Ladies and gentlemen, thank you for standing by and welcome to Disney's Fiscal Full Year and Q4 2020 Earnings Results Conference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker Mr. Lowell Singer, Senior Vice President Investor Relations. Please go ahead. .

Good afternoon, and welcome to The Walt Disney Company's fourth quarter 2020 earnings call. Our press release was issued about 25 minutes ago, and is available on our website at www.disney.com/investors. Today's call is also being webcast and a transcript of this call will be available on our website.

We realize many of you are joining us today from your homes and we are also hosting today's call remotely. So joining me from their homes are Bob Chapek, Disney's Chief Executive Officer; and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer.

Following comments from Bob and Christine, we will of course be happy to take some questions. So with that, let me turn the call over to Bob to get started..

Disney+, ESPN+, Hulu and Star. It's just fantastic. And with that I'll turn it over to Christine..

Rise of Skywalker and Frozen 2. We also anticipate that home entertainment, stage play and studio TV SVOD results will be meaningfully lower year-over-year. Similarly at Consumer Products, we expect merchandise licensing results in Q1 to be adversely impacted due to comparisons versus Star Wars and Frozen merchandise in the prior year.

At ESPN, first quarter results will be significantly impacted by higher rights and production costs due to the shift of four NBA finals games and three additional college football playoff games into quarter, along with incremental regular season college football rights costs shifting into the quarter.

This impact is partially offset by an expected delayed start to the 2020-2021 NBA season. We expect the Q1 operating results of our DTC businesses to decline by approximate $100 million relative to the prior year quarter, driven by continued investment in Disney+, partially offset by improved results at both ESPN+ and Hulu.

At our international channels business, we expect first quarter operating results to decline by approximately $300 million versus the prior year quarter driven by a combination of higher sports rights costs due to timing shifts COVID-related impacts and channel closures.

Our capital expenditures in fiscal 2020 were approximately $4 billion, down about $850 million from the prior year due to decreased spending at our domestic parks and resorts.

We expect CapEx in fiscal year 2021 to be $550 million higher versus fiscal year 2020 due to increased investments at our media and entertainment distribution businesses and at corporate, partially offset by reduced spending at Parks Experiences and Products.

As we've previously noted, we will start reporting under our new organizational structure in the first fiscal quarter of 2021. While our reporting segments will change, we intend to provide key financial and supplemental information, including much of what we report today, particularly as it relates to our direct-to-consumer businesses.

As always, our goal is to provide the needed transparency into our businesses. We remain very excited about our future and we also look forward to sharing more details on our evolving DTC strategy at our December 10 virtual Investor Day. And with that, I'll turn the call over to Lowell and we would be happy to take your questions..

Okay. Thanks Christine. And as we do transition to the Q&A, let me note that since we are not physically together this afternoon, I will do my best to moderate this by directing your questions to the appropriate executive. And with that, operator, we are ready for the first question..

Of course. Our first question will come from Michael Nathanson with MoffettNathanson. Please go ahead..

Thanks. Lowell I have two for you to shepherd. The first is on ESPN.

You'd announced some cost cuts, but I wondered, if the company is taking a fresh look at their content rights needs? And if there's any kind of update on the willingness to maybe cut back on some of the rights you've had previously? How do you think about that? And then secondly, for whomever you want to send it to, over the years Disney made a pretty smart decision to cut back the number of films they release every year, to focus on quality and franchises.

And I just wonder now with the reorganization and the new game plan at DTC, how will kind of the quality of the franchises and the content output be managed, as it's increased, right? So it looks like it's a change in terms of the output of the organization. Just want to hear about the quality management of that. Thanks Lowell..

Okay Michael. Thanks. I'm going to turn both of those over to Bob..

All right. Thank you, Lowell. Hi, Michael..

Hi, Bob..

In terms of ESPN and the cost cuts, we are obviously watching our costs across all of our operating units very carefully, in light of the adversity that we're facing with the pandemic. But long-term, as we look at our content rights, well we're looking at it from a shareholder standpoint.

If it's accretive to shareholder value, then there are decisions that we make going forward in terms of looking at new rights, as they expire. And what we want to put on to our service. So we're being very deliberate and we're being very careful. And analyzing everything to make sure that it would be something, that would be additive to us.

And I might say that, we've got very good relationships with all the leagues. And it's important. We continue to believe in sports. As a matter of fact in 2019, 93 of the top 100 programs in viewership on television were sports. And as you know, we've got the most trusted brand out there in the world, in terms of sports.

So we believe that's a nice recipe for future success. But we realize that the world is changing. And there's a lot of dynamics at play. But we'll only do continue rights deals as long as they add shareholder value.

In terms of the second question and in terms of the looking at the number of films and the amount of content that we put into the system, you're right. Over time we've been very, very discriminate, in terms of what types of films we make and how many we make. And I think that's really benefited the company.

We're in a world though now in a subscription business, where we're managing churn. And we've got a unique combination of assets in this company that are all at play right now in Disney+, where we've not only got the most desirable library in the world, but we realize and that really helps by the way minimize churn.

But we also realize that new content that we put add subscribers. It's very clear to us, that new content adds subscribers. So I think you'll see a continued increase in investment, in our direct-to-consumer platforms. And that will then fuel, some of the growth that Christine will talk about at the investor conference, that we expect on December 10..

Michael? Thanks for the -- okay. Thanks Michael for the questions. Operator, next question please..

Thank you. Our next question will come from Alexia Quadrani with JPMorgan. Please go ahead..

Hi. Thank you.

Just a bit of a follow-up question, if I may, on the studio content commentary, I would love any color you could give potentially on, what you learned from the release of Mulan into premium video-on-demand? And really how you think about, at least how you've thought about it in the past, your decision to allocate content on different platforms for example, why Mulan goes to AOP VOD, but Soul is going directly to Disney+ for example so any thoughts there? And then my second -- just a follow-up question is really on the parks.

You've made some real improvement in cutting your losses this quarter from the last quarter. I guess is it feasible to assume you can continue to see a further improvement in that segment without Disneyland opening? Thank you..

Alexia thanks so much. So Bob, I'll turn them both over to you Mulan and Soul and then some of the trends we're seeing at parks. .

Okay. Great. So from a studio content standpoint, we were very pleased with the results of Mulan as a premier access title. And as you remember that was our very first foray into a strategy like premier access. Unfortunately that title met with some controversy both in the U.S. and internationally shortly after we released it.

But we saw enough very positive results before that controversy started to know that we've got something here in terms of the premier access strategy. And I think we'll talk a little bit more about that at the investor conference in December.

In terms of Soul, we also realized though that part of the lifeblood of Disney+ is providing great content to the base level subscribers that are in there in premier or in Disney+. And so the idea is that, we thought it was a really nice gesture to our subscribers to take Soul during the holiday period and provide that as part of the service.

But I think what we've learned with Mulan is that there's going to be a role for it strategically with our portfolio of offerings. And again we're going to talk more about that at the investor conference in December.

In terms of our opportunities to continue to improve parks, we're actually very encouraged by what we're seeing right now in our parks across the world. There's really two dynamics that are going on.

Number one, our park operators which as you know are the best in the world are becoming much more efficient and effective in operating under COVID guidelines. And we've been able to pretty materially increase our capacity and still stay within the guidelines that local governments are giving us for example 6-foot social distancing.

And this is happening across our parks across the world. In fact Walt Disney World which was at a 25% capacity constraint which was our industrial engineering estimates to keep 6-foot social distancing now has been able to increase to 35% of capacity.

So almost a 50% increase in the number of guests that we can allow in and still adhere to the local guidelines and the guidelines that are stipulated by the CDC with the 6-foot social distancing. So we're very pleased by how we've become adept at operating under these constraints.

But the second thing that's even more encouraging is the demanding -- demand that's growing for our parks across the world. I think it says two different things. Number one shows the love that guests have for our experiences that we have within our parks and the tremendous IP that we as a company have.

But I also think it speaks to the trust that people have given the track record that we now have after months of operating across the globe with very stringent guidelines. And we're very pleased with our track record.

And I think people are now through forward bookings and reservations showing some very encouraging signs about their willingness to come and spend time with us at a Disney park. .

Thank you..

Alexia, thank you.

Operator, next please?.

Our next question will come from Ben Swinburne with Morgan Stanley. Please go ahead..

Thanks, good afternoon. Christine I know you're not going to be providing the accretion dilution analysis going forward and I certainly get a lot of moving pieces. But I'm just wondering, if you could tell us whether there are additional costs that you expect to come out of the business? I think you guys had talked about over $2 billion of synergies.

I'm just wondering if we look at 2021 versus '20, if there's still more to go as you work through the integration etcetera? And then probably for Bob.

Bob, I know you're saving a lot for December 10, but you announced a pretty substantial reorganization of the company in a year that's obviously already had a lot of disruption, particularly around the Direct-to-Consumer business with Kevin leaving et cetera.

I'm just wondering if you could talk a little bit more about your motivation there kind of the reaction you've gotten from your senior executives. Many have had their roles shifted pretty substantially including giving up kind of P&L accountability.

Just wonder if you could talk about your confidence that you -- you're going to get what you want out of this from a company perspective and that you can manage the risk of separating content production decisions from monetization decisions because it's a pretty substantial change? Thank you..

Okay, Hi, Ben..

Hello..

It's Christine. Let me take your first question which was on the cost savings that we achieved from the integration of 21CF. And we did meet -- actually we exceeded that $2 billion number. And so we feel really good about the momentum we have on the efficiency side.

And we're also going to take the opportunity to continue looking for operational efficiencies. The one thing we've learned in this COVID environment is there are ways of being more efficient and we'll continue to mine those.

And it actually has really helped us not only in segments like our parks business that are directly impacted, but throughout the entire company. So we'll continue to drive towards greater efficiencies. And when the -- you asked about how much do we incur in the restructuring charges related to Fox. Overall, Fox restructuring charges were $1.7 billion.

And $1.2 billion of that was incurred in fiscal 2019 so $500 million was done this year. And in this quarter where we had about a little under $400 million of restructuring charges a portion of that was also Fox related. It comes out to about a little over -- a little less than 30%.

So the balance was related to our cuts at – reductions-in-force at Parks. .

Got it. .

And in terms of the question on the reorganization, I would suggest that maybe given everything that's happening in the world this is the perfect time for us to do such a reorganization. And I'm 100% confident that this is going to play out exactly as we had intended. It's going extremely well.

And despite the disruption in everyone's roles, I think we have 100% buy in. I think we have 100% buy in because we have clarity on accountability which everyone really likes. And we separate out roles to what people tend to do best. Content does what they do best and same with distribution.

So distribution who manages the P&L will set the parameters for our annual and long-term budget framework that's been agreed to on the slate with the content creators. And then the content creators then green light the individual projects that then shepherd development and production.

So essentially distribution is now able to optimize the commercialization without maybe too much unnecessary regard for legacy distribution platforms, but at the same time our creatives who as you know are the best in the world are really free to do what they do. And that's just make the best content and storytelling possible.

A lot of collaboration between the two groups, but ultimately some level of independence in terms of each being what they can be and doing their jobs best. .

Thank you..

Okay. Ben, thank you. Operator, next question, please..

Our next question will come from Jessica Reif Ehrlich with Bank of America Securities. Please go ahead..

Lowell, thank you. I have two questions as well.

Could you comment on the change of management at Star? Does that affect your strategy in India or outside with the rollout of the Star-branded service? And then secondly, sorry to be negative, but the sports viewing decline -- I mean there's just so much going on and I wonder if you could give us your thoughts like there were no fans in the stadium so would change the viewing experience.

The calendar has changed. There's a lot of sports in a short period of time.

Do you have any concerns about how this will impact consumer behavior post-COVID? I'd love your thoughts on kind of the longer-term outlook for sports?.

Okay, Jessica. Thanks. I am going to turn both of those questions over to Bob..

Okay. I'm going to take the last one first. In terms of sports ratings, sports ratings we feel that in context of everything that's happening are actually holding up quite well. But we would be careful not to draw any conclusions about the ultimate health of sports sort of the long-term impact that you suggested during this pandemic.

We really think that we're sort of looking at apples and oranges here. I think the best comp we probably have is the NFL, which has been relatively flat. Our Monday night football viewership has been down 4% relatively modest despite all the headwinds. I mean, we've got the risk of seasons not finishing. To your point, we don't have fans in the stands.

We have the risk of games individually every week being canceled. We have election news as competition. And we really can't have our fans doing what they like to do the best which is watch in a communal setting. They pretty much are watching by themselves.

Despite all those headwinds, the fact that our Monday night football business is relatively flat in terms of viewership is really I think really encouraging. And if you adjust if you will viewership over the last couple of months for the amount of available content, you see that they kind of slide together.

So we actually don't have any concerns about the long-term health of sports. Obviously, we've got some headwinds as it pertains to short-term challenges and hurdles. But we think that all in all in context, the health of sports is pretty decent given everything that's going on.

In terms of India, obviously we have an executive there Uday Shankar who we love and we wish him well. He gave us some indication several months ago that he was thinking of moving on. We've got a really deep bench there. And we feel that we have all kinds of opportunities and a lot of success so far with Disney+.

And we have no reason to believe that that success won't continue and even accelerate going forward..

Thank you..

Jessica, thank you. Operator, next question please..

Our next question will come from Doug Mitchelson with Credit Suisse. Please go ahead..

Thanks so much. Lowell, I got two quick ones and then a main question. The quick ones are the math on India, I think if I have it right based on Christine's comment around $5.30 you're around 11 million subs, which would be about 2.5 million added in the quarter.

I just wanted to make sure that was in the ballpark and I was looking for an update on the cruise ships that were on order.

But the main question is having re-upped some Disney+ distribution deals, what changes are you seeing now, now that you are of the uncertain phase and the value on both sides is better defined for you and for the distributor, does the economics of those deals change? Or should we think about the cost of that marketing channel as locked in? And I also ask because as you add more and more original content to your streaming services I would think the benefit starts to shift in favor the distributors as you add more and more value to those services.

So that would be helpful. Thank you..

Okay. So I'll let Christine sort of quickly address your India question and then I'll turn over the cruise and the Disney+ questions to Bob..

Okay. Hi, Doug, we're not – the comments that I gave on the Hotstar Disney+ India subs, we just don't comment on those economics. So unfortunately, we can't give you any more detail on that..

And in terms of cruise ships, as you know, we just got new guidelines from the CDC that are quite thorough let's say. And they really entail some really high hurdles in terms of not only testing by the potential guests that we host on the ships, but also a process that has to happen in order to certify our first sailings.

Those will necessarily result in delays beyond what we had hoped in terms of getting our ships back in service and making magic for our guests. I guess, the best news out of all of it is that, we now do see some light at the end of the tunnel.

I think we have an opportunity to create sort of a Disney bubble, if you want – if you would on each one of our cruise ships. And demand is very, very strong for our cruise ships. We're seeing extremely strong demand in the back half of FY 2021, and all of 2022 in terms of – of bookings.

That said, that then creates the demand for the new ships that you asked about. And right now we're anticipating delivering our first new ship The Wish in summer of 2022. And then we have our next two ships in 2024 and 2025.

And so after a slight delay of roughly six months on those ships, we think that we're going to be able to bring them on to service. We hope and expect that the world will back to normal by then, and anticipate having a fine time trying to fill up the demand of those ships.

And we think there's going to be so much pent-up demand that, we don't expect to have much issues given the love that our guests have for Disney Cruise Lines. In terms of the distribution deals and sort of the changing the landscape over time with those, we're really pleased with our partnerships to date. We try to limit them.

We don't do too many, but we use them to strategically pursue growth of our subscriber base and lower subscriber acquisition costs. So as you know, we have one or two of these in each market. That's about it.

But it really does help us sort of provide a base during our growth phase, and we've got full flexibility over time to either ramp those up, or ramp those down as we see fit..

Great. Thank you..

Thanks Doug. Operator next question, please..

Our next question will come from Jason Bazinet with Citi. Please go ahead..

Just a question for Mr. Chapek. Can I go back to the re-org that you announced? The more content it seems that you put on the DTC side, the lower your earnings will be but the better the sub growth will be and the higher the stock price will be.

And so as those decisions are being made today and next year and the year after, are there guardrails in place that sort of mean, this will be a gradual transition? Or is it really whatever the right business decision, is the right business decision, and you'll do it, even if it means, maybe different near-term financials in terms of profitability than The Street is expecting? Thank you..

Yeah. I think the guardrails are good common sense as it pertains to managing cash. With our parks business sort of being – having an anchor on it, if you will that we can't properly operate our parks business like we'd like to we have to be a little bit more careful today than we might have to be in the future.

But I'm just going to suggest that when we talk to everybody on December 10, I think you're going to see that we're going to put a lot of wind in the sails of our Disney+ business and heavily invest in it. And so the guardrails are just the only ones that would be the constraints that we face today in terms of cash.

Other than that everything is really full speed forward. And of course we've got our linear networks that we're managing. We've made some reductions just this last week at ESPN as we manage the transition from linear to more of a digital experience and direct-to-consumer experience.

And so as we toggle that balance between sort of the legacy old media businesses to the new media businesses, we'll do it aggressively, but we will watch it from a cash standpoint in the meantime..

That's very helpful. Thank you..

Jason, thank you. Operator, next question, please..

Our next question will come from John Hodulik with UBS. Please go ahead..

Hey, thanks. Maybe just a quick couple of few follow-up to Jason's questions. Bob in terms of the cash you got $18 billion on the books.

I guess, can we expect a significant, like you said a significant ramp in the content spend? And can we assume as a result of that that the progress you guys have made in terms of DTC losses, doesn't mean that those losses have peaked at this point? And then can you talk a little bit about content spend as it relates to entertainment program going into Disney+ and Hulu and Star and ESPN+? ESPN+ obviously has been a -- there's some nice growth there getting up to 10 million subs.

Do you expect to shift more of your portfolio from or simulcasted from linear to the DTC platform? Or should we expect some investments in new rights? Thanks..

Okay. John, thanks for the question. I'm going to let Christine take the first question around cash and then Bob talk a little bit more about program investment..

Great. Thanks..

Hi, John. It's Christine. You're right that our cash and cash equivalents are a very healthy $18 billion. That's down from $23 billion in the prior quarter. Just to put some context around the reduction we lowered our commercial paper balances by almost $5 billion. And we also had some bond maturities over $1 billion that we took care of.

But we are still generating operating cash and we are investing in our content now. We're spending a lot of our productions are back up and running. So we're going to manage this. But as we ramp up even more additional new productions we will be spending more cash on that, but we'll follow this up.

And when the peak of investment is anticipated we will update you with that information on December 10. .

And my answers are going to be relatively the same in terms of the programming between our linear and our DTC business. First of all, Christine will talk about sort of the guidance at the investor conference specifically in terms of we have our losses peaked, which was your direct question and will update though.

Additionally, we will be investing heavily. We'll talk again about -- more about this at the investor conference, but we are going to continue to ramp up our investment in DTC.

And we will be heavily tilting the scale from linear networks over to our DTC business, as we see that as we said in our opening comments our primary catalyst for growth as a company. So, again, we're going to talk a lot more about this on December 10, but you will see a heavy tilt..

Okay. Thank you..

John, thanks for the question. Operator, we have time for one more question..

And our final question today will come from Michael Morris with Guggenheim. Please go ahead..

Thank you. Good afternoon. Two for me. First, can you talk about the ad revenue per Hulu subscriber decline in the quarter that you referenced in the release? Just given the strength that we're seeing in the sort of connected TV marketplace, I was kind of surprised to see that.

So I'm curious your take on how that business is going, and how we should think about that. My second question is really a follow-up to one of the early ones around sports and sports content. And I'm curious how you think about expanding sports content availability to consumers that don't have a pay TV package.

I think at this point there's 30 million or 35 million households in the U.S. Bob, you just referenced some of the stability in ratings. So maybe that would imply that people who want sports still pay TV, and so it's not an issue.

But I'm curious, if the leagues have any increasing urgency to sort of reach those, those cord cutters or cord nevers and maybe what some of the considerations are for you whether it's financial impact or whether it's rights limitations or things like that? Thank you..

Okay. Okay, Mike. So I'm going to let Bob take the sports question, and then we'll go to Christine on the Hulu question..

Okay. In terms of the -- sort of the cord cutters and solutions for the cord cutters, I won't speak to what the leagues' thoughts are. I'll leave that up to them. But I will tell you that we've got a product that we're really excited about and has experienced some rapid growth and that's Hulu + Live TV.

And it really gives the utility that consumers might normally find from the cable or satellite subscriber and be able to get it over-the-top directly to their homes.

And I think this will increasingly act as a solution to those households that have walked away from their traditional, more traditional cable type of subscriptions and potentially slide it + Live TV. And that's one of the reasons why we're really bullish about that business. I'm a personal big fan of it. I use it. And it's really slick.

It's very elegant, and it really is a big solution provider. It's really the complete solution, I think. So we're excited about that in terms of solving a consumer need for those consumers as you mentioned that have all walked away from that particular way of distributing and receiving content..

Mike and on Hulu, overall, I would say that we're seeing very, very strong demand for advertising on Hulu in the addressable market. But the year-over-year comparisons were negatively impacted on a per sub basis by what we're seeing in the advertising market overall in Q3 and Q4.

But we're going to talk more about Hulu advertising in more detail at the Investor Day. So, just hold on until December 10, and hopefully we can answer all your questions then..

Great, thank you..

Okay, Mike. Thank you, and thanks again everyone for joining us today. As Bob and Christine have mentioned we are looking forward to sharing a lot more with you at our December 10 Investor Day, and we look forward to seeing a lot of you then.

Note that a reconciliation of non-GAAP measures that were referred to on this call to measures can be found on our Investor Relations website.

Let me also remind you that certain statements on this call including financial estimates or statements about our plans, expectations, beliefs or business prospects, may constitute forward-looking statements under the securities laws.

We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them. And we do not undertake any obligation to update these statements.

Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors including factors contained in our annual report on Form 10-K, quarterly reports on Form 10-Q and in our other filings with the Securities and Exchange Commission.

This concludes today's call. Have a great rest of the day everyone..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..