華納兄弟探索 (WBD) 2008 Q3 法說會逐字稿

Good Day, ladies and gentlemen.

Welcome to the Discovery Communications third-quarter 2008 earnings call conference.

My name is Ann and I will be your coordinator for today.

At this time all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Craig Felenstein, Senior Vice President of Investor Relations.

Please proceed, sir.

Thank you, Ann.

Good morning, everyone, and welcome to Discovery Communications third-quarter 2008 earnings call.

Joining me today is David Zaslav, our President and Chief Executive Officer; Mark Hollinger, our Chief Operating Officer; and Brad Singer, our Chief Financial Officer.

Hopefully you have all received our earnings release, but if not, feel free to access it at our website at www.DiscoveryCommunications.com.

We'll begin today's call with some opening comments from David and Brad, after which we will open the call up for your questions.

Before we begin 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 registration statement on Form S-4 and our subsequent filings made with the US Securities and Exchange Commission.

And with that I'll turn the call over to Brad.

Thanks, Craig.

We're pleased to host our first earnings call as a public company.

Before we begin I would like to discuss the basis of our financial presentation and highlight the disclosures we are providing to better enable users of our financial statements to compare our current operating performance with prior periods.

For GAAP purposes our presentation assumes the transaction between Discovery Holding Company and Advance/Newhouse that resulted in Discovery Communications becoming a public company occurred on January 1, 2008 with historic financial information of our predecessor company, DHC, for fiscal year 2007.

To aid users of our financial statements, we have also included as adjusted results and reconciliations to historic financial statements for 2007.

Please see page 14 through 17 of our press release.

For our discussion today we will focus on 2008 results compared to the as adjusted performance for 2007 which include the results of Discovery adjusted for the spin-off of Ascent Media with the exception of the sound business.

Now let's review the third quarter.

Discovery delivered strong operating performance during the third quarter despite the uneven economics and capital market conditions.

Total revenues increased 11% to $845 million from the third quarter 2007 driven primarily by our growth in our international networks as well as solid domestic growth.

Adjusted OIBDA grew 23% to $311 million demonstrating the operating leverage inherent in our business model as well as the benefit of timing of certain costs, primarily marketing related.

Adjusted OIBDA margins increased over 350 basis points to almost 37%.

Please note the difference between adjusted OIBDA and previously reported operating cash flow is the add back of non-cash amortization of launch fees.

With our solid operating performance net income from continuing operations increased to $94 million including a pretax benefit of $65 million in long-term incentive plan compensation due to the decline in our share price over the quarter, offset by significantly higher non-cash booked tax rate due to DHC's pick up by the equity earnings in Discovery prior to the exchange.

Perhaps most impressively, our free cash flow increased to $200 million for the quarter driven by the strength of our operations.

Year to date our free cash flow increased over $270 million due to the strong operating performance and a $200 million decrease in deferred launch incentives paid in 2007 offset by an $84 million increase in taxes paid and $15 million of negative cash flow related to the operations of DHC and Ascent Media.

Our goal is to continue to maximize the amount that each incremental dollar of revenue turns into free cash flow.

Turning to our operating units.

Domestic revenues grew 6% with distribution revenues growing 8% and advertising revenues contributing 5% growth.

Advertising revenues have benefited from strong pricing in the scatter market offset by lower audience delivery at Discovery and TLC which reduced advertising by 4% or $10 million.

We are encouraged by the performance of our networks during October with an increase in premier ours at Discovery and Eileen O'Neill taking over TLC.

Cost of revenue increased $7 million or 5% including a benefit from the $20 million decrease in content amortization costs due to the fourth-quarter '07 write-off offset by a $17 million content impairment charge related to the TLC management team reorganization.

SG&A decreased 5% or $6 million with higher personnel costs due primarily to investment in digital operations offset by lower marketing costs from the timing of certain premier hours during the quarter.

We anticipate a sequential increase in marketing spend as we increase our premier hours on Discovery and other networks during the fourth quarter.

The combination of increasing revenues and favorable expenses enabled us to increase domestic adjusted OIBDA 9% to $257 million.

International operations continue to perform well.

Total revenues increased 16% including 3% due to foreign exchange effects which have and are anticipated to continue to reverse in the fourth quarter.

Advertising revenues were relatively flat, primarily due to a $13 million decrease in UK advertising due to interpretation of a contract provision resulting in the limitation in our ability to monetize our audience offsetting 29% advertising growth in our other international regions.

We anticipate similar declines in the fourth quarter related to the advertising revenues in the UK.

Distribution revenues increased 18% excluding the impact of foreign exchange primarily from subscriber growth in EMEA and Latin America as pay-TV penetration (inaudible) continue to increase as well as $5 million in one-time revenues.

Cost of revenue is flat compared to the prior year as a result of higher content amortization costs offset by a $4 million one-time benefit from a liability settlement.

SG&A increased modestly by $4 million for the quarter due to an unfavorable foreign exchange impact of $3 million.

International adjusted OIBDA increased to $103 million and adjusted OIBDA margins improved 800 basis points to 34%.

Our commerce, education other segment included the results of operations of Ascent's sound business for Creative Sound Services which represented $20 million in revenue and $2 million in adjusted OIBDA.

Segment OIBDA improved by $8 million from the third quarter of 2007 due to performance in our education division as well as licensing deals.

Corporate expenses increased $13 million to $56 million due to $4 million in costs related to the Oprah Winfrey network and $4 million of DHC transaction expenses.

The remaining increase was primarily costs associated with our preparation to become a public company.

We anticipate a solid end to a strong year in 2008.

We forecast 2008 total revenues between $3.44 billion and $3.485 billion, total adjusted OIBDA between $1.255 billion and $1.305 billion, and net income from continuing operations of $300 million to $340 million.

Our guidance incorporates current foreign exchange rates for revenues and expenses and current share price for LTIP calculations.

Based on current FX rates we anticipate revenues and adjusted OIBDA will be negatively impacted by approximately $25 million and $10 million respectively in the current quarter compared to the prior year.

We continue to improve our financial position with a combination of strong operating performance and utilizing our free cash flow to reduce our leverage.

We paid down $200 million during the third quarter ending with operating company leverage of approximately 2.2 times adjusted OIBDA and total company leverage at 3.5 times.

Given the current market environment we believe it's appropriate to review our leverage in the context of our debt covenants.

Our operating company leverage of 2.2 times provides over a 50% cushion to the covenant of 4.5 times and our total company leverage of 3.5 times provides over a 40% cushion to our covenant of 6 times.

We also have a strong liquidity position with $92 million of cash on hand and $1.2 billion of undrawn domestic revolving loans and an annualized current run rate of free cash flow exceeding $400 million.

When compared to the $456 million of maturities in 2009, we believe we are well positioned to meet our debt service requirements as well as invest in our core business and grow.

I will now turn the call over to David Zaslav, our CEO, who will provide a few [erudite] comments.

Thanks, Brad.

Good morning, everyone, and welcome to the first earnings call for Discovery Communications.

We are excited to establish an open and consistent dialogue with our stakeholders as a newly public company.

Brad has already taken you through our third-quarter results, but while the presentation may be unusual given the unique nature of the transaction, we believe the results are clear.

Discovery delivered strong growth despite the challenging macroeconomic environment and overall capital market conditions.

On an as adjusted basis the 11% revenue growth and 23% adjusted OIBDA growth demonstrates -- one, the strength of Discovery's brand portfolio led by the Discovery Channel, the most widely distributed television brand in the world.

Two, the consistency of performance that comes with having multiple revenue streams.

50% of our revenues are affiliate-based, multi-year contractual relationships not subject to the uneven economic environment and provide the Company with a sturdiness on the top line.

Three, we have the advantage of Discovery's global reach and market diversification with over one third of our revenues derived from operations in 173 countries around the world.

I know the macroeconomic environment is top of mind for many of you and, rest assured, it is for our senior management team as well.

While we firmly believe the Company is well positioned for long-term sustainable growth, there is no question we are currently operating in uncertain times and have to plan accordingly.

So while Discovery delivered strong results in the third quarter, we have and will continue to manage our cost structure to provide us with additional flexibility without sacrificing the long-term growth potential of our businesses and platforms.

As part of our first earnings call I would like to take the next few minutes before we open up to your question to lay out Discovery's long-term growth strategy and the five primary areas that we are focused on as a senior management team.

Number one is creating quality programming with global utility.

Two is focusing on our international opportunities and growth.

Three, investing in our emerging network brands, our beachfront real estate.

Four, building out our digital media platform and Discovery's brand entitlement.

And finally five, improving our operating efficiencies and margins.

So let's start with one of the Company's biggest strengths, the versatility of our nonfiction content.

Our content works around the world, across multiple platforms and has a long life.

With our extensive library and broad ownership of rights we are able to monetize our content creation domestically and internationally as well as pursue new revenue opportunities such as HD, VOD, online and mobile.

An additional advantage given our brand strength is the quality environment it provides to our advertisers.

Not only do advertising clients value their products being associated with quality content, but Discovery's brand portfolio reaches a broad range of demos across our networks and overall our viewers tend to be more loyal and upscale.

Our content strategy across the portfolio is not about quick ratings or temporary fixes.

Our goal is to build long-term value with quality programming and stronger brand position in the marketplace that enhances the impact of each one of our networks.

Discovery focuses on nonfiction content that has embedded learning with an overall mission of satisfying audiences' curiosity about themselves, their family and the world around them.

Sticking to our knitting in nonfiction and focusing on quality we believe drives higher CPMs, more advertiser loyalty and brand integration, and a more consistent audience mix across the platform.

On a more micro level, I know many of you are concerned about the state of the ad market looking forward, so let me give you a synopsis of what we are seeing.

First, the value of cable [verse] broadcasters only continues to increase.

With price compared to audience delivered on cable averaging one third less than those on broadcast, advertisers get a more efficient buy and much more bang for their dollar.

Second, scatter remains above up-front and year-ago levels.

We are obviously operating in a more difficult economic environment these days, but we still expect to deliver advertising revenue growth in Q4.

Lastly, cancellations of up-front commitments in the first quarter, while up from a year ago, are still at normalized levels.

Granted it is still early and our visibility is probably less than in years past, so we're just going to have to wait and see.

Finally, our international network spends over 40% of their programming budget on programs generated domestically.

If we are successful in creating strong franchises in the United States we will be able to take those shows around the world and monetize that content in multiple markets and across platforms.

The second big pillar of Discovery's growth strategy is our continued international expansion.

Discovery is the number one nonfiction media company in the world with over 100 individual networks and between one and -- and 11 brands in over 170 countries.

Many media companies talk about making money internationally; Discovery is executing, delivering well over $300 million in adjusted OIBDA across -- outside of the US.

This year alone in the first nine months we have grown international revenue by over 20% and adjusted OIBDA by over 60%, the result of which is our margins are now exceeding 30% internationally.

In the past 20 years since John Hendrix first launched Discovery Channel in the UK in 1989 we have made a substantial investment internationally, building a best in class technical infrastructure, hiring experienced staff and developing key relationships with distributors and advertisers which today provides us with a strong foundation and significant operating leverage moving forward.

The keys to our international strategy are -- one, the Company is poised to capitalize on the growth of pay-TV around the world.

Pay-TV penetration is under 50% in most of the markets as compared to over 90% here in the US.

Two, we are driving in-country advertising revenue growth.

Only about 27% of international revenues currently come from advertising, primarily in Europe and Latin America.

We are thoughtfully building our local ad sales capabilities in growing markets including Central and Eastern Europe and the Nordic region.

Three, we are focused on strengthening the programming on our existing channels, Discovery Channel, Animal Planet, Science and others.

Creating compelling programming allows us to further capitalize on our strong and growing distribution platform, build market share and attract viewers, ultimately driving global ad revenue over the coming years.

It is important for us to strike the right balance between content specifically created for a particular local market and content developed for an American audience.

By thoughtfully developing our domestic content with an eye toward global utility it can be easily and effectively repurposed.

A good example is Deadliest Catch.

We can take Deadliest Catch, and we do, into 173 markets where we optimize the US production and promotion to drive efficient audience growth, including in Australia where Deadliest Catch is one of the highest rated pay TV programs in the country.

We believe nonfiction content can be more easily and effectively repurposed into other languages and cultures.

And doing this on an international basis is a major component to our global strategy including taking advantage of our leadership position in HD where we have launched HD services in 23 markets and counting.

The third area of our long-term growth strategy is developing our emerging networks in the United States, our beachfront real estate.

Similar to our global distribution strength Discovery has more shelf space than most media companies with 13 channels in the United States.

However, 80% of our US television revenue comes from only three fully distributed channels -- Discovery, TLC and Animal Planet.

With 10 other channels, including seven in over 40 million homes, opportunity exists to create the next generation of growth.

All of these channels are profitable, but we are working hard to ensure they become more relevant to the audience and enhance their performance for our advertising and distribution partners.

In the past 12 months alone we introduced three new brands targeting under served niches in the marketplace -- ID, Investigation Discovering, which was rebranded from Discovery Times in January; Planet Green, which evolved from Discovery Home earlier this year; and we announced our plans to convert Discovery Health into OWN, the Oprah Winfrey Network.

The fourth element of our growth strategy is developing a strong digital platform that leverages our brands and content.

We believe online first and foremost is a way to create additional exposure for our existing programs and brands.

We are aware of the value of our cable business, so we thoughtfully balance our digital extension as additional touch points for our audiences and potentially expose new viewers to our brands and programming while maintaining value to our affiliate partners.

Second, our content strategy online is the same as on TV, satisfying curiosity.

We've carefully invested resources, talent and strategic bolt-ons for our key brands including the addition of Tree Hugger and Pet Finder.

We upgraded our existing branded sites and we acquired How Stuff Works, a key strategic fit in our goal of owning curiosity on line.

The end result is we now have nearly 33 million uniques in aggregate with over 425 million page views, up more than 40% from a year ago.

We are working hard to make digital an important part and an economic contributor to our company.

However, it is still very early in the life cycle of our digital business and we're being very careful to match our spending with the revenues this platform is currently generating.

Lastly and perhaps most importantly, we are focused on continued margin expansion, increasing our free cash flow and effectively investing the capital we generate.

In the first nine months of this year our margins have expanded by 400 basis points to over 37% and we see no reason why we can't continue to grow these margins unless economic conditions worsen to a level much beyond what we have already seen.

Senior management is consistently focused on a prudent cost structure within any additional spending primarily ending up on the screen.

Programming, as you might imagine, is our biggest cost, approximately 30% of our cost base.

And while I mentioned how important content creation is earlier, we will only invest in additional programming if we are confident it will ultimately translate into higher returns.

As Brad mentioned in his remarks, as we ramp up our free cash flow we will look to continue to strengthen the strategic position of our existing assets, but not at the expense of our growing margins or poor investment return.

So that is a quick overview of Discovery's long-term growth strategy.

We look forward to providing you with additional details in the months ahead.

And with that, Brad, Mark and I will be happy to take your questions.

(Operator Instructions).

Rich Greenfield, Pali Capital.

A couple of questions.

One, you have a lot of networks, David, as you just now outlined.

You've rebranded three, but when you think about the rest of the portfolio, brands like Discovery Kids which may be very strong in Latin America but not in the US, is that a brand you're committed to?

How do you think about how much effort to put into re-brands over the course of the next 12 months?

Are there any that are obvious in the portfolio like a Fit TV that you just have to do something with or get out of that business?

And then two, could you just give us some sense on the Oprah Winfrey Network?

How do we think about the -- I assume you're going to consolidate it, Brad, but how do you think about the revenue and earnings opportunity -- from a modeling standpoint how should we think about the cost to actually get that off the ground midyear?

Thanks.

First on the portfolio question; as you mentioned, Discovery Kids is profitable in Latin America.

It's actually be number one channel for preschool kids in Latin America and we're very proud of that.

We have this beachfront real estate and, as you say, we have fantastic carriage.

Discovery Kids in the US is in 60 million homes and we have seven channels that are in over 40.

And three of them we have attacked; I'll talk in a minute about OWN and we launched, ID, Investigation Discovery, which has been over the last 12 months one of the fastest -- the fastest-growing cable network.

We spent a lot of time on Planet Green and acquiring Tree Hugger.

We think that that's going to be a strong brand for us and it fits very well with the values of our company.

But we spent a lot of time looking hard at all of those channels.

The good news is that they're all profitable.

In the context of what are we going to do in the next 12 months, we're in no hurry, but we are looking hard at each of those brands and asking a simple question -- is this the best brand for this platform?

The real estate is very significant.

And how do we make each of those brands something that more and more viewers want to watch?

And so it's something that we spend a lot of time on.

Discovery Kids is one that has great carriage and we're continuing to look and see what the best use of that is.

On OWN, that's a great media opportunity for us in that I think Oprah Winfrey may be one of the best media brands in the media space.

She's very engaged with us.

We've set up shop in California, we have a very strong team that we started to assemble.

We also have Oprah.com as part of that venture which is also profitable and a strong site in the women's space and in the space of living your best life.

And so far I think it's growing great.

We're looking to launch at the end of the '09.

Rich, to specifically answer your question about guidance and investment and the ultimate opportunity, we'll frame that on our fourth-quarter earnings call and we'll walk through the timing of when the programming investment will occur and when the revenue generation will begin.

So I think that is when you should anticipate hearing more specificity around it.

Could you at least just give a sense of whether Discovery Health Today has any meaningful contribution?

Discovery Health Today is a profitable network as we speak.

Thanks.

Jessica Reif Cohen, Merrill Lynch.

I have a couple of questions.

Could you elaborate on what the issue is in the UK and has it been resolved yet?

Good morning, Jessica, it's Mark Hollinger.

The UK is a market we've been in from the beginning.

It was our first international market.

We have a very big portfolio there.

The particular issue that has created issues for us this year is a contractual issue that we are working through.

The good news is that for next year the limitations on our ability to monetize our ratings that have existed this year will not affect us in the same way next year.

Beginning in the first quarter?

Because it sounds like it's going through the fourth quarter.

So the first quarter this will go away?

It's going through the third and fourth quarters where you'll see the impact of the limitation and then for 2009 it will not have the same limitations.

One other point on the UK.

The UK is our largest market.

As Mark said, we had been there since 1989.

We also have a very significant presence there.

We have 11 channels in the UK and if you're on the Star platform they actually -- they have what they call a plus one there where they carry your channel and they change the timing of the programming.

So we actually have 20 channels on the Sky platform.

And we recently acquired a Preview slot.

Preview is a big platform that has over 10 million subscribers in the UK.

It is a big market, however it's going through a recession like a few markets.

And it goes to a point of where we are looking for long-term sustainable growth and we really do look long-term.

The UK is a strong market for us and we think by having a bigger presence there with Preview where we can use our very strong library and our existing resources that over time the UK will become a growth market for us.

Okay.

My other two questions are could you frame the long-term margin potential, either combined or domestic, versus international?

And do you have any plans to separate digital and can you tell is how big it is now?

Sure, Jessica, it's Brad.

I'll take those questions and maybe David or Mark will add on.

In terms of long-term margin potential, the margins are really dictated -- the opportunity by how the revenues will grow.

We'll be very efficient on the cost structure as we strive to continually optimize what we're doing.

But really, when you look at it, as the revenue grows the incremental operating leverage is what makes the margins expand.

And so when you see the international expansion that's occurred this quarter, you have about 800 basis points, that's because $0.70 to $0.80 of every dollar of incremental revenue goes to the margin.

So it really is only limited by how far the revenues ultimately expand.

And so you can see a point as revenues grow incremental margins continue to creep up over time and that's the best way to frame how to think about margins.

With regard to digital, in our Q's we do disclose, I believe, the -- and we have in the past under DHC, the revenues from the digital -- right now digital revenues solely were around $40 million year to date, and for the year we expect them to be somewhere in the $50 million to $60 million range.

Is it profitable?

It is not profitable right now.

Thank you.

Just one point on the margins.

When I got here two years ago we talked about looking at this business as having two sides.

On the right side is growth and on the left side is where we're spending all of our money that isn't related to growth.

And it's a focus that we've had over the last year and a half and you can see it in the margin expansion that we've become more efficient and effective, we have domestic and international working together much more aggressively.

And in light of the current environment we're looking very hard now at what is our growth, our growth is content and building our local -- two big pieces of it is our content and building our local sales revenue outside the US and inside the US and we're looking hard at all of our other costs.

So we think that there's still some opportunity to be more efficient and productive.

Hunter DuBose, Morgan Stanley.

Good morning and thank you for taking my questions.

My first one is as you look at restructuring your international ad sales function, to the extent that that's going to be a headwind against further international cost cutting and margin expansion, have we already seen that baked into the numbers or should we be expecting that in the next few quarters?

And how would the timing of potential increases to CPMs internationally that would be a result of this restructuring likely come into play in terms of timing with the increase in costs there?

Let me take the first one.

We have changed the way that we do business outside the US on the ad sales side in that we used to do a pan-European feed and we've started spot [beaming] into specific markets and have over the last year and a half been building our local sales presence in those markets with some meaningful success.

We're going to continue to do that because we think that there's real growth to take advantage of.

Hunter, I don't think you'll see a meaningful change in cost structure with regard to do this because you're really moving certain bodies from one place to another rather than a lot of incremental heads ultimately as this plays out.

And Mark who runs our international (multiple speakers)

Hunter The only thing I would add to Brad's point is that we have for example taken staff that used to be doing a pan regional ad business which we didn't find had a lot of potential in it and we've moved it locally.

We also, given the distribution infrastructure that we have in place, which is among the most sophisticated in the industry, we have an ability to put local sales feeds into markets in a pretty efficient way.

So as we, for example, have added a local ad sales feed into Russia, we were able to do it off an infrastructure that was already there and couldn't operate very efficiently.

Okay.

And regarding the potential dividends in terms of incremental revenues being generated by this transition, when would you expect those to start coming in?

I think you'll see it play out over time.

You see it now play out as we -- if you exclude the UK we've had a 29% increase in international advertising revenues for the quarter.

And so you'll continue to see that ramp up.

Now it's off not a very large base, but each quarter it's been growing nicely and that should continue to grow as we become more effective at localizing our advertising efforts.

One of the advantages of the geographic diversity that we have is that we're seeing that the UK and France and Italy are facing some recessionary issues, but in some of these growing markets it's -- on the subscriber side it's like the US in the mid-90s where you're seeing some meaningful subscriber growth.

And because we're coming off a small base and we're setting up shop in a lot of these operations over the last year and a half I think it will be helpful to us even in a more difficult environment.

You provided some color in your prepared remarks regarding the current state of the domestic ad market.

Do you have any kind of [real-time] visibility into what's going on internationally in terms of how ad sales are trending there?

I'd say the two are not really dissimilar.

Here in the US the scatter market -- our pricing is holding, the scatter market is slowing down and for the first quarter we've seen some take back but not unusual.

Having said that, we all read the papers and we see everything that's going on and our visibility is -- based on what we're seeing it looks okay except a little slow on scatter.

But we're all waiting to see what the next shoe is and so that's one of the reasons we're continuing to take a hard look at our overall cost structure.

Internationally we have already felt the pinch in the UK and in France and in Southern Europe.

In the other markets, the markets remain pretty steady for now with the exception of a couple of markets where we've seen a little bit of a slowdown.

But overall we haven't really felt the punch of it yet.

right.

Thank you very much.

Anthony DiClemente, Barclays Capital.

Thanks.

Congratulations on the good numbers and the transaction and on finally being live with the Street.

A question for Brad on guidance for '08.

What does the guidance imply for free cash flow in '08?

Should we take the conversion ratio that the first nine months implies, so basically taking 339 over 698, 48% of your adjusted EBITDA is converting to free cash flow?

That's the first question -- for the full year.

Anthony, it's a little difficult to be direct on the exact free cash flow guidance because, as you know, we define it pretty classical which is cash from operations plus CapEx.

Cash from operations is affected by working capital, and so at the end of the year a lot of working capital moves in and out.

Over the course of the year you can average that out very easily.

So I think you'll see us have a routine amount or a percentage that you can do on an annualized basis, just quarterly because of those fluctuations makes it more difficult.

Okay.

So what is the right conversion ratio for the full year?

Can you help with that?

Well, if you think about it in basic terms and use working capital neutral which -- I think working capital might be -- we might have modest uses for it over the course of each year as revenues grow.

But from an EBITDA perspective, you take away your interest, you take away our depreciation, our tax rate effectively is around 38%, on a cash basis it's around 20%.

Okay.

If you're working your way down the free cash flow statement to figure out where the free cash flow is, that's probably a pretty good area.

Our ongoing capital expenditures as a company, because what we have right now included on our statement of cash flows also includes Ascent Media and DHC, our annualized capital expenditures are somewhat -- annualized, not quarterly -- are somewhere in the ballpark of around $60 million.

So I think that gives you the components of how to think about free cash flow and how you generate it.

So working capital neutral, cash tax rate 20%, CapEx $60 million, that should get us to the full year.

That should get you (multiple speakers) pretty far.

Cash interest is in line with book interest and that should get us -- okay.

It should be pretty close.

And the taxes have different nuances and I'm just affecting to what the GAAP statements are.

That could be a plus or minus 5% depending on a quarter.

Okay, thanks.

And then if I can one more.

So the distribution agreements that you have in the US on both the established networks and the merging networks, I wonder, Brad and David, if you could just talk about like when those key contracts with the larger MSOs come up and when do they expire.

And also, what can we expect in terms of growth in distribution fees?

Is it the kind of thing where you're still looking for more distribution on the emerging networks where you're not fully penetrated or do you think you still have a good ramp on your distribution fees per sub on the existing networks?

Thanks very much.

Most of our agreements, as we disclosed in our document, we have one agreement with a large distributor that's coming up this year that's up.

Other than that almost all of our big deals are locked in long-term, meaning over the next four to five years.

Internationally about 70% of our distribution deals are locked up for the next two years.

And in terms of growth, which I think puts us in a very sturdy position.

Again 50% of our revenue is what -- I'd call it long cycle with this sub fee revenue.

And it emphasizes the fact that we are pretty much a pure play cable company.

We are a dual revenue stream company and I think in times like this it provides us meaningful security.

In terms of the growth, we have -- what we call emerging network channels.

We have Fit TV which is in 42 million homes, we have Military which is in 52, Science in 53, Discovery Kids in 60.

Those channels are on the digital box.

So if you get a digital box and you turn it on we have 13 channels.

The digital growth is much more substantial than the analog growth.

The analog growth in the US is about 1%, maybe 1.5%.

The digital growth is more substantial and most of our deals provide that whenever somebody deploys a digital box that they carry our channels and pay us our fees.

And so we will be getting and we have and will continue to get some meaningful growth based on the digital growth.

So if you look at the cable industry and you see how digital is growing and how they're deploying boxes we root for them.

If they rolled off those boxes more and more people get our channels.

In addition, as you know, we get -- the fees increase each year.

And finally, competition is a good thing for us.

When I started in this business it was just the cable guys, then it was cable and DDS.

Now we have also the telcos.

We're platform agnostic and having more and more people competing for your content is helpful and sometimes it's helpful also in terms of price and thee kinds of arrangements that you can get for carriage of your channel.

So it's a good thing for us that there's competition and I think that lays out where most of our growth will come from.

That's great, thank you very much.

Anthony, let me just clarify one of your questions because I was thinking about an easier way to help you think about free cash flow for the year.

On a tax basis we anticipate paying somewhere around call it $215 million to $230 million in cash taxes and we've paid to date about $140 million.

So when you think about the fourth quarter and you're modeling it out, that might be the best way to get to your number.

Awesome.

Thanks again.

Doug Mitchelson, Deutsche Bank.

Nice start, gentlemen.

So a couple questions.

Craig spent the last few years telling us how great the Nat Geo channel is doing, especially internationally, when you look domestically and international.

Are there any competitive battles that you're focused on or worried about or are you running your own race?

And then on the OWN Channel, what's the likelihood that Oprah will move her show over to the channel when its contract is up in a few years?

And then lastly for Brad, just philosophy on returning capital to shareholders.

I know you already articulated that's not a near-term, but is there a preference for dividends or share purchases or hoarding cash for acquisitions, anything just philosophically, please?

Thanks.

I'll start with Nat Geo which is a channel that I helped actually start and was on the Board for a little while when I was at NBC.

National Geographic got a later start in international distribution and they're doing a nice job.

But for us, one of the strengths of Discovery is, one is the platform strength.

Discovery Channel itself is the number-one TV brand in the world, it's in 173 countries and it's on analog in almost every one of those countries where we have very strong shelf space.

That's also true in many or most cases for Animal Planet.

Some of the other later entrants are more on digital.

We've also, because we've been in the game for so long, have very strong and established brand and viewership where in almost every market we're number one in factual and in many cases we're number one by a four or five or six to one ratio.

We also have the strength of a very big engine.

This is part of our overall strength as a company is you can't think of many niche cable networks in the US where the content works very well around the world.

In most other niches you need to create that channel, the majority of it in different markets.

So when we take the 20-year library that we have and all the weight of the economics that we put against content that goes on Discovery or goes on Animal Planet, if you go to Egypt or Israel or France and you put the TV set on you see all of that content.

In the case of Discovery, 80% of Discovery travels around the world.

And so you really need the strength of that bouquet and it's one of the unusual things that we try to use to our advantage.

Doug, with [regards] to our capital and what we generate, what do we do with it.

First and foremost what we like to do is invest in our core business.

So if we have opportunities that's where you'll see us do that and whether that's in making incremental investments in OWN, which David will talk about in a second, or looking for further investments in digital or programming or whatever it is, that's where we'd like to put our money.

The second would probably be anything strategic that would make sense that would generate a good return for our shareholders because we are very cognizant of getting appropriate returns for the money we use.

And I think third, if we don't have use of our capital we return it to our shareholders.

And I think almost any time we make an investment we have to consider somewhat what's that compared to investing in our own stock and are we doing something that would actually benefit shareholders long-term.

The form of returning capital to shareholders, I think we're fairly agnostic, but we would cross that bridge when we come to it.

Typically share repurchases provide you greater flexibility and you can also take advantage sometimes of dislocations in the market and that's how we look at it.

On the OWN, Oprah has been -- she is the Chairman of OWN and she's been very involved with us in focusing on what the channel was going to be as well as developing Oprah.com.

The current expectation is that she recently opted to stay with ABC through September 2011.

And the expectation is after that that her show will go off of ABC in syndication and she will come to OWN.

And we're talking now about what that presence would be and what kind of programming she would be involved in directly.

But this is her chapter two and building the OWN brand online and on air is something that she and I and -- we're working together and it's a core mission for her.

That's terrific.

Thank you very much.

John Janedis, Wachovia.

Good morning, guys.

Can you give us an update on Planet Green?

Has the economy impacted the advertising that would have supported the programming?

And what sort of programming investment should we expect over the next 12 months or so?

Okay.

We had a great launch with Planet Green and I think our strategy of acquiring Tree Hugger, the number one for-profit site in the green space, has really helped us building credibility and knowledge in that space.

The person that was running Planet Green, Eileen O'Neill, we made a change at TLC because we had some ratings issues.

In July we were actually down -- the network itself was actually down 30%.

We made a management change there and Eileen, who was running Planet Green, we moved over to TLC.

The good news on TLC is she's done a -- her and her team have done a spectacular job of turning that network around.

We're now showing real growth in October, meaningful growth even off of where we were.

And we are now currently looking for someone to run the network.

We think it's a strong brand for us and we need to get the right person in place to continue the vision.

To be specific about the numbers and what the investment is over the next 12 months, when we talk about 2009 on our fourth-quarter call we'll walk through our programming investment and our intent at that time.

Okay.

And just maybe shifting over to the ratings -- David, you referenced TLC.

I think Discovery is doing pretty well in (inaudible) season as well.

Would you consider that in line with expectations or above?

And are we now seeing that programming coming on TLC from Eileen or is that on the come?

We did have a tough third quarter and, as Brad said, we were up 5% in domestic ad revenue.

And if our ratings were on plan we would have been up 9%.

So we had some ratings shortfall which we had to deal with with some ADU.

And on the TLC side it was really a fundamental change in the channel, we needed to make a right turn and get on brand.

We think we're on brand now; we took a number of programs off that weren't on brand.

Eileen has been -- she developed Jon & Kate Plus 8, she developed 17 and Counting.

If you take a look at what she's been able to do with Monday night by reinforcing that, Monday night on TLC is the -- either number one or number two night on cable for women, so we've seen some real strength there.

But we've got a ways to go.

The good news is we're on brand and the good news is that we were down 30% and now we're all the way back and a little bit ahead.

But we think we can do a lot better and we've got a great leader there and we're spending a lot of time focusing on now nourishing -- now that we really understand I think a lot better what that brand is and who the audience is, to nourish it.

On Discovery, we also have new leadership in John Ford and candidly we just had a -- we were down on content.

We only had 70 hours of original content that debuted in the third quarter and you saw that that was really tough for us.

Ford has -- he brought back Storm Chasers and refocused that show, it's doing very well on Sunday nights which, as you mentioned, we're up 20% in October with men and women.

You now see some of his touch.

He has a show called Prototype This which is doing well which comes after Mythbusters, before Mythbusters we put a new show on called Time warp which is doing very well.

He's putting in a number of specials that are really kind of true to what Discovery is.

We've got a neat special coming up on the JFK assassination and we have 120 hours of original content in the fourth quarter.

So it's a mix of more original content and us being weak in original content and having more of Ford's touch and his creative touch on the screen which has really helped us.

And not to whine, but we did have -- it was a little bit of a tough one in the third quarter with the Olympics which really in particular hurt Discovery.

But as I say to Ford, our job is to win no matter what anyone else is doing.

And I think we still have a ways to go on both TLC and Discovery, but I think October and early November look strong as does Animal Planet.

Animal Planet has been a real difficult one for this company for 10 years -- great brand, pretty flat ratings.

We have strong leadership.

I've been spending a lot of time working with them, we've put more money against it, we rebranded.

Tonight we have a new show called Whale Wars which has gotten some great reviews in the Times and in USA Today and in the industry.

It's about whaling off the coast of Japan.

It's a rougher channel, it's more aggressive, it's no longer rated G, we're having fun with it.

But I don't think we have the recipe or the secret sauce yet.

It is up about 6%.

It was a network that in the past was mostly young kids and older people and therefore we didn't have a salable demo.

The focus was to get a salable demo in the women 25 to 54 demo which we've been able to do to some extent.

We're up in a meaningful way, but Animal Planet is a great platform.

So I hope over the next couple of years we can really build it but it's going to take time.

David Joyce, Miller Tabak & Co.

Another question on the color of thinking about free cash flow.

Could you describe any seasonality on programming expenses and how that affects working capital and therefore free cash flow throughout the year?

Sure.

The way the programming investment works is that when we put a program -- it's different for different parts of our company in terms of the geographies.

But when we put money to work and we premiere a program we usually amortize in the states 50% of that up front and then 25% in each of the successive years, so it's over a four-year period, a three-year period from that perspective -- or a four-year period.

And then in the international there are some similarities and some portions are also straight line.

So what you're going to have is a difference in timing because that cash will go out day one.

But if you're spending the same amount each year, which we have not been, you wouldn't have any difference in the working capital coming over that four-year cycle.

We have though increased our investment in programming from 2007 to 2008; that investment increase will be somewhere around $100 million.

So in theory the amount of difference in the working capital would probably be the difference in that investment and that's the way to think of it.

Next year if we don't increase that investment you'll start having that catch-up amount.

So to put raw numbers to it, if our programming investment -- this will come off the income statement -- will be about $650 million or our expense will be $650 million and our investment is $700 million, I think those are close to the actual numbers, you'll have about a $50 million difference.

Okay, thank you.

Thanks, everyone.

If you have additional questions, please feel free to give us a call.

Thanks, everyone.

Thanks, everyone.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Have a good day.