Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail Inc. 2019 Q3 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, November 11. 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.

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 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 turn the call over to Mike George.

Thank you, Courtnee, and good morning, everyone. The third quarter was challenging, with continued sales and OIBDA pressure at QxH and Zulily. However we are pleased to see Cornerstone turn to growth after adjusting for the closure of improvements and a further acceleration of growth at QVC International, and despite the sales pressures, we achieved strong growth in free cash flow. As we look ahead, we are intensely focused on improving our operating results, accelerating synergy capture and better positioning our companies for a change in marketplace, while sustaining strong cash flow. Turning to QxH, let me start by welcoming to Leslie Ferraro to our company, Leslie Ferraro joined us in September, and has jumped right in to her new role, as President of QxH. Since Q3 marks our third quarter of declining sales at QxH, while I take some time on this call to walk through the categories and the customer segments that are contributing to the decline. Summarize what we believe are the major drivers behind these declines, and most importantly, share what actions we’re taking to improve the trend and return to strong performance. So I'll start with the category view. Our home business is down $45 million in the quarter versus last year, and down $88 million for the year, driven largely by three pressure points. First, at the end of last year, we closed HSN’s Joy Mangano Ingenious Designs subsidiary. While this brand sales productivity was strong, its cost structure was unattractive, necessitating the closure. The exit has created short-term sales pressures, along with margin challenges as we clear the inventory. We anniversary the exit at the end of the year. Second, the kitchen electric's business has entered a more challenging product innovation cycle and we're beginning to see this impact our sales, especially in…

Thank you, Mike, and good morning, everyone. Beginning with QxH, net revenue declined 4%, on 4% reduction in unit volume slightly offset by 1% increase in ASP, due primarily to make shift within home innovations and the home category. Adjusted OIBDA declined 7% and margin rate declined 50 basis points, primarily due to sales deleverage and headwinds from network fulfillment upgrades, general rate - freight rate increases, inventory management and continued marketing investments. These factors are partially offset by reduced TV commissions, synergies, and product mix impact. Our network optimization plan will reduce our U.S. fulfillment center footprint to seven facilities by the end of 2020, down from nine. We had a soft opening of our new Northeast fulfillment center in Q3, handling a modest amount of large size, non-conveyable products. We also continued to stabilize our Lancaster facility to support apparel fulfillment. We anticipate additional expense headwinds in Q4, primarily from new Northeast site at least, and project implementation costs. However, we anticipate improved productivity and reduced transportation and fixed costs start to have favorable impact on adjusted OIBDA in 2020 along with capital avoidance on facilities we are closing. We will provide an update on our U.S. fulfillment center optimization and current year impact at Investor Day. Finally on QxH we realized cumulative costs energies of $110 million through September 30. We anticipate total 2019 synergies net of onetime costs to be consistent with our prior indications and will provide more detail at Liberty's Investor Day. Moving to our international business, in constant currency international delivered a strong quarter with revenue up 3% on an 8% ASP increase, which was partially counterbalanced by a 3% decline in unit volume and lower shipping and handling revenue. Japan had the best performance across the markets with strong revenue growth. This…

Thank you, Jeff. Let me comment a little bit on our capital allocation philosophy at Qurate. We look at the fallen buckets, which are not necessarily mutually exclusive. First, investment in the business for the future. CapEx as you heard from Jeff is elevated in 2019 as we invest in IT and other fulfillment initiatives, but we expect this to revert to more normal levels in 2020 in part as we complete the integration of HSN. Secondly, managing our tax exposure, while the tax liability from our exchangeable bonds was reduced substantially due to tax reform, we've decided to be proactive, and some of the elements including attacking the MSI bonds, and towards that end, we repurchased $88 million of bonds in October and hedged a portion of our uncovered MSI exposure. We also continue to deploy capital into what we believe are very attractive tax advantage investments and you've heard about some of those in the past. Third, return on capital to shareholders. This year through 10/31, we bought $392 million of stock. We will continue to be opportunistic going forward, but are aware that the stock has experienced much more volatility this year. Qurate continue to generate very strong free cash flow, and we will prudently invest that across all of the buckets I've mentioned above. As Mike and Jeff mentioned, we look forward to seeing many of you next week at our Annual Investor Meeting on Thursday, November 21st in New York, the link to register is on the homepage of our website. We appreciate your continued interest in Qurate Retail. And with that operator, I'd like to open up the line for questions.

[Operator Instructions] Will go first to Heather Balsky of Bank of America.

Hi, thank you for taking my question. First on QxH, can you just talk about some of the near term levers you have to improve performance? Are there any thoughts about investing more in free shipping or marketing and what can you do on the product side? Thanks.

Thanks, Heather. It is a bit of all of the above. I mean, most importantly, it's just continuing to read and react to what the customer is responding to on the product side. And as you know, we benefit from being able to adjust what we're offering fairly quickly. So trying to continue to shift to where she's going in areas - that we know are areas of strength, like fashion and beauty, working intensely to get those back to sustainable growth, launching a number of new product lines, I mentioned a couple of them in Q3, but we've been building our capabilities within our proprietary product development team and you'll see a handful of new brands roll out over the next several months. We're partnering with influencers to try to bring niche influencer brands to market we're - we just completed our effort we talked about in the last call to scour the country for up and coming entrepreneurs and will be met with about 850 or so entrepreneurs if I recall the numbers correctly, and will be launching 80 to 90 of their brands over the next few months. So for us, it just starts with product and just being relatively focused on everything we can do to bring her fresh, exciting products and try to engage her interest. We are - on the other dimensions you mentioned, we're continuing to invest in expanding our marketing, we're mindful of the returns on that marketing spend. So we don't want to invest beyond what the returns would tell us. But did take a marketing spend in Q3 and expect to continue to invest in that that has a little more benefit on new customer acquisition than on overall sales. So it's a little more of a long term play. It doesn't help as much in the short term. And then finally, we are continuing to look at having the right sorts of promotional offers, which for us is about use of our easy pay and flex pay tools along with shipping and handling promotions. We just had a big shipping and handling promotion this past weekend, as an example. We're trying to get our vendor partners to support those where we can and do those in the right way. So we'll tackle all those initiatives still trying to do it in a way where we feel like we're getting healthy volume and volume that’s sustainable overtime as opposed to overly promotional in nature.

Thank you. And then on the balance sheet, can you just remind us what the current tax liability on the exchangeables is and what the impact is from the MSI transaction?

We’ll take that here, Brian, do you have that number?

Yes, it's $1.071 mm at quarter end.

Now, remember, that number will grow as we receive - as we take incremental deductions, but we will also get the benefit of an effective interest free loan for the period until they're retired. So there, it's a continuing increase in that liability offset in part by earnings we can make on that interest free loan.

Does the liability come down with the payment?

It did, yes, yes.

Okay. All right, great. Thank you.

But that was subsequent quarter end in part.

Got it, thank you.

We’ll go next to Eric Sheridan at UBS.

Thanks for taking the question. Two maybe. Mike, it's been about a year now, since you talked about leaning in on performance marketing channels and trying to engage with new and existing customers in different ways. I wanted to know, if we could look back and sort of get a better sense of what you've learned from those efforts, how much they've been a benefit to growth on the customer side over the last year and what sort of it might do to inform you're spending on marketing going forward? And then second question if I could, did you guys call out the benefit to adjusted EBITDA from the carriage renegotiations with HSN. I think I missed it, but I just want to make sure if you did call it out so we didn't miss that. And maybe I think the synergy longer term from carriage agreements probably a topic for next week, but just wanted to take that up if you are willing to address that as a topic. Thanks so much.

Thanks, Eric. I'll take the first and ask Jeff to weigh in on the second. So I would say in the year since we've been talking about it more actively, you are seeing us increase our performance marketing about 30% on a year-over-year, each quarter. It's typically have been in that range. Keep in mind the absolute number is still fairly modest in the kind of 1% of revenues area, but grow over prior year. We found about that level of step up enables us to invest that money in ways to get to attractive returns and we measure the return as the number of new customers that we're bringing in and the value that those new customers bring us over their subsequent couple of years. So it's an investment that's negative in period, but has a sort of within the year payback, as we start to see that new customer repeat. So we feel good that we know how to increase it, we know how to measure it with high integrity. We - it is bringing in more new customers, so I mentioned that about 30% of new customers came in through performance marketing. So, we do think new customer growth would be negative if we didn't have that investment in performance marketing. We don't tend to ascribe a lot of benefit to performance marketing to our existing customers, we may be being conservative in that, but viewed primarily as an acquisition tool. I would say we're learning more and more about what channels are most effective and as you'd expect those channels evolve over time. We know that paid social, while a very high cost channel for us isn’t one where we're most likely to find those new customers who go on to become real super users of QVC, or HSN. So we're trying to kind of spread the dollars across higher cost channels that bring in a very attractive type of customer, along with the channels that just bring in more volume of - still good customers. So, we feel good about the program, we would love to be growing it even faster. So we're going to, I would say in this coming year accelerate our investment in marketing technology tools, as well as resources. So we get ourselves into a position where if we're getting attractive returns, we're in a better position to scale up faster with a higher level of technology to support to be confident in that investment. Jeff, you want to…

Yes, Eric you're exactly right. For a point of brevity I didn't go through in the individual points. There's a page in the presentation that we post of the IR website. The commissions sort of support for the quarter was a total of 95 basis points, about two thirds of that was really associated with the MSO change. So the delta, if you will, is really the portion that is attributed to the synergies associated with the carriage for both Q&H.

Thanks, guys.

We’ll move next to Oliver Wintermantel at Evercore ISI.

Yes, good morning, guys. Thanks, Mike for all the additional details on the QxH business. If - I know you don't break it out anymore, but maybe you could talk a little bit about the difference between QVC U.S. and HSN how the performance was in the third quarter?

Thanks, Oli. Yes, we don't - as you know, we don't break it out anymore, in large part because we're really trying not to manage the business in that way and so our feeling is to try to parse out QVC versus HSN performance can be a misleading signal because we want to be investing our resources where they get the best return across the platforms. So I don't want to say much other than that we’re highlighting both brands and challenges in both brands. There were some issues that were a little more specific to HSN like the pressure we're having, with the Ingenious Designs, a business that we've exited. But on the flip side, we've been encouraged, for example, that we've been able to - part of how we're able to grow the beauty business in a tough cycle is because we felt the beauty was substantially under penetrated at HSN. And so we've seen nice growth over the course of the year, as we've leaned into the beauty business at HSN. So, we're trying to be thoughtful about how to optimize each category across the two brands, in ways that makes sense, relative to where those two brands are.

Got it. Thanks. And then maybe on the free cash flow side, as you mentioned, it's still - free cash flow is still very strong, but with declining sales that might be going forward some pressure on free cash flow. And you also mentioned that CapEx is going to be peaking in or relatively high in 2019 with a level down in 2020. So maybe if you could maybe capital allocation strategy going forward, do you have a leverage ratio that you're aiming at or when we could see maybe free cash flow or sorry - buybacks going to more of a normalized level? Thank you.

I think - go ahead, Jeff, and I'll comment on top.

Very good. I was just going to comment on the first portion of the question with respect to - if your leverage ratio, our focusing commitment right now is continue managing the business in the range of the 2.5 times area at the operating company level. We continue to look for ways to be very diligent with respect to our capital allocation with respect to expenditures as it relates to our network optimization and other areas within our technology platforms. But I'll leave the rest with respect to share buyback. Greg, you want to maybe address that.

Yes. Thanks, Jeff. So, I think we have been tried to be consistent over the last several quarters with the view that our capital allocation philosophy, which has been primarily focused on share repurchase over the last several years, has been somewhat disappointing in light of the results we've had in the performance of the stock. So we've tried to become more opportunistic and buy less on an absolute basis and more on an opportunistic basis and try and find attractive entry points for that. And also do some things as we've talked about to reduce other liabilities like the deferred tax liability, the DTL through taking out the MSI bonds and hedging a portion of that. So we're going to continue to look at those alternatives for non - for balance sheet and capital markets related alternatives. We're going to continue to look at those over the next several quarters and see what is the most attractive in our minds.

Thank you very much. Good luck.

We’ll go next to Ed Yruma at KeyBanc Capital Markets.

Hey, good morning guys. And thanks for taking my question. I guess just first a broader question, the company has had kind of ongoing merchandising issues going back, I think even before Doug Howe left but maybe even its accelerated since then. I guess as you step back and think about this, if it’s beauty, if it’s apparel. Do you think it's been tactical missteps, or do you think there's been kind of a structural way and maybe the consumer changes the way they shop and maybe haven't been as responsive as you could have been? And then second, as you think about kind of the Q&H Merchant organizations, I know that there's been a lot of volatility there. What changes have you implemented to kind of smooth that process out and maybe where did you change HNS merchandising philosophy that in hindsight maybe can be course corrected? Thank you.

Thanks. Great question. Let me try to pine on it for a moment. I think we have an extraordinary merchant team. I don't say that in a defensive way. I just think this is a team that does miraculous things every day. So really don't characterize it as so much tactical missteps. And by that, I mean, we have this very unique mission that pretty much no other retailer in the world can do, which is to identify a handful of items every day that can drive extraordinary volumes and attract mass audiences in a highly fragmented world and just continued to be in exceeding and how they try to do that and try to add creativity and energy and new ideas to it on an ongoing basis in ways that both delight the new customer, but also meet the needs of all of our existing and long standing customers. I would say, our challenge has been and our learning on reflection has been that probably as a leader team we haven’t moved fast enough to evolve the structure of our merchandising capability to respond to just how fast the product cycles are evolving in the world. And, that's definitely on us, on our leadership team. And so one of the things we're doing now having done the heavy lifting of bringing the Q&H organizations, merchant organizations together, so that we could take more of a holistic category view of our opportunities and combine these really talented resources. Now, the next phase of that, now that we're largely stabilizing that organization is to really invest in more specialized capability to be out in market more often, to take all the administrative activities off of the backs of our buyers to get them out in the market to build more product…

Great, thanks so much. Thanks.

Thanks, Ed.

Next, we'll move to Alex Fuhrman at Craig-Hallum Capital Group.

Great. Thank you very much for taking my question. I wanted to ask about the closure of Ingenious Designs. If I'm interpreting your comments correctly, Mike, it sounded like the products were selling well, but the business behind it wasn't very efficient. Can you just give us a little bit more color on why you made the decision to close that subsidiary? And then just looking out at your other proprietary brands across both Q&H or are there any other brands that stand out as perhaps having businesses that that aren't great that are either an opportunity to do some restructuring behind the scenes are or perhaps are at risk of also getting closed?

Yeah, thanks, Alex. I would say there's nothing else that's kind of parallel to Ingenious Designs. So I don't think there's any learnings or risk from Ingenious Designs that apply more broadly across the business. There's a very unique situation where HSN had a wholly owned subsidiary that was operating as a separate business located in New York with a very high cost structure. And quite frankly under resourced for the products it was developing relative to our own existing proprietary development capabilities. And so we had a business structure that was uneconomic and then also we had a wonderful partner in Joy [ph] who's been a very important part of the QVC story and HSN story for many years. But, discussions with her she was ready to move on. And we were just sort of collectively felt a need to make a change. So fairly unique situation, a lot of the products will continue by being developed internally as opposed to through the subsidiary. So good, unique situation we anniversary at the end of the year, don't think it has a lot of application beyond Ingenious Designs.

Okay, that's helpful. Thanks. And then just thinking about the shorter shopping period this year between Thanksgiving and Christmas is that something that you can share with us just historically, how much of a headwind it's been when we’ve made that full week leap in the calendar?

We certainly looked back at every seven years or so when this happens six or seven years. And I would say it's hard to - the world changes so much that I think it's very hard to extrapolate what the impact will be. Last time it happened, just the whole dynamics around Black Friday week were radically different than they are today. So we don't know what the impact will be. We just are prepared trying to get as much demand in as we can and hopefully the impact will be modest, but we haven't been able to find a good historic analog that will would be ethical, relevant reference points, given how much has changed.

Sure that makes sense. Thanks very much.

Thank you.

We’ll go next to Jason Bazinet at Citi.

I think I heard in your prepared remarks, you've reiterated your long-term synergy targets, but I was just wondering [Technical Difficulty] it was about 80 million?

Jason, we blipped you there for a little bit. Maybe you could repeat your question.

Oh, sure. So I heard you maintain - you said you're going to maintain or exceed your long term synergy targets. But I was just wondering if you could give us an update on where we are as of the third quarter I think as of the second quarter it’s about $80 million of net synergy realization and we're looking for maybe $135 million for the full year?

So through the third quarter we’re now at $110 million, for the year our - we were anticipating $165 million to $170 million gross. That would have been - there were approximately $24 million to $25 million of onetime costs that would have been associated in order to get to that $165 to $170. Basically on where we are today, we feel as if we are able to accomplish our 2019 goal for this year.

Okay, very helpful. Thank you.

And we'll go next to Thomas Forte of D.A. Davidson.

Great, thanks for taking my question. So, Mike, I want to know if you could comment on the comparison in conversion rates for some of your digital engagement versus legacy. So TV versus qvc.com versus Facebook Live versus Roku? Thanks.

Thanks, Tom. Yes, that's a tough question because it's obviously hard to truly measure conversion across these platforms, keep in mind that we can’t associate a TV viewer to a sale. We have TV viewership data, but it's all anonymized. So, I guess, I would characterize the overall conversion funnel as we have an enormous volume of people watching QVC or HSN TV at any point in time, the vast majority actually not customers. So we even in today's world, that pool of non-customer shrinks a bit with core cutting, but even with core cutting, we still have this enormous opportunity to engage that non-customer as well as obviously engage the customer. We've talked a little bit about the fact that that it feels like the sort of immediate translation of TV viewing moment to a sale feels like it's not quite as tightly correlated, as its historically been. I think that's I don't want to overplay that point. But I think there is some truth to that just because, folks will take their time to go check it out on the website and do other forms of research. So there can be some other intervening steps that might not have been historically there. We have very high conversions when we get traffic to our website. So even though again, most of our traffic to our website is also non-customers, the power of that TV signal is such that our conversion rates on the websites are absolutely industry leading or typically north of 5% conversion rates, which is, two to three times what the other folks would have, just because of the power of the overall ecosystem. Still early days on platforms like Roku. So, if you just thought about the number of homes that Roku was in, I would say we convert a relatively small number of those homes to a sale. But if we can get them - if we can market to them, get them to download the app, get them to engage in the experience, then we can start to see attractive return conversion rates. So we're in a learn mode on those platforms, but like the power of those platforms to create a more interactive experience for the customer.

Thank you, Mike.

Thanks, Tom.

And we'll take our final question from Victor Anthony at Aegis Capital.

Hey, guys. So, Mike, you talked about, I guess, the foremost headwind for the business is really just a choppy retail environment. Is there any relieving sight for that? Or has this just a sustained norm? And second on Zulily, you talked about the low marketing spend efficiency we talked about for quite some time now. I know some other companies in the space have kind of called out there are changes that Google has made either on the mobile side or on the desktop as well. Maybe you could just give us a little bit more detail in terms of what's driving that marketing spend efficiency? And at a higher level for Zulily, is there any sort of structural, I guess, issue with the model that's probably contributing to I guess the decelerating growth that we've seen in the business? Thanks.

Thanks for the questions. So on the QxH side on the choppy retail environment. I don't think that's a new norm. I do think we're in an unusually tough cycle with apparel, accessories and footwear in negative growth territory. They were not a negative territory last year. So we live in this funny year where we see the growing separation and performance of different retailers heavily driven by what segment of retailing your area. But clearly folks that are in the sort of mid-tier, fashion and - mid to upper tier fashion and beauty business. We're in a tough cycle. Do I think that cycle continues forever? I don't. When does it evolve? When does it change? I don't know, it looked different last year. I suspect it will look different in the future. I separate that from just the - I talked about both the choppy retail environment and the sort of change in industry context. The change in industry context is ongoing, was that core cutting or price competition and we need to win in that changing context. But in terms of the sort of current shop, it feels a bit exaggerated from what we normally see it feels like an unusually adverse cycle. We by no means use it as an excuse for our performance, we need to do better even in average cycles, but I do think that can come around overtime. On the Zulily side, you hit on one of the issues, so I would oversimplify it, I would say there's kind of a couple of real marketing related pressures at Zulily. One is just that our e-mail has historically been a very powerful platform for Zulily to engage its 50 million, 80 million, 90 million prospect base. And that has become increasingly difficult, especially…

And it does conclude today’s conference. Again, thank you for your participation.