華納兄弟探索 (WBD) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2016 Discovery Communications earnings conference call.

My name is Mark, and I'll be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to Jackie Burka, Vice President of Investor Relations.

Please proceed.

Good morning, everyone.

Thank you for joining us for Discovery Communications' first quarter 2016 conference 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 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 annual report for the year ended December 31, 2015, 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'm pleased about Discovery's operating and financial momentum, with current trends in the US particularly strong, and international investments driving new value across our portfolio.

While we continue to face certain secular and economic challenges in various markets around the world, we are evolving in a consumer video market place with 7 billion worldwide screens, and are optimistic about our global growth profile in the more than 220 markets.

As Andy will discuss in more detail, we are focused on spending more on growth, in content and in direct-to-consumer platforms, while relentlessly driving down cost growth in all non-content cost areas.

If it is not going to nourish audiences or help us grow long term, we are attacking it.

As a result, I'm pleased to announce today that we will have real constant-currency margin expansion for the full 2016 year.

The ultimate goal is to maximize growth, first and foremost in our linear TV business, while aggressively pursuing new opportunities to diversify and strengthen our content, and bring it to more screens and more people around the world.

These cost savings will allow us to continue growing our business by focusing our investment in four key areas: More investment in content, more investment in our international growth markets, more investment in digital services and OTT products, and more investment in sports.

Our expansion into sports is well under way with Eurosport.

We have been on a journey to revitalize the brand with locally relevant sports rights and programming, and we are realizing the potential of this cash-flow-positive business.

We're starting to see meaningful results, including double-digit growth all across Europe.

We're leveraging the power of sports programming by driving meaningful affiliate value across our whole portfolio, which you will see grow further in the years ahead.

In addition, the Eurosport Player is generating value by offering a deeper, more immersive experience all across Europe.

It's a separate offering with unique content from what we have on our Eurosport channels all across Europe.

Tennis fanatics were able to watch up to 16 courts at the Australian Open.

At the beginning of the year, Squash TV launched as a dedicated channel on Eurosport Player, with 500 hours of squash action a year.

Our distinct digital offering allows us to have a direct economic relationship with viewers, and gives us an opportunity to go deeper into the sports they love.

It's a richer, different value proposition from our linear channels.

In the first quarter, subscription growth increased double digits versus last year, proving Eurosport's content and brand power is a multi-screen opportunity for us.

We continue to monetize our Olympics investment by signing sub-licensing deals in the Netherlands and Finland, which followed our deal with the BBC in the UK.

These agreements significantly exceeded our plan.

We have retained all rights to the Olympics on all platforms so that we can pursue incremental value and deals on mobile, on social media, with players like Facebook Live and Twitter, or going direct to consumer on our Eurosport app.

The Olympics will not only be profitable, but based on the deals that we've done already, we expect the Olympics will make real money for us on each of the games.

Moving on to our entire international portfolio, our international average audience was up over 5%, driven by worldwide viewership strength from Discovery Channel, especially in Russia, Brazil, and Mexico, and strong performances from our female networks in Latin America.

Germany also enjoyed strong double-digit growth driven by TLC and DMAX.

Across all of our international markets, we are getting good value for our portfolio of global brands and sports, and the momentum remains strong with recent renewals.

As I mentioned last quarter, we pulled our channels in the Nordics to Telenor subscribers as we stood up for the value of our content.

We were able to win significant increases in our renewal, and lock in long-term growth.

We believe in the value of our content, and we will continue to stand up and fight for the value.

Looking at our US portfolio, we had another quarter of very strong results.

We are extremely pleased with our current domestic trends.

Add growth remains solid as we head into the second quarter and the up front.

Discovery Channel had its second-highest rated quarter ever in prime time, with eight of the top 10 unscripted shows on cable, including Gold Rush, Fast and Loud, and Alaska Bush People ranked one, two, and three.

ID was the number two network for women, and had its best quarter ever in prime time.

Velocity had its highest delivering quarter ever, and science its highest-rated quarter ever.

Starting next month, we welcome back Patrice Andrews, who was most recently with ITV and A&E, as the new General Manager of Animal Planet.

Patrice is a fantastic storyteller and a great creative leader.

She will be a big help to driving the value of Animal Planet.

Beyond traditional pay-TV distribution, people want access to our brands and content across all screens.

As we own most of our IP, we are driving our digital strategy and making progress in diversifying how and where we reach consumers, particularly younger viewers.

Across all these efforts, we are building audiences, learning consumption habits, and expanding monetization models.

Part of our digital strategy is to add value to pay-TV subscribers through our own TV-everywhere products, such as Discovery Go in the US, Discovery Kids Play in Latin America, and by extending the availability of our content through distributor TV-everywhere products.

It's very early days for Discovery Go, but we are pleased with our initial results.

The platform is clearly appealing to a younger audience, as 50% of our visitors are in the 18 to 34 demo.

We are selling CPMs at a significant premium, highlighting the appeal of our long-form content in the digital space.

Second, we continue engaging millennials and younger audiences with Discovery Digital Networks.

Today we average more than 300 million streams each month, and we are now focusing our web native efforts under two key brands that are resonating with advertisers and with users: Seeker and SourceFed.

Over the last two years, we have drilled down and developed the best-in-class virtual reality content.

The Discovery Virtual Reality app has over 30 million views in the last few months, and we have developed over 100 pieces of virtual reality content, with a new offering every week.

We're very excited about the possibilities to immerse audiences in new story formats, and create meaningful opportunities for advertisers.

As content gets closer to real, our content brands move to the top of the heap.

Finally, we're focusing on delivering for super-fans with select direct-to-consumer offerings.

In Europe, the Eurosport Player and Dplay exemplify our aim to grow audiences across platforms, and continue to provide captivating exclusive content across more screens than ever before.

We recently took a minority stake in Rugby Pass, the definitive OTT product for rugby fans in 23 markets in Asia.

Across all these efforts, we are learning viewing habits and amassing data on how best to reach consumers across all screens.

As we begin another year, Discovery is well-positioned to broaden our reach and relevance with our audiences.

We end the quarter with a lot of optimism.

Our US business is a real meaningful growth business, even given small subscriber universe declines.

As a Company worldwide, 50% of our revenues come from long-cycle distribution agreements with strong contractual growth rates.

In our international business, we've turned the corner on currency, and are now starting to realize some tail winds that could grow stronger in the months and years ahead.

We're investing in the growth areas for the future.

We are confident in the long-term growth profile of the Company, and our ability to create sustainable shareholder value.

I will now turn the call over to Andy for details of our financial results.

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

Before I review our first-quarter results, I want to highlight a few very important and positive updates regarding our 2016 guidance.

As David mentioned, we are now committing to total Company constant currency margin expansion for the year.

We want to ensure that we position Discovery for growth in both existing and new areas, and continue to embrace change to drive innovation across the Company.

As the industry evolves, we will continue to evolve with it.

We have consistently highlighted our flexible cost structures, and the fact that we own or control most of our own content across all global platforms, as two of our most critical competitive advantages.

These advantages are allowing us to maximize our profit growth, while taking advantage of new opportunities as the media ecosystem evolves.

As a Company, we have for several years now taken a very hard look at our cost structures, and continue to see and realize opportunities to become leaner while freeing up dollars to continue investing in new platforms like mobile and OTT.

Spending on global content and IP will always be our priority.

We are focused on managing down growth in all other cost areas to ensure that our constant-currency revenues will grow faster than our constant-currency costs.

Our 2016 SG&A cost productivity has been much better than planned.

You may have seen yesterday that we filed an 8-K specifying additional personnel-related cost-reduction initiatives that will yield cost benefits in the second half of 2016, as well as full-year 2017.

We remain highly focused on paring back cost growth in non-content expense areas, and re-allocating traditional linear business costs to new media platforms and content development around the globe, such as mobile, short-form video, sports, and direct-to-consumer initiatives.

As a result of this commitment to margin expansion, as well as our better-than-planned US ad sales performance to date, we are also raising our 2016 adjusted EPS and free cash flow guidance to being up at least high teens on a constant-currency basis.

With our first quarter constant-currency margins up almost 100 basis points, adjusted OIBITDA ex-FX of 7%, and adjusted EPS ex-FX up 18%, we're off to a very strong start to the year.

In addition, with the US dollar softening year to date, currency head winds have begun to subside, and are meaningfully better for 2016 than we quantified on our year-end call.

More on this later.

Now, let's talk about our first-quarter results in more detail.

Reported revenues and adjusted OIBITDA were both up 2%.

Excluding currency impacts, revenues were up 5% and adjusted OIBITDA was up 7%.

On an organic basis, so excluding the impact of foreign currency as well as prior-year contributions from SBS radio which we sold on June 30, 2015, total Company revenues and adjusted OIBITDA both grew 7%.

Net income available through Discovery Communications of $263 million was up 5% from the first quarter a year ago, primarily driven by improved operating performance, a lower effective tax rate, and the gain from the SBS radio sale, partially offset by higher stock-based compensation, and a decline in income from equity investees.

We were able to lower our effective tax rate by another 400 basis points, from the full-year 2015 rate to 29% this quarter.

Earnings per diluted share for the first quarter was $0.42, 14% 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 $0.46, a 10% improvement versus 1Q 2015.

Excluding currency impacts, adjusted EPS was up 18% for the quarter, and was up 11% for the last 12-month period over the prior 12-month period.

First-quarter free cash flow increased 62%, as improved operating performance and lower cash taxes were partially offset by higher content spend.

First-quarter free cash flow growth, excluding currency effects, was strong and increased 53% for the last 12-month period, compared to the prior 12 months.

Turning to the operating units, our US networks had a spectacular quarter, with total revenues up 8%, led by 8% distribution growth and 7% advertising growth.

Adjusted OIBITDA was up a very impressive 11%.

Our 7% advertising growth, which accelerated from 5% in the prior quarter, was due to higher pricing and proactively managing and monetizing our inventory to take advantage of the strong demand in the scatter market offsetting lower delivery.

The ad market currently remains quite healthy, and looking ahead to the second quarter we expect advertising revenues to have another strong quarter, with the second quarter's year-over-year growth similar to that of our first quarter.

Our domestic distribution revenues were up 8%, while total portfolio subs again declined by about 1% versus the first quarter of last year.

We continue to benefit from the higher rates we garnered from our recent deals, including our most recent deal with Comcast, which went into effect on January 1.

Turning to the cost side, operating expenses in the quarter were up 3%.

Cost of revenues were up 7%, while SG&A declined 4%, due primarily to lower personnel expenses.

Our focus on controlling base costs led to impressive domestic adjusted OIBITDA growth of 11%, with margins expanding by almost 200 basis points to 59%.

As we look ahead to the rest of the year, US cost growth in the second quarter is expected to rise at a slightly faster rate than first quarter, as we increase marketing spend, partially due to an earlier Shark Week, which starts on June 26.

Then expense growth will abate again in the second half of this year.

Turning now to our international operations.

Excluding currency, revenues increased 3% and adjusted OIBITDA decreased 2%, as changes in currency mix reduced revenue growth by 6%, and adjusted OIBITDA growth by 12%.

For comparability purposes, my following international comment we'll refer to our organic results only, so we'll exclude the impacts of foreign exchange and the previously mentioned SBS radio sale.

International organic revenues increased 7%, and adjusted OIBITDA declined 2% for the first quarter of 2016.

The 7% first-quarter revenue growth was comprised of 12% distribution growth and 4% advertising growth.

Our 12% affiliate revenue growth was due to higher affiliate rates in eastern and northern Europe, where we have been successful in leveraging our expanded content portfolio that now include sports to drive higher contracted pricing increases.

Increased subscribers in Latin America, as well as contributions from Eurosport France, which was not consolidated until the second quarter of last year.

Excluding Eurosport France, affiliate revenues were up high single digits.

Going forward, we still expect organic distribution growth to remain in the high single-digit range for the rest of 2016.

Turning to our first quarter international advertising results.

While we benefited from higher pricing and delivery in southern Europe, and higher volumes in central Europe, growth in these markets was partially offset by declines in northern Europe, our largest advertising region.

Northern Europe was impacted by the February Telenor blackout in the Nordics that we highlighted on our year-end call, and overall softness in the UK and Nordic markets due to macro factors, and lower ratings across the region, especially at our female-skewing networks.

While the Telenor blackout did have a negative impact beyond the 10 days we were dark, as advertisers shifted their money elsewhere due to the uncertainty around our contract renewal, our standing up for the value of our content paid off, as the long-term economic up side from the new deal is significantly greater than the temporary advertising losses incurred while going dark.

Excluding the impact from the Telenor blackout, first-quarter international advertising revenue increased 7%.

We're delivering on our promise that the investments we're making in content and brands will drive sustained global affiliate growth, and this very positive Telenor deal outcome supports this thesis.

Another factor that impacted our first-quarter ad results and will continue to affect results for the rest the year is a shift in the Middle East, where we are pivoting from a free-to-air model to a pay-TV model.

As part of our exclusive content deal with two key affiliate partners, we have locked in long-term affiliate fees, which enhance OIBITDA, but shift ad revenue to affiliate revenue.

Our international ad sales is currently trending at high-single to low-double digits, but we do expect the ad growth to accelerate to low-double digits in the second half of the year.

Second-half growth will be led by increases in the UK, as we expect pricing and ad-market pressures to ease, post the Euro Championships and the June 23 Brexit vote, as well as continued strong growth in Latin America, eastern Europe, and southern Europe.

Turning to the cost side, operating expenses internationally grew 11% in the first quarter, primarily due to higher content amortization, as well as costs associated with Eurosport France, and adjusted OIBITDA declined 2%.

Looking ahead, it is very important to note that cost growth, and therefore adjusted OIBITDA growth, would be lumpy on a quarterly basis, mostly driven by the timing of sporting events.

We currently expect second-quarter organic expense growth to be similar to that of the first quarter.

Cost growth will then significantly moderate in the back half of the year to being up mid-single digits, as we're able to more fully leverage our pre-existing sports rights and local market people and infrastructure.

Lastly, regarding our financial expectations for the Olympics, as a result of the very positive and better-than-planned sub-licensing deals that Dave highlighted in the UK, Netherlands, and Finland, we now expect meaningfully positive cumulative Olympic-related cash flows through the 2024 games.

We forecast that aggregate revenues from this deal will significantly exceed total costs.

Now, taking a look at our share repurchases, in the first quarter we repurchased a total of $373 million in shares.

We have now spent over $7 billion buying back shares since we began our buy-back program at the end of 2010, and we've reduced our outstanding share count by 36%, as we continue to find the return on repurchasing our own shares very attractive.

Getting back to our full-year guidance.

As stated, we are raising our constant-currency adjusted EPS and constant-currency free cash flow growth to being up at least high teens.

Our guidance includes potential upcoming personnel-related and other restructuring charges of approximately $40 million to $50 million, as outlined in our 8K; and also assumes full-year stock-based compensation of approximately $55 million, and no further P&L impact from the Lionsgate investment we made last year.

We also now expect our full-year 2016 effective tax rate to now be approximately 29%, versus our prior expectation of 30%, as we continue to realize significant benefits from our multi-year global tax strategies.

I also want to update the expected year-over-year foreign-exchange impact on our full-year reported results.

As a result of the dollar weakening year to date versus most of the global currencies, the expected year-over-year FX impact has significantly improved since we last guided on February 18.

Assuming current spot rates stay constant for the rest of the year, FX is now expected to reduce our constant currency revenue by $100 million to $110 million, and adjusted OIBITDA by $70 million to $80 million.

We now also expect a positive FX impact to adjusted EPS of $0.01 to $0.05, due to the net effect of this year's adjusted OIBITDA impact and last year's over $100 million of below-the-line FX impact.

In closing, I'm extremely pleased with Discovery's start to 2016.

We are fully committed to constant-currency margin expansion, and our higher full-year 2016 guidance metrics.

As I noted earlier, we will continue to assess operating trends and proactively manage Discovery's overall expense base to best position the Company for growth as the media industry evolves.

I remain very optimistic about our global portfolio, as well as our overall financial and operating momentum.

Thanks again for your time this morning.

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

(Operator Instructions)

Alexia Quadrani, JPMorgan.

On the cost-cutting announcement that we saw last night, if you could elaborate, I think, why now is the right time to pursue this?

Did something fundamentally change in the market where you thought you had to lower fixed costs?

Any more color on the timing of the announcement?

Thanks, Alexia.

We've really been focused little by little on this.

If you've seen, over the last couple of years we've been focused on it.

But we really decided that it was time to really drive what we call the left side of the Business.

We broke the Business in half; the right side is growth.

We've been investing significantly more in content each year, more money in creating -- in the whole creative side of our Business, as well as our direct-to-consumer business, and our TV Everywhere business.

As we look at the overall infrastructure, we just felt that there's a lot of opportunity to attack all of our other costs.

The $40 million to $60 million is something that we think will make our Company more efficient.

We think there's probably more opportunity there, as we're looking at additional technology opportunities, working -- we have satellites all over the world.

We have technology infrastructure all over the world.

A lot of that, over the next year or two, we think we could also get more efficient.

Our overall strategy of continuing to invest in more content, build relationships with consumers on all platforms, just lightening up our existing infrastructure cost helps our margins, gives us more opportunity to invest in all those platforms, and makes us stronger.

It sounds -- (multiple speakers) go ahead.

Just to elaborate on that, Alexia, if you think about the thesis that we've laid out now for a couple years, we've said that we expect to have high single-digit growth in content and marketing, and low single on all others costs.

We've had traction on that for a while now.

We've been very focused on what I call base cost productivity.

This is just another example of our driving that.

As we think about productivity and some of our people areas, some of our support areas, some of what I call back office, we continue to see opportunities to do things better, quicker, faster.

Just the technology of cloud computing itself -- we have one of the largest media libraries in the world over the last 30 years that we've aggregated and digitized.

We have all of that on the ground.

The ability to use cloud computing just gives us the chance, over the next two years, as we move more and more toward that technology, to reap additional significant economic benefits.

We're looking to take advantage of every cost opportunity we have so we can spend more on telling better stories and engaging people on every platform.

There's one more important point to make.

The $40 million to $60 million is the restructuring costs that we've outlined.

The actual benefit -- annualized benefit of that -- is significantly higher.

There's restructuring costs, but then the benefit annualized is going to be 2 times plus that.

The benefits we're going to be seeing, both on the cost, the cash, and the P&L is going to be meaningfully more significant.

It sounds like that benefit is a little bit toward the tail end of this year, but also maybe bulk of it in 2017; is that fair?

That's correct.

Some of the benefit will certainly help this year, but all of it -- all of that 2 times the $40 million to $60 million that I just spoke about, will all be in 2017 and beyond.

Thank you very much.

Todd Juenger from Sanford Bernstein.

Oh, hi, good morning, thanks -- a super-quicky, and then a little bit longer one.

The super-quicky -- thanks for your insight into how Q2 domestic advertising is pacing.

I just wanted to clarify, when you said it would be similar to Q1, was that including the changing timing of Shark Week, or that was not including that change in timing?

The longer question -- there's been so much press this week with the new fronts going on, with all these new apparently over-the-top, maybe skinnier type of bundles being contemplated.

Right now you guys, I don't believe, are on Sling in any way, don't know if you've been talking.

You're not part of the Hulu group.

YouTube is out this morning.

There's all these things going on.

Anything you could share on your conversations and your attitude about being included in those groups, your willingness to put some of your networks versus all of your networks in those groups?

What sort of terms on on-demand, and affiliate fee and rate increases, you would need to see to be included?

Thanks, guys.

Sure, Todd.

To answer the first question, it does include Shark Week being earlier, but I'll say that it would be high-single digit both with or without.

Shark Week will be four days in the quarter.

The advertising market remains robust.

We'll talk about it a little bit later.

We don't have that much information on the up front, but the pricing and scatter is very strong.

Cancellations and options are down significantly from the last few years.

The environment feels quite good going into the up front, I think for us and the whole marketplace.

On the point of over-the-top, I think one of the things that makes us very well positioned is we have our 14 channels, which represents about 12% of viewership on cable.

Even though we're looking at high single to double-digit affiliate growth domestically, we still only get about 5.5% of the economics -- so, 12% of viewership, 5.5% of the economics.

You have ID as the number one or two channel for women, the most valued channel on cable in Discovery; Oprah, the number one channel for African American women with OWN; and TLC, one of the top two or three networks in middle America.

We're a very, very good value with our channels, including Animal Planet being one of the top three or four channels that people value in terms of brand, but also in terms of economics.

If you took just our top six channels, that would represent about 83% of our affiliate.

If you only took four, it would be 70%.

We are talking to everyone.

One of the things -- I think there's two baskets.

If it's a non-sports package, and I think we will be an extraordinarily powerful piece of that, as we bring so many demo's and so much strength to a package like that.

But for all packages, we're very economically attractive.

With Discovery, ID, Animal Planet and Oprah, it's very difficult I think to have a compelling package without us.

We're talking to everyone.

The reason that we're not on Sling right now is that our deal -- Charlie tends -- those deals tend to get done on Sling as the deals come up, and our deal with Charlie is not up.

We look at over-the-top as a real opportunity.

We can even see it in our TV Everywhere product, how much our content is being consumed by consumers, which is quite attractive.

Very helpful.

Thanks, Scott.

Michael Nathanson, MoffettNathanson.

Thanks; I have two for David.

David, firstly, over the past few years you've been very candid and also early about talking about US cable advertising weakness.

I wonder, what do you think is driving this market to these now strong levels?

How do you feel about sustainability of this market past 2Q?

Then I have a follow-up.

Well, the market is certainly robust.

It's very hard to predict, so I'm not going to predict where it's going to be in the quarters ahead.

We thought in second and third quarter of last year that it was going to really be a challenge.

Some of the things that are happening is, one, the measurability is getting better.

A number of companies that move more quickly to digital found that their market share -- they had market share challenges.

I think you have two baskets.

How effective is television advertising?

It's still probably the most effective of all advertising.

Two, knowing that you're getting the actual value, and it can be proven.

In fact, when you get paid only on L3 -- for us, we leave about 14% of viewership on the table.

There are a lot of people in the industry that do more than that.

The fact that you're getting -- that the advertiser is getting the full value, and they only pay on what you watch for the first three days, there's actually an over-delivery.

At least for now, I think the view is that it's quite an effective way to reach a broad audience, and to reach across demo's.

You don't get embarrassed by finding out nine months later that there was an issue with it, and you don't have to worry that it's not going to deliver in terms of the ability to move product.

It does feel good right now.

The whole US market feels good.

I think this whole narrative of -- toward the end of last year, this idea that universe numbers were declining precipitously as a result of distributors losing subscribers; that overall viewership on cable was declining; that advertising was going to decline at an accelerating rate -- all of those have moved, I think, in our favor.

At least for the near term, we see the US now as a meaningful growth market.

For the near term -- I mean for the next several years, with having high single-digit affiliate growth locked in, with 80% of our deals done, even if the universe declines, which we don't -- it looks now like it's stabilized.

And even if the advertising market declines, we'll still have a US growth market.

If the advertising market stays like it is now, we'll have a very significant US growth market.

It feels good for now, and let's hope it continues.

Okay.

And let me just ask this: The past couple years, you've acquired, you've consolidated SBS and Eurosport.

What's your appetite for doing more deals of that size at this point?

Sorry --

Michael, one more time, sorry.

We missed it here.

I was going to say, over the past few years you've done some very large international acquisitions.

I wonder at this point, what's your appetite for doing more large deals abroad, or are you happy with the footprint you've built now?

Look, we are the number-one pay-TV media company in the world.

The good news for us is we did go on a -- we've had a different strategy than most media companies.

We have local infrastructure around the world.

We're embedded with creative talent, commercial talent in serving 220 countries, and all of the cost has been embedded.

When we did do Eurosport, and as we've tucked in channels, we've been able to get meaningful synergy because we have 10 to 12 channels in every country.

We're always opportunistic, but I think we're very happy with our existing mix.

The way we see it now is we have this great sports IP in Europe, and Discovery is on brand and growing, with real pull-through.

In our most recent deals -- the negative is we've had to pull our signal three times.

We did it with Telenor, the largest distributor in the Nordics.

We did it with Telia in Sweden, and we did it with Boxer in Sweden.

We took near-term hits by doing that, but in all three cases we were back up, and we got very significant increases.

The deals are long term, which move us from -- the potential to go from mid-single.

We're now at high single, and we're looking to get to double digit.

We think we've improved our IP portfolio.

The same is true for us in Latin America, where Kids has gotten a lot stronger.

We have a number of female networks that are stronger.

I think we're in a very good position now.

We like our -- we've improved our IP.

As our deals come up, I think you'll see our affiliate line growing internationally, because our content has improved.

We're taking some of that content direct to consumer, and we're having some success.

We would have to see something that would help us grow faster, because we took a step back with SBS, and we took a step back with Eurosport.

We've acquired the sports IP we think we need.

I think we're making the turn.

Now we're very happy with the Olympics, and margins should start to grow now on Eurosport.

I think we like the position we're in.

We've worked hard over the last three years to get in this position, to get all the infrastructure in place.

We got the synergy if there's a good asset out there, but it's going to have to help us grow faster.

Just to elaborate, Michael, on that, from a pure financial perspective, we've long said that the criteria that we use for any acquisition is, A, it has to be free cash flow and EPS accretive day one.

Two, it has to have an un-levered IRR of at least low teens.

Third, maybe most importantly, it has to have a better IRR than allocating capital buying our own stock.

When you look at our free cash flow model and our IRR from a free cash flow perspective, it's such a strong mid- to high-IRR that it's an important threshold that we look at a lens through on all allocations of capital.

Thanks, guys.

Ben Swinburne, Morgan Stanley.

Thank you, good morning.

David, could you spend a little more time revisiting one of the themes from last year's Investor Day on international distribution, and the state of TV Everywhere overseas versus the US?

We've seen Sky roll out a number of -- I don't know if you want to call them OTT platforms or skinny bundle.

The market over there, particularly in Europe, seems to be evolving quite rapidly.

Can you talk about how Discovery sees that landscape, how it fits in?

Are the changes you're seeing going to help drive acceleration in the high single-digit growth you've been putting up internationally?

How should we think about the financial impact of the change?

Okay, thanks, Ben.

Look, I think the thing that's going to drive our distribution revenue the hardest is the fact that our share has been growing over the last several years.

As these deals come up, we have more share, and we have -- as well as sports rights or Kids.

We've been standing up for our value in a way that we haven't in the past.

Part of that has to do with -- through this recession and challenge over the last eight years, most content players have reduced their content investment.

We go into these deals where we've increased our investment, we've increased our share, and we've been able to get more significant dollars.

The second piece that is important is that there's been a change in the marketplace over the last year, and that's distributors are now looking to de-commoditize their platforms.

They don't want to just be pipes to the home or pipes to a device.

They're looking to get exclusive content.

What you saw us do in the Middle East, where some of our advertising revenue went away, it's because we did exclusive deals with OSN and with BeIN.

For each we did our regular package, and then we gave each of them some exclusive content.

We were able to get significant economics.

In addition, we did a similar thing with Canal+.

We're in a number of discussions with distributors.

This is something that could -- right now you see our affiliate line internationally growing.

We want to push that to double digit.

If the opportunity for exclusive content continues, you're going to see that line begin to move up higher in a way that's a lot easier to be moving the advertising line.

Our goal on advertising is to get it back up to double digit, which we think we can do; but the distribution line we're quite optimistic about.

On TV Everywhere, the point that we made a couple of months ago is that TV Everywhere is just much more effective in Europe, because TV Everywhere really means TV everywhere.

Everything is on the platform.

It's helpful because I think it's an impediment to the SVOD platforms coming into those markets.

You have two things helping the -- a push-back on Netflix and some of the other SVOD platforms.

One is that a number of us are going direct to consumer ourselves, like us with the Eurosport app or Dplay.

Two is that players like Fox and Liberty Global are going direct to consumer with their TV everywhere platforms, and they have everything.

Unlike here in the US, which is finally getting it together and we're seeing the great benefit of that -- and Brian is leading in that with X1 -- in Europe, it really is TV everywhere, and that is a big benefit to us, and it will help us on advertising.

Sky is having a real positive with Now TV.

You've got to take your hat off to James and to Jeremy Darroch, because they've really -- they've invested, and we're on Now TV.

Being part of a cable operator's platform for us is a much more favorable environment.

That makes sense.

Just one follow-up -- maybe for Andy.

On the domestic affiliate revenue, the nice number in Q1, Andy, is that something that we should expect to continue through the year, even including any impacts from Charter-TWC, or should we be thinking about some moderation at all, one time?

Well, look, Ben, it is strong.

It does reflect the continued -- every deal we've done has accreted greater pricing, and has continued to increase that line.

We do expect that pricing benefit to continue as new deals come in.

Look, one of the variables is obviously what happens with the sub-universe, but our pricing growth and the inclusion of Comcast continues to be a benefit as we roll in all these new deals.

Thank you, both.

Doug Mitchelson, UBS.

Thanks so much -- one for David and one for Andy.

David, when we're thinking about the up front, one, I'd love it if you are willing to offer what your scatter pricing is versus the up front these days?

How should we think about your positioning going to the up front versus broadcast pricing?

I'm sure you heard Les say the other day he's expecting double-digit pricing for CBS in the up front.

How should we think of Discovery relative to broadcast pricing?

For Andy, looking at your balance sheet, it seems that access to debt capital might not change that meaningfully, even if you decided to go down a notch.

I'm just curious if you thought about whether it's worth getting more aggressive with the balance sheet relative to any impact on debt-market access?

Thank you.

Thanks.

As I mentioned, scatter is up high teens or in the 20s, and volume is up, so that all bodes well.

I love the fact that Les is talking about being double digit.

On a practical level, across all of our domestic portfolio, we tend to be maybe 1 point behind.

If broadcast gets 9, maybe we get 8. If broadcast gets 11, maybe we get 10.

If they get 6, we get 5. That's the way it's been historically.

Having said that, our channels are very firmly on brand.

We've been able to get some significant benefit.

Some of our channels, like ID and Velocity, have been up 50% or 60% higher in CPM over the last year.

Discovery's CPM is up higher.

I think there's a real benefit as you look at OWN, ID, Discovery, Velocity, even Science.

We've worked hard to get back to brand, and to really be nourishing a very specific demographic audience.

We've been rewarded on those channels, I think, a little bit more.

ID still has a lot of headroom for us.

Its length of view is the highest of any channel on cable.

We have an ability to reach women all day, where we're number one on cable; late night, where we're number one.

We think there's still some significant up side on that.

But when you average all of our channels together, we'll tend to do about a little bit behind what some of the best broadcast network does.

If we can get a little bit lucky with ID and pushing it, maybe we can -- even though we don't have the same amount of reach in terms of being able to roll out a product, we could maybe reach it.

We'll do well, I think.

All right.

Thank you, David, that's helpful.

Then, Doug, just to go through your capital question, look, there's a couple of important points here.

One, we are extremely committed to investment grade.

It gives us access to launch from capital, gives us access to multi-currency commercial paper.

It absolutely is the right kind of capital assessment for us in investment grade.

Also, if you look at our access to capital today, we issued a long-term bond earlier in the year, many times oversubscribed, rates that were actually more in the BBB rating.

Even though we intentionally took our rating down to BBB minus, the markets still view us as being more BBB, especially with our mid-teen free cash flow to debt yield.

The other point I'd make, Doug, which I think is so important, if you think about our capital expansion, given our high-single OIBDA growth and given what is an improving currency environment, we're seeing a lot of available capital based on just our profit growth and our ability to leverage that profit growth.

There's no shortage of capital that we have to be proactive and to play offense with either buying stock or allocating capital towards acquisitions.

All that makes sense.

Thank you.

John Janedis, Jefferies.

Thanks.

David, maybe going back to the sports theme, there seems to be a little less demand for smaller sports properties in the US, and rights fees have moderated with less competitive bidding.

I'm wondering if there's any early sign or potential for that in Europe, and to what extent that could accelerate the margin opportunity, the outlook for Eurosport?

Then maybe along those lines, in terms of non-US, can you give us a little more color on international ad trends?

Thanks.

Sure.

Look, the US market is really quite different from the international market, because the US is really just one culture, and it's one satellite.

It's football, baseball, basketball, hockey.

Because there's a very competitive environment by some of the biggest media companies to get into that space, because that's where most of the affiliate revenue has gone over the years, to those that have those sports rights, those rights have accelerated, as you've seen.

The fight for those four sports more and more has generated huge increases.

In Europe, you see that for soccer, in market.

You've seen that kind of huge increases on renewals.

What we've been able to do with Eurosport is we've done over 70 deals on Eurosport, and all of our deals are in the low-single to mid-single-digit increase.

Even on the Olympics itself, we were able to get the Olympics for mid-single-digit increase on what it had gone for four years earlier.

We've been quite disciplined about getting our sports rights, and Eurosport now remains profitable.

We've made the turn.

We don't think we need to own a lot more IP.

We'll do it opportunistically.

Again, when we pick up speed skating, we're picking up a sport that might be the number-one sport in four markets all across northern Europe.

When we pick up handball, we're picking up a sport that's the number-one sport in Poland.

A lot of the -- picking up tennis and cycling.

For us, we're the home for everything but soccer.

We've also picked up a lot of IP for very little.

Remember, there is no bidder for sports in Europe that can provide the platform that we provide.

Eurosport has three channels in every market, but we have 150 million homes on just one of our channels.

ESPN is a little less than 100 million, and we have 150 million.

When a federation wants to sell a sport -- soccer is sold locally.

But most other sports are sold either across Europe, or you have to do 55 deals.

I think that's the unique advantage that we have is a very complex market, both in terms of taste, culture and language that we're set up to deal with.

The fact that we have the only pan-European sports channels gives us a unique advantage.

I think, over time, our ability to continue to get these rights should be pretty stable.

There's not a lot of people that are bidding for the kind of sports that we're building our Business on.

Finally, on the international advertising, Telenor hurt us this quarter.

It hurt us significantly.

It is the biggest distributor in the Nordics, which is one of our biggest markets.

We were off for 11 days.

Not only did we lose on those 11 days, but some money moved.

It's all back now, but it had an impact.

It really resonated in the market.

We were able to get very significant economics.

Driving that long-cycle top line for us is critical.

If you put Telenor back into our economics, we would have been -- our international business would have been positive, in the mid-single digits versus negative.

But we're fighting for the long term.

This quarter, we expect -- the first two quarters we expect to see in the high-single range.

In the second half of the year, we expect acceleration into the double-digit range.

Whether on average that ends up being high single or low double, we will have to see.

John, just to add to that, we have to look at the regional components of this.

We're still seeing very strong double-digit growth in Latin America, southern Europe, in eastern Europe with Eurosport.

Yes, there are some nuances -- Telenor, the Brexit exit discussions -- that we laid out that's coming up.

But no question, strong double-digit growth in the second-half ad sales.

The majority of our regions are seeing strong double-digit growth still, as we've seen in the last several quarters.

Thank you very much.

Last question comes from the line of Anthony DiClemente from Nomura.

Good morning, thanks for taking my questions.

I have two.

I totally understand that the cost-savings initiative here is aimed at non-content-related costs.

Andy, you were clear about that in your remarks.

I wonder, will there be any realignment in terms of the networks, the infrastructure costs against your networks?

I just wonder, given the underperformance in terms of ratings at some of your networks if, as part of this initiative, you would consider rationalizing any of the underperforming smaller cable nets?

Secondly for David, just going back to the theme and the subject of new over-the-top platforms in distribution, I feel like we all went through this period of hand-wringing last year about whether Apple was going to launch something like this.

I think you and I spoke about it.

My thought was that profitability was the real reason that Eddy Cue and Apple decided not to move forward, the fact that the RSNs were just going to be too costly as part of this virtual MVPD bundle, and so forth.

What do you think about the fact that the new Hulu venture is likely to be unprofitable out of the gate?

Does it surprise you that others are deciding to move forward with a business like that, even if it's operating at a loss or as a loss lever?

Thanks a lot.

Look, Hulu's a great product.

I don't want to speak specifically to Hulu.

In general, we as an industry have to make some compromises.

If we do, I think we'll be healthier.

If, in the end, we're going to do an over-the-top bundle that's 30 channels for $30, then each of the media companies can't have every one of their channels, every one of their sports channels, every one of their regional sports channels carried.

For those that have the leverage to include all of them, then there's probably going -- it's not going to be the best of what we have to offer.

For instance, we have 14 channels.

Having six or eight of our channels carried in a package to me seems quite effective.

We would get 85%, 86%.

If it's only six, we'd get 83% of our dollars.

We've done this in a lot of markets where -- a lot -- it happened in Brazil.

The major programmers all decided, look, we'll get a little bit less money, but we'll be on this beginning tier.

It will serve a different audience.

In the case of Brazil, it was the C class.

In the case of the US, it would be more of a millennial audience.

If we all came together -- and if you saw the best of cable, where we would have six of those slots, then I think it could be quite attractive.

But if we each try and put all of our kids in there, which is how we're used to doing business, I think it's going to be overly bloated.

There's going to be a lot of channels that aren't that strong.

It's going to be quite expensive, and it's not going to be that attractive.

But the marketplace is quite rational.

I think, in the end, the smaller bundles that are working around the world are those that have 20 or 30 channels, and those are kind of a best-of bouquet.

That's probably where it'll end up in the US.

As I've said, with all the talk about this, the only place that the skinny bundle is going to present is over-the-top.

Because in the next 3 to 4 years, almost every programmer is contractually committed to have all their channels carried.

With the exception of maybe being able to go down from -- lose 5% of your distribution or 10% of your distribution -- most deals provide that you need to have all your channels carried to at least 90% or 95% of the package.

Having said that, I like the skinny bundle.

I was very interested in what Apple was doing.

I think, again, the fact that we have the number-one channel on cable, the number-one channel for women, the number-one channel for African Americans, and our channels are reasonable, with high-quality content, puts us in a position to be part of those bundles.

We'll have those discussions, and over time, I'm confident that we will.

In terms of rationalizing costs for smaller networks -- two things.

We had quite a good quarter, but we also -- our content channels were hurt, I think, a little bit more than some others by the news networks.

The news networks were up 38%.

But every night, whether it was a Republican or a Democratic debate, a lot of that energy came out of some of our non-fiction channels.

We feel pretty good about how we're going to do this quarter.

There's some of our channels we need to improve.

One of those is Animal Planet.

We just brought in a new GM.

We're working hard on turning TLC.

But Discovery, Science, ID, Velocity, OWN, are all running very strong.

We're looking at everything, but in the end, this cost cutting that we're doing right now isn't related to the channels.

The channels are a journey to find -- to make sure our brands are right, and we're reaching an audience.

The cost cutting is really the other side of the house, where we're having some effective efficiency.

Part of that, Anthony, a few important cost points -- as we've highlighted, we are ruthlessly driving down non-content costs.

Look, Dave and I also look at content spend and any spend as being an investment.

Where do you get the best return and the best growth for that cost investment?

That's certainly part of our rationalization and reallocation, which is why, look, an important thing that we said today on this call is that we're committing to margin growth.

You saw it in the first quarter, up 70 basis points.

We're committing to revenues growing faster than costs.

Those are two critical elements of our strategic financial plan.

A big piece of that is not only accelerating top line, but managing cost so that it grows slower than revenue.

Thank you very much.

Ladies and gentlemen, thank you very much.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.