Good day, ladies and gentlemen, and welcome to the Discovery Incorporated First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning, everyone. Thank you for joining us for Discovery’s 2018 First Quarter Earnings Call. Joining me today is David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at corporate.discovery.com. During today’s call we will begin with some opening comments from David and Gunnar, after which we will open the call up for your questions. Please try to keep to one or two questions, so we can accommodate as many folks as possible. Before we start, I would like to remind you that today’s comments 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, 2017, and our subsequent filings made with the U.S. Securities and Exchange Commission. With that, I’d like to turn the call over to David.

Good morning, everyone, and thanks for joining us today. The first quarter was a transformational period for Discovery, marked by a number of important milestones that will help to further differentiate our strategy from the rest of the marketplace, enhance our portfolio of quality, trusted brands and position us for our next generation of growth. In addition to reporting solid operating momentum across our businesses, we closed on our Scripps transaction and quickly began integrating the two companies. And thus far, I can unequivocally say, we love this combination even more now than when we first announced it. As Gunnar will detail, our combination is exceeding expectations on every level, which you will see reflected in our upwardly-revised synergy target, and we are continuing to drive more synergy value off of this base, and look forward to updating you in future quarters. In short, we feel real good about where we are, operationally, financially and strategically. And we see multiple areas where we can create meaningful long-term value. Behind this momentum, we are ahead of plan to rapidly reduce our debt levels and now plan to be around four times net debt to pro forma adjusted OIBDA by the end of this year. I’d like to share a few thoughts on the state of our industry, our differentiated position as the global leader in real life entertainment and why we are increasingly confident in our strategy. Let’s start by looking more closely at the current state of our business. Despite the challenges of the ecosystem, our existing business continues to show real growth. Net growth continues at the same time we are investing meaningfully across the company in new opportunities like direct-to-consumer, new technology that we expect to bear fruit and give us meaningful growth in the years ahead. We…

Thanks, David, and thank you everyone for joining us today. As David expressed, this is an incredibly exciting time for us, and I could not be more optimistic about the opportunities ahead of us in transforming the new Discovery. I will first provide a brief overview of our first quarter results, followed by an update on our integration and transformation efforts, and will close with our outlook for the second quarter and fiscal year 2018. My commentary today will focus on our constant currency pro forma results unless otherwise stated which differ materially from our reported results given reported actual results only include 26 days of Scripps as of the merger’s close on March 6, whereas pro forma results are more [ph] reflective (16:01) of our underlying trends. Please also note that pro forma results include the operations of Scripps as well as OWN and Motor Trend, formerly The Enthusiast Network, as if all had been owned since the beginning of 2017. Please refer to our earnings release filed earlier this morning for all of the detailed cuts for our first quarter results. Now, let’s delve into the numbers. On a constant currency, pro forma basis first quarter total company revenues grew 10% driven by 2% domestic growth and 26% international growth, while adjusted OIBDA was down 6% with 1% U.S. growth and a 30% decline at international largely driven by the timing of the Olympic Games as we had highlighted on our fourth quarter call. Note that Discovery stand-alone first quarter adjusted OIBDA was down 9%, better than what we had guided to, due to strong cost controls across the board. And also note that excluding the impact of the Olympics, both Discovery’s stand-alone adjusted OIBDA, as well as pro forma adjusted OIBDA were positive. Looking at each operating…

Thank you. [Operator Instructions] And our first question will come from the line of Drew Borst with Goldman Sachs. Your line is now open.

Great. Thanks for the question. Wanted to ask about the synergy target. Thanks for the update. Do you anticipate – the $600 million, do you anticipate reinvesting any of that back into sort of growth initiatives for the business?

Well, so we – if you look at what we’ve said previously, we continue to make investments in our business for future growth a priority, and we have already budgeted for significant investments in our digital activities around the entire global footprint. So that will continue to happen. We do believe that the $600 million that I pointed out earlier are going to be a net impact that’s going to fall to the bottom line.

Drew, as we look at the synergy, just simplistically, Discovery itself is at about 1.4 – was at about $1.4 billion in free cash flow and Scripps was at 8. And we look at the cost synergy that we have, we have $600 million now in hand that we believe we can fully execute on, and we still have a number of buckets that we’re looking at, another 40 or 50 workstreams, which we’ll get back to you on. But our target is, we really think that we can – there’s no reason why we shouldn’t better than double our free cash flow. One of the main reasons for this transaction was all the strategic elements that we’ll talk about, and how this grounds us as maybe the leading IP global media company in the world. But when we look at our $1.4 billion, together with our synergy, we think we can get to $3 billion. And so, getting to $3 billion for us is a target, but we’re going to be relentless about it. And we also think that there’s some upside to that as we look at revenue opportunity moving our content around the world, and seeing how this great portfolio works with the advertising market. So that’s our target.

Great. Thank you. And if I could just get one more in, I wanted to ask about the legacy Scripps business. And I don’t want to dwell on this too much, because there was obviously a transition quarter with the deal closing in March. But, based on the numbers you presented, it did look like the U.S. Networks EBITDA for Scripps legacy was down a little bit, maybe low-single digit, 3%. I was wondering if you could just spend some time talking about what happened there in the quarter? And maybe more importantly, what do you see for sort of the remainder of 2018 at the legacy U.S. Networks for Scripps?

Well, generically as a big driver is the ratings of Food and HG, and one of the values of putting these companies together is not only the global scale that we have, but the portfolio that we have in the U.S. And we’re never going to be in a position where all the business – all the channels are growing at the same time. A year-and-a-half ago TLC was down 25%. We said to you we’re going to focus on who the audience is, how we grow it. We said we thought we can continue to drive ID. We thought we can get Science going and Velocity. Discovery has been down; Food and HG are down and one of our big priorities is focusing on those audiences. In the case of HG and Food, the actual household audience is quite strong. What we really need to do with those two channels is continue to refresh them and grow them, and we got a great team. One of the reasons that we were so attracted was the quality of the leadership there, and we’re convinced in spending more time with Kathleen Finch and her team, that we have a great team. But we are doing a lot of work on who the audience is, how we continue to nourish them, it’s what we do for Living. But we also have been more aggressive in getting our authenticated GO apps out. I mentioned that we’re generating 25 million streams, it’s primarily people under 30. That’s something that wasn’t being implemented at HG and Food. And so a piece of this is really trying to innovate those platforms by getting the content authenticated on all devices to as many people as possible as quickly as possible, and we think that will generate some growth. But then really digging in, like we did at TLC, like we’ve done at ID and like we did at Discovery and we need to do again to continue to grow. We look at the marketplace and we think it’s really a function of us. There’s an opportunity for us despite what’s going on in the marketplace to grow these channels, and we just have to do as good of a job as we can, creating quality content.

And then Drew, maybe from a financial perspective, one thing to keep in mind is the way I look at it is that Scripps essentially created a plain vanilla budget for the year knowing that we’re coming up on closing the transaction. So the Q1, “Scripps” stand-alone result is driven by increasing content and marketing expenses to sort of safeguard the asset. When I talked about the mid-single digit AOIBDA growth for the entire year earlier for the combined entity, that obviously includes the performance of the Scripps portfolio in the first quarter, and when it comes to an outlook for the rest of the year, clearly all those cost elements are part of our transformation initiatives, and we will look at everything. But it’s all baked into that mid-single digit growth guidance for AOIBDA.

Great. Thanks. Really appreciate that. It’s helpful.

Thank you. And the next question will come from the line of Jessica Reif with Bank of America Merrill Lynch. Your line is now open.

Thanks. I have two questions or two topics. First on the international, can you – Gunnar, you went so fast, I just – it sounds like the opportunity is rolling out Scripps content, and then also rebranding channels or creating new channels. I was hoping maybe you can give us more color on that, and are you planning on shutting down any channels? Can you size the opportunity and timing? And the second question is, David, talked a lot about, especially in your opening remarks about how the industry is changing which we all know. So if your leverage comes down to, let’s say, roughly the four times range by year-end 2018, our number, which may or may not be correct is 3 to 3.5 times year-end 2019. At what point would you consider making acquisitions or how do you think about the changing landscape, do you build or buy as your asset mix evolves?

Thanks, Jessica. So on international, you exactly pointed out the two most important levers. One is just lighting up the content in our global footprint, and as I said, we’ve been starting to create language versions for literally thousands of hours of content. We’ve put some stuff on air, but it’s very, very early days. But there will be different waves of rolling this out across the global footprint throughout the rest of the year, and we’ll keep you updated. And also programming teams in virtually all of our territories are looking at their programming strategy right now, and as for example in LatAm, there might be an opportunity to launch additional networks, create additional formats across territories. It’s early days still. We’re doing everything to get the stuff on air as quickly as possible. But it’s really too early to come up with any – very specific numbers here. On your question regarding leverage and capital allocation, so we will continue to follow the same logic that we have followed. Number one is the determination of our optimal leverage target range, and that continues to be at a 3 to 3.5 times leverage range. Number two is, we will then evaluate investment opportunities. We will continue to take a rigorous approach to make sure that we’re getting good returns, but we will make it a priority to grow the business. And number three is, we will continue to return excess capital to our shareholders through buybacks, and those will continue to be the priority, and as you rightly say, we’re at four times by the end of the year, so we should be breaking through the 3.5 times number during 2019. And that is exactly the logic that we will apply.

And we are on a mission in terms of speed. We think having that free cash flow in hand and that flexibility is very important. We like our assets. But we want to get down to a point where we do have that flexibility of looking, of investing more, of buying more stuff, of buying back more of our stock, just having the full flexibility to use that, figuratively the bullets that we have as a result of being a company that’s generating so much free cash flow. And we do feel like pace is important, because with things moving in the marketplace, we could uniquely acquire, invest, or take advantage of what we see as an opportunity even within our own company.

Thank you.

Thank you. And our next question comes from the line of Vijay Jayant with Evercore. Your line is now open.

Thanks. Just want to follow-up on your comments, David, about the digital opportunity. Obviously Scripps is on Sling and Hulu, but Discovery is not on, I think you have a cash deal with DISH this year. How optimistic are you given the relationship Scripps has there to get the Discovery channels on that? And then just quickly, as you look to de-lever the balance sheet, some of your non-strategic assets I think like UKTV and Lionsgate, are those potentially for sale to expedite that process? Thanks so much.

Okay. Thanks, Vijay. We don’t comment on deals. But we think that we have very strong quality channels. We think Scripps does too. And as some of these over-the-top bundles develop, we think we really are in the sweet spot, based on every survey of what people want, whether it’s Discovery’s number one or between ID, Food and HG, they tend to be either one, two and three or in the top three of the top five channels that people want. And we’re moving toward this point of instead of stuffing these bundles with what gets leveraged in through re-trans and sports to thinking about what’s going on everywhere else in the world, which is the way you build a product. What do people want? And we have a lot of the great content that people want and we’re investing in making it better. The other piece that’s important as you look at – as we look at where we are versus the marketplace is, you look at one side of the business with scripted and movies, and executing in a – with exceptional storytelling and they’ve attracted some of the best producers and writers. But it’s getting a lot more expensive. It’s getting a lot more crowded. And when you look at what are the offerings if you’re a consumer and you want to spend $10 or $15, what could you get aside from traditional cable? You get Netflix, movies and scripted. You get HBO, movies and scripted. STARZ and Showtime, movies and scripted. Amazon Prime, movies and scripted. And so when we look at what we have, we see all that as over there. I’ve said before, that’s kind of the ball at my kid’s soccer game, and everyone’s running over there. Well you look at the rest…

Thanks so much.

Thank you. And the next question comes from the line of Rich Greenfield with BTIG. Your line is now open.

Hi. Thanks for taking the question. A couple. As we look at the consolidation wave or maybe consolidation battles might be a better way of shaping it, there’s going to be a bunch of big companies that don’t win out on assets they’re trying to buy. And while you’ve talked about potential growth for Discovery, also wondering given that everyone seems focused on expanding outside of the slowing U.S. market into kind of the attractive overseas markets, what’s Discovery’s appetite to actually be consumed by one of these larger players? And then two, on AT&T Watch, during the trial a few weeks ago, Randall Stephenson essentially announced a product that’s coming, a sportsless bundle, that’s going to be free for probably 15 million, 20 million AT&T wireless subscribers. Wondering, David, is this the watershed moment for Discovery and the other non-sports cable network groups that you’ve been waiting for? And then just a little housekeeping point, Gunnar, you’ve mentioned that U.S. cable networks were actually helped a little bit by Food and by HGTV. Is there any way to look at what the organic growth rates were for the core Discovery networks?

Yeah, let me start with that last question, so that was related to my comment on subscriber trend, again on a consolidated, full portfolio basis, same pattern as in previous quarters with 3% sub decline for the fully distributed nets, and then 5% for the full portfolio. And you can think about it this way, Food and HG have been contributing positively to that 3% decline for the fully distributed nets and for Discovery stand-alone if you look at the old legacy Discovery portfolio, the trend has been bang in line with what we’ve seen in previous quarters.

Thank you.

On the question on AT&T, I don’t really want to comment on any specific company. AT&T is a great company. There are a lot of very strong multichannel to the home companies and they are listening to their consumers every day. I can’t predict whether the moment is now, but the moment is coming. Consumers can’t subsidize these massive sports rights anymore. It’s not fair. And we’re suffering from it. The idea that you have to pay so much money in order to get the bundle, it’s something I’ve been saying for years, I think it’s going to end. It will either be driven by one or two players moving quickly, and then others following or it will be driven by some of the entrepreneurial companies that are already popping up. But there’s no question in my mind, because it’s an outlier, you look at all the countries in the world and the skinny bundles and you see the ecosystem there in most countries healthier than we are, because we don’t have an offering for somebody that doesn’t have a lot of money. We don’t have an offering for someone that goes to college. Their only choice is to get Netflix. It’s not sensible that we have all these broadband subscribers, and that the only product that they’re offering now is Netflix. Why aren’t they offering products that they help develop or they invested in for all these years? And so I think sensibility will come to the marketplace. More importantly, consumers are going to get what they deserve, which is an entry level ability to have multichannel cable without subsidizing sports and paying a massive amount to get an entry. On the point of what’s happening in the marketplace, we love it, because we’ve been hanging out outside the…

Sounds like it’s going to be a fun summer.

Thank you. And the next question will come from the line of Alexia Quadrani with JPMorgan. Your line is now open.

Hi, thank you. Scripps has historically been able to achieve relatively strong pricing in their flagship networks. I guess is there any color you can provide about how that may compare with some of your key networks, and the opportunity to leverage that strength? And is that what you’re referencing at least in part when you’re talking about already seeing some revenue synergies in this coming upfront?

Sure. So, Alexia, that really was one of the most important points for us when we looked at Scripps last summer. If you look at the performance of the two portfolios, Scripps certainly has had a strength in their monetization of their ratings. If you look at it from a power ratio perspective, many people have done the math. They were at a 1.1 versus a 0.8 for us. That’s certainly something that we’re hoping to be able to get some benefits out of. And as David said earlier, the upfronts so far have been positive for us from a feedback perspective, it’s still early days from a negotiation perspective, but we do see a lot of interest and we have full confidence in Jon Steinlauf who has taken over the combined ad sales team, and that’s why I said, I do think that there is a nearer term revenue opportunity here, again, way too early to put some hard numbers against it, but we’re optimistic.

There are some broad reach comparisons as with cable versus broadcast, that when you look at them, they just feel out of whack. With broadcast getting $45, $50 CPMs and cable really in the $10 to $20 CPM, and then you take a look at our ability to deliver across our women’s networks on any given night, a three rating, or on a good night, a four rating or a five rating. The ability for us to – the differentiation from the perspective of the advertiser was the ability to generate scale. Well – and to be able to have reach that’s compelling. We now have some very strong reach and we have some ability to really give detail on demographics and people that may be arguably are more engaged with our platforms than they are on a broader platform. And so we think that there’s some opportunity to make the argument that we have a very – that our audiences are even more valuable. It’s an argument that we would have been making before, and it’s an argument that we’ll make now.

Okay. Thank you very much.

Thank you. The next question comes from the line of Steve Cahall with Royal Bank of Canada. Your line is now open.

Thanks. Good morning. David, maybe one for you, and then Gunnar one for you as well. David, you’ve talked for a few quarters now about the global rights opportunity. I think it’s one of those issues where investors remain a little suspect until there’s a deal on the horizon. So can you get us any indication of whether or not you think you might be able to do a global deal here in the next year or two? And then Gunnar, just on the free cash flow side of things, there’s a few areas just because you ran through a lot, I want to make sure I understand. As we’re thinking about the bridge into next year, can you just help us with how much of the restructuring, again you’ll have this year versus the future years? And then also how the savings sort of stack up between 2018 versus the years beyond? Thanks.

Thanks, Steve. It is a work in progress. We are [ph] IP long (52:32). We own all of our content on all platforms, and as much success as we have with the Olympics, and we had a lot of success, we really expected that most of the mobile players across Europe would – we have the rights to the rings, so we could provide the rights for mobile players to affiliate with the rings year-round. We could have provided a lot of exclusive content to different providers in the marketplace. It wasn’t quite ripe yet. But the idea that we own the Olympics for the next nine years, and we’ve had from the date that we did the deal 11 years to build around it is a, for us, we think a successful formula. And outside of the Olympics and Eurosport we own all of our content globally and we look at it really more in the long-term. But this – one of the big successes that we had with the Olympics was generating a half a million subscribers, paying for the Olympics in less than 10 days, and being able to build a platform that got top ratings and that generated 3,000 hours – over 3,000 hours of streaming and then ability to navigate and curate within that platform to very good reviews. And at the same time to provide content in over 20 languages in linear and on cable. So we certainly, more than any other company, know how to provide content in every language on multiple platforms. And what we learned about the Olympics is on a parallel track to what we’ve learned with the Eurosport Player, that people seem to be willing to pay and not churn out a lot on things that they’re really passionate about. So for the people that love the Olympics, they really want it. It’s one of the reasons why we’ve gone from the buffet which we still offer, to this idea, just like you buy a magazine for tennis or you buy a magazine for cycling, that we give you much more dense, much more IP, short form, long form within a specific area. And so we pass on a load of stuff, but we are on the hunt now with Food, with Home, with Cars, and we’re looking at what other opportunities are there globally to own IP for the long-term that we cannot only build a global platform, but monetize it. And we’ll be focused on what we pay for that IP, to make sure that we can generate global IP, but global IP that if we can get the turn, either through a global player or the regional player, that we can generate real value. Food and HG and Travel are three that we think we can globally take advantage of, but we are looking at loads of opportunities, but we’ve passed on a lot of them, because we’re looking for the right ones.

And then Steve, on the free cash flow, a couple of maybe clarifying comments on the synergy ramp-up. I want to make sure that you guys understand what we see as the potential, the $600 million plus. The timing of that is obviously still influx, right? And the delta is going to be, are we going to be able to get those numbers earlier or later. And that’s why I don’t want to give any very specific guidance for a fiscal year, which is a bit of a random cutoff. But if you look at the comments I made earlier, we’re looking at mid-single digit AOIBDA growth for the year, obviously that is to a large extent synergy driven and could be on the lower end if we’re slower, could be on the higher end if we’re faster. That’s the way to look at it. But either way, the lion’s share of the synergy is going to hit in 2019. So, if you go back to the free cash flow guidance I said $2.3 billion after the cash restructuring expenses. We’ve already paid out $70 million in the first quarter, and as I said, we do expect a slightly higher total restructuring number than we originally guided to. So let’s say maybe $400 million. And I would encourage you to put in about two thirds of that for the cash impact of 2018.

So, Gunnar, just if I understand that, I mean, we should have a pretty nice bridge in terms of synergy plus restructuring tailwind as we move into 2019. Is that correct? Am I thinking about that right?

I agree.

Okay. Thank you.

Thank you. And the next question will come from the line of Michael Nathanson with MoffettNathanson. Your line is now open.

Thank you. David, I have two for you. One is on advertising, one’s on the Olympics. When you look at Scripps, one of the most amazing things was [ph] they had (57:23) really high commercial load per hour versus your own networks have a very low. So how do you see the balance of raising commercial loads maybe at your core networks versus reducing them at Scripps, and how you think about the right way to blend commercial minutes per content? And then I wondered now that you had the Olympics on the air, how do you feel about buying more soccer rights, where you don’t really have a nine year or 11 year hold on licenses? So can you contrast your sports appetite for maybe short-term soccer rights versus [ph] maybe rights (58:00) I don’t have those short-term cycles?

Thanks, Michael. I don’t know if you timed this in some kind of a special way. But I think this is the second year in a row that I have to wish you a happy birthday.

Yeah, thank you, David. [ph] You too David.

I’ll call you later with my wish and you can give me your wish.

Okay. Thank you. Thank you.

On the Scripps side, one of the things that they did was their commercial load was very high, and their promo load was extremely low. We were the opposite. We have now the ability to promote across all of our networks. So this idea that on any given night we’re getting a 3 or a 4 or 4.5 in women, for instance, we now have the ability to use the promo, not only to promote a particular network, but if we have a great show it’ll be able to go across ID, OWN, TLC, HG, Food. And in fact, HG spent a lot of money buying local time on ID trying to get people to come over. And so we’re going to try and understand promo in the traditional sense, our unique ability to do promo across our channels to move people around, both to save dollars, but also to maximize the movement of audiences, and then the importance of fully monetizing our platform. We’ve also developed a lot of analytics that are quite important. We’re seeing, for instance, when we go on our GO platform and we can quantify what – the viewership in terms of length of view and age, we can get a dramatic increase in CPM with some of the analytics that we have in place now. We have an ability to get higher CPMs. And we look at what Viacom is doing. We’re doing a similar thing, maybe there’s an opportunity. We’re talking to them about maybe doing something with them. And so the net-net is we’re going to put it all together and we’ll figure out how do we maximize growth of our channels, taking advantage of the unique ability we have that no one else has to reach across all of our platforms…

Thanks, David.

Thank you. And our last question will come from the line of John Janedis with Jefferies. Your line is now open.

Hi. Thank you. David, maybe a bit of a follow-up. In the past, you’ve talked about improve [ph] monetization (01:03:25) as revenue driver for ID. And I was wondering, are you at a point now that it starts to accelerate with Scripps, because I think in the past you talked about an opportunity maybe in the hundreds of millions, and so I’m wondering does that still hold?

Well, we were on a mission with Scripps with – before Scripps with ID, because it’s the number one cable channel in America for women. Just to take a victory lap for Henry Schleiff and his team, the last fully distributed top 10 network in America was in the, it was History and I was on the Board of that and FOX News. And seven years later, eight years later, we launched ID and then Henry and his team come onboard, and it’s now the number one cable network in America. It’s loved. Its length of view is the same length of view or more than FOX News. And so we have been on a mission for the last couple of years to say that we should be getting more value for that great audience and for the type of audience that we generate in daytime, in late night, in prime, and the numbers only keep growing. And so now as we have a bigger menu and we’re going into the marketplace, and we have Jon Steinlauf running our operation, who had an ability to generate higher CPMs across the board at Scripps, got a better power ratio than we did, we hope that some of his know-how, his relationships and his unique approach will help ID as well as the rest of our channels.

Thank you.

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude your program. You may you all disconnect. Everyone, have a great day.