FY2016 Q4 Year End Earnings Call

[DDLand]

Despite the opening of a new resort in China, this is the smallest growth in Parks & Resorts operating income and revenue since the last recession.

Parks & Resorts operating margin increased by only 0.68%, well below former P&R Chairman Tom Staggs' worse year. The international resorts are really dragging Parks & Resorts down.

Not a good first full year for P&R Chairman Bob Chapek.

Yes and no. Yes it's true this was a bad way to end the year, but I would struggle to blame Chapek for this. This reflects on the shortsighted leadership of Staggs even more. Instead of getting the Marvel and Star Wars Lands going two years ago, he kicked the can down the road. Now they're paying for it. Looking ahead it really seems like come 2018 is when Parks and Resorts is going to ramp up growth again. Avatar may have an effect, but I suspect that it will primarily drive existing Walt Disney World attendance away from the existing parks.

It was really this quarter that wrecked the year. 9 months ending 2015 margins were at 19.4% whereas the nine months ending 2016 was at 20.6%. That performance at the end of the year was abysmal. Paris and Hong Kong are slipping, but you're correct in pointing out Shanghai. What's the one thing that was different between this quarter and the rest of the year? Shanghai. That's all added Revenue with losses thrown into the mix. Nearly 40 years after launching their international operations the only Resort making any money is Tokyo, and that's just licensing. Pretty pathetic.

If Shanghai is on track to nearly break even, that's great though. Not from a margins standpoint (0% isn't something to aspire to), but that growth trajectory is great. It's skipping the typical years of struggle that have followed along with other park openings and skipping straight to near profitability. That's something that took nearly a decade for Hong Kong to do.

You've got to walk before you run, and Shanghai is getting up at an accelerated pace.

 

[ford91exploder]

Despite the opening of a new resort in China, this is the smallest growth in Parks & Resorts operating income and revenue since the last recession.

Parks & Resorts operating margin increased by only 0.68%, well below former P&R Chairman Tom Staggs' worse year. The international resorts are really dragging Parks & Resorts down.

Not a good first full year for P&R Chairman Bob Chapek.

And this tiny bit of growth in spite of the massive service cuts and price increases this year, I think Disney will be forced to cut back on expansion plans at WDW to make the P&R books look better or Wall St is going to severely punish TWDC.

 

[SorcererMC]

Yes and no. Yes it's true this was a bad way to end the year, but I would struggle blame Chapek for this. This reflects on the shortsighted leadership of Staggs even more. Instead of getting the Marvel and Star Wars Lands going two years ago, he kicked the can down the road. Now they're paying for it. Looking ahead it really seems like come 2018 is when Parks and Resorts is going to ramp up growth again. Avatar may have an effect, but I suspect that it will primarily drive existing Walt Disney World attendance away from the existing parks.

It was really this quarter that wrecked the year. 9 months ending 2015 margins were at 19.4% whereas the nine months ending 2016 was at 20.6%. That performance at the end of the year was abysmal. Paris and Hong Kong are slipping, but you're correct in pointing out Shanghai. What's the one thing that was different between this quarter and the rest of the year? Shanghai. That's all added Revenue with losses thrown into the mix. Nearly 40 years after launching their international operations the only Resort making any money is Tokyo, and that's just licensing. Pretty pathetic.

If Shanghai is on track to nearly break even, that's great though. Not from a margins standpoint (0% isn't something to aspire to), but that growth trajectory is great. It's skipping the typical years of struggle that have followed along with other park openings and skipping straight to near profitability. That's something that took nearly a decade for Hong Kong to do.

I would agree with most of this, I think that Chapek is facing headwinds that Staggs wasn't. DLP's 7% revenue decline is 'not so bad', or an aberration considering that the Paris tourism industry has been down all year with hotel occupancy down double digits (from 15-50+%); it's expected to recover going into next season. I hope that SDL stays on track to break even, whether it actually does or not remains to be seen of course. I'm honestly surprised that WDW did not fare worse given all of the crises of the past summer, and the report attributes the lower attendance volume to the 53rd week impact (a little questionable IMO). It's a mixed picture to me at this point and I think it will continue to be given Iger's '2017 will be an anomaly in the growth trajectory' statement.

And if I may be self-interested for a moment about WDW I don't think they have a lot of room for price increases but I expect more upcharge events and cuts to try and keep the numbers looking good.

 

[HauntedMansionFLA]

Not sure what you mean by "how long". Disney's partial ownership is permanent.

Particularly in Shanghai, the Chinese government wanted Disney's capital. They wanted Disney to cough up the cash. There is 0% chance that the Chinese government wants to buy Shanghai Disneyland from Disney. Quite the opposite. Disney's huge capital outlay was a precondition for Disney even having a shot at the rest of the Chinese market.

Building Shanghai Disneyland was not corporate Disney's first choice. They wanted to sell films and merchandise without sinking tremendous amount of capital into mainland China. Iger was pretty much forced to open Shanghai Disneyland in order to do any other meaningful business in China.

I didn't know if they were permanent co-owners or not. Thank you for clearing that up for me. And thanks for all of the information you bring to the site. I'm a numbers person, so I enjoy reading your posts.

 

[DDLand]

And this tiny bit of growth in spite of the massive service cuts and price increases this year, I think Disney will be forced to cut back on expansion plans at WDW to make the P&R books look better or Wall St is going to severely punish TWDC.

There are two ways to grow Revenue:

1) Increase volume by building new offerings
2) Increase prices on existing guests

It appears Parks and Resorts goes in cycles where one strategy takes precedence over the other. WDW and Disneyland have been relying on the buildout the occurred in the mid to late 2000s to power growth (WDW's Soarin, Mission Space, Everest, TSMM and DL's DCA). There were other builds, but those were the last biggest periods of growth. They then fell back primarily on option #2 for growth. That doesn't work longterm.

Over the next several years building seems like the way they're going to go. Which is good, and something that Wall Street knows can reap benefits. Look at the way Cars Land and Harry Potter have worked beautifully. If there's one thing the market believes in it's Star Wars.

 

[ford91exploder]

So you still think SW Land construction will be halted at DHS? He can't stop gushing about leveraging Star Wars

We've been talking about how they should build more resorts for a few years now. The key here is to build high quality but more reasonably priced resorts. They have every right to charge a premium to be on property and it makes good business sense too, but I don't think there's that much more of a market for high priced deluxe resorts. They are taking away deluxe rooms to convert to DVC already. We haven't had a new moderate resort since Coronado Springs opened almost 20 years ago. The family suites at Art of Animation seem pretty popular now too. I think there's still a market in the moderate or higher end value range that they could tap into.

With only a 0.68 percent gain year over year on P&R operating margins yes I would expect that SWL construction will be stopped on the east coast for a while as that 350 million annually for DHS would do a LOT to boost P&R numbers,

Do I think that DHS SWL will NEVER get built? I believe it will get built but only after DL's SWL proves a success, Collectively we as fans know it will succeed, But most Wall St guys are not lovers of fantasy so they only see Star Wars in the context of Movies and Toys sold as adjunct merchandising so to them SWL is an expensive 'vanity' project.

And from yesterday's earnings call DIS expects that next years earnings will be 'modest' or translated from 'Wall St' to English that means they are expecting a bad year for profits overall so expect LOTS of cuts.

That said DIS probably WILL start some new hotels at WDW as that appears to be a segment of P&R they are happy with. Pehaps a Star Wars hotel which opens directly into SWL ?

 

[ford91exploder]

There are two ways to grow Revenue:

1) Increase volume by building new offerings
2) Increase prices on existing guests

It appears Parks and Resorts goes in cycles where one strategy takes precedence over the other. WDW and Disneyland have been relying on the buildout the occurred in the mid to late 2000s to power growth (WDW's Soarin, Mission Space, Everest, TSMM and DL's DCA). There were other builds, but those were the last biggest periods of growth. They then fell back primarily on option #2 for growth. That doesn't work longterm.

Over the next several years building seems like the way they're going to go. Which is good, and something that Wall Street knows can reap benefits. Look at the way Cars Land and Harry Potter have worked beautifully. If there's one thing the market believes in it's Star Wars.

Have to agree to disagree on this one, You forgot option #3 ) Quality and Service cutbacks from the tone of the call yesterday they are expecting 2017 to be a bad year, So I think we are going to see a lot more cost cutting and price increases. This executive team does not know how to build. That said I do expect expansion of hotel capacity to start in 2017 because DIS sees that as a 'sure thing'.

 

[Goofyernmost]

Have to agree to disagree on this one, You forgot option #3 ) Quality and Service cutbacks from the tone of the call yesterday they are expecting 2017 to be a bad year, So I think we are going to see a lot more cost cutting and price increases. This executive team does not know how to build. That said I do expect expansion of hotel capacity to start in 2017 because DIS sees that as a 'sure thing'.

I'm not sure that is a real option. Adding rooms to a place that isn't drawing people seems to be pure expense with no income to offset it. With no draw there is no audience. You can raise ticket prices and still entice some to go, you can add attractions and entice more to go. You can raise prices and add attractions and still get increased revenue. But, I'm at a loss to understand how adding hotel rooms to an lowered demand location will do anything other then speed up the bankruptcy situation.

 

[ParentsOf4]

Yes and no. Yes it's true this was a bad way to end the year, but I would struggle to blame Chapek for this. This reflects on the shortsighted leadership of Staggs even more. Instead of getting the Marvel and Star Wars Lands going two years ago, he kicked the can down the road. Now they're paying for it. Looking ahead it really seems like come 2018 is when Parks and Resorts is going to ramp up growth again. Avatar may have an effect, but I suspect that it will primarily drive existing Walt Disney World attendance away from the existing parks.

It was really this quarter that wrecked the year. 9 months ending 2015 margins were at 19.4% whereas the nine months ending 2016 was at 20.6%. That performance at the end of the year was abysmal. Paris and Hong Kong are slipping, but you're correct in pointing out Shanghai. What's the one thing that was different between this quarter and the rest of the year? Shanghai. That's all added Revenue with losses thrown into the mix. Nearly 40 years after launching their international operations the only Resort making any money is Tokyo, and that's just licensing. Pretty pathetic.

If Shanghai is on track to nearly break even, that's great though. Not from a margins standpoint (0% isn't something to aspire to), but that growth trajectory is great. It's skipping the typical years of struggle that have followed along with other park openings and skipping straight to near profitability. That's something that took nearly a decade for Hong Kong to do.

You've got to walk before you run, and Shanghai is getting up at an accelerated pace.

I'll comment in more detail after Disney releases its 10K, but please keep in mind that Disney's domestic parks did fine for the year.

It's Disney's overseas parks that are stinking up the works.

Between the recapitalization of Disneyland Paris, the opening of Shanghai Disneyland, and the continued high capex spending internationally, Disney is trying to fix its international resorts problem.

The real question is, are they fixable?

 

[marni1971]

Hey @marni1971, can you speak to any new hotels being in the pipeline? Is that what Coronado stuff is about?

Nothing to confirm yet. I know of a half dozen proposals or more but with nothing solid let alone green.

 

[FullSailDan]

With only a 0.68 percent gain year over year on P&R operating margins yes I would expect that SWL construction will be stopped on the east coast for a while as that 350 million annually for DHS would do a LOT to boost P&R numbers,

Do I think that DHS SWL will NEVER get built? I believe it will get built but only after DL's SWL proves a success, Collectively we as fans know it will succeed, But most Wall St guys are not lovers of fantasy so they only see Star Wars in the context of Movies and Toys sold as adjunct merchandising so to them SWL is an expensive 'vanity' project.

And from yesterday's earnings call DIS expects that next years earnings will be 'modest' or translated from 'Wall St' to English that means they are expecting a bad year for profits overall so expect LOTS of cuts.

That said DIS probably WILL start some new hotels at WDW as that appears to be a segment of P&R they are happy with. Pehaps a Star Wars hotel which opens directly into SWL ?

Yeah, I think from a book keeping perspective they might want to push off construction. However, the park is bleeding numbers big time and NOT building what they have already committed to in their financial plan, will only increase the loss. They will need to cut the cost of the park to get people in the door long term or significantly spruce up their offerings in terms of shows etc in order to keep people coming.

 

[andysol]

There are two ways to grow Revenue:

1) Increase volume by building new offerings
2) Increase prices on existing guests

You forgot #3
Exclusive Dessert Parties

 

[ford91exploder]

I'll comment in more detail after Disney releases its 10K, but please keep in mind that Disney's domestic parks did fine for the year.

It's Disney's overseas parks that are stinking up the works.

Between the recapitalization of Disneyland Paris, the opening of Shanghai Disneyland, and the continued high capex spending internationally, Disney is trying to fix its international resorts problem.

The real question is, are they fixable?

Probably not, Let's face it DLP put the kibosh on major expansions at WDW 20 years ago and it's still stinking up the works DLP is THE REASON WDW Tomorrowland seems 'half-finished' because it IS as the funding for the revamp was redirected to DLP, HKDL was a Disney park by Paul Pressler so it was overbuilt with retail/dining and underbuilt with attractions like so many other posters note just like DCA 1.0 as such just like DCA it needs major capital investment.

The only bright spot I have to say is potentially SDL which does seem to be resonating with the Chinese consumer nationally.

 

[ford91exploder]

Yeah, I think from a book keeping perspective they might want to push off construction. However, the park is bleeding numbers big time and NOT building what they have already committed to in their financial plan, will only increase the loss. They will need to cut the cost of the park to get people in the door long term or significantly spruce up their offerings in terms of shows etc in order to keep people coming.

The problem of course is Iger/TDO are 'book numbers' people so they don't even SEE the factors you point out which are excellent and to the point.

Part of the reason I always sound so negative on things Disney is when looking at them I try to look at things and trends with a 'green eyeshade' point of view as in trying to see things as Burbank/TDO do not as a fan.

 

[GoofGoof]

Despite the opening of a new resort in China, this is the smallest growth in Parks & Resorts operating income and revenue since the last recession.

Parks & Resorts operating margin increased by only 0.68%, well below former P&R Chairman Tom Staggs' worse year. The international resorts are really dragging Parks & Resorts down.

Not a good first full year for P&R Chairman Bob Chapek.

I think it's important to point out that you are looking at operating margin, not revenue. If revenue only grew by less than 1% that would be a huge issue. A "glass half full" look at this is you had a huge drag from both China parks in addition to a drag from Paris on the international side, plus all of the issues domestically with the club shooting, gator attack and Zika scare in Orlando along with economic uncertainty coming from S America and England (2 of the biggest demographics for WDW international visitors) and they still managed to grow operating margins. I am curious to see the breakdown between international and domestic within the segment.

With only a 0.68 percent gain year over year on P&R operating margins yes I would expect that SWL construction will be stopped on the east coast for a while as that 350 million annually for DHS would do a LOT to boost P&R numbers,

Do I think that DHS SWL will NEVER get built? I believe it will get built but only after DL's SWL proves a success, Collectively we as fans know it will succeed, But most Wall St guys are not lovers of fantasy so they only see Star Wars in the context of Movies and Toys sold as adjunct merchandising so to them SWL is an expensive 'vanity' project.

And from yesterday's earnings call DIS expects that next years earnings will be 'modest' or translated from 'Wall St' to English that means they are expecting a bad year for profits overall so expect LOTS of cuts.

That said DIS probably WILL start some new hotels at WDW as that appears to be a segment of P&R they are happy with. Pehaps a Star Wars hotel which opens directly into SWL ?

I don't see why they would stop construction now. Sounds like wishful thinking on your part. No analyst on that call questioned anything on domestic P&R. If anything they are going to need a good story to tell the street to deflect attention from ESPN. Star Wars is that story and adding SW Land to both domestic parks is a big part of the strategy. Iger gushed about SW for the studio and P&R segments. No way does he want the PR hit of cancelling that project. It just won't happen.

 

[FoodRockz]

Thanks Ford! Appreciate the play by play.

 

[Sonconato]

Here's what Wall Street Journal had to say:
http://www.nasdaq.com/article/decline-at-espn-takes-a-toll-on-disney--wsj-20161111-00046

 

[MagicHappens1971]

On the topic of new hotels, there was not a single Disney hotel room open this weekend. I called and checked online, and someone said that while checking in at Pop Century they were told they were at 102% capacity, don't really understand how you can be above capacity but lol

 

[rael ramone]

On the topic of new hotels, there was not a single Disney hotel room open this weekend. I called and checked online, and someone said that while checking in at Pop Century they were told they were at 102% capacity, don't really understand how you can be above capacity but lol

Perhaps that means they put someone in a room that was taken out of inventory to make the numbers look good....

 

[djkidkaz]

On the topic of new hotels, there was not a single Disney hotel room open this weekend. I called and checked online, and someone said that while checking in at Pop Century they were told they were at 102% capacity, don't really understand how you can be above capacity but lol

Put more tents over at Fort Wilderness!