Good morning. My name is Stacy, and I will be your conference operator. At this time, I would like to welcome everyone to the AMC Networks' Fourth Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Mr. Seth Zaslow. You may begin your conference.

Thank you. Good morning. And welcome to the AMC Networks full year and fourth quarter 2018 earnings conference call. Joining us this morning are members of our executive team: Josh Sapan, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Sean Sullivan, Chief Financial Officer. Following a discussion of the company's full year and fourth quarter 2018 results, we will open the call for questions. If you don't have a copy of today's earnings release, it is available on our Web site at amcnetworks.com. Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of the future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to the company's filings with the Securities and Exchange Commission for a discussion of risks and uncertainties. The company disclaims any obligation to update the forward-looking statements that may be discussed during this call. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides you with useful supplemental information concerning the company's ongoing operations and is appropriate in your evaluation of the company's performance. For further details, please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information, which we'll refer to on this call. Before we begin, I want to cover one additional item. As noted in our earnings release, the company modified its definition of adjusted operating income or AOI. We now include our proportionate share from greater than 50% owned equity method investees. This change did not have a meaningful impact on our fourth quarter performance and had no impact on prior period results. With that, I would now like to turn the call over to Josh.

Good morning and thank you all for joining us. AMC networks have a strong fourth quarter capping off very successful year with significant contributions from our portfolio of linear networks and our studio, our growing direct to consumer businesses and what was a year of economically attractive and strategic acquisitions that are helping to reshape our business and create significant value over the short and the long term. For the year, our revenues increased 6% and we grew AOI 3% and we generated a record $502 million in free cash, an increase of 75% over the prior year. This is one headline for the year. We think it is that AMC Networks continues to be a company that punches above its weight on almost every count; the long history of having an outsized impact and influence among the most important constituents for our business; our viewers, our distribution partners and our advertising partners all to the benefit of our shareholders. We continue to make significant progress on a few key strategic priorities, which drove our fourth quarter and full year results; they are, creating great content, expanding our distribution base, diversifying our revenue, which includes expanding our direct-to-consumer activities, developing new approaches to add monetization and continuing to maintain a strong balance sheet. I'd like to spend a few minutes expanding on these priorities to give you an understanding of how our execution of each is positioning us well for the future. As to content, our first priority has always been and remains making great shows that are truly compelling. We had great success with content in 2018. Across our portfolio, our shows, new audiences, partnered rewards and drove the broader cultural conversation, demonstrating our ability to have content that has outsized impact, even as we operate alongside increasingly deep-pocketed…

Thanks and good morning. As Josh highlighted, 2018 was a successful and productive year for the company. For the full year, we delivered record revenue, AOI and adjusted EPS. Total company revenue grew to $3 billion, a 6% increase over the prior year. AOI was $933 million, an increase of 3%. And adjusted EPS was $8.69, an increase of 18% or $1.32 per share versus 2017. Company continued its performance of generating strong free cash flow with a record $502 million in 2018, an increase of 75% versus the prior year. Over the past three years, we've generated $1.2 billion in aggregate free cash. The fourth quarter contributed to our strong annual performance whereby total company revenue increased 6% to $773 million, and AOI increased 7% to $219 million. So moving through the performance of our operating segments. National networks revenues for the full year increased 2% to $2.4 billion. National networks AOI increased 3% to a total of $925 million. Margins expanded by 50 basis points to 38%. In the fourth quarter, national networks' revenues decreased 2% to $593 million. AOI was $209 million, an increase of 7% as compared to the prior year period. Advertising revenue in the quarter grew 1%. As anticipated, The Walking Dead delivery moderated in the quarter. However, this performance was more than offset by a strong December at AMC led by our best Christmas ever programming lineup, as well as double-digit advertising growth at each of WE TV, BBC America, IFC and Sundance. BBC in particular reported growth in excess of 20% as it benefited in the airing of Doctor Who. With respect distribution, as anticipated, distribution revenues decreased in the fourth quarter. Subscription revenue, which represents the majority of our distribution revenue stream, continues to provide us with steady and attractive growth.…

[Operator Instructions] And our first question comes from Bryan Goldberg.

I've got two quick ones. On the advertising side, thanks for the commentary around some of the new approaches you've taken to ad monetization. I was just wondering if maybe you could give us a little bit more color on how widely deployed these efforts are today and how we should think about your ability to scale them in 2019? And then separately on the streaming strategy, thanks for the update there. I think you talked about a run rate towards $100 million in revenue in 2019. And I was just curious, assuming you'd owned RLJ for all of 2018. What would the 2018 base of revenues look like? How much growth should we be anticipating? And then how are you thinking about the optimal cadence for original programming rollouts on each of the streaming services? Thanks.

Bryan, its Ed. Maybe I can provide a bit more color on Josh's remarks on advertising. We develop a planning tool, we call it Aurora and it can increase the efficiency of media buys across all of television. And we're using it with a number of more than a dozen blue-chip advertisers. And that includes a variety of categories, we have pharmaceutical, auto in there, retail quick service food restaurants and beverages are represented. We also have something different, which is an ad targeting tool that we call mediator and that can help advertisers with specific segments of consumers from across all five networks. So for example, we can help advertisers identify people who are in the habit of going to see movies on their opening weekend or people whose car leases maybe coming to an end or people who are allergy sufferers, those will be examples. So we have the capability of price a portion of our inventory against those specific segments, and this helps us to increase pricing and also to get a higher volume of dollars from desirable advertisers.

Bryan, this is Joshua. I will try and if I may respond to your question on streaming. We did mention $100 million run rate to try to provide some dimension to the size of the business. We are managing those streaming services that we mentioned very carefully. And with a set of metrics of course that are different from the base metrics in our business that included Sag subscriber et cetera. They are all growing and we're pretty careful about things like free periods and splits. We're watching the economics. So we have an eye on the long-term and in the midterm but we also have a reasonable degree of focus on what's happening in the near term. And so that's what I think is reflected in those economics and in our approach. In attempt to respond to what you asked, they're all growing. And so depending upon how you pick and choose the pieces, if you try to go back what you see is growth, growth and growth is the best answer I can give. In terms of programming, it's a really rich and interesting question, because they each have different characteristics. Acorn has found this very strong constituency with British dramas. And it really has a fan base that is actually surprisingly big, because when you say British dramas, you might think that’s very small and limited. It’s a little larger than one might think at first glance, it is said not in substantially material that is of course pre-existing. It's a nice particular -- note is that the company RLJ on the piece of Agatha Christie, so it participates in that. But the base composition of the business is licensed material, which has fueled its growth and continues to fuel its growth. On AMC Premier, it's a…

Your next question comes from Michael Morris.

I have a couple of Walking Dead related questions. First, I’m hoping that you could provide some frame of reference for the economics of the franchise at this point. So specifically I'm curious if you can help size the ad contribution relative to the other revenue sources now compared to the peak live audience levels for the franchise. And whether that the relative revenue for the franchise at this point you believe it's aligned with that audience size? Then Josh, I believe you referenced to third series based on the franchise. I'm curious if you can give us more information on the timing and whether that will be part of the Hulu SVOD agreement? And then last for Sean, Seth referenced the change in the AOI presentation. I'm sure you answered this as like coming out of it. But what’s the contribution from any of those 50% or greater equity holdings to the AOI outlook for the coming year? Thanks.

So Michael, its Ed. On the Walking Dead for what we call Series 3, that is in active development. We're not yet at a stage where we will be announcing its plans to premier. But we have higher creative people that have pitched story outlines. We feel very good about the development of that series. We are not in a position to talk about partnerships in terms of other territories or ancillary windows, other than as Josh mentioned there's a healthy appetite for it and we've had discussions with a number of different players in the space. On The Walking Dead, generally going to your first question, as you know, the series continues as the number one show on cable TV by a wide margin. In fact, its audience is more than twice as big as the next highest show on cable-TV and it’s the second-biggest drama in all of television, second only to NBC. And it's in season 9 so that is unprecedented. The performance of the first three episodes that have aired in February is actually a bit ahead of our estimates. And I would just say generally to your question, we are well aware that when a show has been around for nine years, you would expect the viewership to be declining. But I think we've managed that and managed that well. And when The Walking Dead when the flagship series is no longer part of the channel, I think that will have more of an impact on revenue than it will on AOI, because generally with shows such as this, expenses go up as the seasons continue and viewership declines. That’s just a general pattern of any show that's been around for as long as The Walking Dead has. But what’s so interesting about this and it's never been seen before is still the number one show on cable by such a wide margin in Season 9.

And then Michael, just on your last point as you noted in the release or I'll note in the release, the contribution of AOI was $3 million in 2018. Obviously, the '19 number is incorporated in my guide for the year. But again, it’s not a big number.

And just Ed, if I could, I know that you're not speaking specifically about the third series. But can you help us at all is the existing SVOD agreement that you have with Hulu, does it encompass a new program that could potentially come out? Or is that something that is part of a future discussion that you would have?

Mike, I’m just not going to be able to say which show is flowing into which deal.

Your next question comes from Dan Swinburne.

Josh, what's your vision as you look out over the next couple of years for AMC Premier? I think it’s been a successful launch so far. You talked about putting more original programming there. Maybe if you just update us on what you think that product looks like over time, and whether we should expect you to place more original programming through a signature AMC programming on that platform on a more exclusive basis. And then related you guys had a very strong free cash flow year. It sounds like you expect that to continue. Can you help us understand your appetite to grow your overall investment in content, which as you mentioned, Josh, is your number one strategic priority with the fact that if we look at the numbers, you're guiding to I think to basically flat programming or flattish direct OpEx in '19. And you've got this really attractive free cash flow conversion level. So just help us understand and reconcile those two things that would be helpful.

Let me attempt to do that. I think that as I mentioned earlier, each of these subscription services is a bit of a different animal; and has different needs and opportunities as to how high the headroom is; what the target audience looks like, what they like; and how fast and sensibly we can grow them. So they really all have different genetics. I would say thing one. The thing two I would say that that whole part of the world as you know it better than I do is undergoing rapid evolution. There are now many more entrance into it; someone might define has having whole house ambition, meaning something for everyone; some is having a general entertainment ambition; and some is having more niche ambition, if that’s an attempt to lay the land. So each of our services is operating against that backdrop, and also the moving picture of what's happening with the so-called conventional Pay TV landscape is also moving. And we see some downward pressure on what we call conventional cable pricing for video. By the way, parentheses we think we’re going to be the beneficiary of that, because we have the best price value relationship for those channels. And there are others we think that are getting dangerously expensive in the manner in which that system is evolving. Specifically to your question, we think that AMC Premier is today the place where the AMC brand-name lives. And so we're moving up we think on a very logical rational and careful basis, the amount of original programming and benefits and features that a consumer experience is there. So as they can say, gee, I like that, I want to buy it while I have linear AMC and we learn every day that we go. And so…

And Ben, just to clarify, sorry we are increasing the programming investment. As I highlighted on AMC Premier, we're really investing in those services and others and limiting the non-programming, non-marketing investment in the business. So I don’t know if that came through clearly or not. But we are not moderating and certainly we love our balance sheet and our free cash flow attribute, so that as this business involves and opportunities present themselves, we can quickly accelerate our investment to the extent we see a near, mid, long-term return.

Your next question comes from Michael Nathanson.

I have one for Josh and one for Sean. So Josh, let me ask. You guys called out on the call that content licensing is now over $400 million and Sean was clear about what happened in the fourth quarter and what first quarter looks like, I guess and what '19 looks like. But my question licensing is this. When you look at the next few years, is this still a growth category? So are you now determining to keep more content in house? Is it demand and the SVOD world changing? So could you just give us a little big picture view on where you think the outlook is for the content licensing business that you guys have built $400 million?

The thing you said second, which is very interesting is, do we keep it for ourselves versus sell it, or do we keep it for ourselves substantially and sell parts of it. And if I can get nuance, because I think it certainly applies to us perhaps not others. We look at all of our shows often individually and the answer that comes we think appropriately is that there is an answer domestically. Meaning, we may play it on our channels and sell it to an service a year later for a period of time. And I would note that after that period of time if we own the show, it comes back to us. So we’re now seeing certain shows starting to come back that had been licensed to domestic Pay-TV services. You may recall a show called Rectify on Sundance and actually extraordinary piece of drama, one of the best things I have seen in my life, it's now in the horizon of return; a show called the Red Rose, which starred Jason Momoa, it's now in the horizon of return; a show called Turn about the American Revolution, which I think was a spectacular drama, a little later in the horizon of return. So the answer to where it goes is, it goes to us domestically in that instance of those shows then it went elsewhere, and then it comes back to us. And that's one of the benefits of being a studio. Turn the frame of reference to rest of world, and we have a different set of considerations. We sell some shows to ourselves and in the territories where we have channels and in other territories we license them to other parties, it maybe streaming and other entities who are paying substantial amounts of money. And so those decisions are all individual as well and we are in the driver’s seat respectful of our participants and making decisions that are strategic and economic. So what I would say is that our horizon for content licensing I think is good and rich over the long term. We will make decisions as time goes forward as you see others doing about where and when we want to sell, where the greatest return for our company is and what makes the most sense. We're in the driver's seat happily. We have the levers happily. The worldwide appetite is of course undergoing evolution, but it's hard to know exactly where it will be in 36 months. To-date and for the foreseeable future the name AMC has worked well and delivered real value to entities who have bought from us. And so they are in reasonably strong pursuit of it. So that’s a picture of what it all looks like. I hope that’s helpful.

And then for Sean, there is a restructuring tariff. You guys called out a sentence that there is a termination of distribution in certain territories. What was terminated in distribution centers if you could help us get some clarity on what that meant?

When we terminate a feed in a certain territory and the primary geographies is Asia, we take that through a restructuring charge. So that's what we're referring to.

Do you have any specific margin that was in the…

That's just in the Asian markets, the small feed, small channel effectively immaterial, it's not a lot of money. I think we've disclosed. You will see it in the K later today is in terms of what relates to the feeds versus what the rest of the employee related restructuring activity, not material.

Your next question comes from Steven Cahall.

Maybe first just to follow-up on restructuring. Can you give us any idea of what you think the benefit is that you are seeing from all those investments in 2019? And do you expect to have any more restructuring costs in 2019? And then I had a quick follow-up on cash.

Steven, I think that there will be de minimis small restructuring activities I believe as I see it today in '19. I won't size the benefits that we see. I think I'll bring you back to my comments about, obviously, how we see '19 in terms of revenue and AOI growth, how we’re looking at the efficiencies of the business and clearly signaling that we intend to reinvest a lot of those savings into the initiatives and the strategic priorities that Josh outlined.

And then just on free cash flow. I mean, it would seem like if you do a similar level on '19 to '18 that’s after your number one priority, which is investing in the business. So we’re still left with this luxury problem of access cash. The stock is pretty close to all time highs but you've been a little less aggressive on buy back activities of late. So should we take that as a signaling that you have some interesting investments out there like some of the acquisitions you made last year? Or how about just maybe put that in context? Thanks.

So again, I think what’s important as you think about '18 and '19 related to free cash flow is obviously, we've highlighted the impact of tax reform. So there was $20 million to $30 million of one-time benefit in '18 that won’t repeat in '19. Obviously, we look at business that we're probably at a higher watermark in terms of CapEx, I would expect that to moderate over time, maybe not '19. We obviously are very focused on working capital management, some of the benefits we saw in '18 were timing related. But at the end of the day, if you just look at our historical free cash flow to AOI conversion very strong. So the capital allocation thing is no different, it's opportunistic and it's flexible, I think we have been disciplined and appropriate in our share repurchase activity; the average price that we purchased at is very attractive relative to the current trading stock; trading price, obviously, with Levity in RLJE last year that definitely utilized some of those sources of free cash flow. But at the end of the day, I think the great part about how we set this business up and the balance is it gives us tremendous flexibility, tremendous optionality. So whether that's organic opportunities, M&A or share repurchases, I think we’re very well suited to pull any one of those levers as those opportunities present themselves.

Your next question comes from Marci Ryvicker.

Sean, just a clarification question. On one hand, you talked about non-organic activity in international being healthy in revenue in AOI. And then you said excluding RLJ and Levity, you mentioned modest growth. So I don’t know if I’m connecting two different concepts, or if you could just clarify what you meant?

So Marci just as for everybody's benefit; we have the international networks business; we have our IFC films business; we have Shutter Sundance now; we have Levity and RLJE, I think are the primary components of the international and other segment. So what I was trying to highlight is taking out the impact of Levity and RLJE, the rest of those businesses in aggregate is the guide for 2019. So I think we feel good about where the international networks business is. Given the independent film business that is another business that can be lumpy year-to-year depending on what movies, what releases and the timing and success of those; Shutter and Sundance now is still both in investment mode but probably not a material year-over-year differential in terms of our approach there. So hopefully that clarification is helpful.

And then secondly totally understand the buyback activity is going to vary from quarter-to-quarter. Can you just about the fourth quarter activity, it was a little bit low, was that because of the purchases and not the stock price?

We have tremendous confidence in the business, our strategy and approach and our position in the current ecosystem and the strength of our balance sheet. We’re going to opportunistic. I think that our past purchasing activity I think says a lot about our approach and perspective. But again we're playing for long-term shareholder value in the creation of that. So like I said, I wouldn't read too much into any individual quarter.

Your next question comes from Vasily Karasyov.

I have a question for Ed on advertising. In prepared remarks, there was a mentioning of addressable advertising. So I wanted to ask you to elaborate on that please, what the CPMs are like compared to your linear inventory. How much inventory you actually have there? And how is the adoption by brands and media buyers going? Is there any pushback or not? So that would be helpful. Thank you.

I think I did elaborate a bit, my feelings aren’t hurt too much that you didn’t remember earlier. But I will…

Because you didn’t talk about CPMs…

Yes, I didn’t talk about CMP and probably won’t at this moment. I was going to say what I said, which we do collect a premium on CPM. And the other thing we do is we increase the volume of advertising committed dollars from some of those blue chip advertisers. And as said, we have upwards of a dozen advertisers that we're actively working with. And there's a broad range of categories in terms of autos and beverages, and retailers and pharmaceuticals that we are working with right at this moment.

And pushback from those who don't participate yet?

No, I don’t its pushback. I think there's a finite and evolving opportunity, and we have conversations with all the major agencies as you would imagine. And they are helpful in identifying which of their clients they think are best situated to take advantage of that. And as we continue to meet with success, we think we will have capacity to work with more advertisers in that capacity.

Well, thank you everyone for joining us call and your interest in AMC Network. At this point, Stacy, you can conclude the conference call.

This does conclude today's conference call. You may all disconnect.