Warner Bros. Discovery Inc (WBD) — Q2 2018 Earnings Call Transcript

Good morning, everyone. Thank you for joining us today for Discovery's 2018 Second Quarter Earnings Call. Joining me today is David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, after which we will open up the call for your questions. Please try to keep to one or two so we can accommodate as many folks as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Annual Report for the year ended December 31, 2017, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thanks for joining us today. For the second quarter, I'm happy to announce that Discovery delivered a solid set of financial results, continued to make strong progress with the integration of Scripps, and accelerated its pivot to become a global leader in digital and direct-to-consumer media. It is still very early days for the new Discovery, but we feel great about where we are and what we've accomplished so far, and even better about the opportunities ahead of us. I'll spend a few minutes this morning going over performance and strategic highlights from the quarter before turning it over to Gunnar for a detailed look at our financials and our outlook. We feel great about our creative momentum as a combined company, which, along with our significantly-enhanced cross-promotional and content-sharing capabilities, is strengthening our industry position and ratings and reinforcing the value of our entire portfolio. Discovery has the number one, two, and three networks for women in the U.S. with ID, Food Network, and HGTV. In July, the Discovery Channel was not only the number one network for men, but the number one network for all of cable. More compelling, our share of TV viewing across our entire portfolio is growing since the acquisition of Scripps. Today, Discovery enjoys the second largest share of total TV viewing in the United States, second only to NBC Universal. Our broad reach provides what I believe is an unparalleled platform to cross-promote viewership. Utilizing data analytics to implement activity day and date across our networks provides us with a real unique opportunity to drive a marked advantage. We're starting to see some very impressive results. We've put together a world-class creative leadership team, made up of the best from both Discovery and Scripps. This team, along with our strong cross-promotion platform and data capabilities, has enabled us to increase our marketing reach by as much as 50%, growing audiences to targeted shows by approximately 12%. This allows us to save on marketing spend and makes our promotion platform much larger and more efficient. A case study for how we're successfully targeting and reaching audiences is the Travel Channel, where in July we drove a 13% ratings gain among adults 25 to 54 in prime with paranormal content shared from TLC and Destination America, helped by cross-promotion efforts on our portfolio of networks. Another example is Food Network, where ratings in prime gained 18% among women 25 to 54 in Q2, showing real audience appetite with repeat viewers in an environment where repeat viewing overall is down across the industry, particularly for broadcast. One of our new projects for HGTV will resonate with many of those Brady Bunch fans on the call. You may have heard that the house from the iconic series was recently on the market in California. I'm excited to share that HGTV is the winning bidder and will restore the Brady Bunch home to its 1970s glory, as only HGTV can. More detail will come over the next few months, but we will bring all the resources to bear to tell safe, fun stories with this beloved piece of American TV history. Our creative momentum for men was also clearly demonstrated by our 30th annual SHARK WEEK this past July. Discovery Channel's ratings in prime gained 6% among adult males 18 to 49 with a wealth of new cross-network content airing across the portfolio, including GUY FIERI'S FEEDING FRENZY on Discovery and SHARK WEEK cocktails on Food's The Kitchen. This cross-network and talent collaboration made this year's SHARK WEEK one of the most successful yet, resulting in a 15% ratings increase over last year, record streams on Discovery Channel's GO app, which reached a new daily record of 625,000 streams and 3.5 million streams overall for SHARK WEEK-related shows. This strength in attracting such large audiences across all demographics was clearly evident during our very successful upfront. Under the leadership of Jon Steinlauf, our newly combined ad sales teams quickly mobilized just days after our acquisition of Scripps closed. The team developed a very compelling sales strategy around the new Discovery portfolio of family-friendly, safe, and deeply loved suite of brands. Working from roughly the same amount of inventory as sold in recent years, we achieved very healthy price increases across many of our brands, including very strong CPM resets at networks such as ID, which we've long identified as underpriced and undervalued. The attractiveness of our combined reach and range of demographics across our 18 networks was a key factor in achieving this strong performance, helping to firmly cement one of the cornerstones of our domestic revenue synergy efforts. The brand strength and reach we've demonstrated to advertisers, along with our added momentum with virtual MVPDs and progress we are making to join additional OTT operators, including the recently launched AT&T Watch service, on which we recently launched with 8 of the 30-plus channels, gives us increased confidence and visibility towards enhanced domestic advertising revenue growth going into the second half of the year and beyond, as well as for stronger affiliate fee revenue growth next year. We also remain on target for the cost synergies we outlined for you last quarter, all of which Gunnar will take you through in more detail in his remarks. Turning more closely to our Scripps integration process, we are now five months in and making real progress. We feel like we're doing really well. Much of the initial heavy lifting needed to unify both companies is now complete, enabling us to gain traction and feel increasingly confident in our roadmap and strategy. On the content side, we have begun to leverage Scripps' IP globally and are deep into the process of identifying, approving, and rolling out several thousand hours in new markets, with encouraging initial results, notably in Latin America, Europe, and the Nordics, with thousands of additional hours further identified. The benefits from this are multi-fold. Content sharing allows us to lower our costs, better align our lifestyle programming strategy across the network portfolio, and allows us to identify talent for potential crossover opportunities. Let's take Latin America, which represents an excellent example of where both the cost and revenue synergy opportunities are playing out nicely. Our management team in the region has embarked on a multi-pronged strategy. First, they have successfully launched and integrated Scripps content on our existing networks, where ratings have exceeded the prior time slot by over 20%. Titles from HGTV have performed especially well, with ratings up 40%, and moreover, have helped increase ratings on existing home-type programming on our network by more than 50%. Second, they have greatly improved channel distribution where legacy Scripps Networks were offered, helped by legacy Discovery's existing relationships with distributors and operators. Third, they have identified several new markets to launch additional Scripps-branded networks. We are very excited about the prospects in this region and several others and look forward to updating you in future quarters as we progress forward. Here in the U.S., we're also expanding Scripps brands to our TV Everywhere GO platforms, where HGTV and Food are rolling out as we speak, which should help provide our growing GO platform with an even more compelling offering to reach even more of the younger demographic on more platforms. As we continue to grow all of our digital platforms, we announced yesterday an important addition to our executive leadership team: Peter Faricy, who joins Discovery from Amazon as our first-ever CEO of Global Direct-to-Consumer, overseeing all our global digital and direct-to-consumer businesses. Peter was instrumental in building Amazon Marketplace, Amazon's hugely successful third-party seller business. We're excited to welcome his vision and expertise as we drive our direct-to-consumer initiatives around the world, including Eurosport, PGA Tour, Motor Trend, and more. Peter will be looking at all of our IP. Our unique strategic advantage is that we believe we are the leading global IP company, from HG to Food to Science to Sports; we own all of our content on all platforms. Lastly, before turning it over to Gunnar, I'd like to spend a few minutes discussing two international developments: our strategic alliance with the PGA Tour and our expanded joint venture with ProSieben. These are great examples of our differentiated strategy: our pivot to reach viewers across digital, mobile, and direct-to-consumer channels; and our ability to stand out in the marketplace as a preferred partner for the top players in the industry. In June, we announced plans to form an unprecedented 12-year strategic partnership with the PGA Tour to create a Global Home of Golf, including a dedicated OTT service which we'll launch globally across our digital and linear channels beginning in 2019. This is a fantastic opportunity to expand our sports portfolio, leading in sports in Europe through Eurosport, home to the Olympics in Europe, as well as our global distribution platform and direct-to-consumer capabilities to a passionate international audience which complements our existing superfan portfolio. Golf is a truly global sport, with half of the PGA Tour's top players coming from outside the United States, as highlighted by Italian Francesco Molinari's victory at the British Open last month. In Germany, we expanded our partnership with ProSieben to include the Eurosport Player and ProSieben's maxdome VOD service, positioning us uniquely to become a leading streaming service in Germany. The agreement builds on our existing partnership with ProSieben to create a Hulu-like streaming service with Discovery and ProSieben's nine combined German channels, which is a good example of using our market relationship, direct-to-consumer expertise, and sports portfolio to drive value with important local partners. We expect to see more of this innovation in key markets going forward. We're very excited about these opportunities and others, including Motor Trend and the Eurosport Player. As we execute and scale these businesses, we expect modest investment headwinds to translate over time into impressive revenue tailwinds. The culmination of all our efforts is manifesting itself in strong free cash flow growth, where we are notably ahead of our original timeline to deleverage back below our target of 3.5 times net debt to adjusted OIBDA. Our path to greater financial flexibility paves the way for us to make smart long-term investments in our business while maintaining a healthy trajectory for operating and free cash flow growth. Thank you for your time this morning, and I wish you all a few great last weeks of summer with friends and family. I'll now turn it over to Gunnar.

Thanks, David, and thank you, everyone, for joining us today. As David noted, I am very pleased with our underlying fundamental performance this quarter as well as the continued momentum we're gaining with respect to the integration and transformation of our newly-combined company. Indeed, as I stated before, the further we proceed in executing our strategic plan, the better we feel about the opportunities ahead for the new Discovery. This morning, I will first provide a brief overview of our second quarter results, followed by an update on our integration and transformation efforts as well as a discussion of the financial impact from some recent strategic developments, and we'll close with our outlook for the third quarter and the full year. My commentary today will, again, focus on our pro forma results, which include the operations of Scripps as well as OWN and Motor Trend as if all had been owned since the beginning of 2017, and it will be in constant currency terms for the international and total company commentary, unless otherwise stated. Please refer to our earnings release filed earlier this morning for all the detailed cuts of our second quarter results. Let me start by noting that we are very pleased to report that we met or exceeded all of our second quarter top line guidance metrics, and now, let's delve into the results. Starting with total company, second quarter total company revenues grew 1% driven by 5% international growth and 1% domestic growth, partially offset by a 69% revenue decline for Education and Other due to the April sale of our education division. Adjusted OIBDA grew 5%, 400 basis points above revenue growth as total company costs were down year-over-year in our first full quarter post-acquiring Scripps where we started to realize the benefits of transforming the new Discovery with 1% U.S. adjusted OIBDA growth and 14% international adjusted OIBDA growth. Looking at each operating unit, starting with the U.S. segment, second quarter U.S. total revenues, advertising and affiliate revenues each grew 1%. The 1% advertising growth was driven by continued monetization and integration of our GO platform and digital offerings, as well as strong pricing, partially offset by lower linear delivery, especially in the first part of the quarter. On ratings, as David noted, we enjoyed real momentum throughout the quarter at certain networks including Food and Travel, and this momentum continued to build in July. The 1% distribution growth was primarily due to increases in affiliate rates, partially offset by declines in subscribers. The 1% represents a slight deceleration versus the first quarter trends due to a slightly tougher SVOD comp in the second quarter. Delving further into the drivers of U.S. affiliate and looking at pro forma sub trends, overall sub trends remain consistent with recent quarters. Subscribers for our combined portfolio were, again, down 5% due to the continued high-single to low-double digit losses at our smaller networks. More importantly, subscriber declines for our combined fully distributed networks remain consistent with the last four quarters, down 3%. Pro forma second quarter U.S. adjusted OIBDA increased 1% as operating costs were up with higher marketing spending driven by the timing of premieres, particularly at TLC, partially offset by lower personnel costs. Turning now to the International segment, pro forma total second quarter International revenues were up 5%, driven by 2% advertising growth, primarily due to strength at TVN in Poland from higher pricing, as well as increases due to stronger sell-through leading to higher volume in key markets like Italy, Sweden, and Spain, partially offset by weakness in the UK in part due to the World Cup and declines in Norway and Denmark due primarily to continued decreases in put levels. Pro forma affiliate growth was 7%, just ahead of our guidance of mid-single digits. Looking at the drivers of our second quarter affiliate growth by region, in Europe, we had another quarter of solid growth driven again by higher and stronger-than-expected digital revenues from the Eurosport Player, partially due to another quarter of Bundesliga. To a lesser extent, growth in Europe was also driven by increases in linear contractual rates. In Latin America, we also saw healthy growth, primarily due to higher pricing. Growth in Europe and Latin America was, again, offset by declines in Asia, our smallest market, as we continued to be impacted by lower pricing as affiliate deals renew. Turning to the cost side, pro forma operating costs were up 1% in the second quarter, as a 3% increase in the cost of revenues was partially offset by a 3% decline in SG&A. I am very happy that adjusted OIBDA was up 15%, with margins expanding 200 basis points to 32% as we benefited from a combination of solid underlying growth due to strong cost management and transformation savings starting to flow through, partially offset by P&L investments back into a digital and mobile growth area. Having reviewed the highlights of our second quarter results, let me now provide some color on certain forward-looking trends. As usual, I will specifically outline our third quarter top line expectations for each major operating segment. Again, International commentary will focus on pro forma constant-currency growth. First, U.S. advertising. We expect third quarter U.S. advertising growth to sequentially accelerate a couple of hundred basis points versus the 1% growth seen in the second quarter. Growth is expected to be primarily driven by our improvement in linear ratings, continued monetization of digital, as we expect further success of our GO apps as well as continued pricing increases. This growth is expected to be partially offset by further universe declines. Looking ahead to the fourth quarter, we are confident that we will see additional tailwinds due to the very successful recently-completed upfront that David discussed. We identified the upfront as one of the early significant revenue synergies of the new Discovery, and we're very pleased with the outcome Jon Steinlauf and his team were able to achieve. Second, U.S. affiliate. Given the unusually large digital contributions from selling global distribution rights for Manhunt to Netflix in the third quarter of 2017, we expect third quarter U.S. affiliate growth to be around flat. Fourth quarter growth should be similar, given the tough comp on the Scripps side due to their distribution agreement true-up in the fourth quarter of 2017, during which legacy Scripps domestic distribution revenue increased over 10%. However, beyond the tough comps in the back half of this year, based on the terms of our existing deals, the renewal cycle, and increasing confidence in gaining additional distribution on virtual MVPDs, we currently expect to deliver a significant step-up in our affiliate growth rates in 2019. Third, International advertising. Third quarter International advertising is expected to again be up in the low single-digits range. Overall, we expect Europe will again benefit from continued strength at TVN in Poland, as well as sell-through and pricing in markets like Sweden and Germany, partially offset by continued put level declines in Norway and Denmark. The Latin American region is also expected to see continued growth, although we've turned a bit more cautious on our outlook for Brazil. Finally, International affiliate. Third quarter International affiliate is expected to be up in the low single-digit range, a deceleration versus second quarter growth primarily due to the impact from the new ProSieben joint venture, which deconsolidates our Eurosport Player and a large portion of the associated costs in Germany. Otherwise, overall trends remain relatively consistent with the second quarter. We still expect Europe and Latin America to grow. Growth in Europe should be driven by year-over-year increases in digital revenues as well as higher contractual linear rates, and Latin America should continue to benefit from higher pricing. This will again be partially offset by overall declines in Asia. It's important to note that third quarter growth would have projected to be in the mid-single-digit range excluding the impact of our new ProSieben JV. So, let me take a minute to explain this JV and its financial impact. I am personally very excited about this strategic and financial investment. For several years, TV players in the German market have been strategizing about the opportunity that exists for a joint OTT platform, and we have finally come together with this groundbreaking offering. While there is still a lot of operational execution ahead of us, I'm confident in our joint ability to provide a great product to the marketplace. This deal will have several implications for our reported financials. Discovery's international affiliate revenue growth will be lower than current trends and prior projections by a couple of hundred basis points due to the absence of contributions from Eurosport Player in Germany to Discovery’s consolidated revenues. International adjusted OIBDA will improve by a couple of hundred basis points, and of course, we will pick up our 50% share of the JV in equity and earnings of affiliates, which we expect to incur modest initial losses, so our share should be $5 million per quarter for the remainder of this year. For the sake of clarity, please note that we will not be recognizing any revenues on our P&L to the extent we fund associated losses of this JV. And now, I would like to share a quick update on our integration of Scripps. We remain in full transformation mode and are fully engaged in reshaping the business and positioning Discovery to best address our industry's challenges and opportunities. We continue to press ahead across our multiple work streams and initiatives, striving to maximize the potential of the new Discovery, touching upon and refining virtually all of our core competencies, including content creation, advertising, and global distribution of content. All of our initial progress is still extremely encouraging. We're confident in our synergy target of at least $600 million of run-rate cost synergies alone within the first two years of close or by March 2020, and we're already starting to enjoy early success as evidenced by our declines in personnel costs and the lower structural costs internationally this quarter. Let me remind you that we've continued to make investments in next-generation platforms and new businesses. These investments were approximately $50 million for this quarter alone, yet at the same time, we were able to expand our total company adjusted OIBDA margins by 200 basis points year-over-year, as our transformation is absorbing these investments and overall underlying cost inflation. Now, let's look at cost to achieve. In the second quarter, we booked another $187 million of restructuring and other costs, including an additional reserve for severance and additional content impairments in our International business, where we look to increasingly use Scripps content to replace previously acquired content. While a lot of transformation activity is still being refined, we now expect that we could see another $100 million to $150 million of restructuring and other costs in the back half for a total of around $600 million for the full year. Depending on the pace and timing of implementation of the total restructuring costs for 2018, we currently anticipate that around $300 million to $400 million will impact our 2018 free cash flow. As David mentioned, we remain equally excited about the revenue opportunities and enhanced growth prospects we are just beginning to realize from the combination and are extremely pleased with our initial progress. Let me now turn to our outlook for the full year 2018. I am pleased to reiterate all of the full year guidance we've given on our last call. We still expect pro forma constant currency adjusted OIBDA growth to be in the mid-single-digit range versus 2017's pro forma adjusted OIBDA of $4.055 billion. Please keep in mind that our full year reported adjusted OIBDA will be roughly $250 million lower than pro forma since we are only including Scripps in our reported numbers from March 6 on. Please note that as a result of the higher restructuring expenses related to International content, as well as the net $28 million tax reserve taken in the quarter, we now expect our full year book tax rate to be in the mid- to high-20% range versus our prior expectation of mid-20% range. While our cash tax rate ex PPA is still expected to be in the low 20% range with full year total intangible asset amortization still expected to be around $1.2 billion. I am also pleased to reiterate that our full year reported free cash flow is still expected to be around the $2.3 billion range. The final result will continue to depend on currency trends, the timing of the payout of restructuring costs, and working capital movements. I remain very pleased with the ability of our company to generate significant free cash flow. We will continue to allocate virtually all of our free cash flow towards paying down debt and now expect to have net leverage at or below four times by the end of the year, an improvement versus our prior guidance of around four times. I will also again quantify the expected foreign exchange impact on our 2018 results. Given the strengthening dollar recently, the year-over-year impact on revenues and adjusted OIBDA has come down a bit versus prior guidance, but we still expect a nice tailwind. At current spot rates, FX is expected to positively impact revenues by approximately $80 million and positively impact adjusted OIBDA by approximately $20 million versus our 2017 reported results. In closing, we continue to be pleased by our continued progress and excited by the many opportunities we are uncovering through the transformation of the new Discovery. Thank you again for your time this morning. David and I will be happy to answer any questions that you may have.

Great. I have two questions. First for Gunnar, when you look at the legacy Discovery business in the U.S., I noticed that the distribution and advertising, you had no growth in the second quarter. You made some comments that on the distribution side, there was an SVOD comp. Maybe you could explain how big of a comp that was. And on the advertising side, maybe you could just elaborate a little more on what was going on.

Sure, Drew. Good morning. So, let me start with one general comment on how we look at those numbers now. You've seen that we focused the commentary on the pro forma numbers because that's how we manage the company, and our standalone legacy Discovery or Scripps numbers will become less and less meaningless. But to address your question, clearly you're right with the observation. So, we've seen flat distribution revenue in the second quarter. And we have pointed out that part of that was driven by SVOD seasonality in the prior year, so there was a bit of an impact and if it hadn't been for that SVOD comp, we would have seen distribution revenues up. Also, I mean, while we're at the topic, let's talk about some of the other revenue components on the U.S. side for the Discovery standalone portfolio. You've also seen flat advertising revenues. We've talked about previously that the ratings trends going into the second quarter weren't great, but I'm also very happy with the dynamic that we have seen developing through the second quarter and into the third quarter now. The Food Network has come around very nicely. We're also seeing the Discovery Channel up in June, and we're continuing to see a trend in July, which has led us to a more positive outlook for the third quarter, and then the additional tailwind that I've mentioned earlier for the fourth quarter. Also, I want to...

Okay, great. And then...

Yeah, no. So, I mean, just – while we're at it, you also see that the profitability on the U.S. side for the Discovery standalone has been slightly lackluster. Again, this is a deliberate decision that we made to drive our investments in marketing expenses in the second quarter, partly driven by seasonality because we had a larger number of premieres that we wanted to push. But also, as David pointed out in his speech, we are seeing a lot of traction in our ability to promote content across the larger portfolio. So, we’ve made those deliberate investments here and I think we can be happy with the results that we're seeing, and the rating trends give us a lot of confidence. And then, I want to point out one last point on this, on the profitability of the business. As I said in my speech, there are different overlaying trends here. We've got a business as usual cost development. We have continued to make investments in our next-generation platforms. Again, that was $50 million across the entire group. And we have been offsetting that by the early impact of our transformation exercises. So, if you want to take a step back, look at the full company results, then the way I look at it is we've generated $75 million in revenue growth on a pro forma basis and we've dropped $62 million of that to the bottom line. So, that's clearly the early impact of our transformation, and there are puts and takes across the portfolio, but that's sort of the high-level view that I would take.

That's great, very helpful. And then, a second question for David. I wanted to ask about your DTC strategy, particularly in the U.S. I saw you made some comments recently at TCA about direct-to-consumer and the importance of it. Obviously, you made the new hire yesterday that you mentioned in your script. Could you just give us an update on your current thinking about the potential for taking some of your big U.S. brands direct-to-consumer?

Sure. Thanks, Drew. Well, we're pleased to have Peter Faricy join us. He built the Amazon Marketplace platform. He built the tech stack, and he's a digital native that really focuses on what does the consumer want. We've been at this for a while on the direct-to-consumer side, and we're excited about having him join us. One of the things that we've decided is, as a company, and you see it because it flows through everything we do, is that we want to own all of our IP on all platforms. Part of what happened with legacy Discovery is we're not syndicating our content like we used to. We're not selling it in ways that we used to because we want to hold on to as much as we can because we think we have something really special and something that's quite unusual. We're feeling better and better about that. We're confident in our quality brands. We own the content. It’s global. Here in the U.S., our share is growing, and the viewership on our channels is growing, and our ability to promote across our channels and, at the same time, our GO platforms are growing. On the DTC, we have full optionality. The first thing I've been saying for years is that the U.S. is different than every other market. It's been driven by the aggressive push of retransmission consent networks and sports, which kind of bullied the marketplace into carrying that onto every platform at very high rates. The good news is that I think consumers are saying, enough; that there's a lot of quality content out there. We see it with our GO platform with droves of 18 to 25-year-olds watching our channels. And Randall, I think, courageously said, I'm launching a real skinny bundle. Between DIRECTV GO and AT&T Watch, it's very encouraging. We don’t have all the data yet, but we're seeing that when we can get that kind of share, we end up with a massive increase in the viewership we get on those platforms, and it drives much younger people coming on. The distributors doing skinny bundles is a big step forward. We believe we will participate in it. One of the things that we're feeling more confident about now is our channels. We have three of the top channels for women; Discovery is getting stronger. Our overall portfolio is the second largest in America in terms of total viewership. Given the quality of what we have, we expect to be on many more of these platforms. We’re confident that's going to happen. Now we look and we go, what do we do with this great IP? What do we do with these great brands? Unlike any other media company, we have full optionality. We like the skinny bundles. We're focused on getting on all of them, and I think you'll see that we are making progress on that. We have the ability to do it ourselves or do it with others. We're having discussions and we feel very good about our differentiating basket of content.

That's great.

And, Drew, let me come back to your first question. I want to make sure that we very clearly lay out what the affiliate cadence is going to look like for this year. Because, I mean, as we said going into the year, 2018 has less of a rate increase impact than prior years, and we do see some seasonality on the SVOD side. While SVOD does explain part of the slower growth in the second quarter, it will also continue to have an impact in the second half of the year, specifically on the third quarter numbers. That's why we're guiding around flat. The fourth quarter has a very tough legacy SNI comp, so that's going to be in that range as well. But, as I said, we are now much clearer on the view for 2019. If we look at the contractual rate increases that we have locked in and our renewal cycle, much more confidence is lying on the virtual MVPD side. As I said, we do see a significant step-up in 2019. So, around flat in Q3, around flat in Q4, and then a step-up for next year.

Great. Thank you for the responses. Very helpful.

Thank you. This is David Joyce for Vijay. Maybe we could ask a nuance of that question. But David talked about seeing an increase in visibility in the over-the-top pick-up from the different platforms and the revenue growth into the year-end and into 2019. What gives you confidence on that? Thank you.

What gives us confidence is that when you look at how people are watching television, when they could watch anything, there are more people in America who love our content. They want to watch it; having most of our channels be the number one channel they want to watch. Three of the top five channels they wanted at over-the-top services. I'll just say that I think we feel quite confident that we'll make some real progress soon and that we've earned it.

Thank you. Good morning, guys. I want to follow up a little bit on the affiliate outlook into next year and just decompose it a little bit. First, I guess, on the subscriber trend side, you’ve seen kind of consistency in the rate of decline for the last several quarters, as you've mentioned. Do you expect – do you have clear sight into that decline mitigating? And is there – are there any particular events, a launch of a service or a change in some input there that you're going to lap coming up that could give some relief? And then, second of all, you mentioned not only the renewal cycle, but also your existing terms as contributing to your confidence and acceleration. So, could you share what type of terms those are? Are there – you have existing contracts that have an acceleration in the rate that you're being paid next year? Thanks.

Yeah, Michael, so, if we look at the drivers on a piece-by-piece basis, the subscriber trend is one of the most uncertain variables, and we're assuming a continuation of the trends that we're seeing in the marketplace today. Clearly, if, as David alluded to, we manage to secure additional distribution on further MVPDs, that would impact subscriber numbers. But sort of the general trend, we're not assuming a major change. In terms of existing terms, yes, we have a large number of contracts in place and we have contractual rate changes. And as we've said before, 2018 was a bit of a special year because the share of our subscriber base that was affected by rate increases was a very small share only for 2018. We have price increases kicking in for a larger part of the base.

Great. Thank you for that. And maybe if I could just follow up on the first question – or one of the first questions. With respect to your direct-to-consumer strategy, it's a pretty basic question, I think, but maybe a complex answer which is, what do you think about or what are the considerations in not simply launching a Discovery direct-to-consumer product in the U.S. at a price point that's meaningfully above, let's say, your average or even the high-end of your current distribution contract? So, an example would be a CBS All Access, which clearly seems to be priced above their retransmission fee rates. You haven't chosen to do it. I know there's a lot going on, but maybe what are the key considerations for why you haven't done it to date? Thanks.

Right. First, we have great partners with all our existing distributors that have seen the light. They've been talking to their consumers and their consumers want an affordable product. AT&T, in particular, is going to be offering their product for free to high-end, heavy-use users, which we think will start a significant change in the way the industry is structured. This heavy retrans in sports and regional sports package on top is going to be pushed to the side, and we are going to be a big beneficiary of that. Having said that, we are quite ambitious about what we have because we think we have something very different from everyone else. We look at a lot of the great companies right now: Netflix, Showtime, HBO, Starz, and Amazon Prime. These look like fantastic companies that are in the business of scripted content and movies. As you go on these platforms more and more, you're seeing the same movies, and their cost is very high, and they're quite good, and I think many of them are destined to be very successful. They're starting to look alike to consumers. If you want something different, you have one place to look that has all the quality, all the brands that people love, all the characters and stories, and a massive library to nourish and support. We are carefully looking at it: Would we – could we align with someone? Should we align with existing players? Should we go it ourselves or align with a direct-to-consumer platform? We're having a lot of discussions, and we feel very good about the fact that we have something quite different that's in high demand, and we're seeing our viewership and the love for our content growing. So, we'll keep our optionality open, and in the meantime, we are going direct-to-consumer already with sports in Europe. We're going direct-to-consumer in Germany where we launched our Hulu product, and with our Motor Trend product, which we’re taking global. The deal we did with Jay Monahan, the great commissioner of the PGA, is something we think could be a serious, meaningful business. We reach over five billion people, and we own all the rights to the PGA Tour outside the U.S., including the Latin America Tour and the Asia Tour, and we have some more content that we're looking at that will be interesting in that space. But we will build a full-on golf ecosystem that people will be very interested in. We are in the direct-to-consumer business already, and we like our hand.

Great. Thank you both.

Thank you. A couple of financial questions from me. Maybe first, both for David and for Gunnar. Gunnar, I think you talked about $300 million to $400 million of net impact on free cash flow from restructuring this year. So, could you just talk about, as you get into 2019, what that may look like? And is that net of the run rate savings? I imagine when you start to look into next year, you have both more savings and less restructuring spend. So, maybe helping us bridge that would be helpful? And relatedly, David, I think you've talked about $3.5 billion in free cash flow. If you could just give us an update on what your line of sight is into that? And then, I have a quick follow-up just on the adjusted OIBDA guidance.

Why don't I just start off before I hand it to Gunnar for details because we're quite serious here about setting the right economic incentives to get the right performance to ensure we achieve the right synergy, optimize growth, and generate free cash flow. Our goal is to double free cash flow and have this company look like a free cash flow machine. One of the things in the incentives in particular for Gunnar is, if we do not meet these targets, we're going to move Gunnar into Greg's bedroom in the attic of the Brady Bunch house. And that's not a fun place to be. It didn’t have a door, there were beads, if you remember. And Marcia, Cindy, Peter, Bobby, and Jan were all in the main house, but Greg was up in the attic. And that’s the final kind of incentive to make sure that Gunnar delivers on all these numbers he's going to tell you about right now.

Okay. So, yeah. So, look, I mean, as I said, we're reiterating the guidance for this year. We're looking at slightly higher restructuring expenses. Of that $300 million to $400 million, $250 million have already come through in the first and second quarter, so there's between $50 million and $150 million left for the remainder of the year. And then, based on the fact that some of the restructuring expenses are non-cash, you might have seen there's some content impairment in territories where we're leaning into the Scripps content more heavily. That, obviously, will remain non-cash, so there shouldn't be a large number of restructuring expenses coming through in 2019. As we've said before, if we look at the combination of our baseline growth, our transformation and synergy opportunities, I think some opportunities in working capital, we continue to have clear visibility for the $3 billion free cash flow number that David and I have been talking about. Again, I want to make clear, this is not a 2019 guidance. We'll guide you for 2019 as we close this year. But there's clear visibility ahead of us for that number.

So, I would just say, in all seriousness, it's going very, very well. You could see it in the fact that we've said originally two years to be below 3.5 times levered, and we'll be at 4 times or below this year. So, you do the math. But we're looking forward to, and driving very hard, to be below 3.5 times leverage soon and emerge with this great global IP company together with a free cash flow machine, and sit down with our board and look at what do we do with that free cash flow.

Great. And then, just a quick follow-up on the adjusted OIBDA guidance. With the deconsolidation of Eurosport Player in Germany, I get that from what you said, to only be about a $20-million increase to International adjusted OIBDA. So, is it correct to clarify that your total company-adjusted OIBDA guidance for the year is not a downgrade because you're getting this slight uptick in International? It's all kind of the same because the bucket's too big? Or are you signaling a bit of a slight reduction excluding the ProSieben impact? Thanks.

No, I'm absolutely not signaling a reduction in our OIBDA guidance. We've said before that we're looking at a mid-single-digit increase over the $4.055 billion pro forma number from last year, and that continues to be the guidance. Keep in mind, this is only a couple months' impact from the deconsolidation of the Eurosport Player in Germany. It’s not a hugely material number.

Hi. Thank you. Just a bigger picture question for David, and then a quick follow-up. Following the PGA deal you guys just recently did, as well as your other global sports investments, do you feel you have a full plate of opportunities ahead, or should we look even for more announcements of new investments in European or global sports? And then, just a follow-up on the commentary earlier on the upfront, just curious if you could give any more color on how the ownership of Scripps really impacted? Obviously, it was positive. I think you mentioned that. But any more color on really the ins and outs of the upfront and how that worked would be great. Thank you.

Thanks, Alexia. Look, we like our current position. We're looking hard at our Eurosport position. We're the leader in sports, and we don't think we necessarily need more, but we have learned over the last couple of years that it's the big events. So, we've extended out all the majors in tennis; we've extended out the cycling; we have the Olympics. I think we've gotten better at buying. The majority of the sports that we've bought are in low- to mid-single-digit increases, with that strategy of having somebody else spend a lot of money on football. In many cases, we come in with the only pan-European platform. We feel pretty good about Eurosport and think we don't need much more. The PGA will reinforce our golf position, and with PGA we have the premier tour, along with the PGA library and their know-how. We are serious about building a global golf ecosystem with markets like China and a number of markets in Asia, we think have huge potential. Other than that, we’ll be opportunistic. Once we build a global platform for golf with a functioning ecosystem, Peter will drive it. That best practice could be something that attracts a lot of interest. We're in a unique position to reach sports globally, and if you're a smaller league, it'd be tough to build an entire platform. We have a platform across all of Europe and we're building a global platform for the PGA, which opens up a unique opportunity because it's a differentiated skill set.

Thanks. I have two topics. One on Germany, could you just talk a little about the revenue model for the JV? Is it advertising, subscription, or both? And what's the potential in this market, and the potential to expand out of this market with the JV? And then, on advertising, do you see it – it's a little just to clarify maybe a little bit on you've closed the gap a bit. It sounds like you've closed the gap on the female networks, but how much have you closed? How much more is there to go? And then, just in general on advertising, are you seeing any share shifts? Like, David, you talked a lot about how you deserve a higher share. Are you seeing more money coming into cable? Are you seeing less money going into digital? Like, just talk about overall trends.

Yes. Jessica, let me start on that Germany question. So, I mean, as you know, I've been in that market for most of my career and, as I said in my script, we have been thinking about this for many, many years. Early efforts have been stopped by, quite frankly, antitrust considerations because back then the strength of the digital and Internet players wasn't recognized. So, the marketplace agrees that this is a huge revenue opportunity because every TV player in the market has been building their own offerings on an OTT basis. By coming together for the first time, we're creating a single destination like your TV set in a traditional world for the online space. We’ve been clear in our press release that we're inviting other players in the market to join this platform. Not only is there an efficiency point since we stop making all those investments on an individual basis, but we're joining forces. It's a very attractive product from a consumer standpoint. To your question on the revenue model, we're going to be offering various opportunities for consumers to enjoy our content. The basic layer will be an ad-funded catch-up OTT product. Then, on top of that, you'll get an HD live stream for a subscription. You will have the opportunity to add on the maxdome SVOD product with a lot of top Hollywood content and also the Eurosport Player. We’re working on structuring these offerings, and I believe it's going to be a very compelling menu for the market. Regarding to your second question about U.S. upfronts, clearly, we've been successful from a pricing perspective. As David said, one of our most important priorities was to get adequate pricing for ID. On average, across the upfront deals, we obtained a 25% increase for ID, which I think is a great result. This will benefit our fourth quarter and 2019 revenue growth. Moreover, beyond ID, on average we were in the high-single, low-double digit range for most of the networks.

Hi. Thanks for taking the question. I'll try and keep it quick. First, David, you mentioned a couple of times about some optimism about getting incremental distribution on some of these virtual MVPDs. Could you just talk through a little bit on your thinking around your willingness in terms of the number of your networks that you'd be willing to put on there, assuming maybe a smaller selection of them and the rate you'd require to get those networks on there; if it's similar, higher, or lower, in order to secure that distribution compared to others? And then, the other quick question – I hope quick – is just Asia. Maybe, Gunnar, I know it's your smallest part of International. Could you remind us just, at this point, about how big Asia is as a percent? And any information on what's going on there in terms of – looks like lower affiliate prices on renewals? I think advertising has been down too. What can we learn from that market, and what's specific to that market that makes it so different? Thanks.

I think that we've been clear that our channels are very valuable, and we're making progress in our discussions with some MVPDs that we're not carried on. The integrity of the economics of those channels will be preserved. We've structured it so that if someone carries our top channels, we end up with 85% of the money. That’s true in the U.S. and around the world where the fees for our more important networks are higher, and we've done that over the last several years. We won't be compromising these true economics because we believe our channels provide significant value.

And, Todd, you actually asked two questions, right? One is the size. It's very small. It's a single-digit percentage of our total revenue and even smaller from a profit perspective. To your question about what's going on, I think this is something that not only we are dealing with. As the markets mature, there are many territories in Southeast Asia where there's an increasing appetite for local content. For years, we've exploited international English-speaking content, but consumers are turning more toward local content, and we're consequently seeing that in our recent renewals. As I said, while it's not huge, we will see how bundling our activities with the digital space, along with our PGA Tour deal and new local content, will play out.

We think golf is going to be a big helper. We spent a lot of time talking to existing distributors, doing an analysis on how golf is presented, growth statistics for golf, and player statistics in each country. As we enter China, we own all the PGA Tour rights; we have rights in Japan, Korea. We think that these discussions are revealing positive trends, as the PGA is the NFL. We believe this will be very helpful to us.

Thanks. I have two quick ones for David. David, just on the JV in Germany, do you see that model working in other places? And if so, what type of markets would that work in? Secondly, now that you're pointing to 2019 as a better affiliate fee growth year, can you give us a sense of the consolidated U.S. footprint? What is the number or the percentage of footprint that comes due in 2019 and 2020? So, just a broader look at how much of your seasoning of your portfolio is turning over in the next couple of years.

Sure. Well, I think the JV model is compelling. We have all this local content. As a global company, we are looking at Poland, Northern Europe, where we're the equivalent of NBC and CBS combined, and we value this IP. It presents a significant opportunity to collaborate with other broadcasters, to align, and pool IP, because that is what people want to watch. I think you will see more of this across Europe and Latin America. We're not planning to buy more but will ensure our programs stand out. We have loads of rights across Europe, and should we secure additional distribution, we can enhance subscriber growth significantly over the next year.