Good day, ladies and gentlemen, and welcome to the Walt Disney Fiscal 2019 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Lowell Singer, Vice President, Investor Relations. Sir, please go ahead.

Good afternoon, and welcome to The Walt Disney Company's Second Quarter 2019 Earnings Call. Our press release was issued about 25 minutes ago, and it's available on our website at www.disney.com/investors. Today's call is also being webcast, and a transcript will also be available on our website. Joining me for today's call are Bob Iger, Disney's Chairman and Chief Executive Officer; and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Bob will lead off, followed by Christine, and we will then be happy to take your questions. So with that, I will turn the call over to Bob, and we'll get started.

Thanks, Lowell, and good afternoon, everyone. We're pleased with our results in Q2, which were impacted by our acquisition of 21st Century Fox in late March as well as our ongoing investment in our direct-to-consumer business. But I'd like to start by mentioning the phenomenal success of Avengers: Endgame, which continues to exceed even our highest expectations. After delivering the biggest opening of all time, the movie has generated almost $2.3 billion in worldwide box office to date, making it the second-highest grossing film of all time, after just 2 weeks in theaters. We've also been extremely pleased with the reaction to our Investor Day presentation, which offered an in-depth look at our DTC plans, including additional information regarding ESPN+ and Hulu as well as a detailed look at the content interface and pricing for Disney+. And I'm happy to announce that Avengers: Endgame will be available on Disney+ on December 11, just a month after we launched the service. While the initial response to our DTC efforts has been gratifying, we're not taking anything for granted, and we continue to leverage our creative engines across our company to ensure we deliver a strong value proposition to consumers. We're expanding into the DTC arena with tremendous excitement and optimism, confident that the indelible connection we've built with billions of people over a century of great storytelling gives us an advantage in the marketplace and provides a strong foundation for success. This is the first earnings call since our 21st Century Fox acquisition closed, and I'd like to give you a quick summary of our integration and consolidation efforts across the company. From the beginning, we analyzed this acquisition through the lens of our new strategy. When we first considered the deal, we had just announced our DTC initiative, and we…

Thanks, Bob, and good afternoon, everyone. Excluding certain items affecting comparability, earnings per share for the second quarter were $1.61. As you know, we closed the acquisition of 21st Century Fox on March 20, so our Q2 results reflect the consolidation of the Fox assets, including the impact of consolidating Hulu for the last 11 days of the quarter. Results for 21st Century Fox for the 11 days, which we are reporting as a separate segment, reflect the contribution of $373 million in revenue and $25 million in operating income. We recorded $105 million in purchase price amortization in Q2, which is not included in these results. At Studio Entertainment, lower worldwide theatrical and home entertainment results were partially offset by higher TV SVOD distribution results. As we discussed last quarter, we expected the studio's results this quarter to face a tough comparison given that Q2 last year was the best second quarter in the studio's history. We were pleased with our worldwide theatrical results in the quarter, especially the strong performance of Captain Marvel. However, the year-over-year comparison reflects the outstanding performance of Black Panther and the carryover performance of Star Wars: The Last Jedi and Coco last year. Our home entertainment business also faced a different comparison given Q2 titles last year, which included Star Wars: The Last Jedi, Thor: Ragnarok and Coco. In total, our worldwide theatrical and home entertainment results came in modestly better than our previous outlook due primarily to the stronger-than-anticipated performance from Captain Marvel. At Parks, Experiences and Products, operating income growth was driven by higher results at our theme parks and resorts and the Cruise Line businesses, and growth of consumer products. Second quarter parks and resorts results reflect an adverse OI impact of about $45 million due to the timing of…

Okay, Christine, thank you. Operator, we are ready for the first question.

[Operator Instructions]. Our first question comes from Ben Swinburne with Morgan Stanley.

Bob, I want to ask you about -- actually, Bob and Christine, about Fox. Now that it's closed and the streaming Investor Day is behind us. Bob, can you put this acquisition into context? When you look at the deals you've done in the past, you've talked a lot about acquiring powerful brands like Pixar, Lucas and Marvel, and obviously, we've seen the success there. This feels like a little bit of a different transaction, but I'd love to hear it from you now that you own the business, what you think the biggest opportunity is running this company and integrating it into Disney or opportunities as you look forward, so we can think about where opportunities and upside might exist. And sort of a similar question, Christine, to you, on both synergies and the balance sheet, which are 2 areas you've talked about. Now that you own the business, can you update us on your thoughts on synergy timing and any opportunities you see on the debt side, too?

Thanks, Ben. To give you some perspective, in the summer of 2017, I think it was during our August earnings call, we announced our intention to purchase the controlling interest in BAMTech and to launch Disney and ESPN direct-to-consumer service. Soon after that, Rupert and I first started engaging in conversation about the possibility of buying 21st Century Fox assets, so that when we began analyzing their value, it was all through the lens of the launch of direct-to-consumer platforms. And we were able to, in analyzing value, really think hard about how we might use or leverage both the content we are buying -- I'm talking about library, the brands we are buying and the titles, but also the people at Fox, which is critical, to essentially enable us to fulfill our goals as it related to direct-to-consumer. And I think if you then sort of dissolve almost all the way forward to our Investor Day and think about the fact that Uday Shankar was on stage talking about direct-to-consumer business service in India, which is beyond what we're even imagining back in '17, but the fact that National Geographic was well-represented, the fact that we announced The Simpsons deal, just a few examples, you can -- I think immediately conclude that the vision that we had, which is to analyze value through that lens, was basically being implemented or showing potential right away. I can't emphasize enough the importance of people, too. Because as I think we all know, these are ambitious plans, both in terms of managing the technology side and the interface with consumers, but in particular, ambitious plans when it comes to the creation of original content. And whether you're looking at the movie side or in the TV side, although in the direct-to-consumer front,…

So Ben, let me address your questions on synergy and the balance sheet. First of all, in synergy, we're still on track to deliver the 2 -- at least $2 billion in cost synergies related to the acquisition. We told you initially that you should expect us to realize about half of those benefits by the first full year and the remainder in the second full year. And once again, the $2 billion in cost synergies never included anything from the RSN, so that's immaterial to us achieving this $2 billion going forward. The other thing I've mentioned, and you'll see it in the press release and more disclosure in the Q, you saw some charges taken for restructuring. That number was 6 62. We'll continue to take those charges as we continue to achieve those synergies, and you'll be able to follow it quarter-by-quarter. On the balance sheet side, we did significantly increase our debt portfolio. At the close, we had about $18 billion of long-term debt. And with the increment of debt and related positions coming from other entities, the balance -- the debt portfolio went up to about $52 billion. That's a number that our treasury group has been managing, too. We did some bond exchanges leading up to the close of the acquisition. So we're aggressively managing that portfolio in the same manner in which we have always managed the balance of short-term and long-term liquidity management and the way we positioned that balance sheet. On the -- you're probably also curious about leverage, and we have not recommenced any share buyback because we said we would not be doing that until our leverage ratios came back in line with that of the single A company. So for the time being, you can assume that our share repurchases will be suspended.

Our next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch.

Just maybe returning to the parks. It seems like you have so many drivers right now, especially in front of the Star Wars Lands plural openings. So can you give us color on how you're thinking about pricing, particularly given the past year's price increase, which have no negative impact, impact that we could see on attendance; the timing of the second major attraction at the Star Wars Lands; and maybe some insight, how you're thinking about expanding in China over time. I know attendance has been weak recently.

Okay. Multifaceted question. On the first question, the parks, I'll start with pricing. We have been very strategic at our approach to pricing over the last number of years, and it's really paying off. The results this quarter certainly are evidence of that. And what we're trying to the basically is 2 things, is to price according to demand, and in managing demand, try to basically spread out attendance so that we can preserve or improve the guest experience; it's that simple. The popularity of what we've been building, which I think is tied to both the quality and the scale of what we've been building, but also the fact that we've been building attractions in lands and shows, et cetera that are tied to some of our best stories and our franchises, I think has created an even greater demand and more popularity, which gives us more flexibility on the pricing side. But it's not just about raising prices, it's about being really smart about it, and it's showing. We have, as you know, Jessica, a tremendous amount of expansion going on. Star Wars Land is only one of them, and there are two of them, I should say. We're breaking ground on a big project in Tokyo just in 1.5 weeks, for instance, so we're building cruise ships, and we've got expansion just about every place that we operate. Specifically in China, where business actually has been quite good lately, we have announced that we're expanding with the Zootopia Land. I don't believe we've announced the date for that yet, but we're continuing to look at expansion. And right now, our plans for expansion there are solely focused on Shanghai. We've now talked about building at another location at this point. By the way, going back to Galaxy's Edge and Star Wars, the lands which are attractions themselves, have two e-ticket attractions. One is the Millennium Falcon experience or ride that I've tried a number of times, and it's fantastic. We're opening with that. The second attraction will open later in the year, but we've not said when. And as I've mentioned on my call, the Star Wars Land or Galaxy's Edge will open in Orlando at the end of August. Did I cover all the aspects of that question?

Jessica, I would just add one thing on margins. Since I have been in this role, I think any time a question came up about the growth in the parks' margins, it was usually asked in the vein of, can this margin improvement continue. And I just want to say that while we don't give any guidance on margins, there's nothing structural that would prevent our margins growing from here. And as Bob articulated, the growth -- the yield strategy is something that benefits the parks on multiple levels, spreading the demand, improving the guest experience, and also driving to the bottom line. We also see further potential for improvement in our international parks businesses and also managing our cost base effectively by deploying capital and labor efficiently. So I don't think there's any -- there's no constraint right now that we believe on our parks margins.

Our next question comes from Alexia Quadrani with JPMorgan.

On the studio side, after the fantastic Endgame, it's kind of hard to imagine there's more to come from Marvel, but I'm sure there is. I guess when do you think we'll get an update on the longer-term slate there? And then a follow-up question, staying on the studio, how much opportunity do you think there is on the film side of Fox, taking their IP and refining it further over the years to the success level more in line with Disney's historical portfolio.

We announced -- in announcing our new slate, I think we announced 2 or 3, maybe three new Marvel titles, but didn't say what they were. No Marvel dates, rather, without the titles. We obviously know what they are. And there's a lot of speculation online. So Alexia, if you go online, you may be able to get some of the answers. But Marvel didn't give me permission to announce it today because they want to announce it. I'm guessing they're going to do so later this summer. If you watch -- and I hope you did, Avengers: Endgame, there were a lot of clues in that film as to the movies that may be coming, but I'm not at liberty to help you with those either. I guess I'm just a Marvel guy when it comes to protecting their secrets. There are huge opportunities. When we brought Marvel, we started studying their characters. And when we got to about 8,000, we stopped. But there are many, many different directions that we can go. We've obviously laid a lot of pipe in terms of characters and character story -- stories, even though we kind of came to an end on some of them, in this film, there are more possibilities, certainly beyond it. And then of course, on the television side, as we announced when we had our Disney+ presentation, Marvel is going to be making a series for a Loki. We're doing Winter Soldier -- Falcon and Winter Soldier, we're doing one with Wanda and Vision. And all of these are intricately linked and tied to the storytelling in the films. And so we're now looking at basically telling Marvel stories and being somewhat platform-agnostic. We'll make big films for the obvious reason, but those films will also live on the Disney+ platform in the stories we tell, in the series that we create. And no one's really doing that right now. As it relates to Fox, there are a number of different opportunities. Clearly, our library titles that were never going to be made as sequels or as remakes for theatrical distribution that we're going to look at for a possible production inclusion in Disney+, but there's also sort of richness of development and storytelling for theatrical release using the Fox brand. And Emma Watts is reporting to Alan Bergman and Alan Horn. As we're working to develop those, we inherited a slate of films that are being made. We're bringing them to the system, and we're now working with her to help -- to basically determine the slate beyond what's been announced, and I'm guessing that it'll be somewhere in the neighborhood of 5 or 6 films a year. But we're not locking ourselves into that, from that end. And of course, we have Searchlight, which is going to continue their business as is.

Alexia, before you go, I just want to add one thing on Avengers: Endgame. And I said a very similar thing a year ago as it related to Avenger's Infinity War. Given the size of the cast involved and anyone who's seen it, knows that the cast was extremely large, and the cost to produce a film of that scale of magnitude and length, while we expect the results for this film to be terrific, they will be tempered somewhat by the cost structure. And I said the exact same thing as it related to Infinity War.

Our next question comes from Michael Nathanson with MoffettNathanson LLC.

So one for you Bob and one for your Christine. Bob, at Investor Day, one thing that didn't come was China. And I look at parks you have there and how well Marvel does, how are you thinking about the OTT opportunities for China? And then for Christine, in answering Ben's question, you want to get to a single-A credit, when do you think you'll hit that threshold in the coming years?

Michael, right now, there are regulations in China that might limit what we can do from an OTT perspective. Certainly, what we can do on our own, we'd have to -- at this point, if we're going to launch something, it'd have to be with a local partner and shared ownership. So we're going to have to work our way through that. We certainly believe there are opportunities. Interestingly, if you look at the performance of Avengers: Endgame -- I was going to mention this as it related to Shanghai. But Marvel has gotten extremely popular in China, and I think this film has already done somewhere in the neighborhood of $600 million in box office -- dollars in box office in China already, and it's just enormously popular. So the idea of bringing the Marvel television shows to China as part of a direct-to-consumer platform or proposition is something that we're very, very interested in. And as it relates specifically to Shanghai, we think we have a huge opportunity for Marvel there. We built something somewhat temporary in nature, just a tent that features Marvel franchises and characters, because when we began designing the park in Shanghai, it was only soon after really we had purchased Marvel, and we went in early enough to do it. But there are great opportunities long term given the affinity people have in China for these characters. That's a hint to our parks and resorts group. We should be hard at work already designing and developing some Marvel presence in Shanghai. They're listening, I know.

Okay. Now onto the more exciting leverage question, Michael. Let me just say that the -- that our approach to our physical discipline, it has not changed. It's just that we're managing more. But we're right now in the middle of our long-range planning process, which will be followed by our annual process. We'll work through this between -- over the next few months, and we'll have more clarity on it probably by next earnings release. However, what I would say is that we've -- the rating agencies maintain a very solid working relationship with the company. In particular, the treasury team. And they have all been apprised of the activities around the company, not only on our own, but also with closing and with the integration of Fox. And you can see where their positioning us, which is maintaining us at our current ratings level. We have every intention of bringing that down as quickly as possible, but we're going to balance that with investing in our businesses to create that long-term shareholder value.

Our next question comes from Marci Ryvicker with Wolfe Research.

Going back to the DTC Analyst Day, I think there was a lot more content available on Disney+ than the Street had been expecting, at least in the first year. So is this just a timing of when the content slowing in from your contracts? Or did you have to negotiate with third-party distributors to get that content back earlier?

We did some deals, Marci, to get some of the content back that had been licensed to third parties. We continue to explore ways that we might be able to get more back. But what we announced at Investor Day included some of the rights that we've managed to buy back or negotiate back from what had been licensed to third parties. And there's still some out there that we're exploring.

Okay. And then what happens with content in the P2 window? So if you get content from Netflix, does it go back to them? Or do you keep it for forever?

I don't want get too specific on that, but there was a window in the Netflix deal that enable us access to some of the films, so it's the films that we were licensing to them, and again, I don't want to get more specific than that. But when we did the Netflix deal some -- way back, we envisioned, even though it was at that point, far off, the possibility that one day we might want to launch our own service. So we carved out an ability to run some of the films on such a service, and it did pay off.

Our next question comes from Kannan Venkateshwar with Barclays.

I guess a couple. First on the KPIs for DTC going forward, just wanted to understand what kind of metrics we should be tracking in order to figure out the progress. I mean, Disney+, of course, doesn't launch until later in the year. But would you be helping us with subscribers on the Hulu front or on the ESPN+ front? And the second question is, when we look at film margins of Fox, that's significantly lower than Disney, and I know you don't manage studios from margins. But the delta is just very big, and it could be $1 billion-plus opportunity over time on the margin front. So just wanted to figure out how you're thinking about margins on the studio side for film.

Okay. Let me take first this sub-question. As you saw in the Investor Day, we have committed to being very transparent as it relates to our strategy and our progress in our direct-to-consumer initiative. As you mentioned, Disney+ is not yet launched, there's nothing to report. But as we get further into the latter part of the calendar year, while we haven't -- not going to commit to exactly when, we will be providing sub-numbers going forward at the appropriate time as well as some of the other metrics that we spelled out on the Investor Day. So once again, our commitment is to transparency to allow you to understand the progress that we're making in this business. It's very important to us. And on the theatrical side, we do manage our studio to margins and returns more specifically. We look at those returns on a regular basis. We update them at when a film is in its early runs. But it's very much a return-driven business.

And we would hope to bring that same approach, that same discipline to the Fox Studios.

Our next question comes from Doug Mitchelson of Crédit Suisse.

So one for Bob, one for Christine. Bob, for Hulu, does the expansion of your non-Disney+ entertainment content require you to own 100% of Hulu if you want to take that internationally? And so if I ask that right, do you need to own all of Hulu to do Hulu international? And pushing that further, because I imagine you're going to say you don't need to. Disney+ has numerous advantages. You laid those out of the Analyst Day. How do you think about the Hulu opportunity overseas and how that service would be differentiated? And any timing on that? I imagine it will be a couple years before enough content is available. And for Christine, Bob talked about the Fox Film slate coming down to 5 or so films a year ex Fox Searchlight. Fewer films will reduce cost a lot in the Fox Studios side. Does the $2 billion of cost synergies include that sort of bringing down the number of films at Fox? Or should we think about those more as sort of core SG&A and other OpEx-type items?

Doug, first of all, we're bullish about Hulu for a number of reasons, but mostly because as we see it, it's the best consumer television proposition out there because it offers linear channels that include a lot of live news and sports, in-season stacking of network programming, a lot of great original programming, and then, of course, a lot of library beyond just the network library in season that I suggested. With Comcast as basically a 33% owner, any big decisions that are made as it relates to investment or expansion would have to be done with their cooperation. And again, I think we would probably both share a bullish outlook about Hulu, but we can't do it on our own.

And Doug, as it relates to the studio and where it factors in with the $2 billion of synergies, at the time that we announced the transaction, that was the number, and it did include the studio. It included a reduction in output as well as 2 studios that had a significant amount of overlap. With overlap came redundancies, and that's all part of the cost synergies that were well on the way of realizing for the studio.

And Christine, if I could just follow up real quick. The $0.35 Fox solution for the fiscal third quarter, I imagine, is sort of unusually high. Just want -- can you confirm that you're still targeting Fox being accretive by fiscal '21?

As I mentioned earlier, we are in the early stage -- well in the middle of, not early stages, in the middle of our long-range planning which will go out within the next couple of years, probably in greater detail than we would do if we had not done this acquisition. But we're in the middle of doing that. So to the extent to which there's any refinement of the accretion dilution, we'll report it at the right point in time.

Our next question comes from John Hodulik with UBS.

Bob, it looks like the NFL's going to move forward with a digital version of the Sunday ticket. Couple of questions from that. First of all, is that a set of rights that could possibly be a good fit for ESPN+? Or are you still sort of focused on second and third-tier rights? And two, does that change your view on, say, the value of the broadcast NFL packages? And then if I could ask just one follow-up, Fox just announced an equity stake in Stars Group to pursue sports gambling and sort of leverage their existing set of sports rights. And I know you've said that, that's not something that you had on the drawing board. But as you look out and becomes more mainstream, is that something that you could potentially revisit?

Well, on the gambling front, we've said, and actually we've already done some things that we would integrate it into our programming, but not to the extent that we would be facilitating gambling as an entity. In other words, we'll provide programming that will, I guess, be designed to enlighten people who are betting on sports. But that's as far as we would go. And I think you'll see more of it integrated in the programming, but we just don't intend to go into the gambling business. On Sunday ticket, I think I'd rather -- I'm not going to elaborate much except that there have been some exploration as to whether there was an opportunity there, but I'm going to leave it at that. And we're very bullish on the NFL. By the way, we got a great schedule this coming year. But we're bullish on the relationship ESPN has with the NFL. And I think we all believe that there are opportunities to strengthen our relationship with them.

Our next question comes from Tim Nollen with Macquarie.

My question is back on the subject of Hulu, if that's okay. News of AT&T selling out and then some discussion of Comcast considering selling. I just wonder, if you lose any partners, what happens to the content that they are contributing to the platform? Do you still get a lot of that Warner content for a long period of time? Does it fall off? And likewise, if Comcast were to drop off, I'm assuming the answer is they won't do that. But if they were to, what would happen to their content in Hulu?

Well, obviously Warner has sold their stake to us -- or AT&T Time Warner sold their stake to us. And I can't get specific about what was tied to that, but there were some ongoing relationship as it related to their product including their channels. And as it relates to the other question and maybe going back to the one that was asked earlier, we're 2/3 owner of Hulu. So the big decisions that are made, there's a vote that is to occur. But we're going to be mindful of how that's managed knowing that we have a fiduciary responsibility to the third-party owner, to Comcast, 33%. And I would imagine -- and I think we've publicly confirmed that there have been -- there has been dialogue with Comcast about them possibly divesting their stake. And you can expect that if that were to occur, there probably would be some ongoing relationship as it resulted to programming.

Okay. So even if you have lost AT&T, Warner as a part owner and the possibility of Comcast leaving, it still means you have a lot, if not all of the content that they were providing for some fairly long period of time?

I'm not going to get more specific than that, so I can't help you at all in terms of your assumptions beyond what I just said.

The next question comes from Alan Gould with Loop Capital.

Bob, you talked about China possibly expanding a Marvel land. I've never seen a series as successful as Marvel. I believe you have the rights west to the Mississippi. Is there any thoughts of having a Marvel land in the U.S.?

We're building a considerable Marvel presence at Disneyland as we speak. And as I don't remember how specific we've gotten about what's in it, but I was there last week, 1.5 weeks, and there's a lot of construction going on. I just have to check. I just don't recall whether we've been specific about what's in it. There are -- I think actually I saw an image online recently of a design concept, but I don't know whether that was leaked or not. We have said that -- and we already have a Guardians of the Galaxy presence as we converted Tower of Terror, and there'll be a Spider-Man attraction as part of the expansion that I'm describing. We're also building a Guardians of the Galaxy coaster in -- at Epcot in Florida, where there are more restrictions to the question that you asked than we have in California. And then in China, we don't have any restrictions. So I imagine we're, at some point, going to get very ambitious about what we do with Marvel at Shanghai Disneyland.

Alan, thank you. And thanks, everyone, for joining us today. Please note that a reconciliation of non-GAAP measures that we 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 call, including financial estimates, may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding the 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 factors contained in our Annual Report on Form 10-K, quarterly reports on Form 10-Q and in our other filings with the Securities and Exchange Commission. This concludes today's call. Have a great afternoon, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.