LPWire: Andy Mooney's Comments at Florida Conference

Andy Mooney's Presentation at the Florida Conference

To listen to the Conference Presentations, click here. Andy Mooney's presentation can be heard immediately following Jay Rasulo's presentation as part of Business #2 and #3.

On Thursday, February 12th Andy Mooney spoke to the Institutional Investors who gathered at Walt Disney World for a two day conference.

Good morning everyone. Disney Consumer Products, or DCP as I will refer to it throughout the presentation, is the division of The Walt Disney Company that capitalizes on the company’s strong brands and franchises in the consumer products arena. DCP fundamentally uses licensing as a business model and as such, is a significant contributor of free cash with low levels of capital employed. DCPs’ operating income in 2003 was $384m, down 2% from $394 million in FY02 .

The trend line looks quite different, however, when the results of the Disney Store in North America are excluded. DCPs’ core business in fact grew 14% from $409 million in FY02 to $468 million in FY03. In 2001, The Disney Store Japan was sold to the Oriental Land Company converting the business from a vertical to licensed model. In 2003, we began exploring a range of options for The Disney Stores in North America and Europe, and we are currently in the late stages of that exploration.

DCP had a strong Q1, with operating income up 25%. Excluding Disney Store North America again, DCP grew 20% from $152 million in Q1 2003 to $183 million in Q1 2004. We believe DCP can generate high single-digit to low double-digit operating income growth in the foreseeable future and also has the potential to double operating income and free cash flow on a long-term basis.

To refresh you, DCPs’ core business is comprised of five lines of business. All five businesses fundamentally employ licensing as a business model and three of our businesses, Hardlines, Softlines and Toys representing 82% of total operating income, employ licensing as the sole business model.

Hardlines, representing 40% of DCP operating income, is comprised of home furnishings, stationery, food & beverage and more recently consumer electronics, including the Mickey-inspired Disney Karaoke microphone that we left in your room last night and hope you and your family will enjoy.

Softlines, representing 21% of total operating income, manages the Disney brand in the apparel, accessories, footwear and time piece categories. This division pioneered direct-to-retail licensing, an important subject which I will talk more about later in the presentation.

Toys, also at 21% of total operating income, manages the Disney brand for dolls, plush, action figures and infant and pre-school toys. This division has relationships with the world’s leading toy companies, including Mattel, Hasbro and Tomy.

Hardlines, Softlines and Toys together generate margins in excess of 70% with very low capital employed. As such, we are highly focused on the growth opportunities for these three businesses.

Our two content divisions, Disney Publishing and Buena Vista Games, represent 18% of DCPs’ operating income. Disney Publishing is the largest publisher of children’s books and magazines worldwide, publishing over 350 million books and magazines each year while reaching 100 million kids per month through its various offerings.

Portions of Disney Publishing operate via a licensed business model, but the division also has a vertical business that generates books and magazines in North America and Europe. This blend of licensed and vertical business models generates a contribution margin of roughly 25%.

Buena Vista Games, our Interactive gaming arm, also has a licensed and vertical business. In North America, BVG is vertically integrated in the PC category and selectively self-publishes titles in the handheld console category. BVG generates high single-digit margins. Publishing and BVG are both becoming more strategically important to DCP and The Walt Disney Company because they create new franchises which are being leveraged across the company.

For example, Disney Publishing has created W.i.t.c.h, an important new property I’ll expand on later in the presentation. DCPs’ international business is significant with 58% of revenues being earned outside of North America.

In 2004, growth at DCP will be driven by building market share in key categories. We will achieve this by improving the price-to-value of our products while expanding our portfolio of properties. Unlike almost all other brands, Disney boasts an unaided global awareness in the high 90th percentile and enjoys significant market share in core categories with core consumers. For instance, Disney is market share leader in its animated theatrical, home entertainment and theme park categories. Within DCP, Publishing is the only clear cut market share leader.

This slide details our market share in just a few key categories. Our low share in these extremely large categories is actually exciting for us because it represents areas where Disney can grow.

As I mentioned earlier, I strongly believe we can drive share growth by significantly improving price to value for consumers. Direct-to-retail licensing is one way to accomplish this, but we are currently developing an even more powerful method called supply chain licensing that I will discuss in detail in a moment. Consumers today are demanding higher value. This has fueled growth in mass market retailing globally.

In the US, mass-market retail has increased at a compounded annual growth rate of 10% for over a decade and this trend is being replicated worldwide.

Within this overall trend, the growth in private label brands has been even more rapid, and the pricing gap between private label brands and national brands has become profound. The gap is most pronounced in Europe with national brands in Germany priced on average 45% higher than private label brands. Here in the U.S., the price gap averages 31%.

Private label brands now account for 22% of all retail sales in Europe and 16% of all retail sales here in the U.S. Private label brands offer value but often fall short on status. National brands offer status but often fall short on value. Given the choice between value and status, consumers are increasingly choosing value over status. However we see real opportunity for any brand that can deliver status and value. The great news is that Disney is that brand.

Disney is the world’s No. 1 family entertainment brand.

Disney is multi-category, multi-geography and multi-generational. If you take the world’s No. 1 family entertainment brand and power it with private label supply chain economics, the end result is a highly compelling business model.

We improved our product price to value in Softlines in 2001 by employing direct-to-retail licensing. Here, Disney licenses the retailer directly and the end result is greatly improved product quality at significantly reduced prices.

At the bottom of the price pyramid, private label brands at very attractive price points are growing every year.

At the top of the price pyramid, the universe for national brands is large but shrinking day by day.

We believe strongly that Disney can thrive in the middle. With direct-to-retail licensing, DCP typically retails at a 10% to 15% price premium to private label brands and, therefore, at a significant discount to national brands. Royalty contribution per unit may drop, but the overall increase in volume more than compensates and drives revenue growth. Since, 2001 we have signed 23 direct-to-retail deals worldwide. Most recently we signed direct-to-retail licensing agreements with Wal*Mart USA, Wal*Mart’s Asda division in the UK and with Wal*Mart Germany. We also recently added Target.

Retailers like direct-to-retail as a business model. They are able to achieve higher margin dollars with Disney under this model than is possible with their own private labels, and significantly more margin dollars than with national brands.

In fact, our key accounts are so pleased with this model that both Wal*Mart and Carrefour now want to expand direct licensing into other categories beyond apparel.

Target and Disney, through a direct-to-retail model, have developed a full range of exclusive Classic Pooh merchandise that is debuting this month across all three of Target Corporation’s retail banners: Target, Mervyn’s and Marshall Field’s.

A second key strategy to improve price to value is what we call supply chain licensing. All large retailers now utilize highly efficient third-party suppliers to manage the supply of their private label brands. These suppliers generally do not own national brands themselves.

For this reason, these suppliers are perfect for Disney to partner with on price to value improvements. Recent examples of this are our alliances with Memcorp in the US and Medion in Europe.

Memcorp and Medion have become licensees of Disney, managing the supply chain to retailers for the creative line of electronics that launched in 2002 and were designed by frog design. This approach ensures Disney has highly innovative product offered at retail price points lower than any of the global consumer electronic brands.

In the long run, we believe supply chain licensing will be an even more important driver of growth than direct-to-retail licensing, as supply chain licensing enables us to extend the impact of our price to value improvements beyond just key retailers.

If you visualize our business models on a continuum from traditional licensing to direct-to-retail licensing, with supply chain licensing somewhere in between, the combination of direct to retail and supply chain licensing today accounts for 11% of DCPs’ revenues. Over the next five years we see this growing to 25% or more. Share growth for DCP will also be fueled by a growing roster of properties enabling us to reach new demographic and psychographic audiences.

As Bob Iger described earlier, supporting and growing our properties is much more than synergy. It requires cohesive brand management across all of Disney’s divisions. In 2003, Mickey Mouse and Winnie the Pooh generated 71% of DCPs’ revenues. That percentage will get smaller in future years, not because Mickey and Pooh will shrink but because newer properties will grow at an even faster pace. We also will continue to introduce other properties.

The company will continue to support and grow Mickey and Pooh through new theatrical releases, direct-to-video releases, theme park attractions, TV shows and compelling consumer products.

For example, we began an initiative several years ago to capitalize on the current retro phenomenon. Who else has a better treasure trove of classic characters than Disney? Soon after we began seeding retro Mickey t-shirts to talent both in and out of the Disney family, celebrities like of Jennifer Aniston, Leonardo DiCaprio, Debra Messing, Sarah Jessica Parker, Jennifer Garner and Lenny Kravitz began showing up in People magazine, Us Weekly and even their own shows wearing vintage Mickey clothing. We also worked with Fred Segal, the trend-setting Santa Monica boutique, to create a line of retro t-shirts and other apparel. Shortly thereafter, there were Mickey t-shirts in full page Lord & Taylor ads in the New York Times, fashion spreads in French Vogue and in the Bloomingdale’s catalogue. We have retro Mickey apparel in three different departments in Nordstrom’s, in Neiman-Marcus, Colette in Paris and Selfridges’s in London. Barney’s of New York has placed eight re-orders just since Thanksgiving. Fred Segal recently rolled out a new collection that includes $300 cashmere Mickey sweaters that are flying off the shelves. This initiative has been such a success that a few months ago Katie Couric asked fashion guru Steven Cojo on the Today Show if “Mickey is the new black.�?

While all of this helps our current bottom line, more importantly, it’s another way in which we are working as a company to keep a 75 year old property relevant to new generations of kids. If Hilary Duff or Raven love their own Mickey t-shirts, that’s all the proof needed for kids to keep Mickey cool.

In 2003, Disney Princess accounted for 9% of retail revenue resulting in retail sales of over $1.3b. Princess continues to grow robustly in 2004 fueled by multiple product line extensions across multiple categories and multiple geographies. It doesn’t seem to matter if it’s Tokyo, Shanghai, Berlin or Los Angeles, globally, girls want to be Princesses. We do not view the rise of Princess as a short-term phenomenon. We view it as a long-term lifestyle brand for girls that also enables them to build their imaginations.

Film properties accounted for 11% of DCP revenues in 2003 with 3% coming specifically from Toy Story. Given the strength of the upcoming movie slate presented last night by Dick Cook, we anticipate reversing the downward trend in film licensing of recent years and growing this category once again.

Disney/Pixar’s Incredibles and Cars will, of course, generate opportunities as will Chicken Little, the upcoming CGI movie from Disney Feature Animation. However, the retail environment for new-film based intellectual property continues to be challenging. DCP will however benefit significantly as The Walt Disney Company develops sustainable content in the form of theatrical or direct-to-video sequels as well as television shows behind proven properties, particularly Toy Story, as our franchise development efforts in support of Toy Story were essentially put on hold during the Pixar negotiations.

Our live action slate offers a whole new area of opportunity with Hitchhiker’s Guide to the Galaxy, The Lion, The Witch and the Wardrobe, and future Pirates of the Caribbean adventures. All three properties will enjoy high pre-awareness and will be supported by significant pre-film marketing. Both will drive merchandise sell-in and sell-through.

Moving to television …Although DCP revenues from television-based properties are small today at 3%, TV properties will become increasingly important to DCP. Power Rangers is an evergreen property and continues to grow in its 12th year on-air in the U.S. The show’s core trait of teamwork has resonated with boys for over a decade. This, coupled with the intrinsic creativity of the show that includes its reinvention every 12 months, makes it a winning formula. DCP recently assumed the management of Power Rangers consumer products in Europe from Fox Kids. This will allow us to leverage our significant infrastructure there to ignite growth for this important property.

As I mentioned earlier, another important property that will fuel growth at DCP in 2005 is W.i.t.c.h. W.i.t.c.h was initially developed in Italy in 2001 by Disney Publishing in comic book form and has now been successfully launched in 42 countries. Like Disney Princess, the appeal of W.i.t.c.h. appears to be universal. This short video will give you a feel for the property. The strength of our Publishing program in Europe has already enabled us to successfully introduce W.i.t.c.h merchandise at retail. In Italy, W.i.t.c.h product is selling at the same pace as Disney Princess. The turbo booster for W.i.t.c.h will come in spring 2005 when W.i.t.c.h migrates to television. As W.i.t.c.h appeals to a slightly older girl than Disney Princess, we see product opportunities here being largely incremental to Princess.

You will hear from Anne Sweeney a little later about our latest, exciting new branded TV platform named Jetix. Jetix, over time, will offer a whole new world of opportunity for DCP, particularly in the boy’s area.

I’ve talked about just a few of our franchises today but there are many others in development at Disney Feature Animation, Disney Channel, Disney Publishing and Buena Vista Games that will provide the basis future growth.

In conclusion, we believe that growth at Disney Consumer Products is both achievable and sustainable. The key strategies instituted over the last three years are working, and we feel confident in our projections for the future.

Thank You.

--Posted February 12, 2004
Transcript of Conference Presentation in Walt Disney World