Disney Speakers: Bob Iger - The Walt Disney...

Q4 and Fiscal Full Year FY07

Earnings Conference Call

NOVEMBER 8 , 2007

Disney Speakers:

Bob Iger President and Chief Executive Officer

Tom Staggs Senior Executive Vice President and Chief Financial Officer

Moderated by,

Lowell Singer Senior Vice President, Investor Relations

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the fourth quarter 2007 Walt Disney Company earnings conference call. My name is Bill, and I'll be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's

Q4 and Fiscal Full Year 2007


November 8, 2007

conference call, Mr. Lowell Singer, Senior Vice President of Investor Relations of The Walt Disney Company. Please proceed.

Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company

Good afternoon. Thanks operator, I want to welcome everyone to our fourth quarter 2007 call. Today's call is being webcast, and the webcast can be accessed on our investor relations website. A press release was issued a few minutes ago and is now available on the website, and we will provide a replay of the call as well as an MP3 file and an archived written transcript of today's remarks on the website. We're actually in New York for today's call, and here with me are Bob Iger, Disney's President and Chief Executive Officer, and Tom Staggs, our Senior Executive Vice President and Chief Financial Officer. Bob's going to lead off, Tom will follow up with some comments and then we'll open up the call to your questions. I hope you'll stick around after the Q&A because I'm going to read through some very exciting changes to our Safe Harbor provisions that I think you'll really enjoy. So with that, I'll turn it over to Bob and we can get started.

Bob Iger – President and Chief Executive Officer, The Walt Disney Company

Thanks for not upstaging us with that, Lowell. Good afternoon. I'm pleased to report that we've had another year of outstanding financial results. We posted record net income, record segment operating income, and record earnings per share for our 2007 fiscal year, bolstered by a strong fourth quarter performance. These results stem directly from our emphasis on the creation of high-quality content across all of our businesses, backed up by a clear strategy for maximizing the value of that content across platforms and markets. Our performance over the last two years highlights the Disney Difference - unique factors we believe can create sustainable shareholder value and which set us apart from our entertainment industry peers. At Disney, we have strong recognizable and relevant brands that help us to cut through an increasingly cluttered media landscape, giving us entrée to new platforms and new geographical markets and giving us access to more consumers. Disney, ABC and ESPN are each managed in a highly integrated manner allowing us to maximize the value of our hit creative properties and, in the case of Disney in particular, to extend them as franchises. And we have at our disposal unrivaled promotional power through our many distribution outlets. This gives us a tremendous advantage in executing our core strategies of creating high-quality creative content and experiences, of using technology to expand consumer access, and reaching into promising high-growth international



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markets. We believe it allows us to reduce risk and to manage through economic cycles with a higher degree of certainty than our peers. Perhaps the most prominent example of the Disney Difference at work is Disney Channel's High School Musical, which has set global performance records across multiple categories, becoming ubiquitous on stage, screens, online, in stores, and even on ice, and having a positive financial impact across all of our divisions. The sequel, High School Musical 2 debuted in August to the largest ever audience for a cable broadcast, and to date, some 100 million viewers worldwide have tuned into the movie. Then, there's Hannah Montana, another bona fide cultural phenomenon, now the #1 cable series for kids 6 to 14. Hannah has also yielded two #1 records, a sold-out national concert tour and a winning merchandise line that encompasses everything from video games to Halloween costumes. High School Musical and Hannah Montana speak to our tremendous ability to create and grow new franchises. Great Disney content can live on for generations. The platinum edition DVD release of our 18-year-old film, Little Mermaid last year was a huge hit with consumers, selling 9 million copies worldwide and setting up the arrival of the Broadway stage show which opens next month. This past year brought many examples of how we're building on and extending the lives of some of our favorite franchise properties, from the hit Disney Channel series for preschoolers, My Friends Tigger and Pooh, to DisneyFairies.com where kids have created nearly 3.3 million fairies of their own. We will soon open Toy Story Mania at Disney's California Adventure and at Disney's Hollywood Studios in Orlando, where families will get reacquainted with Woody, Buzz and the gang in a 3-D interactive environment. And fans of Pirates of the Caribbean can now test their wits against Jack Sparrow and his crew in our recently launched massive multi-player Disney.com virtual world. Our Studio posted its highest operating income in its history, while releasing substantially fewer movies than in recent years. Pirates of the Caribbean: At World's End was the #1 movie of the year globally, and at nearly $1 billion in box office, the fifth highest grossing movie of all-time. Ratatouille, the best reviewed movie of the year has just passed $580 million in worldwide box office, breaking several European box-office records and making it the third highest grossing Pixar movie. The Studio also had solid comedy hits with Wild Hogs and The Game Plan. DVD, Blu-ray and digital sales of Pirates and Ratatouille are rolling out now through the holiday season and we are very enthusiastic about several upcoming films, including Enchanted which opens on November 21st, our Christmas release, National Treasure: Book of Secrets; and for next

year the second installment of our Narnia series, Prince Caspian, and Wall.E, another Pixar tale with an unusual protagonist. The addition of the Pixar team has helped us sustain a creative hot streak that's had huge benefits across the company, as has the full



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incorporation of their great characters and stories in our franchise portfolio, particularly in our Parks and Resorts. Our Parks and Resorts unit had yet another solid year, increasing attendance and benefiting from higher per capita spending. The Year of a Million Dreams campaign has resonated with our consumers so much we are extending it for a second year. Walt Disney Imagineering is constantly incorporating new technologies in our attractions, such as the newly opened Finding Nemo Sub Voyage at Disneyland. And we're making a significant investment in the success of the Disneyland Resort by expanding Disney's California Adventure over the next several years, adding new family attractions, entertainment, and an entirely new land, Cars Land, which makes real the virtual world of our hit movie and the source of one of our best-selling licensed merchandise lines. We're also launching several projects that give consumers the opportunity to enjoy high quality Disney family experiences outside of our parks. We're building two new spectacular cruise ships and developing a new resort at a stunning Hawaii location. New Disney Vacation Club properties at that resort and at the Grand Californian Hotel at Disneyland Resort will build on the great success we're having with that business and the trust consumers have in the Disney vacation brand. We're also very gratified by the performance of our Broadcasting and Cable Networks at a time of sweeping change in the way consumers seek and enjoy their entertainment. I remarked earlier on the amazing success of the Disney Channel, but our emphasis on great content and innovative application of technology is allowing us to reach more people, more often, across the multiple digital platforms that now make up the ABC network and ESPN. This emphasis is critical as we compete for an audience which has unlimited entertainment options. ABC's fall season is off to a good start with the network leading its rivals by a wide margin with young, upscale adults and benefiting from a strong scatter market. New shows Private Practice, Pushing Daisies, Dirty Sexy Money and Samantha Who? are bolstering our already solid lineup of primetime programming that includes Grey's Anatomy, Desperate Housewives, Ugly Betty and Dancing with the Stars. For the first six weeks of the fall season, we have five of the top seven rated new primetime shows including the #1 new drama and #1 new comedy, both produced by ABC Studios. In fact, Samantha Who? is currently the season's most-watched sitcom - new or returning. In the year since the ABC.com player was launched, viewers have started around 160 million episodes, adding to 33 million downloads of our shows purchased on the iTunes store. These viewers are younger, more affluent and boast an impressive ad recall rate. By pairing our great content with these digital technologies, we are creating a more direct connection with the consumer, delivering more targeted messages for our



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advertisers, and collecting better information about who our consumers are and what they want. ESPN, the #1 worldwide brand in sports media, has been a pioneer in unlocking value by using digital technology to create new fan experiences. And in fiscal 2007, ESPN again produced strong growth on the basis of the compelling cross-platform programming it creates for everything from the NFL to NASCAR. ESPN continued to build its brand internationally this past year, acquiring key multi-media properties in sports like rugby and cricket as well as the leading cable broadcaster of U.S. sports in Europe. Our push to harness digital technology on behalf of consumers took a giant leap forward earlier this year, when we launched the all-new Disney.com. Already the #1 family website, Disney.com is reaching over 20 million monthly unique visitors and has become a great showcase for concerts, special events and immersive virtual worlds filled with Disney characters and stories. Our acquisition of Club Penguin, a highly successful kids virtual world site, adds an exciting new dimension to Disney's Internet efforts and gives us a great new franchise to build upon. It's also worth mentioning that we're making solid progress in building our console gaming business, another promising creative engine for Disney. In Fiscal 2007, we acquired several specialty game studios, and shipped a record 20 million published and licensed games with a focus shifting increasingly to what we create and develop ourselves. We are now the #1 game maker after Nintendo for its DS system, the most popular player among pre-teens. Disney is also rapidly expanding its global reach. We've successfully penetrated some of the world's most promising markets. In India, we now have three popular television channels, a growing consumer products operation, and have greenlit two Hindi language animated films. In China, where the media market remains restricted, we now have 4,800 Disney retail corners, our flagship Hong Kong theme park, and a hit TV show in Mickey Mouse Playhouse. And in Russia, a combination of television program sales and live shows is bringing Disney into peoples‟ lives like never before. We believe great popular entertainment created locally is increasingly what audiences want. Our first film made for the Chinese market, Secret of the Magic Gourd was broadly distributed during last summer's school holidays and warmly received by audiences, and we plan to invest $100 million in such locally made films over the next two to three years. In managing the company, we remain committed to financial discipline, investing in those areas where we can deliver superior returns. Our improved results have led to improved returns on invested capital, which is a clear reflection of our ability to combine creative excellence with a sharp focus on the bottom line. We have an agile, experienced management team, an unparalleled portfolio of creative assets, and a clear strategic vision for maximizing returns.



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The Disney brand has never been stronger. It is clear from our 2007 results, from what we are hearing from consumers worldwide, and it is perhaps best illustrated by a strong portfolio of franchises that has delivered our recent growth, and we expect will deliver growth for years to come. And so, we thank you very much for your support and with that, I'll turn things over to Tom.

Tom Staggs – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company

Thank you, Bob. And thanks to all of you for joining us on the call today. We use three key financial metrics to assess our company's overall performance and to gauge how well our strategic initiatives are translating into delivering value for our shareholders: earnings per share, return on invested capital and free cash flow. We're pleased to report solid performance against all three measures again in fiscal 2007. As importantly, these results were driven by strong performance throughout the company, as we capitalized on creative successes across our many lines of business. Our Media Networks were the biggest driver of our growth for both the full year and the fourth quarter, led once again by ESPN. ESPN benefited in the fourth quarter from the timing of revenue deferrals as we recognized $188 million more in deferred affiliate revenues than we did in the prior year. In addition, ESPN's ad sales were up 30% in Q4 versus the prior year, and were up double-digits even if we exclude the benefit we received from the addition of NASCAR events to our schedule. Disney Channel also continues to be a great success story for us. Disney Channel's total day ratings for its key demos were up over 12% this year versus last, and in the fourth quarter, Disney Channel had the second highest quarterly primetime total viewer ratings ever across all cable networks. By the way, the highest quarterly mark was set by ESPN in fiscal Q1 of this year. Of course, Disney Channel's creative success helps drive growth in other businesses like music and merchandising, and also fuels the expansion of the Channel and the Disney brand around the world. At Broadcasting, ABC Studios‟ hit shows drove demand across platforms and syndication windows, helping Broadcasting deliver fiscal year operating income growth of 48%. Broadcasting's results were down somewhat in Q4 due to syndication sales of According to Jim and Scrubs in the fourth quarter of fiscal 2006, as well as the previously announced shutdown of the Disney MVNO and the absence of the ABC show Lost on DVD in Q4 this year. For Lost fans out there, the third season DVD will be available on December 11th. Also, in the fourth quarter the strong ad market resulted in CPMs that were significant double-digits above upfront levels, which together with higher sold inventory largely offset the impact of softer ratings at the network.



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As Bob mentioned, Studio Entertainment delivered record profit this year on the strength of Pirates of the Caribbean: Dead Man's Chest and Cars on DVD. Over the last few years, we have reduced our overall investment in film while focusing more on Disney-branded movies, and the studio's success in 2007 helps demonstrate the benefits of that approach. As we expected, Studio Entertainment‟s operating income declined in the fourth quarter given the difficult comp created by the theatrical release of Pirates of the Caribbean: Dead Man's Chest in the fourth quarter 2006 and a roughly 20% decline in home video unit sales, driven by a high number of catalog title sales in the fourth quarter of last year. We're also extremely pleased with the continued strong performance of our Parks and Resorts. For the full year, operating profit was up 11%, segment margins improved by 60 basis points. The success of the Year of a Million Dreams marketing initiative at our domestic parks helped to achieve record attendance in 2007. Disneyland Paris also generated record attendance driven by new Pixar-based attractions and their 15th Anniversary celebration. In the fourth quarter, combined attendance at our domestic parks grew 5%, led by increases of Walt Disney World, which more than offset a modest decline at Disneyland versus the tough comps created by our 50th Anniversary last year. Guest spending at our domestic resorts grew 2%. Walt Disney World occupancies were up roughly 7 percentage points to 90%, with Disneyland's occupancy level coming in very close to Q4 of last year at 91%. Per room spending increased by 2% across our domestic resorts. As we've discussed, Hong Kong Disneyland has been less successful initially than we had hoped. However, we continue to believe in the potential of this property and we anticipate additional investment in the park to help drive its success. At Consumer Products, merchandise licensing continues to drive our performance as our successful studio releases and Disney Channel shows enable us to diversify and strengthen our product portfolio. Robust demand for Cars, Pirates, High School Musical and Hannah Montana products contributed to double-digit increases in earned royalties for the fourth quarter and for the year. We're pleased with results for 2007, but as you would expect our attention is focused on continuing that success. Although we do not give earnings guidance, I'd like to touch on some of the factors that will likely influence our results in 2008. Concerns over the economy, and more specifically travel and tourism, and the ad market, are a consideration for many companies this year. While these factors could certainly impact our 2008 results, thus far our businesses remain strong and we have not seen indications of a downturn. At our domestic theme parks, rooms on the books



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and attendance to date for the first quarter fiscal 2008 are mid single-digit percentages ahead of last year. At Media Networks, the advertising marketplace remains very healthy. ABC's scatter pricing the first quarter of 2008 is running strong double-digit percentages ahead of upfront pricing. While some of that strength in scatter pricing is driven by tightening supply, underlying demand in the marketplace is very strong. Advertising in our Cable Networks is also solid with ad sales trending up double-digits in the first quarter. Now, it's premature to speculate on the extent of any financial impact from the Writers Guild strike, however, in the event of an extended walkout, we would see the impact in television first. Film results would be impacted later, probably not until 2009. Of course, we will pursue opportunities to reduce costs in order to mitigate any impact from a prolonged work stoppage. Studio Entertainment faces the toughest year-over-year comparisons in 2008, given their tremendous results in 2007. The key drivers of their performance will include three first quarter home video releases, Pirates 3, Ratatouille, and High School Musical 2, and the four theatrical releases Bob mentioned earlier. At Consumer Products, we continue to invest in our merchandise licensing capabilities, as we believe there's further opportunity to grow across character franchises and product categories. We've also been pleased with our video game results from both a creative and sales standpoint, and we will further ramp up our investment in this business. We incurred roughly $130 million in product development costs in 2007 and we expect to invest approximately $175 million in development spending in 2008. Our video game releases this year include titles based on Prince Caspian, High School Musical and Hannah Montana. We expect to increase our investment in a number of strategic growth opportunities this year including Disney Vacation Club, Disney Online, virtual worlds and other digital media initiatives, and in film and television programming both domestically and in markets outside the U.S. In 2008, we expect our overall capital expenditures to increase by approximately $250 million to $350 million. Most of the increase will be used to further develop our digital capabilities at Media Networks and Studio Entertainment while the remainder will go towards investment in our Parks and Resorts, including some of the initial spending to expand and enhance California Adventure at the Disneyland Resort. Our primary objective is to manage and invest for growth in shareholder value, and our approach to allocating capital reflects that objective. Given our significant free cash flow over the past several years and our expectation of continued strong cash flow, we believe that maintaining a disciplined approach to reinvesting that capital is critical to maximizing value for shareholders. Our first priority is to invest in existing businesses



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or new growth opportunities that can generate attractive returns. We also expect that over the next three to five years, we will find additional attractive acquisition opportunities that will more than likely be small-to-medium size. Obviously, any acquisition would need to meet all financial and strategic criteria. Our Club Penguin acquisition last summer is an excellent example of just such an opportunity. In addition to internal investments and acquisitions, we expect to continue to return cash to shareholders via both buybacks and dividends. During fiscal 2007, we repurchased over 200 million shares of Disney stock for approximately $6.9 billion, with just over 50 million of those shares purchased in the fourth quarter. Since we began our share buyback activities about three years ago, we have repurchased over $17 billion of our stock, while at the same time strengthening our financial position. Bob spoke earlier about the Disney Difference. We believe this competitive advantage allows us to generate higher returns on successful branded content and that effect was evident in 2007. More importantly, we believe it positions us extremely well to deliver attractive earnings growth in the years ahead. Consider the tremendous number of important and valuable branded franchises at the company, franchises like High School Musical, Hannah Montana, Disney Princesses, Cars, Toy Story, Lion King, Pirates of the Caribbean, Fairies and, of course, Mickey Mouse and Winnie the Pooh. High School Musical is a particularly good example. This franchise contributed more than $100 million to operating income in fiscal 2006 and 2007 combined. Given the success of High School Musical 2 around the world, we expect to see an even bigger impact from the High School Musical franchise in 2008. The growth in the combined contribution from all these franchises demonstrates the value of the Disney Difference. Our key brands, most notably Disney and ESPN, and the high-quality content and experiences we create and distribute under them provide us a base of business from which we can grow in our existing businesses, as well as through new platforms and technologies and across markets around the world. With that, I'll hand the call back to Lowell for Q&A.


Okay, thanks, Tom. Operator, please open the lines and we're happy to take the first question.



November 8, 2007

Q&A

Operator

Thank you very much you, sir. Your first question comes from the line of Anthony Noto with Goldman Sachs. Please proceed.

Anthony Noto – Analyst, Goldman Sachs

Thank you very much. Tom, first question for you - obviously the top line results at theme parks continue to be strong, but I think the margins were down on a year-over-year basis for the first time in a number of quarters. So I was wondering if you could talk a little bit about some of the details there. And then Bob, obviously return on invested capital remains a key focus for the management team and driving shareholder value, by my calculations up to about 9.2% in '07 from up about 3.9% in '02. I think there's a lot of skepticism that it can continue to increase. Where do you think that goes longer term, and are you compensated specifically on that number? Thank you.


Anthony, with regards to Parks, the key thing to know is that the margin decline that you saw in the fourth quarter was driven solely off of the international parks activities. Some foreign exchange differences at Disneyland Paris, but also the results at Hong Kong Disneyland. If you take a look at the domestic parks by themselves, we actually saw some margin expansion in the quarter, as we will continue to try to work for going forward.


On the ROIC question, Anthony, first of all, it has been a significant component from a metric perspective in the determination of not just my compensation, but the compensation of a number of top executives at the company. And every decision that we make in terms of capex spending, we make with an eye toward delivering returns that we consider to be acceptable. And in fact as a goal, we are determined to improve our returns on capital, which we've been doing as you noted over the last number of years. In terms of where it goes, I can only tell you that our targets in terms of the decisions we've made so far would have us delivering improved returns overall on our invested capital. Specifically, on the so-called “big ticket” items, we've made three key



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decisions in the last year about the theme parks, each one with an eye toward improved capital returns, but each one for different reasons. We continue to invest in our Vacation Club business where ROIC has been strong for quite a long time, and we believe we'll be able to continue to maintain that strength. On the cruise ship side, as all of you know, we've had double-digit returns on invested capital there. Our investment in the two new ships is designed to continue those strong returns, and we believe we'll be able to, or we would not have made that decision. And then lastly, in California Adventure. Let's face it, we had a problem with California Adventure. It was not as successful, and the returns on that investment were not as strong as we would like. As we looked at the entire Disneyland Resort and we considered the most recent success, we concluded that the only way we could grow that business would be to fix and expand California Adventure and, in doing so, we intend fully to improve capital returns but we're also using a critical asset, Pixar, to help do that. Everything that we have done in the parks that's Pixar derivative has been enormously successful, most recently the submarine ride at Disneyland. And so using Cars Land to anchor California Adventure is not only right creatively, but we think it's the best thing we can do to strengthen our return on invested capital.

Anthony Noto – Analyst, Goldman Sachs

Great. Thank you.


Thanks, Anthony. Operator, we'll take the next question.

Operator

Next question comes from the line of Jessica Reif Cohen of Merrill Lynch. Please proceed.

Jessica Reif-Cohen – Analyst, Merrill Lynch

Thanks. Can you discuss the impact of the U.S. dollar, I guess, across your businesses, but in the theme parks, what are you seeing from the international visitor side and what are your expectations that the weak dollar will keep U.S. consumers closer to home and, therefore, in your parks? And a completely separate question, music seems to be this little hidden gem for you guys. How big is it now?



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Well, Tom, you go over the numbers on the theme parks, I just want to make one comment on the currency issue and I think you touched upon exactly what we're seeing. I think people immediately conclude that because the dollar is weak, particularly against European currencies, notably the Euro and the Pound, that more Europeans will be coming to the parks. And in fact, we've had some decent growth in international visitation but not up to the point that we saw back in early part of this decade. So in other words, it hasn't quite bounced back as far as it had been in 2000, in particular. What we are seeing though is that, even though Europe had a pretty good summer in terms of American tourism, by and large our tourists, the people who are visiting the Disney Parks, are probably staying closer to home, meaning taking more domestic vacations than they may have been if the dollar was stronger against European currency. That sort of upper middle class which might be going to international destinations under different currency circumstances is staying more put domestically.


Jessica, just looking at attendance trends, the international attendance has been strong. We saw it strong in the fourth quarter. In fact, it was up low double-digit percentages versus the prior year. Interestingly enough, domestic tourist attendance was also strong at Walt Disney World, and so it syncs up with what Bob was saying. So if you look at the dollar overall in our business, first of all, the currency fluctuation doesn't have a dramatic effect in any one year because of our hedging program, but over time, obviously, we can see some impact in terms of the difference in our businesses and the value of what we sell internationally. But that effect thus far has been modest.


On your question regarding music, as you know, we don't report music out separately. It's part of the studio. Another reason it isn't reported out separately is the way we are running the music business right now is really multi-platform in approach. We create music both through our record group but also on other platforms, notably the Disney Channel. And we're using this multi-platform approach to turn a business that not long ago was losing money into a business that's become highly profitable - to put it in perspective over $100 million in what we call operating income. And we believe it has a chance to be one of the most successful new music businesses in the music industry. What I find interesting about that is that multi-platform approach, which was definitely a strategy of ours, is the exact same thing that we intend to apply to our video game



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business. So, where in music you have the Disney Channel and Radio Disney and the Music Group and the studio and other platforms, in our video games business, we're doing the exact same thing. Whereas a publishing company on the outside in the video games business may not have a cable channel or a movie company or even a record business, or a radio business, we have all of those and we intend -- online is the other example -- and we intend to use them fully to do exactly what we did in the music business to our video games business, but on a much larger scale.

Jessica Reif-Cohen – Analyst, Merrill Lynch

Thank you.


Thanks, Jessica.

Operator

Ladies and gentlemen, your next question comes from the line of Michael Nathanson of Sanford Bernstein. Please proceed.

Michael Nathanson – Analyst, Sanford Bernstein

Thanks, I have one for Bob, and one for Tom. The question I have for Bob is, historically when you look back, how long in advance of people‟s trips to the parks do they start booking those trips, and I guess the question is, when will today's consumer plan their trip to go to your parks?


Well, good question, Michael. That window has narrowed over the years, and while I don't think we've seen more narrowing, it's gotten a lot narrower than it used to be. In other words, it's sort of flattened out at this point and visibility is more a few months in, maybe if you're lucky you get out to a second quarter as opposed to the old 6-month, 9-month cycle. Tom talked a little bit about bookings in the first quarter being up over last year at our parks. I can tell you that bookings for the second quarter and the third quarter are up significantly. I have to say, though, that in the third quarter, you're not talking about that much booking because of the window issue that I talked about, so while we're up now versus a similar period last year nicely in the third quarter, it's still pretty early.



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The second quarter is interesting because we're looking at substantial improvement, and we find that's interesting because of what's going on in the economy. And we might not be, by the way, as leading edge as we used to be in being an indicator. We might be more lagging than that, but so far, we're not seeing an impact on everything that‟s going on in the economy. Gas prices is an interesting one. I talked to the head of our global parks today. For instance, we have a big RV park at Orlando, and I would think that they would be hit the hardest because it's pretty expensive to fill up a tank in one of those babies, and those parks have been completely full. And there's demand on the RV Parks going forward from a bookings perspective, so it appears that even though there are definite issues in the economy, people are not giving up their family vacations, particularly to Disney destinations.


Okay, thanks. And then I have one for Tom which is, there's been a lot of chatter about the makegood status of broadcast TV, whether or not all makegoods from the previous season have been completed, so can you talk about where ABC stands on makegoods from last year, and are you delivering the audiences this season you expected from the start of the year?


Yes, we had makegood carryover from last year, so this calendar Q3 to this calendar Q4, our fiscal Q1. But as we look at it now, we feel very good about where we are in terms of our stewardship situation. I don't expect to be in a difficult makegoods situation come the end of the quarter at this point. And in terms of audience delivery, all the networks save one are down a little bit year-over-year but not dramatically so, and it's within the stewardship levels that we anticipated going into the upfront. And so, I would say that we are in reasonably good shape. And certainly, by being in good shape, we have the happy opportunity to take advantage of what is an extremely strong advertising market right now.


Okay, thanks.



November 8, 2007


Thanks, Michael.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Spencer Wang of Bear Stearns. Please proceed.

Spencer Wang - Analyst, Bear Stearns

Thanks, just two quick questions. I guess the first is for Tom. Your balance sheet, your leverage ratio is well under two times now. Outside of, I guess, reinvesting in the core businesses, would you consider accelerating the share buyback? And then, the second question is, could you just tell us what your expectations are for your pension and post-retirement medical cost assumptions for fiscal '08? Thanks.


Sure. With regards to the balance sheet, we've said in the past that we were targeting sort of that single „A-minus,‟ single „A‟ sort of a rating level and I guess we're at the strong end of that. I'm not overly concerned about it having gotten too strong, but at the same time, we're also not looking to dramatically decrease our leverage from here. So, as I mentioned in the prepared remarks, you should expect the share repurchase to continue despite the fact that we think there are opportunities to invest for growth in our existing and new lines of business. So I guess that's by way of saying, don't look for a dramatic acceleration in the share buyback program but I think you can expect us to continue to buyback shares, given our expectation of strong cash flow going forward. And then, with regard to pension and post-retirement medical, the change in that will not be a big driver in 2008. There will be a very modest reduction, I expect, in the expense of that due to change in interest rates, but again, not a big driver at all.

Spencer Wang - Analyst, Bear Stearns

Thank you.


All right, thanks, Spencer. Operator, we'll take the next question.



November 8, 2007

Operator

Thank you very much, sir. Next question comes from the line of Doug Mitchelson of Deutsche Bank. Please proceed.

Doug Mitchelson – Analyst, Deutsche Bank

Thanks, good afternoon. So, if I look across your branded properties, seems to me the most under monetized are the Pixar brands. I mean, everyone on this call knows them, Toy Story and Finding Nemo, Incredibles, Cars, and now Ratatouille, which has been so successful internationally. But at one Pixar film per year, it seems Disney is not in a position to fully monetize these properties, so Bob, I know you're intensely focused on brand monetization. So do you agree with that statement, and when might we see a solution to that problem?


Well, I agree with you that there's definitely value both to the Pixar brand overall. When that name's on a movie or a DVD, as a for instance, I think it adds real value to consumers but also specifically to those franchises. And we are working hard at mining those franchises, both on the big screen and in other ways. Toy Story is clearly an obvious one as it relates to the big screen, and we are in production on Toy Story 3, and we feel really good about. We know the story already and looking forward to that release a few years from now, in 2010. Cars has turned out to be a tremendous franchise for us. Interestingly, over 85 million of those die cast cars have been sold to date. You can add another 4 or 5 million above that when you add what's been sold at our various Disney properties, and you get an incredible number. It's one of the strongest toy franchises out there and in fact, the numbers went up in 2007 versus 2006 which is the year that it was released, and we have high hopes for that in '08 and beyond. And so, we are developing for online a virtual world for Cars that we are quite excited about, and I don't have anything further to say about other big screen development with Pixar beyond what we've announced, but it would clearly be considered a candidate for a sequel. In terms of the others, there are definitely opportunities but again we're not just looking at big screen possibilities and sequels, we're looking at new means. Our very recent experience with Club Penguin suggests that you can engage people, notably kids, by immersing them in these online worlds, pretty deeply and heavily, and keep franchises



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alive in ways that are, I think, quite attractive long-term for the company. And so when we think Pixar, we definitely agree that there's more to be mined, but we're not going to mine the value in one way, it will be in multiple ways.

Doug Mitchelson – Analyst, Deutsche Bank

Right, thank you.


Thanks, Doug. Operator, we'll take the next question, please.

Operator

Thank you very much, sir. The next question comes from the line of Anthony DiClemente of Lehman Brothers. Please proceed.

Anthony DiClemente – Analyst, Lehman Bros.

Thank you. Question for Bob. Bob, relative to the other broadcast networks it's clear that ABC‟s content is available in the fewest number of distribution channels. And it might seem like the presence of Steve Jobs on your Board may have an impact on your strategy on digital TV distribution, both on the paid per download side, where iTunes is your primary distributor, and on the free TV side where it's more of a closed architecture. So my question is, would you agree with that assessment? What do you see as the key benefits of that closed architecture approach and do you think that the limited number of distribution channels for ABC is actually driving incrementally stronger demand for your TV content? Thanks.


Well, we just did a deal recently with AOL, which is a pretty significant platform in terms of distributing our product, and we're going to continue to take an expansive point of view in terms of where we distribute the product, meaning there will be more places than just iTunes, ABC.com and AOL. But, we have pretty high standards in terms of the platforms that we put them on. We found, in a lot of the deals that have been made, when you take a look at the platform, whether it's the positioning of your content or the quality of the user interface, we think that it's unlikely that value is going to be created there. And so what we're looking to do is actually create value with high quality user interface, so that more consumers consume the shows, and also an



November 8, 2007

environment that we feel is simply right for the programming that we create and not lumped in with the massive product that's put on the internet, branded and unbranded, high quality, low quality, in some cases no quality. And again, we've had an interesting debate because we've amassed a lot of our content online on ABC.com with an eye toward essentially mining a little bit of brand value out of that platform and also using it to upsell, to market other things that ABC is doing. It's also become a pretty good platform for advertisers that we can integrate well with our overall network sales effort. But I think long term, if we're going to drive greater circulation for those shows, we'll have to put them on more platforms, but we don't believe we need to put them on just any platforms.

Anthony DiClemente – Analyst, Lehman Bros.

Thank you.


All right thanks Anthony. Operator, next question, please.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Imran Khan of JP Morgan. Please proceed.

Imran Khan – Analyst, JP Morgan

Yes, hi, thank you for taking my questions. Two questions. Number one, Tom, can you give us some swing factors to understand how we should think about the Media Networks cost structure growth next year? And secondly, Studio had a great year, as you said your Disney branded strategy is working. How should we think about normalized margins for Studio over the next three years or so? Thank you.


Sure, swing factors of Media Networks, as I think you were pointing out, beyond the revenue side that I discussed earlier, of course the programming cost as a primary swing factor, I would expect that if you look at the network, you will see some increase in the average cost for primetime entertainment hour, that you would expect that because we have a number of returning hit shows, but where it really comes out will



November 8, 2007

depend of course on the number of new shows that are successful, how long they run, et cetera, and what would be put in place of any shows that don't make it. The programming costs also would be impacted potentially, to the extent that the writer strike went for a long period of time, and there again, we would look to respond in part by mitigating costs. If you go beyond, you got the first complete year of NASCAR coverage at ESPN, which will, of course, impact their programming costs and that's the biggest driver there. And then I alluded to earlier, we're continuing to invest in original programming at the Disney Channels, we're doing that domestically and internationally. We are investing in programming at ABC Family as we continue to see good results there, but I'd point out that ABC Family this year does not the have Major League Baseball expense against it where it did last year. So on the whole, I think you'll see a net greater investment in film and television. We think that investment overall is going to help drive longer term growth, and per the conversations we've had today and earlier, there's a lot of focus on doing that under our key brands, where we think we earn the strongest returns and have the best opportunity to leverage that programming across multiple platforms.


Thank you.


With regard to the Studio and the Studio margins, the Studio obviously had a great year this year. I believe that they are positioned to deliver more consistent strong margins like the strong margins they had this year by virtue of the fact that they're focused on the Disney brand, et cetera. Margins in any given year are going to be impacted by the degree and the level to which we have hits. That's the nature of the business. It's somewhat hit driven. The good news is that as businesses like music that Bob discussed earlier, stage plays, et cetera, grow within the studio, I think you can see more predictability and more stability to those margins. And while we don't target or disclose publicly a specific margin for the studio business, I think you'll see consistently higher margins out of the studio in the coming years as opposed to if you look back at the last five.


Thank you, that‟s helpful.



November 8, 2007

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Heath Terry of Credit Suisse. Please proceed.

Heath Terry – Analyst, Credit Suisse

Great. Thank you. You mentioned the strength in international travel to the theme parks that you're seeing due to the weak dollar. Can you give us an idea of what kind of mix you're seeing now and how that compares with what you've seen in the past?


Yes, if you look at the international attendance, that had been up around a little over 20% of the total attendance, it dropped down to something closer to the mid-teens at the low point after 2001. And now, it's closer to about 18% or so. So in terms of mix, it's not quite back to where it was before and we think there might be room to continue to push that up, but it has recovered nicely in terms of percentages from where it had been just after 9/11.


The other thing to note, when we talk about international tourism, it's not just about currency. Traveling to the United States isn't as easy as we believe it could or should be. In some markets, not EU markets but in some, there are huge visa complications and in others, there are infrastructure issues, quality of airports, and difficulty from a security perspective. Some of that, of course, we understand and tolerate, but it's clear from some of the work that we've done, particularly in Europe, that Europeans view traveling to the United States as much more difficult than it used to be, and that, I think, has had an impact.

Heath Terry – Analyst, Credit Suisse

Okay, thanks.


Thanks, Heath. Operator we'll take the next question, please?



November 8, 2007

Operator

Thank you. Your next question comes from the line of Jonathan Jacoby, Banc of America Securities. Please proceed.

Jonathan Jacoby - Analyst, Banc of America Securities

Good afternoon. Thanks for taking the questions. Just following up on the park‟s visibility and not to harp on this, but when you look out two quarters, how much different in terms of, you keep saying the tightness, I'm curious how much less visibility you have. And then, in terms of advertising, national clearly strong, you spoke about the strong scatter markets in both cable and broadcast, but I'm wondering at your local TV stations, if you're seeing any different trends? Thanks.


On the parks visibility question, it narrowed a couple of years ago, actually probably a little more than a couple, just post-9/11, and it hasn't narrowed more since then. So we really - we have bookings a few quarters out, but the significant bookings just in terms of volume, more like one quarter out. You're talking basically 3 to 4 months, so when we talk about growth and bookings for our fiscal second quarter, we feel pretty good that the early indications suggest it should be a decent quarter there. When we talk about the third quarter, even though we're up nicely, we're talking about relatively few rooms on the books at this point. And on the advertising front…


Well, if you take a look at the fourth quarter, local TV stations ad revenues were down about 4%. Now, that's more than explained by a difference in political advertising across our local TV stations, and so that number might look a little worse than perhaps the underlying market is from an overall demand standpoint. We're seeing a similar phenomenon in the first quarter. Pacings right now are down in the neighborhood of 7%. Again, if you look at political advertising this year and this quarter specifically, that handily explains that decline. I think political advertising for the year as a whole for us will be off modestly but it will be down in the first quarter and up slightly in the ensuing three quarters. It's hard to read underneath that, but I think that's what's really driving that equation.



November 8, 2007


Remember, we're not talking about that much in terms of volume. We only have 10 TV stations. And our exposure as a company - roughly 23% of our revenue '07 came from advertising, so relatively modest compared with some of our peers in terms of percentage of total revenue.

Jonathan Jacoby - Analyst, Banc of America Securities

Thank you.


Thanks, Jonathan. Operator, next question.

Operator

Thank you very much. Next question comes from the line of Michael Morris of UBS. Please proceed.

Mike Morris – Analyst, UBS

Hi, thank you. A couple questions on the international sale of television programming, which you noted as a contributor in the third quarter, and didn't mention this quarter. I'm wondering is that something that we should consider just seasonable and as a third quarter contributor or do you see opportunity to have that smoothed out a bit more during the year? I‟m trying to get a feel for the growth potential of that incrementally to what you're currently doing. And then also, do you see opportunities to produce television content in local markets, similar to the way you mentioned films or is the best way to approach that by basically repurposing the domestically produced content? Thanks.


With regard to international syndication sales, looking at that quarter-to-quarter is a little dangerous because the timing of the sales and the timing of the availability of the programming will impact the booking of the revenues from that. So for example, in this most recent quarter, in 2006 we had strong syndication sales, mostly domestic, from



November 8, 2007

shows like According to Jim. This year we had less availability, so less revenue in that quarter. We continue to see real strength in the international syndication. We see real demand for the kinds of shows that we've been making and the strength of shows like Desperate Housewives, Grey's, Lost, makes us think that that will continue to be an important driver, even though on a quarter-to-quarter basis, it might look a little bit lumpy. If you look at it over time, they should be pretty strong steady contributors, assuming we continue to refill that pipeline.


And on the question of investing in local production, as we've done already in movies, we intend to do that in television as well. A lot of it will be done under the Disney brand, and we have a number of instances where we're creating original television content for markets, although what we're finding is a lot of that has application back in the United States and other markets. We're also doing it somewhat at ABC, there's been some what we're calling “reversioning,” so we're actually shooting original episodes of Desperate Housewives in Latin American countries, as a for instance, with local actors in local languages, both Southern Latin America, Argentina, Northern Latin America in Mexico, and also in Portuguese in Brazil.

Mike Morris – Analyst, UBS

Thank you.


Thanks, Mike. Operator, next question.

Operator

Thank you very much, sir. Next question comes from the line of Jason Bazinet of Citigroup. Please proceed.

Jason Bazinet – Analyst, Citigroup

Thanks so much. I guess if I roll the clock back 3 or 4 years and I was listening appropriately, it seemed like a lot of the cable operators were begging for the media companies to help them put, to differentiate their product by putting a lot of your TV and theatrical product on VOD. And now we've sort of moved forward to this bizarre world where everyone has this DVR on their TV and we've got this new rating system.



November 8, 2007

And I guess my question is, if you sort of step back and look where the industry is now, would you put the odds at low or medium or high, that sort of the flood gates open up and we sort of rethink the way content is distributed to make VOD much more user-friendly to sort of restore the ad affiliate balance that cable networks historically had?


Well, I think there's an opportunity to grow consumption of this programming in many different ways. I think the answer I would give would be, it's not going to come just from one direction. It's going to come from multiple directions. And VOD is going to be a contributor to that. We are entering that world, walking before we run in many cases, with both ABC and Disney branded programming, advertisers supported and what I'll call pay-per-view basis, movies included by the way. And I think that as systems improve from a user-friendly or a navigation perspective, consumption is likely to improve, but consumers - one thing that we're learning more and more from the research that we've done with consumers - is they want customization. It's no longer one size fits all. They don't want a product just one way. They want it their way, and their way is different from consumer to consumer, and that's why we have taken a pretty open, and I think fairly modern, point of view on this. Because we're trying in multiple businesses to keep the consumer in mind, particularly younger consumers, and that's going to affect how people watch programming. It will not be as linear as it used to be, and if it's not going to be, we still believe there's a business in investing in high-quality branded programming but we're going to have to offer it in a much more varied way than we did in the past.


Okay, thanks, Jason. Operator next question, please?

Operator

Thank you very much, sir. Next question comes from the line of Tuna Amobi of Standard & Poor's Equities.

Tuna Amobi – Analyst, Standard & Poor’s

Thank you very much. Bob, there's been some suggestion that, with regard to the writers‟ strike, given ABC's strong mix of returning, as well as new, shows that ABC



November 8, 2007

could actually be among the most vulnerable should this strike go on and that some of these shows that you have now could be affected as early as December or January. So in that context, can you perhaps update us on any contingency plans that you have to mitigate the risk of this strike beyond the cost reduction that Tom had spoken about? And a question for Tom, on High School Musical, you've spoken about $100 million in operating income for last two fiscal years. So looking ahead, how should we think about that franchise in terms of how that franchise could grow, given the theatrical release that you have coming up in late 2008, I believe. So how do you kind of account for the incremental contributions from High School Musical across the various segments? I believe it flows into Studio and Consumer and Network. Can you give some sense of how or what the bulk of the incremental revenues or contributions from that franchise are going to flow through your financials? Thank you.


Tuna, we don't know how long this strike is going to last, so I could answer your question but a lot of it is contingent upon, again, length. If the writers stay out for a four-week plus period of time, it will definitely have an impact on ABC's schedule because scripted shows, even though we have a number of shows that are currently on the schedule in the can, ultimately we're going to run out of those. We're fine through the November sweeps. We believe the strike could go longer, running a little bit more reruns in December or holiday programming than we may have and save some of the original programs for after the first of the year. We also have a lot of scripted and reality shows in the can led by Lost, which has been in production, and we weren't intending to bring back until after the first of the year anyway. But we have a number of other ones and we have added to our program line-up some reality shows and we also have a number of movie titles that we could turn too, and news that we could also run and so we actually think that the network is well prepared. Of course, our preference would be to keep the schedule intact given the momentum that we have and given the success that we've had. We would hope that we'll be able to find a way to settle this difference and settle this strike before there's indelible damage done to the business, or, by the way, to the community, that we operate in. There is a trickle down effect that this has on more than just people directly associated with producing these shows. Southern California is going to feel it first and hard, and I think that's just a shame, but we are definitely going to have to implement contingency plans from a programming perspective if the strike persists.



November 8, 2007


With regard to High School Musical, as I mentioned earlier, we do expect the 2008 to exceed what we saw in 2006 and 2007, so the growth in that franchise continues. But just to give you a little more color on that, Tuna, I would say that the primary drivers of the growth, our expectation is that it would be merchandise licensing, home video, and I also think that you'll see a little bit more out of the video games, so it shows up in a number of different places. The home video contribution, by the way, shows up at both at Media Networks and at Studio because some of the profits are at the Studio and some of the profits are at Media Networks since the Studio does the distribution. So, those are the primary drivers of the growth and where you would see the incremental impact.


Thanks, Tuna. Operator, we'll have time for one more question.

Operator

Our final question comes from the line of David Miller of SMH Capital. Please proceed.

Dave Miller - Analyst, SMH Capital

Yes. Good afternoon. Bob and Tom, if I could just get both of your perspectives on this question. Obviously, you're familiar with what's going on with the Big 10 Network and the current imbroglio with Time Warner Cable and some of the other cable MSO's. If the Big 10 Network is successful in getting onto the analog tier, which I don't know how they're going to do it, since there's no room, but that's what they want. And if they're successful in doing that, what does that do if anything to your ratings guarantees as it applies to the Big 10 football package that you have on ESPN, and what if there theoretically would be some siphoning off of viewership there over to the Big 10 Network for some of those football games, especially in the Upper Midwest states? Thanks very much.


So, ESPN is incredibly strong both from a brand perspective and a programming perspective. And the deal it has with the Big 10, which is long term in nature, affords them the right to cover primary games on their networks. And so, I really don't think that there will be an impact if the Big 10 Network gets more coverage. Now, I have to admit, Dave, I haven't asked specifically of the ESPN sales guys or the research people,



November 8, 2007

but George Bodenheimer and I talk a lot about the impact of these, what I'll call sports organization-owned channels, and we've spent a fair amount of time focused on just maintaining ESPN‟s strength, both from a primary platform and a multi-platform, strengthening our marketing efforts, as well as our creative efforts. They've made a number of steps in terms of the production quality that is aimed at being even more competitive than they've been. So, reach more people more often with higher quality programming, better marketing, and I actually think they will be fine. I think it's also important to point out that these leagues or sports organizations are paid significantly by not just ESPN but other networks carrying sports. And that essentially eliminates the risk from these organizations in terms of having to distribute their product and having to sell their product, and having to produce their product, and we're essentially paying them guarantees. So the risk is completely taken out of the equation, and so I don't think you're going to see a time any time soon that these sports-owned channels eclipse the non-sports-owned channels, meaning the non-organization-owned channels. Nor do I think you're going to see a time any time soon where there's going to be a substantial impact on ratings. Now from time to time, there will be programming on that is more competitive. I note with great interest that the NFL channel has a good game coming up. I'm a Green Bay Packers fan and I think they're playing the Dallas Cowboys. That's a good game and I'm sure they'll have an impact, but it's not airing against ESPN NFL football fortunately.


Thanks, Dave. Okay, thanks again for joining us today. I want to 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 conference call may constitute forward-looking statements under the securities laws. It does get better, just stick with me. 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 the results expressed or implied in light of a variety of factors, including those factors contained in our annual report, on Form 10-K and in our other filings with the Securities and Exchange Commission. Fortunately for you, this does conclude today's fourth quarter conference call.

# # #



November 8, 2007

Management believes certain statements in this call may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management‟s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company‟s control, including:

- adverse weather conditions or natural disasters; - health concerns; - international, political, or military developments; - technological developments; and - changes in domestic and global economic conditions, competitive conditions and consumer preferences.

Such developments may affect travel and leisure businesses generally and may, among other things, affect: - the performance of the Company‟s theatrical and home entertainment releases; - the advertising market for broadcast and cable television programming;

- expenses of providing medical and pension benefits; - demand for our products; and - performance of some or all company businesses either directly or through their impact on those who distribute our products.

Additional factors are set forth in the Company‟s Annual Report on Form 10-K for the year ended September 30, 2006 and in subsequent reports on Form 10-Q under Item 1A, “Risk Factors”. Reconciliations of non-GAAP measures to closest equivalent GAAP measures can be found at www.disney.com/investors.

http://www.disney.com/investors

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