華納兄弟探索 (WBD) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the call to discuss the Scripps transaction as well as a Discovery Communications' Second Quarter Results.

(Operator Instructions) As a reminder, this conference call may be recorded.

I'd now like to turn the conference over to Andrew Slabin, EVP, Global Investor Strategy.

You may begin.

Good morning, everyone.

Thank you for joining us today to discuss the announcement of Discovery Communications definitive agreement to acquire Scripps Networks Interactive as well as for Discovery's Second Quarter 2017 Earnings Call.

Joining me today from Discovery are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, our Chief Financial Officer; and Bruce Campbell, Chief Development, Distribution and Legal Officer.

We are also pleased to welcome Ken Lowe, Scripps Networks Interactive Chairman, President and Chief Executive Officer, who will also be participating on today's call.

This morning, we released 2 press releases, one announcing the acquisition agreement and one detailing our Q2 earnings, both of which are available on our website at www.discoverycommunications.com.

A slide deck with detail on the transaction will also be posted.

On today's call, we will begin with some opening comments from David, Ken and Gunnar about the transaction, after which, David and Gunnar will speak to our second quarter results and outlook.

We will then open the call up for your questions.

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, 2016, and our subsequent filings made with the U.S. Securities and Exchange Commission.

Just a note that this communication does not constitute an offer to sell or the solicitation of any offer to buy any securities or solicitation of any vote or approval.

In connection with the proposed merger, the companies intend to file a registration statement on Form S-4 containing a proxy statement prospectus with the SEC, and you should read the proxy statement prospectus when it becomes available because it will contain important information.

Both companies and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from their stockholders in respect to the proposed merger.

Information about each company's directors and executive officers is set forth in their respective 10-Ks filed with the SEC.

You may obtain additional information regarding the interests of such participants by reading the proxy statement prospectus regarding the proposed merger when it becomes available.

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

Good morning, everyone.

Today, we are excited to announce that Discovery Communications has reached an agreement to acquire 100% of Scripps Networks Interactive for $90 per share, comprised of 70% cash and 30% Discovery Class C or DISCK shares.

This transaction will bring Scripps' world-class portfolio of high-quality, deeply loved brands, including the Food Network, HGTV, Travel Channel, the Cooking Channel, DIY and Great American Country together with Discovery's portfolio of world-class brands, including the Discovery Channel, TLC, ID, Animal Planet, OWN, Velocity and Eurosport to create a new global leader in real-life entertainment.

This transaction supports and accelerates Discovery's pivot from a linear TV-only company to a leading content provider across all screens and services around the world.

We know the Scripps assets and management team well.

And we believe this transaction checks all the boxes that we look for in driving growth and creating long-term shareholder value.

By coming together with Scripps and combining 2 world-class organizations, creative teams and quality brand portfolios, we are building a global content engine, spanning multiple categories, including sports, like the upcoming Olympics in Europe; entertainment; lifestyle; factual; Kids in Latin America; and free-to-air in major markets like Nordics, Germany, Italy, Spain, U.K. and Poland as well as our superfan brands here in the U.S.

I'd like to touch upon the key strategic rationale for why we are so excited about this transaction and how it will benefit our viewers, deliver value to advertisers, distribution partners and create meaningful value for investors.

I will then turn the call over to Ken Lowe, my close friend for almost 30 years, for some of his thoughts on the deal, followed by Gunnar, to provide the key financial highlights of the transaction.

Following this, Gunnar and I will return to provide commentary on Discovery's second quarter results.

Let me quickly summarize the reasons why this acquisition is great for Discovery and its shareholders.

First, we will become a premier portfolio of owned and controlled IP across a broad range of genres.

This positions us very well as our industry continues to evolve.

Second, we expect this combination to unlock global strategic synergies, driving significant value.

Third, there will be significant upside to extend Scripps brand and content internationally.

Fourth, together we can accelerate the innovation and rollout of digital and mobile content on new platforms.

And finally, we expect to produce robust free cash flow, allowing us to maintain our investment-grade rating and quickly leading to further balance sheet flexibility.

I'll speak to each of these in more detail.

For both Discovery and Scripps, content has always been our North Star.

Scripps has a wonderful heritage of storytelling and creating quality brands, formats and content.

And together, we will produce approximately 8,000 hours of original programming annually.

We'll be home to approximately 300,000 hours of content, and we'll generate a combined 7 billion short-form video streams monthly, demonstrating our commitment to delivering content as a top short-form provider.

Combined, Discovery and Scripps will capture about 20% share of ad-supported cable audiences in the United States.

The combined company will be home to 5 of the top cable networks for women with over 20% share of women watching ad-supported prime time cable in the U.S.

During the last few years, Scripps has grown outside the U.S., now reaching over 175 countries with 60 unique feeds.

We feel one of the most exciting aspects of this transaction is our ability to take the Scripps brands, programming and talent around the world to the next level.

Over the last 30-plus years, we have built a best-in-class international distribution, sales and languaging infrastructure that gives Discovery an efficient and flexible foundation to maximize quality content across multiple markets around the world.

This is what we do, and we are excited to do it with the world-class Scripps brands.

We are excited by the opportunity to program our existing global female brands like TLC, Real Time and Fatafeat in the Middle East, with content from Food Network and HGTV.

We can also take those strong brands and formats like Food and HGTV and launch them in new territories and capitalize on our combined talent, formats and IP to introduce new brands and products from our portfolio to help our distribution and advertising partners.

As part of its global strategy, Scripps also acquired a larger footprint in 2 of our top growth markets, the U.K. and Poland.

In Poland, Scripps acquired TVN, a leading Polish broadcaster with part ownership in nc+, one of the leading distributors with nearly 2.5 million subscribers in Poland.

Both businesses will highlight our collective presence in Poland.

Similarly, in the U.K., Scripps owns 50% of UKTV in partnership with the BBC, one of the leading portfolios of entertainment channels with nearly 10% audience share.

We believe having this larger presence and ratings share will help grow our combined business in our #1 international market.

Another strategic opportunity of this deal is to use Scripps lifestyle content to fortify our pipeline for Home & Health in Latin America.

Home & Health has been a growing brand and business for many years and has successfully licensed some of Scripps content in the past.

With full access to the Scripps brands and lifestyle pipeline, we expect to more fully optimize and monetize this content across all of Latin America.

The combination of our collective brands and IP enhances our optionality to create and participate in new mobile and OTT products and platforms, and simultaneously strengthens our expertise in short-form content creation, data-driven marketing, endemic advertising and branded entertainment.

Notably, between Scripps' strength, 2-billion plus views per month and leadership in the important food category and our stake in Group Nine Media, we will, together, account for 7 billion mobile-first short-form streams and be a leading SnapChat provider.

Our industry is evolving quickly, but I can't be more excited about the opportunities this combination will bring to our company, for our viewers, for our advertisers and distribution partners and for our shareholders.

Scripps is a great company, and one of the big reasons I'm so optimistic is that our companies, our cultures and our workforces share a lot of the values that make these kinds of integrations a lot smoother and more successful.

Ken just finished his 37th year at the Scripps company, which he helped build into one of the finest, most successful media companies in the world.

In fact, Home and Garden itself was Ken Lowe's idea.

He is a great leader, a great entrepreneur and a great friend.

And I'm thrilled to also announce that Ken will be joining our board.

I'll now turn the call to Ken, and then Gunnar will walk through the financial highlights of the transaction.

Thank you, David, for those very kind words.

You're much too generous.

I'm very pleased to be sitting here today with David, Gunnar, Bruce and the Discovery team to talk about this exciting combination.

Bringing Scripps together with Discovery creates an industry leader that will open up new opportunities in the United States and around the world to serve our advertisers, our distribution partners and our superfans.

At Scripps, we have successfully transitioned from a U.S.-focused TV network company to a comprehensive and global lifestyle content business.

Just like Discovery, we're delivering our content on a multitude of platforms, building deeper connections with consumers everywhere regardless of device or geography.

This agreement presents an unmatched opportunity to grow Scripps leading lifestyle brands like HGTV, Food Network and Travel Channel across the world and on new and emerging social and mobile platforms.

Discovery has a terrific set of brands, a great management team and it's built the best and broadest international platform in the world.

They know how to take entertainment brands, take things global, make them better than anybody else.

And Discovery has already extended Scripps programming into international regions such as Latin America, and this has demonstrated the significant upside potential to extend our brands around the world.

Each of our companies has made strong progress driving innovation in mobile, over-the-top and direct-to-consumer platforms.

Together, no doubt, we'll be a more innovative enterprise in short-form video as well as branded content, endemic advertising and data-driven marketing.

We can quickly accelerate our progress with best-practice sharing, greater scale and a deeper portfolio of brands, ensuring we continue to grow our relationship with our passionate fans worldwide.

I'm really delighted to be joining the board of the combined company, and I look forward to working closely with David and the entire Discovery board and team to drive growth and create long-term value for our shareholders.

I'd also like to make sure that you saw our 8-K that we filed this morning with our earnings pre-announcement.

In light of the agreement with Discovery, we wanted to provide you with an early look at our second quarter results and our updated full year guidance.

As our 8-K indicates, due to continued ratings and impression softness in the U.S. market, as evident in our second quarter ad results, we now expect 2017 total company revenue growth to be approximately 4% versus our prior guidance of 6%.

And due to the lower revenue outlook combined with higher expected programming and SG&A expense, we now expect full year total company adjusted segment profit to be approximately flat for the year versus our prior guidance of up 3%.

I will not be taking questions about Scripps financial update on this conference call, but you can follow up with our team with additional questions on our results.

With that, let me turn it back over to Gunnar.

Good morning, everyone.

I will now provide more details on the terms and financial expectations for this transaction.

Let me start with a recap of some key parameters.

The purchase price values Scripps equity at $11.9 billion plus approximately $2.7 billion of rolled net debt.

This implies a total transaction value of $14.6 billion.

Scripps shareholders will receive a 70-30 mix of cash and Discovery C Class or DISCK stock.

The cash portion will be funded from cash on hand and new debt to be raised and is backstopped by a fully committed bridge facility from Goldman Sachs.

The reference stock price for Discovery C Class shares is $25.51, which is as of the close on Friday, July 21.

We have also provided Scripps shareholders a symmetrical collar around this reference DISCK share price.

Within a band from $22.32 to $28.70, the value of the stock consideration is fixed to an adjustment of the exchange ratio.

Outside of that band, the value is variable.

The transaction includes a customary breakup fee of 3% of total equity.

Post closing, Discovery shareholders will own 80% of the economics of the combined company and Scripps shareholders will own 20% on a fully diluted basis.

The deal is expected to be accretive to free cash flow and adjusted earnings per share in the first year after closing and is anticipated to generate run-rate cost synergies of approximately $350 million by 2019.

We plan to realize half of the synergies in the first year after closing, and we will budget a onetime cost to achieve of around $300 million to $350 million in the first year after closing.

The cost savings will predominantly come from shared corporate technology and operational efficiency.

To put this into perspective, savings of approximately $350 million represent less than 10% of the combined company's expense base, excluding content, marketing and advertising expenses.

And as David discussed, we also see the opportunity for significant growth in both linear and digital advertising and affiliate sales globally as well as the generally improved vantage point on our journey to a more direct-to-consumer and digital future, none of which has been included in our deal model.

Pro forma for the approximately $350 million in cost synergies alone and baking in no revenue upside, the acquisition AOIBDA multiple on 2017 estimated AOIBDA is 8.7x and is, as such, relatively in line with Discovery's current trading AOIBDA multiple.

While leverage on the combined company will initially rise to approximately 4.8x gross debt to AOIBDA, we are committed and confident in our ability to delever quickly and maintain a strong balance sheet and our investment-grade rating.

Let me give you a bit more background.

First of all, please note that all of our analyses fully take into account Scripps new lower full year 2017 revenue and EBITDA forecast that Ken mentioned earlier.

And of course, their updated expectations have been fully accounted for in our models and valuation work.

We intend to develop substantially all of our free cash flows toward paying down debt until we are back within our new target gross leverage ratio of 3 to 3.5x, which is expected to occur by the end of 2019 at the latest.

To be clear, that means we will be suspending share repurchases until we are compliant with our new target leverage metrics.

Please note that the transaction is subject to approval by Discovery and Scripps shareholders, regulatory approvals and other customary closing conditions.

John Malone, Advance/Newhouse Programming Partnership and Scripps family shareholders representing an overwhelming majority of common voting shares of Scripps have entered into voting agreements to vote in favor of the transaction and take certain other actions in each case subject to the terms and conditions of their respective agreement.

And with this, I will turn the call back to David to give an update on Discovery's second quarter results.

Thanks, Gunnar.

Now I wanted to touch on a few highlights from Discovery's second quarter.

The second quarter was another important chapter in our strategic pivot to reach viewers across every screen, platform and service around the world, which we expect will accelerate with the Scripps transaction.

We continue to make real progress in maximizing our linear business while making significant progress in growing our digital, mobile and direct-to-consumer channels around the world.

I'll begin with a few details on the strong performance of our global content portfolio where our superfan strategy continued to engage viewers and drive growth.

Discovery was again the #1 non-sports network for men in the U.S. in the second quarter, with Street Outlaws ranking as cable's #1 unscripted series among men, ID earned its best second quarter in network history in the U.S., ranking #1 across all ad-supported cable for women, and ID's audience was up 17%.

TLC's resurgence has continued in the U.S., with hits like 90 Day Fiancé, Happily Ever After, Little People, Big World, 7 Little Johnstons, My 600 lb Life and Skin Tight, together driving 10% growth among women in prime.

OWN was again a top network for African-American women and the #1 network for African-American women on Tuesday nights.

And Velocity earned its 19th consecutive quarter of growth.

Outside the U.S., Eurosport grew its ratings by 17% as a record number of fans tuned in for Giro d'Italia, the French Open and Wimbledon.

Third quarter has kicked off with continued momentum, highlighted by record-breaking ratings for the 2017 Tour de France, which were up 10%.

We remain focused on driving digital growth across 3 complementary tracks: ad-supported online video, subscription-based OTT and mobile-first short-form video.

First, on the ad-supported front.

In the U.S, our TV Everywhere GO apps continued to see impressive growth with a 72% increase in streams since the fourth quarter 2016, and we continue to attract a much younger demo with half of GO viewers ages 18 to 34.

Looking into the current quarter, Shark Week made a huge splash on GO and helped us record our highest live and on-demand streaming to date on GO, delivering over 4 million on-demand and live streams through Saturday, with over 60% of the audience ages 18 to 34.

On our second digital track, we continued to expand our subscription-based OTT business through the Eurosport Player, our sports streaming product.

I'd like to highlight 4 key linchpins supporting the continued rollout of this product.

The first is an improved technology capability as we transition to the BAMTech platform.

Second is our updated product and pricing strategy, namely our recent strategic pivot to a season pass model and a more tailored country-by-country approach.

Third, our new and differentiated distribution deals.

In the second quarter, we announced 2 major telco distribution partnerships for the Eurosport Player.

One with Telecom Italia and another with Swisscom, the mobile leaders in Italy and Switzerland, respectively.

The partnerships commit these 2 mobile and broadband leaders to market the Eurosport Player to their millions of subscribers, providing a very efficient and exciting customer acquisition pipeline for us.

Because they bill for the service, we expect it will be a real helper in acquisition as well as reducing churn because we'll be part of their billing process.

Furthermore, Telecom Italia was the first partner to sign up to being the official mobile broadcaster for the Olympics.

The partnership grants Telecom Italia access to the rings and brings exclusive and differentiated Olympic Games content to their users.

Fourth is leveraging our deep rights packages, notably Eliteserien in Norway, MotoGP and Tennis have been large drivers of the recent sub growth as subs have nearly doubled over the past 6 months.

In summary, we continue to learn a lot about our direct-to-consumer product.

The way customers are interfacing with it, the data we are able to access, and we're very pleased with the continued momentum in our subscriber growth.

In this vein, as we continue to focus on driving growth for the Eurosport Player, instead of the old model of simply licensing our channels to a third-party with no customer information, we have made the strategic decision to exploit our Bundesliga soccer rights through the Eurosport Player in Germany for the season, starting in 2 weeks.

This is a big decision, reflecting an important trade-off.

We are building asset value at the expense of lower short-term revenues compared with a traditional distribution deal.

We're confident these rights will help significantly accelerate growth for our Eurosport Player platform.

And we also expect to elevate the Eurosport brand to a new level in Germany, a key market for us.

We also continue to see other opportunities to monetize the Bundesliga rights as highlighted by our recent deals to bring the games to Switzerland's Swisscom and Teleclub subscribers.

By the time of the first Bundesliga match of the season, we are confident the Eurosport Player will have additional distribution partners in Germany who are recognized household brands in that market.

As Gunnar will discuss in more detail, in light of our decision around Bundesliga, we now expect full year international organic distribution growth of approximately 10%.

We are still very comfortable with our official constant currency guidance of low to mid-teen adjusted EPS growth and low double-digit free cash flow growth for 2017.

During the second quarter, we also announced a deal with Amazon U.K. to stream Discovery Channel, Eurosport and Olympics content to U.K. Prime subscribers, extending our reach with the help of Amazon's marketing prowess and data around customer behavior and habits.

Finally, we continue to fortify our leadership in short-form, thanks in large part due to Group Nine.

Discovery and Snap teamed up last week to bring SnapChatters a mix of highly informative and entertaining Shark Week content on SnapChat Discover.

Shark Week on SnapChat was a great success.

The Shark Week premier falls within the top 3 SnapChat show premieres to date in terms of audience size, and over the course of last week, over 12 million unique SnapChatters tuned in to the show.

We also have put concepts into development for MythBusters and ID snap series.

Since our investment, Group Nine has grown an astonishing 40% to nearly 5 billion monthly streams.

The Group Nine relationship and the scale of streams on Facebook has opened doors for us to work with Facebook to greenlight a number of mid-form content series that we recently announced on their Spotlight platform.

I'll now turn it over to Gunnar for more details on the quarter.

Now I will share the highlights of our second quarter financials.

Our second quarter results were driven by continued global distribution growth combined with a strict focus on cost management.

Our total company reported revenues and adjusted OIBDA were both up 2%, while our constant currency revenues and adjusted OIBDA were up 3% and 2%, respectively, as currency impacts on our revenues and profits continue to improve this year.

Net income available to Discovery Communications of $374 million decreased versus the second quarter a year ago due to below the line items.

On the positive side, we had improved operating performance and a lower effective tax rate of 20%.

However, these positive effects were more than offset by a large noncash $67 million swing in below the line FX expense due to revaluing our cash and other balance sheet items held in foreign currencies as well as higher equity earnings losses, primarily due to the timing of our solar investments.

These losses depend on the number of installations going live in the quarter, and we are currently ahead of plan, which led to the losses totaling $42 million in the second quarter versus our expectation of $30 million while the full tax benefit will still come over the balance of the year.

Looking forward to the full year.

We are now quite confident to achieve a full year tax rate of a couple of hundred basis points below 20% as we continue to benefit from our international asset base as well as our solar investments.

The full year book loss from solar is expected to total approximately $200 million with the current expectation that the remaining impact will be split evenly between the third and fourth quarters.

Note that net-net, we still anticipate that our solar investments will have a positive impact on the full year net income as the benefits from our tax credits as well as the tax shield on the book losses will more than outweigh around $200 million of book losses.

Now let us turn to EPS.

Earnings per diluted share for the second quarter was $0.64, and adjusted earnings per diluted share, which excludes the impact of acquisition-related noncash amortization of intangible assets, was $0.68.

Keeping in mind the large below-the-line FX swings mentioned earlier, excluding currency impacts, adjusted EPS was up 9% for the quarter.

Second quarter free cash flow was $157 million.

The decline versus prior year period was almost completely driven by the timing of working capital.

Our full year outlook for free cash flow, excluding FX, has not changed.

Turning to the operating units.

Let me start with our U.S. Networks.

Our U.S. Networks total revenues were up 2%, led by 4% distribution growth and flat reported advertising growth.

And adjusted AOIBDA was up 4% given lower SG&A and cost of revenue.

Our flat advertising growth or up 1% on an underlying basis, excluding the impact of December's Group Nine transaction and the deconsolidation of Seeker and SourceFed, was primarily due to strong pricing and improved monetization of our GO platform, which again added a point of growth in the quarter, partially offset by lower delivery due to continued Universe declines and the timing of Shark Week, which aired partially in the second and partially in the third quarter last year, but aired 100% in the third quarter this year.

As we look ahead to the third quarter of 2017, we currently expect reported U.S. ad growth to accelerate versus the flat growth this quarter and be up low single digits.

In more detail, as just mentioned, we will benefit from the timing of Shark Week as well as easier comps versus the Olympics last year.

And otherwise, we are seeing similar trends in the second quarter.

We expect to continue to maximize yield on our linear networks as pricing remains healthy, which will likely be offset by overall universe declines.

Additionally included in our outlook is, again, 1 point of growth from our GO platform, which will again be offset by 100 basis points impact from the Group Nine transaction.

Now let us look at affiliate revenues.

Our second quarter domestic distribution revenues were up 4% with growth drivers similar to the first quarter: higher contracted affiliate rates, partially offset by a decline in subscribers.

To a lesser extent, growth was also driven by contributions from other distribution revenues, i.e., content deliveries under licensing agreements.

Total portfolio subs in the second quarter declined by just over 4% year-over-year, an acceleration versus the first quarter when subs declined just over 3%.

As we stated on our year-end call, we still expect 2017 full year distribution revenue growth to be in the mid-single-digit range, assuming subscriber trends remain relatively consistent.

We will continue to benefit from higher pricing in our existing affiliate deals, and we will also continue to aggressively pursue additional ways to increase our digital distribution revenue and monetize our content across all platforms with existing and new distribution partners as the media landscape continues to change.

Turning to the cost side.

Operating expenses in the quarter were down 2%, leading to adjusted OIBDA growth of 4% with margins expanding by 200 basis points to 64%.

As we look ahead to the rest of the year, we will continue to focus on managing and limiting U.S. cost growth with year-over-year total cost growth still expected to peak in the low single digits range in the third quarter, partially due to Shark Week and our scripted drama, Manhunt: Unabomber.

I will now turn to our international operations.

Reported revenues were up 3% and adjusted OIBDA was down 4%, while excluding currency, revenues increased 4%, and adjusted OIBDA was down 5%.

For comparability purposes, my following international comments will refer to our organic results only, so will exclude the impact of currency.

The 4% second quarter revenue growth was comprised of 7% distribution growth and 1% advertising growth.

Our 7% distribution growth was driven by higher affiliate rates throughout Europe, where we have already been successful in monetizing our expanded content portfolio that now includes sports to secure higher contracted pricing increases and higher rates throughout Latin America, partially offset by a onetime favorable contractual adjustment in Europe in the second quarter of last year.

Looking forward, as David mentioned, we are revising our full year distribution outlook given our strategic pivot on Bundesliga in Germany, and we now expect growth of approximately 10% for the full year.

Let me explain this decision in more detail.

Clearly, Bundesliga will not be profitable this year based on the player alone, but as we have stated before, we are optimizing the total value of our sports IP portfolio over the long contract terms.

We always want to balance exploitation across linear, digital and sublicensing and, given the early successes we have seen pivoting to the season pass model and leveraging premium rights for the player as well as the high value of these rights, we believe that at this point, this is the best way to maximize monetization.

I will reiterate what David said, we will now expect real acceleration of the player and expect to elevate the brand to a new level in the key German market.

We're convinced we will be able to build real asset value here, which is clearly a top priority at the expense of short-term revenue growth.

As you have seen over the past quarters, we have been successful in limiting our cost growth to create profit headroom that allows us to make such value-oriented exploitative decisions without having to take a hit on AOIBDA.

Turning to advertising.

Our 1% growth was mostly driven by growth throughout most of Europe, excluding the Nordics, due to improved ratings and volume, offset by declines in the Nordics due to put and share challenges and declines in our smallest region, Asia-Pac.

As we look ahead to the third quarter, we expect ad sales to be up low to mid-single digits, helped by easier year-over-year comps with the Olympics and the European Football Championships.

We expect to see growth in most Europe and Latin America, again offset by weaknesses in our smallest region, Asia-Pac.

Turning to the cost side.

Operating expenses internationally grew 8%, primarily due to higher sports content and production costs.

Given the tough AOIBDA comp as this quarter saw lower revenue growth from distribution and advertising in the quarter versus higher sports cost this year, AOIBDA growth was down 5%.

Looking ahead, we expect total cost growth to peak next quarter at high single to low double digits and then come down in the fourth quarter.

As indicated on our last call, we also want to provide an initial framework on how to think about the financial impact of the Olympics for 2018 and beyond.

Let me start with some thoughts on the value of these games, please.

Summer Games generally have more hours, are more popular and bring in higher revenues than Winter Games.

Location matters as well, given the impact of time zones on value in individual markets.

As you know, the first 3 games are in Asia with our current expectation being that the 2024 Games will be in Paris.

On this basis, our current working hypothesis, which represents our best expectation at this time, is that we will recognize 10% of the total $1.4 billion rights cost in the first quarter of 2018 with 30% then recognized in 2020, 15% in 2022 and 45% in 2024.

Other financial implications for next year's Olympics are: we expect an additional $100 million of production and other costs to also be recognized in the first quarter, and we do not expect the Olympics to have a material impact on our full year profit.

As we have discussed before, the majority of revenues will come from sublicensing, which will be recognized in the other international revenue line.

And additional revenues from ad sales, digital, as well as some attribution of affiliate revenues in Europe due to the halo effect of having these rights.

Now taking a look at our financial overall picture.

In the second quarter, we spent a total of $301 million repurchasing our shares after investing $15 million gross in solar.

We have now spent over $8.5 billion buying back shares since we began our buyback program in 2010.

And we have reduced our outstanding share count by over 38%.

During our first quarter call, we talked about a review of our capital structure and allocation approach.

Having completed this review, I am happy to largely reiterate our financial policies.

Looking forward, as stated, we remain absolutely committed to our investment-grade rating with the new goal of ultimately having our gross leverage between 3 and 3.5x.

Once we are comfortably in that range, our capital allocation philosophy will remain the same.

First, investing in the company and strategic accretive M&A with remaining capital allocated towards buying back stock.

Finally, regarding our full year guidance, as mentioned, we are reiterating our expectation that full year 2017 constant currency free cash flow growth will be at least low double digits.

I am also pleased to reiterate that constant currency adjusted EPS growth will be at least low to mid-teens.

While our net international affiliate outlook is lower, on the positive side, we continue to manage our constant currency total company cost of revenues to be in the high single-digit range versus the previous guidance of high single to low double-digit range.

Our budgets had always left us with headroom and, following our success in managing these costs in the first half of the year, we are now comfortable going to the low end of that range.

We still expect total company constant currency SG&A growth to be flat to up low single digits.

Finally, these metrics exclude any impact from the Scripps deal.

Clearly, we do expect additional interest and transaction costs, and we will update you on these items later in the year.

I also want to update you on the expected year-over-year foreign exchange impact on our full year reported results, which has again improved versus our prior guidance, given the recent weakening of the dollar as well as our hedging program.

Assuming rates stay constant for the rest of the year, the year-over-year FX impact on revenues is now expected to be around flat with a slightly negative impact on advertising revenues and a slightly positive impact on affiliate revenues, canceling each other out.

On AOIBDA, currency remains a slight tailwind and is still expected to have a positive impact of $10 million to $20 million.

Finally, currency is now expected to have a negative $0.13 to $0.16 impact on adjusted EPS, primarily due to last year's below-the-line FX gains.

In closing, let me come back to the Scripps transaction.

This is a very exciting time for us, and we're extremely optimistic about the opportunities this accretive combination creates for our company, for our viewers and for our shareholders.

We will become a global content leader in a strong position to drive sustainable growth.

The combined company will innovate and leverage our effective brands and expertise across existing and new platforms around the world to drive growth, innovation and long-term value creation for shareholders.

Thank you again for your time this morning.

And now David, Ken, Bruce and I will be happy to answer your questions.

Please note, we would like to keep the questions on the transaction and Discovery's second quarter results.

(Operator Instructions) Our first question comes from the line of John Janedis of Jefferies.

David, when we look at your focus on the international business and sports over the past 3 years, I guess, this is a bit of a pivot, so can you talk about why now?

Is it simply the rapid change in the U.S.?

And looking ahead a couple of years, do you think you have the global portfolio you need across all platforms?

Thanks, John.

A great day for us.

And it's a good question.

There's such alignment in terms of how we see the future with Ken and Scripps.

We own almost all of our IP and we take it around the world and can take it on to any platform.

And Scripps, similarly, owns its IP.

We moved into this structure of thinking about our content more about what will people watch when they can watch anything, and what do we have that people will pay for before they pay for dinner.

That's why we got into Eurosport.

That's why we did the Olympics and we bought so much sports IP.

It's one of the reasons why we've pushed very hard with Kids in Latin America, where we're the leader, and it's one of the reasons why we've really tightened up our brands, whether it's Oprah, Discovery about curiosity, ID with crime, and we believe the ability to take that IP around the world and direct-to-consumer is the future of Discovery.

And nobody has done that better in terms of passionate superfan brands than Scripps.

So -- and a few years ago, when we were looking at Scripps, we were 75% to 80% male around the world with our 10 channels.

But over the last 4 years, we've launched TLC around the world.

We have Home & Health.

We've launched free-to-air female channels in Europe.

And so we think that their content, as we sprinkle it in 55 languages around the world, together with their formats, together with the ability to convert underperforming channels that we have, like we did with ID and with TLC, we could do that with Food and HGTV.

So we think that this gives us a huge content engine, and it also allows us to pivot that content onto any platform, whether it'd be skinny bundles, direct-to-consumer or the 7 billion screens out there in mobile.

So I think this gives us much more optionality, much more strength and the idea of our company being filled with passionate content that delivers to superfans around the world, Travel, Home and Garden, Food, Cooking, all I think make us much stronger, and it fits right on top of us.

We have this huge infrastructure and this just fits right in on top of our existing infrastructure.

Okay.

And maybe on the cost front.

You guys spoke of the $350 million in the cost synergies.

From an affiliate fee perspective, can you speak to any potential in the benefits of scale on future negotiations?

And can you help us with any timeline for potential revenue synergy upside?

Just speaking to the affiliate side, the brands that Ken has developed and the great team that he has at Scripps are some of the most loved brands on cable.

When you put them together with us, our mission has been quality brands.

Scripps' mission has been quality brands, and so we now have some of the most important quality brand with superfans here in the U.S. Whether, though -- any entertainment bundle, we would be right in the sweet spot of delivering passionate viewers, people that would -- that are spending time watching television or spending time with these brands and we'd be a critical element of that.

As I've said many times, as you look around the world, we're on every skinny bundle in a meaningful way around the world because almost every skinny bundle is entertainment.

Here, it's a bundle that is -- that has sports, and we're the only market with retrans.

We think this helps us with our ability to get on to all bundles, but as there's a transition to skinnier bundles and entertainment bundles, over-the-top, direct-to-consumer, this gives us terrific IP, that helps us, and Ken has been so effective in getting his content on all platforms.

Ken, you may want to speak to that?

Well, yes, John.

I just echo a lot of what David has said.

When you look at the future of bringing Scripps into Discovery, it really future-proofs our brands, I think, on a global basis.

First, let me just say how proud I am today of all our employees and the brands they built, the digital businesses they've built.

And now to be able to think about this on a global basis, combining with Discovery, is really exciting.

And to echo what David said, the content that we have so successfully, both companies, created, developed on linear, now has this huge opportunity on digital basis, on a social basis, on short-form video.

And John, you've heard us talk about this for several years now.

How we pivoted the company and how we've successfully started moving into these areas.

So it's just a historic day for Scripps, for the Scripps family, for the employees of Scripps Networks Interactive, and we couldn't be more excited about the future together and the possibilities that are out there.

One point on distribution which we think is meaningful.

Discovery provides about, today, 12% of the viewership on cable and we get about 6% of the economics.

And Scripps provides 8% or 8-plus percent of viewership and also a much -- a smaller amount of economics.

When you put us together, we're about 20% of the viewership on cable, but we're less than 10% of the economics.

And so we're very low priced, which I think gives us some opportunity and headroom to move that up, but more importantly, as people are choosing content to put on a platform, our content, together, way over-delivers in a way that's -- not just over-delivering in terms of the passionate audience or the ratings, but in terms of the economics that it's being paid for it in the marketplace today.

And John, maybe on the synergies, clearly we do see a lot of strategic synergy on the top line as well.

As I said earlier, the $350 million number that we have put into our model is purely cost synergies, and we haven't baked in any upsides on the top line.

So as you look at our international business, all those female channels, generally, our ad revenue over a period of time of like a year would track pretty close to our market share growth, particularly because GDP is about 0 around the world.

So as our international business was growing double-digit or mid-teens, our market share was growing.

And so we look -- this isn't built into the model, but we look at their model, at their content, which is basically unencumbered, largely, around the world and being able to convert that into 55 languages, we already have been buying their content in Latin America for Home & Health and seeing a very significant lift, and we'll be able to deploy that content around the world.

And if we see market share gain, that'll translate very quickly to real advertising value for us around the world.

Our next question comes from the line of Alexia Quadrani of JPMorgan.

Actually my question is sort of a follow-up on that, if you don't mind.

On the revenue side, do you see -- if you could maybe prioritize, it sounds like there's a tremendous opportunity on the revenue side for this combined company.

But I'd love it if, in the intermediate term, you could sort of prioritize where you see those kind of lie?

Is international sort of at the top of the list?

Is it U.S. distribution?

I know that a lot of the distribution agreements have recently been signed at Scripps and as well as at Discovery.

Does that limit your ability to kind of relook at those until they expire?

Or is it maybe in the over-the-top where -- I know Scripps is on some over-the-top distributions that Discovery is not.

Is there an opportunity to kind of go back and revisit those discussions?

If you could sort of give us more color on sort of the -- what are the priorities in the immediate term, that would be great?

Thanks, Alexia.

I think it's all of the above.

As we look at our company and we put our -- we look at our company in baskets.

You look at U.S. distribution.

I think this helps us with direct -- with the skinny bundle.

It helps us with the entertainment bundle.

It helps us over-the-top and gives us a lot of flexibility to provide more and more content to distributors also on mobile.

In addition to the distribution side, on the advertising side, we now have 5 of the top channels for women and we have an even stronger portfolio to go to the advertising market with.

And one of the things that Scripps and Ken and the team have done very effectively that we can learn from is bringing in endemic advertisers.

Nobody has done a better job than they have.

In short form -- the short-form basket, we think this helps us a lot.

We've already invested in Group Nine, where we have over 5 billion streams a month, and we're a leader on Facebook.

They are the leader with Food and they have over 2 billion.

So together we're now 1, 2 or 3 in terms of short-form content and that content goes around the world.

And as I -- domestically and internationally, we think that being able to take our content and use it across all of these channels should help us as we -- in many markets where there is some secular decline, the ability to move the talent, the content, the IP around our linear channels, on other platforms gives us I think a real strategic advantage.

Ken?

Yes.

And Alexia, just -- I totally agree with your scenario about top line growth.

Just give you 1 example, and we've talked about it recently.

In January, we launched HGTV in Poland, as you know.

It immediately, just overnight, has become the second lifestyle network, second only to our other lifestyle network there, Style.

But what's been interesting is we've already seen the same pattern with HGTV in Poland that we've seen domestically.

And that is the ancillary revenue opportunities, as David said, endemic advertising, the social media that's already sparking up around this.

So just imagine launching our brands globally, as David has said, and having the same attributes on a global basis that we've seen domestically.

So we think we can bring a lot of firepower to the top line growth with these brands as we accelerate their launch around the world.

As we look at this combined company, we may have more IP than any other media company.

We're certainly up there, and if our strategy is correct that the consolidation by the distributors so that, over the next couple of years, there'll be one distributor providing mobile, broadband, multichannel and hard phone, which we're already seeing in Europe.

More and more you see these distributors wanting to decommoditize that pipe.

We did a terrific deal with Bolloré in France.

We've done a terrific deal with Drahi.

We've done a deal with Telecom Italia.

In each case, saying, what IP do you have that could either be exclusive or interesting for us to give to our users or to uniquely nourish our subscribers or users?

And we just have now a bigger menu of affinity brands, of lots of content we can put together for -- down in Europe, in Latin America and here in the U.S., and we have a lot more data.

One of the things that Scripps has done better than anybody is to lean in, not just to the superfan affinity group, but to get data and to have real interaction with them.

I mean, Ken talk about that because that's the practice that we think we can really learn from and bring to our company.

Well, as we've talked about on our earnings calls over the past several years, these brands bring along an affinity group, a passionate group of folks that we like to say do what they view.

And as we have been able to dig deeper into data, for example, let's take the HGTV Dream Home, where we had over 130 million entries in this year's home.

Those are opportunities to get direct communication with consumers where we can bore deeper on data, find out viewing patterns, find out behavior patterns and most importantly buying patterns, and that's why we've been able to over-index on advertising.

And if you really look at the future, we've talked about this many times, again, it's taking what we -- both companies have done an outstanding job on linear television and now, thinking about how we take that globally to bring in additional revenue streams.

So based on everything we have to date and looking at each other, this is just the perfect marriage as far as 2 companies and 2 incredible management teams and employee groups coming together.

One important point about that is that we look at the management team at Scripps and we see that as one of the most important assets that we're acquiring: their ability to program Home and Garden and Food and take it to different platforms and to build a real relationship with the users and to figure out how to nourish them on all platforms.

It's a hugely talented team across the board, marketing, programming, sales, and so I think, as we look at it, we get a chance to take our team, which we think is best of class and Ken's team that's best of class and build a company for the future.

Yes.

Our next question comes from the line of Steven Cahall of RBC.

Just 2 for me.

First, I was just wondering if you might be able to give us a range of EPS accretion that you expect in the first year based on where your current models are today.

I know you've got a lot of moving parts today between Olympics and the change to the SNI outlook, et cetera, et cetera.

And then secondly, I was just wondering if you could give us a little more detail on what you saw in the quarter in terms of the slowing or -- sorry, the accelerating subscriber declines at the portfolio level that you mentioned.

Do you think this is a seasonal thing?

Do you think this has to do with maybe the introduction of some of the vMVPDs?

Or do you think that this may start to be a trend that you see in future quarters?

I'll hit the universe decline piece.

It's about 3% is what we're seeing for our larger channels.

Some of the smaller channels that we have are seeing a decline a little bit larger than that.

It's pretty hard to tell based on the quarter.

You look at the -- at what each of the distributors are reporting, and it feels like maybe that's about right, maybe it's a little bit better for us than that, but we'll just have to see whether it's -- it levels off at that, gets a little better or gets a little worse.

It's very hard to tell but, right now, it's around 3% for our bigger networks.

Right, and even on the accretion, I think we kind of hit a sweet spot with a 70-30 cash versus equity mix, making use of the balance sheet without jeopardizing investment-grade rating.

So we clearly look at a deal which is going to be accretive in the first year already.

I will also say that the $350 million synergy number, I'm very, very confident with our ability to achieve that.

To remind you, we're planning to achieve 100% of that by 2019 and about 50% in 2018.

And as I said earlier, I'm very, very confident that we will not only achieve but likely overachieve this number.

Our next question comes from the line of Ben Swinburne of Morgan Stanley.

David, could you talk a little bit about how you're thinking about direct-to-consumer in the U.S.?

I know it's something you've been working on in Europe and have deployed.

Sounds like you're having some success there.

The U.S. market is trickier given the earnings you generate from the bundle.

Does this deal change sort of your calculus on going to market here?

And do you have the capabilities and the rights you need to do it here if you so choose?

And then, I just have a couple of quick ones for Gunnar.

Gunnar, any tax synergies or tax comments you can give us about the pro forma entity?

You guys have a, I think, a 500, 600 basis point lower tax rate than Scripps does with some nice cash tax characteristics as well.

Can you help us think about the tax impact on the deal?

And on Bundesliga, I assume those rights fees grow for you every year that you pay the Bundesliga.

So does -- what is the strategic decision you've made with the Eurosport mean as you move through the rest of the life of this contract?

Do those losses sort of increase in the first part of the contract?

Wondering if you can help us think about the impact of this decision on sort of the life of the contract, would be great?

,

Thanks, Ben.

This new company is going to have tremendous optionality, but the ecosystem in the U.S. remains extremely healthy for us.

Our U.S. business, as Discovery is continuing to grow, together we think we can grow in a meaningful way for a lot of the reasons that we've already explained.

Working with the distributors will be a very effective way to take all these quality brands and skinnier bundles and have them reach more consumers and more demos.

Going over-the-top with some of our existing distributors or some of the new players will be a way to add incremental opportunity.

I think we're going to be extremely attractive.

We should be the core of any skinny bundle.

If you -- Discovery was the #1 most valued brand for over-the-top and for women, Home and Garden and Food are in the top 3 or 4 most selected brands.

You add to that OWN and TLC and ID, which is the #1 channel for women in America, we have quite a compelling offering that we could bring to any distributor or we can come together with a few others and do it ourselves.

And so I think we have a lot of optionality.

Let me just hit the Bundesliga point because I think it's very important strategically.

The direct-to-consumer business, we think, is a huge part of the future of our company.

It's one of the reasons why we have been investing in Eurosport.

We did the BAM deal.

We have our sports Netflix product, which we're finding some real traction on now.

We're learning a lot about -- it's been 2 years, and in 2 years, we learned that our platform wasn't good enough, so we did the BAM deal.

We now have that platform, which will be fully rolled out within the next 6 months.

We've been talking to consumers for 2 years about what they like about our player, what they don't, how they'd like to have our content.

We've changed our -- the idea.

Before we thought it was effectively like an ESPN all-you-could-eat for $8 and now, we're finding it's really more like a magazine rack.

People that love tennis are willing to pay a lot more, but all they want is tennis.

And people who want cycling, all they want is cycling.

We had to talk to the users because they would come in for the French Open and then the churn would be huge, and we'd say, but wait a minute, MotoGP is on and cycling is on, and they said, "No, no, I love the tennis, that's what I want." And so we're changing our pricing, we're changing our approach, our churn is coming down.

We've almost doubled our subscriber base in the last few months.

And so, we see the ability to take the Bundesliga in Germany direct-to-consumer now that we have a strong platform, a really good team that we built out of London that's just in the direct-to-consumer business.

It's a direct marketing business.

It's a team that deals with churn, that deals with credit cards.

And it took us 2 years to build that team and we're ready to go now.

And the idea of building a direct-to-consumer sports business across Europe, 740 million people.

If we could get that to scale, the kind of multiple that you guys are giving to Netflix, and we look at that and we say, we have a very profitable existing business and if we can build this direct-to-consumer business in Europe, and we're doing it with our other IP and we think we can do it with some of these affinity brands around the world, that we could come out of this terminal value tunnel as one of the big winners in media.

And Ben, maybe to add to that.

I mean, as you say, it's a long-term deal, it's 4 years.

There are no meaningful increases in terms of the license fee over that deal term.

And the way we look at it is we optimize the value of that contract over the full lifetime.

The landscape is going to evolve over those 4 years.

As a matter of fact, we're in the process of talking to a number of other partners.

Matter of fact, we're confident that we will be announcing additional partnerships before the first match is going on air.

So there's a lot of moving parts in that whole deal, and we continue to see a lot of value that we're optimizing out of that contract.

The final point, which I think is important that we learned is we could be in the direct marketing business for our IP, but it's much more powerful if you can get existing distributors to market it and bill for it.

So when we send a bill, whether it's $8 or $18 or $29 for a season's pass to a particular product, we're billing and the customer is now getting that every month.

The deal that we did with Telecom Italia and Swisscom, they're now billing for us and they're marketing for us.

And I think that, we believe, as we take that across Europe is going to be a huge helper for us.

The idea that someone is now getting a bill for $116 and $8 or $10 or $12 of that is us, we believe that that's going to reduce churn.

It's reduced churn significantly for Netflix.

As John Malone would call it, it's check the box.

It gives you an incremental heft in your marketer, and it puts you in a billing system that's much more sustainable.

And that's a key part of our strategy, and we've proven that out in early stage by getting 2 of the bigger players in Europe to sign on with us.

And we're going to look to take that across Europe.

Right.

So on your tax question, Ben, so we haven't factored any tax synergies into our model.

That being said, of course, we will continue to be very, very focused on optimizing our tax rate.

So let's wait until the deal closes, and I'm sure taxes will remain a key factor in all our decisions.

Our next question comes from the line of Doug Mitchelson of UBS.

A few quick ones for Gunnar, and then one for David.

Gunnar, are any asset sales being considered at all to accelerate the deleveraging process?

We're not planning any asset sales, but clearly we'll -- let's wait until the deal closes and then we'll take a look at the broader portfolio and see how we can extract the best value out of the combined business.

We're not planning any sales and we haven't baked anything into the numbers.

One of the great things about this transaction is it's one-over-one.

You look at TVN in Poland for instance.

That's a very big market for us.

We pick up a huge amount of EBITDA and a lot of market share in Poland.

UKTV, our #1 market is the U.K., and we think that was a very smart investment.

We like the BBC very much.

Tony Hall is a -- has been a great partner to us and being able to step into those shoes, we're looking forward to that and seeing what we can do together.

But you look at their overall assets, we're in the same business, and so we don't look at it and say, they've got a radio business here or they're in a different business there that we should get out of.

They're in the core business that we are, and we think those core assets make us, together, stronger.

That's helpful, and then I just wanted to confirm the commentary around EPS accretion.

Is that for GAAP EPS or adjusted EPS, excluding purchase price accounting or both?

Well, that would be, in the first year, clearly for adjusted EPS because we'll have some transaction costs but, going forward, it's going to be for both.

For both?

And then I noticed in the press release and commentary on the Advance/Newhouse share class change.

Is there anything meaningful in terms of the new class of stock versus the old class of stock?

No.

In terms of the economics and ratios, et cetera, nothing has changed.

There's no real value transfer.

It's really just a flexibility increase.

But I -- Bruce, do you want to (inaudible)?

Yes, it's Bruce.

That's exactly right.

The transaction, which was negotiated actually by a special committee of our board, from an Advance/Newhouse perspective, just gives them more flexibility and liquidity in the C shares that they hold.

But in exchange for that and the reason the company went along with the agreement, Advance/Newhouse have a consent right over the Scripps deal, so as part of this exchange, they gave their consent.

In addition, they agreed to give the company a 7.5-year right of first offer should Advance/Newhouse decide to sell their Series A preferred shares, which have special voting rights attached to them.

And then lastly, for the C common shares, which now have increased liquidity for Advance/Newhouse, they did, however, agree to a 3-year lockup on those shares that kind of plays out over the next 3 years.

So it was a good exchange for both parties.

David, given the strategy change on Bundesliga games in Germany and the commentary you gave earlier on the Eurosport Player progress, can you give us sort of the (inaudible) about the Olympics and the sublicensing progress so far?

I think there might be some news out for licensing in Germany?

Sure.

Thanks.

We had said earlier that we were going to do the Olympics ourselves in Germany with the buzz -- and it's not final, but the buzz around Paris being a possibility for '24 and with the momentum that we were able to build across Europe, we ended up back in discussions with ARD ZDF, the public broadcaster in Germany.

It's one of our biggest markets.

And we're very close to deal with them where we would give them rights to broadcast the Olympics, but it will be quite creative and it'll -- the Olympics in Germany will be, like in other markets, much more robust than it's ever been.

It'll follow the model that I worked on at NBC with Dick Ebersol and Jack Welch and Bob Wright, and that was we put -- you put a significant amount on broadcast, but our deal would provide a significant amount that would go on our Eurosport channels.

We also have a free-to-air channel of Eurosport in Germany along with the full bouquet of content for digital that we would -- that would be available to us to make available throughout Germany.

So -- and we think that this provides not just a good economic package, but it'll also give us an opportunity to really put on a terrific show in Germany together.

Right, and Doug, just one follow-up on the EPS.

To be very clear, obviously, the reported EPS accretion will depend on the amount of purchase price amortization -- allocation amortization that we need to book.

That's obviously still being worked out, but we should focus on adjusted EPS.

A last point on the Olympics.

If it turns out to be Paris, it will be a very big deal for us as we have the Olympics across all of Europe in 2024 and the buildup to it.

There's a tremendous amount of excitement all across Europe at the prospect of it.

And it really enhances that IP.

We have so many Olympic rights that will be leading up to that, and as we put our bouquet of IP together across Europe, the crescendo, if it were to happen, would be very good for us.

David, do you have a sense of when that would be announced?

Probably in the -- within the next few weeks, I think, yes.

Our next question will come from the line of Rich Greenfield of BTIG.

John -- it's Brandon Ross for Rich.

John Malone has talked openly about the move for the so-called free radicals to combine.

Is this step 1 of several?

Or you now have sufficient (inaudible) as you see the media industry rapidly changing?

And then just one more, do you see any of the brands that you have in the combined portfolio that may not make sense in the combined company?

Thanks so much, Brandon.

First, John loves this deal as does the Newhouse family.

And I would say it's a very big step 1 because there is no final step for any media company today.

But one of the most attractive things about this deal is not only is it accretive for us but within 18 to 24 months of this acquisition, we'll be below 3.5x levered.

We'll have a very flexible balance sheet with a lot of artillery.

We're not out of bullets.

Over the next 2 years, we still have enough room to do some selective purchases that are smaller, if we need to.

But what's more important is that within 2 years, we'll be, in today's numbers, almost a $40 billion company enterprise value with a very strong balance sheet that will be levered below 3.5x, and the optionality at that point to look at what else do we need to have sustainable high growth to come out of this terminal value tunnel as one of the big winners.

What else do we need to add?

Whether we need to add by investing in ourselves, in the brands that Scripps has developed, in more talent or more acquisitions to assure the fact that we continue to be the leader, the #1 international media company, the leader in sports, the leader in kids and drive our content to all platforms.

And so we love the idea that we're stronger with more optionality with -- in less than 2 years after closing.

Gunnar, anything to add to that?

No?

No.

Okay.

Anything on the specific brands?

On the brands.

I think we'll evaluate all of them.

At least for us, we had started to move toward looking at our 12 channels here in the U.S. and seeing that a strong 8 may be the direction that the industry is going.

It's one of the reasons why when we restructured our deals, did all of our new deals, we were able to do it so that 85% of the revenue came from 6 of our channels.

And the overwhelming majority of ad revenue comes from 6 or 7 of our channels.

Ken and Scripps have developed a lot of very strong brands.

We haven't really gotten into it with Ken and the team to try and get their best sense of which -- of whether all of them are going to be survivors and winners or whether some of them need to be invested in more or maybe some of them could be taken in a different way to mobile or to consumer.

So Ken, your thought on your brands?

Well, Rich, as a now former free radical, no longer floating around out there.

Look, I think you bring up a great question, but what we're finding, and I think that you could say the same for Discovery, is some of these brands have a very passionate base that may not necessarily, for the future, be a linear platform or a platform that we necessarily have thought about in the past.

So when we think about these brands and especially on a global basis and beyond the deals that David and I have been doing for, as he said, 30 years, I believe we've been together that long, but I think we have to think in terms of might some of these reside in direct-to-consumer type brands, which would have a different financial model.

But it's way too early, at least -- I'm just speaking for the Scripps side, to start thinking about which brands "go away" as opposed to which brands are better positioned in a different format and a different delivery, and we're already working on some of those.

You've heard us talk about it.

If you take, for example, Food and Cooking, maybe you're only interested just in Italian cooking, maybe you're only interested in French cooking, comfort cooking.

Those are passionate consumer bases that may or may not support a video or social model or short-form model.

So I think the great thing about putting these 2 combined companies together, and I just have to go back through some of the headline numbers, 8,000 hours we're creating collectively each year.

We have ownership of 300,000 hours.

So let's think more about the opportunities ahead of us, less about what goes away as businesses.

What other businesses can we enhance and develop?

And to me, that's the real excitement of the announcement today, Rich.

Our next question comes from the line of Kannan Venkat of Barclays.

Just a couple from me.

First on the Olympics, Gunnar.

So you mentioned the cost recognition schedule over the next few years, which was very helpful.

Thanks for that.

But on the cash flow front, should we assume a similar schedule?

Or does the cash flow vary compared to the cost recognition on the income statement?

No, you can assume pretty much the same flow there.

Okay, and secondly, on -- David, on the skinny bundles, it looks like there was a little bit of an acceleration this quarter on the pace of sub losses.

The acquisition of Scripps, is this one of the ways -- is there an ability, at least from your end, to use Scripps deals with, say, Hulu or YouTube in order to try and negotiate terms to get into some of these skinny bundles?

Is that one of the objectives of this deal?

And is that possible given how the deals are structured?

Thank you.

We've been in discussions with all of those providers.

We are on the Sony platform, the DIRECTV NOW platform.

I think it probably helps with those discussions to have more channels, to have more -- to be in business with them already.

I think they're all going to be learning.

They're launching, and they're going to be hearing from customers what they like, what they -- what's missing.

So I think it's all a work in progress, but we do think we have the makings ourselves for a very -- the very compelling core of a skinny bundle.

And there's all kinds of optionality, whether we go with existing players, new players, we go with other players in the marketplace, we go over-the-top with other players in the marketplace.

There's a lot of different ways to play it, and we'll be really listening to the consumers.

There's no question that there will be an evolution.

It exists everywhere else in the world.

And more importantly, right now, distributors are starting to offer Netflix.

And so it's just kind of logical to look in the U.S. and see these large distributors that have millions of customers that are broadband only, and the only product that they're offering them is Netflix.

And so they should be offering them a product that -- we grew up in business together.

We have great content that's nourishing.

And so I think you'll be seeing existing distributors putting together over-the-top packages.

One, because they'll make money on it; and two, because consumers that are buying Netflix want other products.

They want great quality television.

They want other choices.

And so I think that will happen.

It's just a question of how quickly, and we'll try and accelerate those discussions because we think it's good for the ecosystem.

Our next question comes from the line of Jason Bazinet of Citi.

I just had one backward-looking question and one forward-looking.

Gunnar, the 8.7x you said you paid for this asset, I guess that confuses me because in the release it says $14.4 billion EV and I think Scripps did about $1.4 billion of EBITDA with new guidance for sort of flat as you move into -- from '16 to '17.

And then they don't control 100% -- or they consolidate the EBITDA, but they don't own all of Food.

So can you just explain how you got to the 8.7x?

And then my second question is for Ken, actually.

The U.K. and Poland notwithstanding, what was the main impediment that prevented you from going internationally more aggressively?

Was it an on-the-ground sales force?

Or is it more a function of the content being sort of readily applicable to international markets?

And the reason I ask is that might give us some window into how quickly Discovery could pivot and accelerate top line growth.

All right.

So Jason, so the math is as follows: If you take the $90 per share, that takes you to 11.9x for the equity.

Then there is about 2.5 -- $2.7 billion in net debt and then, clearly, we have taken into account minorities and unconsolidated profits.

And then the big step back is the $350 million synergy potential that we see, and that takes you back down to that 8.7x range.

Oh, so it puts in 100% of the multiyear synergies in the '17 numbers?

Right.

Got it, okay.

And Jason, it's Ken.

A great question and one that, as you heard earlier, I'm very excited about because if you look at our opportunities on a global basis, this merger with Discovery, this acquisition by Discovery just accelerates it in light-years.

If you go back and look at the history of these 2 companies, Discovery very smartly, early on, thought globally where we really have only moved globally in the last 5 years.

So if you take the infrastructure, the distribution, and quite frankly, the time that Discovery has been developing this global footprint, global distribution network, if you will, they can almost immediately accelerate a lot of our brands that, in my opinion, would have taken several years to really fill out.

And some of this is nothing more than just the time, energy and effort it takes to get there.

Each country has its own culture, its own challenges.

And what we found, and I'll go back to HGTV in Poland, when we can get our brands into a country, when we can localize them, in the case of HGTV Poland, a lot of Polish content, just not exporting our American continent, but creating content in these categories, food a great example, travel a great example.

And you have 2 of the best storytelling, creative content teams in the industry between Discovery and Scripps.

And now you take the Discovery infrastructure and you put our brands into it, and it's just very, very exciting.

And I would expect to see our brands accelerate immensely as far as distribution, popularity and connecting with consumers once the marriage comes together.

Hope that answers your question, Jason?

So it's essentially both, on-the-ground sales plus you need to tailor the content?

Yes.

I mean it's there.

They're there.

It takes a while -- it takes -- David will tell you, it takes a while to build these organizations out, to get them structured, to get on the ground, and we have found that.

So this really just accelerates everything for Scripps.

I guess the only thing that I would add is that the great thing about the dual revenue stream cable model, as we all know, is it's somewhat of a gated community.

And so we're sitting, in a lot of these markets, where there's 50 channels and we have 10 or 12.

And so when we decided we wanted to roll out ID or TLC, we could just flip those channels.

And not only do we have infrastructure but we have channels that are on basic cable with subscriber fees in decent channel position.

And so we can choose to take the content and make our female channels better or we can just flip an existing channel that's in good position and very quickly have it accelerating in.

And as Ken said, you don't win by just bringing the U.S. content.

We would do local, but local tends to be less extensive, significantly less expensive.

Totally, yes.

And our last question comes from the line of Barton Crockett of FBR Capital Markets.

Okay.

I guess, a couple of things.

First, Ken, I was wondering if you could talk about why you're taking monthly cash in this transaction as opposed to getting more equity participation in the combination?

And as part of that, is -- the trust that's been there since the beginning, the [strong] TV assets that you created, so they might have had a step-up in cost basis, but are there tax concerns that make them relatively agnostic to the stock versus the cash?

That's the first question.

Sure.

Well, first off, I think, from day 1, this was all about value.

It was all about the right place, as far as the Scripps family was concerned, for the company, the brands and the employees.

So you looked at total value overall, but -- and I can't speak specifically for the family, obviously, but I think the tax issue part of it became less important over time than did what was the right partnership and the right place for SNI, for Scripps networks.

So they're very excited of reuniting, if you will, with the Newhouse family.

The Scripps and Newhouse family goes back for a number of years, joint newspaper operations.

The Scripps family and John Malone owned cable systems together back in the '80s and '90s.

So the opportunity to team once again with great partners, great stakeholders, and evaluation that the family felt for all shareholders is the best possible outcome, I think, is really what drove the family's approval of this deal.

So taxes are always a consideration, but on top of value is very much about what was right for this company going forward and what was right for the employees.

So that's probably the best way to answer that part.

I would just sign off by saying how excited we are to welcome all the Scripps employees.

It's going to be several months before the deal closes, but the idea of having them become part of our family, having Ken become part of our family, have all the incredible brands and creativity and energy.

And we have so many great people here at Discovery that are chomping at the bit to try and -- to get to meet all of you and to work together.

And I think it's going to be a fantastic ride for us.

The whole leadership team couldn't be more excited, and we're off to the races.

So thank you all very much.

And let me just add one thing because David was so generous with his comments up front.

For a company that I helped create, to be able to bring it to this level and now see the opportunities that Discovery brings to Scripps, that's exciting.

But to turn the keys over to a person who I've known, as David said, for over 30 years and have nothing but the utmost respect for on a personal and professional basis, to know that David is going to be leading these 2 companies forward as they come together, for me, is personally exciting.

And I can't wait to see what the future holds because it's going to be a great run and a great ride, and I'm so pleased and happy for my friend, David.

Thank you, Ken, and we're going to take that ride together.

Okay.

Thank you, everyone.

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

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.