spring, waiting for summer to come. So, I think, the jury is not out creatively. The jury is out circulation wise,

and I think we have to wait till summer. As far as pricing, it's going to be priced basically at the same price, which is our history, as Disneyland, but there are customers, excuse me, local discounts that we do. We sell multiple day tickets. We are creative with our media, but we think that the quality is of the level of Disneyland, and we will probably hold that same price.

As it relates to the question about the schedule we present in May and a possible work stoppage, we have made a decision that we're going to put up on the board that day, the best possible schedule we've got. We'll deal with labor-related issues accordingly, should they transpire. [_______________] sort of under gag order in terms of discussing that in detail because the negotiations are going on. I'm actually optimistic that things are going get resolved, and it's not something in terms of a strike that we're really going to have to deal with. [_______________]

Financially, by the way, our company is not at risk financially during this period.

And the goal is to put the best schedule together and to go after the most amount of revenue in the upfront and deal with the other issues should they actually occur at some other time.

Okay, thanks for joining us today. Let me remind you that certain statements in today's press release and on this conference call may constitute forward-looking statements under the securities laws. These statements are subject to a number of risks and uncertainties, and actual results may differ materially from those expressed or implied in light of future decisions by the company and by market, economic, competitive, and technological developments beyond the company's control. Let me also remind you that all the statements made on this call are statements as of today's date based upon information available as of today's date. The company does not assume any responsibility to update this information in the future. This concludes Disney's conference call regarding its second quarter earnings.