華納兄弟探索 (WBD) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2015 Discovery Communications, Inc.

earnings conference call.

(Operator Instructions).

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

(Operator Instructions).

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

With that I would like to turn the call over to Mr. Jackie Burka, Vice President of Investor Relations.

Please proceed.

Good morning, everyone.

Thank you for joining us for Discovery Communications 2015 first-quarter earnings call.

Joining me today are David Zaslav, our President and Chief Executive Officer, and Andy Warren, our Chief Financial Officer.

You should have received our earnings release but if not feel free to access it on our website at www.DiscoveryCommunications.com.

On today's call we will begin with some opening comments from David and Andy and then we will open up the call for your questions.

Please keep to one question so we can accommodate as many people as possible.

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

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

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

For additional information on important factors that could cause affect these expectations please see our annual report for the year ended December 31, 2014, and our subsequent filings made with the US Securities and Exchange Commission.

With that I will turn the call over to David.

Good morning, everyone, and thank you for joining us.

I am pleased to report that Discovery is off to a strong start to the year and despite facing a challenging US marketplace and increasing currency headwinds, we continue to execute our long-term strategy of investing in marquee content, leveraging it across our unmatched distribution platforms around the world and driving operating momentum and strong financial results.

Discovery was founded 30 years ago with a mission to satisfy curiosity, ignite minds and educate and entertain viewers.

Our purpose driven approach continues to drive our global content engine today.

It sets us apart from our peers and propels our sustained ability to produce strong results over the long term.

Nowhere is that more clear than on our flagship Discovery Channel which kicked off its 30th year on the air stronger than ever and has been resurgent from the second half of last year.

Discovery had its best quarter ever in prime in the target demo and its total viewers in the US saw a double-digit increase over a year ago.

Rich Ross took over as President in January and is off to a fantastic start.

While much of his creative vision won't hit the air until the third and fourth quarters, Rich has already put forward and delivered results on a plan to diversify Discovery's audience attracting more women, millennials and co-viewing while continuing to nourish our core male audience and passionate super fans.

For the quarter, Gold Rush was the number one unscripted show on cable with all male demos and the number seven with women 25 to 54.

And new hit series, Alaskan Bush People, was the number two unscripted show among men 25 to 54 on cable and was in the top 10 for women 25 to 54.

Both series made Discovery number one in all of cable on Friday nights among all demos, total viewers and households, and proved as a real opportunity to expand our audience mix on the network.

In addition for the quarter, Discovery was the number one network on all of cable for men 18 to 34 which is a huge accomplishment and this quarter we continue to lead as the number one network in most weeks.

Discovery's programming success in the quarter wasn't just the US phenomenon.

Many of our top US shows are hits around the globe.

Discovery Channel's average international audience rose more than 5% last quarter with Gold Rush replicating its US success, it is one of our top international series and Fast N' Loud and Misfit Garage are also off to strong starts to overseas so far this quarter.

Other wins included TLC's 19 Kids and Counting, which has recently made TLC the number one network for women on Tuesday night.

The network's family-oriented characters have become pop-culture magnets and continue to resonate and nourish super fans across middle America and abroad.

In international markets, TLC's average audience rose 26% due to strong gains in the Netherlands and from successful launches in Germany last year and Hungary this quarter.

In the US, our juggernaut ID posted its best quarter ever in prime and total day among total viewers and was a top three ad supported cable network with women 25 to 54 in total day fueled by ID super fans who watch the network for much longer than any other channel on cable.

ID's launch late last year in India led to another impressive quarter of viewership gains internationally.

The network's rapid global ascent is simply stunning.

For the first four months of the year, Discovery's domestic portfolio has outperformed the market with particularly strong ratings in the month of April where we were up against an industry that was down mid-single digits.

Turning to the advertising market, we were very pleased with our upfront presentations over the past couple of months.

After talking with clients and agencies last year, we decided to change our upfront presentation strategy in 2015 to a series of up close and personal in agency meetings in New York, Los Angeles and Chicago.

It was a departure from the traditional stage presentation format and the response has been enthusiastic from top agencies because we were able to get more senior and more robust attendance and engagement at their offices.

In addition, there has been strong client response in these key sales markets.

While it is certainly too early to make predictions on the upfront, we feel confident that we articulated our content and sales strategy in the right agencies and clients in an effective and efficient manner.

And with leading growth metrics on our channels and strong on-brand networks, we believe we are well-positioned across our portfolio heading into this year's market.

In the first quarter we saw a nice acceleration from the fourth quarter with total US ad sales up 400 basis points to 1%.

Current trends seem relatively steady to slightly up.

Pricing is healthy but delivery in demand remain a little improved but still the challenge.

Overall in our projections since we don't have visibility we continue to expect the advertising market to remain tepid for the remainder of the year in our numbers.

In terms of distribution, the deals we signed late last year in the US all recognized the full value of our content having grown from 7% of viewership on cable six years ago to more than 12% of viewership on cable today, underscoring the strong affiliate growth we experienced this quarter of 8%.

I would note our Time Warner Cable rates renegotiated at the end of 2013 will be preserved now that they will not be merging with Comcast.

However, as has been previously disclosed by Comcast, our renewal with them is upcoming.

Like all other deals we negotiated over the past several years, we remain optimistic that Comcast and Discovery will be able to resolve a renewal that is fair and valuable for both companies.

The US market remains a strong cash flow business for us and we will manage costs appropriately to maintain our industry-leading margins.

Outside the US, our international business remains a focus and a growth engine.

Beyond our homegrown brands in the US, our newest contributor to our international business is Eurosport.

At the end of the month we will reach the one-year mark of taking control of Eurosport.

We named a new CEO of Eurosport, sports veteran Peter Hutton, who started in March and has moved quickly to pursue new strategic rights that create new value on a local level and strengthen existing rights with additional exclusivities and more comprehensive coverage.

The goal is to build at least two strong sports channels in every market by utilizing the Discovery model of sharing rights across channels and markets to drive investment efficiency and audience engagement.

Simply put, we buy rights in three ways, Pan Regional, like our deal for US Major League Soccer rights for Europe to put on the broad platform which reaches about 130 million homes across 55 countries in Europe and it was the largest deal for the MLS outside the US.

Two would be multi-market deals like Moto GP for Germany and Benelux.

And three would be just local rights like National Hockey rights in Sweden and the recently announced Champions League games airing in Singapore which illustrates our commitment to strengthening our sports offering across Asia-Pacific.

In the case of the Moto GP, it is a major driver of our initial localization strategy in Germany which improved ratings by 22% during the first quarter.

We also just acquired exclusive German TV and digital rights for England's prestigious FA Cup Soccer.

In the UK, we won the rights for five more tennis tournaments for British Eurosport and in France, we successfully bid on key local rugby rights, both of which feed the appetite of passionate local fans.

All in all more than 30 sports rights and IP deals in the last six months and we still expect Eurosport to have high single-digit margins this year.

Along with focused investments in key sports rights, we are bolstering Eurosport's production values and on-air talent to give the channels a new personality and build excitement and audiences.

We recently announced that global tennis icon Chris Evert, will provide expert analysis and commentary for the French Open, starring in a new show, Tennis For Evert, along with Mats Wilander and Henri Leconte, who will be commentating and providing content in Paris.

Regarding our broader IP investments, we also are very pleased with the progress at All3Media, our joint venture with Liberty Global.

Just last month All3Media acquired one of the UK's most respected independent scripted production companies, Sam Mendes' Neal Street Productions, creators of the hit BBC series Call the Midwife and Penny Dreadful for Showtime.

The acquisition adds to our growing stable of creative worldwide producers and expands our ownership of valuable global IP.

With an average of more than 10 channels in more than 220 countries, nearly 3 billion cumulative worldwide subscribers, we are pushing hard to expand our unmatched network on linear and digital platforms.

Internationally we again achieved new record reach and market share gains and we had 10% average audience growth across our entire global portfolio in the quarter, 10%.

Our audience and share gains were led by our pay-TV channels in India, Brazil and Mexico, each of which just recorded their best quarter ever for Discovery Channel.

Our free-to-air strategy is also paying dividends with our portfolio growing to an average audience of nearly 700,000 led by Discovery Max in Spain which grew audience by over 21% during the first quarter and we are seeing some real recovery in Spain which is providing real value.

In the US and internationally, we are leveraging our content and brands on new distribution platforms around the world as the ecosystem evolves.

This strategy can also be summarized in a new mantra I have recently shared with our leadership team -- maximize linear while aggressively attacking digital around the world.

Owning our content has been a key differentiator for Discovery for 30 years.

It allows us to be platform ready and flexible in how we reach consumers as viewing habits change.

Our recent affiliate deals have all included TV Everywhere rights.

We are eager to work with our distribution partners to maximize the potential of this powerful non-linear platform as it is a win for operators, programmers and consumers.

We will continue to do our part to develop this platform in the months to come.

Ultimately we remain platform agnostic as long as we receive the economics our content deserves.

We are also aggressively pursuing new distribution platforms as the market evolves.

Our content is valuable and our new deals with Hulu and Sony's new PlayStation Vue recognize that value.

In Europe, Discovery's leadership and market share are providing us a unique opportunity to launch new OTT products with the type of diverse must-have content that consumers love.

Outside the US, we have two direct-to-consumer products, dplay in select markets across Europe and the Eurosport Player, now available in 54 countries across Europe.

I believe Discovery is holding a great hand as we have for the past 30 years.

We are creating big brands, compelling stories and characters and taking them around the world.

We are focused on continuing to grow market share which translates into real economics, launching new channels, and extending our reach into new markets and maybe most importantly, new platforms.

And we are committed to our long-term strategy of investing in content, formats and IP.

This is a strong start to the year and we are making great progress toward delivering increased value to shareholders in 2015 and the years ahead.

Finally, I'm excited to announce that we will hold our first-ever Discovery Investor Day in New York City on September 29.

We will send details over the next couple of months and look forward to sharing with you an in-depth look at our global business and strategy.

With that I will turn the call over to Andy to detail our strong first-quarter financial results.

Thanks so much.

Thanks, David, and thank everyone for joining us today.

As David mentioned, we are excited that Discovery is off to a very solid start to 2015.

On a reported basis, total Company first-quarter revenues increased 9% and adjusted OIBDA increased 8%.

As expected given our increasingly international business mix, the continued strengthening of the dollar remained a major headwind and changes in currency rates reduced our reported revenue growth by 8% and reduced our adjusted OIBDA growth by 6%.

Excluding currency, revenues and adjusted OIBDA quarter up an impressive 17% and 14% respectively.

On an organic basis so excluding the impact of foreign currency as well as contributions from Eurosport and Discovery Family which have not yet been fully lapped, total Company revenues grew 6% and adjusted OIBDA grew 11% as revenue growth outpaced cost growth by 200 basis points.

Our strong and successful cost discipline led to total Company margins on an organic basis of 39%, up 200 basis points from the first quarter of 2014.

Net income available to Discovery Communications of $250 million was up 9% from the first quarter a year ago primarily driven by the strong operating performance in the current year and an $11 million year-over-year improvement in mark-to-market equity-based compensation partially offset by a $12 million decline in equity earnings, $8 million of higher interest expense, and $6 million of higher restructuring costs.

As expected, equity earnings declined as positive first-quarter earnings at OWN and other non-consolidated investments were partially offset by losses from our 50% stake in All3Media related to below the line items.

We also lowered our effective tax rate another 200 basis points from the full-year 2014 rate to 33% this quarter as we remain extremely focused on lowering both our effective and cash tax rates.

We still expect our effective tax rate to be at or below 30% for fiscal 2017 which will drive net income growth as well as accelerate our free cash flow growth.

Earnings per diluted share for the first quarter were $0.37, 12% above the first quarter a year ago.

Adjusted earnings per diluted share, a more relevant metric from a comparability perspective as it excludes the impact from acquisition-related non-cash amortization of intangible assets was $0.42, an 11% improvement versus Q1 2014.

Excluding currency impacts, adjusted EPS was up 17% for the quarter.

For the last 12 months, adjusted EPS was $1.89, up 12% over the prior 12 months.

Free cash flow in the first quarter declined to $29 million as the strong operating performance and lower stock-based compensation were offset by timing of tax payments which increased approximately $180 million versus last year as well as by higher content payments.

We still expect our full-year free cash flow to be up low single digits versus 2014 but cash tax payments will be heavily weighted toward the first half of the year and will significantly subside in the second half.

Turning now to the operating units, the US networks grew revenue 6% led by positive advertising revenue growth of 1% and a very impressive 13% increase in distribution revenues.

Our advertising revenue growth was due to higher pricing offsetting lower delivery.

Delivery did improve slightly from Q4 led by the flagship Discovery Network but was still down mid-single digits versus the first quarter of last year.

As David mentioned, domestic ad trends have remained relatively steady to slightly better since we last reported and we still have a muted view of full-year advertising growth.

Our full-year ad sales outcome will ultimately depend upon a variety of factors, the most important being our network ratings performance.

Distribution revenues excluding the impact from consolidating the Discovery Family results, were up 8%, a 200 basis point improvement from the 6% organic growth rate in 2014 as we benefited from the higher rates we garnered from our new deals with NCTC, Cablevision, Sony and others at the end of 2014 as well as from contributions from our new Hulu deal which started on January 1 of this year.

As a reminder, unlike our prior S5 deals, the revenue recognition for Hulu will be relatively smooth over the life of the contract and therefore not as significant in any one quarter so we will no longer be breaking out our digital licensing revenue separately.

Turning to the cost side, operating expenses in the quarter were up 2% on a reported basis but were down 2% excluding the Discovery Family consolidation.

Excluding Family, cost of revenues were up 5% while SG&A declined 11% in large part due to higher marketing spend on Klondike last year.

Our focus on controlling costs led to domestic adjusted OIBDA growth of 10% on a reported basis versus last year's first-quarter and 6% excluding Family and margins on a reported basis and excluding Family both expanded by almost 200 basis points year-over-year to 57%.

Now reviewing our international operations, our international division delivered another quarter of strong results.

On a reported basis, revenues grew 10% and reported adjusted OIBDA declined 2%.

Excluding currency, revenues increased 27% and adjusted OIBDA increased 11% as changes in FX rates reduced revenue growth by 17% in adjusted OIBDA growth by 13% as the strengthening dollar remains a major headwind.

On an organic basis which excludes currency as well as the Eurosport acquisition, revenues in adjusted OIBDA increased 9% and 11% respectively.

For comparability purposes, my following international comments will refer to our organic results only so they will exclude the impacts of Eurosport and foreign exchange.

The 9% first-quarter revenue growth was led by 12% advertising growth and 6% distribution growth.

Our advertising growth was broad-based as our industry-leading global distribution platform and IP enabled us to benefit from the continued growth in global pay-TV subscribers while simultaneously taking share and increasing pricing at our existing networks while further rolling out our global TLC, ID and Velocity brands to more and more markets around the world.

Excluding Russia, all regions except Asia saw double-digit ad growth increases led by the continued success of our free-to-air initiatives across Europe and by Latin America driven by increased volume in Brazil and Mexico.

While organic advertising growth is expected to moderate in the second quarter due to tough comps as well as elections this year in the UK, we still expect full-year organic advertising growth to be in the low double-digit range.

On the affiliate front, the 6% affiliate revenue increase in the quarter was driven primarily by another quarter of double-digit growth in Latin America due to higher rates and the continued expansion of pay television in key markets like Brazil, Mexico and Colombia.

CEEMEA also had solid growth despite the renegotiation of deals in Russia and some recent contract terminations in the Ukraine, we benefited from continued growth in Germany and across Southeastern Europe.

Due to the Ukraine terminations plus a pivot tool dual pay free-to-air strategy in certain Eastern European markets similar to the strategy that has been very successful for us in Germany, Italy, Spain and the UK, we now expect organic affiliate growth each quarter this year to be in the mid to high single-digit range.

Turning to the cost side, operating expenses internationally grew 8% in the first quarter primarily due to higher content amortization and increased personnel costs as we further localize our international businesses.

Adjusted OIBDA grew 11% and international organic margins expanded fully 100 basis points to 34%.

Taking a look at our overall financial position, in the first quarter we repurchased a total of $317 million worth of shares.

We have now spent over $6 billion buying back shares since we began our buyback program at the end of 2010 and we have reduced our outstanding share count by 29% as we continue to find the return on repurchasing our shares very attractive.

As we stated in our last year-end call, we remain highly committed to our BBB rating as we still expect to have approximately $1.5 billion of available capital for full-year 2015 to fund both share repurchases as well as to fund any additional M&A strategic investments including the potential TF1 put for the remaining 49% in Eurosport.

As a reminder, the first of their two put windows for TF1 will occur this summer from July to September with a second window next summer during the same period.

Turning to our full-year guidance excluding currency, we still expect full-year 2015 revenues will grow in the high single- to low double-digit range.

Adjusted OIBDA will grow in the low to mid single-digit range and adjusted EPS will grow in the high single- to low double-digit range.

Growth will be driven by solid operating performance and a lower tax rate partially offset by approximately $10 million of higher interest expense.

We are reiterating our guidance despite our new news that we are selling the non-core SBS radio assets as this will be mostly offset by the positive financial impact from Time Warner Cable not being acquired by Comcast.

Additionally, note that this guidance has always included results from consolidating Eurosport France from the second quarter through year-end as that deal closed as expected and the guidance also still includes the $50 million negative impact from Russia.

I will also highlight again that revenue growth this quarter will outpace adjusted OIBDA growth mostly due to increased content spend at Eurosport as we look to further bolster our investments in sport rights in the near-term in order to fully maximize the growth potential of the asset in the medium and long term.

Eurosport had no OIBDA margin in the first quarter due to their first quarter beginning the seasonally lowest advertising quarter as there are far fewer sporting events aired in the first few months of the year.

We still expect though that full-year Eurosport margins will be in the high single-digit range.

As David highlighted, we remain extremely bullish on the prospects of Eurosport and expect our increased investments in sports rights to pay off both at Eurosport as well as across our entire international portfolio.

In addition, while the first-quarter total Company growth rates excluding currency were above the rates we guided to for the full year, we remind investors that topline growth excluding currency was always expected to peak in Q1 primary due to the timing of the Eurosport transaction last year which will begin to be lapped at the end of May.

Also, cost comparisons get tougher as the year progresses.

Before we move on to Q&A, I do want to update the expected foreign currency impact on our 2015 results given that the dollar has further strengthened since we gave guidance on our year-end call this past February.

While we have successfully hedged a portion of our currency exposures and did realize gains in these hedges in the first quarter, we only hedged about 60% of our transactional exposures.

We also do not hedge translational exposures as these derivatives do not qualify for hedge accounting.

Therefore, net of our hedging strategy at current spot rates, FX is now expected to reduce our constant currency guided revenue by $425 million or roughly 6% and adjusted OIBDA still by $150 million, also roughly 6% versus our 2014 reported results.

Looking at our international networks mix of currency exposures, the revenue mix in 2015 is expected to be around 30% euro, 30% Nordic, 20% US dollar, 10% British pound and 5% Brazilian real.

Our international networks OIBDA currency mix is forecasted to be around 25% euro, 25% Nordic, 15% real, 5% Russian ruble, 5% US dollar and still slightly short to British pound as our international headquarters are in London.

Lastly, as previously stated, we reiterate our guidance, our reported free cash flow growth of low single digits in 2015 as we still expect significant growth in operating cash flow to be partially offset by higher full-year cash taxes due to prior year timing benefits related to Section 181.

We do expect cash taxes in 2016 to decline significantly as the cash tax deferral effect of 181 subsides.

Thanks again for your time this morning.

Now David and I will be happy to answer any questions you may have.

(Operator Instructions).

John Janedis, Jefferies.

Thank you.

David, as you mentioned beyond Discover, your ratings across your portfolio have largely decoupled from the industry this year.

Can you talk about the drivers more so meaning is it a lot more original hours, a different way to promote them?

And in the second quarter where ratings are scarce, can the gap in ad growth between you and the market widen further?

Thanks, John.

First I would say broadly we have affected a strategy which we started about a year ago which is to get back to the core brands and I think that is really working for us.

I think there was some brand drift across the industry.

There was some brand drift across our platforms and in order to have our content working stronger here in the US, having more value to advertisers and working in a much more compelling way around the world, we got rid of some of the programming that wasn't on brand and so you really see that difference on Science, you see it on Discovery which has been two of the bigger drivers.

Having Discovery now as the number one network in America for men 18 to 49 for the majority of this year and having that kind of leadership and having that content work around the world is a big deal for us.

And it goes through every one of our channels that we have really focused on what is the brand, how do we deliver on it?

And I think that works also not only for around the world and in the US but we own all of that IP and as this transitions to people want to be curated for the content they want, people knowing that when they go to Animal Planet or they go to Science or they go to Discovery or TLC or the Oprah Winfrey Network, that they see content on brand.

It reinforces the viewership.

I think that is one of reasons why we are seeing gains.

Quarter to date, we are either up 1% or relatively flat against a market that is down 7% or 8%, and in April we are seeing even better trends.

So I think that pivot to being on brand is really helping us.

Our GMs are really focused on using our 12% to 13% viewership on cable to promote between channels, which we think is much more effective.

We did this in Latin America where we actually curate and let people know across our channels what is coming up.

You're watching Discovery in Brazil and they will tell you what is coming up on Science, what is coming up on Animal Planet, what is coming up on our car channel, and that had real value for us.

So we are starting to take that around the world.

On the advertising side, I do think that with the ratings momentum that we have and the brand strength that if the volume is there that we can continue to accelerate a differential.

The question on the advertising side is, will the volume be there?

As we have said for our projections for the year, we are assuming it stays tepid.

It has been slightly better.

We have been able to take advantage of it to some extent, but if there was more volume we would have had a much more robust quarter.

We had the inventory, we had the strength, we had very attractive demographics.

So we are not getting excited.

We can't see really what is happening in the upfront yet, although we have sold about 30% of the upfront so far, and we are staying conservative.

Thanks, that is helpful.

Maybe separately, since last quarter's call there has been a lot of discussion about skinny bundles and where Discovery fits within them.

How important is it for you to be a part of them?

Do you think the Verizon offering will have broad appeal from consumers, and does it pose risk to you or the ecosystem if others follow?

I don't want to really speak too much about any particular player, but the ecosystem at least for the next few years, I believe, will stay together in terms of the overall majority.

For most of our channels we have contractual agreements, long-term agreements that require 90%, 85%, 95% that our channels be provided . So the ability to just determine to offer a smaller bundle, I just don't see that as likely given the contractual obligations across the industry.

Having said that, since we own all of our content, to the extent that others want to pick the best channels and make those available domestically and around the world, or even take content outside of channels and offer them, that is more dollars for us and more opportunity.

In the longer term I think it is important for us to continue to keep the existing ecosystem which is very favorable to us and as we transition to fight for the right kind of economics like platforms like TV Everywhere.

I think that you will see it at the margins.

If you look at what Charlie is doing, it is starting, it is growing small but there are certain gates on that in terms of its ability to be marketed to only subscribers that don't have cable.

I think the Apple platform is interesting and all of these things are good if you own all of your content and you have content that people really want.

That is why we have been really focusing hard on our super fans, talking to who loves Discovery, Science, Oprah, Animal Planet, ID, having really strong brands that people love that we can curate to is more important and I think we got out early on that and we will continue to take advantage of it.

Thank you.

Michael Nathanson, MoffettNathanson.

Thanks.

I have one for David and one for Andy.

David, you are one of the only media companies and one of the only execs I know to stand up and oppose the Comcast deal.

I wonder, do you feel retribution when that deal comes due later this quarter or do you think the fact that you were so public gives you counter-intuitively some protection that Comcast won't drop you because it is such a public squabble?

So I wonder what is your thinking in going public and opposing the deal and what do you expect to happen in the next quarter?

Thanks, Michael.

First, we didn't oppose the deal.

What we said is we had some concerns about it and at this point -- look, we have always had great respect for Brian and for Neil and Steve Burke and I have worked with them over the last 30 years.

They are very effective, they run a great company and we have always managed to work together.

The concerns that we raised, the concerns that we raised around the world, issues of what does consolidation do to content, what happens in terms of content investment?

That is all behind us now.

I think the goal for us after Comcast is to find a deal that makes sense for both of us.

We have been able to do over the last three years over 180 deals where we were happy, the distributors were happy.

We represent between 12% and 13% of viewership on cable and we still only represent between 4% and 5% of the economics.

So I think we are quite attractive with Discovery as the number one network and TLC as number one in many of the markets in middle America.

And as we have said, a lot of the affinity channels that we have like Oprah and Science, we have had conversations and negotiations.

I am going to see Neil later after this call, I am headed to Chicago.

I saw Neil on Saturday night.

And so I think that it is business as usual now.

Comcast is a great company, they are going to look to create a deal that is fair for them and so will we had we have plenty of time and we are very hopeful that we will get something done.

I know they are too.

Okay, thanks.

Let me ask Andy, when you look at your domestic cost growth for this year, what quarter or two do you think gives you the highest cost growth?

Can you talk a bit about the profile of expense growth domestically this year?

Sure, Michael.

We are very happy with how the cost trends have played out.

We have been saying for a while now that we are committed to revenues growing faster than expense and we saw both in the US and globally margin expansion in 2014 and in the first quarter of 2015 and we certainly see that trend continuing over time.

But to answer your question, we do think costs will uptick in the second and third quarter based on predominantly timing of content, when they air and some marketing investments and then they will abate again in the fourth quarter.

But again, the focus on margin expansion both for the US and internationally couldn't be more real and has been playing out very nicely for us.

Thanks, Andy.

Thanks, David.

Benjamin Swinburne, Morgan Stanley.

Thank you, good morning.

One for David and then I have a quick follow-up for Andy.

David, you have acquired a lot of assets overseas to build scale and I think at least some had the expectation that affiliate revenue growth over time might accelerate particularly in Europe given how much you have built the portfolio out.

But it seems to be slowing and I think part of that might be by strategic design as you pivot a little bit more free-to-air but I don't want to over read the quarter.

So could just spend some time talking about the affiliate revenue growth outlook and maybe just the general strategy to drive the topline internationally given what you are seeing in the landscape over there?

Sure.

Thanks, Ben.

I think the fact that we have 10 traditional channels in 220 or 230 markets and now we have two to three sports channels across all of Europe, these are long cycle these deals and they take some time.

What you have seen in the short term is given the geopolitical issues in the Ukraine which as we all know what has happened there, we took a one-time only hit there because it has affected the cable market.

And in one, Andy mentioned it said markets, it is really one market in Eastern Europe and we will announce in the next few weeks which one it is.

We have gone from a pay only to pay and over the air.

I think it is going to be quite effective for us.

I think it is going to be a very good deal.

It will generate more value for us.

Turkey is a market that doesn't have, doesn't have enough pay-TV so that is a market where we are going free-to-air as well as pay.

So we think we will get pretty meaningful incremental value out of that.

Having said that, we still think that you will see a trend to high single and longer-term you will see some good affiliate growth as those deals come up, as we have an ability to take advantage of scale and the scale is -- part of the scale is our market share growth.

One of the key elements for our growth as a Company has been that we have been able to grow our market share outside the US and it translates almost pretty efficiently to advertising revenue and we are getting a little better at advertising revenue so we are over delivering.

So the fact that we were up 10% in market share around the world and then we were able to grow advertising 12% is really effective and it is driven by our channels getting stronger, a little bit more localization but also by the fact that we have real conviction across Eastern and Western Europe, we have conviction in Latin America and in Asia.

And a lot of the local players as the economies have gotten more challenging are spending less on content and a lot of the US players are pulling out and spending less on content.

And so we have seen on average mid-teen growth over the last four years and we expect that is going to continue.

We have an awful lot of momentum on our growth and so we remain very optimistic about our international business.

We have between channels and free-to-air as well as sports in Europe and leadership with kids in Latin America, a very strong hand.

We are seeing a slowdown in Asia.

So I would say an acceleration in Latin America, continued strong performance in Eastern and Western Europe with a little bit of a hiccup from some geopolitical and the overall market in Asia outside of India, a little bit slow that we were seeing double digit growth there over the years and that has really flattened now.

And so overall I think our story is intact or better and we are aggregating a lot more IP under the covers that is not only helping our market share and helping our brands around the world but is better positioning us for the new world.

Thank you.

Just quickly, Andy, on currency, it looked like it was an even more significant hit to the international advertising growth this quarter.

Could you just remind us of how the ad exposure compares to affiliate?

It looks like there was a bigger skew to Latin America but I'm just guessing at the results.

The currencies continue as you know to move against us.

The ad sales exposure particularly with the euro, you look at some of the Nordic currencies, you look at Brazil, places where we have a greater proportion of free-to-air and ad dollars that is where the currency have moved against us.

We have had success though.

If you look at what we said at year end, we said revenue impact from foreign exchange was going to be 350, 150 OIBDA.

We updated that today to say it is (425) (corrected by company after the call) and 150.

So it is, you do see that our hedging strategy is working.

We are mitigating some of our bottom-line exposures but clearly the proportion of revenues coming out of Europe do dictate more ad sales impact.

One last point, Ben, on advertising.

There were some markets where I think a lot of the hard work that we have done will really pay off over the next couple of years.

Some of the issues that we see, the gestational slowing of the US and the question of what business models will emerge and how quickly and what will happen to bundling over the next five to seven years, outside the US in a number of markets particularly Latin America and India, it is almost -- it feels a lot like the US did 10 years ago and a lot of what we see here will take many, many years.

Brazil for instance reached 30% cable penetration last year.

As a result of that we saw 40% or 50% advertising gains.

Brazil is probably our strongest market.

We are the leader in kids where we are the number one cable channel in all of Brazil, not just for kids.

We have a channel called Home & Health which is like the Home & Garden of Latin America and that is the number three channel for women down there.

And we have Discovery.

So when you look at our 11 channels in Brazil, it is extremely strong, we have five of the top 15.

And coming off of last year where it was up 40% to 50% we are seeing growth this year of another 40% to 50%.

And so there is this moment in a lot of these markets were all of a sudden what was just DR starts to move over into advertising and you start to see the acceleration that we saw here in the US in 1996, 1997, 1998.

So Mexico and Brazil in particular I think are going to be engines that will really help us both gestationally but also in terms of revenue growth because we have such strong content down there.

Thank you both.

Alexia Quadrani, JPMorgan.

On the US advertising front in the domestic networks, I guess my question is I think you previously mentioned having less advertising spots this year.

I guess can you give us some color how you think that will give you some leverage whether it is in the upfront or just generally in pricing?

And then just a follow-up question that is still staying on the US on the distribution front, I know you have said you are not going to break out the over the top or SVOD going forward but maybe more generally speaking how we should think about US distribution growth and the relative mix over the long-term of traditional versus nontraditional?

Sure.

Thanks so much.

I think there is always this balance but we have opted not to add meaningful inventory into our services and I think this is a key element for us.

When people go to Discovery, when they go to Science, when they go to Animal Planet or Oprah, we think that the load is critical.

So that 1% could have been higher if we added some more spots, there is no question about it.

We are significantly less than a lot of our peers but we think for long-term brand value that is important and I think it is a philosophical long-term position for our Company.

We are still investing a lot in content, we are investing in IP, we are seeing how do we position Discovery so that we have more viewers, we have better content and we have more strength three to four years from now than we do now?

So you won't see us adding a lot of minutes to make a good quarter.

We are going to focus much more on getting more people enjoying spending time with our channels, rebuilding more characters and building more shows that could really work not just on linear but outside of linear.

Right now SVOD is relatively immaterial here in the US because we own all of our content and we have a 30-year library.

We have a fair amount of optionality and depending on how the marketplace develops, there is a chance for us to do that but that would be upside.

And if there is a change in the marketplace and there is curation directly to consumers even if that content is not brand new, the ability to develop content which we have looked at for instance on Science developing a science app, it is already converted into 48 languages.

There has been some interest as we have looked into the marketplace for Science, there could be some interest in Animal Planet that we could offer much like you would see a Silicon Valley new media company where we could offer some of those worldwide concepts like Science or Animal Planet in an app around the world over the top with content that isn't even that fresh that could nourish an affinity group.

And that could be incremental but that is not built in today.

Thank you very much.

Just to add to the domestic distribution trend, this has been a multiyear effort for us.

We have talked about our share of viewership is much higher than our share of wallet.

So the deals we have done the last three years, we have talked about the rate increases, we have talked about the various economic benefits and you see that in spades in the first quarter with the organic distribution rate up 8%.

So that traction and those new deals continue to support not only our brands and our content but trying to close that gap between share of viewership and share of wallet.

Thanks, Andy.

Todd Juenger, Sanford Bernstein.

Thanks a lot.

I will keep it to just one question at this point in the hour.

Just like to turn back to content strategy and I guess related to expense also.

I know Rich is now firmly installed and last quarter you mentioned several high-profile direct reports to Rich overseeing things like scripted, programming, miniseries programming, you talked about broadening your appeal to more targets.

I guess one, listening to all of that could interpret that to sound like somewhat of a shift towards a little more scripted or may I say expensive sounding programming.

I just want to test you whether that would be a correct interpretation, whether you are feel an imperative given the increasing on-demand consumption model to move to more higher profile and maybe even scripted programming or would that be a misread?

Is it more just getting back to the core Discovery, nonfiction plan?

Thanks.

Thanks, Todd.

No, and in fact I would say that you will see more resources going against our best characters and shows and against blue-chip and we have two initiatives there and some of these actually are less expensive.

We have a 30-year library of fantastic content in the space genre and natural history and some of it has been narrated or edited in a way that feels like it is a little bit old and so one of the initiatives that John Hoffman is looking at with Rich is an initiative called Hello World.

We have the best library in the world of content and we are now working with a number of the best producers and musicians to create kind of a fresh, a refresh of a lot of the fantastic content that we have so that we can get another shot at that.

We also have an initiative called Discovery Impact which is a socially conscious what is happening with the world whether it relates to water or the environment or extinction of a lot of the animal races that Racing Extinction is just one of those.

But we don't see a significant increase in investment.

What we see is a hyper focus on blue-chip and the quality content and we will be doing some stuff with John Goldwyn who is great and he will be overseeing scripted but we think we can do scripted in a much more efficient way.

We are going to do it in more longform as opposed to one-offs and we will do it with content that could work around the world so we can share it across 230 countries.

Just to add the financial perspective on that, Todd, we still see the US content growth being low to mid single digits, international being mid to high.

So that perimeter of how we see the cost trends does not change.

That is very helpful.

Thank you, guys.

Anthony DiClemente, Nomura.

Thanks a lot.

I have one for Andy and one for David.

Andy, just on the buyback, going back to the TF1 put, you mentioned the $1.5 billion available for the year.

Is it fair to assume that if you have no M&A and TF1 doesn't put their stake that you would use the majority or all of that $1.5 billion on buybacks?

Can you just give us a little more there and then a follow-up for David.

The answer is clearly yes, Anthony.

We still see the $1.5 billion as you said as capital availability.

Clearly our priority would be on strategic both on M&A and the TF1 put is part of that.

We couldn't be more bullish on our stock today and I have said before, I am a very simple free cash flow per share guy and when I look at that IRR, it is incredibly compelling to David, the Board and I. So the answer is, yes.

That clearly is where we would put available capital staying within our BBB rating which is an important strategic imperative for us.

Great, thanks.

David, couldn't help but notice that you mentioned that you thought Apple TV was interesting.

Just wanted to probe a little bit there what you think is compelling about it for the consumer?

And then would you consider doing a deal with Apple TV that encompassed only let's say a few of your networks as opposed to all of them?

And then do you think that you would include a robust portion of that 30-year library that you have mentioned, would VOD content from Discovery be a big piece of that sort of agreement?

Thanks.

Thanks, Anthony.

We can't speak about any specific deal.

We are platform agnostic but I think as there is some transition within the marketplace, the fact that we have -- that Discovery is stronger than it has ever been and is the number one channel for men 18 to 34 in America and we are winning a number of nights where we are even beating the broadcasters.

The fact that TLC has real strength where we can be in a position where several nights a week in 40 of the middle states in America, we are the number one cable network for women.

And Oprah and Tyler's programming when he goes on the air on OWN, we have over a 20 share of the African-American community and Oprah's programming is working so well on OWN.

And ID is the most -- is the stickiness channel on cable.

These have become more and more important when people can make choices about what shows they want and what channels to put on different platforms and how much they are going to pay for those channels.

Because in a world where there is a lot of opportunity you want the best stuff with the most people that are yearning for it.

For us it is all about the economics.

We want to make sure we get the right economics for our programming.

We opted not to do certain SVOD deals in the US because we didn't think the money was strong enough and we thought we would rather hold onto it ourselves and either do something ourselves directly with consumers or do something with the existing distributors.

And every time there is a new player in the market that is looking for content, if we as an industry can stay disciplined about economics and how that content is offered, it just reinforces the fact that whether it is Apple, whether it is a Sony device, whether it is a cable distributed product or satellite or any new device, those are all essentially in the nicest way, they are a pipe or a device to a consumer.

What the consumer really wants is great brands, great characters, great stories that make those devices or those interfaces come alive.

And anybody that is going to curate on any of those platforms, no one is going to buy it for the pipe or the platform so our mission stays the same but even more focused on the best content, the best brands will make Discovery more successful in the future on every platform.

Thank you.

Rich Greenfield, BTIG.

Rich has disconnected, sir.

We have to wait for Rich.

Otherwise he is going to be mad at us.

We don't want Rich mad at us.

One last question.

David Bank, RBC.

Okay, thank you, Rich for dropping off.

We didn't do that.

We didn't do that.

And I assure you I didn't have him dropped off either.

Look, to offer greater transparency in the affiliate growth you kind of helpfully called out some of the drivers domestically for distribution including the Sony distribution deal.

I think I can't remember if Andy or David called it out but no good deed goes unpunished.

Since you kind of called it out, is the Sony deal -- and maybe I know you don't want to talk about specific deals but maybe talk about as kind of a template generally for these kinds of deals.

Was this more of a both take or pay kind of deal or was it based on existing subs during the quarter?

How does it reflect the template as we see some of these new over the top IP-based cable systems or MVPD systems rolling out?

Thanks.

We just can't talk specifically about any one deal.

Sony is a very good company and they are offering I think a platform that is interesting and we are rooting for them, we hope they like every other platform out there does well.

I would say that when there is a new platform if we have channels that have real leadership with affinity groups and we are very strong particularly with young demos as we are across the lot of our portfolio, that it gives us a strong hand in those discussions.

But again we are coming off of a small base.

When you look at our overall -- the revenue that we take from the marketplace, most of the money goes to sports and retransmission.

That is just, we don't complain about it because that is the way it works.

But if you looked at those players they would have a percentage of viewership and then the revenue would be a multiple, some percentage significantly higher than that.

In our case we have 12% trending toward 13% of viewership and we have between 3%, 4% or 5% of the economics.

And so even when you look at those existing platforms not only are we attractive because our content has some leading edge to it and the demos that we deliver but even if we get what looks like a great deal for us or a very favorable deal still compared with some of the other content that is out there, we are a pretty good buy.

And so I think that helps us domestically and around the world that to be in the number one channel in America 18 to 49 and look at our cost base versus some of the guys that we compete with including the sports guys, that is a pretty compelling model and that is pretty much true in the majority of countries around the world that we are the number one channel for men in nonfiction.

And in many of these countries where we have launched over the air Turbo channels, the demo is even younger, we are really in that 18 to 25 with the cars.

So I think aggregating those audiences is going to be helpful and we tend to get much better deals with new players around the world but it also is because the looks of our content compared to the sports guys is much more reasonable and is scripted.

And just to quickly clarify, David, the numbers, it was a de minimis impact on our first-quarter affiliate.

The plus 8 was driven by the many deals we have gotten done both at the end of 2014 and the end of 2013.

So that continued traction on the distribution line was more driven by the substantial increases on the base business.

Thanks, Andy.

Thank you, guys.

Thanks everyone.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.