LPWire: Transcript of Michael Eisner's Remarks to Smith Barney Conference

Address to Smith Barney Conference by Michael Eisner Chairman and CEO, The Walt Disney Company

Thank you Jill. Happy new year everyone.

As we begin this new year, I want to emphasize to you the strong sense of excitement and confidence that our management and our organization have with respect to our company's long-term prospects, both in terms of financial growth and in terms of the quality of our products and employees. We are extremely pleased with the momentum we commenced over the past year. I firmly believe that the performance turnaround at our company is now underway. And the momentum we are experiencing is the result of the business strategies and financial priorities we have been implementing.

During fiscal '03, despite the long build up to the war in Iraq and the war itself, which impacted the first half of the year, we:

•  Achieved 10% growth in our as-reported earnings, and, excluding non-recurring items, earnings growth of roughly 25%.
•  Generated a more than 50% increase in free cash flow after capital spending,
•  and we reduced our net debt by 11%.

And, all of this was achieved while maintaining excellence across all of our assets.

By the way, for your comparison, we have reconciled the non-GAAP measures to their corresponding GAAP measures on our investor relations' web site. We expect to build on these results in fiscal 2004 and, as Tom Staggs indicated last month, we anticipate Earnings per Share growth of 30% or more for fiscal 2004 assuming current economic trends continue. By the way, Tom just signed a long-term contract.

Our shareholders are benefiting directly from what our organization has achieved. For calendar 2003, the stock price of the Walt Disney Company appreciated 43%, comfortably outperforming the S&P 500's growth of 26%.

What drove our results in fiscal 2003 and will help us deliver the growth we're expecting for fiscal 2004 is our commitment to and achievement of creative excellence. At Disney, achieving creative excellence within a prudent financial framework is a fundamental driver of shareholder value. The strategy we are applying to our businesses to do this encompasses three primary elements:

• Maintaining competitive advantages for our brands
• Growing our portfolio of programming and character franchises
• Using innovations in technology to build distribution and enhance creation and consumption of content

The benefits of this strategy are already evident. Our FY '04 first quarter included the successful home video releases of "Finding Nemo" and "Pirates of the Caribbean," which, together, have so far sold an extraordinary 48 million units worldwide. And we have positioned Disney so that we are a leader in a host of important categories.

• For Calendar Year just ended, our studio was number one at the domestic and international box office and number one in home video. Our motion picture companies had a phenomenal 24% of the domestic box office.
• We have the number one rated sports network, ESPN, which is also one of the most valuable assets in all of television. We are also number one in sports on radio.
• We have the number one children's network in primetime among kids 6-11.
• We are the world's largest publisher of children's books, magazines and music.
• We are the world's largest licensor of intellectual property, generating twice the retail revenue of our nearest competitor.
• Our owned television stations are number one in 8 of the 10 markets in which we operate.
• ABC Radio delivers the highest revenue-per-station in the country among general market stations, and has the #1 news/talk station in the country and the #1 most listened to broadcaster in the country.
• We are number one on Broadway.
• We operate the number one destination resorts in North America, Europe and Japan.
• We have the most attended theme parks in the world. We even have the two most popular water parks in America.

Indeed, our parks are perhaps our most distinctive asset and they just concluded a rather auspicious holiday season. Despite the nationwide security alerts, we were very pleased by the holiday performance at our parks worldwide, especially at Walt Disney World, where a number of attendance records were set ... including its best day ever, its best week ever, and Epcot set an all-time daily attendance record on New Year's Eve. Perhaps most important, even with the big crowds, our guest surveys continue to show high satisfaction ratings. Of course, you should not jump to conclusions. As we have discussed in the past, we are incurring more costs in employee benefits and in marketing. Also, the quarter ended on December 27, before the holiday season was over. But, the strong attendance we experienced does point to the gradual improvement that we have been anticipating. I just spent three days at Walt Disney World and have never felt so positive about the look of the property with its four parks, brand new attractions, 17 hotels - including the 2,800 room Pop Century hotel that just opened, the spirit of the cast and the excitement of the 200,000-plus people there each day. Meanwhile, Bob was at Disneyland, where it rained.

Across the company, we are pushing creativity. We can do this thanks to a seasoned management team that understands Disney and understands the creative process. Each of our businesses is run by insightful and motivated executives. These men and women work in a variety of areas, but they all share a common mission to make sure that every initiative is conducted within a financial box that sets reasonable fiscal parameters for its development in order to optimize profitability and returns.

Starting with 9/11, we, as a company, were confronted with something of a "perfect storm" that hit tourism, consumer products, ad rates and - less quantifiable, but equally real - the national mood. This "storm" impacted our results as it did many other companies. Fortunately, we had operated the company in such a way that our cast, our senior management, and our balance sheet could weather that storm. During this time, we moved decisively to plan for the long-term to regain momentum, primarily in two ways.

First, we worked across all businesses to achieve greater efficiency in operations, through such initiatives as strategic sourcing; reducing the number of talent deals at the Studios and Media Networks and workforce reductions throughout the company ... without negatively affecting the quality of our products, shows or guest satisfaction.

Second, we continued to make strategic investments - all within their own financial parameters - so that the company would be well-positioned for growth once the down cycle ended.

At our domestic parks, having ended our multi-year build-out that resulted in the creation of four entire new theme parks, we began a program of more targeted investment to grow the appeal of these assets and to keep them fresh in a cost-effective manner.

For instance, at Disney's California Adventure, which opened just as the downturn began, we have continued to "plus" the park with such additions as the "Aladdin" stage production, a bug's land and the Playhouse Disney show. The total cost of these attractions was far less than traditional E-ticket rides. As a result, "Amusement Business" reported that Disney's California Adventure was one of the few parks to increase its attendance in 2003 ... and that its double-digit increase was the most of any park in the country.

Another park that "Amusement Business" noted for bucking the industry downturn was Epcot where, in October, we opened Mission: SPACE. This attraction, which simulates the sensation of blasting off to Mars, had a rather large financial box. But, here too, we were being fiscally prudent, since we partnered with a great sponsor - Hewlett Packard - and we believe that this single attraction will generate long-term returns, driving incremental attendance at Epcot for years to come.

At Media Networks, creative cost-consciousness is in evidence at all of our TV businesses.

During the last two years, ABC's management team effectively halted increases in the network's cost base, with the annual average growth rate for total expenses at the network from fiscal '02 to fiscal '04 expected to be less than 1%. One of the ways, by example, we were able to accomplish this was by shrinking the financial box for our successful series, "The Practice" by $76 million a year. This season, "The Practice"'s ratings are a full 21% above what they averaged last year on Monday nights among adults 18-49.

Since we acquired Cap Cities/ABC, we have especially focused on fostering growth at ESPN. When we acquired the sports network, it consisted of these five components. Since then, we have enhanced ESPN with ten more branded offerings, each a strong business in its own right, and many of them highly cost-efficient. For example, we purchased the Classic Sports Network in 1997 and renamed it ESPN Classic. Since then, its penetration has gone up 500%, from 10 million households to 50 million. And remember, this is a programming service that shows inexpensive, archival programming, so the economics are very attractive.

At ESPN Motion, which can be found on ESPN.com, we have developed proprietary technology to provide instant TV quality images with no buffering or streaming. Embedded in the programming are commercials from top advertisers. As a result, at a very low per-user cost, ESPN Motion is opening up a new and effective way to generate ad-supported revenue on the Internet, while further extending the ESPN brand. No other TV brand is as committed to applying technology to distribute more efficiently, and to thoroughly enhance the consumer experience, as ESPN. Just watch ESPN HD and you'll see what I mean.

The net result of our efforts is that the network has become an integral part of the sports landscape as 90 million Americans interact with ESPN each week. ESPN's appeal for sports fans is stronger than ever, as reflected by surveys that rank ESPN as the number-one cable brand by both operators and subscribers.

Perhaps our most stellar long-term example of producing cost-effective entertainment is our TV Animation business. This unit is committed to extending the life of Disney animated franchises by producing direct-to-video sequels and TV series, utilizing less expensive development and production techniques. We have produced a total of 15 animated direct-to-video sequels since 1994. With healthy double-digit returns that sometimes rise to triple digit, these films are expected to contribute profits of more than $1 billion over their lifetime. This enormous value creation does not take into account the fact that the life of these assets are extended in the hearts and minds of consumers, allowing our characters to have continuing merchandise appeal.

Consider "Lilo & Stitch." The original theatrical film was the first to be produced under the new cost management regime at Walt Disney Feature Animation. Going forward, the direct cost of production for Disney animated films is being reduced significantly. With $263 million in worldwide box office and more than 18 million video units sold, the "Lilo & Stitch" feature film was a major popular, and bottom line, success.

Within a year of the movie, our TV Animation unit released into home video "Stitch: The Movie," which is on track to sell more than five million units worldwide. Then came the "Lilo & Stitch" hit TV series on the Disney Channel. Another "Lilo & Stitch" sequel is currently in the works. In essence, we have created a great character franchise in Lilo and Stitch that will flourish across our company and across the globe for years to come.

All this creative enhancement of our existing animated product does not diminish our commitment to unique theatrical animated movies that are either produced internally or with partners. We have six internal movies in production, beginning with "Chicken Little," and four movies with partners, the first of which is "The Incredibles" with Pixar, due in theaters this fall.

Animation is part of our heritage. And The Disney Channel is part of carrying that heritage from one generation to another. For instance, it airs the "Tarzan" animated series, based on our highly successful animated movie. It also creates original animated programming of its own, such as "Kim Possible." Kim is a cheerleader by day, international spy by night, and her popularity on the Disney Channel has led to a very successful line of Consumer Products merchandise and a possible Kim Possible direct-to-video film of her own, as well as possible appearances in the parks. But the channel does much more than create animation franchises ... it also creates live action franchises of its own. Indeed, it is something of a franchise factory, though you may not be fully aware of this ... unless you have a son or daughter under age 14.

The list is long and growing longer: "Lizzie McGuire," "Kim Possible," "That's So Raven," "Even Stevens," "Stanley" and "Rolie Polie Olie" each represents a strong franchise in its own right.

All of these shows are created within tight financial boxes. A hit live action series like "That's So Raven" is produced at half the price of a network series, resulting in very good returns. And, because the series is so creatively strong, we have been able to extend Raven beyond the show. She starred in the top-rated Disney Channel original movie, "The Cheetah Girls" - which, in turn, was based on the book franchise developed by Disney publishing. She has signed with Walt Disney Records and she is in production on the Walt Disney Pictures film, "All-American Girl."

Thanks, in large measure, to its great programming, in 2003 the Disney Channel leapfrogged in the ratings from number-six in households and total viewers to number-two among all basic cable channels. Equally significant, in 2003 the channel was number-one in primetime with the demographic of Kids 6-11 and number-one in total day and primetime with Tweens 9-14. This audience growth, in turn, provides a platform on which to build continued success. And let's not forget that Disney Channels now operate in 60 markets around the world, connecting people of diverse nationalities with great family entertainment and the Disney brand.

Our biggest growth driver during the past year has been The Walt Disney Studios. The Studios' stellar performance was in many ways an outgrowth of management's strategic redirection to "make the right movie for the right price." Under this business approach, we try to design an appropriately sized financial box for each film project. In this way, it makes equal sense to make a "Bringing Down the House" at a modest budget level as to produce a "Pirates of the Caribbean" at a higher budget level. This conscientious risk management allows us to say "no" to projects that we feel don't make fiscal sense and to embrace those that meet our metrics, helping to promote dependable performance in the years ahead. Obviously, this can never be an exact science, but our track record in 2003 suggests that we have developed a dependable approach.

For this reason, looking to the future, we expect the Studios to provide solid financial performance.

I thought I'd show you some trailers to give you a sampling of what's coming.

In March, we have a classic action adventure film, "Hidalgo," which many of you saw Sunday night, so I won't show you that trailer. Later in March, we have "Lady Killers," starring Tom Hanks.

In April comes the next film from Walt Disney Feature Animation, "Home on the Range."

On April 9, comes the epic "The Alamo."

Among our films for summer are ones from two of the most dependable filmmakers in the business - M. Night Shyamalan and Jerry Bruckheimer. Shyamalan - who has already directed for us the blockbusters, "The Sixth Sense," "Untouchable" and "Signs" - will be bringing his latest dark thriller, "The Village."

As for Jerry Bruckheimer, he is producing "King Arthur." Here's the trailer.

By the way, during the holidays, we will be releasing Jerry's second film for the calendar year, "National Treasure," starring Nicolas Cage.

Looking to 2004 and 2005 in our other businesses, we expect continued improvement across the company.

At ABC, thanks to our ongoing efforts at cost containment, and assuming continued strength in our schedule and the overall marketplace, our goal is to achieve profitability at the network in Fiscal Year 2005. But let's not underestimate the value of ABC even before we get to breakeven. Without ABC and our owned stations, we would not have been able to achieve the major growth we have realized at ESPN and our other cable holdings because ABC offers the highly valued programming that cable operators need, i.e. retransmission consent. The syndication value of "My Wife and Kids" proves that ABC gives us yet another venue for creating intellectual product and provides bottom line syndication value that we believe will increase over time thanks to the integration of Touchstone Television with ABC. Furthermore, ABC offers an important promotional platform to help other Disney businesses launch new products. Just look at these ABC interstitials for two of our films last year.

And if you were one of our 2,200 telephone reservationists in central Florida this past Christmas, you would understand the power of network television. After the two-hour Christmas Parade from Walt Disney World aired, the phones started literally ringing off the hook. Our reservationists are still working 60 hour weeks to handle the response.

We confidently expect continued growth at ESPN thanks to its history of ratings increases, long-term affiliate contracts and its extension into new markets, with initiatives such as ESPN HD, ESPN International and ESPN Deportes, which launches tomorrow.

At our theme parks, Disney's California Adventure should benefit from the addition in May of a major new attraction, The Twilight Zone Tower of Terror. We expect continued gradual improvement at all of our parks, helped in part by marketing campaigns designed to maximize the utilization of our existing assets. The Magical Gatherings initiative currently underway to bring extended family groups to our parks is just one example. Magical Gatherings will allow these large groups to make reservations at restaurants, to travel in one vehicle together, to have all their rooms next to each other in the same hotel, or to schedule special activities and tours together. This is what we are now uniquely able to do, and it is working. This ad should give you a sense of its appeal.

In 2005, we will conduct a global celebration of Disneyland's 50th anniversary, which will feature new attractions across our parks and should drive attendance worldwide. Then, in late calendar 2005, we will open Hong Kong Disneyland, which should serve as a beachhead for the entire Disney brand in the world's most populous nation.

We are also bullish about the possibilities of long-term gains at Consumer Products, thanks to the licensing alliances that have been forged with some of the world's leading retailers. These targeted partnerships allow us greater creative control and more advantageous marketing and display of Disney products, which we expect will continue to add attractive returns from this royalty-based business. Furthermore, we continue to pursue the sale of the Disney Stores, which should help us improve both our capital returns and operating profit at Consumer Products.

We believe that a tremendous growth opportunity in the coming years will be the digital transformation of the entertainment industry. Throughout its history, Disney has set itself apart from other entertainment companies by embracing new technology, whether in animation, live action film, television or at our parks.

We now view digital technology as an opportunity that could be as great as the advent of television and home video. For all these reasons, we are actively working to embrace this new technology and are determined to be on the cutting edge of its application. As we do this, we intend to implement our approach of cost-conscious creativity every step of the way.

For example, in October we launched MovieBeam in Salt Lake City, Spokane and Jacksonville. Thanks to digital technology, this initiative offers consumers an ever-changing lineup of 100 movies, including new releases and popular favorites, all available 24 hours a day at the touch of a button. Every week, using the broadcast spectrum, ten of these movies are, almost magically changed out for ten new movies. MovieBeam gives consumers a more convenient way to rent movies directly from their homes without the inconvenience of trips to and from the video store and without the possibility of late fees. This remarkable new technology application will be recognized at the International Consumer Electronics Show this week with a 2004 Innovations Design and Engineering Award. The initial rollout is encouraging and the economics are very attractive since we can reach breakeven with only two million subscribers. We have conducted hours of focus groups and I thought you'd be interested in seeing a sampling of what consumers themselves are saying.

Another new technology-based business is an Internet subscription-based game called Toontown Online. It was developed by the Disney Internet Group, which, in 2003, became one of the few Internet enterprises to actually achieve profitability. Toontown Online brings the Roger Rabbit franchise to customers anywhere they have Internet access, making it possible to play in real time against other participants around the world.

Other examples of our digital delivery initiatives include ESPN Motion, digital distribution and projection of films in theaters, movies.com, our success in the DVD market and the leadership of ABC and ESPN to be among the first to broadcast in high definition television.

But digital isn't just about delivery, it's also about content creation. Novel forms of entertainment such as Mission: SPACE and Toontown Online simply couldn't have been created just a few years ago.

Or, consider this dinosaur named Lucky. For decades, Disney has been a leader in the development of robotic entertainment. We recently took this technology to a new level by creating the first free-standing, walking audioanimatronic figure. You can see him here, interacting with guests at Disney's California Adventure. Lucky both startles and delights guests and literally represents the next step in robotics.

The examples of our use of digital technology in content creation go on and on. Let me offer just one more. Next year, we will be releasing an all-digital animated film, "Chicken Little." All our movies since "The Great Mouse Detective" in 1986 have increasingly used digital technology, employing technology we innovated with Pixar. Our 1999 release of "Dinosaur" was digital but used live action backgrounds. Now, we have developed the next generation of computer animation, which we will unveil with "Chicken Little." You can get some flavor of the film from this animation test, which gives some sense of this major creative work-in-progress. Please note that this is only a test and that none of this footage will actually appear in the film.

As you can see, opportunities abound across our company. Utilizing creativity, we intend to achieve continued success in 2004 and beyond.

We believe that the company's performance in 2003 signaled the beginning of the next major phase of The Walt Disney Company, during which we intend to capitalize on our market-leading array of assets to drive new levels of growth. And it is the beginning of a new Disney, a Disney that is looking forward to growth in this new decade in this new century through technology, through innovation and through prudent use of capital. Our eyes are directed ahead, as we maintain our focus on quality in products, in management and in governance. As we do so, we will continue to measure our success by the financial yardsticks of growth in earnings, growth in cash flow, and increasing returns on our invested capital.

We are confident that our strategy is correct and our results underscore it is working. We have built solid momentum. We have an organization whose people are committed and energized. We are growing the Walt Disney Company by growing the value of our brands and in so doing growing performance that can drive long-term growth in shareholder value.

This is why, for all of us at Disney as we begin 2004, when we say "Happy New Year" ... we really mean it.

Thank you very much.

--Posted January 7, 2004
Source: Disney Company Press Release