華納兄弟探索 (WBD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Discovery Communications Incorporated earnings conference call.

My name is Heather, and I will be your operator today.

Speaking on today's call will be President and CEO David Zaslav, Chief Financial Officer David Singer and Chief Operating Officer Peter Liguori.

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

We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

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

Craig Felenstein, Senior Vice President of Investor Relations.

Please proceed.

Thank you, Heather.

Good morning everyone, and welcome to Discovery Communications first quarter 2010 earnings call.

As Heather mentioned, joining me is David Zaslav, our President and Chief Executive Officer, Peter Liguori, 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 on our website at www.discoverycommunications.com.

Please note that included in the release is a recast on both a quarterly and full-year basis of our 2009 financial results reflecting the updated requirements for variable interest entities, as well as the realignment of our commerce business into the US Networks segment.

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

Before we begin, as usual, I would like to remind you that the comments today regarding the Company's future business plans, prospects and financial performance are forward-looking statement that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based made on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Form 10K for the year ended December 31, 2009 and our subsequent filings made with the US Securities and Exchange Commission.

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

Thanks, Craig.

Good morning everyone, and thanks for joining us.

In a few moments, Brad will take you through Discovery's strong financial results for the first quarter.

A balanced performance across our business unit that built upon the growth we delivered during 2009 and reflects the sustained operating momentum we continue to generate across our Company.

Throughout the challenging economic environment a year ago, our growth was he led by the recurring and escalating subscriber fees which provided Discovery sturdiness on the top line and largely insulated the Company from the financial headwinds.

While affiliate fees provide a reliable revenue stream that will continue to grow from both increased rates domestically and the growth of the pay TV market globally, it is the ratings momentum across our brand portfolio, combined with our ability to better monetize these ratings and recovering ad environment that we anticipate will accelerate our growth in 2010.

As we look out over the longer horizon, we expect the continued growth and strength of our existing domestic content assets together with our success in building new networks to take advantage of the robust distribution platform we have developed around the world to provide sustainable growth in the years ahead.

The backbone of our growth in both the short and long term will be the continued strength of the Company's content and brand portfolio.

As I mentioned on our last call, we had a strong performance across the board in 2009, ratings up 8% domestically and 18% internationally.

But the economic downturn hampered our ability to fully monetize our growing audiences and dynamic brands.

In 2010, with a strengthening ad market and over 40% of our revenue sourced from advertising, it is imperative that we keep our ratings strong and growing so we can further capitalize on the expanding pool of advertising dollars.

So far, we are off to a strong start.

Our ratings momentum has continued in the US and across many of our international markets with a broad development slate of new and returning series across the portfolio.

The long-term investment in content we made over the past few years, including 2009, despite the weak economy, is paying real dividends for many of our networks, both in terms of ratings and advertising dollars.

Domestically, ratings in the March quarter were up 11% across US Networks, despite competition from the Olympics.

Two of our biggest growth stories, Animal Planet and ID, are channels we identified a couple of years ago as significant opportunities and decided to invest in to attract a larger audience share.

Animal Planet was rebranded in the early part of 2008 as we invested in making the channel bigger and bolder.

Since that point, it has generated 26 months of year-on-year delivery gains, including its highest ever quarter of viewership this past quarter.

Animal Planet's Q1 audience was up 12% among its core women's demographic, led by Fatal Attractions and Pit Boss.

And we are excited for the return of networks two highest rated series in the second quarter, Whale Wars premiering in June and River Monsters, which debuted its second season earlier this week and delivered the highest season premier in the network's history.

In the early part of 2008, we also transformed Discovery times into ID, and it has delivered more than 24 consecutive months of year on year viewership gains, moving from the 49th ranked network in the United States for women 25 to 54 to the 38th ranked today, despite being in only 60 million homes.

This past quarter, ID delivered its best performance ever, growing its viewership by nearly 60%.

It is the fastest growing cable network in America and has quickly established itself as the preeminent channel for investigative story telling with hits such as On the Case with Paula Zahn, Disappeared and I Almost Got Away With It, beating top 20 networks on most nights.

ID and Animal Planet were not the only channels to enjoy success this past quarter.

TLC continued its strong performance.

It is a brand that we now really understand, and it is connecting with millions of people across the country.

TLC delivered its biggest first quarter in five years as viewership increased 7% among women 25 to 54.

As I mentioned on our last call, TLC has grown from a top 20 network to a top 10 network for women, and it now has 15 programs averaging more than 1 million total viewers.

TLC's success this past quarter was led by returning hits, Little People, Big World, Cake Boss, LA Inc.

and What Not To Wear, as well as new hits Hoarding, Buried Alive, and Police Women of Maricopa County.

We do have some tough ratings comparisons coming up given the success of Jon & Kate a year ago, but with our robust stable of established series, a solid development slate and a better ad environment, TLC remains strong and very well positioned looking ahead.

Turning to Discovery Channel, we installed the new leadership team towards the end of last year led by long term veteran, Clark Bunting.

And despite the transition, Discovery delivered ratings in line with the first quarter a year ago.

The quarter was led by returning hit Dirty Jobs which increased its ratings versus prior season.

Following the quarter, Deadliest Catch returned, delivering its highest ratings ever in its sixth season and drawing more viewers than nearly all the broadcast networks in key demos.

The success of these returning series provides a strong foundation as the new management team looks to add to our stable of hit series.

Of course, the programming highlights in the past few months was the success of our special series, Life.

Life is the type of big, bold high quality non-fiction project that Discovery does best.

The premier was most watched show on the network in 10 years, even besting its predecessor, Planet Earth.

And over the course of its run, life delivered an average of nearly 4.5 million viewers.

Life is another example of our willingness to invest for the future.

This programming was four years in the making, and our long-term focus has been rewarded with a spectacular visual experience, higher ratings, strong advertising and quality content that we will use across all of our networks in the future.

Unlike a year ago when there were ratings points left on the table, thus far in 2010, we have capitalized on our increased viewership with advertising revenues up 9% domestically in the first quarter, and we are optimistic that if we continue to deliver strong ratings, advertising revenues will grow solidly for the remainder of the year.

Looking out longer term, we just completed our initial upfront presentations last month in New York, Chicago and L.A.

There was no question there is a much higher degree of optimism in the marketplace from clients across virtually every category, and as Brad will discuss in more detail, scattered volumes continue to accelerate.

It's difficult to predict where the upfront market will ultimately end up, but with scattered pricing continually well above last year's upfront pricing and growing, ratings momentum across our networks, a strong brand portfolio and what we think is the best ad sales team in the business led by Joe Abruzzese, we are optimistic that we will see real significant increases in this year's upfront.

Our exposure to an improving ad market and our sustained investment in programming is also paying dividends internationally.

Ratings across our international platforms were up 17% in the first quarter.

And the ad market continued its sequential improvement that began in the second half of 2009.

The result was advertising growth up 35% this quarter, excluding foreign currency.

This growth has been broad based with double-digit ad gains across the US, EMEA, Latin America and Asia Pacific.

But while visibility has improved internationally, there remains only a couple of months out, so we remain cautious regarding a continued recovery in all of those economies.

At the same time that we capitalized on the strength of our existing content assets, we are also focused on investing in our future and building the next generation of growth opportunities.

We discussed Animal Planet and ID, but there are two are other examples that underscore this.

One is OWN, and the other is HUB, our two joint ventures.

In each case, we have taken channels that had great distribution but were underperforming in brand strength and audience growth.

We attracted terrific partners with enormous creative appeal, built strong management teams and have have created two new exciting brands with significant up side.

We have been hard at work on the programming lineup for each of these channels and are very excited about the October launch of the HUB and the January 2011 launch of OWN.

We unveiled the slate of shows in development for both of these networks during our recent upfront presentation to advertisers, with Oprah herself presenting OWN's lineup, including her new prime time series that will be on OWN, Oprah's Next Chapter.

The response from advertisers has been very, very positive.

In fact, as you may have seen, we have already signed a large multi-year deal for OWN.

Advertisers are excited about Oprah's involvement and the vision for the channel.

The third example of our investment in the future is the new 3-D channel we announced with Sony and Imax in January.

It will be the first seven day 24 hour 3-D channel.

While it's very early days, Discovery is very well positioned with content that will look great in 3-D.

Strong partners with real strategic benefits and first mover advantage to lead and grow this platform over the coming decade.

We are pursuing a similar strategy internationally as well, investing in the creation of new brands around the world and providing quality programming to a growing roster of advertising and distribution clients.

Last quarter, we launched TLC globally.

And with our internationally distribution platforms, TLC will reach 100 million subscribers outside the US by the middle of 2011.

This would make TLC the most widely distributed female lifestyle brand in pay TV and create a powerful compliment to Discovery Channel across the globe.

We have between two and 11 channels in over 180 countries and remain committed to strengthening the brand portfolio, expanding our market share and taking advantage of the growing ad dollars in the international marketplace.

It's important to note that as we invest in strengthening our portfolio worldwide, we are not significantly altering our cost structure.

As you have heard us say in the past, our focus will remain on success-based investment, putting our money to work where it has proven to generate a return, such as Animal Planet and ID.

Despite our continued investment in original programming and strengthening our brands, we expect margins to continue to rise as we capture a greater percentage of the ad dollars that come from in addressed ratings and reach.

Discovery is off to a great start in 2010.

We continue to benefit from our long-term affiliate contracts while our sustained rating strength has allowed us to take advantage of the increased advertising demand worldwide.

Moving forward, we remain focused on building stronger assets that will provide long-term value while at the same time delivering real operating leverage and margin expansion.

And with that, let me turn it over to Brad.

Thanks, David.

As David highlighted, during the first quarter we continued to experience the favorable economic and operating trends that began in the latter part of 2009.

Our top-line advertising growth was as strong as it's been in two years as demand increased in our domestic and international operations.

Total revenues increased 8% compared to prior year led by 10% international revenue growth, excluding a $13 million favorable currency impact complimented by 5% US network growth.

Our total operating expenses increased 5% excluding currency impact, primarily due to a $13 million increase in content impairment charges at US Networks, mostly related to Discovery network and $4 million of one-time costs related to our acquisition of UK production facilities.

Excluding these one-time items, operating expenses increased 2%.

Our reported adjusted OIBDA grew 10% to $367 million compared to prior year.

Please note, our first quarter results reflect the deconsolidation of Discovery Kids which contributed revenue of $12 million and OIBDA of $7 million in the first quarter of 2009.

Our net income increased to $169 million, reflecting our improved operating performance and $28 million lower tax expense due to the release of a tax reserve.

Our free cash flow declined to $114 million as our improved operating performance was offset by $49 million in long-term incentive plan payments and $28 million in additional tax payments in the first quarter.

Turning to our operations, US operations continue to perform well during the first quarter.

Domestic revenues grew 5% with distribution revenues increasing 4% from higher rates and expanded distribution of our digital network, offset by the deconsolidation of the Kids network.

Adjusting for the Kids network and lower launch amortization, the affiliate revenue growth was 8% compared to prior year.

Our domestic ad sales team continued its strong performance, growing revenues 9% in a demonstrably stronger ad market.

Our decision to hold back inventory during the upfront played a significant part in our quarterly performance, enabling us to capitalize in our strong ratings delivery in the robust scatter market..

Our ad sales time effectively monetized our ratings strength which accounted for two-thirds of ad sales increase with greater sell-through contributing most of the other one-third of our ad sales growth.

Our overall pricing was slightly above the prior year with scatter premiums averaging high teens above our broadcast upfront and mid single digits above the prior year.

We remain encouraged by the continued strength of the scatter pricing as we head into the broadcast upfront.

Our domestic operating expenses increased in the first quarter by $8 million, or 3% compared to the prior year.

The increase was primarily due to approximately $22 million of program impairments, primarily at Discovery as our new general manager refined the network's programming strategy.

The increased marketing expenses related to Life also contributed to the higher operating expenses.

Turning to our international operations, revenues increased 16%, which included a 2% increase in affiliate revenues and a 35% increase in advertising and a 6% increase due to favorable foreign exchange rates.

International affiliate revenue increased 2% due to stronger growth in Latin America and Asia, offset by repositioning of certain channels in EMEA, resulting in difficult year-on-year comparisons in the first quarter.

Looking ahead, we anticipate international affiliate revenue growth increasing each quarter to high single digits by fourth quarter and growth averaging mid single digits for 2010.

Our international advertising revenue continued to accelerate sequentially from 18% growth in the fourth quarter to 35% growth in the first quarter compared to the prior year, excluding favorable impact of foreign exchange and positive one-time items in fourth quarter '09.

Ad revenue growth was broad-based with all of our regions experiencing greater than 20% growth rates, primarily driven by greater sell-through.

Excluding the currency impact to our expenses, our operating costs were up 6%.

The majority of the costs of revenue increases from the termination of a contract due to the acquisition of the Ascent media facility in the UK.

The SG&A costs increased primarily due to favorable one-time items in the prior year.

Excluding these one-time items, expenses increased 2%.

Our international operations increased adjusted OIBDA 15%, excluding the $12 million positive foreign currency impact.

Overall, the Company's performance during the first quarter of 2010 slightly exceeded our expectations in terms of revenue adjusted OIBDA as conditions improved globally in the advertising markets.

As we look forward to the rest of 2010, we are encouraged that the ad demand trends we experienced in the first quarter have continued through April.

For 2010, we are raising our revenue and adjusted OIBDA outlook.

We are forecasting a revenue range of $3.675 billion to $3.775 billion, which incorporates mid single to upper single digit US ad growth and low double to mid teen international ad growth, excluding foreign currency.

We continue to believe affiliate revenues adjusted for divestitures will grow in the mid to high single digits domestically, and as I mentioned earlier, mid single digits internationally.

For comparative purposes, please note that our 2010 revenues do not include Discovery Kids, which produced $17 million prior to the May sale of the 50% interest.

We anticipate 2010 adjusted OIBDA of $1.6 billion to $1.675 billion.

Our adjusted OIBDA growth will be primarily driven by our revenue growth with the majority of incremental revenue transmitting into adjusted OIBDA.

We continue to anticipate low single digit operating expenses in 2010.

Please note that our forecast does include incremental investments in Animal Planet and Investigation Discovery, as well as continued investment in our international networks, including the global rollout of TLC.

Before I finish up, I would like to remind everyone to tune in for the return of many of our great series including Deadliest Catch on Discovery, Buddy and His Family on TLC's Cake Boss, as well as Whale Wars and River Monsters on Animal Planet.

David, Peter and I will now be happy to take your questions.

(Operator Instructions) And your first question comes from the line of Ben Swinburne with Morgan Stanley.

Please proceed.

Thank you, good morning.

And Brad, thanks for the programming suggestions coming up for us.

(laughter) Just maybe one on free cash flow.

Brad, you mentioned tax payments but also the cash incentive plan payments.

I think those are related to the old private company options you guys had.

So if you could help us think about the working cash, cash tax, any other odds and ends for the year as we look at free cash flow for the full year versus what you guys posted in the first quarter.

And then I have one follow up.

Ben, our free cash flow outlook is consistent with what we gave in February, which was $700 million to $800 million.

Our operating performance that we've increased our estimate for is offset by since our share price is risen, we're going to have an increase in the LTIP payments, which is, as you said, the predecessor stock option plan, or equity compensation plan.

And so you should still expect -- investors should still expect $700 million to $800 million of free cash flow for 2010.

Okay, and then having said that, follow up on use of capital and leverage targets and share repurchases.

And if you could update us on your thought process maybe for the whole team, and you could you speak for the board, I don't know if you can, but how we should think about that stuff looking out from here.

I cannot speak for the board.

(laughter) But the way we think of our leverage is that we are within our target ranges, and so we are not looking to de-lever from where we are today.

And our first priority is taking our capital that we generate and putting into it our core business.

And hopefully, when we make these investments, they will be accretive to our investors.

And that would be our priority, whether it's domestically or internationally, whether it's organic or external.

All those uses of capital, that's how we think of it.

If we cannot put the excess capital to productive use, the capital we generate to productive use, you'll see us return that to shareholders over the course, probably some time in 2010.

Thanks a lot.

Next question, operator?

Your next question comes from the line of Doug Mitchelson with Deutsche Bank.

Please proceed.

Thanks very much.

If I can squeeze in two question, the first is the jump ball.

Is the advertising growth at international sustainable at double-digit levels?

I know 1Q core growth of 35% is likely an outlier, but would you suggest that structurally, as we all look at 2011 and beyond that 10% plus growth is possible based on the trends you see there, and if not, why not?

Then the second question for Brad, following up on capital deployment, would you consider your stock cheap at this price?

And on the acquisition front, is there a laundry list of things out there that you guys are interested in that look reasonably priced?

Doug, it's Brad.

I'll take -- I'll start and then David and Peter can hopefully jump in.

With regard to international advertising, the 35%, we don't expect 35% for the rest of the year.

We do expect to average for the year, as we said, low double digits to mid teens.

Our biggest quarter is the fourth quarter.

So -- and we're going up against tougher comps by the fourth quarter 2010.

First quarter and second quarter in 2009, we had minimal growth, very low single digits.

And so our comparisons are easier to have, post bigger numbers And as we go on through the year when you have 9% growth in the third quarter and 18% in the fourth quarter of 2009, it gets a little bit tougher.

I will say though, structurally, advertising should grow faster internationally than in the US, and that's really a composition mix, which is in the US, we're almost 50/50 advertising to our affiliate.

In international, what you have is, because of the lifecycle of pay TV in many of these markets, you have much more affiliate revenue than you have advertising.

So that provides a basis of the advertising to continue to grow to catch up to the affiliate growth as these markets mature and you have a greater base of subscribers to advertisers.

To Brad's point, I think we're playing into a good strategic hand, particularly in the growth markets.

What you have seen in the US in the late '90s as distribution on pay TV grew, there was a transition where more and more advertisers became comfortable moving to cable and the CPMs began to grow.

But separate from that, we've been investing significantly in content, so last year we grew 14% internationally.

We weren't able to fully monetize that because the market was not that strong.

This year, we grew 18% above last year's first quarter, reflecting the fact that we have a better sense of our brands around the world, we have a better sense of our viewers and nourishing them.

So whether we can fully monetize that this year or next year or the year after is really a reflection on how those economies develop and how sustainable the recovery is in a lot of those markets.

But we're aggregating more viewers in our basket around the world.

And we think long term, that's going to really help us get sustainable growth.

And with regard to capital, we're not going to be a daily arbiter of our stock price, but we try to be thoughtful in how we're going to deploy our capital.

And so if we don't have after productive use or one that could generate good returns for our shareholders, we will be ultimately returning it to our shareholders.

Is there a laundry list of acquisitions that are enticing?

We're always looking opportunistically for opportunities.

The good news is we have a lot of opportunities internally.

We talked about we're investing in Animal Planet, we're investing in ID, we're investing in TLC around the world.

We've invested in a number of other specific channels around the world that are paying off for us.

The real time in Italy, our kids network throughout Latin America.

So we still have the ability really invest in the platforms we have and getting those more right and building those brands and having those really return for us.

At the same time, we do look opportunistically at what's out there, but needs to provide a good return for shareholders.

If we had our choice, the international market, where we have great factories were unusual in that we're really on the ground in 180 countries, and we have strong leadership teams where we can assess investments and where we could have real synergy if we can find assets.

So we're always looking, but we're careful about what would provide real return to shareholders.

Thank you so much.

Your next question comes from the line of Jessica Reif Cohen of Bank of America Merrill Lynch.

Please proceed.

Thank you.

Couple questions.

First, as you think about the returns to shareholders, and you have obviously addressed this already, but can you talk about the spread between the A and the K, and if you do eventually do a bay back, can you buy one and not the other?

Jessica, it's Brad.

I will start, and maybe Peter and David can add something.

With regard to the spread, it does it gap out and has for the last, let's call it six to 12 months, from where it was from our initial spin-off in September 2008.

Part of that is likely technical.

There are index rebalancing, whether it 's S&P 500 or even potentially the Russell 1000.

So some of these things are driven by the supply/demand of the different classes of stock.

If we do ultimately repatriate capital through share repurchase, we'll be thoughtful about what provides the best return for the Company if we are returning capital.

So I think we'd look at which class makes the most sense, and we'd work with our board to determine what that would be.

Okay, and the next I wanted to ask you about OWN.

You have said in the past, I know David said in the past that you expect to increase subs prior to launch.

I was just wondering if you could address the affiliate fee.

Obviously, for Health, it's pretty low right now.

Do you -- presumably you have started to talk to cable or pay TV operators.

Will they opt for an increasing affiliate fee now or do you think they will opt for paying more post 2012?

Let me talk about OWN generally.

The idea of Oprah coming to cable is a great value to the cable industry, and I think all of her energy and talent is going to be brought to this channel, which is great for us.

So we're currently in the process of sitting down with operators, and they have seen the slate, they've gotten a sense of what this brand is.

They see that we're real, we have Oprah.com, we will have Oprah, we'll have the library, and we have a great leadership team that's driving it.

And with all that value coming to cable, we're in those discussions of how to represent that value coming back to the channel.

Peter has been spending a lot of time with us in terms of building our brands, enhancing all of our channels, but he's just coming back from having spent a fair amount of time with OWN.

Jessica, it really is a situation where we're out trying to provide value for cable operators, plain and simply, and the discussions have been fruitful and productive.

There's a lot of transparency from to us them, with good reason.

Oprah is thoroughly engaged.

They have a slate of about 15 shows.

All of them seem quite compelling.

And certainly filling a niche in the marketplace, being an independent voice serving a somewhat underserved niche within cable.

So we have every anticipation, especially through the support of what we're seeing from advertisers, the creative community and the positive initial impressions from distributors that we will, in fact, create value for them and will be rewarded in kind.

And on that advertising, you have announced a multi-year deal, or someone announced a multi-year deal with P&G.

Can the channel reach $150 million in advertising in year one, and when do you expect the channel OWN in total with the library and Oprah.com to contribute positively to earnings?

I think the best way to look at it, Jessica, that was a very good first step.

And clearly, it's going to be setting the pace for the market and what we can do.

It was a terrific, terrific deal brokered by Kathy on the OWN front, and I think reflective of the programming and value that we're going to be out there with.

So it was a great upfront, that was a great first deal.

There's a lot of excitement, I have to say, at OWN, and we look forward to announcing a second, third and fourth deal soon.

And Jessica, with regard to how it plays forward financially, we're going to launch in 2011 early.

Around a launch, as you can anticipate, we're going to have marking costs to launch the network and support and build awareness, and then the program amortization will start to hit, and then we'll have -- the advertising revenue will come in.

So over the course of 2011, we feel good that we should -- if we produce good programming and the ratings are within a relevant range, we should be able to attract advertising, and that should ultimately produce positive income over, call it the initial 12 to 18 month period.

But that has to play itself out, and it's right now still in the launch -- in the pre-launch phase, so it's probably premature to give any type of specific guidance to how that will ultimately be right now.

Great, thank you.

Your next question comes from the line of Anthony Di Clemente with Barclays Capital, please proceed.

Hi, good morning.

A couple of questions for you Brad.

First on the tax rate, it seems like, if you could help me understand, it seems like taxes helped you on the P&L -- or on the income statement but hurt you on free cash flow.

If you could help us reconcile what happened with the release of the tax reserve, and is that sustainable in how we model the tax rate going forward?

And I have a follow-up, thanks.

Anthony, the tax rate should be rate around 37%.

This quarter, we had a reserve in place for one of our European operations that we thought we'd have a tax liability.

We don't have to have pay that, so we just released the reserve, it's not cash.

Our taxes that we anticipate paying are still in that 37% range.

In 2010 though, we do after catch-up.

And I think I talked about this in February, which is we anticipate paying about $400 million to $425 million of cash taxes in 2010.

That's around $70 million, maybe $75 million higher than we would typically pay, based on just our earnings.

The reason for that is we had a section of the tax code that expired, what's called Section 181.

181 enabled you to accelerate deductions on domestic content production.

When that expires, you have a catch-up in the year that you no longer have it, because you already took the deduction in the prior year.

So that's all in our free cash flow guidance.

So if you think about the free cash flow, the run rate would likely be $70 million, $75 million higher than where it's going to be this year.

Okay, Section 181.

Okay.

And then is there anything in the quarter other than the LTIP plan that would have also affected he decline of free cash flow year-over-year that -- whether it be working capital or anything else that we should know about?

No, those are the two big things.

If you think about it, we have (inaudible) and you have about $25 million rounding.

It's probably a little higher for taxes, and so that's a pretty big -- it's a $75 million negative to free cash flow for the quarter.

Got it, okay, thank you.

And then final question is, you put up pretty good -- pretty impressive number, domestic ad growth of 9%.

And then I think you sudden your comments mid to high single digits is what we should expect in terms of domestic ad growth.

But the comps actually get a little bit easier, I think, as we go to 2Q or 3Q.

So is that just conservatism, or is there any actual reason in terms of scatter versus upfront pricing that you should have that little bit of deceleration off of the nine?

Thanks.

Let me just take where the second quarter is running, just a preview., and then how to think about the rest of the year.

The second quarter is running, I would say, at least as good as the first quarter.

It is dependent, however, on how we -- our ratings perform in May and June.

So we have high hopes, but that's something that still has to be determined.

For the rest of the year, the upfront has not been consummated, and it's very early in the process, so you do after factor there of how that will play out.

We have high hopes again, but that's something that needs to come about.

So when you think of our guidance of mid to upper single digits, those are the variables that play into it.

But for the second quarter, it does look like business is very good.

So the market is quite strong right now as Brad has said.

For the second quarter, everybody is back, the orders are back significantly.

Our overall sell-out is stronger, scatter pricing is very good.

So right now it's feeling like it's continuing to grow.

So if everything stays where it is now, then we should expect something north of 9%, if everything stays where it is now for the second quarter?

Well, we have to see how we do for the up-front.

We have to see what the pricing of the upfront it, how much we sell into the upfront.

Coming into the upfront, the factors are looking pretty strong like we'll have a very nice upfront, particularly when last year was difficult for all of us.

We took a small reduction, and it was a real fight, a day to day fight.

So right now we're feeling good about it, but we don't have the visibility to project that things are going to continue with the kind of strength we're seeing in the first and second quarter throughout the rest of the year.

We'll just have to see.

Next question operator, please.

Thank --

Your next question comes from the line of Imran Khan with JPMorgan.

Please proceed.

Yes, hi, thank you very much for taking my questions.

A couple of questions.

So international margins was 42% OIBDA margins.

I know, David, you talked about it that it will not get to US level.

Trying to understand how should we think about optimal level of international network OIBDA margins.

And secondly, I might have missed it the call, but affiliate revenue in the local currency was up 2% in the first quarter.

Trying to understand how should we think about that going forward this year.

And then the finally last question is if you look at your international advertising revenue as a percentage of affiliate revenues, like high 40s percentage, if I look at your comp, like Viacom has like low 80s.

So I was trying to figure out how quickly you might be able to narrow that gap, thank you.

Okay, I'll take international margin first.

Where we serve 100 million subscribers here in the US out of one factory, the ability to drive real efficiency there and have margins in the mid 50s or even grow, and we think we can grow our margins a little bit domestically.

The ability to do that when we serve 180 countries, when we have factories in a number of those countries with boots on the ground, it will never be what the US is.

However, we have some basic advantages versus a lot of the other players.

There's a number of our brands that work very well around the world.

And so Discovery is very unique.

And when Discovery is at its best, it works in 180 countries.

The same is true for Animal Planet.

We've now rolled out science in 80 countries.

So there's a number -- in each of those, we don't have to have do that much local.

So the ability to have our margins grow.

In addition, we have -- we went from a company that had two different operations, domestic and international, to be in a position where we're now focused on looking at ourselves as global.

We're not there yet.

But having a global content group for Discovery, for Animal Planet, for science, we're now looking at that for ID, where Liguori could sit down with a whole group and say, how do we grow Discovery across the board, and how do we market Discovery across the board, and how do we do promotion for Discovery or science or Animal Planet in a way that's more efficient?

So we think we have -- there's significant efficiency that we can get going forward.

And at the same time we should be able to get some more top-line growth by driving the productivity of what we do as we become more of a global company.

Imran, the other big contributing factor is that ad sales mix.

So as ad sales becomes more towards the US, those margins will rise.

And as you can guess, ad sales is a very high margin endeavor.

And so if ad sales continue to outpace the affiliate side, will you continue to have margin expansion in international just by the math of how high margin the ad sales activity.

With regard to your affiliate question, I mentioned in my remarks that we expect international affiliate revenue to be in the mid single digits this year.

The first two quarters are tough comps.

We also -- we repositioned a couple channels.

We also lost a channel that was not one of our bigger channels, one of our very small ones, actually, in one country, and that adversely affected the revenue stream.

So we do think by the third and fourth quarter we'll be getting up to our normalized run rates, which is 6%, 8%, hopefully in those ranges towards the end of the year.

In some cases, one of the things that we've done is we've had some older agreements that are exclusive which limit our ability to carry our channels on competitive platforms.

And the ability to do that gives us some longer term growth.

So in some cases, some of those agreements reflect the fact that we've come off of a exclusivity premium in return for being able to launch our channels on other platforms that we'll be able to monetize more effectively over the years.

And Imran, I can't remember your last question.

I think you guys covered it, so I'm all set, thank you.

Your next question comes from the line of Richard Greenfield with BTIG.

Please proceed.

Hi, good afternoon -- or good morning.

Two questions, both related to OWN.

When you look at Discovery Health's ratings, when you answered Jessica's question before, what type of ratings are you assuming?

Or how do we even think about how much you need to grow ratings in order to get to that breakeven or even into profitability?

You're obviously spending a lot on programming, looking at the upfront versus what Discovery Health spent.

Just trying to understand what the Discovery Health ratings are roughly today and how you think about what you need to get to.

And then just attached to that, you talked about $75 million as kind of this non-recurring free cash flow hit this year based on taxes.

How much free cash flow hit is there around the launch of OWN, meaning actual cash that's going into the JV to fund the rollout in the programming?

And how should we think about that in terms of a 2010 versus 2011 event from a free cash flow standpoint?

Thanks.

Thanks, Rich.

On OWN, that's not our focus at all, the ratings.

It's really about finding a voice for the channel.

Oprah is one of the best brands in media, and if we can find a real voice for that network and reach people and nourish people and have them want OWN to be one of their eight or ten channels that they watch, then there's going to be a huge amount of value created.

So the focus really is on finding the voice of the brand, and Peter is spending a lot of time on that.

He created FX, he's working with Oprah with the whole team.

Maybe you could talk to it a little bit.

Yes, I think David hit it right on the head.

It's very difficult to stay out there and predict what those ratings are going to be.

Health is in that 0.2, 0.3 range.

And in fact, some of that -- some of Health's programs will actually wind up on OWN.

We expect the network to after very solid slate.

That slate should notice strong ratings, but it's a brand-new network.

Brand-new networks are very difficult to predict.

People need to find it.

We'll be out there, clearly speaking loudly.

We expect to focus right now on creating and defining what that voice, how those shows will reflect that voice and knowing full well that this is the proverbial marathon and not a sprint of making sure that we are consistently providing programming value for the affiliates and for advertisers and for the audience.

And the advertisers have bought into that.

We're not talking -- they're looking at this as a great opportunity to get involved with some quality programming, building a niche that's underserved and doing with it one of the best brands in media.

And so we're not getting a lot of pressure on that side.

The idea here is to be true to the brand and then create a strong voice.

And with regard to free cash flow, Rich, our numbers don't include the OWN investment.

That's in the investing section of our statement of cash flow.

So when we talk about free cash flow, it's cash from ops, less CapEx.

The investment right now, we are obligated under the current agreements to put a maximum of $65 million into OWN.

We've already funded $35 million.

We are working right now with our partners on incremental funding.

Chances are, we will be above that over the course of the next 12 months, and when we finalize what those plans are, we will relay them.

I'm sorry, so looking at that $65 million, $30 million of that remainder will come in throughout this calendar year and then there will be an incremental amount --

$100 million total.

We've already spent $35 million.

We're averaging around $2 million to $3 million a month right now.

We spent $35 million as of the end of 2009.

We've spent $15 million this quarter.

There's another $50 million during 2010, and so that's where we're at today, rich.

And so as I said, it's likely that that will be a greater number, and we'll come up to you -- we will relay that information as we finalize our plans with our partner.

Got it, thank you.

Your next question comes from the line of John Janedis with Wells Fargo Securities.

Thank you, guys.

You have talked about some of your new and returning programming.

Are you still expecting incremental programming expenses here of about $40 million to 50 million?

And are your total prime time hours of new programming similar year over year?

Let me answer that question.

Peter can talk about programming, the programs themselves.

We don't expect our programming expense to be $40 million or $50 million higher.

Last year we had some content write-offs, so that drove up the expense.

And also then the next year, it drops the expense.

So the expenses are a little, I wouldn't say flat, but just modestly up, very long single digits from 2009.

So that's where we expect to end up.

And cash spending wise John, which is probably the most important, we expect to spend about the same as we did last year regardless of the amortization, and so that's where we've come out.

With regard to hours and plans, Peter, you may want to comment on that.

Let me reiterate where we are financially.

Again, we're going to be within that expected range of spending.

In terms of mix, so far we're playing a pretty good hand.

When you look at all the returning series on Discovery, they continue to reach series highs, most recently Deadliest Catch.

We will efficiently fold in new shows, use tried and true shows who are reaching new heights as a lead-in to some other strong bets.

By way of example, when you look at what happened last week, we took a show from Friday night, Swamp Loggers, and put it after Deadliest Catch.

Did a large number.

So there, with no marketing, we're able to use our own audience flow to get new viewership for a show that we believe in that eventually we may be able to migrate to anchor a new night, doing it all without any increased spending in marketing at all.

So it's really maximizing our audience flow, knowledge of what our audience is seeking in order to make the network breed its own strength and own audience.

A fairly efficient model.

And it doesn't require us to, in a willy-nilly fashion, filling holes.

It allows to us line extend off of ourselves.

As we look at our creative team, we now have very strong leadership domestically and internationally on the creative side.

And with Liguori here, we think now that we know our brands well and we have some more established series, that we could be more efficient.

We're also going to focus on better -- less swings and better quality.

So bigger and stronger programming in an environment where there's a lot of competition that's been working for us domestically and internationally.

Thanks.

And just one quickie on ratings if I could follow up.

You mentioned the monetization last year, many not fully monetizing them given the market environment, but to what extent are you baking in maybe just a little bit of erosion, at least for the second quarter at TLC given the Jon & Kate comp?

We don't break out by network our revenue streams.

If you look at it in totality, we do have some ratings expectation of growth across our entire portfolio, without singling out any single one.

Eileen O'Neil and her team have done a very good job with the ratings.

We do after very big number.

We don't expect to have an 8 or 9 rating that TLC did one night last year, but their team is up in April.

They've delivered high single-digit increase, and so we do have a good expectation that with the second quarter, it will play out much like April did.

Alright, thank you.

Your next question comes from the line of Jason Helfstein with Oppenheimer.

Please proceed.

Hi, thanks.

Two questions, hopefully they're both quick.

So the deal that OWN announced with P&G, do you think that's reflective of the types of goals of the network, or do we consider this unique?

So basically, do you think we will see more integrated types of deals with Oprah?

And secondly, would you say you guys have been able to leverage that strong female audience you built on TLC and then sell that to other networks that you guys own?

Thanks.

This is Peter.

I will take the first part of that.

Procter & Gamble is a very sophisticated advertiser and marketer.

So needless to say, we're incredibly heartened by the fact that they find great value in OWN.

And I think again, that opens the door and is a great seal of approval for what it is that we're doing and for other advertisers as well.

In terms of the female audiences, the work is sold separately.

Kathy sells OWN, Joe sells TLC, and each network needs to stand on its own, depending on audience delivery and depending on the value and predicting what new shows will look like.

In general, the audience is underserved.

These two, three brands that we have under our portfolio are servicing them, and we think we're servicing them with high quality programming.

And on the TLC front, with proven performance.

We're up in the teens in April on the 25 to 54 demo.

It just goes to show you that with consistent investment, knowing your audience and staying true to your brands, that you are going to provide long-term value for advertisers.

Strategically on the TLC side, having TLC strong last year was really helpful to us because we have Discovery on the one hand, which is primarily male, and then TLC, primarily female.

Two top cable channels.

It allows us to see all advertisers.

We saw the strength of that last year when the male market went weak.

When you lost financials and autos, we really leaned on TLC, and it was very helpful.

We were able to push off of that.

On the female side, we have TLC, which now is very helpful to us on Animal Planet when it grows -- as it's growing, to be -- because we're seeing all those advertisers.

And it's been helpful to us on ID as ID has really exploded.

Now it's a meaningful service, and we're seeing those advertisers and so we do have that reach.

It's not lost on us.

One of the reasons why we're launching TLC to 100 million homes around the world is because having a strong female vehicle to partner with Discovery is really helpful to us on the advertiser side, and it's also helpful to us on the distribution side.

When you're sitting down with -- on these long cycle deals, and you have a very strong brand, the number one brand in cable like Discovery, it gives a lot of weight.

But on the other hand, if you have a strong female vehicle, it makes you that much more powerful.

So domestically we're leaning on it to the bleed into some of our other female services, and it's even helpful with us at OWN.

Everybody that we're talking to at TLC, they're saying, hey, they've been asking for nine months.

When can we talk to you about OWN?

And internationally, we like the model, we think it works.

We see it in Latin America.

We have the number one home channel in Latin America called Home and Health.

And it's a female vehicle and that's been very helpful to us.

And if you could just comment on what you would say were strong and -- noticeably strong and noticeably weak categories in the quarter?

The strong categories are autos, retail, technology, financials, credit cards.

They all did very well.

Movies were not that strong, and I think first quarter is traditionally not one of the stronger times.

And consumer production wasn't quite as strong as it was the year before.

Thank you.

Operator, we have time for one last question, please.

Thank you.

Your last question comes from the line of David Miller with Caris & Company.

Please proceed.

Sorry, guys, I should have logged off.

My question was on taxes, and Brad, you answered it, so you could take one more question if you want.

Sorry about that.

Thanks, David.

Operator, take one more question, please.

Your next question is from the line of David Joyce with Miller Tabak & Company.

Please proceed.

Thanks.

If you could provide a little color on any of your international markets that were standouts to the upside or downside on ratings and advertising?

David, with regard to a couple of the markets that did really well, Poland did very well in terms of ratings.

I believe they had their highest ratings and they had great sellout.

And also, the UK seemed to have come back in terms of pricing very well, and our ratings were up in the UK.

So those were two markets I would highlight that were very helpful this quarter.

Great, thank you.

One of the things that's helped us there is we've seen the emerging markets, we've seen pretty broad growth or a return on a lot of those economies, like Mexico, which was really soft, has come back.

But in addition, some of the markets that were really struggling, like the UK and southern Europe, have come back a little bit, too.

So it's kind of a very broad return with winds at our back, and I think everyone else's, that are playing in those markets right now.

We hope it continues.

Thank for joining us, everybody.

And if you have any follow-up questions, give us a call.

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

This concludes the presentation.

You may now disconnect.

Have a great day.