Disney’s Q2 (Jan/Feb/Mar) FY 2020 Earnings Results Webcast on Tuesday, May 5, 4:30ET

[Sirwalterraleigh]

I wonder what sunk or fixed costs are part of the profitability formula? It’s not like they stopped paying rent while closed. It’s mostly labor and proportional increases in utilities.

At what point do guest numbers meet or exceed costs to turn a profit or break even?

Where?

In parks?

 

[DVCakaCarlF]

Where?

In parks?

Parks, cruises, etc...how many people need to walk into MK or AK each day for anyone park to turn a profit or break even...its costs something for the parks and cruises to just sit there idle, regardless. I would think the threshold is fairly low, especially if they are opening Shanghai with less than 30%.

 

[CastAStone]

It wasn’t $1bn in losses over 2 weeks. It was $500(ish) million in reduced profit over 2 weeks for the domestic parks - plus they said it was for the quarter, so I would imagine they included the last week they were open as the parks drained guests while running staff and hours at full Spring Break levels.

That includes both losses and missed profits. The last 2 weeks of March are incredibly expensive weeks to visit WDW. I have no doubt Disney just prints money during those weeks. Those missed profits are in the $500 Million too.
That difference is important because missed profits don’t burn through cash.

I don’t know how much money they’ll lose from the parks in Q3. But it won’t be $250 million a week.

 

[Sirwalterraleigh]

Parks, cruises, etc...how many people need to walk into MK or AK each day for anyone park to turn a profit or break even...its costs something for the parks and cruises to just sit there idle, regardless. I would think the threshold is fairly low, especially if they are opening Shanghai with less than 30%.

Overhead is huge at wdw...and that’s mainly because of the tremendous ops cost to even think about opening...employees and logistics.

Takes a lot to make it worth it to open...if they’re closed, they have disruption insurance.

That’s a reason why they are in no rush to hurry up. They are looking for all the free money/assurances they can get.

 

[Sirwalterraleigh]

It wasn’t $1bn in losses over 2 weeks. It was $500(ish) million in reduced profit over 2 weeks for the domestic parks - plus they said it was for the quarter, so I would imagine they included the last week they were open as the parks drained guests while running staff and hours at full Spring Break levels.

That includes both losses and missed profits. The last 2 weeks of March are incredibly expensive weeks to visit WDW. I have no doubt Disney just prints money during those weeks. Those missed profits are in the $500 Million too.
That difference is important because missed profits don’t burn through cash.

I don’t know how much money they’ll lose from the parks in Q3. But it won’t be $250 million a week.

It’s gonna be a lot more than you think.

The crowds are amazingly balanced now and there are no real discounts anymore.

And to your point: net zero is pointless...they only reason they operate their parks is for the profits...41% of the whole company take - give or take.

The profit has to be there...it’s a stock company, not a charity.

 

[CastAStone]

It’s gonna be a lot more than you think.

I will set the over-under for losses for the US parks at $1.65 billion in Q3. That’s about $126 million per week. That’s assuming they don’t reopen in June.

I have no prediction for the international parks as I just don’t understand the model well.

So that’s what I think. You are clearly taking the over as you said it will be more than I think.

 

[Sirwalterraleigh]

I will set the over-under for losses for the US parks at $1.65 billion in Q3. That’s about $126 million per week. That’s assuming they don’t reopen in June.

I have no prediction for the international parks as I just don’t understand the model well.

So that’s what I think. You are clearly taking the over as you said it will be more than I think.

The “parks unit” has been wdw, Disneyland and paris since 2017...

Since the entire quarter could be wiped...since they aren’t opening anytime soon...I’ll say it’s at least a $2 bil loss in profit and revenue. I think that total number is about $8 bill a year and it will be a total loss.

Another interesting tidbit they threw in the number jumble - if i caught it right - was attendance was down leading into the closure but “per guest spending was up 13%”...in a moment of clarity, she even said it was due to price increases across the board.

I hope that’s over. Stop spending more and more for the same stuff, people! But I’ll bank on this for awhile...the money to do so won’t be there.

 

[DVCakaCarlF]

Overhead is huge at wdw...and that’s mainly because of the tremendous ops cost to even think about opening...employees and logistics.

Takes a lot to make it worth it to open...if they’re closed, they have disruption insurance.

That’s a reason why they are in no rush to hurry up. They are looking for all the free money/assurances they can get.

Disruption insurance won’t pay out for at least a year...no insurance policy covers terrorism, nuclear disasters, or pandemics.

Congress will first need to pass legislation bailing out the insurance companies funding a payout.

TWDC is not waiting on a payout to open.

 

[Sirwalterraleigh]

Disruption insurance won’t pay out for at least a year...no insurance policy covers terrorism, nuclear disasters, or pandemics.

Congress will first need to pass legislation bailing out the insurance companies funding a payout.

TWDC is not waiting on a payout to open.

Not as a strategy...

But I bet they get it and it makes their thinking more “cautious”

Disney is largely “self insured”....which means they pay Chubb, Zurich, AIG, etc for rainy day insurance as a supplement.

Disney is too large and has too many well paid lawyers to not have some safety net. Well connected politically as well.

If I phrased that wrong...I apologize. I’m not saying they are not looking at reopening based on a free payout...just saying their “pressure” to reopen may not be as simple as people think.

 

[MisterPenguin]

Q: JPMorgan: What capacity makes parks profitable?
Q: Studios… what’s the sched on tentpole movies


A: Chapek: we need enough guests to make it to profitable
Chapek: Studios… Mulan… hope it goes well!

This was not how I understood Chapek’s answer. He said it needed to be profitable at the contribution line. That’s not the same thing as profitable AT ALL. It just means that they need to lose less money open than they do closed.

Hmmm... I most definitely could be wrong. I'll take a relisten once audio recording is released, which is usually within one day.

Ok, here's a transcript:

Q from Alexia (Cudron?) from J.P. Morgan:

...just following up on your comments on the parks: I was wondering if you could tell us or speak generally about what capacity you guys can operate the parks capacity which I know is very closed and we can't pinpoint that right now in terms of the domestic opening but try to get it done so what sort of capacity can get you to profitability.​

A: From Chapek:

In terms in how we look at our park reopenings and what hurdle we need to meet to make it make sense we actually look at it as a positive net contribution to overhead and profit. In other words, it's not about breaking a point for profitability necessarily but just making a positive contribution at the net contribution level.​

So, what we're thinking is that while every site is completely different; that's the approach we're going to take, and frankly, we would not reopen any park unless we can make it at least a positive contribution to that overhead and operating profit level.​

I believe @GoofGoof's explanation works...

On the earnings call the question came up of what the minimum capacity at a park would need to be to be profitable. The answer was we would not reopen any park unless we can make at least a positive contribution to the overhead and operating profit level. In non-accounting talk that just means turning a profit ignoring the non-cash expenses like depreciation which are sunk costs and exist whether you open or not. So at least publicly they are saying we would not reopen and run at a loss.

 

[MisterPenguin]

The audio recording of the meeting is now available...

Disney’s Q2 FY20 Earnings Results Webcast - The Walt Disney Company

Listen here: https://thewaltdisneycompany.com/app/uploads/2020/04/q2-fy20-earnings.mp3 DOWNLOADS: Earnings Report Financial Reconciliations Audio Transcript Forward-Looking Statements: Management believes certain statements in this call may constitute “forward-looking statements” within the...

thewaltdisneycompany.com

 

[GoofGoof]

Ok, here's a transcript:

Q from Alexia (Cudron?) from J.P. Morgan:

...just following up on your comments on the parks: I was wondering if you could tell us or speak generally about what capacity you guys can operate the parks capacity which I know is very closed and we can't pinpoint that right now in terms of the domestic opening but try to get it done so what sort of capacity can get you to profitability.​

A: From Chapek:

In terms in how we look at our park reopenings and what hurdle we need to meet to make it make sense we actually look at it as a positive net contribution to overhead and profit. In other words, it's not about breaking a point for profitability necessarily but just making a positive contribution at the net contribution level.​

So, what we're thinking is that while every site is completely different; that's the approach we're going to take, and frankly, we would not reopen any park unless we can make it at least a positive contribution to that overhead and operating profit level.​

I believe @GoofGoof's explanation works...

I didn’t realize there was another thread. When the analyst asked what the minimum capacity needed to be to make a profit Chapek said they wouldn’t look at profit but rather a positive contribution from operations (Gross margin less operating costs). So basically it could open and still not show an accounting profit but any sunk costs or non-cash items like depreciation exist whether they open the parks or not.

Bottom line is they aren’t going to open the parks and operate cash negative. They will either not open or cut costs to at least break even.

 

[MisterPenguin]

Q: Jessica: Any longer term changes in business due to CV?
Q: What percent were cruises for profits?


A: Chapek: We’ll look at things. Maybe…. less expenditures for a while.
A: Chapek: Cruises will be last to come back online. But guest interest is still high.
A: Christine: [Hhahahahha] We don’t reveal those figures, but cruises are a small percentage overall. But, it has a very high enthusiasm rating.

So, the question on Capex reduction brought up a discussion...

Re: CAPEX

At another part of the call Bob said that, “If the project was a good idea before COVID, it will be a good idea after COVID.”

I got the impression they were looking more at delays, not canceled.

There was a reference to "trimming" as well as a commitment to good projects.

that’s how I took that as well - I think the spaceship earth redo tho is put on the back burner. The Epcot redo, some anyways will still go forward just maybe slower than previously planned

Just looked at the year end report. Chapek said they cut capital expenditures by 900 million. This is based on an annual budget of $4.8 Billion. So, it looks as though (so far) they have cut what would have been spent during the last three months of shut-down around the world. Not all CAPEX is in the Parks area (a big chunk is though) and not all of it is in the United States. I think your assumption is correct. Seems more like a slow down or temporary pause, if all they are cutting this year is 20% of the Project budget.

Remember, maintenance is not CAPEX, so painting the castle and other regular maintenance is under operating expenses. Cuts here can result in a bigger expense later. I would expect regular maintenance will take a hit, but not as large as the CAPEX expenditures.

Bob C specifically said how they allocate capex is going to be one way they will stop the cash bleed.

And so, a transcript...

Q: Jessice Rice-Aerlish (sp?) from Bank of America Securities

How are you thinking about longer term changes in your business model as a result of this crisis? And however you think about that, whether it's sports, or how much you will bid on how many contracts you need, or conversely, is this an opportunity? Versus competitors? Capex? Resizing the business, etc...​

A: Chapek

Ah, yes, in terms of future rights and the business models we think that live sports remain incredibly valuable to us and we continue to have an interest in live sports rights given the unique slate of assets that we own with ESPN, ESPN+, and ABC. And we're going to do that though as we've always have done in a very disciplined manner. Existing consumer trends play a real big part in how we think about the value of sports rights as they make the transition from linear over to digital and I think really it's a bit premature to give any specific tells on what the strategy is other than we're highly interested in those and we want to make the evolution along with the consumer as the go from linear to digital.​

In terms of the capex question obviously we have a lot of really big plans in the parks and we continue to have big plans. Those good ideas before COVID are going to be really good ideas after. And as Christine said in her opening remarks, there are certain *trimmings* we're doing here and there to be responsible from a financial standpoint. But we have such great Intellectual Property, and our imagineers over at our theme parks, where the majority of our capital goes, have done such a tremendous job of planning out future experiences for our guests that we're just going to go ahead and take a slightly finer toothed comb, if you will, through those expenditures but essentially plan on investing behind those businesses like we always have.​

​

I should point out that capex is not entirely new things, but also major repairs and upgrades to existing things that have depreciated over time.

 

[GoofGoof]

Any refurb that extends the useful life of the asset can be capitalized so it’s not just new rides/attractions or major changes. It would also potentially include major parts or components that may be replaced during an annual refurb. They can capitalize the labor costs as well as the physical parts.

Remember this was the Q2 call since their fiscal year ends 9/30 so they would have already spent potentially half the year’s budget before the shutdown if you assume average costs over 12 months. This number also includes part of the the new cruise ships which it sounds like they are not canceling. The $900M cut makes me believe all but a handful of mostly finished projects (like Rat in EPCOT for example) are probably delayed until October or later. Not cancelled, but there’s a good chance the 50th anniversary will look a lot different than planned

 

[Sirwalterraleigh]

Ok, here's a transcript:

Q from Alexia (Cudron?) from J.P. Morgan:

...just following up on your comments on the parks: I was wondering if you could tell us or speak generally about what capacity you guys can operate the parks capacity which I know is very closed and we can't pinpoint that right now in terms of the domestic opening but try to get it done so what sort of capacity can get you to profitability.​

A: From Chapek:

In terms in how we look at our park reopenings and what hurdle we need to meet to make it make sense we actually look at it as a positive net contribution to overhead and profit. In other words, it's not about breaking a point for profitability necessarily but just making a positive contribution at the net contribution level.​

So, what we're thinking is that while every site is completely different; that's the approach we're going to take, and frankly, we would not reopen any park unless we can make it at least a positive contribution to that overhead and operating profit level.​

I believe @GoofGoof's explanation works...

I didn’t realize there was another thread. When the analyst asked what the minimum capacity needed to be to make a profit Chapek said they wouldn’t look at profit but rather a positive contribution from operations (Gross margin less operating costs). So basically it could open and still not show an accounting profit but any sunk costs or non-cash items like depreciation exist whether they open the parks or not.

Bottom line is they aren’t going to open the parks and operate cash negative. They will either not open or cut costs to at least break even.

Absolutely fantastic breakdowns by you two...

And it gets us clearly to the point where we always where gonna be:

They are not doing some limited number, walk on ride, Florida only, AP only, no hotel, half cocked opening scheme. There is no money in it...and there must be money in it.

 

[Sirwalterraleigh]

Any refurb that extends the useful life of the asset can be capitalized so it’s not just new rides/attractions or major changes. It would also potentially include major parts or components that may be replaced during an annual refurb. They can capitalize the labor costs as well as the physical parts.

Remember this was the Q2 call since their fiscal year ends 9/30 so they would have already spent potentially half the year’s budget before the shutdown if you assume average costs over 12 months. This number also includes part of the the new cruise ships which it sounds like they are not canceling. The $900M cut makes me believe all but a handful of mostly finished projects (like Rat in EPCOT for example) are probably delayed until October or later. Not cancelled, but there’s a good chance the 50th anniversary will look a lot different than planned

I don’t see consruction proceeding on anything other than rat, guardians and perhaps tron...after the restart occurs and appears to take hold.

So that means a near year delay IF things go well and no further business disruptions. As you said...10/01 will be an interesting “coincidence” date if that’s what happens...

There just isn’t any money in more capex right now...not when you likely will have two huge catalysts for declining attendance and discounts.

As far as “the 50th” goes...I’m just gonna double down: it was never going to be what fans convinced themselves it was. Disney watches people on forums such as this express their willingness to spend on the concept of an anniversary without substance. Put up some banners and let them spend. Window dressing more than substance.

It’s just coming into focus now. They haven’t spent to throw a “celebration” in Florida since 2006...the funding for that was approved prior to Iger.

Iger is good at looking for money...if there was money in it - don’t you think he might have discovered that?

 

[GoofGoof]

I don’t see consruction proceeding on anything other than rat, guardians and perhaps tron...after the restart occurs and appears to take hold.

So that means a near year delay IF things go well and no further business disruptions. As you said...10/01 will be an interesting “coincidence” date if that’s what happens...

There just isn’t any money in more capex right now...not when you likely will have two huge catalysts for declining attendance and discounts.

As far as “the 50th” goes...I’m just gonna double down: it was never going to be what fans convinced themselves it was. Disney watches people on forums such as this express their willingness to spend on the concept of an anniversary without substance. Put up some banners and let them spend. Window dressing more than substance.

It’s just coming into focus now. They haven’t spent to throw a “celebration” in Florida since 2006...the funding for that was approved prior to Iger.

Iger is good at looking for money...if there was money in it - don’t you think he might have discovered that?

When you eliminate the dividend to conserve cash it’s a tough sell to then convince the street that it’s a good idea to dump $900M into parks projects. I think the projects you listed will be safe but who knows what happens with the whole EPCOT thing. They already broke ground so it’s hard to just put it on hold but I’d rather see that vs a cheap, watered down version. The cruise ships are a tough call too. I’m not a fan of cruises in general but the Disney ones were wildly popular. If anyone in the cruise industry makes it work it will be Disney. It’s just too bad they were right I’m the middle of construction when all this went down. They probably would have been fine with the feet they have for the foreseeable future.

 

[Imagineer45]

2 weeks of domestic parks closures relates to a little over $500 million cash burn

When Shanghai opens, it will be the end of a 15-week closure. Assuming the same for the domestic parks is a $3.75 billion cash burn at the $250 million per week rate. It is definitely a ton of money, so luckily the company made a net income of over $11 billion last year.

I am shocked they still cannot make money off of D+ with 50+ million subscribers. For comparison, Netflix has 167 million subscribers and had a net income of over $1.8 billion last year. Yes, they charge almost twice as much, but they are also making a lot more content and paying licensing fees Disney does not have to. Netflix was making over $100 million in net income at this number of subscribers.

 

[Sirwalterraleigh]

When you eliminate the dividend to conserve cash it’s a tough sell to then convince the street that it’s a good idea to dump $900M into parks projects. I think the projects you listed will be safe but who knows what happens with the whole EPCOT thing. They already broke ground so it’s hard to just put it on hold but I’d rather see that vs a cheap, watered down version. The cruise ships are a tough call too. I’m not a fan of cruises in general but the Disney ones were wildly popular. If anyone in the cruise industry makes it work it will be Disney. It’s just too bad they were right I’m the middle of construction when all this went down. They probably would have been fine with the feet they have for the foreseeable future.

My opinion is dividends should be outlawed because they no longer meet the standards they were being Made for...

But everyone loves a dividend! It’s “free money” as a reward for making free money

And I agree with you that you can’t take away a whole $0.88 a share without offering blood and vestal virgins to the street as a sacrifice...

 

[Sirwalterraleigh]

When Shanghai opens, it will be the end of a 15-week closure. Assuming the same for the domestic parks is a $3.75 billion cash burn at the $250 million per week rate. It is definitely a ton of money, so luckily the company made a net income of over $11 billion last year.

I am shocked they still cannot make money off of D+ with 50+ million subscribers. For comparison, Netflix has 167 million subscribers and had a net income of over $1.8 billion last year. Yes, they charge almost twice as much, but they are also making a lot more content and paying licensing fees Disney does not have to. Netflix was making over $100 million in net income at this number of subscribers.

I think it’s time - now that the Economy is wrecked - for society to educate ourselves and learn what goes on behind under the skin.

I looked for truth a little during the dot.com crash (it was lies)...and really got scared again and did a lot of recreational reading of theory and governance after the housing crash (shocking...it was again lies...just bigger)...

Enlightening.

Anyway...as to the bolded statement: that money is gone...because companies can’t help themselves.

Stock buybacks...dividends...huge investment in takeovers and buyouts...

Normal stuff.

The example are airlines...$48 billion in stock buybacks over 5 years and record compensation and payouts...one week of airline lockdown and they went straight to DC and begged and received $50 billion in free cash...

You could literally count how long the turn took in minutes.

Disney isn’t that...but they are in the business of pumping their own tires like all public traded companies.