Good afternoon and welcome to The Walt Disney Company's Third Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Alexia Quadrani, Senior VP of Investor Relations. Please, go ahead..

Good afternoon. It's my pleasure to welcome everybody to The Walt Disney Company's third quarter 2022 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 being webcast and a replay and transcript will also be available on our website.

Joining me for today's call 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 be happy to take some of your questions. So with that, let me turn the call over to Bob to get started..

Cosmic Rewind opened an Epcot as part of the park's ongoing transformation to a place that is more family more timeless and more Disney. Second, we expanded the Disney Cruise Line fleet with a Disney Wish, which sailed its maiden voyage on July 14.

This is the first of three new ships and is infused with Disney storytelling one-of-a-kind entertainment and a modern interior aesthetic. It is powered by liquefied natural gas one of the cleanest burning fuels available. And finally, Disneyland Paris opened Avengers Campus on July 20 completing the first phase of our ambitious expansion plan.

The new immersive area features two new attractions, five action stunts encounters with Marvel superhero and theme restaurants. I had the opportunity to help open this new land with stars from the Marvel Cinematic Universe and our cast and I could not be more proud of the resort's ongoing transformation.

Guests are responding in a big way to our enhanced offering at Disneyland Paris' per capita spending in Q3 was up over 30% versus 2019 a great sign of the site's potential for growth. I am incredibly pleased with our performance this quarter, our competitive position and the unique collection of assets and capabilities that sets us apart.

Going forward, The Walt Disney Company's incredible employees cast members and creative teams will continue to transform entertainment by combining extraordinary storytelling with innovative technology to create an even larger more connected and magical Disney universe for families and fans around the world. With that, I'll hand it over to Christine.

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core Disney+ and Disney+ Hotstar.

Excluding the impact of any significant future macro headwinds, our core Disney+ subscriber target range is 135 million to 165 million by the end of fiscal 2024, largely consistent with previously provided guidance that non-Hotstar Disney+ subscribers in 2024 would approximate 60% to 70% of the expected 230 million to 260 million total subscriber base.

We are, however, updating subscriber guidance for Disney+ Hotstar to up to 80 million subscribers by the end of fiscal 2024. We intend to refine this target over time as subscriber visibility in India will be clearer once the ICC and BCCI cricket rights sales processes are completed.

As you may know we recently made the disciplined decision to not proceed with the Indian Premier League digital rights and we'll evaluate these rights with that same discipline.

As we sit here today, we remain confident that Disney+ will achieve profitability in fiscal 2024 and look forward to several upcoming catalysts including reaching a steady state of tentpole original content releases, delivery of premium general entertainment and international local originals and the upcoming launch of our ad-supported tier alongside the new pricing structure announced earlier today.

And with that, I'll turn it back to Alexia and we would be happy to take your questions..

Thanks Christine. As we transition to Q&A, we ask you please limit yourself to one question in order to help us get to as many analysts as possible today. And with that operator, we're ready for the first question..

Thank you. [Operator Instructions] And the first question will be from Doug Mitchelson from Credit Suisse. Please go ahead..

Thanks so much. One question, there was so much to ask about. Why don't I go with this and I do appreciate you separating out the guidance between Hotstar and core Disney, but Parks were impressive this quarter.

And as you talked about levers of demand were to shift, has the company satisfied pent-up demand from the pandemic at the Parks' point? Should we look at the go-forward basis is relatively normal trends? And I'm guessing you have a different answer for domestic versus international.

And Christine I'd be curious if you'd put any meat on the bone regarding the levers if demand were to shift at the Parks? Thank you..

Sure. Thanks Doug. Our Parks certainly did have a fantastic quarter. And I just want to say that the parks team is the same team led by Josh D'Amaro that was able to manage through the COVID crisis that impacted the business significantly.

They also were able to ramp back in on a very phased basis back to the recovery phase and they're now positioned for growth. So I just want to acknowledge that team for being a triple threat when it comes to being able to manage from very, very different vantage points based on the environment.

As it relates to levers of demand some of the things we could do Doug we had limited the number of annual passes that we have across some of our businesses -- some of the Parks. And all of those come with some with the exception of the highest tiered priced annual passes. They all come with some blackout dates.

So to the extent to which perhaps you had lightened demand, you could loosen up some of those to bring more people in the Park and just enjoy the Park and spend money while they're there. And also as it relates to demand we have not yet seen demand abate at all. And we still have many days when people cannot get reservations.

So we're still seeing demand in excess of the reservations that we are making available for our guests..

Thank you. Next question..

Thank you. And the next question will be from Ben Swinburne from Morgan Stanley. Please go ahead..

Good afternoon.

Bob can you talk a little bit about, sort of the research and insight you have into your streaming customer base that sort of informs the decision to take these price increases which on a percentage basis are pretty large, without really reducing net adds with from churn spiking as you implement these price increases? And maybe talk a little bit about, how the product that consumers will be paying for next year at these higher prices will compare to this year.

And I'm just wondering are you planning to take similar pricing moves at least directionally outside the U.S. overtime? Thanks for the color..

Well, as you know, we launched at an extraordinarily compelling price across all the platforms that we have for streaming. I think it was easy to say that, we're probably the best value in streaming. And since that initial launch, we've continued to invest handsomely in our content as you know.

We believe, because the increase in the investment over the past 2.5 years relative to a very good price point that we have plenty of room on price value. And we do not believe that there's going to be any meaningful long-term impact on our churn as a result.

I mean, one only needs to look at our recent significant increase on ESPN+, which had the exact same impact of really no meaningful impact at all on our churn. And we believe that we've got plenty of price value room left to go..

Thank you.

Next question?.

Thank you. And the next question will come from Steven Cahall from Wells Fargo. Please go ahead..

Thanks. So the DPEP margins were really spectacular. I'm just wondering, what kind of trends you're seeing from international visitations.

Were those strong in the quarter, or is that a tailwind to either per caps or hotel occupancy as you get into the back half of the year and you see more international traffic?.

I'll take that one, Steve. The DPEP margins were indeed, very strong. One of the things that we've seen is, during the pandemic international visitation to our domestic park primarily Walt Disney World was basically non-existent.

That has proceeded to come back and it has come back very nicely, but it is still below the traditional range that we've given you which is around 17% 18%, up to the low-20s. But it's made significant progress.

And we expect the international visitation when it is fully back to actually be additive to margins, because those guests tend to stay longer at the parks and they spend more money when they're there as well..

Thank you.

Next question?.

Thank you. The next question is from Michael Nathanson from MoffettNathanson. Please go ahead..

Thank you. I just wanted to dig a bit on the ad product at Disney+. What's your expectation for ad load or modernization per sub, given there's a $3 difference between the premium with no ads and the ad product? And maybe what you've learned from Hulu over the years, that informs your expectations on monetization. Thanks..

As you know, we've had a lot of experience with this on Hulu and a lot of success with this on Hulu. And we are walking before we run in terms of seeing what the market will bear in terms of an ad load. So we're going in very conservative upfront.

But we believe that, there's probably going to be some more ultimate elasticity in that as well as we go forward. And we're just really thrilled that we're able to launch the Disney+ ad tier and expand our audience access through all these multiple price points that we're going to have.

And as Christine had alluded to, the advertising demand since the launch of Disney+ is great. And we think that by taking a conservative approach in terms of that ad load upfront, it will give us the ability to expand if we need to and not have to go the other way, which I think would be a much bigger deal..

And the only other thing I'd add to that Michael is based on our Hulu experience that even current subscribers who have ad-free may choose to stay at the same price point with ads. The Hulu ad-supported tier has more subscribers than the ad-free. In fact, it's well over about – it's about two-third.

And that's something that we can't anticipate that we'd have exactly the same behavior because it's a different demo that has Disney+ versus Hulu but that's the best indication that we have. But we expect the ad tier to be popular and we also expect some people to want to stay with ad-free..

Thank you.

Next question?.

And that question will come from Jessica Reif Ehrlich from Bank of America. Please go ahead..

Thank you. Maybe switching gears a little bit to sports. Can you give us your thoughts on what the structure of an NBA renewal might look like? Would it be different? And in the past you've mentioned participating in sports betting. You have the best brand name.

Can you maybe elaborate a little bit on timing of what you're thinking? And then just a follow-up to some of the comments. Just on – you launched a new cruise ship.

Can you talk about what you're seeing in terms of cruise demand overall?.

I think you want to divide yourself. Okay. I'll talk about the MBA first. As you know, we've had a great history with the NBA, really proud of our partnership there. And the past season and the ratings for the finals have been absolutely extraordinary. So we're interested in a renewal with the NBA.

But like all of our decisions that we make in terms of content, we'll only do it if it's accretive to shareholder value. And I think that remains the overall guidance, whether you're talking about India with IPL, whether you're talking about college sports, whether you're talking about Formula 1 racing or you're talking about NBA.

So we have an interest to do that. We're really happy with our portfolio of sports rights that we have. But of course, the continued relationship with the NBA would be something that would be very attractive to us..

Do you want to take sports betting?.

Yes. Well, in terms of sports betting we are – have been in conversations for quite a long time now with a number of different platforms to add some utility to sports betting and take away some friction for that for our guests.

We have found that basically our sports fans that are under 30 absolutely require this type of utility in the overall portfolio of what ESPN offers. So we think it's important.

We're working hard on it, and we hope to have something to announce in the future in terms of a partnership there that will allow us to access that revenue stream and also make sure that our guests are being – having their needs met..

So Jessica on cruise. As you know, we welcomed our fifth ship to our four ship fleet, so we now have five. The new ship goes by the name of Wish, as Bob mentioned, and it's quite an extraordinary vessel. But we've always said that that business has been the most severely impacted by COVID in terms of duration of disruption to the business.

So we're still coming out of that, but we are focused on the business recovering. Historically, the cruise line has been terrific with really attractive ROICs for us and it's generated double-digit returns on the investment. And we expect that business to come back to the similarly attractive returns that we had previously experienced.

And a couple of things. The WISH is our newest ship and that has gone with very, very high capacity. And that one it's just very well received. But we have a competitive position overall in the cruise business, especially the family cruise market. So we generate pricing that's well above the industry average.

And our cruise ships deliver for us one of the highest rated guest experiences across all of our parks and experiences offerings. And this is a really interesting comment that we received from our cruise passengers. 40% of them say that they would not have chosen to go on a cruise vacation if it weren't a Disney Cruise.

So we're a unique product and we're still a relatively small share of the cruise market and we're positioned for growth. And the other four ships are all sailing and their occupancy is improving week by week..

Next question please..

Next question is from Kutgun Maral from RBC Capital Markets. Please go ahead..

Great. Thank you for taking the questions. One on the parks and then a follow-up on FX if I could. First, the parks are going through a particularly innovative and transformative period given your investments in technology, digital tools and improvements in the guest experience.

So from the outside, it seems that the business is as well positioned as it's ever been in the face of a potential recession. But I'd love to get your views on the various sensitivities associated with what the consumer is seeing and how you'd characterize the resiliency of the business.

I know you talked about different levers at your disposal, but perhaps there's been a structural change in the business compared to prior recessionary periods that you could speak to? And then Christine, if I could follow up on your foreign exchange commentary.

Can you share a bit more on how you manage your FX risk? And what was the impact of FX on DTC ARPU? Thank you..

Yeah. I think a lot of onlookers look at our park business and try to sum up our success recently and say that it has something to do with pent-up demand. And certainly, there is pent-up demand.

But what we're seeing is far more resilient, far more long lasting in terms of increase in the affinity for our parks both from the willingness to come to our parks and its attendance, but also in terms of what guests are willing to spend when they get there in order to personalize their experience.

As you know, everything we do in our parks is all about improving the guest experience. And part of that has to do with limiting capacity, but also about personalizing those experiences. So we believe we do have a lot of flexibility to shift, if our demand changes.

Remember, we have a reservation system which now enables us essentially real time on the fly to change whatever factors we need in terms of our ticket packaging that we want where years ago we didn't have that. We published our prices by the quarter and that was essentially all the flexibility we had.

But as you know our business looks very strong with forward-looking bookings and intent at pre-pandemic levels and we see nothing in the future that's indicating anything to the contrary of what we've seen. So we're very pleased with that. I should also remind you that our reservation system really does a great job at spreading demand.

So if we see any spikiness, we can actually smooth that in a way that we couldn't before.

And we're real pleased with that because even our Genie product, which as you know we released just a little bit short of a year ago, now about 50% of the people that come through the gate, actually buy up to that Genie product which I think you can see the result of in our yields. .

And I'll take the question on foreign exchange and the way we hedge. So, we do have a hedging policy that is well established and has really served the company well over very volatile foreign exchange markets.

So, just level set, we have a program and the goal of it is to reduce the impact that changes in foreign exchange rates have on our current and future earnings. So, we really have an objective of trying to attain earnings and cash flow stability and predictability. So, we try to take out the ups and the downs.

So, the hedging program it has significantly reduced the negative earnings impact of the strong dollar that we've seen both in the third quarter as well as the fiscal year-to-date. And so despite being economically hedged as it relates to ARPU, we do not allocate the hedge gains or losses specifically to ARPU in the various markets.

So, therefore, the reported ARPU for international Disney+ was impacted by the unfavorable exchange rates in the quarter. Another thing is when you look at content sales and licensing, especially if you go back and look at the transcript, you'll note that there was a reference to that also being impacted by negative foreign exchange.

That was just a balance sheet ineffectiveness. We also hedge the balance sheet. And that had to do more with we based our hedging on forecasted plans.

And if the plans come in stronger and were underhedged or overhedged, in this case we were it did not benefit us because we were hedged the right way for the dollar strengthening, but that is a one-timer that should not be repeated.

But as it relates to ARPU, if you have some volatility, you will see it in the ARPU, but it nets out as a company overall. As I mentioned in my other comments that this is not a material item for us on a consolidated basis. You just saw it spike out, especially in DMED. And the other thing is we do hedging on a multiyear basis.

So, we layer in our hedges over a period of time, which has really served us well in the current environment. .

Thank you. Next question..

And the next question is from in Kannan Venkateshwar from Barclays. Please go ahead..

Thank you. So, maybe Bob from a strategic perspective, when you think about sports, it does seem like that there are a lot of new entrants. I mean Apple seems to be interested in more and more sports rates.

And from your perspective, you obviously walked away from the cricket rights in India and it looks like Big 10 may also be going in a different direction.

So, when you think about sports strategically, given that cord cutting is structural, how do you think about this business longer term? Do you really have to own ESPN or get into sports streaming in a much bigger way or invest a lot more? I mean directionally, they are off of it obviously from a decision perspective.

So, it would be great to get a sense for how you're thinking about sports more broadly? And then on the advertising side, if I could just ask a bigger picture question around Disney+. From a subscriber base perspective, Disney+ is comparable domestically to Hulu and US is the biggest ad market when it comes to the television opportunity.

So when we think about the scale of advertising for Disney+, is Hulu the kind of benchmark we should be thinking about, or can Disney+ be much bigger because it is international in scale all those CPMs are much lower outside the US? So if you could just help us scale that opportunity that would be great? Thanks..

Okay. In terms of the strategy on sports, we're continually enamored by the power sports in terms of viewership and what it adds to our overall portfolio particularly in an advertising type world.

As you know, we get strong cash flows on linear and it helps to pay some of the bills in the companies we make some of our significant investments in content, and we also like the proposition of growth and expansion on our DTC.. In terms of the rights, if you look at the college rights, we've got the SEC, we've got the ACC, we've got the Pac-12.

We've got the Big 12. We've got the play off. We've got the most comprehensive programming. So if we don't get rights in every single conference, we don't believe that's in any way limiting for us. But what we're all preparing for is the future of what ESPN would look like in a direct-to-consumer -- in a true direct-to-consumer fashion.

And I think the way that we're looking at this is that we want to proactively prepare for that future without prematurely disrupting the cash flow that we get from the linear networks right now.

And as you know we've negotiated flexibility into our rights agreements across the board for any new rights that we have acquired over the last several years, but we're still bullish on sports. We believe there's tremendous degrees of freedom in terms of what ESPN DTC ultimately looks like.

I think we're very proud of what we've done to-date on ESPN+, but that no way limits how we envision what true ESPN DTC proposition would look like going into the future. .

Hi, Kannan. Thank you for asking this question about advertising. I know there's been a lot written recently about ad trends. But I just want to start off by saying pacing in our scatter market continues to be solid across streaming sports, as well as our broadcast network.

Now to get to your question about Disney+ AVOD and the scale, first of all, we are going to launch later this year, as Bob said, December 8. And we're taking an intentionally limited approach to it, meaning, we're launching with a lower ad load and a lower frequency than say Hulu.

And so this will ensure a great experience for viewers, and these viewers are different then, because a lot of them are families and you have a lot of adults at Hulu, but it's a different viewing experience.

But because of that disciplined lower ad load, lower frequency and the strong advertising, demand that we've had that translates into some of the industry-leading CPM rates at the most recent upfront for Disney+. And then we look at beyond domestic, what we can do internationally, and we plan to go international sometime next year.

And we've built these strong advertising relationships around the world with our previously existing and currently existing linear footprint. So we're confident in our ability to navigate the international advertising marketplace given our depth of knowledge and experience with the traditional linear business.

So, we really feel well suited to deliver both domestically on Disney+ AVOD, as well as international..

Thank you. Next question please..

And that question is from Phil Cusick from JPMorgan. Please go ahead..

Hi. Thank you. One and a follow-up on DTC. First, Christine, there were higher DTC and Disney+ programming costs than we expected this quarter.

Can you give us some direction of where to go in the fourth quarter? And when should we expect those Disney+ operating income losses to peak? And then second, if you could dig into the guidance to acceleration of subs in the fourth quarter.

I think that's an acceleration in the total subs and then you set a higher mix of growth toward domestic? Thank you..

Okay. Let me start first with the acceleration of subs. I did mention that that we expect acceleration of subs to be -- especially in the domestic market to be modestly above where we are now. But you will see growth in Q4 and we feel good about that because of the content releases we have and just the existing shows that are on.

Peak losses, we expect peak losses -- as of today, we expect Disney+ to reach peak losses in this current fiscal year '22. So that is something that is consistent with what we've previously said. As it relates to higher costs of content and programming, we have said that, we have -- this is a peak year of losses which includes those costs.

But also, we expect as we go into developing our full slate that the next quarter you will see a similar increase year-over-year that you saw this quarter..

Thank you. Next question please..

And that question is from Brett Feldman from Goldman Sachs. Please go ahead..

Hi. Thanks. And if you don't mind I'd like to follow up with the question about the ad experience on Disney+. And it's only two things, I was hoping you could comment on.

The first is, would you expect to potentially display ads alongside any of the content? Some of that content including some of the kids' content I think historically in a linear world didn't necessarily have ads alongside of it. So I'm just thinking about that element of it.

And then secondly, you have a competitor that's looking to layer advertising into their product, they're suggesting that, they're going to somehow do it differently. And I'm just curious, as you think about the experience you've had in streaming advertising.

Are you mostly going to look to leverage the formats you've used very successfully with Hulu, or do you actually think there may be an opportunity to use some innovative new formats on Disney+ for ads? Thank you..

I should say that the technology for Disney+ is a completely different platform than the Hulu platform. So, while we certainly have tremendous learnings over the years, in terms of how to do addressable advertising and we've done that at the advantage of our shareholders' result.

I will have to say that, we are not encumbered by that or in any way limited by what we've done in the past. Therefore, we could have an ad proposition as good as the one that we've had on Hulu, but it could actually be better because of that different technology platform.

So, it has the ability to evolve over time much more on the new platform than it does in the old platform..

And as it relates to the ad experience Brett, it's not all content on Disney+ being treated equally. There will be no ads in kid's profiles or preschool at least at the launch. And so this is going to be done very thoughtfully and looking at the content and also making sure that the advertiser is consistent with the content..

Thank you. Operator, I think we have time for one more question..

Sure. And that question is from Bryan Kraft from Deutsche Bank. Please go ahead..

Hi, good afternoon. Christine there's been a heavy working capital use year-to-date in fiscal 2022 both from cash content cost as well as what we traditionally think about as working capital.

Can you just talk about your outlook for the rest of the year and the prospects for some of that reversing in 4Q and to next year? And then I was wondering if you could also comment briefly just on tax. I think you've had an elevated tax rate this year. You talked about it last quarter.

Is that something that's going to extend into 2023? And if you could just provide any color around what some of the factors are driving that? Thank you..

Sure. So on working capital, we have seen net working capital outflows as our businesses are getting back up and running and going back to more normalized operations after they were turned down during the pandemic. And you'll see in this quarter, we did generate positive free cash flow of $187 million in the quarter.

On taxes, our effective -- annual effective tax rate has generally been correlated with the US statutory rate. But there are a lot of things on a quarterly basis. We call them puts and takes in any given period. And these can lead to these quarterly variances.

But we still expect our full year 2022 tax rate is going to be somewhat elevated above the US statutory rate similar to what you saw. And for Q4 it could even be slightly above Q3. As it relates to fiscal 2023, we're just working now through our annual operating plan.

And I don't want to get too specific today but it's one of the factors we keep a close eye on as it relates to our ability to utilize foreign tax credits. And that ability to utilize foreign tax credits has been the source of some volatility that you've seen especially in Q2 tax rate..

Okay. Thanks for the question. I want to thank everybody for joining us as well. And for your convenience we will be posting the pricing schedule and updated content slate on our website. 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 including financial estimates or statements about our plans, guidance, expectations, beliefs or business prospects and other statements that are not historical in nature 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 results expressed or implied in light of a variety of factors including macroeconomic or industry factors and execution risks.

For more information about key risks please refer to our Investor Relations website, the press release issued today and the risks and uncertainties described in our Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. We want to thank you all for joining us and wish everyone a good rest of the day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..