Welcome to the Qurate Retail’s 2019 Q2 Earnings Call. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, August 8. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.

Good morning. 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 statement 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, and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations including preliminary notes and schedules 1 through 3, can be found in the earnings press release issued today, which is available on our website. Today speaking on the call, we have Qurate Retail President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Executive Chairman, Greg Maffei. Please note, we've also published slides to accompany the earnings release. These slides are also available on our website. Now I'll hand the call over to Mike George.

Thank you, Courtnee, and good morning, everyone. We are making good progress against the priorities we outlined on our last call. Our second quarter results were highlighted by improved performance at QxH and QVC international relative to the first quarter, including sequential net revenue and OIBDA margin improvement at QxH and double-digits year-over-year OIBDA growth at QVC international and constant currency. These gains were partially offset by further performance deterioration at Zulily. We are working aggressively to address these issues at Zu, although we do anticipate that they will persist in the near-term. We also improved free cash flow relative to Q1 due to disciplined inventory management and more favorable working capital timing. Additionally, we resumed our share buyback program purchasing nearly 12 million shares of stock for $153 million from May 1 to July 31. While our Q2 results declined year-over-year, I am encouraged by the resiliency of our QxH business, and our ability to generate high levels of OIBDA and free cash flow in a dynamic and highly competitive environment. Going forward, we remain focused on evolving the QVC and HSN brands, building on our collective strengths in the powerball model here in the U.S. and globally, capturing our targeted synergies and stabilizing Zulily. I'll focus my comments on strategic and operational execution and then turn the call over to Jeff for a more detailed financial review. Starting with QxH, despite a slight decline year-over-year, we are pleased with sequential improvement in operating results. The improved sales trend reflected a moderation in the sales decline from on-air products relative to Q1. Please see the definitions of on-air, off-air and digital-only sales in the presentation posted on our website. We drove year-over-year on-air sales gain in several areas. Culinary and garden strengthened due in part to Eastern driven demand…

Thank you, Mike, and good morning, everyone. I'll now provide an overview of the second quarter financial results for our business segments beginning with QxH. QxH revenue decreased 1% led by a 3% decline in ASP, partially offset by a 1% growth and unit volume. The sequential improvement first quarter results was driven by improved trends in our on-air business. Adjusted OIBDA dollars declined 1% and margin rate was flat versus last year, but improved sequentially from Q1. The flat margin rate primarily reflects favorability from reduced TV distribution commissions in part due to the accounting treatment for certain renewed HSN carriage agreements, as well as the renegotiated rates that HSN and growth in off-air sales, offset by warehouse, freight and inventory management expenses. The warehouse pressures are mainly related to our multi-year multi-phase fulfillment network optimization plan. The initial phase will reduce our U.S. fulfillment center footprint from nine to seven facilities. By 2020, we expect to improve customer delivery times and labor productivity, and reduce transportation and fixed costs. However, in the short-term, we absorbed approximately 15 basis points of dual lease and quarterly incentive payments, and approximately 35 basis points from reduced productivity during the ramp up and retrofit of certain facilities. We expect the productivity headwinds to continue through the back half of the year. Additionally, freight costs reflect higher freight rates, particularly from U.S. postal service and unit growth at lower ASPs. While higher freight rates are not anything new, we were less successful offsetting these rate increases with pack factor improvements or the number of items we ship in the same box, due to the ongoing fulfillment network optimization plan. We expect these freight pressures to also continue through the year, but begin to moderate in 2020 as new fulfillment center begins to realize…

Great. Thanks Jeff. Looking at the corporate level issues, I wanted to recently revisit our green energy investments including wind and solar. These green energy investments are very attractive financially and will continue to be a part of our strategy. The assets were invested in generate losses which appear on our P&L under the share of earnings losses of affiliates. However, we are able to generate material tax benefits both through these losses and tax credit associated with these investments. Other issues in the quarter, we sold our investment in FTD resulting in $34 million book income tax benefit in Q2 from the tax loss, we expect approximately $100 million tax benefits at the end of 2020 when our long-term tax receivable is collected from the period of May 1 through July 31, we repurchased 11.9 million shares of curated retail for $153 million. This compared to 9.6 million shares bought in Q2 last year. As a reminder, we will be holding our Annual Investor meeting on November 21 in New York. The link to register for this event is on our homepage of our website. We appreciate your continued interest in Qurate Retail. And with that, operator, I'd like to open it up for questions. Thank you.

[Operator Instructions] And we will take our first question from Ed Yruma with KeyBanc Capital Markets. Please go ahead.

Good morning. Thanks for taking the questions. I guess first, last call you signaled that you were suspending share buybacks given kind of the volatility in the business. Obviously, you restarted that. I guess what changed in terms of the speed by which we're able to inflect the trajectory of the business, kind of what gives you the confidence to do more share repurchase going forward? And then as a follow-up, I know that there were some issues that kind of resulted on the operational side is merging your merchant organizations I think at the end of last year that impacted the first quarter. Are those issues behind you? Thank you.

So we are on the first one. I would say as we expressed are going to be opportunistic on our share buybacks. We had increasing competence during some of the results of the quarter as Mike and Jeff outlined. And I would note there was a substantial pullback in the share price during the quarter, which made share repurchase a more attractive option. Mike, do you want to handle the second part?

Yes. On the challenges with integration especially around the merchant function, I do think we’re largely passed and the things have now been working together for several months. I have still some work to do to get all the processes working smoothly and of course with fine lead times, it takes a bit of time for all that to show up in the results. So I was still feeling a little bit of pressure from that and our numbers probably, but I think we're largely passed the biggest challenges associated with integration.

Great. Thanks so much.

We'll take our next question from Oliver Wintermantel with Evercore ISI.

Yes. Good morning, guys. Thank you. I just had a question regarding Zulily. If you could maybe walk us through, I know you provided the details there, but I think it's still a little bit unclear what really drove the deterioration over the last, I would say two or three quarters in the Zulily business. If you could maybe try to explain what drove that and how you are trying to fix that?

Thanks, Oliver. I would say at a high level, I would point to two things. Clearly the most proximate cause was that this is a business that really worked well on bringing in new customers through Facebook marketing and now it's a channel we were having a huge success with a year ago and grow the kind of strong level of new customer ads and growth we enjoyed last year. Just seeing that dramatic sort of increase in cost or the decrease in efficiency of that channel, such that, we just have struggled to get the times of marketing returns the need. And so we're both bringing in fewer new customers for every dollar spent and spending fewer dollars. And this is a business that still needs to bring in a lot of new customers every year. So a fair amount of pressure on the customer acquisition front. We are obviously working hard to find new acquisition channels that will work for us. Some amount of experimentation that haven't yet cracked the code on that, but we'll obviously have to stay after that. We've chosen not to kind of give up on our return on marketing spend requirements to stabilize the sales. We just don't think that would be healthy spend. That's the biggest issue. I think the second issue is that in some ways, probably some of the success we had in marketing last year, masked the fact that I think we haven't made as much progress as we would've liked to make and just continuing to evolve the overall customer experience. So website isn't as fresh as it needs to be. Tim is working on a number of things as we speak some new innovations in the website store experience. We haven't had as much success bringing in delivery times as we'd hoped for. And so we can see when those delivery times are really long that we get a lot of customer satisfaction at the long tail of those delivery times. And so we need to move faster on some of these more experiential aspects of the brand, which I think are causing a little bit of burnout with existing customers. So I’d say those are the two big factors. We have to get more effective forms of marketing spend at the front end, and just kind of be sensitive to burnout risk with existing customers through freshness and product, freshness in the web experience, better service levels, and a number of initiatives underway on all those fronts. And good news is I do think that the customer base still wants the brand, still purchase as frequently, but clearly, we're seeing a pretty big erosion in that rate of purchase and need to work it aggressively.

Got it. Thanks. And maybe as a follow-up to that maybe bigger picture question regarding the portfolio of your brands or businesses. If you look at hurdle rates in regards to Zulily or Cornerstone, is there anything that you would say, we give to these businesses, not a year or whatever the hurdle rates are and look for the opportunities then or if there's within the portfolio, if you think that there's – is there any need for acquisitions in the near-term? Thank you very much.

Yes. Thanks. I would say on the acquisition front, we're certainly open to something that probably will come in our way. But our view is we're focused on the businesses we have and we'll take a really just extremely attractive scenario for us to consider acquisition at this stage. We like the current portfolio cleaned up. We're happy with the portfolio of businesses we have. We've got a couple – both Zulily and Cornerstone are different types of turnaround. So we need to see that work. Again, we're never going to say never to looking at any opportunity, either acquisition or divestiture, but I would say our focuses on getting these businesses to work and to get back to growth, and I think that is absolutely doable.

Got it. Thanks very much. Good luck.

Thank you.

And we'll take our next question from Alex Fuhrman from Craig-Hallum Capital Group.

Great. Thanks very much for taking my question. Curious with Zulily, I'm struggling a little bit here. Is that brand still helping to bring new customers to QVC and HSN? Just curious if you're still getting that that strategic value and then if I remember correctly, I think you've been doing some today's special values that you've been cross marketing on Zulily. Are you still doing that? Are you still seeing any response to that? Just would love some more color on how you're continuing to use the different assets in your portfolio to drive customers to QVC?

We do think we're getting those strategic benefits, and some of it doesn't outweigh the performance pressures we're seeing. But on the customer acquisition front from Zulily, we've tried to kind of pivot with where we see the performance. So last year as Zulily was really growing, we were focused on keeping new customers on the Zulily platform, less so about trying to get them to migrate to Q&H, a little bit of cross marketing, but not heavy. This year as Zulily has struggled, so we still have a lot of traffic and visitors, but as they've struggled more to monetize that, we put a little more focus on that crossover customer. So as an example, in the daily e-mail that go out to the Zulily customers, we do feature the QVC today's special value. We'll probably in the future be featuring that HSN, today's special and other ways to sort of market the QVC and HSN brands to very large and engaged, so really customer base. We're also doing more cross marketing with our proprietary card program. So as you may recall, we put the QVC proprietary card and launched a Zulily equivalent at Zu and are in the process of converting HSN card to a one – on the QVC platform. That's going to enable us to do some interesting cross marketing, through our proprietary card programs across the brands. We've done a little bit of that in Zu, but I think there's more to be done. So not a massive benefit, but certainly additives, let's speak to a wider range of visitors and potential customers every day.

Great. Thanks. That's really helpful. Thank you, Mike.

Thank you.

We'll take our next question from Eric Sheridan with UBS.

Thanks for taking the question. Mike, I wanted to just check in and sort of get a better view of sort of how your own thoughts on digital marketing and performance based advertising continue to evolve as both the stimulant of individual transactions and at the top of the funnel as sort of a growth driver for users and buyers coming into the platform broadly? What have you learned since you made some of the changes you did late last year? How those sort of continued to evolve? And then maybe a second quick one if I can, just you highlighted mobile shopping and you continue to talk about that in the last couple earnings calls. What have you seen is the mobile shopper continues to evolve with the all of your various properties on a global scale? Thanks so much for the detail.

Yes. Thanks, Eric. On the first one, on performance marketing, we continue to be in this high experimentation mode from the numbers kind of modifying increase in performance marketing every quarter, against a pretty tight sort of return metrics that say that that spend has to kind of pay back within a year. And we are focused on the sort of needle in the haystack of, how do we find customers that could become really great core QVC customers as opposed to one and done, which just doesn't fit our model? And so we're – kind of the stored in our return requirements in particular focus on those, potential customers who could become super users of the brand. And we are finding that we can do that. That's I think the most encouraging thing to us. We're gating our spend. So that we do meet these return requirements. But we're finding that overall average value of these customers, a little – is a little below our total average. There are pockets of these digital customers, especially those that come in on more engagement platforms like social media, medium marketing, that are coming into the ecosystem and becoming pretty high value, pretty high frequency customers, right away. So we think it is working as another way to tell our story and get people into the ecosystem and then get them energized about all the things that we have to offer, so really encouraged by that. Our limitation is really just the fact that if we overspend and we see the returns are dropping, and so we're trying to view this as a long-term strategy, be surgical block who we're going after bump it up every quarter and help sort of build the customer file. But the fact that a quarter of…

Great. Thanks Michael.

Thank you.

Next question comes from Thomas Forte with D.A. Davidson.

Great. Thanks for taking my question. So for Mike, first, Leslie sounds like an excellent hire. So congratulations there. I want to talk a little about over the top four QVC and HSN. To what extent is it driving viewership and how should we think about the shopping habits for consumers who are engaging via Roku, Amazon Fire, Apple TV, and an over the top in general? Thanks.

Thanks Tom. And thanks on Leslie we are thrilled to have on the team so really exciting for us. And I would say we're still in a kind of early learn mode on over the top. We've been pleasantly surprised by the amount of viewership we're getting, especially on Roku, and Amazon Fire growing rapidly, but Roku continues to be now by far the industry leader. What we’d like about the platform as we can present the full experience. So today if you have the QVC app on Roku, you'll see all four of our networks simultaneously along with a lot of short-form content and long-form content. And we're spending a lot of time trying to figure out how to market and push activity to the Roku customer to get her to engage with us. And we expect in the not that distant future knows there could be more of a video shopping app generally that includes not just access to the QVC networks but the QVC and HSN network. So yes, it's a way to get folks into an environment that can be more interactive have the full experience available. So there's a lot we'd like about it. And as I said, we're pleased with the amount of viewership we're getting. I think we still have a lot to learn about how to convert that viewership into sales. So that's probably earlier going. So just really trying to study their viewing patterns, their behaviors, and make sure we're getting out the conversion. We think we will because again, it's essentially a fully feature TV experience so we believe over time. We should be able to get that to convert the sales at the same rate. But it's a little early to read that. So more to come, but happy with where we are pleased with the amount of growth and the amount of engagement.

Thank you, Mike.

And we'll take our last question from Jason Bazinet with Citi.

Thanks. I just had a question on Amazon Prime Day. What impact does that have to your business when that I think rolled out in July and this move from Amazon to one-day shipping on Prime customers? Has that or do you expect it to have any sort of impact on your business? Thanks.

Yes, thanks Jason. Prime day is interesting. We see really no impact. We've not typically – we generally speaking of not taking the approach of using it as a data accessibly market or promote to our customers, but there's sort of more people in the e-commerce ecosystem on that day. So typically you might see a little more traffic, but we've been pleased that we've never seen it hurt our business either sort of immediately on the day of or in the following days. We haven't necessarily credited aggressively capitalize on it either. But I would say fairly neutral to us. I don't see there move to one day shipping has having much impact on us. We were very open about the fact that if you need it in one day or if you need it in two days, we're not the best place to come. We're getting that impulse purchase and someone who's kind of okay with the typical three to five day delivery times that we have. So we really haven't seen, but we've learned over the years is that. We need to get it to the customer in a reasonable period of time and we'll see a fall off if we have a pay a slow delivery times. We're getting it to her in that three to five days that seems to be sufficient and that doesn't appear to be changing a whole lot and haven't seen any sort of direct impact from the move to one day.

All right. Very helpful. Thank you.

So thanks everyone. I think that was the last question. We need to appreciate your interest in support in Qurate and we'll look forward to talking to you on the next call and seeing you at the Investor Day.

Thank you.

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