華納兄弟探索 (WBD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Discovery Communications Incorporated earnings conference call. My name is Louisa and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I would like to turn the call over to there Mr Craig Felenstein, Senior Vice President of Investor Relations. Please proceed, sir.

Thank you, Louisa. Good afternoon, everyone. Welcome to Discovery Communications third quarter 2009 earnings call. Joining me today is David Zaslav, our President and Chief Executive Officer, and Brad Singer, our Chief Financial Officer. Hopefully, you have all received our earnings release, but if not, feel free to access it on you are website at www.discoverycommunications.com. We will 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 form 10-K for the year ended December 31st, 2008 and our subsequent filings made with the US Securities and Exchange Commission. With that, I would like to turn the call over to Brad.

Thanks, Craig. We appreciate the opportunity to discuss our third quarter performance and current operating environment with you. Discovery continued to deliver on our key corporate initiatives during the third quarter. Producing high-quality programming, growing and monetizing our ratings to increase advertising and affiliate revenues, while thoughtfully controling our or operating costs. We also took another step forward in strengthening our financial position with our initial offering into the public investment grade bond market. Total revenues increased modestly compared to the prior year with US network growth offset by a slight decline in international network revenue due to a $22 million unfavorable currency impact. Our total operating expenses decreased $47 million, as we lowered SG&A costs by $27 million, and benefited an additional $21 million due to foreign exchange.

As a result of our continued ability to moderate our cost structure, our adjusted OIBDA grew 17% to $364 million, and enabled us to expand our adjusted OIBDA margins by almost 600 basis points to 43% from the prior year. Excluding the impact of foreign currency, we grew total revenues 4% and adjusted OBIDA 19%. Our operating income decreased to $215 million with the $53 million increase in adjusted OIBDA offset by the $156 million year-on-year change in long-term incentive compensation, which was a $91 million expense in the current year reflecting the increase in Discovery's share price compared to a fifth $65 million benefit in the prior year. Please note, the third quarter results reflect a deconsolidation of the Discovery Kids Network, which reduced revenues by $11 million, and adjusted OIBDA by $5 million from the prior year. The quarter also includes $6 million of operating expenses related to OEM.

Our net income available to Discovery decreased to $95 million with the improved operating performance offset by higher long-term incentive comp. Our free cash flow declined to $29 million due to the payment of $140 million of taxes related to the gain on the sale of the Kids Network and prior period taxes, as well as the timing of certain working capital expenditures. Year-to-date, adjusting for the tax payments, our free cash flow has increased 34% to $455 million.

Our US operations performed well during the third quarter. Third quarter domestic revenues grew 5% with distribution revenues increasing 5% from higher rates and expanded distribution of our Digital Network offset by the deconsolidation of the Kids Network revenue. Adjusting for the Kids Network, the affiliate network growth was 9.5% compared to the prior year. Our domestic ad sales team continued it's strong performance, growing revenues almost 5% in an improving, yet still challenging market. Strong rating were offset by lower demand and a flat overall pricing compared to the prior year making it difficult to fully monetize our programming success. Our domestic operating team decreased overall operating expenses by $22 million compared to the prior year. The cost performance compared to the prior year was aided by a $17 million content impairment charge in the third quarter of '08 for TLC, offset by $4 million of increased SG&A spending related to OEM.

Adjusting for these items, our domestic operations held the cost of revenues relatively stable, while decreasing SG&A by $11 million. With the strong revenue performance and disciplined cost controls, adjusted OIBDA for our US networks increased 18% to $302 million, and domestic margins expanded to 58%. Our international operations perform well, despite the economy and currency impact on our top line. Total reported revenues decreased 2%, which included a 5% increase in affiliate revenues and 9% increase in advertising revenues, offset by an 8% unfavorable foreign exchange compared to the prior year.

International affiliate growth rate was adversely affected by positive one-time prior year revenue items of $5 million, as well as other factors, primarily slower than anticipated subscriber growth due to the economic conditions and lower pricing in two selected markets. Our international advertising accelerated from the first half of the year, increasing 9% from the third quarter of a year ago. The growth was driven primarily by our largest region EMEA. Excluding the $21 million positive currency impact to our expenses, cost of revenue increased 23% from the prior year, primarily due to higher content amortization distribution costs. Our SG&A costs declined 14% with lower personnel, marketing, and other general expenditures. Operating expenses without foreign currency impact were up 3% compared to the provide year. Excluding the foreign currency impact, our international operations increased adjusted OIBDA 10%, and margins increased to 36%.

Our commerce, education, and other segment delivered solid results, led by our education operations with continued to grow profitably. The segment quarterly results were lower due to timing of recognition of revenues and expenses compared to the prior year. Year-to-date, the segment has significantly increase adjusted OIBDA from $2 million to $13 million. The Company's overall performance during the third quarter of 2009 made our revenue and exceeded our adjusted OIBDA expectations. As we look forward to the remainder of the year, we believe consistent revenue growth may still continue to be somewhat challenging. Our domestic advertising demand has increased, and we believe scattered volumes will continue to significantly exceed the prior year offsetting the lower upfront sales total. However, the scattered pricing brought double-digit premiums to our upfront pricing is below the prior year's 20% to 30% premium.

We are encouraged by the greater demand and higher pricing and anticipate these trends will likely follow the broad, economic activity. As a result, we anticipate domestic ad sales in Q4 will be flat to slightly positive compared to the prior year. Internationally, we have seen a strengthening of our markets in Latin America and EMEA and Asia and anticipate high, single to low, double-digit ad growth, excluding FX and one-time items. International affiliate revenue growth should be consistent with the third quarter adjusted growth rate in the 6% to 8% range excluding FX. On the expense side, we anticipate levels consistent with the prior year with increased content amortization and distribution costs and higher OEM related experiences offset by SG&A reduction. Please note that we don't anticipate consolidating the operations of OEM in fiscal 2010 due to the implementation of FAS-167.

For the full year of 2009, we are raising the low end of our revenue range and expect revenues to be $3.45 billion to $3.5 billion. Our forecast includes approximately $70 million or 2% decrease in revenues related to foreign exchange rates, and approximately $25 million less than the prior year related to the deconsolidation of Discovery Kids Network. We are raising our adjusted OIBDA guidance to $1.43 billion to $1.46 billion to reflect our strong performance to date and our anticipated fourth quarter performance. Our adjusted OIBDA guidance includes an estimated $15 million decrease to the current foreign exchange rates compared to the prior year and an approximate $10 million decreased to the sale of the Discovery Kids Network.

Our guidance includes the impact of further expenditures related to the Oprah Winfrey Network. Our earlier OEM guidance for 2009 indicated we would spend $70 to $80 million in anticipation of our first-quarter launch. We continue to invest additional resources in the channel and to fill out Senior Management Team with several high quality recent additions. As we continue to evaluate and refine the exact timing of the launch, OEM's digital operations and programming and development pipeline, we now expect to invest approximately $30 to $40 million in OEM during 2009. We are working diligently with Oprah Winfrey and her team on building a world-class offering, and we anticipate updating you on the specific timing of the launch, as well as, the new channel's programming slate in the near future.

We except net income available to Discovery of $525 million to $550 million, incorporating our current share prices for long-term incentive comp purchases and capital expenditures of $50 to $55 million in total. During the past two quarters, we significantly improved our financial position with a combination of strong operating performance, a $500 million incremental loan facility, $500 million ten-year note issuance, and the $300 million proceeds from the sale of Discovery Kids transaction. As a result of these activities, we have successfully reduced our leverage 2.4 times adjusted OIBDA and lowered our maturities through the end of 2010 by $1.3 billion to $25 million. We will continue to selectively increase the duration of our capital structure to better match the long lives of our assets and increase our financial flexibility. Our strength in financial position enables us to direct our capital resources on the most appropriate uses to generate the highest returns for our shareholders in the future. Before I finish up, I would like to remind everyone, the Cake Boss is back for its second season on TLC on Mondays. And check out Clash of the Dinosaurs in December on Discovery Channel. I will now turn the call over to David Zaslav, our CEO.

Thanks, Brad. Good afternoon, everyone, and thank you for joining us. It has been a full year since our first earnings call as a public Company back in November of 2008. While economic conditions have not been optimal over the last year, Discovery has delivered sustained growth due to the strength of our business model, as well as, our focus as a management team on expanding our market share across the globe and delivering real operating leverage. Discovery's third quarter financial results are the latest example of how the diverse revenue streams that our cable programming business provides can help overcome economic softness, if executed smartly. Despite a stabilized operating environment that still reminds challenging, our foreign currency headwinds in Q3, Discovery delivered both advertising revenue growth from continued rating strength and affiliate reference growth from contractually growing distribution fees and expanding pay-TV markets worldwide. Most importantly, this revenue stability was combined with a cost base that was 5% below year-ago levels, excluding foreign currency. The result was adjusted OIBDA growth, excluding foreign currency of 19%, and margin expansion of almost 600 basis points over the third quarter of 2008.

While the current operating environment is clearly improving, the Company remains focused on those parts of our business, which we have greater command of. Namely, growing market share by leveraging our brand portfolio, building additional growth engines, and maintaining an appropriate cost structure. Our investment in original content over the last few years has led to greater audience reach throughout 2009. For the first nine months of this year, viewership across the US network portfolio is up 10% among our core adults 25 to 54 demographic as opposed to the non-Discovery cable marketplace, which was up only 1%.

During the third quarter, our domestic networks were up 14% in prime time, while non-Discovery was flat. Our growth this past quarter was led by TLC with ratings among its key women 25 to 54 demo up 33%, driven by returning series such as Toddlers & Tiaras, Say Yes to the Dress, and LA Ink, as well as, new series Police Women of Broward County and Cake Boss. The second season of Cake Boss premiered last week with ratings gains in all key demos versus season one, and it continues to rank in the top 10 among ad-supported cable.

TLC has gone from the number 15 network in America for women a year ago to the number eight network today. And with a great slate ahead, including BBQ Pitmaster, which premiers in December. We continue to be encouraged about the brand strength and creative pipeline on TLC. Animal Planet has also sustained it ratings momentum from the first half of the year, with ratings growth of 12% among adults 25 to 54 in the third quarter. Animal Planet ratings gains were lead by New Hit, Monsters Inside Me, as well as Returning Tent Pole, Whale Wars, which out performed it's first season by 18%. Our flagship Discovery Channel was also up double digits this past quarter among persons 25 to 54, and once again, finished among the top five in ad-supported cable for men, led by strong ratings for returning favorite, Deadliest Catch, as well as new successes, Swords and the Colony. The Discovery Channel also strengthened its special strategy with the launch of Awesome Sundays, giving us a foundation on that key family viewing night. This broad-based ratings strength across our three fully distributed US networks contributed to 5% advertising growth domestically this quarter, despite the weak economy. With sustained ratings, and increased salable inventory, we have positioned ourselves to garner a larger share of the available ad dollars going forward in the US. This was readily apparent in the recently completed up front.

While pricing was slightly down, we anticipate being able to make up those declines with strong ratings delivery across the portfolio. We did sell about 10% to 15% less inventory than in prior years but not because of less demand. Our view at the time was that scatter pricing was at a premium to up front pricing, and we expected pricing to continue to improve in 2010. Therefore, holding back additional inventory was prudent given our ratings momentum. Current scatter pricing is up high-single to mid-teens versus the recently completed up front. But as Brad mentioned, pricing is still below the strong prior year levels. Visibility continues to be relatively limited, so it is too early to say things have turned, but demand is much improved, which should ultimately translate into higher scatter pricing. And with our market share expanding at a balance portfolio that reaches both men and women demographics, we expect to deliver advertising growth domestically in 2010.

At the same time, we also continue to build out our valuable domestic distribution portfolio as we remain focused on our transition from a strong platform Company to an even stronger content Company. Since it rebrand from Discovery times in January of 2008, Investigation Discovery has grown it's viewership every month, and this past quarter ID delivered the best third quarter of ratings in its history with audience up over 20% among key demos. As I mentioned last quarter, we recently brought in Henry Schlieff, former CEO of Court TV and Hallmark, as our President and General Manager with the goal of creating the distinctive brand in a popular genre, that is currently being underserved. And where we have a strong programming library and a strong track record. ID has quickly established itself as America's leading investigation network, with a line-up of new shows that appeal to its core women demographic, including On the Case with Paul Zahn, the number one series in network history. And we're looking forward to further monetizing ID's ratings growth over the coming year.

We also continue to ramp up OEM. Kristina Norman, the former CEO of MTV and her team and I are working closely with Oprah on the programming, the development, and branding strategies. And we continue to fill out the senior management team, including recently adding an advertising sales and an affiliate sales leader. Lastly, we continue to focus on building out our joint venture with Hasbro. We're working closely with Brian Goldman, a great leader and fantastic partner, along with the entire Hasbro team. And newly imported CEO, Margaret Loesch, who ran Fox Kids Show has already begun to assemble a world-class team for the joint venture.

Discovery is not only expanding it market share in the US but also around the world, both from the subscriber, as well as, viewership growth. On the international affiliate side, during Q3 we increased our subscriber base with growth in Latin America, India and eastern Europe. We also launched several new channel offerings including Investigation Discovery in eight markets, and Discovery HD in 13 markets, expanding our HD reach internationally to 45 countries. We continue to evaluate individual market opportunities, and will launch additional brands in order to strengthen our programming line-up and deliver greater reach to advertisers, when and where appropriate.

From a viewership perspective, during the first fine months of 2009, we have continually grown our international audience, including 14% ratings growth this past quarter, with a balanced performance across EMEA, Latin America and Asia Pacific, all of which experienced double-digit growth. This rating strength contributed to 9% advertising growth internationally in Q3, excluding foreign currency, despite a weak overall market environment. Similar to the US, we have begun to see some stabilizing internationally in certain markets, such as Latin America, EMEA, and Asia, and as the global economy strengthens, we expect to more effectively monetize our increased international audience. We should also benefit going forward from our recently-announced renewal with Sky Media to provide advertising representation for us in the UK. This deal marks a new partnership with a key affiliate and advertising partner and should help us grow ad revenue in the UK, which remains a very difficult market.

Much like in the US, our international market share continues to expand, and through increased viewership and reach, the Company remains well-positioned to deliver continued growth in 2010, as we capture a larger share of the available ad dollars in the marketplace. As we continue to invest in these businesses, and despite current pressure from the economy on the topline, we have been able to deliver real operating leverage. Brad mentioned earlier that in the face of economic softness on our revenues, the total Company margins expanded to 43% from 37% a year ago. The majority of the margin expansion in 2009 has been the result of the significant cost cuts we implemented this year. However, it is important to note that as evidenced by our ratings success, we have not sacrificed the quality of the programming that ends up on the screen. We will continue to invest in our brands and original content, but we will not spend unwisely. Our focus continues to be on success-based investment to ensure we put our money to work where it has been proven to generate a return. At the same time, we have refined our cost structure in nonstrategic areas that don't translate directly to revenues, and won't impact the long-term growth potential of our business. Year-to-date, excluding currency, we have offset the slight increase in content expense with a 12% reduction to SG&A, including a 10% reduction in the third quarter, as we improve our spending on marketing, personnel, and research costs.

Looking forward, we expect margins to continue to rise, but over the longer term that growth should be driven primarily by revenue expansion rather than largely through cost reductions. We will maintain a stable cost base, and act accordingly if the economic environment does not cooperate. But the impetus for sustained margin expansion will be advertising and affiliate revenue growth both domestically and internationally. Brad updated you on our increased guidance for the remainder of the year. As we finish out 2009, and look forward to 2010, we firmly believe that the increased market share we have delivered, the attractiveness of our business model, and the efficiencies we have realized over the past few quarters, sets us up to deliver continued strong results ahead. With that, Brad and I are happy to take your questions.

(Operator Instructions). Your first question comes from the line of Jessica Reef-Cowen with Bank of America Merrill Lynch. Please proceed.

Thanks. What impact to the P&L will there be from the sale of the Travel Channel.

The sale of the channel, depending on when it is consummated if it is ultimately is consummated, Jessica, we would anticipate probably by around mid-year, our services, if it goes to a strategic buyer, which it's unclear who it goes to, they may no longer use our affiliate and ad sales services. So you would see a reduction in revenue and a reduction in expenses. The net impact on cash flow would be somewhere in the 1% to 2% range of our adjusted OIBDA.

On an annualized basis.

And Brad, could you follow up on something you said earlier, did you say there were two markets in which you had price decreases if affiliate fees.

Internationally. They ever idiosyncratic to those markets. It was unique situations in terms of what we did. It wasn't priced -- We didn't specifically say -

Specifically, it was that the prices were less that we had anticipated.

So there wasn't an actual decrease, just less of an increase

The prices were less than we expected.

Okay. And finally --

And those were mature markets. We're in 173 markets, and we have 70% of our deals are locked through the next three years, but as the markets come up, there is a distance difference between the markets where there is one player that are very mature, and the markets where we have a number of players, and those differ depending on the market.

Next question, operator.

Your next question comes from the line of Ben Swinberg with Morgan Stanley. Please, proceed.

Thank you. Good afternoon, guys. I have one question and one point of clarification. David, I think the third quarter you guys had guided to sort of flat to slightly up domestic advertising. You obviously did better than that. Just wanted to understand what the drivers of the outperformance was, that was ratings driven, or changes in pricing. And you we should think about those levers in 4Q. You guys spend a lot of time talking about year on year scatter. If you could quantify how much that is down year over year and if you have seen any improvement through the months. And then just a clarification, Brad, did you say you were going to be deconsolidating OEM? I was unclear on what you meant.

Ben, I'll take both of those and maybe David can add some additional color to it. With regard to the third quarter, our pricing was flat year-over-year, so where we really made it, our sellout was slightly down, but since our delivery was up, that's what led to the above performance. Almost entirely ratings driven. The pricing really didn't help us.

In the fourth quarter, the pricing is slightly down because the scatter premiums in 2008 were 20% to 30%, and this year, they're running high single digits to about 15%, depending on which network. And so even though our sellouts will be up, and our ratings may be slightly up, as they're running today, that combination would lead to flat to hopefully slightly up, and, you know, if our ratings improved, we may do slightly better. If they don't, we would do slightly worse.

We are seeing that the marketplace is feeling a little bit stronger in terms of that pricing. That's one of the reasons why we didn't sell as much in the up front. And if you look at over the last two months or so, the market does feel more robust. There's no visibility to see whether it will continue, but in terms of our sellout over the last few weeks, and our pricing, we're experiencing a good trend, and the pricing has been getting better. But, again, we can't predict where it will be in three weeks or four weeks, but it feels much stronger over the last few weeks.

Just as a data point that may be helpful, this is the first quarter of the year that at this time when we have our earnings call, we're actually running ahead of the prior year in the cash market in terms of total dollars, and that hasn't happened in the last three quarters. So it does feel like a somewhat better environment, as we move into 2010.

With regard to OEM, we will not be consolidating the Oprah Winfrey Network next year. That is just a change in the accounting for is due to the implementation of FAS-167 which starts Jan 1. The way it is going to work is you actually take out in 2009 what you had recognition, and everything is accounted for under the equity method in 2009 and 2010.

Okay. I see. Thanks a lot.

Your next question comes from the line of Doug Mitchelson with Deutsche Banc. Please proceed.

Thanks very much. Just a couple. One, could you not take us out a little farther in those scatter comps? So you look at 1Q, 2Q? I imagine you were up 20% to 30% numbers?

In terms of -- you're talking about 2009 scatter markets, or 2008 scatter markets?

'09, yes.

Yes, 2009 in the first and second quarter we had weaker comps that are generally single digits, depending on the network, up compared to a higher level of up front.

Are you able to put any numbers or ranges around the change in your UK ad sales renewal?

I think the best way to think about it, Doug, is that if all things being equal, that -- let's say we had the same level of pricing and same level of sellout next year that we had this year, you would ultimately have $8 to $10 million of benefit.

And then lastly, just sort of big picture. I mean clearly something that really distinguishes Discovery from any of the peers here is how much of revenue and profit is sourced from international, and we think that's going to grow faster. But, you mentioned, creating new content in it and I am just curious, if David, as you look at what you have been building internationally. You touched on a little bit, but can you give us a sense of how you're building brands internationally versus the US? Are you just extending US brands internationally, or are there new brands you're frying to creat internationally and does geography matter or are you looking to create brands that might work in some geographies and not others or you want to focus on local brands. Any commentary would be helpful.

One of the first things we did before I get the actual content to expand is we've really pushed out HD. We were successful here in the US getting seven channels. We've always been a leader as a platform Company, so we went out with 45 countries, where we've been able to get HD coverage. Our content does look very strong in HD and in most cases that is Discovery and in some cases, that is more than just Discovery.

In the last two years, we've been pushing Science, which is now in over 80 countries, which really translates pretty well all around the world. It's a universal language. We think Investigation Discovery could be another vehicle for us that could work well. We have launched in over six markets in this past quarter. And so we're looking first to our core brands and our library, which is the best model for us. If we can get our content to work because we own so much of it, it gives us a different economic model than most other media companies. When our content works on Discovery and we've taken it into 173 countries, it works on Animal Planet, we can take it around the world. We can get a much better return for that. So Science is starting to give us some of that opportunity. ID. We also have a big strength in the -- in what we call Turbo, which is thing likes American Chopper. We have a very big library in that area, and we've been working that around the world. But there are some one-offs.

We have the number one network in the Kids space in all of Latin America for kids six and under with Discovery Kids, and we also have recently pushed hard on Home and Health in Latin America, which is a women's network, which has grown aggressive in Latin America. It is now one of the top ten cable channels down there in the women's demo. And so it really does depend by market. There are a lot of channels that we have uniquely that will work well around the world, and that's our best model, but in order to take advantage of the fact that we have on average five channels in 173 countries, we need to be aggressive with other demos as well, and we're experimenting now with the women's demo. We've had a lot of success recently with TLC here in the US. And we're going to see whether that's something we could use over the next year to build out a women's network in 2010.

Great. Thank you.

Your next question comes from the line of Rich Greenfield with Discovery. Please proceed.

Hi, a couple of questions. One, could you discuss the economics and ancillaries of the series you're doing next year the follow on to Planet Earth, the series Life. How does that work when you look at DVD. I know there is a lot of kind of confusion or kind of questions about how you are to monetize it domestically versus internationally with the first series. I am just wondering what structure is this line. And two, you have launch recently TLC Cooking, you're doing this Cake Boss, you're doing the BBQ Pitmasters. It seems like you're moving very much into the category of Scrip's Food Network. Wonder if that's intentional and if you see a big opportunity to kind of replicate some of the success that they have had there. Lastly, assuming OWN's launch in mid-2010, Brad, you made comments about what happens with the Travel Channel but what would happen from Discovery Health if it was deconsolidated? What would the impact be on 2010 numbers considering a mid-year deconsolidation. Thanks.

Let me take the TLC, Cake Boss, Pitmasters first. TLC has had enormous success over the last 12 months, and the credit goes to Eileen O'Neal and her team. We started the year as the number 15 network in America. We're now the number eight network. And Cake Boss is the number one food show on cable beating all other shows in that category. One reason Eileen has been so successful is she spend a lot of time figuring out who is the TLC audience and how do we nourish them? And the TLC brand we think is very broad, and it will encompass things like Cake Boss and some food programs, but it's a lot broader than that, and the road map to TLC is to continue to build on that audience.

In the last few months we've also been successful with TLC in the 18 to 49 demo where we primarily sell 25 to 54, but in the 18 to 49 demo, TLC the number five network in America. So we are not looking at other networks like Food and say we have a lot of admiration for food, but the focus for TLC is what is TLC at it's best, and how do we nourish the audience. We are going to continue to do that. So that's a big success story on us.

Life is, I would call, the successor to Planet Earth. It's the first big 11-part series. It's been in the works for about four years. We announced within the last few days that Oprah Winfrey is going to be the voice of Life. We have a lot of hope for it. We think it's spectacular, but there are some pieces of Life that still have some of the old baggage of the Planet Earth deal. The deal was struck a long time ago, and so we'll be able to get the full advantage of the domestic piece of Life, but it is a BBC co production, and like Planet Earth, Life outside the US will be a BBC property. On the OWN piece, Brad, why don't you speak to that?

Sure. Rich, with Health, Health provides around $20 million OIBDA a year and so depending on when one would stop and the other would start, you would just prorate that amount, and that's probably a pretty good ballpark.

Perfect, thanks.

Your next question comes from the like of Michael Nathenson with Sanford Bernstein. Please, proceed.

Thanks. I have a couple. For either one of you guys. As David said, I think domestic SG&A was down about 10% this year, and wonder when you look into the fourth quarter, if it will be down similar rates, and at what point does it start inflating again? The right runrate (Inaudible).

So Michael is your question it's not compounding negatively 10% in the future indefinitely?

Well, yes, and the point would be, at what point does -- you know, when does it start growing, and what are the triggers for growing it again?

I think the best way to think about it is along the lines of what David's remarks were, which is that a majority of our margin expansion in the future will come from revenue growth rather than cost reduction. Having said that, we're going to continue to drive down our SG&A and our cost structures to be as efficient as we can.

That doesn't mean that it has to recert having an inflationary increase next year or the year after. But since we're not going through 2010, what I would suggest is that we have done a nice job on our SG&A structure, and you should expect us to continue to work on refining our SG&A structure, and we'll let you know in more specificity when we talk about 2010.

Our approach to that remains the same. We have the Company broke essentially in half. To the right sided is growth, which is our content -- investing in our content and brands and in adding revenue by building our sales teams around the world and the competency of those teams, and everything else is to the left, and we continue to attack that and look at how we can drive that cost down. So ultimately, we could spend more in areas where we can get growth.

Okay. And let me ask one for David or Brad. When you look at your Q4 up front base that was just built in, what percentage of Q4 inventory would come from the up front base versus let's say Q3?

The percent is what David said. It's slightly less than we had last year, it's so slightly less than half of it is the best way to think about it.

And is there any difference versus Q3?

It's somewhat comparable, but again less.

We did a little bit more than 50% in the up front last year, and this year it's in the 45% range.

And the reason I say less, because of Q3, is Q3 also had 14% commitment cancellations. So what we sold in the up front a year ago, what we actually realized when you rolled into the third quarter, is less, Michael.

Right.

And so I think you're starting off with a base in the fourth quarter that's probably actually higher like to like as a percent, because you don't have the cancellations that you had in the third quarter.

And one of the things I hear is some other networks have reported that some of the up front buying was more Q4 way than previously. Did you see any of your clients pretty much come stronger in Q4 than they did last year taking advantage of the up front to be in the fourth quarter?

I think the best way to say it is, there's not a -- there's not a large difference between our cores and terms of the percent.

Okay.

Having said that, we're assuming some sort of normalized consistent level of the calendar up front to achieve those numbers.

Okay. Thanks.

Your next question comes from the line of Anthony DeClement with Barclays Capital. Please, proceed.

Hi. Thank you. First one for David. Your operating systems were down 9% in the quarter of your programming costs were down at least for the US networks, and I remember last quarter, one of thing you mentioned is where you have 11 networks and you were thinking of -- you were continuing to think about of the best way to use your real estate in terms of the brands on some of the smaller networks, whether it be Science or TV or Military.

So I guess my question is, you know, you have all of this to real estate, would it make more sense to be investing more in content, given that you have the slots, and you already have the distribution for a lot of those smaller networks?

Anthony, one thing would like to highlight, that I'm not sure you saw, which we mentioned in the press release, is the reason the programming investment is down where the expense this year compared to last year domestically is we had a write-off in 2008 that was $17 million. So if you added that back, it is not a decrease in the programming expense.

Okay. Thank you.

It's a good question. We are investing. We're investing in Science. We're investing in ID. We're investing in Animal Planet, but we're also being a little bit prudent. There were some of the channels that we have that we haven't decided, is this the right brand, can we get substantial growth. As you know, all of our merging net works are profitable. And so on some of them, we're finding that the better strategy is to starve the ones that we have the one or two that we haven't decided what we're going to do with yet, and don't spend more money on programming there, and invest more in the networks that we think have more potential and the brands that we think are stronger.

I mean, does it have to do with carriage? Does it have to do with the fact maybe your affiliates are pushing back on some of the smaller niche channels in terms of expanded distribution?

No. In fact, all of our large deals are locked through the end of 2012 on all of our channels. So all of up the channels are locked in, the subfees for the most part are all locked in. So our challenge is to continue to grow those brands. So the growth that we're getting, the 10% growth that we got this quarter across all of our channels, is a representation of the fact that we're investing in creative talent here, and we're investing in programming. You're seeing it on ID. You're saying it in on Science. You saw it on TLC, Animal Planet, and on Discovery . So that's really our

And Anthony, another way to think about it, we also have brought in partners, whether it's Oprah Winfrey, whether it's Hasbro. So the networks that we haven't put incremental investment by our ourselves, we've actually brought in people with intellectual property that could really be beneficial for someone who can really be helpful in the programming. And so I think we have a track record that hopefully has proven provides value to to our affiliate partners.

Thanks. One more quick one, Brad, and thank you for taking the questions. On foreign exchange, it would seem that what's going on with the dollar would create a tailwind with you in the fourth quarter and going forward. Just wondering, is there a way we can quantify that for the model or you can help us with FX?

Sure, for the fourth quarter, have actually implied it's a benefit, so we can't use the phrase foreign exchange head winds anymore, it's foreign exchange tail winds heading in the fourth quarter. We will have a little more than a $10 million revenue pick up and a $5 million OIBDA pick up. A little bit less than that but around there.

Thanks again.

The next question comes from the line of John Trajidi with Wells Fargo Securities. Please, proceed.

Hi, thank you. Can you guys talk -- David, I think you mentioned this actually more about the 600 basis point margin ramp in the US. How much of that was driven by improvement at the emerging nets for the removal of Discovery Kids compared to improvement at TLC, Discovery and Animal Planet.

The margin improvement is all of our emerging net works are doing well. Kids had a fairly nice margin, so it might have been, you know, 100 to 300 basis points might have improved in aggregate over a full year because it was below the 58% average, but even that, I would have to do the math, bit it's probably more like 1% of that 600%. So this is improvement across all the networks, and that's taking out costs when your revenues aren't growing as dramatically as dramatically as you would like, that's the vast majority of that improvement.

Is it fair to say, Brad, that the bigger three, if you will be, are something north of 60% now. In aggregate?

They are. It depends which of the big three. Animal Planet is less, because it's revenue base is lower, but all of our networks that you range I think the lowest percentage we have is in the high 30% in terms of OIBDA margin, in the emerging nets. Some of them are approaching close to 60% or slightly north. So the range -- there -- no one is really not carrying their weight dramatically is the best way to think about it.

Just one clarification, if you will, when you know talk about being up, is that had relative to 3Q or last year's 4Q?

Last years.

Okay. Thank you.

Your next question comes from the line of David Bank with RBC Capital Markets. Please, proceed.

Thanks. Just a follow on realizing that your visibility is certainly limited to the rest of the quarter, can you just talk about what you saw in October, and were those trends consistent with the advertising growth guidance you know gave for the quarter? Were they, you know a little better or worse, or just kind of consistent? Thanks.

David, I think the best way to think about it, the guidance was based on those trends, so I wish I could -- they directly correlate to how we think we'll end up. The difficulty or why even though we have decent ratings, and we have very good sellout, looks like for the quarter is we had significant scatter premiums in 2008 in the fourth quarter. They were averaging 20% to 30%, and so where we're averaging today might be high single digits to 15, 16% depending on the network. So you're going up against very robust pricing a year ago. So there's a significant amount of demand in the market, but the pricing has not caught up to that demand.

So the scatter -- can you give us what is the scatter over scatter pricing increase right now?

Well, it's a decline.

I'm sorry, the scatter over scatter decline.

I think you can infer from the comment I made pretty directly.

Okay. Thank you.

We are seeing in October, you could see it in the sellout, that there is more pressure in the market. Some of the players that weren't in the market before in categories, most of the categories are now in market, and the pricing is reflecting it, and I would say week to week, over the last, you know, two -- the last two to three weeks are better than four weeks ago, and to three weeks are better than four weeks ago, and so October does show some more strength and some more momentum, but, again, it's still extremely short term domestically and internationally.

And we're basing this, again, we are talking about the fourth quarter and not 2010, and so we're trying to be -- provide as much visibility as we can over the near future, but longer term, we believe the best way to think about it, it will follow economic activity.

Okay. Thanks again, guys.

Your next question comes from the line of Michael Morris with UBS. Please proceed.

Hi, thank you. First on the international side. In the quarter, it was a bit -- in local currency terms, there was a bit of reversal in terms of ad being more robust in distribution and you made some comments about it, but hoping maybe you can give us a bit more detail on some specifics on why distribution growth may have been a little slower than we saw in the first half of the year. How to think about that both in the fourth quarter and going forward, and then advertising as well. I realize it's a smaller number, but it's a difference from the trend that we're seeing in terms of international advertising, which seems to be contracting yet you're growing almost double digits. I guess the question is, where -- where do you think that share is coming from, and what's the opportunity there as you look forward? Thanks.

Sure. With regard to international advertising -- let's just start with advertising we'll go to the affiliate. With advertising, because our numbers aren't that large, I mean our total amount of revenue the quarter is about $80 million, and so the difference when we talk about 1, 2, 3%, or even 4%, these aren't big numbers, and so it's really the mix of where it comes from. We saw strengthening Latin America did better, and that's what fueled the growth rate for the quarter. We expect those trends to a little bit better in the fourth quarter, and so that's why we feel pretty good about where we're going at least for the rest of the year. But the visibility is very similar to the US if not even slightly less, where the quarters come together late and we don't have the same up front base in many of these markets with the exception of the UK, where you kind of presell the whole year. So it is a quarter by quarter, you know, in terms of how well they're doing.

With regard to the affiliate. It's also a sales mix. So we had subscriber growth in some markets while still maybe robust, it's less than we had anticipated, so you see that slowing down. We had two markets that we did do not as well as we thought we would do in terms of pricing. So that also impacted us. But we do -- but what we're talking about is a 1% to 2% lower growth rate than what we had the quarter before. So, again, you have a sales mix and a general economic environment depending on the markets we're participating in. And so certain markets, the emerging markets are still doing fairly well, and what we classify as emerging is the pull in likes Brazil or central Europe, those two fairly well. The more mature markets seem to be slower, and that's really been part of the impact and some of the -- then when you dollar to weight the weighted average of those, it produces a lower growth rate.

Just to add to that broadly, if we use, and we do, we use Discovery as kind of -- it's fully distributed in analog around the world in 173 countries, as that's our -- when we look at that, we can tell generically how is subscriber growth going around the world. And we are in a recession. So we have -- based on what our expectation was, it has slowed down a little bit. And it slowed down a little bit pretty much across the board, and I think that reflects the fact that in a difficult environment, when you're marketing multichannel television to the home that as the economies around the world slow down, that some of the pace of growth slows down, and so we've seen that.

And it will probably continue in the economy stays weak, and if the economy picks up, we're very well positioned with all of our channels to get the lift of that. The good news there is we have a -- we have all of our distributors heavily incented to try and drive those bases around the world, and so we're more in the back seat on that. On the advertising side, moist of it is what Brad said, but the other piece of it is that we have a young ad sales team, and so we're building our strength. We're far from an A. We've been going around the world working on building our teams, and we've really focused on how to sell and how to sell more effectively. It's still about 70% of our revenue outside the US is from distribution. Over time, it should be higher.

And as you see, the fact that we're growing more than double digit in ratings, that gives us help, but in many of these markets we've only been selling locally for two years, or one year, or three years, and so building our credibility in those markets takes time, but, on the other hand, it's a small basis. So we can get some growth by just doing a better growth in some markets.

Great. Thank you.

Your next question comes from line of Vacilli Carisal with JPMorgan. Please, proceed.

Thank you. Good afternoon. I have one for Brad. Brad, you mentioned that it's challenging monetizing audiences at this point. Can you talk maybe about how the percentage of direct response as a percentage of your advertising inventory trend is throughout in the year, and where this year is going, and what the normal levels are, and what your position is? Do you sell a lot, or do you prefer not to sell into direct response. Thank you.

Vacilli, Trends - we don't disclose the exact percent of what the direct response is but when we say our sellout is lower than the prior year, the implication is direct response goes up, because when you're not selling in the scatter or the up front cash market, you fill it with direct response. So the third quarter when we had lower sellout than the year before, we sold it with some more direct response, because we had more inventory since our ratings were better. So we proceeded less goods, and since we had more inventory and sold less, that goes to direct response. In the fourth quarter, it's the inverse. We have greater sellout, so you'll have lower direct response.

Brad, thank you. And would it be correct to assume that the pricing for direct response is approximately half of branded inventory?

It all depends on what day part you're talking about. We don't have a lot of direct response in prime time on our distribution networks, we may have it on some of the smaller ones. So there it may be a third to a half, and some daytime, depending on the network, direct response may be somewhat competitive with the cash market itself. But it really is, all things being equal, it is less, and I think you're statistic of half is probably not a bad generalization, maybe even slightly less than that.

Thank you very much.

Operator, we have time for one more than question, please.

Your last question comes from the line of David Joyce with Miller. Please proceed.

Thank you. You mentioned that 70% of your carriage deals are still good for the next three years. Of the 30%, is it smoothed out? Is it lumpy? Is it domestic versus international? Just wondered how we should think about that, the kind of increasing, and how HD and VOD are playing into those.

Well, first that 70% was for international. In the US, all of our major deals are locked through 2012, and after 2012, it's spread out over a couple of years. So domestically is pretty well locked and our mission here is just to grow our audience and monetize it, and make our brand stronger. So that in a few years when our deals come up, we'll be better positioned with the affiliates to get more value. Outside the US, we have 70% of the deals are locked, and it's not lumpy. It's spread out. The HD that we've been building is -- those are deals that are done out of sequence. We have good relationships with our distributors around the world, and so we've gone to them in all of our markets. Be have a ton of HD, and in many cases, there's a fallout, in most cases they're behind, put there's a fallout of what's happened here in the US. And there's a feeling that HD will become more up important, so we've tried to be first to market in terms of getting Discovery in HD, and also getting commitments for additional channels in HD so that we have some platform advantage.

The only thing also also highlight is just for clarification, when David says three years, he means from the beginning of 2009, so it's through 2010 and 2011, not through 2012. And we were talking about international.

Thanks. On the international front, on the margins, do you foresee any time when that gap completely closes with the US? Is there something structural in how the TV markets work in your various markets that they might top out at some point.

Right now our international margins are at about 36, and we think we have some more room to move those, to drive our productivity. On the other hand, it will never be what our domestic margins are. The efficiency of the US market is just really too strong. And operate out of one facility. We literally do business in 173 countries. Our content does travel extremely well, but the ability to sell locally, to understand the local tastes, all of that plays into our strength around the world, and so the margins will never meet, because there's inherent additional costs in being effective and being a true international player in the media marketplace.

Great. Thank you.

Thanks for joining us be everybody, and please follow up with any questions with myself or Brad.

Thank you, guys.

Thank you.

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect, and have a great day.