Thomas O. Staggs, senior executive vice president & CFO
Good morning. It's a pleasure to be here with you today to provide a financial overview for your company. So far this fiscal year, Disney stock has somewhat outperformed both the S&P and the broad index of entertainment companies. Nonetheless, as a management team we are far from satisfied and are committed to delivering much stronger performance in the future. Ultimately, we will do that by maximizing earnings and cash flow growth over the long run, which is of course our overarching financial goal. Given the strength of the assets of this company, we feel confident in doing just that.
I'd like to briefly touch on current results at some of our major businesses, beginning with our Theme Parks. As we see daily in the media, these are challenging times for American business in general and the entire tourism industry specifically. Concerns about war and terrorism, and low consumer confidence contribute to a mood of uncertainty, which makes people reluctant to travel or make vacation plans very far in advance. The entire travel industry is feeling the effects and at least in the near term we will see that in our Theme Park results.
At Walt Disney World, which is by far the largest of our resort locations, our guests tend to travel from farther away and stay longer. As a result, the disruption in tourism is having a larger effect there than it is at the Disneyland Resort in California. Disneyland is also being helped by stronger attendance at our new theme park, Disney's California Adventure, which is being driven by the success of attractions like "A Bug's Land" that we added last fall. So while the pace of advance reservations at Walt Disney World is down versus 2002, Disneyland reservations continue to track ahead of last year.
Bear in mind that Easter and most children's spring breaks fall later this year than they did in 2002. That timing will contribute to our seeing softer attendance in the current quarter versus the same quarter of last year.
In response to these challenges, we are aggressively managing the cost side of our business. For example, we've temporarily limited our hiring to seasonal, hard-to-fill and critical positions. We're also reducing day-to-day spending, while keeping our focus on maintaining the quality guest experience that is this company's hallmark. These are the kinds of prudent steps that many companies are taking right now, and we'll continue to make appropriate adjustments in our business as conditions change.
We have recently completed a period of substantial investment in our Theme Park assets. As a result, current capital requirements for this segment have come down considerably. In fact, Parks and Resorts capital expenditures came in under $650 million for fiscal 2002 - more than $600 million below the prior year. We expect to hold down capital expenditures to similar levels again this year.
Although the timing of economic recovery remains difficult to predict, our strong market position, unparalleled asset base, and improved cost-efficiency at Parks and Resorts makes this business particularly well positioned to improve profitability and take advantage of growth opportunities as global conditions improve.
In Consumer Products, our merchandise licensing business -- which is the largest contributor to operating profit for the segment -- continues to gain traction, benefiting both from the reorganization we instituted two years ago and from our successful efforts to partner with "best of breed" retailers to drive demand for our new product lines around the world.
Nonetheless, we are witnessing an industry-wide downturn in retail sales. So although we expect to see solid growth in our licensing business over the next several years, that growth will be offset this year by soft sales at the Disney Stores. Looking further ahead, Disney's Consumer Products business continues to be the strongest of its kind, supported by Disney's tremendous library of characters and films, and we are confident that this business will contribute to our long-term growth.
In Studio Entertainment, we are striving to reduce the costs of individual films - especially in feature animation - and our total investment level in order to drive higher returns on our capital. Of course, our overall objective is to make great films with great profit potential.
While not every film will be a hit, two excellent examples of our approach are Bringing Down the House, which is currently in theaters, and Sweet Home Alabama, currently in release on video and DVD. Each film cost a relatively modest $35 million to produce. Sweet Home generated over $125 million at the domestic Box Office, is well on its way to selling over 8 million units in Home Video and will ultimately deliver total profit to the company of over $130 million. Bringing Down the House looks as though it could meet or exceed Sweet Home's box office total and should be a strong video title as well.
Of course, our new and library releases are benefiting from the success of DVD. In fact, in 2002, Disney DVD unit sales increased by more than 50% versus the prior year.
In our media networks segment, our management team continues to address the recent performance issues at ABC primetime. The goal for this season was to halt the decline in our overall ratings delivery and improve our performance on key nights and so far that has happened, although our challenge here is not yet over.
While a turnaround in the network's financial performance will trail ratings improvement somewhat, over time, the positive swing in our broadcast network earnings can be a substantial driver of growth.
On the cable networks side, the company continues to benefit from long term carriage agreements that help to insulate us somewhat from economic volatility. Thanks to the tremendous strength of its brand and programming, ESPN continues to enjoy both a powerful position in sports television and steadily improving ratings. Although increasing costs for sports telecast rights and our new contract with the NBA will impact the first three quarters of the year, we still expect ESPN to deliver strong operating income growth for 2003 as a whole.
The cable segment also benefits from the Disney Channel's recent conversion to a basic cable service, its powerful brand awareness and overall popularity as measured by our strength in the ratings. Subscriber growth at our start-up services -- Toon Disney, SOAPnet and our international kid's networks - will also contribute to our cable networks' success.
Across the company, we've successfully made efficiency and cost containment an even more fundamental part of running our businesses. Despite continued upward pressure on costs, the changes and programs the company has implemented over the past several years have accounted for more than $1 billion in annualized cost cuts. In addition, we've maintained a solid balance sheet, and managed for cash flow, delivering $1.2 billion in free cash flow in 2002, despite the challenging environment, which is nearly as much as the company generated in 2001.
And of course we will continue to apply the same standards of quality and integrity to our accounting practices that we apply to the protection and development of the Disney brand itself.
At the beginning of the year we set earnings targets predicated on a continued improvement in the economy and the travel industry, but that improvement has stalled, which will likely result in more moderate growth for this year.
We are addressing our performance issues and managing through a difficult environment. Even so, it is important to recognize that despite these near term issues, the tremendous strength of Disney's unrivaled brands, characters and entertainment franchises is undiminished.
With that let me turn the floor back to Michael Eisner and Bob Iger.