Good day, ladies and gentlemen, and welcome to the Q1 2015 Discovery Communications Incorporated Earnings Conference Call. My name is Allison, and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. As a reminder, this call is being recorded for replay purposes. Now I would like to turn the call over to Ms. Jackie Burka, Vice President of Investor Relations. Please proceed.

Good morning, everyone. Thank you for joining us for Discovery Communications 2015 first quarter earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com. On today's call we will begin with some opening comments from David and Andy, and then we will open up the call for your questions. Please keep to one question so we can accommodate as many people as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Annual Report for the year ended December 31, 2014 and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I will turn the call over to David.

Good morning, everyone, and thank you for joining us. I'm pleased to report that Discovery is off to a strong start to the year, and despite facing a challenging U.S. marketplace and increasing currency headwinds, we continue to execute our long-term strategy of investing in marquee content, leveraging at across our unmatched distribution platforms around the world, and driving operating momentum and strong financial results. Discovery was founded 30 years ago with a mission to satisfy curiosity, ignite minds and educate and entertain viewers. Our purpose-driven approach continues to drive our global content engine today. It sets us apart from our peers and propels our sustained ability to produce strong results over the long-term. Nowhere is that more clear than on our flagship Discovery Channel, which kicked off its 30th year on the air stronger than ever and has been resurgent from the second half of last year. Discovery had its best quarter ever in prime in the target demo, and its total viewers in the U.S. saw a double digit increase over a year ago. Rich Ross took over as President in January and is off to a fantastic start. While much of his creative vision won't hit the air until the third quarter and fourth quarter, Rich has already put forward and delivered results on a plan to diversify Discovery's audience, attracting more women, Millennials and co-viewing while continuing to nourish our core male audience and passionate super fans. For the quarter, Gold Rush was the number one unscripted show on cable with all male demos and the number seven with women 25 years old to 54 years old, and new hit series, Alaskan Bush People, was the number two unscripted show among men 25 years old to 54 years old on cable and was in the top…

Thanks, David, and thank you, everyone, for joining us today. As David mentioned, we're excited that Discovery is off to a very solid start to 2015. On a reported basis, total company first quarter revenues increased 9% and adjusted OIBDA increased 8%. As expected, given our increasingly international business mix, the continued strengthening of the dollar remained a major headwind and changes in currency rates reduced our reported revenue growth by 8% and reduced our adjusted OIBDA growth by 6%. Excluding currency, revenues and adjusted OIBDA were up an impressive 17% and 14%, respectively. On an organic basis, so excluding the impact of foreign currency as well as contributions from Eurosport and Discovery Family, which have not yet been fully lapped, total company revenues grew 6% and adjusted OIBDA grew 11% as revenue growth outpaced cost growth by 200 basis points. Our strong and successful cost discipline led to total company margins on an organic basis of 39%, up 200 basis points from the first quarter of 2014. Net income available to Discovery Communications of $250 million was up 9% from the first quarter a year ago, primarily driven by the strong operating performance in the current year and an $11 million year-over-year improvement in mark-to-market equity-based compensation, partially offset by a $12 million decline in equity earnings, $8 million of higher interest expense and $6 million of higher restructuring costs. As expected, equity earnings declined as positive first quarter earnings at OWN and other non-consolidated investments were partially offset by losses from our 50% stake in all3media, related to below the line items. We also lowered our effective tax rate another 200 basis points from the full year 2014 rate to 33% this quarter as we remain extremely focused on lowering both our effective and cash tax rates. We…

Thank you very much. Please, stand by for your first question. And the first question comes from the line of John Janedis from Jefferies. Please go ahead.

Thank you. David, as you mentioned, beyond Discovery, your ratings across your portfolio have largely decoupled from the industry this year. Can you talk about the drivers more so meaning is it a lot more original hours, a different way to promote them, and in the second quarter where ratings are scarce, can the gap in ad growth between you and the market widen further?

Okay, thanks, John. First I would say broadly we've effected a strategy which we started about a year ago which is to get back to the core brands, and I think that's really working for us. I think there was some brand drift across the industry, there was some brand drift across our platforms, and in order to have our content working stronger here in the U.S. having more value to advertisers and working in a much more compelling way around the world. We got rid of some of the programming that wasn't on-brand. And so you really see that difference on Science, you see it on Discovery which has been two of the bigger drivers, having Discovery now as the number one network in America for men 18 years old to 49 years old for the majority of this year, and having that kind of leadership and having that content work around the world is a big deal for us. And it goes through every one of our channels that we've really focused on; what is the brand, how do we deliver on it. And I think that works also not only for around the world and in the U.S. but we own all that IP. And as this transitions to people want to be curated for the content they want, people knowing that when they go to Animal Planet or they go to Science or they go to Discovery or TLC or the Oprah Winfrey Network that they see content on-brand, it reinforces the viewership. I think that's one of the reasons why we're seeing gains. Quarter-to-date we're either up 1% or relatively flat against a market that's down 7% or 8% and in April we're seeing even better trends. So I think that pivot to being on-brand…

Thanks. That's helpful. Maybe separately, since last quarter's call there's been a lot of discussion about skinny bundles and where Discovery fits within them. How important is it for you to be a part of them? Do you think the Verizon offering will have broad appeal from consumers and does it pose risk to you or the ecosystem if others follow?

Okay. I don't want to really speak too much about any particular player, but the ecosystem at least for the next few years, I believe, will stay together in terms of the overall majority. For most of our channels we have contractual agreements, long-term agreements that require 90%, 85%, 95% that our channels be provided. So the ability to just determine to offer a smaller bundle, I just don't see that as likely given the contractual obligations across the industry. Having said that, since we own all of our content, to the extent that others want to pick the best channels and make those available domestically and around the world or even take content outside of channels and offer them, that's more dollars for us and more opportunity. In the longer term, I think it's important for us to continue to keep the existing ecosystem, which is very favorable to us, and as we transition to fight for the right kind of economics, like platforms like TV Everywhere. So I think that you'll see it at the margins, if you look at what Charlie's doing, it's starting, it's growing small but there are certain gates on that in terms of its ability to be marketed to only subscribers that don't have cable. I think the Apple platform is interesting. And all these things are good if you own all of your content and you have content that people really want. And that's why we've been really focusing hard on our super fans, who loves Discovery, Science, Oprah, Animal Planet, ID, having really strong brands that people love that we can curate to is more important, I think we got out early on that and we'll continue to take advantage of it.

Thank you.

Thank you. The next question comes from the line of Michael Nathanson from MoffettNathanson. Please go ahead, sir.

Thanks. I have one for David and one for Andy. David, you were one of the only media companies and one of the only execs I know to stand up and oppose the Comcast deal. I wonder, do you feel retribution when that deal comes due later this quarter or do you think that the fact that you were so public gives you counterintuitively some protection that Comcast won't drop you because it's such a public squabble. So I wonder what was your thinking in going public and opposing that deal? And what do you expect to happen in the next quarter?

Thanks, Michael. Well, first we didn't oppose the deal, what we said is we had some concerns about it. And at this point, look, we've always had great respect for Brian and for Neil and Steve Burke and I've worked with them over the last 30 years, they're very effective, they run a great company. And we've always managed to work together. The concerns that we raised, the concerns that we raise around the world, issues of what does consolidation do to content? What happens in terms of content investment; that's all behind us now. I think the goal for us and for Comcast is to find a deal that makes sense for both of us. We've been able to do over the last three years over 180 deals where we were happy, the distributors were happy. We represent between 12% and 13% of viewership on cable and we still only represent between 4% and 5% of the economics. So, I think we're quite attractive with Discovery as the number one network and TLC as number one in many of the markets in Middle America, and as we've said, a lot of the affinity channels that we have like Oprah and Science, we've had conversations and negotiations. I'm going to see Neil later after this call, I'm headed to Chicago. I saw Neil on Saturday night. And so I think that it's business as usual now. Comcast is a great company; they're going to look to create a deal that's fair for them and so will we and we have plenty of time and we're very hopeful that we'll get something done; I know they are, too.

Okay, hey, thanks, and let me ask Andy, when you look at your domestic cost growth for this year, what quarter or two quarters do you think just gives you the highest cost growth, could you talk a bit about your profile of expense growth domestically this year?

Sure, Michael. Yes, we're very happy with how the cost trends have played out. We've been saying for a while now that we're committed to revenues growing faster than expense. We saw both in the U.S. and globally margin expansion in 2014 and in the first quarter of 2015 and we certainly see that trend continuing over time, but to answer your question we do think costs will uptick in the second quarter and third quarter based on predominantly timing of content, when they air and some marketing investments and then they will abate again in the fourth quarter. But, again, the focus on margin expansion both in the U.S. and internationally couldn't be more real and has been playing out very nicely for us.

Okay. Thanks, Andy. Thanks, David.

Thank you very much. The next question comes from the line of Benjamin Swinburne from Morgan Stanley. Please go ahead.

Thank you, good morning. One for David; then I have a quick follow-up for Andy. David, you've acquired a lot of assets overseas to build scale. And I think at least some had the expectation that affiliate revenue growth over time might accelerate particularly in Europe given how much you've built the portfolio out. But it seems to be slowing and I think part of that might be by strategic design as you pivot a little bit more free-to-air but I don't want to over-read the quarter. So, could you just spend some time talking about the affiliate revenue growth outlook and maybe just the general strategy to drive the top line internationally given what you're seeing in the landscape over there?

Sure. Thanks, Ben. Look, I think that the fact that we have 10 traditional channels in 220 or 230 markets and now we have two to three sports channels across all of Europe, these are long cycle, these deals, and they take some time. What you've seen in the short-term is, given the geopolitical issues in the Ukraine, which as we all know what's happened there, we took a one-time only hit there from – because it's affected the cable market. And in one – Andy said markets, it's really one market in Eastern Europe, and we'll announce in the next few weeks which one it is. We've gone from a pay-only to pay and over-the-air, I think it's going to be quite effective for us, I think it's going to be a very good deal. It'll generate more value for us. We're able to – Turkey is a market, that doesn't have – oops, it doesn't have enough pay-TV, so that's a market that we're going free-to-air as well as pay. And we think we'll get pretty meaningful incremental value out of that. Having said that, we still think that you'll see a trend to high single and longer-term you will see some good affiliate growth as those deals come up, as we have an ability to take advantage of scale and the scale is part of the scale is our market share growth. One of the key elements for our growth as a company has been that we've been able to grow our market share outside the U.S. and it translates almost pretty efficiently to advertising revenue, and we're getting a little better at advertising revenue, so we're over delivering. So the fact that we were up 10% in market share around the world and then we were…

Thank you. And just quickly, Andy, on currency, it looks like it was an even more significant hit to the international advertising growth this quarter. If you could just remind us of how the ad exposure compares to affiliate? It looks like there was a, I mean, a bigger SKU in Latin America, I'm just guessing looking at the results.

Yes, yes, the currencies continue to, Ben, as you know, to move against us. The ad sales exposure particularly with the euro, you look at some of the Nordic currencies, you look at Brazil, places where we have a greater proportion of free-to-air and ad dollars, that's where the currencies have moved against us. We have a success, though, if you look at what we said at year end, we said, well, the revenue impact from foreign exchange is going to be $350 million, $150 million OIBDA, we updated that today to say it's $475 million (sic) [$425 million] (46:49), and $150 million. So you do see that our hedging strategy is working, we are mitigating some of our bottom line exposures, but clearly the proportion of revenues coming out of Europe do dictate more ad sales impact.

One last point, Ben, on advertising. There were some markets where I think a lot of the hard work that we've done will really pay off over the next couple of years. Some of the issues that we see, the gestational slowing of the U.S. and the question of what business models will emerge and how quickly and what will happen to bundling over the next five years to seven years, and outside the U.S, in a number of markets, particularly Latin America and India, it feels a lot like the U.S. did 10 years ago and a lot of what we see here will take many, many years. Brazil, for instance, reached 30% cable penetration last year. As a result of that, we saw 40% or 50% advertising gains. Brazil is probably our strongest market; we're the leader in kids, we're the number one cable channel in all of Brazil, not just for kids, we have a channel called Home & Health, which is like the Home & Garden of Latin America, and that's the number three channel for women down there and we have Discovery, so when you look at our 11 channels in Brazil, it's extremely strong, we have five of the top 15. And coming off of last year where it was up 40% to 50%, we're seeing growth this year of another 40% to 50%. And so, there is this moment in a lot of these markets where all of a sudden what was just DR starts to move over into advertising and you start to see the acceleration that we saw here in the U.S. in 1996, 1997, 1998. And so, Mexico and Brazil in particular I think are going to be engines that will really help us both gestationally, but also in terms of revenue growth because we have such strong content down there.

Thank you, both.

Thank you very much. The next question comes from the line of Alexia Quadrani from JPMorgan. Please go ahead.

Thank you. On the U.S. advertising front in the domestic networks, I guess my question is, I think you previously mentioned having less advertising spots this year. I guess, can you give us some color how you think that will give you some leverage, whether it's in the Upfront or just generally in pricing? And then, just a follow-up question that's still staying on the U.S. on the distribution front; I know you've said you're not going to break out the over-the-top or SVOD going forward, but maybe more generally speaking, how we should think about U.S. distribution growth and the relative mix of the long-term of sort of traditional versus non-traditional?

Sure, thanks so much. Look, I think there's always this balance, but we have opted not to add meaningful inventory into our services, and I think this is a key element for us. When people go to Discovery, when they go to Science, when they go to Animal Planet or Oprah, we think that the load is critical. So that 1% could've been higher if we added some more spots, there's no question about it. We're significantly less than a lot of our peers, but we think for long-term brand value that's important. And I think it's a philosophical long-term position for our company. We're still investing a lot in content, we're investing in IP, we're seeing how do we position Discovery so that we have more viewers, we have better content and we have more strength three years to four years from now than we do now. So, you won't see us adding a lot of minutes to make a good quarter. We're going to focus much more on are we getting more people enjoying spending time with our channels, are we building more characters and building more shows that could really work, not just on linear but outside of linear. Right now, SVOD is relatively immaterial here in the U.S. because we own all of our content and we have a 30-year library. We have a fair amount of optionality. And depending on how the marketplace develops, there's a chance for us to do that, but that would be upside. And if there is a change in the marketplace and there is curation directly to consumers even if that content is not brand new, the ability to develop content, which we've looked at, for instance, on Science, developing a Science app, it's already converted into 48 languages. There has been some interest, as we've looked into the marketplace for Science, there could be some interest in Animal Planet that we could offer, much like you would see a Silicon Valley new media company, where we could offer some of those worldwide concepts like Science or Animal Planet in an app around the world over-the-top with content that isn't even that fresh that could nourish an affinity group. And that could be incremental, but that's not built-in today.

Thank you very much.

And just to add to the domestic distribution trend. This has been a multi-year effort for us. We've talked about our share of viewership is much higher than our share of wallet. So, the deals we've done in the last three years, we talked about the rate increases, we talked about the various economic benefits, and you see that in spades in the first quarter with the organic distribution rate up 8%. So that traction and those new deals continue to support not only our brands and our content but trying to close that gap between share of viewership and share of wallet.

Thanks, Andy.

Thank you very much. The next question comes from Todd Juenger from Sanford Bernstein. Please go ahead, sir.

Oh, hi. Thanks a lot. I'll keep it to just one question at this point in the hour. Just like to turn back to content strategy and I guess related to expense also; I know Rich has now firmly installed and last quarter you mentioned several high-profile direct reports to Rich overseeing things like scripted or programming miniseries programming, you talked about broadening your appeal to more targets. I guess, one, listening to all of that could interpret that to sound like somewhat of a shift toward a little more scripted or, may I say, expensive-sounding programming, I just want to test you whether that would be a correct interpretation, whether you feel an imperative given the increasing on-demand consumption model to move to more sort of higher profile and maybe even scripted programming or would that be a misread, is it more just getting more to the core Discovery non-fiction plan? Thanks.

Yes, thanks, Todd. No, and, in fact, I would say that you'll see more resources going against our best characters and shows and against blue chip. And we have two initiatives there, and some of these actually are less expensive. We have a 30-year library of fantastic content in the space genre and natural history and some of it has been narrated or edited in a way that feels like it's a little bit old, and so one of the initiatives that John Hoffman is looking at with Rich is an initiative called, Hello world!. We have the best library in the world of content. And we're now working with a number of the best producers and musicians to create kind of a fresh, a refresh of a lot of the fantastic content that we have, so that we can get another shot at that. We also have an initiative called, Discovery Impact, which is a socially conscious, what's happening with the world, whether it relates to water or the environment or extinction of a lot of the animal races that were – racing extinction is just one of those. But we don't see a significant increase in investment. What we see is a hyper-focus on blue chip and the quality content, and we will be doing some stuff with John Goldwyn, who is great and he'll be overseeing scripted but we think we could do scripted in a much more efficient way; we're going to do it in more long form as opposed to one-offs and we'll do it with content that could work around the world so we could share it across 230 countries.

Yes, and just to add the financial perspective on that, Todd, we still see the U.S. content growth being low-single digits to mid-single digits, international as being mid-single digits to high-single digits. So that parameter of how we see the cost trends does not change.

That's very helpful. Thank you, guys.

Thank you very much. The next question comes from the line of Anthony DiClemente from Nomura. Please proceed. Thank you.

Hi. Thanks a lot. I have one for Andy and one for David. Andy, just on the buyback, going back to the TF1 put, you mentioned the $1.5 billion available for the year. Is it fair to assume that if you have no M&A and TF1 doesn't put their stake, that you'd use the majority or all of that $1.5 billion on buybacks? Can you just give us a little more there and then a follow-up for David?

Yes. Well, the answer is clearly yes, Anthony. We still see the $1.5 billion, as you said, of capital availability. Clearly, our priority would be on strategic bolt-on M&A and the TF1 put is part of that. But look, we couldn't be more bullish on our stock today. And I've said before, I'm a very simple free cash flow per share guy. When I look at that IRR, it's incredibly compelling to David and the board and I; so the answer is yes. That clearly is where we'd put available capital, staying within our BBB rating, which is an important strategic imperative for us.

Great, thanks. And then, David, I couldn't help but notice that you mentioned that you thought Apple TV was interesting. Just wanted to probe a little bit there what you think is compelling about it for the consumer, and then would you consider doing a deal with Apple TV that encompassed only let's say a few of your networks as opposed to all of them? And then do you think that you'd include a robust portion of that 30-year library that you've mentioned; would VOD content from Discovery be a big piece of that sort of agreement (57:17)? Thanks.

Thanks, Anthony. We can't speak about any specific deal. Really, we are platform-agnostic. But I think as there is some transition within the marketplace, the fact that we have – that Discovery is stronger than it's ever been and is the number one channel for men 18 years old to 34 years old in America and we're winning a number of nights where we're even beating the broadcasters. The fact that TLC has real strength where we can be in a position where several nights a week in 40 of the Middle States in America we're the number one cable network for women and Oprah is – and Tyler, Tyler's programming when he goes on the air on OWN we have over a 20% share of the African-American community and Oprah's programming is working so well on OWN. And ID is the most – is the stickiest channel on cable. These become more and more important when people can make choices about what shows they want and what channels to put on different platforms and how much they're going to pay for those channels. Because in a world where there's a lot, a lot of opportunity, you want the best stuff with the most people that are yearning for it. For us, it's all about the economics. We want to make sure we get the right economics for our programming. We opted not to do certain SVOD deals in the U.S. because we didn't think the money was strong enough and we thought we'd rather hold on to it ourselves and either do something ourselves directly with consumers or do something with the existing distributors. And every time there's a new player in the market that's looking for content, if we as an industry can stay disciplined about economics and how that content is offered, it just reinforces the fact that whether it's Apple, whether it's a Sony device, whether it's a cable-distributed product or a satellite or any new device, those are all essentially, in the nicest way, they're a pipe or a device to a consumer. What the consumer really wants is great brands, great characters, great stories that make those devices or those interfaces come alive. And anybody that's going to curate on any of those platforms, no one's going to buy it for the pipe or the platform. And so, our mission stays the same, but even more focused on the best content, the best brands will make Discovery more successful in the future on every platform.

Thank you.

Thank you very much. This is the final question; it comes from the line of Rich Greenfield from BTIG. Please go ahead, sir.

Okay.

Rich?

Rich has disconnected, sir.

We have to wait for Rich, otherwise he's going to be mad at us. We don't want Rich mad at us.

One last question?

Okay. A couple of people have now disconnected. Please confirm who you want as your next question, please.

Is Rich back on?

He's not, sir. I have one final question now; it comes from the line of David Bank from RBC. Please proceed.

Wow. Okay. Well, thank you, Rich, for dropping off so I could get in here.

We didn't do that. We didn't do that.

And I assure you I didn't have him drop off either. So, look, to offer greater transparency in the affiliate growth, you kind of helpfully called out some of the drivers domestically for distribution, including the Sony distribution deal. I think, I can't remember if Andy or David called it out, but no good deed goes unpunished. Since you kind of called it out; is the Sony deal, and maybe – I know you don't want to talk about specific deals, but maybe talk about it as kind of a template generally for these kinds of deal. Was this more of a bulk take or pay kind of deal? Or was it based on existing subs during the quarter? How does it reflect a template as we see some of these new over-the-top IP-based cable systems or MPB systems rolling out? Thanks.

Okay, thanks, David. We just can't talk specifically about any one deal. Sony's a very good company and they're offering I think a platform that's interesting and we're rooting for them. We hope they, like every other platform out there, does well. I would say that when there's a new platform, if we have channels that have real leadership with affinity groups and we're very strong, particularly with young demos as we are across a lot of our portfolio, that it gives us a strong hand in those discussions. But, again, we're coming off a small base. When you look at our overall – the revenue that we take from the marketplace, most of the money goes to sports and retrans. And that's just – we don't complain about it because that's the way it works. But if you looked at those players, they would have a percentage of viewership and then the revenue would be a multiple, some percentage significantly higher than that. In our case, we have 12% trending toward 13% of viewership and we have between 3%, 4%, or 5% of the economics. And so, even when you look at those existing platforms, not only are we attractive because our content has some leading edge to it and the demos that we deliver, but even if we get what looks like a great deal for us or a very favorable deal, still compared with some of the other content that's out there, we're a pretty good buy. And I think that helps us, domestically and around the world, that to be the number one channel in America 18 years old to 49 years old and look at our cost base versus some of the guys that we compete with, including the sports guys, that's pretty compelling model. And that's pretty much true in the majority of countries around the world, that we're the number one channel for men in non-fiction. And in many of these countries where we've launched over-the-air Turbo channels, the demo is even younger. We're really in that 18 years old to 25 years old with the cars. And so, I think aggregating those audiences is going to be helpful and we tend to get much better deals with new players around the world. But it also is because our – the looks of our content compared to the sports guys is much more reasonable, and unscripted.

And just to quickly clarify, David, the numbers.

Yes.

It was a de minimis impact on our first quarter affiliate. The plus 8% was driven by the many deals we've gotten done, both at end of 2014 and the end of 2013. So that continued traction on the distribution line was more driven by the substantial increases on the base business.

Okay. Thanks, Andy. Thank you, guys.

Thanks, everyone.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.