Warner Bros. Discovery Inc (WBD) — Q4 2018 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for Discovery's fourth quarter 2018 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; Gunnar Wiedenfels, our Chief Financial Officer; and JB Perrette, our President and CEO of International. You should have received our earnings release, but if not, feel free to access it on our website at www.corporate.Discovery.com. On today's call, we will begin with some opening comments from David and Gunnar and then we will open up the call for your questions. Please try to keep to one question, so we can accommodate as many people 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 may 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 will turn the call over to David.

Good morning everyone and thank you all for joining us on today's call. Before we begin, I'd like to extend a warm welcome to JB Perrette, our President and CEO of International. JB and I have been working together for almost 20 years and I'm pleased that he'll be joining us on this morning's earnings call. With so much exciting activity taking place across our diversified international portfolio, JB can help provide some color and perspective on what's taking place in the many international markets in which we operate. I'm pleased to report that we delivered a strong set of operating results this morning capping off a transformative year for Discovery. Coming up on a year since our merger with Scripps, I'm proud of the achievements and progress we've made in a short amount of time and even more excited about the opportunities ahead. Over the last year, we've reengineered our company, creating a leaner, more efficient, and more focused global operating structure, represented impressively in our expanding operating margins which increased by 600 basis points this quarter and we expect to expand our margins further in 2019 as Gunnar will discuss. Our better-than-expected free cash flow generation and our significantly reduced net leverage reduced by roughly a turn in just 10 months. We are a free cash flow machine and we intend to drive it hard. We've also taken meaningful steps to strengthen and solidify our core businesses by adding exclusive new content and capitalizing on the uniqueness of our globally loved brand and treasure trove of IP. We are powering people's passions with immersive 360-degree media ecosystems in popular and valuable content categories uniquely combining linear and direct-to-consumer experiences. And we continue to enhance our global suite of brands and IP that have real utility and function, helping to further differentiate us from our peers. We have a growing opportunity to more effectively attract and engage viewers around the world and across all platforms, against the backdrop of our position as the number two TV company in America including broadcast and cable. Our leadership position in 200 countries and territories around the globe with multiple channels in every market make us the number one pay-TV company in the world. We cast a uniquely wide global net essentially unparalleled. Our existing reach allows us to drive awareness to our emerging set of consumer services. I've referred to this in the past as having a brick-and-mortar presence or the ability to drive awareness on the ground to our mobile and direct-to-consumer presence. Our ubiquitous global brands and pay and free-to-air channels such as the Discovery Channel, Animal Planet, Food, HDTV, MotorTrend, Science, TLC, ID, Oprah, and Eurosport and valuable strategic long-term partnerships like those with the Olympic Games and the PGA Tour, the European Tour, and Tiger Woods, helped to differentiate us on this front. Our Global IP which we own above the globe is also distinguished by the fact that it married entertainment with function and utility. And in an environment where 5G and bigger broader pipes create wider lanes into the home and directly to consumers wherever they are, the nature of what nourishes people can and will change, we're extraordinarily well-suited to capitalize on that. We view our passion verticals like Food, Home, Natural History, Science, Auto, and Oprah, as representing great examples of where our functional content can extend into new ecosystems with a conversation with viewers, fans, and participants has elevated into an experience that brings watching and doing together. When it comes to traditional scripted content and movies, people watch that content. We have an opportunity to create content and experiences where people watch and do. Additionally, our strategy has been to own and control virtually all of our content rights in every window, in every market around the world. We have purposely left meaningful revenue dollars on the table by playing the long game as compared to many of our peers that have for example hived off digital distribution to any number of streaming services or sold-off international rights. As a result, we will not have to buy back content and give up revenue to drive our strategy forward. It allows us to have great speed to market and accelerate our ability to scale as services gain consumer appeal. For example, let's look at the Food and Cooking category, a broad genre that represents a multiple-hundred-billion-dollar addressable marketplace in which we have excelled as a perennial top cable network for decades. We enjoy rich engagement with a strong and trusted brand that is loved by fans. The Food Network reaches over 150 million global fans per month on its digital properties alone and they consume over 450 million monthly video views, enjoy a leading social footprint, has 10 million monthly readers of our Food newsletter, and over 80,000 recipes that are regularly accessed. When fans think of Food, our brands are well represented and our relationships run deep and wide and serve as a great backbone from which we can continue to pursue entirely new business models. In our drive to build and own the global cycling ecosystem, we acquired the Global Cycling Network last month. It is a targeted and highly valuable global audience including a sizable group here in the U.S. and it follows on the heels of our multi-platform global alliance with the PGA Tour in which we are seeking to super serve communities of passionate sports fans. We first invested in the Global Cycling Network two years ago and recently took a large majority ownership position. We're now the leader in serving passionate highly participatory and high-income cycling enthusiasts around the globe, a $50 billion plus market. The business model has multiple revenue streams including advertising, subscription, commerce, and events among others, and by complementing Eurosport's position as the home of cycling in Europe we believe there is great upside to this combination and offering. And it's a terrific blueprint much like MotorTrend, another strong example of the vertical where we have been able to drive an immersive 360-degree offering by leveraging our linear presence, in-depth IP, and brand recognition with fans. We've gotten off to a great start with Golf TV, our long-term relationship with the PGA Tour and we're very pleased with early product results. While we're still in beta and really just getting started, we're happy with the quality of the technological capabilities thus far and early engagement numbers are impressive after only a few events. We're super excited about our global relationship with Tiger Woods and the initial Tiger content is proving to be a great driver of interest. Tiger is having a lot of fun with the interface with fans and we've already produced over 30 original pieces that have been consumed by millions of fans over just the first three tournaments. And we are enthused by the positive perception we've seen to both the linear and OTT product within the initial countries where we've come to market and we're hard at work building something truly unique in the years ahead. As we dig deeper and refine our strategy in direct-to-consumer under Peter Faricy and his team, we gain a great perspective on how best to pivot our resources financially, strategically, technologically, and operationally to the consumer-first mindset that engages fans across the breadth and depth of our functional content verticals. And building upon the experiences we've gained from our initial forays into this ecosystem such as launching the Eurosport Player and our GO apps which are now a several-hundred-million-dollar-a-year business and growing. We’ve gained some great insights into what works and what doesn't. You've heard me say repeatedly achieving success in the direct-to-consumer world will require a lot more than a simple shifting of content from one platform to another. We believe the successful offering requires an experience that is immersive, trusted, informative, educational, social, and community-driven. And by virtue of our many functional verticals, we're well-suited to successfully pivot our businesses forward. Gunnar will take you through the financials in detail in a few moments, but I'd like to highlight just a few key items. Our brands continue to strongly resonate and feel differentiated within a content landscape that is increasingly cluttered and crowded. Whether marked by the continued momentum at TLC, picking up even more momentum from where it finished 2018 as the number one ranked channel in Prime in January for women 25 to 54, or the impressive resurgence in ratings at both Food and HDTV that began midway through 2018, the continued success at ID which maintained its number one position in total day for women 25 to 54. Thus, even with the noted rating challenges at the flagship Discovery which are improving, Discovery is still the number one network for men in Prime X Sports. Our portfolio still achieved domestic advertising revenue growth of 3% despite not having news or sports which speaks to the power of our broad portfolio balance. We launched additional legacy Discovery Networks late in the fourth quarter on Hulu and Sling solidifying our long-held view that our portfolio brands do indeed resonate in an OTT world and we continue to strive to partner with every and all key OTT players in the marketplace. Turning to International. While our results are somewhat skewed due to the tough comparisons against the China Mobile distribution deal and deconsolidation of our Eurosport Germany ProSieben venture, our underlying international performance remains solid particularly in light of softness in certain international markets such as the UK with Brexit, Italy, and Mexico due to economic and political challenges. We remain focused on continuing to integrate and take full advantage of Scripps content and brands internationally. It's still very early and will take time to see these benefits fully materialize but less than a year into it, we're seeing positive signs on our three main objectives and benefits. One, driving meaningful cost savings by replacing acquired content. These content cost synergies are a meaningful contributor to yet another quarter of margin expansion that we have delivered in 4Q and anticipate more in 2019. Two, leveraging the previously unexploited content and formats to strengthen our existing international networks. Scripps content is now making up from single-digit to low 20% of schedules in certain key markets such as Germany, Italy, Brazil, and Mexico and we are seeing continued improvements in performance as well. And finally, three, launching new pay free-to-air and digital branded services focused primarily around Food and HDTV where in markets such as Europe and Latin America, we're securing commitments and getting off to a great start with new network launches. Lastly, we believe that we have the right combination of linear and non-linear platforms. The strongest hand in Global IP and some of the strongest brands in creative curators in the world, all supported by a strong and de-levered balance sheet throwing off a ton of cash which provides us with great runway and optionality. We're confident in our ability to execute during this time of disruption and during this time of great opportunity.

Thank you, David, and thank you everyone for joining us today. As David stated, 2018 was a momentous transformational year for Discovery, as we completed the acquisition and integration of Scripps and I'm so proud of what we have accomplished operationally, strategically, and financially. We remain well ahead of our original expectations in our synergy realization and overall company transformation and are very optimistic about Discovery's outlook. Let me now walk through our fourth quarter and full-year financial results. My commentary today will again focus on our pro forma results which include the operations of Scripps as well as OWN and MotorTrend as if all had been owned since the beginning of 2017 and 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 of the detailed cuts of our fourth quarter and full-year results. For the full-year 2018, Discovery achieved or exceeded all of our total company guidance metrics with 8% full-year adjusted OIBDA growth helped by a decline in SG&A and total costs due primarily to strong synergies from the Scripps transaction. Over $2.4 billion of reported free cash flow as we benefited from strong operating performance and working capital timing deficiencies partially offset by Scripps related acquisition and integration costs. And as David noted, we ended the year with net leverage of 3.7 times roughly a full turn lower than when we closed the transaction. Looking at the rest of our full-year results, total company revenues were up 3% with 2% domestic growth which was driven by 3% advertising growth and 1% distribution growth and 8% international growth which was driven by 3% ad growth, 5% distribution growth, and almost 90% other revenue growth primarily from sub-licensing a portion of our Olympics rights in the first quarter. This was partially offset by a 66% decline for education and other due to the April sale of our Education division. Pro forma revenue growth excluding the impact of the sale of the Education business was 4%. As I previously noted, adjusted OIBDA grew 8% well above revenue growth as total company costs were down year-over-year despite having the first quarter Winter Olympics in Europe and despite continued investment in digital initiatives as we realized significant synergies from the merger. Full-year net income increased to $594 million versus a net loss in the prior year which was impacted by the non-cash European goodwill write-down. Our full-year tax rate came in at 33% higher than our latest expectation of the high 20% range due to higher than expected taxes in the fourth quarter primarily due to a book tax charge associated with net deferred tax assets as well as additional fourth quarter non-cash impairments and restructuring charges which impacted net income before taxes in our International division. Focusing now on our total company fourth quarter results, total company revenues were down 1% with 2% domestic growth and flat international growth and a large decline in Education and other due to the sale of the Education business. Adjusted OIBDA increased 16% and margins expanded a healthy 600 basis points helped by significant declines in costs both in the U.S. and internationally in large part due to merger synergy which more than offset continued investments in our digital initiatives. Now let's look at our individual operating units, fourth quarter results, starting with our U.S. segment. Total U.S. revenues grew 2%. We had another quarter of solid advertising growth of 3% which was driven by strong pricing and continued modernization of our GO TV Everywhere platform, partially offset by the impact of lower linear rating particularly at the flagship Discovery Network. Distribution revenues grew 1% driven by increases in affiliate rates and additional contributions due to new carriage on Sling and Hulu towards the end of the year for certain key legacy Discovery nets, partially offset by a decline in linear subscribers across the full portfolio for the three months. Delving further into the drivers of fourth quarter U.S. affiliate growth, subscriber trends at our top fully distributed nets like Discovery and TLC which are driving the lion's share of our economics were flat at the end of December, a nice improvement versus down 2% in the prior quarter primarily due to the additional carriage on Hulu and Sling. While total portfolio subs declined 4% year-over-year as expected due to continued high-single to low double-digit losses at our smaller nets. Total domestic costs were down 13% due to content synergies and lower personnel costs leading to 17% growth in fourth quarter domestic adjusted OIBDA and very strong 56% domestic margins or 700 basis points of year-over-year margin expansion. Turning now to our international segment. Fourth quarter advertising growth came in flat year-over-year as increases in Europe primarily due to pricing were offset by declines in Asia and in Latin America where double-digit growth in Brazil was more than offset by declines in Mexico and other markets. Fourth quarter affiliate growth of 2% came in ahead of our guidance as increases in Europe due primarily to higher pricing and increases in Latin America due to greater than expected increases in subscribers as well as pricing were partially offset by declines in Asia, our smallest market due to lower pricing as well as a tough comp versus contributions from our mobile licensing deal in China in the fourth quarter of last year and the continued impact from the proceeds in JV. Turning to the cost side, operating costs were down 6% in the fourth quarter with cost of revenue down 9% primarily due to content synergy and flat SG&A with personnel cost reductions from the integration of Scripps offsetting increased personnel hiring primarily related to the digital initiatives. This led to 15% adjusted OIBDA growth and 500 basis points of year-over-year margin expansion. So now that I have reviewed the highlights of our 2018 results, let me share some forward-looking commentary on 2019. From a total company perspective, starting with free cash flow, we are very proud to have come in at over $2.4 billion of free cash flow in 2018 versus a target of around $2.3 billion that we said going into the year. I think this is a great result given our priority of de-levering the company as quickly as possible taking net leverage down roughly a full turn in less than 10 months. This represents a free cash flow conversion of over 55% of adjusted OIBDA which underscores the strong potential for cash generation at the new Discovery and nicely offset the significant step-up in operating investments in our direct-to-consumer and overall global digital businesses. Looking ahead in 2019, we expect another year of healthy free cash flow growth based on further adjusted OIBDA growth and continued margin expansion even after further $200 million to $300 million digital P&L investments, lower cash restructuring costs to achieve which we currently expect to be around $150 million versus $400 million in 2018, and further focus on working capital efficiency. There will be some offsetting factors such as higher cash taxes and a roughly $100 million step-up in capital expenditures as part of our further transformation efforts but we will continue to be laser-focused on driving healthy free cash flow growth after also making the investments necessary to build out our direct-to-consumer portfolio. We will continue to update you over the course of the year as we refine the timing and magnitude of our digital investments based on progress, acceptance, and the ultimate success of our initiative. I also wanted to share some commentary around our synergy progress. In 2018, we grew adjusted OIBDA by 8% despite significant investments in digital initiatives primarily due to strong merger benefits across the full global portfolio. While it will become increasingly difficult to identify synergy versus underlying business momentum, we continue to relentlessly drive our ongoing transformation, and as we look ahead to 2019, we will strive towards further cost and revenue upside. And while we expect to increase our investments in our strategic pivot, merger synergies will allow us to more than offset these investments and even after realizing healthy margin expansion in 2018, we expect to see additional margin expansion in 2019. On leverage, we remain well ahead of our schedule to get our net leverage within our target range of 3 to 3.5 times and we expect to be under 3.5 times in the first half of this year. We will discuss our capital allocation plans in more detail once we are within our target range, but for now, our priorities have not changed: first, to reinvest in our businesses; second, to pursue strategic and value-accretive M&A investments; and third, to return capital to shareholders through share buybacks. With two-thirds of the first quarter now under our belt, I will also give some color around our four key revenue drivers on the pro forma constant currency basis for the first quarter 2019. First, for U.S. advertising, growth is expected to be up in the low-single-digit range with similar dynamics as in the fourth quarter of last year, continued pricing increases and the continued monetization of our digital and GO products, partially offset by lower linear ratings on a year-over-year basis. Portfolio ratings overall are currently similar quarter-to-date, though key networks like Discovery and TLC are slightly improved versus the fourth quarter supported by additional carriage on Sling and Hulu. Where our ratings end up for the quarter will help determine where we will fall within our guidance range. We would note that we expect a positive impact from having additional nets on Sling and Hulu to continue to slightly pick up throughout the year. Second, U.S. affiliate growth is expected to be up around 3% to 4%, Instagram over the course of the year to be up comfortably in the mid-single-digit range on a full-year basis again given expected tough growth at virtual MVPD. Note this guidance assumes no significant change in the industry's underlying subscriber trends. Third, international advertising growth is expected to be down high-single digits due to the tough comp versus the Olympics in Europe in the first quarter of last year as underlying trends remain relatively consistent with what we saw in the fourth quarter across our markets. And finally, international affiliate growth will be around flat where again underlying trends remain relatively consistent with last quarter across our markets. So in the first quarter, we face a much tougher comp versus our China Mobile licensing deal in Asia as we delivered more than double the content in the first quarter of 2018 versus the fourth quarter of 2017 as well as some year-over-year impact from additional digital revenues associated with the Olympics and the Eurosport player in last year's first quarter. Before I close, let me quantify the expected foreign exchange impact on our 2019 results. At current spot rates, FX is now expected to negatively impact revenues by approximately $150 million to $160 million and adjusted OIBDA by $65 million to $75 million versus our 2018 reported results. In closing, we remain extremely optimistic about the outlook for the new Discovery which will allow us to accelerate the transformation of our business, drive free cash flow, and ultimately generate significant long-term value for our shareholders. Thank you again for your time this morning and now, David, JB, and I will be happy to answer any questions that you may have.

Thank you. I have multiple questions. First, JB, it’s a pleasure to have you on the call, and I appreciate the opportunity to speak with you. When we last met in Warsaw in the fall, you provided an insightful perspective on TVN's growth. Can you discuss the significance of Poland in the International portfolio and update us on the strength of that market, including its drivers? Additionally, could you provide some insight into the current situation in Latin America regarding the ratings? For Gunnar or David, I'd like to revisit the free cash flow comment about 2019. Could you clarify the components that contribute to free cash flow? You mentioned there's still more to be achieved in terms of synergy on both the cost and operational sides, so any additional information on that would be much appreciated.

Yes, good morning, Jessica. This is Gunnar. Let me start by providing some background on my thoughts regarding free cash flow. David and I have been discussing free cash flow and the combined company's ability to generate cash extensively. I'm very proud of the remarkable progress we've made with the $2.4 billion figure for 2018, considering we're only 10 months into the merger. This amount includes approximately $400 million in restructuring costs, and we have also made all the necessary investments in our digital and direct-to-consumer portfolio this year. I believe that's a strong outcome, and we remain very excited about the potential ahead. As I mentioned earlier, we are guiding for healthy growth in 2019. We anticipate significant improvements in the cash generated by our underlying operations, and as the year progresses, we will decide how much and when to reinvest some of that cash, which will influence the reported free cash flow figure. In terms of the components you asked about, we expect continued growth in underlying AOIBDA. Additionally, I am anticipating further margin expansion this year following the margin growth we experienced in 2018. Cash restructuring costs are projected to decrease; we expect around $150 million in cash outlays in 2019, down from $400 million in 2018. We will continue to emphasize working capital efficiency, as I still see a lot of opportunity there, which will again be a key focus in 2019, just as it was last year. Furthermore, as we reduce debt, cash and expenses will gradually decline over time. On the other hand, as our net income before tax grows, we will face higher taxes. We're also planning for approximately a $100 million increase in capital expenditures, primarily for building our global tech stack and making transformational investments related to consolidating our real estate footprint and systems integration. A major factor this year will be the additional P&L investments we plan to make. We have a strong portfolio and have made some key decisions, but there are still more decisions to come. We want to maintain flexibility, and the number and timing of those investments will ultimately affect how much we report as free cash flow. That's why I didn't provide a specific figure, but we remain very excited and confident about our cash generation capabilities.

What's critical here is that when we closed on Scripps, I mentioned almost a year ago that we saw this company as quite unique and that we could generate significant free cash flow, which we are doing and will continue to do, with an expectation of acceleration. The key aspect here is the uniqueness of this company. The fact that we can produce this level of free cash flow, and as I indicated at that time, we have the potential to be a free cash flow machine. In an environment where there are challenges across the ecosystem, this provides us a competitive advantage with all this free cash flow. When we consider Golf, Cycling, Natural History, and the influence of Chip and Joanna Gaines with their brands and reach, we see that these initiatives are performing well. We can invest more capital in areas that are accelerating, and in cases where growth is not as strong, we can choose to invest less. This gives us tremendous flexibility, which is a distinct advantage for us. JB?

Yes, Jessica. It was wonderful to have you and many of our investors in Warsaw last fall. Regarding the two questions, first about Poland; we view the Polish market and the TVN asset as significant opportunities for us. Our focus is on three key aspects. Firstly, we have a dominant position in television, closing 2018 with a record audience share of 27%, which rose to an impressive 29% in our fall season, thanks to successful launches starting in September. We are very excited about the momentum in our TV segment. Secondly, we lead in the local OTT market, leveraging all the content produced by TVN, and we're seeing strong double-digit growth in our digital business in Poland. Thirdly, this has established a major hub for us to produce content efficiently, both in backend operations and production, allowing us to create excellent shows at significantly lower costs, achieving discounts of 30% to 40% compared to what we could do in the U.S. or internationally with shows like House Hunters International. Additionally, we are shifting some of our back office functions to a highly skilled, cost-effective environment. These three areas have exceeded our expectations, and we are very enthusiastic about the progress of our Polish operations. In LATAM, the situation is a bit different; it’s not primarily a ratings issue since our ratings are performing well. As David mentioned earlier, we’re receiving strong commitments from distributors to launch Food and HG, which should lead to millions of new subscriptions in that region. The operational momentum in both audience engagement and distribution remains robust. The real challenge lies in Mexico, where political instability is leading to volume challenges. Conversely, Brazil is performing much better than before, with double-digit growth in the fourth quarter and significant improvements in the advertising sales market. It seems that our LATAM issues are more cyclical, and we remain hopeful that Mexico will stabilize over the year. If Brazil continues its positive trajectory from the fourth quarter into the first, we expect a more favorable narrative as we approach the latter half of the year.

Hi, thank you very much. I have a question regarding your commentary on international advertising. You mentioned some weakness due to Brexit in the UK. Do you expect the situation to worsen before it improves? Also, when do you believe the Scripps content will have an impact on the international advertising landscape? Additionally, David, I would appreciate your thoughts on Netflix. Is it becoming a stronger competitor in the unscripted content space, particularly regarding content acquisition and viewership for your networks? I'm curious to hear your insights.

On the international front, it's quite complex due to the diverse nature of the markets. We are experiencing a mix of performances. Some markets are performing exceptionally well, such as Poland and certain Nordic countries, which have shown unexpected growth, particularly in Sweden. Meanwhile, other markets are underperforming, as David mentioned. Regarding Brexit, it's difficult to predict the outcome; we are all waiting to see what develops. I don't believe it will have a quick resolution. However, if there is some form of extension, there may be potential for the market to improve in the latter half of the year, though predicting that is quite challenging at this moment. Regarding Scripps content, in a landscape where we are witnessing favorable trends in some of our largest markets, audience performance is indeed positive. This is promising, as audience engagement and ratings are strong as the year progresses. If we can stabilize these larger markets such as the UK and Mexico, we anticipate that monetization will likely improve in the latter half of the year and continue into 2020.

On the Netflix Prime, Amazon Prime, HBO Showtime, I can answer in two ways. One is that Food, Travel, Home, and Crime genres are all expanding. People are spending more time with us and watching more of our content, which is growing. This is challenging work, but it’s what we excel at. We have a dedicated team for Food, collaborating closely with production companies that focus on this area. We have learned how to create shows and develop characters within that genre. The same goes for Home and Crime; there are many exploring Crime, but Henry Schleiff and his team know how to approach it and collaborate with production companies effectively, giving us a unique edge. We're witnessing growth in these sectors, and that's our focus. When people choose HBO, Showtime, Amazon Prime, or Netflix, they are generally seeking scripted series and movies, paying around $10 to $15 for them. That's the brand appeal. On a broader scope, as we advance in our mission to fuel people's passions, we find they spend about half their time on scripted content and the other half on various interests. We have identified compelling brands and categories in that "everything else" segment. The significant opportunity lies in scripted content: viewers are dedicated to watching that. In contrast, our focus is on people engaging with content actively. For instance, they watch Golf and also purchase equipment or seek instruction from experts. They want tips on vacationing related to Golf. They enjoy cycling and buy gear, searching for the best clothing and coaching. Similarly, in Food, viewers want recipes and expert advice on how to cook, engaging with content both in long and short formats. We believe categories like Home, Cycling, PGA, Natural History, and Travel are where viewers not only watch but also take action, which is why we invested in the cycling business and entered the PGA. Even in Natural History, where we lead globally, viewers may watch but can also explore our science or space content deeply. We see ourselves as market leaders in a differentiated environment, with a unique opportunity in this "watch and do" approach, which can help us build businesses around these funnels.

Hello, thanks so much. I guess two questions, JB curious regarding your sports strategy internationally in Latin America and Asia, with Fox Sports in Brazil and Mexico be a natural fit if Disney has to sell them for deal approval purposes and if not wanting to touch that one just more broadly given the viewing declines mentioned and the pricing declines in Asia, would sports in those markets be something that might make sense to pursue at some point similar to what you've done in Europe. And David on your end, I think a lot of investors look at the stock valuation and while they want you to invest in growth, I think they also think the company should be buying back stock hand over fist and I think what's been outlined on the call so far has been investing in lots of interesting niche opportunities rather than large scale acquisitions suggesting a lot of balance sheet flexibility should be remaining as you go through the year and I was just curious if you had any comment on that and whether I was missing anything there? Thank you.

On the sports side, we explore a wide range of opportunities. We have a stake in Liberty Formula E and partner with Jay Monahan in the PGA. We hold global rights everywhere except the U.S. where I manage Tiger's rights. Recently, we acquired a global cycling business, and we are keen on tapping into sports as a brand that can engage diverse interests. However, we assess many opportunities that may not align with our long-term growth metrics. Most of our sports assets have extended timelines; for instance, we have a deal with the PGA until the end of 2030, the Olympics for a decade, and we own the cycling business outright. On Eurosport, we secured rights with minimal increases and aimed for six-year agreements, steering clear of shorter three-year soccer deals. We plan to remain opportunistic and believe we could lead globally in sports if we consider all our intellectual property collectively. We will continue to evaluate every opportunity regarding its sustainability.

Yes, I think that's right. And on the Asia piece of it, the reality is the a) the Golf deal has put us in business in Asia in a major way. The two of the biggest markets in Asia for Golf are Japan and Korea. And so that has significantly changed the game. We announced obviously last quarter our expansion of our relationship with J:COM, our distributor there, who is now also our Golf partner, and in Korea we will be coming up next and then China as well. So we are in sports business through Golf which I think is a meaningful step for us. And then the other thing that in terms of more things in Asia and sports, a lot of it becomes much more localized which I think is a bit of a challenge. The rights that are big in terms of Australian Rules Football, Rugby in Australia versus what works in Malaysia versus what works in Japan is oftentimes very different and so it's hard to get the same scalable play. But as David said, we'll look at everything. But I think for now we're going to take the Golf product for a real ride here and we think that has great opportunity.

And look, I think that we're building a platform that's unique. If we're successful with Golf and cycling, we're also doing MotorTrend and in addition to that, we have global rights to Natural History and these other brands. But if we're able to build, we're the only company that's doing business in over 48 languages and as we build this platform for which we've brought Peter over to build and we've brought over one of the most senior technology leaders from Amazon. If we build that and we're in multiple languages like we did the Olympics in 22 languages, we're going to do the PGA in over 40 languages. And so there's very few companies that can promote from the ground and convert into multiple languages and have a platform that's above the globe. And once that's done, we think the opportunity could be significant. There's a lot of sports with federations are going to want to try and reach above the globe but they're not going to have the scale to build the platform. Our platform is built. They're not going to have the scale to market in every country. We have multiple channels in every country and we have an online digital business in every country. And so we think once we build and we can prove out these ecosystems that we could be a platform that people come to where instead of paying for those rights that we can represent those rights and get a split.

Okay. And then, Doug, on your buyback question, look I mean the way I look at this is I'm really proud of how the leverage number has come down. I mean again almost a full turn in only 10 months. The free cash flow number 2018 has been better than what we planned honestly and also what we guided to and this isn't going to stop. As I said, we're planning to get back into our target range of 3 to 3.5 times within the first half of this year. That's great flexibility, as David said, that's very important in this environment and we see a lot of potential of underlying additional growth in our cash generation. And all those investments that we're discussing about again those are investments that we can fund out of our free cash flow growth. I think that's a very unique situation. I don't think we need any sort of major transactions but you've seen some of the partnerships we've been able to strike over the past 12 months. Those are great divestments into our future growth and don't change our financial profile. We've got a very strong balance sheet. Regarding buybacks we're going to come back. Our first priority has always been to de-lever down to 3 to 3.5 times, when we get there, we'll come back and update you on what the capital allocation is going to look like. But again priorities are de-lever first, invest in the business, and then return capital through buybacks.

Hi, thanks for taking the questions. I want to ask about the costs in particular the cost of revenues which in the fourth quarter took a noticeable step down relative to what you had been doing in the prior couple of quarters. So I guess as we look into 2019, should we think about what we saw in the fourth quarter as kind of the run rate for 2019?

Thank you. So well I mean the step down in Q4 actually has two components. Number one, as JB laid out earlier, we've really taken a new strategic look at the programming grid literally across the entire global footprint. And we've made more use of the SNI content replacing acquisition content so that obviously has a pretty significant impact on our cost of revenues. In the fourth quarter, there was another U.S. component that was supported on a year-over-year basis because in the prior year fourth quarter Scripps had taken some significant write-downs on content. So that has been helping us on a year-over-year basis as well. So it's probably a little more pronounced but as we've said before this content synergy is one of the key elements of the merger thesis. We will continue to see improvements over the year. Keep in mind that the full first quarter is essentially excluding any synergy impact in 2018. So we'll see a step up in 2019 and we'll continue to be very, very focused on costs as I said. And as a consequence of that, we will see further margin expansion in 2019.

Okay. Thank you for that. And if I could one more on the digital investments that you mentioned, I just want to make sure I understand it. I think you mentioned $200 million to $300 million for 2019; is that an incremental step-up beyond what you had been doing in 2018 or is that kind of an absolute number. So I think the last time you gave us an update you guys talked about sort of spending about $50 million per quarter, so call $400 million per annum maybe you could just describe that in a little more detail?

Yes, we have been investing at a pace of $50 million per quarter since we closed the transaction, which totals to $200 million a year. I indicated a range of $200 million to $300 million because there is some flexibility involved. This is not a fixed figure; we don't just create a plan in the fall for the following year and stick to it. We have numerous promising initiatives underway and have seen early successes, so we need the flexibility to invest more heavily in areas that show potential. Conversely, we won’t proceed with certain investments if initial market feedback is not encouraging. That's why I provided a broader range, but essentially, the $50 million run rate translates to a total annual investment range of $200 million to $300 million in additional P&L investments.

Okay, thanks. And just real quickly restructuring charges I assume are we done now like in 2019, we won't see any more restructuring charges related to the deal?

We're mostly done. As you can see, we are expecting to pay out some of the 2018 accruals in 2019. That's why we still have about $150 million cash out in the numbers that I just discussed. And we probably will see round about $50 million of additional P&L charges. But I would expect that that's it though.

Hi, thanks. I appreciate it. It's a bit mundane today, but I hope I can ask. Gunnar, I was hoping for the guidance on the affiliate fees for 2019, consistent with what we've heard before. Just wondering if you could clarify whether there are any licensing components involved, particularly spot licensing, and what the underlying organic rate for pure affiliate fees is compared to other components. Additionally, for either you or David, I've been thinking about the portfolio of networks in the States and your comments about the fully distributed networks and their stability in distribution, as well as some of the digital tier networks losing distribution at a quicker pace. As you consider this, what do you think is the right number of networks? Does it make sense to reconsider some of the digital networks and potentially express them differently than a linear full network? What are the trade-offs, and what is the incremental margin from those? Any insights on this would be great. Thank you.

So indeed the guidance that we're giving for Q4 for affiliate revenues both for Q1 and for the full-year is very clean number if you wanted to call it that. As a matter of fact, Q1 is actually slightly tougher comp versus last year regarding some Ava components that were in there last year. But it's a very clean numbers driven by our pricing step-ups in new and existing deals and the additional carriage on virtual MVPDs and the expected growth on those platforms.

On the channels, we mentioned that around 85% of our fees relate to our top six or eight channels. We believe that growing our core eight presents a significant opportunity. We have successfully managed to get our channels included in the smaller bundles available globally, which are not currently offered here. As these bundles expand, we expect to benefit more than anyone else. Additionally, we are collaborating with Chip and Joanna, and we believe this presents a unique chance to enhance our channel and facilitate its growth. Unlike many media companies in recent years that have not launched any new channels, we have successfully developed channels like ID, which has become the number one cable channel for women. We also launched the Oprah Winfrey Network, which leads among African American women. With Chip and Joanna, we see the potential to elevate a network that is already performing adequately to new heights. Furthermore, we have a clear vision for going direct-to-consumer. The concept of “watch and do” is perfectly exemplified by Chip and Joanna, who established a thriving multibillion-dollar business called Magnolia, rooted in their design and product development skills following their successful show, Fixer Upper. We are reconnecting with them and are enthusiastic about our partnership. While they operate Magnolia independently, we see a plethora of opportunities to grow our channel collaboratively. Ultimately, we foresee fewer channels in the long term, but we believe there is room for at least one or two more strong brands in the U.S. featuring beloved characters and personalities. Our strategy includes major partnerships like the Tiger deal, PGA, cycling, and collaborations with figures such as Oprah and Chip and Joanna. Our focus is on great brands and the characters audiences love, because this business thrives on connecting with people and understanding their stories and passions.

Thanks. One for Gunnar, one for David. Gunnar, you talked about the underlying trends in subscribers that are holding to what it was in 2018. Obviously, there's been a lot of movements in the virtual MVPD space. You guys are one of the few companies on AT&T Watch. Can you sort of talk about how you sort of think the virtual MVPD contribution as part of that would broadly be in 2019 given your position. And for you, David, obviously you've talked about the passion of your verticals in Food and Home and new ecosystem and you gave a full bunch of numbers about the TAM, you have also talked about in the past the strategic partnerships possibly with the Samsung and Amazon. Can you just sort of give us some insight on if those do happen, what is the monetization model there?

Let me start by discussing how 5G fits into the larger story of home ownership. The kitchen is where people spend most of their time, and the common question everyone asks daily is what's for dinner or breakfast. The challenge lies in who will dominate the kitchen space. We see a significant opportunity here. We have top chefs, we lead in recipes, short-form content, branding, and credibility. We are actively working to engage with various kitchen stakeholders to establish our presence, whether through distributors utilizing 5G or companies interested in voice activation and screens for kitchens. Additionally, we believe the do-it-yourself and home design segment is another area where we excel, providing substantial expertise and content. We're pushing hard in this direction, even though it's not currently part of our plan, as we believe we offer something genuinely functional that brings real value to customers beyond just entertaining content.

And on your distribution question, I don't want to break out individual contributions of individual deals but as we've said before that mid-single-digit guidance for the U.S. affiliate growth is a combination obviously of the inclusion Hulu and Sling and then price increases on our traditional deals. And I mean in terms of the mix in the market, we've always been a firm believer in the value of our content and I think our ability to hold those deals last year underpin that quality. And we've also been a firm believer in value of smaller bundles in the market. And I think we're seeing some confirmation there as well.

Thanks. I have a simple question about International M&A involving David and JB. A couple of years ago, we observed cable networks starting to acquire broadcast assets overseas, like what you did at SBS and Viacom with Telefe Channel 5. Looking ahead, do you believe this remains a successful strategy for entering local markets and acquiring broadcast assets? Also, do you foresee any advantages in your financials from being both a broadcaster and a cable network, particularly in terms of driving higher returns or growth? I would love to hear your thoughts on this.

We are primarily focused on owning intellectual property. We have numerous free-to-air and cable channels, and we aim to leverage that intellectual property across different platforms to enhance the efficiency and free cash flow of our current operations. While we consider various options, acquiring broadcast assets is not our immediate priority. Owning such assets might be more advantageous in a market like Poland, which benefits from a unique language and strong GDP growth. However, it is not currently at the forefront of our interests.

And ultimately markets that have other ancillary as we talk about in terms of Poland, their market position and strength and ability to pivot to digital and ability to provide us other benefits in terms of lower cost of production and back office services as well. There are other benefits to it than purely the broadcast assets. So that asset actually is fairly unique. And we're seeing even in the Nordics, as you mentioned, as we're finally getting more traction and pushing more aggressively into the OTT space, a stronger growth on the OTT, so pivoting those businesses to be much more OTT and direct-to-consumer driven, leveraging the local content and IP as David said that they have in their portfolio is really the focus for us.

Yes, thanks. Maybe first, Gunnar, I was hoping I could at least try to pin you down a little bit on adjusted OIBDA growth for 2019. Just some of the trends that we've been seeing is a big pickup in U.S. OIBDA growth driven by I think the cost synergy. And then you've got a pretty easy comp in International in Q1 just because of the Olympics headwind that you had in 2018. So can you just help us maybe put in context should we see an acceleration in adjusted OIBDA growth in 2019 versus 2018 or anything there would be helpful.

Let me begin by addressing your question about OIBDA. While I won't provide specific guidance, it's important to note that Q1 will have a favorable comparison due to the negative profit impact from the Olympics last year. We are also considering the last quarter before the transaction was closed, which means there will be no synergy impact in the Q1 2018 figures. We anticipate a nice improvement in results. For the full year, I want to emphasize my expectation for margin expansion in addition to the margins we experienced in 2018. Overall, we are expecting significant growth in AOIBDA on an underlying basis. However, as previously mentioned, we will continue making investments in our P&L. The 2019 plan includes investments similar to those made last year, which could lead to a negative impact of about $300 million to $400 million from our direct-to-consumer investments. It’s crucial to remember that we are building a portfolio to foster future growth. After these investments, I am still aiming for margin expansion and continued AOIBDA growth, although the timing and scale of these investments will play a significant role.

Thank you. Good morning, David. I believe you finalized the Scripps deal a few months before last year's upfront. Now that the acquisition is complete, I'm curious if you are considering any changes in your approach to this year's upfront. It certainly provides a significant audience share, especially among female viewers. Should we expect any adjustments in how you market and package inventory, or how Discovery GO might play a role? Any details on that would be interesting.

Thank you, Ben. We had a successful upfront and a strong calendar. We anticipate this quarter will resemble the previous one quite closely. Honestly, I’m headed to Florida now, and I believe we may have missed some opportunities this quarter and can perform better. I am not satisfied at all. Over the past two weeks, we've been analyzing our efficiency rate and our sell-out rate. The reason I mention this is that TLC became the leading network in America for women in January. We have strong performance from ID, Food, HD, and Discovery is improving with GO gaining traction. I believe our creative team is doing well, and we have a solid ad sales team, but we need to focus more. We've created detailed work streams on costs, and now we’re developing co-work streams for revenue and sales. I remain unsatisfied, as we should have achieved bigger results this quarter. We will keep pushing forward, and if we execute our strategy properly, I believe you’ll see improved results in the upcoming quarters.

Okay. Let me clarify the digital investments commentary. So as we've said previously, we have been investing on a run rate of about $50 million in the quarter since closing the transaction that is against our 2017 baseline. We're going to slightly accelerate that pace and I'm targeting $200 million to $300 million additional investments in 2019 and as obviously some of those investments started to pay off, the total dollar amount in absolute terms in our 2019 profits and cash flow will be between $300 million and $400 million total impact from investments on the digital side.