Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail Incorporated, 2019 Q1 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, May 10th, 2019. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent Forms 10-K and 10-Q filed by our Company and QVC with the SEC. These forward-looking statements speak only as of the date of this call and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Qurate Retail's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures including adjusted OIBDA, adjusted OIBDA margin, adjusted EPS and constant currency. Information regarding the comparable GAAP metrics along with required definitions and reconciliations including preliminary note and schedules one through three can be found in the earnings press release issued today, which is available on our website. With that, we have also published slides to accompany the earnings release. These slides are also available on our website. Today, speaking on the call we have Qurate Retail, President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Qurate Retail Inc CFO, Mark Carleton and Executive Chairman, Greg Maffei. Now, I'll turn the call over to Mike George.

Thank you, Courtnee, and good morning everyone. In Q1, our performance was disappointing, led by sales declines at QXH and zulily, both of which were down significantly. Adjusted OIBDA also declined, but at a reduced rate from Q4, as we continue to focus on improving the flow through from revenue to profits. I'll focus my comments on QXH and zulily and Jeff will discuss QVC International and Cornerstone. So starting with QXH; across 30-plus years, our business has gone through multiple evolutions, as the retail and media landscapes change. We're in the midst of another important evolution, and before I dive into the quarterly results, I thought it would be helpful to reiterate, what's changing, what actions we're taking in response, and how to think about our current results in that context. So what's changing? On the media side, we see the continued growth of cord cutting and cord nevers and the decline in traditional TV viewing, partially offset by the explosion of digital media consumption. On the Commerce side, we see the continued rapid shift to e-commerce and new types of brick and mortar experiences combined with the ease of price comparisons, ever growing levels of promotional intensity and the rise of digitally native brands and social influencers, all of which contribute the shortening product life cycles. And of course we're undergoing our own substantial change, acquiring HSN, creating the new integrated QXH business and aligning our teams, our resources and our strategies to meet both the challenges and the opportunities presented by this changing market landscape. In particular, we're focused on two overarching priorities to evolve our business, in ways that build on our competitive strengths and our strong customer relationships. First, we must be the best at product curation and discovery. This has always been at the…

Thank you, Mike and good morning everyone. As Mike mentioned, while our overall Q1 performance was disappointing, we made progress on margin improvement and key long-term growth initiatives across our business segments. As the quarter progressed, we moderated promotional and marketing investments to protect margin and avoid chasing less profitable sales, particularly at QXH and Zulily. We're now -- we have now delivered $67 million of cumulative cost synergies and remain on track to realize total cumulative cost synergies of approximately $165 million to $170 million by the end of 2019. We expect these synergies to be weighted approximately 60% to the second half of the year, and we'll continue to make sensible choices to invest -- reinvest a portion of these savings. Turning to our business segments, starting with QXH; as discussed in last earnings call, we are now reporting the combined financial results and metrics for QVC US and HSN as our new QXH segment. QXH revenue decreased 4% led by a 4% decline in unit volume. Adjusted OIBDA margin decreased 20 basis points year-over-year, which is primarily the result of a benefit of 140 basis points from the renegotiated HSN carriage agreements, which includes the change in accounting, plus lower commissions from reduced rates and increased digital penetration; an approximately 40 basis point benefit from product mix impact, which covers initial margin, shipping, handling revenue, freight associated with Drop Ship vendors and bad debt associated with Easy-Pay. Now these two items were partially offset by 90 basis points from an inventory management, including increased obsolescence reserve adjustments from inventory replenishment and liquidation of exited brands, such as Ingenious Designs. 70 basis points from fulfillment, including startup and duplicative costs associated with the current phase of our network optimization, which we expect to continue to be a headwind…

Thank you, Jeff. Let's take a quick look at the liquidity picture. At the end of the quarter, Qurate Retail had attributed cash and liquid investments of $508 million and $7.5 billion in principal amount of debt. QVC's total net debt to adjusted OIBDA ratio as defined in our credit agreement was around 2.3 times as compared to a maximum allowable leverage ratio of 3.5 times. And with that, I'll turn it over to Greg Maffei.

Thanks, Mark. During the quarter, Qurate Retail in the period February 1st to April 30th, we purchased $119 million of its stock. As the business evolves and we experience volatility in our results, we will continue to evaluate our buyback strategy for the balance of 2019. We appreciate your continued interest in Qurate Retail. With that, operator, I'd like to open up for questions.

[Operator Instructions] We will now take our first question from Oliver Wintermantel of Evercore ISI. Please go ahead.

Good morning guys. I just had a question regarding the new HSN carriage agreement, if you maybe can speak a little bit more about what the impact was in the first quarter and then more importantly though, what you think the impact of that would be for the full year. Thank you.

Jeff, you want to cover that?

Sure. So as we have mentioned, the impact of the commissions in the fourth quarter, now once again the commissions not only includes this accounting change, it also includes the synergies we're getting from these renegotiated contracts as well as the additional penetration of digital, which helps us reduce our overall commissions. But as I mentioned about 140 basis point improvement, year-over-year. Of that 140 basis points, about half of that would have been associated with the accounting change. And as we think about the rest of the year, we will continue to have that type of differential, as we kind of proceed through the next couple of quarters and then it will normalize thereafter.

Got it. Thank you. And then secondly, you mentioned that at Zulily, there will be a change in the return policy. Could you maybe speak a little bit to that and what do you think the impact on margins from that would be? Thank you.

Thanks, Oliver. I'll take that one. The changes of return policy are largely complete. So over the course of the probably last 18 months, we've been testing various forms of return policies and sort of beginning, middle part of last year, we moved to essentially a 100% returns. So that's kind of been baked into the results. So it's hard to break it out specifically as it has a discrete impact on margins. But still there's some margin impact that we started to see middle of last year, and would continue to -- through Q2 and then we should largely have anniversaried that change.

Thanks very much. Good luck.

Thank you.

Our next question will come from Edward Yruma of KeyBanc Capital Markets. Please go ahead.

Hi, good morning and thanks for taking the questions. I guess first, going back to Analyst Day, you guys had articulated this new customers you were seeing nice growth there, and many of them are acquired to digital channels. I know that you've given some color on the performance of new customers, but if you could maybe click down a little bit, maybe over the past kind of 18 months. Those new customers that are acquired through digital channels, did they persist, did they turn into broadcast customers and kind of how should we view new customers going forward?

Thanks, Edward. I would say at a high level, all of our metrics on customers have been stable. So kind of the value of those new online customers -- those new customers we acquired through online marketing have paid out. They have performed as expected. They don't necessarily become a broadcast customer, although it's hard for us to understand exactly the impact of TV viewing. Their mix certainly skews over time to the off-air side of the business, whether or not there are still engaging in the TV signals a little harder to see directly. But they end up being healthy customers, multiple purchasers, engaging across a broad array of categories, and a marketing acquired customer is less valuable than an organically acquired customer. But what we're seeing is the sort of nice mix impact where organic digital customers are growing, they're the most valuable. Phone customers are shrinking, they are kind of middling in value. And then these online marketing customers are growing to offset the decline in phone customer's a little bit lower value. But as a result of those mix changes, the aggregate new customer value is staying very stable.

And one other follow-up if I may, you guys have historically cited kind of positive trends in kind of minutes viewed as a response to cord cutting, and I know you did cite cord cutting in your opening remarks. I guess are you starting to see changes in viewership? Thank you.

Yes, interesting for us, we have continued to be really pleased by our ability to grow viewing minutes. And if anything that growth rate is maybe getting a little bit stronger, part of that is because of -- I think a lot of good work on the QV side with programming and on the HSN side as we have worked to renegotiate contracts, committed carriage contracts to both save money, but also to get better channel position, and that better channel position is I think helping give us a bump in HSN viewership. So we feel good about the viewership, it's true that we have fewer discrete TV homes at any one time that have access to use or total number of Pay TV homes we're in has obviously declined as Cord Cutting has grown, but we're able to offset that with viewership for the time being. That said, again, we recognize it certainly a long-term risk and that's part of why we're still focused on creating compelling digital experiences, getting people to digital, wrapping up performance marketing with the belief that we can get that performance marketing to offset a potential erosion over time in viewership. But again for now, ours has held up pretty well.

Great. Thanks so much.

Thank you.

Our next question will come from Heather Balsky of Bank of America. Please go ahead.

Thank you for taking my questions. I got two questions. One, can you just comment on QVC US's performance during the quarter? Was it negative or was the sort of decline in QXH driven just by H? And then second, I think you made a comment when you were talking about Zulily, about seeing less efficient social media marketing for QXH, as well as Zulily. I am curious if you could just talk a little bit more about what you meant. Thanks.

Thanks, Heather. In general, regarding your first question of QVC performance versus HSN. Generally we want to get away from talking about the individual brand, because we really are trying to manage it as a whole and optimize how we're growing across total QXH. So we kind of don't want to get in the habit of regular disclosure of the individual channel results, because it's not really how we are trying to manage the business. All that said, given the size of the decline and the size of QVC, it's safe to infer that we definitely saw sales erosion at the QVC, as part of that story, and kind of concentrated in those -- the on-air slowdown that I referenced in a few key categories. On your second question about less efficient social marketing that, at Q, it's not particularly meaningful at QXH, social marketing is an important part of our marketing mix, but a minority of our marketing spend. We think it gives a halo to the rest of the marketing spend, so we tend to tolerate somewhat lower direct returns from social marketing, because we believe it has an indirect impact on all the other marketing channels we use that tend to have much higher returns. So for QXH, while we're early in ramping up marketing spend, we feel like we have a nice balanced mix of channels that reduces our risk of erosion in any one channel. And we can -- and we're learning how the different channels interplay with each other. The challenge on Zulily is greater, as I mentioned, because social marketing is a much higher part of their mix and because new customers are much higher part of their mix.

Thank you for that.

Thank you.

Our next question will come from Eric Sheridan of UBS, please go ahead.

Thanks for taking the question. In terms of laying out that this is going to take some time. Can you give a little bit more granularity on how we should think about the investments that need to be made in the business to realign it against your medium to long-term goals? How we should think about some of the synergies playing out from the transaction we noticed in the investor presentations, if you can give a little bit more granularity on the synergy side, versus when investors can expect the output, meaning the growth, a positive growth profile and how you're thinking about when you will achieve that goal. So sort of a piecing over maybe the next four to eight quarters or just this -- the slope of how we should think about the investments versus the return that's going to come back. And then the second part of the question, just broadly on capital allocation. While we're going through this transition, what can investors expect on capital return versus M&A and whether there will be any changes in the way you allocate capital against to the business versus trying to inorganically reposition the business. Thanks guys.

Thanks, Eric. Let me start, and maybe I'll ask Jeff to comment and Greg could also weigh in on, different capital choices. You now, when you think about the synergies we have been pretty specific about how we see those rolling through the P&L and again for the -- we're on target for this year's goal with about 60% hitting in the second half, so modestly second-half weighted. And as you know, next year is another big step up in synergies as we start to get some of the benefits from the first of our new fulfillment centers coming online and other initiatives. So those -- that is fairly well laid out. I would say performance marketing as the second big category of investment, is one that we can definitely toggle up and down based on the returns we're seeing. Our goal is to continue to increase it at the kind of rates you've seen, and if we're getting strong returns from it, we could even increase it further. Generally speaking, we feel that the synergy savings can offset the performance marketing increases, that they may not always align perfectly from a timing standpoint. I think the biggest variable right now for us on the cost side is this margin pressure that Jeff talked about, particularly at HSN largely related to turning that business around. So you heard a pretty substantial basis point impact from a couple of things. We announced late last year that we were closing our Ingenious Designs business, which was a wholly owned HSN business with both wholesale and retail operations; liquidity in that inventory is having a meaningful impact on the P&L. That will continue through the year, although I would say Q1 and Q2 are probably the steepest parts of the curve on that liquidation, it gets a little bit lighter in the back half. We also substantially ramped up our HSN inventory and we're sort of at the peak of that inventory. So we don't -- that will be a year-over-year pressure as we go through the year, but not a sequential pressure, but a year-over-year pressure on obsolescence rates through the year and then it will normalize as we get late in the year and into next year. We've also done a lot to change out, HSN assortments that's had some margin pressure. And we're trying to normalize that over the course of the year as well. So from my vantage point, I think on a structural basis, separate from what sales are and what kind of what our product mix is, probably -- it's more sort of structural aspects of costs, you certainly see a fairly strong pressure continuing in Q2, moderately better in the back half of the year and improving further as we go into next year. Jeff, are there other things you would add on that flow?

No, I think you just covered everything off that I -- I think is important.

So I'll comment, Mike and Jeff to Eric, on the, my view in investments. I think Mike just outlined a series of investments that are I'll call expense investment, they're all basically in the P&L and some short-term time frame and relate to the ongoing operations and about synergies, particularly on the QXH combination, reassessment of the fulfillment centers, FCs, reworking of many of the internal purchasing processes. All those are things which are critical, obviously the ongoing operations and why we saw some of the QXH opportunity and what we can do with it. There are another series of what I'll call non-expense investments, like acquisitions and share repurchase. And I think I commented earlier we're going to hold off or be timid at least for a period, and try and gain visibility and certainty around the success of the first set of investments and the ongoing direction before we lean in on some of these things like share repurchase. I also would note that in the past, we've had some success utilizing the enormous free cash flow that Q has had in other areas. If you look at them in the main a good portion of our GSI Liberty investment in charter, which has been quite successful really came from allocated or reallocated QVC free cash flow. And so, you know, our first focus is as Mike and Jeff have outlined, streamlining, fixing, improving the core QXH business. We will continue to look at uses of outside those both the investments and the free cash flow and share repurchase potentially acquisitions and even in third party things that we find attractive because we've had some success with that.

Thanks so much for the color, guys.

Thanks, Eric.

Our next question will come from Alex Fuhrman of Craig-Hallum Capital Group. Please go ahead.

Great, thanks very much for taking my question. I was interested to hear that you're starting to run some best of content on QVC 3, I'm just curious if you can share with us a little bit about the productivity and cost of running that type of content and I'm just curious if you see a sufficient productivity from those hours, if there are any thoughts to maybe starting to layer in some of that type of content perhaps in some of the overnight hours on the other channels?

Alex, thanks for the question. We -- it's early days on QVC 3. So I don't want to draw too many conclusions at this stage. But we are definitely seeing nice productivity with those hours. I would say, less than the life productivity of QVC 1 and QVC 2, but obviously at a much, much lower cost and better productivity than we were seeing with its predecessor Network, Beauty iQ. So we do think it's a good formula especially having two live networks this -- you have a lot of content to draw from and I think this best of approach is going to work nicely for us. We have tested that kind of best of content in the overnights on the main channel, so it's a great question. We still find even though with a lower productivity, you have in the overnights that live Trump's taped even factored in the variable cost of producing that live content. So we do enough volume on the main channel that, that will stick with live in the overnights, but we'll do the clip based test [ph] on QVC 3 and also the overnight on QVC 2 and I think that's a good formula for us.

Okay, thanks very much, Mike. And then, forgive me if I, if I missed this, but you mentioned the timing of Easter and that having an impact on the planning of some of your seasonal assortment. Just curious I mean given that shift in the timing, if you feel there was a meaningful amount of revenue that shift from Q1 into Q2 and could you give us a sense of, to what extent you think the results that you reported reflect your year-to-date trend or how much of that might have been impacted in Q1, just given that shift in the timing.

We certainly think Easter had some impact we're hesitant to try to point to it as our big explainer of the quarter. We certainly saw pressure in little heightened pressure in February as that sort of normal run up to Easter. We weren't seeing that, and again I don't think we did a great job of really anticipating that maybe as well as we could have. So that -- it had some impact, but I wouldn't want to say that it was a major driver, nor would I want to suggest that we get that back in Q2, because in our kind of programming schedule when you have this kind of a shift and a miss, it's kind of a miss, you don't really get it back unfortunately in the subsequent time period.

Okay, that makes sense. Thank you.

Thanks.

Our next question comes from Tom Forte of DA Davidson. Please go ahead.

Great, thanks for taking my question. I have one question for Greg. So Greg, given the consistent ability for Qurate Retail to generate significant free cash flow and given some of the near-term challenges what are the thoughts on potentially taking it private as a way to give it an opportunity to work through some of these situations? Thank you.

Thank you. That's a good question. I guess I'd say in general, we like the public as our partners. We value the liquidity, densities of the currency and in line with some of my earlier comments about where we are in share repurchase and we are evaluating that and what is the right time to think that it's value creating, I think that the go private scenario would be that on steroids and we were still evaluating that, we would evaluate that, we're always open to ways to create value and we're not locked into any particular format. But in general, I think we favor the public, one keeping them as our partners and leading them with share repurchases. As you have noted, we have large free cash flow, we have balance sheet capacity. So the opportunity to do share purchase when we see visibility and confidence in the results is there.

Thank you, Greg.

Thank you.

Our final question will come from Victor Anthony of Aegis Capital. Please go ahead.

Two questions; first one on the market trends that you cited, the growth of cord cutting and cord never shift away from traditional media consumption and the shift to digital to media consumption, those are trends that have existed at least for the better part of the past decade. So why is it having a more pronounced impact in the first quarter? That's one. Second on France, and I'm not sure if you touched upon this in your script, but you cited some unique structural challenges that led you to exit the market. I think this is the first market you've exited since I've been covering the stock. So maybe can you just talk about what challenges you -- what those unique challenges are and are you seeing those challenges in the other European markets like Italy? Thanks.

Thanks, Victor. Yes, I mean you're right. These trends I referenced are long-term trends. I wasn't trying to point to them as being a major specific drivers of Q1, but more an acknowledgment that clearly we've had choppier results over a handful of quarters and choppier than certainly we're accustomed to having. And I think it reflects the fact that we do see a world that's changing and nothing I talked about is new, hopefully it will stand familiar with past discussions, but it's an acknowledgement that yeah, we're living in a changing world, we need to be pulled about evolving our model with this changing world, and the combination of those things coupled with a very large and complicated acquisition and integration have made for a bumpier performance than we want to be delivering and have typically delivered. And that's now a multi-quarter trend. And so, we're pushing hard to stay committed to those changes, because we believe they're right for the health of the long-term business, and trying to drive through those changes as best we can with as much transparency to all of you, as we can, about where we are seeing those bumps and what that implies in the short-term. On the question about France, I would say, the issues were pretty specific to France. So the biggest challenge in France was just a very unfavorable environment, as it related to quality of TV distribution. We could not get TV distribution in -- on the kind of core DTT platform, which is where most people spend their time viewing in sort of 30 core networks in France. So we had very distant channel location, wasn't accessible to all homes. We thought we could improve on that over time and it ended up being a much more negative impact than we expected. I think there were other softer issues in France. Just the fact that it was the most developed e-commerce market in France, when we entered versus, say in Italy, which was a very low developed e-commerce market. So I think the competitive pressures were intrinsically higher in France. But the biggest challenge was a fairly unique situation around TV carriage.

Thank you.

Thanks, Victor. And I think that's the final question.

I think that's right. Thank you to all of our listeners and thank you for your interest in Qurate. We hope to see you at coming conferences or speak with you again in next quarter. Thanks very much. Operator?

Thanks everyone.

This concludes today's conference. Thank you for your participation. You may now disconnect.