Euro Disney S.C.A. received ten written questions from two shareholders for this years Annual General Meeting.
The following are the questions received from M. Michel Bayard (individual shareholder):
Question 1: M. Michel Bayard would like to understand why revenues decreased while costs and expenses increased in Fiscal Year 2016?
Fiscal Year 2016 was particularly difficult for the tourism industry in Île -de-France. It was marked by an accumulation of external factors that had a negative impact which include: security concerns following the events in Paris, Brussels and Nice, as well as strikes in France and exceptionally poor weather conditions, including flooding in Paris. In addition, the Euro Disney Group (the “Group”) closed the parks for four days to respect the national period of mourning.
Over the same period, costs increased driven by the Group’s continued focus on its long- term strategy of investing in the guest experience and entertainment. These planned cost increases were necessary in executing our strategy and included renovations of our parks and hotels, and preparations for the 25th Anniversary.
In addition, following the events in Paris, Nice and Brussels, the Group incurred additional costs related to incremental security measures, as the safety of visitors and employees is a top priority at Disneyland Paris.
The Group remains attentive to the evolution of its costs and will continue to pursue a prudent approach in operating the business and executing its long-term strategy.
Question 2: M. Michel Bayard expressed being perplexed about the impairment charge recorded this year and he would like to know why the impairment was not anticipated in the previous years?
In accordance with the accounting rules, an impairment test is only required to be performed if there is an indicator of impairment. Due to the decline in revenue of the Group in fiscal year 2016 resulting from the challenging economic environment in Europe (and in particular the overall tourism industry in Paris) it was determined that an indicator of impairment existed. Accordingly, the Group was required to perform an impairment test on the Group’s asset in the current year.
Question 3: M. Michel Bayard would like to know how the Group intends to limit the risk that its investments will not have a positive impact on its revenues .
The Group’s strategy is a long-term strategy. This strategy aims to enhance the guest experience, and therefore, increase guest satisfaction as well as average spending. If guests are satisfied they return to the Park, recommend the Park to family and friends, and consume more in the Disneyland Paris parks, hotels and boutiques.
Guest satisfaction related to our recent investments (i.e., renovated hotels and Park assets) is increasing. The rehabilitation of the Newport Bay Club Hotel is a perfect example: since its reopening, guest satisfaction has increased by 30 points and we have seen a double-digit increase in rates.
The Group monitors its investments closely, including the ongoing assessment of the impact from prior investments (i.e., financial, guest satisfaction, operational).
Question 4: M. Michel Bayard estimates/believes that the reference document does not sufficiently detail the impairment charge.
The depreciation of our long-term assets is detailed in section B.3 “Consolidated financial statements”, note 3 “Property, plant and equipment, investment property and intangible assets”, section 3.3 “Impairment charge” (see page 83).
In this section, the Group provides robust disclosure on the assumptions used in calculating the value in use of the assets in determining the impairment charge.
Question 5: M. Michel Bayard asked for more information on royalties: 1) Is the 10% rate comparable with market rates? 2) Is it normal that a parent company with the amount of revenues as The Walt Disney Company charges its subsidiary for certain costs?
On average royalties represent 5% of total revenue, which is a lower level than some market practices.
These royalties are paid as compensation for the use of the intellectual property rights of TWDC. This intellectual property constitutes the “terroir” of Disneyland Paris that makes it unique and creates the Disney magic.
Royalties to be paid by the Group for the use of these rights are equal to:
• 10% of gross revenues (net of taxes) from rides, admissions and related fees (such as parking, tour guides and similar service fees) at all Theme Parks and attractions;
• 5% of gross revenues (net of taxes) from merchandise, food and beverage sales in or adjacent to any Theme Park or other attraction, or in any other facility (with the exception of the Disneyland® Hotel), whose overall design concept is based predominantly on a Disney theme;
• 10% of all fees paid by participants (net of taxes) (see section A.4.2. “Other Significant Operating Agreements” for more details); and
• 5% of gross revenues (net of taxes) from the exploitation of hotel rooms and related revenues at certain Disney-themed accommodations. None of the Group’s currently existing Hotels at the Resort are considered Disney-themed as defined in the License Agreement, except the Disneyland Hotel which is specifically excluded.
In November 2016, The Walt Disney Company agreed to waive the payment of two years of royalties and management fees, commencing with payment for the fourth quarter of Fiscal Year 2016.
Following are the questions received from Charity & Investment Merger Arbitrage Fund (“CIMA”)
Question 6: “How do you justify the significant increase in the cost and expense items of the consolidated income statement for the fiscal year 2016? In particular the distribution of variable compensation while the company recorded a significant loss.”
Costs and expenses were up 5% compared to the prior year. This increase reflects the long- term strategy of the Group of investing in the guest experience, including the renovation of theme parks and hotels (notably in preparation of the 25th Anniversary), higher salaries, and other operating expenses (such as technology initiatives and mobile applications). The Group also increased its security costs following the events in Paris, Nice and Brussels. These increases were partially offset by lower costs associated with declining attendance.
The wage policies implemented by the Group are market-consistent and comparable to practices implemented by companies of similar size and / or operating in the same industry.
Question 7: “How do you justify the 40% increase in expenses over the years 2006 to 2016 while over the same period the revenues increased only by 17.5%?”
From 2006 to 2016 our costs have grown at a compounded annual rate of approximately 3%. Over the same period, the compounded annual growth rate of inflation was 1.2%.
During this time, the Group’s strategy focused on investing in the guest experience to generate long-term revenue growth. This strategy is proving successful. Disney’s Newport Bay Club and other renovations in the parks are good examples. The Group is also investing in entertainment and shows that drive guest satisfaction, including the launch of the show The Forest of Enchantment: A Disney Musical Adventure and Mickey and the Magician.
Additionally during this period, the Group invested in areas that are less visible to our guests. Examples include investments in the Cast Members who deliver the service to our guests and create the Magic, as well as invests in technology that makes online tools and mobile applications available to guests before and during their stay.
Regarding revenue performance, it is important to note that from 2006 to 2016, the Group experienced economic crises, terrorist attacks, and political instability, all of which negatively impacted revenue growth during the period. Had the Group not pursued the strategy of investing to improve the guest experience, the impact of these unfavorable events would have likely been much more detrimental.
Question 8: “How exactly do you justify the 2 massive depreciation charges announced respectively for €565 million for the assets of Euro Disney Associés S.C.A. and €953 million for the shares of Euro Disney Associés S.C.A. held by Euro Disney S.C.A. ?”
As disclosed in our 2016 Reference Document, “as a result of the adverse economic conditions of the tourism industry in Paris, which contributed to the deterioration of the operating results of the Group for Fiscal Year 2016, the Group performed an impairment test of all its long-lived assets and determined its assets were impaired. Accordingly, the Group recorded a charge of €565 million in the year.” This impairment charge was calculated in accordance with International Financial Reporting Standards (“IFRS”).
Separately, the Company prepared stand-alone statutory financial statements under French accounting principles (being different than IFRS principles) with the Company’s primary asset being its investment in the equity of its subsidiary Euro Disney Associés S.C.A. (“EDA”). The Company performed an impairment test of its investment in EDA and recorded an impairment charge of €953 million.
These asset depreciation charges have no impact on the liquidity position of the Group and the Company or on their cash flows.
More information on these asset impairment charges are included in the 2016 Reference Document of the Group, notably notes 184.108.40.206. “Impairment of long-lived assets” and 3.3. “Impairment charge” of the consolidated financial statements and notes 2.3. “Investments in subsidiaries” and 3.1. “EDA” of the statutory financial statements of the Company.
Fiscal years 2014 and 2016 included impairments charges which impacted overall accounting losses in those years.
For Fiscal Year 2016, the Company recorded a net loss of 953 million euros due to an impairment of its investment in the equity of its main subsidiary, EDA, the operating company of Disneyland® Paris. In Fiscal Year 2014, the Company recorded a net loss of 472 million euros, of which 471 million euros related to an impairment charge of its investment in the equity of EDA.
Excluding the 2014 and 2016 impairments, the average statutory loss of Euro Disney S.C.A. from 2014 to 2016 was €3 million.
Question 10: “How do you justify the impairment of the assets at the level of Euro Disney Associés S.C.A. and EDL Hôtels S.C.A., while the first quarter shows an upward trend (up 3% in revenues) and you assume on page 83 of the reference document for 2016 that ‘the group will benefit from its 25th anniversary celebration, the economic recover y of the tourism industry in Paris and its long-term strategy of investing in the guest experience’?”
As detailed on page 83 of the 2016 Reference Document, the calculation of value in use takes into account a “revenue growth assumption higher than the historical average as the calculation assumes the Group will benefit from its 25th anniversary celebration, the economic recovery of the tourism industry in Paris and its long-term strategy of investing in the guest experience.”
Finally, while performance in the first quarter was positive, it was in comparison to the first quarter of fiscal year 2016, which was significantly impacted by the events in Paris, the closure of our parks for four days, and the subsequent decline in bookings.
Source: Euro Disney S.C.A.